qsii-10q_20180630.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 June 30, 2018

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 July 27, 2018 was 64,216,977 shares.

 

 

 


 

QUALITY SYSTEMS, INC.

TABLE OF CONTENTS

FORM 10-Q

FOR THE THREE MONTHS ENDED JUNE 30, 2018

 

 

 

Item

 

Page

 

 

PART I.  FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements.

 

3

 

 

Unaudited Consolidated Balance Sheets as of June 30, 2018 and March 31, 2018

 

3

 

 

Unaudited Consolidated Statements of Comprehensive Income for the three months ended June 30, 2018 and 2017

 

4

 

 

Unaudited Consolidated Statements of Cash Flows for the three months ended June 30, 2018 and 2017

 

5

 

 

Notes to Unaudited Consolidated Financial Statements

 

7

Item 2.

 

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

 

25

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk.

 

35

Item 4.

 

Controls and Procedures.

 

35

 

 

PART II.  OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings.

 

36

Item 1A.

 

Risk Factors.

 

37

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds.

 

37

Item 3.

 

Defaults Upon Senior Securities.

 

37

Item 4.

 

Mine Safety Disclosure.

 

37

Item 5.

 

Other Information.

 

37

Item 6.

 

Exhibits.

 

38

 

 

Signatures

 

39

2


 

PART I.  FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

QUALITY SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)

 

 

 

June 30, 2018

 

 

March 31, 2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

26,544

 

 

$

28,845

 

Restricted cash and cash equivalents

 

 

7,520

 

 

 

2,373

 

Accounts receivable, net

 

 

86,064

 

 

 

84,962

 

Contract assets

 

 

10,448

 

 

 

 

Inventory

 

 

161

 

 

 

180

 

Income taxes receivable

 

 

7,677

 

 

 

8,122

 

Prepaid expenses and other current assets

 

 

17,397

 

 

 

17,180

 

Total current assets

 

 

155,811

 

 

 

141,662

 

Equipment and improvements, net

 

 

26,567

 

 

 

26,795

 

Capitalized software costs, net

 

 

28,846

 

 

 

26,318

 

Deferred income taxes, net

 

 

6,249

 

 

 

9,219

 

Contract assets, net of current

 

 

2,768

 

 

 

 

Intangibles, net

 

 

68,636

 

 

 

74,091

 

Goodwill

 

 

218,875

 

 

 

218,875

 

Other assets

 

 

27,383

 

 

 

18,795

 

Total assets

 

$

535,135

 

 

$

515,755

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,133

 

 

$

4,213

 

Contract liabilities

 

 

52,196

 

 

 

54,079

 

Accrued compensation and related benefits

 

 

17,567

 

 

 

27,910

 

Income taxes payable

 

 

111

 

 

 

73

 

Other current liabilities

 

 

62,067

 

 

 

48,317

 

Total current liabilities

 

 

135,074

 

 

 

134,592

 

Contract liabilities, net of current

 

 

 

 

 

1,173

 

Deferred compensation

 

 

5,937

 

 

 

6,086

 

Line of credit

 

 

44,000

 

 

 

37,000

 

Other noncurrent liabilities

 

 

13,232

 

 

 

13,494

 

Total liabilities

 

 

198,243

 

 

 

192,345

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Common stock

 

 

 

 

 

 

 

 

$0.01 par value; authorized 100,000 shares; issued and outstanding 64,220 and 63,995 shares at June 30, 2018 and March 31, 2018, respectively

 

 

642

 

 

 

640

 

Additional paid-in capital

 

 

247,374

 

 

 

244,462

 

Accumulated other comprehensive loss

 

 

(899

)

 

 

(400

)

Retained earnings (1)

 

 

89,775

 

 

 

78,708

 

Total shareholders' equity

 

 

336,892

 

 

 

323,410

 

Total liabilities and shareholders' equity

 

$

535,135

 

 

$

515,755

 

 

 

(1)

Includes cumulative effect adjustment related to the adoption of ASC 606, 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 June 30,

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

Recurring

$

120,007

 

 

$

119,178

 

Software, hardware, and other non-recurring

 

13,193

 

 

 

11,744

 

Total revenues

 

133,200

 

 

 

130,922

 

Cost of revenue:

