qsii-10q_20171231.htm

 

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, 2017

or

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

Commission file number: 001-12537

QUALITY SYSTEMS, 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)

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. 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 (Do not check if a smaller reporting company)

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, 2018 was 63,713,925 shares.

 

 

 


 

QUALITY SYSTEMS, INC.

TABLE OF CONTENTS

FORM 10-Q

FOR THE THREE MONTHS ENDED December 31, 2017

 

 

 

Item

 

Page

 

 

PART I.  FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements.

 

3

 

 

Unaudited Consolidated Balance Sheets as of December 31, 2017 and March 31, 2017

 

3

 

 

Unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended December 31, 2017 and 2016

 

4

 

 

Unaudited Consolidated Statements of Cash Flows for the nine months ended December 31, 2017 and 2016

 

5

 

 

Notes to Unaudited Consolidated Financial Statements

 

7

Item 2.

 

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

 

23

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk.

 

34

Item 4.

 

Controls and Procedures.

 

34

 

 

PART II.  OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings.

 

35

Item 1A.

 

Risk Factors.

 

36

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds.

 

36

Item 3.

 

Defaults Upon Senior Securities.

 

36

Item 4.

 

Mine Safety Disclosure.

 

36

Item 5.

 

Other Information.

 

36

Item 6.

 

Exhibits.

 

37

 

 

Signatures

 

38

2


 

PART I.  FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

QUALITY SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)

 

 

December 31, 2017

 

 

March 31, 2017

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

23,359

 

 

$

37,673

 

Restricted cash and cash equivalents

 

3,393

 

 

 

4,916

 

Accounts receivable, net

 

79,416

 

 

 

83,407

 

Inventory

 

154

 

 

 

158

 

Income taxes receivable

 

4,082

 

 

 

2,679

 

Prepaid expenses and other current assets

 

17,944

 

 

 

17,969

 

Total current assets

 

128,348

 

 

 

146,802

 

Equipment and improvements, net

 

27,137

 

 

 

27,426

 

Capitalized software costs, net

 

23,209

 

 

 

13,607

 

Deferred income taxes, net

 

7,197

 

 

 

11,265

 

Intangibles, net

 

80,663

 

 

 

69,213

 

Goodwill

 

216,530

 

 

 

185,898

 

Other assets

 

18,299

 

 

 

19,010

 

Total assets

$

501,383

 

 

$

473,221

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

3,069

 

 

$

4,618

 

Deferred revenue

 

52,843

 

 

 

52,383

 

Accrued compensation and related benefits

 

21,898

 

 

 

24,513

 

Income taxes payable

 

 

 

 

405

 

Other current liabilities

 

30,153

 

 

 

46,775

 

Total current liabilities

 

107,963

 

 

 

128,694

 

Deferred revenue, net of current

 

853

 

 

 

1,394

 

Deferred compensation

 

6,473

 

 

 

6,629

 

Line of credit

 

39,000

 

 

 

15,000

 

Other noncurrent liabilities

 

16,354

 

 

 

16,461

 

Total liabilities

 

170,643

 

 

 

168,178

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

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

 

Additional paid-in capital

 

240,584

 

 

 

228,549

 

Accumulated other comprehensive loss

 

(235

)

 

 

(358

)

Retained earnings (1)

 

89,754

 

 

 

76,227

 

Total shareholders' equity

 

330,740

 

 

 

305,043

 

Total liabilities and shareholders' equity

$

501,383

 

 

$

473,221

 

 

 

(1)

Includes cumulative-effect adjustment related to the adoption of ASU 2016-09, as defined in Note 1. See Note 1 for additional details.

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

3


 

QUALITY SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except per share data)

(Unaudited)

 

 

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

 

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

 

Total cost of revenue

 

61,634

 

 

 

54,352

 

 

 

179,558

 

 

 

167,164

 

Gross profit

 

70,081

 

 

 

73,516

 

 

 

215,686

 

 

 

210,075

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

43,563

 

 

 

37,542

 

 

 

127,517

 

 

 

120,913

 

Research and development costs, net

 

20,645

 

 

 

19,714

 

 

 

60,161

 

 

 

56,230

 

Amortization of acquired intangible assets

 

1,956

 

 

 

2,568

 

 

 

6,015

 

 

 

7,889

 

Restructuring costs

 

130

 

 

 

231

 

 

 

130

 

 

 

4,685

 

Total operating expenses

 

66,294

 

 

 

60,055

 

 

 

193,823

 

 

 

189,717

 

Income from operations

 

3,787

 

 

 

13,461

 

 

 

21,863

 

 

 

20,358

 

Interest income

 

15

 

 

 

-

 

 

 

36

 

 

 

9

 

Interest expense

 

(733

)

 

 

(629

)

 

 

(2,250

)

 

 

(2,445

)

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

 

Net income

$

1,541

 

 

$

10,486

 

 

$

13,467

 

 

$

13,826

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation, net of tax

 

222

 

 

 

(89

)

 

 

123

 

 

 

(182

)

Unrealized gain on marketable securities, net of tax

 

 

 

 

 

 

 

 

 

 

10

 

Comprehensive income

$

1,763

 

 

$

10,397

 

 

$

13,590

 

 

$

13,654

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.02

 

 

$

0.17

 

 

$

0.21

 

 

$

0.22

 

Diluted

$

0.02

 

 

$

0.17

 

 

$

0.21

 

 

$

0.22

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

63,706

 

 

 

62,093

 

 

 

63,287

 

 

 

61,645

 

Diluted

 

63,708

 

 

 

62,093

 

 

 

63,296

 

 

 

61,900

 

 

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

4


 

QUALITY SYSTEMS, INC.

