nxgn-10q_20181231.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, 2018

or

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

Commission file number: 001-12537

NEXTGEN HEALTHCARE, INC.

(Exact name of registrant as specified in its charter)

 

California

(State or other jurisdiction of incorporation or organization)

 

18111 Von Karman Avenue, Suite 800, Irvine, California

(Address of principal executive offices)

95-2888568

(IRS Employer Identification No.)

 

92612

(Zip Code)

 

(949) 255-2600

(Registrant’s telephone number, including area code)

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 every Interactive Data File required to be submitted 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 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

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 18, 2019 was 64,696,913 shares.

 

 

 


 

NEXTGEN HEALTHCARE, INC.

TABLE OF CONTENTS

FORM 10-Q

FOR THE THREE MONTHS ENDED DECEMBER 31, 2018

 

 

 

Item

 

Page

 

 

PART I.  FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements.

 

3

 

 

Unaudited Consolidated Balance Sheets as of December 31, 2018 and March 31, 2018

 

3

 

 

Unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended December 31, 2018 and 2017

 

4

 

 

Unaudited Consolidated Statements of Cash Flows for the nine months ended December 31, 2018 and 2017

 

5

 

 

Notes to Unaudited Consolidated Financial Statements

 

6

Item 2.

 

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

 

27

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk.

 

38

Item 4.

 

Controls and Procedures.

 

38

 

 

PART II.  OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings.

 

39

Item 1A.

 

Risk Factors.

 

40

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds.

 

40

Item 3.

 

Defaults Upon Senior Securities.

 

40

Item 4.

 

Mine Safety Disclosure.

 

40

Item 5.

 

Other Information.

 

40

Item 6.

 

Exhibits.

 

41

 

 

Signatures

 

42

2


 

PART I.  FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

NEXTGEN HEALTHCARE, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)

 

 

 

December 31, 2018

 

 

March 31, 2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

30,054

 

 

$

28,845

 

Restricted cash and cash equivalents

 

 

7,389

 

 

 

2,373

 

Accounts receivable, net

 

 

84,360

 

 

 

84,962

 

Contract assets

 

 

11,281

 

 

 

 

Inventory

 

 

129

 

 

 

180

 

Income taxes receivable

 

 

6,061

 

 

 

8,122

 

Prepaid expenses and other current assets

 

 

18,505

 

 

 

17,180

 

Total current assets

 

 

157,779

 

 

 

141,662

 

Equipment and improvements, net

 

 

23,169

 

 

 

26,795

 

Capitalized software costs, net

 

 

33,468

 

 

 

26,318

 

Deferred income taxes, net

 

 

6,417

 

 

 

9,219

 

Contract assets, net of current

 

 

3,608

 

 

 

 

Intangibles, net

 

 

57,911

 

 

 

74,091

 

Goodwill

 

 

218,771

 

 

 

218,875

 

Other assets

 

 

29,620

 

 

 

18,795

 

Total assets

 

$

530,743

 

 

$

515,755

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,611

 

 

$

4,213

 

Contract liabilities

 

 

50,449

 

 

 

54,079

 

Accrued compensation and related benefits

 

 

24,179

 

 

 

27,910

 

Income taxes payable

 

 

47

 

 

 

73

 

Other current liabilities

 

 

41,610

 

 

 

48,317

 

Total current liabilities

 

 

119,896

 

 

 

134,592

 

Contract liabilities, net of current

 

 

 

 

 

1,173

 

Deferred compensation

 

 

5,564

 

 

 

6,086

 

Line of credit

 

 

27,000

 

 

 

37,000

 

Other noncurrent liabilities

 

 

12,913

 

 

 

13,494

 

Total liabilities

 

 

165,373

 

 

 

192,345

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Common stock

 

 

 

 

 

 

 

 

$0.01 par value; authorized 100,000 shares; issued and outstanding 64,704 and 63,995 shares at December 31, 2018 and March 31, 2018, respectively

 

 

647

 

 

 

640

 

Additional paid-in capital

 

 

258,311

 

 

 

244,462

 

Accumulated other comprehensive loss

 

 

(1,281

)

 

 

(400

)

Retained earnings (1)

 

 

107,693

 

 

 

78,708

 

Total shareholders' equity

 

 

365,370

 

 

 

323,410

 

Total liabilities and shareholders' equity

 

$

530,743

 

 

$

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


 

NEXTGEN HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except per share data)

(Unaudited)

 

 

Three Months Ended December 31,

 

 

Nine Months Ended December 31,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring

$

117,446

 

 

$

118,997

 

 

$

353,770

 

 

$

357,616

 

Software, hardware, and other non-recurring

 

13,421

 

 

 

12,718

 

 

 

40,618

 

 

 

37,628

 