 

 

 

 

 

 

 

Recurring

 

48,153

 

 

 

48,458

 

Software, hardware, and other non-recurring

 

7,154

 

 

 

6,040

 

Amortization of capitalized software costs and acquired intangible assets

 

6,544

 

 

 

4,671

 

Total cost of revenue

 

61,851

 

 

 

59,169

 

Gross profit

 

71,349

 

 

 

71,753

 

Operating expenses:

 

 

 

 

 

 

 

Selling, general and administrative

 

44,636

 

 

 

42,977

 

Research and development costs, net

 

22,128

 

 

 

19,989

 

Amortization of acquired intangible assets

 

1,168

 

 

 

2,047

 

Total operating expenses

 

67,932

 

 

 

65,013

 

Income from operations

 

3,417

 

 

 

6,740

 

Interest income

 

29

 

 

 

9

 

Interest expense

 

(730

)

 

 

(677

)

Other income (expense), net

 

374

 

 

 

(22

)

Income before provision for income taxes

 

3,090

 

 

 

6,050

 

Provision for income taxes

 

442

 

 

 

2,154

 

Net income

$

2,648

 

 

$

3,896

 

Other comprehensive income:

 

 

 

 

 

 

 

Foreign currency translation, net of tax

 

(499

)

 

 

(14

)

Comprehensive income

$

2,149

 

 

$

3,882

 

Net income per share:

 

 

 

 

 

 

 

Basic

$

0.04

 

 

$

0.06

 

Diluted

$

0.04

 

 

$

0.06

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

Basic

 

64,019

 

 

 

62,636

 

Diluted

 

64,054

 

 

 

62,643

 

 

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

4


 

QUALITY SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

2,648

 

 

$

3,896

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

2,393

 

 

 

2,774

 

Amortization of capitalized software costs

 

 

2,257

 

 

 

1,271

 

Amortization of other intangibles

 

 

5,455

 

 

 

5,448

 

Amortization of debt issuance costs

 

 

177

 

 

 

269

 

Provision for bad debts

 

 

792

 

 

 

2,091

 

Provision for inventory obsolescence

 

 

10

 

 

 

20

 

Share-based compensation

 

 

3,116

 

 

 

2,041

 

Deferred income taxes

 

 

86

 

 

 

 

Excess tax deficiency (benefit) from share-based compensation

 

 

(33

)

 

 

420

 

Loss on disposal of equipment and improvements

 

 

106

 

 

 

16

 

Changes in assets and liabilities, net of amounts acquired:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

486

 

 

 

1,546

 

Contract assets

 

 

2,998

 

 

 

 

Inventory

 

 

9

 

 

 

38

 

Accounts payable

 

 

(1,172

)

 

 

(841

)

Contract liabilities

 

 

(6,057

)

 

 

(1,102

)

Accrued compensation and related benefits

 

 

(11,088

)

 

 

(10,245

)

Income taxes

 

 

624

 

 

 

2,157

 

Deferred compensation

 

 

(149

)

 

 

(243

)

Other assets and liabilities

 

 

354

 

 

 

4,237

 

Net cash provided by operating activities

 

 

3,012

 

 

 

13,793

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Additions to capitalized software costs

 

 

(4,785

)

 

 

(5,248

)

Additions to equipment and improvements

 

 

(2,179

)

 

 

(2,471

)

Payments for acquisitions, net of cash acquired

 

 

 

 

 

(33,856

)

Net cash used in investing activities

 

 

(6,964

)

 

 

(41,575

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from line of credit

 

 

20,000

 

 

 

30,000

 

Repayments on line of credit

 

 

(13,000

)

 

 

 

Proceeds from issuance of shares under employee plans

 

 

1,352

 

 

 

3,970

 

Payment of contingent consideration related to acquisitions

 

 

 

 

 

(18,817

)

Payments for taxes related to net share settlement of equity awards

 

 

(1,554

)

 

 

(708

)

Net cash provided by financing activities

 

 

6,798

 

 

 

14,445

 

Net increase (decrease) in cash, cash equivalents, and restricted cash

 

 

2,846

 

 

 

(13,337

)

Cash, cash equivalents, and restricted cash at beginning of period

 

 

31,218

 

 

 

42,589

 

Cash, cash equivalents, and restricted cash at end of period

 

$

34,064

 

 

$

29,252

 

5


 

QUALITY SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)

(In thousands)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

 

2018

 

 

2017

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

191

 

 

$

157

 

Cash refunds from income taxes

 

 

367

 

 

 

579

 

Cash paid for interest

 

 

286

 

 

 

411

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Tenant improvement allowance from landlord

 

$

 

 

$

980

 

Unpaid additions to equipment and improvements

 

 

92

 

 

 

591

 

 

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.