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

 

5


 

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

 

 

$

 

 

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

6


 

QUALITY SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except shares and per share data)

(Unaudited)

1. Summary of Significant Accounting Policies

Principles of Consolidation.  The consolidated financial statements include the accounts of Quality Systems, 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 consolidated financial statements as of December 31, 2017 and for the three and nine months ended December 31, 2017 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 consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These 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. In the opinion of management, the accompanying 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 consolidated financial statement sections are in thousands, except shares and per share data, unless otherwise specified.

Significant Accounting Policies. There have been no 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.

Share-Based Compensation. The following table summarizes total share-based compensation expense included in the consolidated statements of comprehensive income for the three and nine months ended December 31, 2017 and 2016:

 

 

Three Months Ended December 31,

 

 

Nine Months Ended December 31,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

$

259

 

 

$

144

 

 

$

686

 

 

$

459

 

Research and development costs

 

557

 

 

 

273

 

 

 

1,431

 

 

 

690

 

Selling, general and administrative

 

2,637

 

 

 

1,584

 

 

 

6,468

 

 

 

4,028

 

Total share-based compensation

 

3,453

 

 

 

2,001

 

 

 

8,585

 

 

 

5,177

 

Income tax benefit

 

(1,080

)

 

 

(718

)

 

 

(2,940

)

 

 

(1,825

)

Decrease in net income

$

2,373

 

 

$

1,283

 

 

$

5,645

 

 

$

3,352

 

 

7


 

Recent Accounting Standards.  Recent accounting pronouncements requiring implementation in current or future periods are discussed below or in the notes, where applicable.

In May 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-09, Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting ("ASU 2017-09"). ASU 2017-09 clarifies the changes to terms or conditions of a share-based payment award that require an entity to apply modification accounting. ASU 2017-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early application is permitted and prospective application is required. ASU 2017-09 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 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 fourth quarter of fiscal 2020, 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

8


 

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.

9


 

2. 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, 2017 and March 31, 2017:

 

 

Balance At

 

 

Quoted Prices

in Active

Markets for

 

 

Significant Other

 

 

Unobservable

 

 

December 31, 2017

 

 

Identical Assets

(Level 1)

 

 

Observable Inputs

(Level 2)

 

 

Inputs

(Level 3)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents (1)

$

23,359

 

 

$

23,359

 

 

$

 

 

$

 

Restricted cash and cash equivalents

 

3,393

 

 

 

3,393

 

 

 

 

 

 

 

 

$

26,752

 

 

$

26,752

 

 

$

 

 

$

 

 

 

Balance At

 

 

Quoted Prices

in Active

Markets for

 

 

Significant Other

 

 

Unobservable

 

 

March 31, 2017

 

 

Identical Assets

(Level 1)

 

 

Observable Inputs

(Level 2)

 

 

Inputs

(Level 3)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents (1)

$

37,673

 

 

$

37,673

 

 

$

 

 

$

 

Restricted cash and cash equivalents

 

4,916

 

 

 

4,916

 

 

 

 

 

 

 

 

$

42,589

 

 

$

42,589

 

 

$

 

 

$

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration related to acquisitions (2)

$

18,817

 

 

$

 

 

$

18,817

 

 

$

 

 

$

18,817

 

 

$

 

 

$

18,817

 

 

$

 

 

 

(1)

Cash equivalents consist primarily of money market funds.

(2)

The contingent consideration liability as of March 31, 2017 relates to the acquisition of HealthFusion, which was settled during the quarter ended June 30, 2017. The measurement period of the contingent consideration liability ended on December 31, 2016, and thus the actual revenue achievement rate was utilized to compute the ending contingent consideration liability as of March 31, 2017. Accordingly, the contingent consideration liability was reflected under a Level 2 valuation hierarchy because the fair value was determined based on other significant observable inputs.

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, we completed our acquisition of Entrada, Inc. ("Entrada") pursuant to the terms of the Agreement 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 whenever 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 agreement (see Note 7).

10


 

We accounted for the Entrada 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 as of the acquisition date. The preliminary fair values of acquired assets and liabilities assumed represent management’s estimate of fair value and 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 Entrada acquisition, we recorded $15,400 of intangible assets 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 acquisition 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

 

 

The pro forma effects of the Entrada acquisition would not have been material to the Company's results of operations and are therefore not presented.

EagleDream Health Acquisition

On August 16, 2017, we completed the acquisition 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).