Total revenues

 

130,867

 

 

 

131,715

 

 

 

394,388

 

 

 

395,244

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring

 

47,997

 

 

 

49,347

 

 

 

143,322

 

 

 

145,504

 

Software, hardware, and other non-recurring

 

6,576

 

 

 

6,323

 

 

 

20,752

 

 

 

18,310

 

Amortization of capitalized software costs and acquired intangible assets

 

7,098

 

 

 

5,964

 

 

 

20,566

 

 

 

15,744

 

Total cost of revenue

 

61,671

 

 

 

61,634

 

 

 

184,640

 

 

 

179,558

 

Gross profit

 

69,196

 

 

 

70,081

 

 

 

209,748

 

 

 

215,686

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

41,304

 

 

 

43,563

 

 

 

120,169

 

 

 

127,517

 

Research and development costs, net

 

20,682

 

 

 

20,645

 

 

 

61,181

 

 

 

60,161

 

Amortization of acquired intangible assets

 

1,027

 

 

 

1,956

 

 

 

3,316

 

 

 

6,015

 

Restructuring costs

 

 

 

 

130

 

 

 

 

 

 

130

 

Total operating expenses

 

63,013

 

 

 

66,294

 

 

 

184,666

 

 

 

193,823

 

Income from operations

 

6,183

 

 

 

3,787

 

 

 

25,082

 

 

 

21,863

 

Interest income

 

44

 

 

 

15

 

 

 

113

 

 

 

36

 

Interest expense

 

(720

)

 

 

(733

)

 

 

(2,219

)

 

 

(2,250

)

Other income (expense), net

 

(227

)

 

 

(41

)

 

 

384

 

 

 

(48

)

Income before provision for income taxes

 

5,280

 

 

 

3,028

 

 

 

23,360

 

 

 

19,601

 

Provision for income taxes

 

456

 

 

 

1,487

 

 

 

2,794

 

 

 

6,134

 

Net income

$

4,824

 

 

$

1,541

 

 

$

20,566

 

 

$

13,467

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation, net of tax

 

411

 

 

 

222

 

 

 

(882

)

 

 

123

 

Comprehensive income

$

5,235

 

 

$

1,763

 

 

$

19,684

 

 

$

13,590

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.07

 

 

$

0.02

 

 

$

0.32

 

 

$

0.21

 

Diluted

$

0.07

 

 

$

0.02

 

 

$

0.32

 

 

$

0.21

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

64,637

 

 

 

63,706

 

 

 

64,308

 

 

 

63,287

 

Diluted

 

64,776

 

 

 

63,708

 

 

 

64,499

 

 

 

63,296

 

 

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

 

4


 

NEXTGEN HEALTHCARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended December 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

20,566

 

 

$

13,467

 

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

 

 

 

 

 

 

 

 

Depreciation

 

 

7,721

 

 

 

8,017

 

Amortization of capitalized software costs

 

 

7,703

 

 

 

4,409

 

Amortization of other intangibles

 

 

16,180

 

 

 

17,350

 

Amortization of debt issuance costs

 

 

532

 

 

 

807

 

Provision for bad debts

 

 

2,740

 

 

 

5,084

 

Provision for inventory obsolescence

 

 

8

 

 

 

55

 

Share-based compensation

 

 

11,949

 

 

 

8,585

 

Deferred income taxes

 

 

22

 

 

 

3,110

 

Excess tax deficiency (benefit) from share-based compensation

 

 

(313

)

 

 

328

 

Loss on disposal of equipment and improvements

 

 

194

 

 

 

150

 

Changes in assets and liabilities, net of amounts acquired:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

242

 

 

 

960

 

Contract assets

 

 

1,288

 

 

 

 

Inventory

 

 

43

 

 

 

(51

)

Accounts payable

 

 

(783

)

 

 

(2,442

)

Contract liabilities

 

 

(7,804

)

 

 

(709

)

Accrued compensation and related benefits

 

 

(4,476

)

 

 

(3,315

)

Income taxes

 

 

2,595

 

 

 

(1,956

)

Deferred compensation

 

 

(522

)

 

 

(156

)

Other assets and liabilities

 

 

(24,606

)

 

 

1,559

 

Net cash provided by operating activities

 

 

33,279

 

 

 

55,252

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Additions to capitalized software costs

 

 

(14,853

)

 

 

(13,647

)

Additions to equipment and improvements

 

 

(4,108

)

 

 

(7,606

)

Payments for acquisitions, net of cash acquired

 

 

 

 

 

(58,892

)

Net cash used in investing activities

 

 

(18,961

)

 

 

(80,145

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from line of credit

 

 

26,000

 

 

 

50,000

 

Repayments on line of credit

 

 

(36,000

)

 

 