Basis of Presentation.  The accompanying unaudited consolidated financial statements as of June 30, 2018 and for the three months ended June 30, 2018 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, 2018. 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.

Effective April 1, 2018, we changed the presentation of our consolidated statements of comprehensive income to present revenue and cost of revenue under a ‘recurring’ caption and a ‘software, hardware, and other non-recurring’ caption. Recurring consists of revenue and related cost of revenue for subscription services, support and maintenance, managed services, and electronic data interchange and data services. Software, hardware, and other non-recurring consists of revenue and related cost of revenue, for software licenses, hardware, and other non-recurring services, such as implementation, training, and consulting services. Cost of revenue within recurring and software, hardware, and other non-recurring are reported exclusive of the amortization of capitalized software costs and acquired intangible assets. Amortization of capitalized software costs and acquired intangible assets are now reported in a separate cost of revenue caption. Prior period amounts have been reclassified to conform to current year presentation.

Also effective April 1, 2018, prior period amounts previously presented as deferred revenue are now presented as contract liabilities. Prior period balances have not changed.

References to amounts in the 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. 2014-09, Revenue from Contracts with Customers: Topic 606, effective on April 1, 2018 using the modified retrospective method (see Note 2). 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, 2018.

Share-Based Compensation. The following table summarizes total share-based compensation expense included in the consolidated statements of comprehensive income for the three months ended June 30, 2018 and 2017:

 

 

Three Months Ended June 30,

 

 

2018

 

 

2017

 

Costs and expenses:

 

 

 

 

 

 

 

Cost of revenue

$

233

 

 

$

137

 

Research and development costs

 

610

 

 

 

361

 

Selling, general and administrative

 

2,273

 

 

 

1,543

 

Total share-based compensation

 

3,116

 

 

 

2,041

 

Income tax benefit

 

(753

)

 

 

(716

)

Decrease in net income

$

2,363

 

 

$

1,325

 

 

Recently adopted accounting pronouncements.  Recently adopted accounting pronouncements are discussed below or in the notes, where applicable.

In March 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, to add various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No. 118 (“SAB 118”) to Accounting Standards codification 740. SAB 118 was issued by the SEC in December 2017 to provide immediate guidance for accounting implications of the United States Tax Reform under the Tax Cuts and Jobs Act (“TCJA”). We have evaluated the potential impacts of SAB 118 and have applied this guidance to our consolidated financial statements and related disclosures (see Note 10).

7


 

In May 2017, FASB issued 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. The adoption of this new standard did not 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. The adoption of this new standard did not 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. The adoption of this new standard resulted in an increase to net cash provided by operating activities of $5,147 and $999 for the three months ended June 30, 2018 and 2017, respectively.

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. The adoption of this new standard did not have a material impact 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: Topic 606 ("ASC 606"), which supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605, Revenue Recognition (“ASC 605”). We adopted ASC 606 and all related amendments as of April 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption (see Note 2).

Recent Accounting Standards Not Yet Adopted.   Recent accounting pronouncements requiring implementation in current or future periods are discussed below or in the notes, where applicable.

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 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.

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.

8


 

2. Revenue from Contracts with Customers

Adoption of ASC 606

In May 2014, the FASB issued ASC 606, which supersedes the revenue recognition requirements in ASC 605 and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new guidance provides a five-step process for determining the amount and timing of revenue recognition and establishes disclosure requirements to enable users of the financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers. It also provides guidance on the accounting treatment for the incremental costs of obtaining a contract that would not have been incurred had the contract not been obtained.

We adopted ASC 606 and all related amendments as of April 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. Results for reporting periods beginning after April 1, 2018 are presented under ASC 606, while prior period comparative information has not been adjusted and continue to be reported under the accounting standards in effect for those prior periods. We have also implemented changes to our processes, policies, and internal controls over financial reporting to address the impacts of the new revenue recognition standard on our consolidated financial statements and related disclosures.