11


 

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 as of the acquisition date. The preliminary fair values of acquired assets and liabilities assumed represent management’s estimate of fair value and 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

 

 

 

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

 

 

The pro forma effects of the EagleDream acquisition would not have been material to the Company's results of operations and are therefore not presented.

4. 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 not identified any events or circumstances as of December 31, 2017 that would require an interim goodwill impairment test.

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 Entrada and EagleDream (see Note 3). The carrying amount of goodwill as of March 31, 2017 was $185,898.

12


 

5. 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):

 

 

December 31, 2017

 

 

Customer

 

 

Trade Name

 

 

Software

 

 

 

 

 

 

Relationships

 

 

and Contracts

 

 

Technology

 

 

Total

 

Gross carrying amount

$

54,450

 

 

$

7,080

 

 

$

91,110

 

 

$

152,640

 

Accumulated amortization

 

(33,955

)

 

 

(3,118

)

 

 

(34,904

)

 

 

(71,977

)

Net intangible assets

$

20,495

 

 

$

3,962

 

 

$

56,206

 

 

$

80,663

 

 

 

March 31, 2017

 

 

Customer

 

 

Trade Name

 

 

Software

 

 

 

 

 

 

Relationships

 

 

and Contracts

 

 

Technology

 

 

Total

 

Gross carrying amount

$

50,550

 

 

$

5,480

 

 

$

67,810

 

 

$

123,840

 

Accumulated amortization

 

(28,972

)

 

 

(2,088

)

 

 

(23,567

)

 

 

(54,627

)

Net intangible assets

$

21,578

 

 

$

3,392

 

 

$

44,243

 

 

$

69,213

 

 

Amortization expense related to customer relationships and trade name and contracts recorded as operating expenses in the consolidated statements of comprehensive income was $1,956 and $2,568 for the three months ended December 31, 2017 and 2016, respectively. Amortization expense related to software technology recorded as cost of revenue was $4,127 and $3,007 for the three months ended December 31, 2017 and 2016, 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:

 

 

Amortization Expense Recorded As:

 

 

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

 

2021

 

3,731

 

 

 

12,628

 

 

 

16,359

 

2022

 

2,593

 

 

 

4,840

 

 

 

7,433

 

2023 and beyond

 

6,054

 

 

 

1,588

 

 

 

7,642

 

Total

$

24,457

 

 

$

56,206

 

 

$

80,663

 

 

6. Capitalized Software Costs

Our capitalized software costs are summarized as follows:

 

 

December 31, 2017

 

 

March 31, 2017

 

Gross carrying amount

$

115,202

 

 

$

104,948

 

Accumulated amortization

 

(91,993

)

 

 

(91,341

)

Net capitalized software costs

$

23,209

 

 

$

13,607

 

 

Amortization expense related to capitalized software costs was $1,838 and $1,807 for the three months ended December 31, 2017 and 2016, respectively, and is recorded as cost of revenue in the 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.

13


 

The following table presents the remaining estimated amortization of capitalized software costs as of December 31, 2017. 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

 

2021

 

3,500

 

2022

 

609

 

Total

$

23,209

 

 

7. Line of Credit

On January 4, 2016, we entered into a $250,000 revolving credit agreement (“Credit Agreement”) with JP Morgan Chase Bank, N.A., as administrative agent, U.S. Bank National Association, as syndication agent, and certain other lenders. The Credit Agreement is secured by substantially all of our existing and future property and material domestic subsidiaries. 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. The Credit Agreement matures on January 4, 2021 and the full balance of the revolving loans and all other obligations under the agreement must be paid at that time. The revolving loans under the Credit Agreement will be available for letters of credit, working capital and general corporate purposes. We were in compliance with all covenants under the Credit Agreement as of December 31, 2017.

As of December 31, 2017, we had $39,000 in outstanding loans and $211,000 of unused credit under the Credit Agreement. As of March 31, 2017, we had $15,000 in outstanding loans under the Credit Agreement.

Interest expense related to the Credit Agreement was $463 and $359 for the three months ended December 31, 2017 and 2016, respectively. Amortization of deferred debt issuance costs was $269 for both the three months ended December 31, 2017 and 2016.

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. Composition of Certain Financial Statement Captions

Accounts receivable may include amounts invoiced for undelivered products and services at each period end. Undelivered products and services are included as a component of the deferred revenue balance on the accompanying consolidated balance sheets.

 

 

December 31, 2017

 

 

March 31, 2017

 

Accounts receivable, gross

$

88,437

 

 

$

93,377

 

Sales return reserve

 

(5,580

)

 

 

(7,213

)

Allowance for doubtful accounts

 

(3,441

)

 

 

(2,757

)

Accounts receivable, net

$

79,416

 

 

$

83,407

 

 

Inventory is comprised of computer systems and components.

Prepaid expenses and other current assets are summarized as follows:

 

 

December 31, 2017

 

 

March 31, 2017

 

Prepaid expenses

$

16,409

 

 

$

14,884

 

Other current assets