UNITED STATES
SECURITIES and EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number:
(Exact name of registrant as specified in its charter)
California (State or other jurisdiction of incorporation or organization)
(Address of principal executive offices) |
95-2888568 (IRS Employer Identification No.)
(Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol |
Name of each exchange on which registered |
Common Stock, $0.01 Par Value |
|
NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ |
Accelerated filer ☐ |
Non-accelerated filer ☐ |
Small reporting company |
|
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of outstanding shares of the Registrant’s common stock as of July 22, 2019 was
NEXTGEN HEALTHCARE, INC.
TABLE OF CONTENTS
FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 2019
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Item 1. |
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3 |
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Unaudited Condensed Consolidated Balance Sheets as of June 30, 2019 and March 31, 2019 |
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3 |
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4 |
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5 |
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6 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
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8 |
Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
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23 |
Item 3. |
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33 |
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Item 4. |
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33 |
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Item 1. |
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34 |
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Item 1A. |
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35 |
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Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds. |
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35 |
Item 3. |
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35 |
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Item 4. |
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35 |
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Item 5. |
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35 |
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Item 6. |
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36 |
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37 |
2
PART I. FINANCIAL INFORMATION
ITEM 1. |
FINANCIAL STATEMENTS. |
NEXTGEN HEALTHCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
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June 30, 2019 |
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March 31, 2019 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Restricted cash and cash equivalents |
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Accounts receivable, net |
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Contract assets |
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Inventory |
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Income taxes receivable |
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Prepaid expenses and other current assets |
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Total current assets |
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Equipment and improvements, net |
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Capitalized software costs, net |
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Operating lease assets |
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— |
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Deferred income taxes, net |
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Contract assets, net of current |
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Intangibles, net |
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Goodwill |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Contract liabilities |
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Accrued compensation and related benefits |
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Income taxes payable |
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Operating lease liabilities |
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— |
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Other current liabilities |
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Total current liabilities |
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Deferred compensation |
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Line of credit |
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Operating lease liabilities, net of current |
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— |
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Other noncurrent liabilities |
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Total liabilities |
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Commitments and contingencies (Note 14) |
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Shareholders' equity: |
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Common stock |
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$ |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
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( |
) |
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( |
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Retained earnings |
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Total shareholders' equity |
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Total liabilities and shareholders' equity |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
NEXTGEN HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share data)
(Unaudited)
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Three Months Ended June 30, |
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2019 |
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2018 |
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Revenues: |
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Recurring |
$ |
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$ |
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Software, hardware, and other non-recurring |
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Total revenues |
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Cost of revenue: |
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Recurring |
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Software, hardware, and other non-recurring |
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Amortization of capitalized software costs and acquired intangible assets |
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Total cost of revenue |
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Gross profit |
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Operating expenses: |
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Selling, general and administrative |
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Research and development costs, net |
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Amortization of acquired intangible assets |
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Impairment of assets |
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— |
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Restructuring costs |
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— |
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Total operating expenses |
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Income from operations |
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Interest income |
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Interest expense |
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( |
) |
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( |
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Other income (expense), net |
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( |
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Income before provision for (benefit of) income taxes |
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Provision for (benefit of) income taxes |
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( |
) |
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Net income |
$ |
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$ |
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Other comprehensive income: |
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Foreign currency translation, net of tax |
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( |
) |
Comprehensive income |
$ |
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$ |
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Net income per share: |
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Basic |
$ |
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$ |
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Diluted |
$ |
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$ |
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Weighted-average shares outstanding: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
NEXTGEN HEALTHCARE, INC.
STATEMENTS OF CONDENSED CONSOLIDATED STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
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Three Months Ended June 30, 2018 |
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Accumulated |
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Additional |
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Other |
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Total |
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Common Stock |
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Paid-in |
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Retained |
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Comprehensive |
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Shareholders' |
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Shares |
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Amount |
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Capital |
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Earnings |
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Loss |
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Equity |
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Balance, March 31, 2018 |
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( |
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Common stock issued under stock plans, net of shares withheld for taxes |
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( |
) |
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— |
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— |
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( |
) |
Stock-based compensation |
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— |
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— |
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— |
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— |
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Cumulative effect adjustment related to the adoption of ASC 606 |
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— |
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— |
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— |
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— |
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Components of other comprehensive income: |
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Translation adjustments |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Net income |
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— |
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— |
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— |
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— |
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Balance, June 30, 2018 |
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( |
) |
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Three Months Ended June 30, 2019 |
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Accumulated |
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Additional |
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Other |
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Total |
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Common Stock |
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Paid-in |
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Retained |
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Comprehensive |
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Shareholders' |
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Shares |
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Amount |
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Capital |
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Earnings |
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Loss |
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Equity |
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Balance, March 31, 2019 |
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( |
) |
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Common stock issued under stock plans, net of shares withheld for taxes |
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( |
) |
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— |
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— |
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( |
) |
Stock-based compensation |
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— |
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— |
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— |
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— |
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Components of other comprehensive income: |
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Translation adjustments |
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— |
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— |
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— |
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— |
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Net income |
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— |
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— |
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— |
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Balance, June 30, 2019 |
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( |
) |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
NEXTGEN HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Three Months Ended June 30, |
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2019 |
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2018 |
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Cash flows from operating activities: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Amortization of capitalized software costs |
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Amortization of debt issuance costs |
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Amortization of other intangibles |
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Deferred income taxes |
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( |
) |
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Depreciation |
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Excess tax benefit from share-based compensation |
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( |
) |
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( |
) |
Impairment of assets |
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— |
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Loss on disposal of equipment and improvements |
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Non-cash operating lease costs |
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— |
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Provision for bad debts |
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Provision for inventory obsolescence |
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— |
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Restructuring costs, net of amounts paid |
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— |
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Share-based compensation |
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Changes in assets and liabilities: |
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Accounts receivable |
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Contract assets |
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Inventory |
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Accounts payable |
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( |
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Contract liabilities |
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( |
) |
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( |
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Accrued compensation and related benefits |
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( |
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( |
) |
Income taxes |
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Deferred compensation |
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( |
) |
Operating lease liabilities |
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( |
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— |
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Other assets and liabilities |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Additions to capitalized software costs |
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( |
) |
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( |
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Additions to equipment and improvements |
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( |
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( |
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Net cash used in investing activities |
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( |
) |
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( |
) |
Cash flows from financing activities: |
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Proceeds from line of credit |
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— |
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Repayments on line of credit |
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( |
) |
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( |
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Proceeds from issuance of shares under employee plans |
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Payments for taxes related to net share settlement of equity awards |
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( |
) |
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( |
) |
Net cash provided by (used in) financing activities |
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( |
) |
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Net increase in cash, cash equivalents, and restricted cash |
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Cash, cash equivalents, and restricted cash at beginning of period |
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Cash, cash equivalents, and restricted cash at end of period |
|
$ |
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$ |
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Supplemental disclosures of cash flow information: |
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Cash paid for income taxes |
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$ |
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$ |
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Cash refunds from income taxes |
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Cash paid for interest |
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Cash paid for amounts included in the measurement of operating lease liabilities |
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— |
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Operating lease assets obtained in exchange for operating lease liabilities |
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— |
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Accrued purchases of equipment and improvements |
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— |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
6
NEXTGEN HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES INDEX
Note |
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Page |
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Note 1 |
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8 |
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Note 2 |
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9 |
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Note 3 |
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12 |
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Note 4 |
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13 |
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Note 5 |
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14 |
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Note 6 |
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14 |
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Note 7 |
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15 |
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Note 8 |
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15 |
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Note 9 |
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16 |
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Note 10 |
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17 |
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Note 11 |
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18 |
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Note 12 |
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18 |
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Note 13 |
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20 |
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Note 14 |
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20 |
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Note 15 |
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22 |
7
NEXTGEN HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
(Unaudited)
1. Summary of Significant Accounting Policies
Principles of Consolidation. The condensed consolidated financial statements include the accounts of 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 June 30, 2019 and for the three months ended June 30, 2019 have been prepared in accordance with the requirements of Quarterly Report on Form 10-Q and Article 10 of the Securities and Exchange Commission Regulation S-X and therefore do not include all information and notes which would be presented were such condensed consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements presented in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments which are necessary for a fair statement of the results of operations and cash flows for the periods presented. The results of operations for such interim periods are not necessarily indicative of results of operations to be expected for the full year.
References to amounts in the condensed consolidated financial statement sections are in thousands, except shares and per share data, unless otherwise specified.
Significant Accounting Policies. We adopted Accounting Standards Update No. 2016-02, Leases (Topic 842), effective on April 1, 2019 using the cumulative-effect adjustment transition method, as described further below. There have been no other material changes to our significant accounting policies from those disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019.
Share-Based Compensation.
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Three Months Ended June 30, |
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2019 |
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2018 |
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Costs and expenses: |
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Cost of revenue |
$ |
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$ |
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Research and development costs |
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Selling, general and administrative |
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Total share-based compensation |
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Income tax benefit |
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( |
) |
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( |
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Decrease in net income |
$ |
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$ |
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Recently Adopted Accounting Pronouncements. Recently adopted accounting pronouncements are discussed below or in the notes, where applicable.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which was intended to improve financial reporting about leasing transactions. The new guidance requires lessees to recognize on their balance sheets the assets and liabilities for the rights and obligations created by leases and to disclose key information about the leasing arrangements. We have implemented the necessary changes to our policies, processes, and internal controls over financial reporting to meet the requirements under the new guidance related to identifying and measuring right-of-use assets and lease liabilities, including related disclosures.
We adopted ASU 2016-02 and its subsequent amendments (together “ASC 842”) using the cumulative-effect adjustment transition method, which is the additional transition method described within ASU 2018-11, Leases (Topic 842): Targeted Improvements, issued by the FASB in July 2018, which allowed us to apply the new lease standard as of April 1, 2019, rather than the beginning of the earliest period presented. We elected the package of practical expedients that permitted us to not reassess: (1) whether any expired contracts are or contain leases; (2) the lease classification for any existing or expired leases, and (3) the initial direct costs for our existing leases.
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Upon adoption of ASC 842, we recognized operating lease right-of-use assets of $
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.
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 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.
We do not believe that any other recently issued, but not yet effective accounting standards, if adopted, would have a material impact on our consolidated financial statements.
2. Revenue from Contracts with Customers
Revenue Recognition and Performance Obligations
We generate revenue from sales of licensing rights and subscriptions to our software solutions, hardware and third-party software products, support and maintenance, managed services, electronic data interchange (“EDI”) and data services, and other non-recurring services, including implementation, training, and consulting services. Our contracts with customers may include multiple performance obligations that consist of various combinations of our software solutions and related services, which are generally capable of being distinct and accounted for as separate performance obligations.
The total transaction price is allocated to each performance obligation within an arrangement based on estimated standalone selling prices. We generally determine standalone selling prices based on the prices charged to customers, except for certain software licenses that are based on the residual approach and certain maintenance customers that are based on substantive renewal rates. In instances where standalone selling price is not observable, such as software licenses included in our revenue cycle management (“RCM”) arrangements, we estimate standalone selling price utilizing an expected cost plus a margin approach. When standalone selling prices are not observable, significant judgment is required in estimating the standalone selling price for each performance obligation.
Revenue is recognized when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration that we expect to be entitled to in exchange for those goods or services.
We exclude sales tax from the measurement of the transaction price and record revenue net of taxes collected from customers and subsequently remitted to governmental authorities.
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The following table presents our revenues disaggregated by our major revenue categories and by occurrence:
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Three Months Ended June 30, |
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2019 |
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2018 |
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Recurring revenues: |
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Subscription services |
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$ |
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$ |
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Support and maintenance |
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Managed services |
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Electronic data interchange and data services |
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Total recurring revenues |
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Software, hardware, and other non-recurring revenues: |
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Software license and hardware |
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Other non-recurring services |
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Total software, hardware and other non-recurring revenues |
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Total revenues |
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$ |
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$ |
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Recurring revenues consist of subscription services, support and maintenance, managed services, and EDI and data services. Software, hardware, and other non-recurring revenues consist of sales of software license and hardware and certain non-recurring services, such as implementation, training, and consulting performed for clients who use our products.
Generally, we recognize revenue for our most significant performance obligations as follows:
Subscription services. Performance obligations involving subscription services, which include annual licenses, are satisfied over time as the customer simultaneously receives and consumes the benefits of the services throughout the contract period. We recognize revenue related to these services ratably over the respective noncancelable contract term.
Support and maintenance. Performance obligations involving support and maintenance are satisfied over time as the customer simultaneously receives and consumes the benefits of the maintenance services provided. Our support and maintenance services may consist of separate performance obligations, such as unspecified upgrades or enhancements and technical support, which are considered stand-ready in nature and can be offered at various points during the service period. Since the efforts associated with the combined support and maintenance services are rendered concurrently and provided evenly throughout the service period, we consider the series of support and maintenance services to be a single performance obligation. Therefore, we recognize revenue related to these services ratably over the respective noncancelable contract term.
Managed services. Managed services consist primarily of RCM and related services, but also includes transcription services and certain other recurring services. Performance obligations associated with RCM services are satisfied over time as the customer simultaneously receives and consumes the benefits of the services executed throughout the contract period. The majority of service fees under our RCM arrangements are variable consideration contingent upon collections by our clients. We estimate the variable consideration which we expect to be entitled to over the noncancelable contract term associated with our RCM service arrangements. The estimate of variable consideration included in the transaction price typically involves estimating the amounts we will ultimately collect on behalf of our clients and the relative fee we charge that is generally calculated as a percentage of those collections. Inputs to these estimates include, but are not limited to, historical service fees and collections amounts, timing of historical collections relative to the timing of when claims are submitted by our clients to their respective payers, macroeconomic trends, and anticipated changes in the number of providers. Significant judgement is required when estimating the total transaction price based on the variable consideration. We may apply certain constraints, when appropriate and permitted, to our estimates around our variable consideration in order to ensure that our estimates do not pose a risk of significantly misstating our revenue in any reporting period. RCM and related services may not be rendered evenly over the contract period as the timing of services are based on customer collections, which may vary throughout the service period. We recognize revenue for RCM based on the amount of collections received throughout the contract term as it most closely depicts our efforts to transfer our service obligations to the customer. Performance obligations related to the transcription services and other recurring services are generally satisfied as the corresponding services are provided and revenue is recognized as such services are rendered.
Electronic data interchange and data services. Performance obligations related to EDI and other transaction processing services are satisfied at the point in time the services are rendered. The transfer of control occurs when the transaction processing services are delivered and the customer receives the benefits from the services provided.
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Software license and hardware. Software license and hardware are considered point-in-time performance obligations as control is transferred to customers upon the delivery of the software license and hardware. Our software licenses are considered functional licenses, and revenue recognition generally occurs on the date of contract execution as the customer is provided with immediate access to the license. We generally determine the amount of consideration allocated to the software license performance obligation using the residual approach, except for certain RCM arrangements where the amount allocated to the software license performance obligation is determined based on estimated relative standalone selling prices. For hardware, we recognize revenue upon transfer of such hardware or devices to the customer.
Other non-recurring services. Performance obligations related to other non-recurring services, including implementation, training, and consulting services, are generally satisfied as the corresponding services are provided. Once the services have been provided to the customer, the transfer of control has occurred. Therefore, we recognize revenue as such services are rendered.
Transaction Price Allocated to Remaining Performance Obligations
As of June 30, 2019, the aggregate amount of transaction price related to remaining unsatisfied or partially unsatisfied performance obligations over the respective noncancelable contract term was approximately $
Contract Balances
Contract balances result from the timing differences between our revenue recognition, invoicing, and cash collections. Such contract balances include accounts receivables, contract assets and liabilities, and other customer deposits and liabilities balances. Accounts receivable includes invoiced amounts where the right to receive payment is unconditional and only subject to the passage of time. Contract assets include amounts where revenue recognized exceeds the amount invoiced to the customer and the right to payment is not solely subject to the passage of time. Contract assets are generally associated with our sales of software licenses, but may also be associated other performance obligations such as subscription services, support and maintenance, annual licenses, and professional services, where control has been transferred to our customers but the associated payments are based on future customer collections (in the case of our RCM service arrangements) or based on future milestone payment due dates. In such instances, the revenue recognized may exceed the amount invoiced to the customer and such balances are included in contract assets since our right to receive payment is not unconditional, but rather is conditional upon customer collections or the continued functionality of the software and our ongoing support and maintenance obligations. Contract liabilities consist mainly of fees invoiced or paid by our clients for which the associated services have not been performed and revenues have not been recognized. Contract assets and contract liabilities are reported in a net position on an individual contract basis at the end of each reporting period. Contract assets are classified as current or long-term on our condensed consolidated balance sheets based on the timing of when we expect to complete the related performance obligations and invoice the customer. Contract liabilities are classified as current on our condensed consolidated balance sheets since the revenue recognition associated to the related customer payments and invoicing is expected to occur within the next twelve months. During the three months ended June 30, 2019 and 2018, we recognized $
Our contracts with customers do not include any major financing components.
Costs to Obtain or Fulfill a Contract
We capitalize all incremental costs of obtaining a contract with a customer to the extent that such costs are directly related to a contract and expected to be recoverable. Our sales commissions and related sales incentives are considered incremental costs requiring capitalization. Capitalized contract costs are amortized to expense utilizing a method that is consistent with the transfer of the related goods or services to the customer. The amortization period ranges from less than one year up to eight years, based on the period over which the related goods and services are transferred, including consideration of the expected customer renewals and the related useful lives of the products.
Capitalized commissions costs were $
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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, 2019 and March 31, 2019:
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Balance At |
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Quoted Prices in Active Markets for Identical Assets |
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Significant Other Observable Inputs |
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Unobservable Inputs |
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June 30, 2019 |
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(Level 1) |
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(Level 2) |
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(Level 3) |
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ASSETS |
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Cash and cash equivalents (1) |
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$ |
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$ |
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$ |
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$ |
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Restricted cash and cash equivalents |
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$ |
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$ |
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$ |
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$ |
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LIABILITIES |
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Contingent consideration related to acquisitions |
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$ |
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$ |
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