The adjustments to reflect the cumulative effect of the changes to the balances of our previously reported consolidated balance sheet as of March 31, 2018 for the adoption of ASC 606 are summarized as follows:

 

 

 

As Reported

 

 

ASC 606 Transition

 

 

Adjusted

 

 

 

March 31, 2018

 

 

Adjustments

 

 

April 1, 2018

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

84,962

 

 

$

2,380

 

 

$

87,342

 

Contract assets

 

 

 

 

 

13,446

 

 

 

13,446

 

Prepaid expenses and other current assets

 

 

17,180

 

 

 

(223

)

 

 

16,957

 

Deferred income taxes, net

 

 

9,219

 

 

 

(2,884

)

 

 

6,335

 

Contract assets, net of current

 

 

 

 

 

2,731

 

 

 

2,731

 

Other assets

 

 

18,795

 

 

 

6,679

 

 

 

25,474

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

Contract liabilities

 

 

54,079

 

 

 

4,174

 

 

 

58,253

 

Accrued compensation and related benefits

 

 

27,910

 

 

 

745

 

 

 

28,655

 

Other current liabilities

 

 

48,317

 

 

 

9,964

 

 

 

58,281

 

Contract liabilities, net of current

 

 

1,173

 

 

 

(1,173

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

78,708

 

 

 

8,419

 

 

 

87,127

 

We recorded a net increase to retained earnings of $8,419 as of April 1, 2018 due to the cumulative impact of adopting ASC 606, with the impact primarily related to (i) revenue cycle management (“RCM”) and related services revenue whereby revenue recognition may be accelerated under ASC 606 for software, subscriptions, support and maintenance, and professional services included with RCM arrangements as the timing of revenue recognition is based upon the transfer of value of the promised goods or services to our clients, which may occur prior to time that client collections occur, (ii) the amortization of capitalized direct sales commissions costs over a longer period of time under ASC 606, and (iii) the income tax impact of the cumulative transition adjustment. Further, we recorded reclassifications to present certain unbilled amounts as contract assets and sales returns reserves and certain customer liabilities as other current liabilities, which were both previously recorded within accounts receivables on our consolidated balance sheets.

We applied the practical expedient permitting the recognition of revenue in the amount to which the entity has a right to invoice based on the actual usage by the customers for our electronic data interchange (“EDI”) services and other transaction-based services. We have reflected the aggregate effect of all contract modifications occurring prior to the ASC 606 adoption date when (i) identifying the satisfied and unsatisfied performance obligations, (ii) determining the transaction price, and (iii) allocating the transaction price to the satisfied and unsatisfied performance obligations.

The adoption of ASC 606 had no transition impact on cash provided by or used in operating, financing or investing activities reported in our consolidated statement of cash flows.

9


 

The impact of the adoption of ASC 606 on our consolidated balance sheet and consolidated statements of net income and comprehensive income as of and for the three months ended June 30, 2018, assuming that the previous revenue recognition guidance in ASC 605 had been in effect, is summarized as follows:

 

 

 

June 30, 2018

 

 

 

As reported under

 

 

Adjustments due to

 

 

As disclosed under

 

 

 

ASC 606

 

 

adoption of ASC 606

 

 

ASC 605

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

86,064

 

 

$

6,685

 

 

$

92,749

 

Contract assets

 

 

10,448

 

 

 

(10,448

)

 

 

 

Income taxes receivable

 

 

7,677

 

 

 

246

 

 

 

7,923

 

Prepaid expenses and other current assets

 

 

17,397

 

 

 

344

 

 

 

17,741

 

Deferred income taxes, net

 

 

6,249

 

 

 

2,884

 

 

 

9,133

 

Contract assets, net of current

 

 

2,768

 

 

 

(2,768

)

 

 

 

Other assets

 

 

27,383

 

 

 

(7,703

)

 

 

19,680

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

Contract liabilities

 

 

52,196

 

 

 

6,241

 

 

 

58,437

 

Accrued compensation and related benefits

 

 

17,567

 

 

 

(158

)

 

 

17,409

 