(26,000

)

Proceeds from issuance of shares under employee plans

 

 

4,505

 

 

 

4,640

 

Payment of contingent consideration related to acquisitions

 

 

 

 

 

(18,817

)

Payments for taxes related to net share settlement of equity awards

 

 

(2,598

)

 

 

(767

)

Net cash provided by (used in) financing activities

 

 

(8,093

)

 

 

9,056

 

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

 

 

6,225

 

 

 

(15,837

)

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

 

 

31,218

 

 

 

42,589

 

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

 

$

37,443

 

 

$

26,752

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

966

 

 

$

5,786

 

Cash refunds from income taxes

 

 

442

 

 

 

1,084

 

Cash paid for interest

 

 

1,385

 

 

 

1,388

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Unpaid additions to equipment and improvements

 

$

181

 

 

$

138

 

 

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

5


 

NEXTGEN HEALTHCARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except shares and per share data)

(Unaudited)

1. Summary of Significant Accounting Policies

Principles of Consolidation.  On September 6, 2018, Quality Systems, Inc. changed its corporate name to NextGen Healthcare, Inc. The consolidated financial statements include the accounts of NextGen Healthcare, Inc. and its wholly-owned subsidiaries (collectively, the “Company”). Each of the terms “we,” “us,” or “our” as used herein refers collectively to the Company, unless otherwise stated. All intercompany accounts and transactions have been eliminated.

Basis of Presentation.  The accompanying unaudited condensed consolidated financial statements as of December 31, 2018 and for the three and nine months ended December 31, 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 separate ‘recurring’ captions and ‘software, hardware, and other non-recurring’ captions. 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 and nine months ended December 31, 2018 and 2017:

 

 

Three Months Ended December 31,

 

 

Nine Months Ended December 31,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

$

358

 

 

$

259

 

 

$

939

 

 

$

686

 

Research and development costs

 

860

 

 

 

557

 

 

 

2,196

 

 

 

1,431

 

Selling, general and administrative

 

3,480

 

 

 

2,637

 

 

 

8,814

 

 

 

6,468

 

Total share-based compensation

 

4,698

 

 

 

3,453

 

 

 

11,949

 

 

 

8,585

 

Income tax benefit

 

(1,180

)

 

 

(1,080

)

 

 

(2,949

)

 

 

(2,940

)

Decrease in net income

$

3,518

 

 

$

2,373

 

 

$

9,000

 

 

$

5,645

 

 

6


 

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).

In May 2017, 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 was 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 was 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 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 was 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 was 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 $5,016 and a decrease to net cash provided by operating activities of $1,523 for the nine months ended December 31, 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 was 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 August 2018, the FASB issued ASU 2018-15, Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. ASU 2018-15 is effective for us in the first quarter of fiscal 2021. We are currently in the process of evaluating the potential impact of adoption of this updated authoritative guidance on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework–Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 modifies certain disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. ASU 2018-13 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. ASU 2018-13 is effective for us in the first quarter of fiscal 2021, and we currently do not expect the adoption of this new standard to have a material impact on our consolidated financial statements.

7


 

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 for annual periods, and interim periods within those annual 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 first quarter of fiscal 2021, and we currently do not expect the adoption of this new standard to have a material impact on our consolidated financial statements.

 

In 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 annual periods, and interim periods within those 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 expect to implement the new lease guidance, including all related updates, when it becomes effective for us on April 1, 2019 using the cumulative-effect adjustment transition method, which is the additional transition method described within ASU 2018-11, Leases (Topic 842): Targeted Improvements, issued by the FASB in July 2018. We are currently in the process of finalizing our impact assessment and implementing changes to our policies, processes, and internal controls over financial reporting to meet the requirements under the new guidance related to identifying and measuring right-of-use assets and lease liabilities, including related disclosures. In addition to evaluating each of our existing facility lease arrangements, we are also in the process of reviewing other contractual arrangements to determine if any other leases exist within the scope of the new lease guidance or whether our arrangements contain any embedded leases. We expect that the most significant impact will be the recognition of right-of-use assets and lease liabilities on our consolidated balance sheet and an additional level of disclosures related to our leases. While we continue to assess the impact of the new lease guidance on our consolidated financial statements, we currently do not expect the adoption of the new lease guidance to have a significant impact on our consolidated statements of comprehensive income.

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

2. Revenue from Contracts with Customers

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 continues 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.

8


 

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 the 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 December 31, 2018 and for the three and nine months ended December 31, 2018, assuming that the previous revenue recognition guidance in ASC 605 had been in effect, is summarized as follows:

 

 

 

December 31, 2018

 

 

 

As reported under

 

 

Adjustments due to

 

 

As disclosed under

 

 

 

ASC 606

 

 

adoption of ASC 606

 

 

ASC 605

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

84,360

 

 

$

1,298

 

 

$

85,658

 

Contract assets

 

 

11,281

 

 

 

(11,281

)

 

 

 

Income taxes receivable

 

 

6,061

 

 

 

1,550

 

 

 

7,611

 

Prepaid expenses and other current assets

 

 

18,505

 

 

 

(2,935

)

 

 

15,570

 

Deferred income taxes, net

 

 

6,417

 

 

 

2,884

 

 

 

9,301

 

Contract assets, net of current

 

 

3,608

 

 

 

(3,608

)

 

 

 

Other assets

 

 

29,620

 

 

 

(6,808

)

 

 

22,812

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

Contract liabilities

 

 

50,449

 

 

 

235

 

 

 

50,684

 

Accrued compensation and related benefits

 

 

24,179

 

 

 

300

 

 

 

24,479

 

Other current liabilities

 

 

41,610

 

 

 

(7,777

)

 

 

33,833

 

Contract liabilities, net of current

 

 

 

 

 

910

 

 

 

910

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

107,693

 

 

 

(12,568

)

 

 

95,125

 

 

 

 

Three Months Ended December 31, 2018

 

 

 

As reported under

 

 

Adjustments due to

 

 

As disclosed under

 

 

 

ASC 606

 

 

adoption of ASC 606

 

 

ASC 605

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Recurring

 

$

117,446

 

 

$

(557

)

 

$

116,889

 

Software, hardware, and other non-recurring

 

 

13,421

 

 

 

33

 

 

 

13,454

 

Total revenue

 

 

130,867

 

 

 

(524

)

 

 

130,343

 

Total cost of revenue

 

 

61,671

 

 

 

36

 

 

 

61,707

 

Gross profit

 

 

69,196

 

 

 

(560

)

 

 

68,636

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

41,304

 

 

 

1,050

 

 

 

42,354

 

Research and development costs, net

 

 

20,682

 

 

 

 

 

 

20,682

 

Amortization of acquired intangibles

 

 

1,027

 

 

 

 

 

 

1,027

 

Total operating expenses

 

 

63,013

 

 

 

1,050

 

 

 

64,063

 

Income from operations

 

 

6,183

 

 

 

(1,610

)

 

 

4,573

 

Interest and other income, net

 

 

(903

)

 

 

 

 

 

(903

)

Income before provision for income taxes

 

 

5,280

 

 

 

(1,610

)

 

 

3,670

 

Provision for income taxes

 

 

456

 

 

 

(553

)

 

 

(97

)

Net income

 

$

4,824

 

 

$

(1,057

)

 

$

3,767

 

10


 

 

 

 

Nine Months Ended December 31, 2018

 

 

 

As reported under

 

 

Adjustments due to

 

 

As disclosed under

 

 

 

ASC 606

 

 

adoption of ASC 606

 

 

ASC 605

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Recurring

 

$

353,770

 

 

$

(663

)

 

$

353,107

 

Software, hardware, and other non-recurring

 

 

40,618

 

 

 

(704

)

 

 

39,914

 

Total revenue

 

 

394,388

 

 

 

(1,367

)

 

 

393,021

 

Total cost of revenue

 

 

184,640

 

 

 

130

 

 

 

184,770

 

Gross profit

 

 

209,748

 

 

 

(1,497

)

 

 

208,251

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

120,169

 

 

 

4,202

 

 

 

124,371

 

Research and development costs, net

 

 

61,181

 

 

 

 

 

 

61,181

 

Amortization of acquired intangibles

 

 

3,316

 

 

 

 

 

 

3,316

 

Total operating expenses

 

 

184,666

 

 

 

4,202

 

 

 

188,868

 

Income from operations

 

 

25,082

 

 

 

(5,699

)

 

 

19,383

 

Interest and other income, net

 

 

(1,722

)

 

 

 

 

 

(1,722

)

Income before provision for income taxes

 

 

23,360

 

 

 

(5,699

)

 

 

17,661

 

Provision for income taxes

 

 

2,794

 

 

 

(1,550

)

 

 

1,244

 

Net income

 

$

20,566

 

 

$

(4,149

)

 

$

16,417

 

As of December 31, 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.

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 because their standalone selling prices are highly variable 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.

11


 

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

 

 

 

Three Months Ended December 31,

 

 

Nine Months Ended December 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Recurring revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription services

 

$

30,035

 

 

$

26,596

 

 

$

87,618

 

 

$

78,959

 

Support and maintenance

 

 

39,714

 

 

 

40,362

 

 

 

120,556

 

 

 

123,171

 

Managed services

 

 

24,251

 

 

 

28,903

 

 

 

74,048

 

 

 

86,040

 

Electronic data interchange and data services