Other current liabilities

 

 

62,067

 

 

 

(8,658

)

 

 

53,409

 

Contract liabilities, net of current

 

 

 

 

 

1,179

 

 

 

1,179

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

89,775

 

 

 

(9,364

)

 

 

80,411

 

 

 

 

Three Months Ended June 30, 2018

 

 

 

As reported under

 

 

Adjustments due to

 

 

As disclosed under

 

 

 

ASC 606

 

 

adoption of ASC 606

 

 

ASC 605

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Recurring

 

$

120,007

 

 

$

687

 

 

$

120,694

 

Software, hardware, and other non-recurring

 

 

13,193

 

 

 

(641

)

 

 

12,552

 

Total revenue

 

 

133,200

 

 

 

46

 

 

 

133,246

 

Total cost of revenue

 

 

61,851

 

 

 

40

 

 

 

61,891

 

Gross profit

 

 

71,349

 

 

 

6

 

 

 

71,355

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

44,636

 

 

 

1,197

 

 

 

45,833

 

Research and development costs, net

 

 

22,128

 

 

 

 

 

 

22,128

 

Amortization of acquired intangibles

 

 

1,168

 

 

 

 

 

 

1,168

 

Total operating expenses

 

 

67,932

 

 

 

1,197

 

 

 

69,129

 

Income from operations

 

 

3,417

 

 

 

(1,191

)

 

 

2,226

 

Interest and other income, net

 

 

(327

)

 

 

 

 

 

(327

)

Income before provision for income taxes

 

 

3,090

 

 

 

(1,191

)

 

 

1,899

 

Provision for income taxes

 

 

442

 

 

 

(246

)

 

 

196

 

Net income

 

$

2,648

 

 

$

(945

)

 

$

1,703

 

As of June 30, 2018, the reported balances include the cumulative effect adjustments of adopting ASC 606.

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 (formerly referred to as revenue cycle management and related services), EDI, 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.

10


 

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 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 expect that the new revenue guidance in ASC 606 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.

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.

The following table presents our revenues disaggregated by our major revenue categories and by occurrence:

 

 

 

Three Months Ended June 30,

 

 

 

2018

 

 

2017

 

Recurring revenues:

 

 

 

 

 

 

 

 

Subscription services

 

$

28,328

 

 

$

25,575

 

Support and maintenance

 

 

41,248

 

 

 

41,116

 

Managed services

 

 

26,270

 

 

 

29,175

 

Electronic data interchange and data services

 

 

24,161

 

 

 

23,312

 

Total recurring revenues

 

 

120,007

 

 

 

119,178

 

 

 

 

 

 

 

 

 

 

Software, hardware, and other non-recurring revenues:

 

 

 

 

 

 

 

 

Software license and hardware

 

 

7,443

 

 

 

7,420

 

Other non-recurring services

 

 

5,750

 

 

 

4,324

 

Total software, hardware and other non-recurring revenues

 

 

13,193

 

 

 

11,744

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

133,200

 

 

$

130,922

 

Recurring revenues consists of subscription services, support and maintenance, managed services, and EDI and data services. Software, hardware, and other non-recurring consists of revenue from 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 under Topic 606 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

11


 

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 under ASC 606, 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, 2018, the aggregate amount of transaction price related to remaining unsatisfied or partially unsatisfied performance obligations over the respective noncancelable contract term was approximately $422,000, of which we expect to recognize approximately 9% as services are rendered or goods are delivered, 47% 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 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 consolidated balance sheets since the revenue recognition associated to the related customer payments and invoicing is expected to occur within the next 12 months.

Our contracts with customers do not include any major financing components.

Costs to Obtain or Fulfill a Contract

ASC 606 requires the capitalization of 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.

12


 

Capitalized commissions costs were $12,492 as of June 30, 2018, of which $2,952 is current and included as other current assets and $9,540 is long-term and included within other assets on our consolidated balance sheets, based on the expected timing of expense recognition. During the three months ended June 30, 2018, we recognized $1,589 of commissions expense primarily related to the amortization of capitalized commissions costs, which is included as a selling, general and administrative expense in the 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 June 30, 2018 and March 31, 2018:

 

 

 

Balance At

 

 

Quoted Prices

in Active

Markets for

Identical Assets

 

 

Significant Other

Observable Inputs

 

 

Unobservable

Inputs

 

 

 

June 30, 2018

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents (1)

 

$

26,544

 

 

$

26,544

 

 

$

 

 

$

 

Restricted cash and cash equivalents

 

 

7,520

 

 

 

7,520

 

 

 

 

 

 

 

 

 

$

34,064

 

 

$

34,064

 

 

$

 

 

$

 

 

 

 

Balance At

 

 

Quoted Prices

in Active

Markets for

Identical Assets

 

 

Significant Other

Observable Inputs

 

 

Unobservable

Inputs

 

 

 

March 31, 2018

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents (1)

 

$

28,845

 

 

$

28,845

 

 

$

 

 

$

 

Restricted cash and cash equivalents

 

 

2,373

 

 

 

2,373

 

 

 

 

 

 

 

 

 

$

31,218

 

 

$

31,218

 

 

$

 

 

$

 

 

 

(1)

Cash equivalents consist primarily of money market funds.

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 months ended June 30, 2018, no adjustments were recorded.

4. Business Combinations

On January 31, 2018, we completed the acquisition of Inforth Technologies, LLC ("Inforth") pursuant to the Membership Interest Purchase Agreement, dated January 31, 2018. Headquartered in Traverse City, MI. Inforth was one of our premier clinical content and technical services partners specializing in comprehensive solutions for physician practices. The preliminary purchase price of Inforth totaled $4,337 and was funded by cash flows from operations.

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 8).

13


 

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 purchase price totaled $33,958, which included working capital and other customary adjustments. The acquisition was primarily funded by a draw against our revolving credit agreement (see Note 8). The purchase price allocation of the Entrada acquisition was considered final as of June 30, 2018.  

We accounted for the acquisitions noted above as purchase business combinations using the acquisition method of accounting. The purchase allocation of Inforth and EagleDream are deemed to be preliminary. The purchase price allocated to the tangible and intangible assets acquired and liabilities assumed based on their 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 allocations as soon as practicable within the measurement period, but not later than one year following the acquisition dates.

Goodwill represents the excess of the purchase price over the 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 Inforth is considered deductible for tax purposes, and goodwill arising from the acquisitions of EagleDream and Entrada are not deductible for tax purposes.

The total preliminary purchase price for the acquisitions of Inforth and EagleDream, and final purchase price for the acquisition of Entrada are summarized as follows:

 

 

Preliminary

 

 

Preliminary

 

 

 

 

 

 

 

Inforth

 

 

EagleDream

 

 

Entrada

 

 

 

Purchase Price

 

 

Purchase Price

 

 

Purchase Price

 

 

Initial purchase price

$

4,000

 

 

$

26,000

 

 

$

34,000

 

 

Settlement of pre-existing net liabilities

 

337

 

 

 

 

 

 

 

 

Working capital and other adjustments

 

 

 

 

(391

)

 

 

(42

)

 

Total purchase price

$

4,337

 

 

$

25,609

 

 

$

33,958

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of the net tangible assets acquired and liabilities assumed:

 

 

 

 

 

 

 

 

 

 

 

 

Acquired cash and cash equivalents

$

25

 

 

$

573

 

 

$

102

 

 

Accounts receivable

 

6

 

 

 

217

 

 

 

1,836

 

 

Prepaid expense and other current assets

 

 

 

 

20

 

 

 

145

 

 

Equipment and improvements

 

 

 

 

 

 

 

163

 

 

Capitalized software costs

 

 

 

 

 

 

 

364

 

 

Deferred income tax asset

 

 

 

 

 

 

 

117

 

 

Accounts payable

 

 

 

 

(115

)

 

 

(639

)

 

Accrued compensation and related benefits

 

(49

)

 

 

(691

)

 

 

(120

)

 

Deferred revenues

 

 

 

 

(394

)

 

 

(234

)

 

Deferred income tax liability

 

 

 

 

(1,811

)

 

 

 

 

Other liabilities

 

(22

)

 

 

(122

)

 

 

(444

)

 

Total net tangible assets acquired and liabilities assumed

 

(40

)

 

 

(2,323

)

 

 

1,290

 

 

Fair value of identifiable intangible assets acquired: