CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q ("Report") and certain information incorporated herein by reference contain forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this Report, other than statements that are purely historical, are forward-looking statements. Words such as "anticipate," "expect," "intend," "plan," "believe," "seek," "estimate," "will," "should," "would," "could," "may," and similar expressions also identify forward-looking statements. These forward-looking statements include, without limitation, discussions of the impact of the COVID-19 pandemic and measures taken in response thereto, as well as our product development plans, business strategies, future operations, financial condition and prospects, developments in and the impacts of government regulation and legislation and market factors influencing our results. Our expectations, beliefs, objectives, intentions and strategies regarding our future results are not guarantees of future performance and are subject to risks and uncertainties, both foreseen and unforeseen, that could cause actual results to differ materially from results contemplated in our forward-looking statements. These risks and uncertainties include, but are not limited to, our ability to continue to develop new products and increase systems sales in markets characterized by rapid technological evolution, consolidation, and competition from larger, better-capitalized competitors. Many other economic, competitive, governmental and technological factors could affect our ability to achieve our goals, and interested persons are urged to review any risks that may be described in "Item 1A. Risk Factors" as set forth herein and other risk factors appearing in our most recent Annual Report on Form 10-K for the fiscal year endedMarch 31, 2020 ("Annual Report"), as supplemented by additional risk factors, if any, in our interim filings on our Quarterly Reports on Form 10-Q, as well as in our other public disclosures and filings with theSecurities and Exchange Commission ("SEC"). Because of these risk factors, as well as other variables affecting our financial condition and results of operations, past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. We assume no obligation to update any forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of the filing of this Report. Each of the terms "NextGen Healthcare ," "NextGen," "we," "us," "our," or the "Company" as used throughout this Report refers collectively toNextGen Healthcare, Inc. and its wholly-owned subsidiaries, unless otherwise indicated. This management's discussion and analysis of financial condition and results of operations ("MD&A") is provided as a supplement to the condensed consolidated financial statements and notes thereto included elsewhere in this Report in order to enhance your understanding of our results of operations and financial condition and should be read in conjunction with, and is qualified in its entirety by, the condensed consolidated financial statements and related notes thereto included elsewhere in this Report. Historical results of operations, percentage margin fluctuations and any trends that may be inferred from the discussion below are not necessarily indicative of the operating results for any future period. Company OverviewNextGen Healthcare is a leading provider of software and services that empower ambulatory healthcare practices to manage the risk and complexity of delivering care in the rapidly evolvingU.S. healthcare system. Our combination of technological breadth, depth and domain expertise makes us a preferred solution provider and trusted advisor for our clients. In addition to highly configurable core clinical and financial capabilities, our portfolio includes tightly integrated solutions that deliver on ambulatory healthcare imperatives including: population health, care management, patient outreach, telemedicine and nationwide clinical information exchange. We serve clients across all 50 states. Our approximately 100,000 providers deliver care in nearly every medical specialty in a wide variety of practice models including accountable care organizations ("ACOs"), independent physician associations ("IPAs"), managed service organizations ("MSOs"), Veterans Service Organizations ("VSOs"), and Dental Service Organizations ("DSOs"). Our clients include some of the largest and most progressive multi-specialty groups in the country. With the recent addition of behavioral health to our strong medical and oral health capabilities, we continue to extend our share not only in Federally Qualified Health Centers ("FQHCs"), but also in the emerging integrated care market.NextGen Healthcare has historically enhanced our offering through both organic and inorganic activities. InOctober 2015 , we divested our former Hospital Solutions division to focus exclusively on the ambulatory marketplace. InJanuary 2016 , we acquiredHealthFusion Holdings, Inc. and its cloud-based electronic health record and practice management solution. InApril 2017 , we acquiredEntrada, Inc. and its cloud-based, mobile platform for clinical documentation and collaboration. InAugust 2017 , we acquiredEagleDream Health, Inc. and its cloud-based population health analytics solution. InJanuary 2018 , we acquired Inforth Technologies for its specialty-focused clinical content. InOctober 2019 , we acquiredTopaz Information Systems, LLC ("Topaz") for its behavioral health solutions. InDecember 2019 , we acquiredMedfusion, Inc. ("Medfusion") for its Patient Experience Platform (i.e., patient portal, self-scheduling, and patient pay) capabilities andOTTO Health, LLC ("OTTO") for its integrated virtual care solutions, notably telemedicine. The integration of these acquired technologies has madeNextGen Healthcare's solutions among the most comprehensive and powerful in the market.
Our company was incorporated in
25 --------------------------------------------------------------------------------
Industry Background, Regulatory Environment, and Market Opportunity
We believe that the trends and events described below have contributed to our consolidated results of operations and may continue to impact our future results.
Over the last decade, the ambulatory healthcare market has experienced significant regulatory change, which has driven the need for improved technology to enable practice transformation. Recognizing it was imperative to digitize the American health system to stem the escalating cost of healthcare and improve the quality of care being delivered,Congress enacted the Health Information Technology for Economic and Clinical Health Act in 2009 ("HITECH Act"). The legislation stimulated healthcare organizations to not only adopt electronic health records, but to use them to collect discrete data that could be used to drive quality care. This standardization supported early pay-for-reporting and pay-for-performance programs. In 2010, the Affordable Care Act ("ACA") established the roadmap for shifting American healthcare from volume (fee-for-service) to a value-based care ("VBC") system that rewards improved outcomes at lower costs (fee-for-value). This was followed by the Medicare Access and CHIP Reauthorization Act of 2015 ("MACRA"), bipartisan legislation that further changed the way Medicare rewards clinicians for value vs. volume. Initially focused on government-funded care, the domain of theCenters for Medicare & Medicaid Services ("CMS"), these programs are now firmly established on the commercial insurance side of the industry as well. VBC created the need for a new category of healthcare information technology ("HIT") tools that could be used to identify and treat groups of patients, or cohorts, based on risk. Population Health Management ("PHM") tools support these needs by identifying patient risk, engaging patients, coordinating care, and determining when interventions are needed to improve clinical and financial outcomes. According to estimates fromFrost & Sullivan inMay 2020 , the United States PHM market is expected to reach$9.4 billion in total revenue by 2022, representing a compound annual growth rate ("CAGR") of 28% from 2017. Importantly, the introduction of VBC programs was only an element of the broader approach to reducing healthcare expenditure. It was also accompanied by significant reductions in Medicare spending with a projected reduction of$253 billion in payments by 2029, as reported by RevCycle Intelligence inOctober 2019 . The drive to reduce costs initially led to consolidation in the healthcare system that was followed by a significant shift of care from the inpatient to lower cost outpatient setting. Ambulatory surgery centers (ASCs) have become an essential component of comprehensive, low cost distributed care. According to anOctober 2019 report from ResearchandMarkets, ASCs continue to perform more than half of allU.S. outpatient surgical procedures and are expected to see greater volumes as the number of outpatient procedures increases by an estimated 15% by 2028. From 2015 to 2022, the proportion of outpatient cases performed in ASCs is expected to increase across most service lines with the largest jump (10%) to occur in spine procedures. Among other factors, consumerism is set to play a major role in driving ASC volume increases, as procedures performed in ASCs cost an average of 58% less than the same procedure in a hospital outpatient department. The need to sustain revenue has made it extremely important for practices to secure their patient market share, elevating patient loyalty to a significant determinant of provider success. In addition to being loyal, groups participating in value-based contracts realized that patients also needed to be engaged in their care and interested in improving their own health. The need to attract, retain and engage patients has made patient experience one of the most important aspects of evolving care delivery inthe United States . Capturing patient market share and thriving in a market driven by VBC requires both an integrated platform and a full view of the patient population's clinical and cost data, neither of which could be accomplished without new technologies to collect and analyze multi-sourced patient data. Effectively implemented, these new technologies allow organizations to enhance financial viability while exercising the freedom to join, affiliate, integrate or interoperate in ways that maximize strategic control. Although the HITECH Act led to the successful adoption of electronic health records, many in the healthcare industry were dissatisfied with the level of exchange of health information between different providers and across different software platforms. With the passing of the MACRA law in 2015, theU.S. Congress declared it a national objective to achieve widespread exchange of health information through interoperable certified EHR technology. Then, inDecember 2016 , the 21st Century Cures Act ("Cures Act") was passed and signed into law. Among many other policies, the law includes numerous provisions intended to encourage nationwide interoperability. InMarch 2020 , theHHS Office of the National Coordinator for Health Information Technology ("ONC") released a final regulation which implements the key interoperability provisions included in the Cures Act. The rule calls on developers of certified EHRs to adopt standardized application programming interfaces ("APIs") and to meet a list of other new certification and maintenance of certification requirements in order to maintain approved federal government certification status. The ONC rule also implements the information blocking provisions of the Cures Act, including identifying reasonable and necessary activities that do not constitute information blocking. Under the Cures Act, HHS has the regulatory authority to investigate and assess civil monetary penalties of up to$1,000,000 against certified health IT developers found to be in violation of "information blocking." The new regulations will require significant compliance efforts for healthcare providers, information networks, exchanges, and HIT companies. However, CURES also creates opportunities for improving care delivery and outcomes through increased data exchange between providers, and easier patient access to their own health information. Key to unlocking these benefits is the introduction of new Fast Healthcare Interoperability Resources ("FHIR") standards. ONC's goal is for certified HIT companies to adopt FHIR-based API standards. Meanwhile, CMS is requiring hospitals to provide electronic admission, discharge and transfer notification to other healthcare facilities, providers and designated care team members. 26
-------------------------------------------------------------------------------- Through the expansion of our NextGen® Share interoperability services platform and API partner marketplace, we will address the increased demand for moving and sharing patient data from the EHR easily, quickly and securely. Interoperability improves patient experience and care coordination, enhances patient safety, and reduces costs. We are also expanding resources such as educational webinars, blogs and videos on interoperability to help educate and support healthcare providers. In recent years, there has been incremental investment to improve the delivery of behavioral healthcare. One of the central drivers of this investment has been the opioid epidemic which claims more than 70,000 lives a year inthe United States . The integrated care model previously prevalent mainly in FQHCs, a model which calls for integration of behavioral health and primary care in single care settings, has also gained momentum. Both behavioral health and the integrated care workflows require broad, purpose built, tailored HIT capabilities, many of which are supported by the NextGen platform.
Based on these trends, successful clients must undertake the following imperatives:
1. Manage patient experience and engagement 2. Align incentives and energize clinicians 3. Maximize and shape financial outcomes 4. Assume risk and drive commercial advantage 5. Optimize workflows with data exchange
Our Strategy
We empower the accelerating transformation of ambulatory care by delivering solutions that enable groups to be successful under all models of care, including emerging value-based care in which providers assume risk while minimizing risk. We primarily serve groups that focus on delivering care in ambulatory settings, and do so across diverse practice sizes, specialties, and business constructs. In addition to traditional medical specialties, we participate actively with groups that deliver oral (dental) and behavioral healthcare, and with those that combine these in the emerging model for integrated care.
Our configurability enables groups to drive commercial advantage with creative workflows for patient access, patient-provider interactions, clinical workflows and care coordination. At the same time, our automation helps drive variability and cost out of the back office by accommodating exacting regulatory, billing and reporting requirements. We embrace both the art and science of delivering healthcare in the transformingU.S. healthcare system. We believe that the ability to interoperate in a complex, heterogeneous healthcare ecosystem is one of the keys to providing great care and healthy financial outcomes. Because we interoperate with the major stakeholders across theU.S. healthcare system and power many of the nation's Health Information Exchanges ("HIEs"), we help keep patient data more secure, promote continuity of care, lower the cost of care delivery and perhaps most importantly improve the patient experience. We recognize that patient experience drives patient engagement and that engaged patients have better outcomes. Consequently, much of our activity over the last few years has been informed by the emergence of the patient as an active, involved consumer. Our solutions help our clients create a holistic, personalized care experience that drive loyalty and satisfaction. We surround our technical solutions with implementation and optimization services and provide business process outsourcing with managed hosting and revenue cycle management services. With some of our most sophisticated clients, we have been asked to share the breadth of our experience as they shape their strategies. We believe that this sort of engagement, acting as a virtual extension of our clients' leadership teams, is an important step along our journey to becoming a trusted advisor.
As one of the leading healthcare information technology players in the
• Be a learning organization and transform ahead of the industry • Be a trusted advisor for our customers and prospects • Deliver breadth, depth and configurability to enable our clients to effectively execute their strategies
• Use automation to drive variability and cost from our clients' operations
• Drive real innovation in patient experience and patient-provider interactions
• Help our clients be recognized as interoperability leaders in their regions
and areas of specialty
• Integrate new capabilities (whether organic or inorganic) more quickly and
successfully than others. 27
--------------------------------------------------------------------------------
COVID-19 Update
In late 2019, the emergence of a novel coronavirus, or COVID-19, was reported and inJanuary 2020 , theWorld Health Organization ("WHO"), declared it a Public Health Emergency of International Concern. InMarch 2020 , theWHO escalated COVID-19 as a pandemic. We proactively responded to the pandemic by creating an executive task force to monitor the COVID-19 situation daily and immediately restricted non-essential travel and migrated to a fully remote workforce while maintaining complete operational effectiveness. Shortly thereafter, and in line with guidance provided by government agencies and international organizations, we restricted all travel, mandated a work-from-home policy across our global workforce, and moved all in-person client-facing events to virtual ones. Since the COVID-19 pandemic began, millions of cases and hundreds of thousands of deaths have been reported globally. In addition to the socioeconomic disruption caused by the pandemic, both treatment and suppression measures stressed the very fabric of theU.S. healthcare system in some geographies, exacerbating some of the existing challenges with capacity, balance and reimbursement. Among the measures to slow the spread of the disease and flatten the curve in line with healthcare system capacity was social/physical distancing. The need to access care while still social distancing was addressed early on with the limited use of virtual visits and was energized when the federal government reduced regulatory barriers and addressed payment parity between virtual and in-person visits. With these tailwinds, telemedicine quickly became regarded as a safer way for patients and providers to engage each other while also relieving economic pressure on the medical practice. We believe that the uptake of telemedicine will transcend COVID-19 and that virtual visits will become a permanent and important change in the way care is delivered. Keeping patients out of the transit system, out of the waiting room and away from other sick patients is simply good medicine. We also believe that ambulatory practices will emerge from the pandemic with a clearer appreciation of the importance of business continuity and will turn to NextGen more often for managed services. Consequently, we expect to see increased subscription of our revenue cycle management services, managed hosting, and our emerging capabilities for managed clinical and administrative services. Since themid-March 2020 timing of government orders to shelter in place and restrict non-essential medical services, the COVID-19 pandemic has caused declines in patient volume. This has negatively impacted our revenue in the fourth quarter of 2020, most notably for purchases of software and hardware. The impact of the disruption will continue to heavily impact the first half of fiscal 2021 primarily in managed services and EDI, which are volume driven, and purchases of software and hardware due to client management being focused on business continuity. Assuming the impact of the pandemic and related restrictive measures begin to subside late in the fiscal first half, we expect that patient volume and thus revenue will likely return to more normal levels throughout late fiscal 2021. Based on our overall financial health and the opportunity in front of us, we have made some important decisions on how to approach the first two quarters of fiscal 2021, which include executing cost reductions with a primary goal of mitigating COVID-19 based impacts to earnings. Most of these cost reductions are temporary as we believe that preserving our employee base, organizational momentum, and robust capabilities for the near future will be a win for the Company and our shareholders. The net effect of the aforementioned actions will result in earnings being down markedly and negative free cash flow (calculated as net cash provided by operating activities, less net of cash used for the additions of capitalized software costs and equipment and improvements) in the first half of the fiscal year. We believe we will be well positioned to weather the initial storm and increase earnings, revenue, and opportunity as volume begins to return in the second half of the year. The broader implications of the global emergence of COVID-19 on our business, operating results, and overall financial performance remain uncertain and it depends on certain developments, including the duration and spread of the outbreak, impact on our clients and our sales cycles, impact on our partners or employees, and impact on the economic environment and financial markets, all of which are uncertain and cannot be predicted. We are conducting business as usual with certain modifications to employee travel, employee work locations, and marketing events, among other modifications. We have observed other companies taking precautionary and preemptive actions to address COVID-19, and the effects it has had and is expected to have on business and the economy. We expect that our customers and potential customers will take actions to reduce operating expenses and moderate cash flows, including by delaying sales and requesting extended billing and payment terms. We will continue to actively monitor the situation and may take further actions that we determine are in the best interests of our employees, customers, partners, suppliers, and shareholders. 28 --------------------------------------------------------------------------------
Results of Operations
The following table sets forth the percentage of revenue represented by each item in our condensed consolidated statements of net income (loss) and comprehensive income (loss) for the three months endedJune 30, 2020 and 2019 (certain percentages below may not sum due to rounding): Three Months Ended June 30, 2020 2019 Revenues: Recurring 91.3 % 90.6 % Software, hardware, and other non-recurring 8.7 9.4 Total revenues 100.0 100.0 Cost of revenue: Recurring 38.5 38.3 Software, hardware, and other non-recurring 4.6 4.8 Amortization of capitalized software costs and acquired intangible assets 7.6 6.4 Total cost of revenue 50.7 49.5 Gross profit 49.3 50.5 Operating expenses: Selling, general and administrative 31.1 30.4 Research and development costs, net 13.9 16.7 Amortization of acquired intangible assets 0.8 0.7 Impairment of assets 0.0 0.4 Restructuring costs 2.0 1.3 Total operating expenses 47.9 49.5 Income from operations 1.4 1.1 Interest income 0.0 0.1 Interest expense (0.8 ) (0.4 ) Other income (expense), net 0.0 (0.1 ) Income before provision for (benefit of) income taxes 0.6 0.7 Provision for (benefit of) income taxes 1.2 (0.3 ) Net income (loss) (0.6 )% 0.9 % Revenues
The following table presents our disaggregated revenues for the three months
ended
Three Months Ended June 30, 2020 2019 Recurring revenues: Subscription services$ 35,360 $ 30,144 Support and maintenance 38,547 39,652 Managed services 22,493 25,681 Electronic data interchange and data services 23,122 23,970 Total recurring revenues 119,522 119,447
Software, hardware, and other non-recurring revenues: Software license and hardware
4,740 7,095 Other non-recurring services 6,617 5,319 Total software, hardware and other non-recurring revenues 11,357 12,414 Total revenues$ 130,879 $ 131,861 Recurring revenues as a percentage of total revenues 91.3 % 90.6 %
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 performed for clients
29 -------------------------------------------------------------------------------- Revenue for the three months endedJune 30, 2020 decreased$1.0 million compared to the prior year, driven mostly by a$1.1 million decrease in software, hardware and other non-recurring revenues, including a$2.4 million decrease in software license and hardware revenue due to lower software bookings from the impact of the COVID-19 pandemic and our transition to a recurring subscription-based model, partially offset by a$1.3 million increase in other non-recurring services related to the completion of professional services projects. Recurring revenues increased$0.1 million , driven by a$5.2 million increase in subscription services, partially offset by$3.2 million lower managed services,$1.1 million lower support and maintenance, and$0.8 million lower EDI and data services. The increase in subscription services was primarily due to growth in subscriptions associated with patient experience and telehealth platforms, including the incremental revenues from the acquisitions ofMedfusion and OTTO, our population health and analytics, core NextGen, and NextGen Office cloud-based solutions. The decrease in managed services and EDI and data services was primarily the result of lower patient volumes directly associated with the COVID-19 pandemic. Support and maintenance decrease due to client attrition and our transition to a recurring subscription-based model. Bookings reflect the estimated annual value of our executed contracts and are believed to provide a broad indicator of the general direction and progress of the business. Total bookings on a comparable basis, adjusted to include the effect of pre-acquisition bookings, were$25.6 million for the three months endedJune 30, 2020 compared to$32.3 million in the prior year, reflecting a decrease in software and non-recurring services bookings, partially offset by higher subscriptions bookings. InMay 2020 , we announced a move to reduce our perpetual license revenue in favor of recurring subscription revenue.
Cost of Revenue and Gross Profit
The following table presents our cost of revenue and gross profit for the three
months ended
Three Months Ended June 30, 2020 2019 Cost of revenue: Recurring$ 50,429 $ 50,540 Software, hardware, and other non-recurring 6,041 6,278 Amortization of capitalized software costs and acquired intangible assets 9,899 8,413 Total cost of revenue$ 66,369 $ 65,231 Gross profit$ 64,510 $ 66,630 Gross margin % 49.3 % 50.5 % Cost of revenue consists primarily of compensation expense, including share-based compensation, for personnel that deliver our products and services. Cost of revenue also includes amortization of capitalized software costs and acquired technology, third party consultant and outsourcing costs, costs associated with our EDI business partners and clearinghouses, hosting service costs, third party software costs and royalties, and other costs directly associated with delivering our products and services. Refer to Note 8, "Intangible Assets" and Note 9, "Capitalized Software Costs" of our notes to consolidated financial statements included elsewhere in this Report for additional information on current period amortization of capitalized software costs and acquired technology and an estimate of future expected amortization. As noted above, we announced inMay 2020 a move to reduce our perpetual license revenue in favor of recurring subscription revenue, which will impact our gross margin percentages as we will book less high-margin perpetual licenses than we have historically, but ultimately it will produce high-margin recurring revenue. When combined with incremental amortization of capitalized software costs and acquired intangible assets, it will further reduce our expected gross margin percentage.
Share-based compensation expense included in cost of revenue was
Gross profit for the three months endedJune 30, 2020 decreased$2.1 million compared to the prior year period due to$1.0 million lower revenues, consisting mostly of lower software, hardware and other non-recurring revenue, as discussed above and a$1.5 million increase in amortization of acquired intangible assets mostly related to our acquisitions of Topaz,Medfusion , and OTTO, higher amortization of previously capitalized software costs from the general release of development projects, and higher subscriptions services costs, offset by lower managed services and EDI and data services costs due to lower transactional volume. As a result, our gross margin decreased to 49.3% for the three months endedJune 30, 2020 compared to 50.5% in the prior year. 30 --------------------------------------------------------------------------------
Selling, General and Administrative Expense
The following table presents our selling, general and administrative expense for
the three months ended
Three Months Ended June 30, 2020 2019 Selling, general and administrative$ 40,737 $ 40,128 Selling, general and administrative, as a percentage of revenue 31.1 % 30.4 % Selling, general and administrative expense consist of compensation expense, including share-based compensation, for management and administrative personnel, selling and marketing expense, facilities costs, depreciation, professional service fees, including legal and accounting services, legal settlements, acquisition and transaction-related costs, and other general corporate and administrative expenses. Share-based compensation expense included in selling, general and administrative expenses was$4.1 million and$3.4 million for the three months endedJune 30, 2020 and 2019, respectively. The increase in share-based compensation for the three months endedJune 30, 2020 compared to the same prior year periods is due to increased utilization of share-based awards to incentivize our executives and employees. Refer to Note 14, "Share-Based Awards" of our notes to condensed consolidated financial statements included elsewhere in this Report for additional information of our share-based awards and related incentive plans. Selling, general and administrative expenses increased$0.6 million for the three months endedJune 30, 2020 compared to the prior year period, driven by higher legal fees, higher share-based compensation expenses noted above, and incremental personnel costs from our acquisitions, partially offset by decreases in travel and conferences and infrastructure expenses.
Research and Development Costs, net
The following table presents our net research and development costs, capitalized software costs, and gross expenditures prior to capitalization, for the three months endedJune 30, 2020 and 2019 (in thousands): Three Months Ended June 30, 2020 2019 Gross expenditures$ 23,834 $ 26,786 Capitalized software costs (5,612 ) (4,735 ) Research and development costs, net$ 18,222
Research and development costs, as a percentage of revenue
13.9 % 16.7 % Capitalized software costs as a percentage of gross expenditures 23.5 % 17.7 % Gross research and development expenditures, including costs expensed and costs capitalized, consist of compensation expense, including share-based compensation for research and development personnel, certain third-party consultant fees, software maintenance costs, and other costs related to new product development and enhancement to our existing products. The healthcare information systems and services industry is characterized by rapid technological change, requiring us to engage in continuing investments in our research and development to update, enhance and improve our systems. This includes expansion of our software and service offerings that support pay-for-performance initiatives around accountable care organizations, bringing greater ease of use and intuitiveness to our software products, enhancing our managed cloud and hosting services to lower our clients' total cost of ownership, expanding our interoperability and enterprise analytics capabilities, and furthering development and enhancements of our portfolio of specialty-focused templates within our electronic health records software. The capitalization of software development costs results in a reduction to our reported net research and development costs. Our software capitalization rate, or capitalized software costs as a percentage of gross expenditures, has varied historically and may continue to vary based on the nature and status of specific projects and initiatives in progress. Although changes in software capitalization rates have no impact on our overall cash flows, it results in fluctuations in the amount of software development costs that may be capitalized or expensed up front and the amount of net research and development costs reported in our consolidated statements of net income (loss) and comprehensive income (loss), and ultimately also affects the future amortization of our previously capitalized software development costs. Refer to Note 9, "Capitalized Software Costs" of our notes to consolidated financial statements included elsewhere in this Report for additional information on current period amortization of capitalized software costs and an estimate of future expected amortization. Share-based compensation expense included in research and development costs was$0.9 million and$1.0 million for the three months endedJune 30, 2020 and 2019, respectively. 31
-------------------------------------------------------------------------------- Net research and development costs for the three months endedJune 30, 2020 decreased$3.8 million compared to the prior year period due to$2.9 million lower gross expenditures and$0.9 million higher capitalization of software costs. The decrease in gross expenditures was driven primarily by lower personnel costs associated with our business restructuring plan and lower travel costs. Our software capitalization rate fluctuates due to differences in the nature and status of our projects and initiatives during a given year, which affects the amount of development costs that may be capitalized.
Amortization of Acquired Intangible Assets
The following table presents our amortization of acquired intangible assets for
the three months ended
Three Months EndedJune 30, 2020 2019
Amortization of acquired intangible assets $ 1,112
Amortization of acquired intangible assets included in operating expense consist of the amortization related to our customer relationships and trade names intangible assets acquired as part of our business combinations. Refer to Note 8, "Intangible Assets" of our notes to consolidated financial statements included elsewhere in this Report for an estimate of future expected amortization. Amortization of acquired intangible assets for the three months endedJune 30, 2020 increased$0.2 million compared to the prior year due to additional amortization of the customer relationships and trade names intangible assets acquired fromMedfusion .
Restructuring Costs and Impairment of Assets
InMay 2020 , we announced a decision to execute a reduction in our workforce of less than 3% as well as other temporary cost reductions in response to the COVID-19 pandemic. We recorded$2.6 million of restructuring costs, consisting of payroll-related costs, such as severance, outplacement costs, and continuing healthcare coverage, associated with the involuntary separation of employees pursuant to a one-time benefit arrangement, in the three months endedJune 30, 2020 within operating expenses in our condensed consolidated statements of net income (loss) and comprehensive income (loss). These amounts were accrued when it was probable that the benefits would be paid, and the amounts were reasonably estimable. The payroll-related costs have been substantially paid as ofJune 30, 2020 . In the three months endedJune 30, 2019 , we recorded$1.7 million of restructuring costs, consisting primarily of payroll-related costs, such as severance, outplacement costs, and continuing healthcare coverage, associated with the involuntary separation of employees pursuant to a one-time benefit arrangement, as part of a business restructuring plan implemented inJune 2019 . In connection with theJune 2019 restructuring plan, we also vacated portions of certain leased locations and recorded impairments of$0.5 million in the three months endedJune 30, 2019 to our operating right-of-use assets and certain related fixed assets associated with the vacated locations, or portions thereof, in Horsham,St. Louis , andIrvine based on projected sublease rental income and estimated sublease commencement dates. The impairment analysis was performed at the asset group level and the impairment charge was estimated by comparing the fair value of each asset group based on the expected cash flows to its respective book value. We determined the discount rate for each asset group based on the approximate interest rate on a collateralized basis with similar remaining terms and payments as of the impairment date. Significant judgment was required to estimate the fair value of each asset group and actual results could vary from the estimates, resulting in potential future adjustments to amounts previously recorded.
Interest and Other Income and Expense
The following table presents our interest expense for the three months ended
Three Months Ended June 30, 2020 2019 Interest income $ 6$ 79 Interest expense (1,107 ) (472 ) Other income (expense), net 16 (133 ) Interest expense relates to our revolving credit agreement and the related amortization of deferred debt issuance costs. Refer to Note 10, "Line of Credit" of our notes to condensed consolidated financial statements included elsewhere in this Report for additional information. 32 -------------------------------------------------------------------------------- The changes in interest expense is primarily caused by fluctuations in outstanding balances under our revolving credit agreement and the related amortization of debt issuance costs. As ofJune 30, 2020 , we had$179.0 million of outstanding balances under the revolving credit agreement, compared to an outstanding balance of$129.0 million as ofMarch 31, 2020 and$6.0 million as ofJune 30, 2019 , resulting in higher interest expense for the three months endedJune 30, 2020 compared to the prior year. The fluctuations of other income and expense compared to the prior year period is primarily due to changes to theIndia foreign exchange rates.
Provision for (Benefit of) Income Taxes
The following table presents our provision for (benefit of) income taxes for the
three months ended
Three Months EndedJune 30, 2020 2019
Provision for (benefit of) income taxes $ 1,616
204.0 % 44.0 % The increase in the effective tax rate for the three months endedJune 30, 2020 compared to the prior year was primarily due to the decrease in pre-tax book income and increase tax benefit in research and development credits offset with additional tax expense related to higher nondeductible officer's compensation and an increase in stock option discrete items. The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), signed into law onMarch 27, 2020 , has resulted in significant changes to theU.S. federal corporate tax law. Additionally, several state and foreign jurisdictions have enacted additional legislation and or comply with federal changes. We have considered the applicable tax law changes in our current and deferred income tax expense and recognized the impact in our income tax provision, as applicable.
Net Income (Loss)
The following table presents our net income and loss (in thousands) and net income (loss) per share and for the three months endedJune 30, 2020 and 2019: Three Months Ended June 30, 2020 2019 Net income (loss)$ (824 ) $ 1,244 Net income (loss) per share: Basic$ (0.01 ) $ 0.02 Diluted$ (0.01 ) $ 0.02 As a result of the foregoing changes in revenue and expense, net income (loss) for the three months endedJune 30, 2020 decreased$2.1 million compared to the prior year period.
Liquidity and Capital Resources
The following table presents selected financial statistics and information for
the three months ended
Three Months Ended June 30, 2020 2019 Cash and cash equivalents$ 192,323 $ 28,607 Unused portion of revolving credit agreement (1) 121,000 294,000 Total liquidity$ 313,323 $ 322,607 Net income (loss) $ (824 )$ 1,244 Net cash provided by operating activities$ 17,672 $ 16,997
(1) As of
Our outstanding borrowings under our revolving credit agreement was
33 --------------------------------------------------------------------------------
Our principal sources of liquidity are our cash generated from operations, driven mostly by our net income and working capital management, our cash and cash equivalents, and our revolving credit agreement.
We believe that our cash and cash equivalents on hand atJune 30, 2020 , together with our cash flows from operating activities and liquidity provided by our revolving credit agreement, will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months. Due to the ongoing uncertainties of the impact of the COVID-19 pandemic on the industry in which we operate, we had proactively implemented certain precautionary measures, including cost containment and strengthening our cash position by increasing the outstanding borrowings under our revolving credit agreement. We borrowed an additional$50.0 million under our revolving credit agreement inApril 2020 and subsequently paid down$50.0 million inJuly 2020 based on the reassessment of our short-term cash flow and working capital requirements. The impact of COVID-19 is rapidly evolving and widespread, and therefore, it is not possible to fully identify, measure, and predict the various impacts that COVID-19 may have on our financial condition, results of operations, cash flows, and liquidity requirements. We will continue to assess the potential effects of the COVID-19 pandemic on our business and actively manage our response accordingly.
Cash and Cash Equivalents
As of
We may continue to use a portion of our funds as well as available financing from our revolving credit agreement for future acquisitions or other similar business activities, although the specific timing and amount of funds to be used is not currently determinable. We intend to expend some of our available funds for the development of products complementary to our existing product line as well as new versions of certain of our products. These developments are intended to take advantage of more powerful technologies and to increase the integration of our products. Our investment policy is determined by our Board of Directors. Excess cash, if any, may be invested in very liquid short-term assets including tax exempt and taxable money market funds, certificates of deposit and short-term municipal bonds with average maturities of 365 days or less at the time of purchase. Our Board of Directors continues to review alternate uses for our cash including an expansion of our investment policy and other items. Any or all of these programs could significantly impact our investment income in future periods.
Cash Flows from Operating Activities
The following table summarizes our condensed consolidated statements of cash
flows for the three months ended
Three Months Ended June 30, 2020 2019 Net income (loss) $ (824 )$ 1,244 Non-cash expenses 22,037 20,894
Cash from net income (loss), as adjusted
22,138
Change in contract assets and liabilities, net (6,708 ) (650 ) Change in accounts receivable 2,286
5,105
Change in other assets and liabilities 881 (9,596 ) Net cash provided by operating activities$ 17,672 $ 16,997 For the three months endedJune 30, 2020 , cash provided by operating activities increased$0.7 million compared to the prior year, driven by a$10.5 million increase in cash from changes in other assets and liabilities, partially offset by decreases of$6.1 million from net changes in contract assets and liabilities,$2.8 million from changes in accounts receivable, and$0.9 million from changes in net income (loss) as adjusted for non-cash expenses. The increase in cash from net changes in other assets and liabilities is primarily due to an increase in the deferral of payroll taxes in the three months endedJune 30, 2020 and higher payments of cash incentive bonuses and commissions in the prior year. The decrease in cash associated with net changes in contract assets and liabilities is primarily due to a lower level of maintenance invoicing as a result of client attrition. The change in accounts receivable decreased as collections in the three months endedJune 30, 2020 was negatively impacted by the COVID-19 pandemic in comparison to stronger collections in the prior year. Net income (loss) for the three months endedJune 30, 2020 decreased$2.1 million compared to the prior year, as described above under the heading "Net Income (Loss)".
Cash Flows from Investing Activities
Net cash used in investing activities for the three months endedJune 30, 2020 was$6.2 million compared with$8.4 million in the prior year. The$2.2 million decrease in net cash used in investing activities is due to a$3.1 million decrease in additions to equipment and improvements, offset by a$0.9 million increase in additions to capitalized software costs. 34 --------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net cash provided by financing activities for the three months endedJune 30, 2020 was$48.6 million cash provided compared with$6.3 million cash used in the prior year. The$54.9 million increase in cash provided by financing activities is due to additional borrowings of$50.0 million on our line of credit in the three months endedJune 30, 2020 , compared to$5.0 million in principal repayments in the prior year and$0.6 million lower payments of taxes related to net share settlement of equity awards, partially offset by$0.7 million lower proceeds from the issuance of shares under employee plans.
Contractual Obligations
We have minimum purchase commitments of
The following table summarizes our significant contractual obligations at
For the year ended March 31, 2021 (remaining 2026 and Contractual Obligations Total nine months) 2022 2023 2024 2025 beyond Operating lease obligations$ 40,676 $ 7,066$ 9,186 $ 9,249 $ 7,955 $ 5,948 $ 1,272 Remaining lease obligations for vacated properties (1) 11,108 2,391 2,935 2,255 1,677 1,338 512 Line of credit obligations (Note 10) 179,000 - - 179,000 - - - Total$ 230,784 $ 9,457$ 12,121 $ 190,504 $ 9,632 $ 7,286 $ 1,784
(1) Remaining lease obligations for vacated properties relates to remaining lease
obligations at certain locations, including
Louis, that we have vacated and are actively marketing the locations for
sublease as part of our reorganization efforts. Refer to Note 17,
"Restructuring Plan" of our notes to consolidated financial statements
included elsewhere in this Report for additional information. Total
obligations have not been reduced by projected sublease rentals or by minimum
sublease rentals of
subleases.
The deferred compensation liability as ofJune 30, 2020 was$6.0 million , which is not included in the table above as the timing of future benefit payments to employees is not determinable. The uncertain tax position liability as ofJune 30, 2020 was$4.7 million , which is not included in the table above as the timing of expected payments is not determinable. New Accounting Pronouncements Refer to Note 1, "Summary of Significant Accounting Policies" of our notes to condensed consolidated financial statements included elsewhere in this Report for a discussion of new accounting standards.
Critical Accounting Policies and Estimates
The discussion and analysis of our condensed consolidated financial statements and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenue and expenses, and related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends, and other factors we believe to be reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. On a regular basis, we review the accounting policies and update our assumptions, estimates, and judgments, as needed, to ensure that our condensed consolidated financial statements are presented fairly and in accordance with GAAP. Actual results could differ materially from our estimates under different assumptions or conditions. To the extent that there are material differences between our estimates and actual results, our financial condition or results of operations will be affected. We describe our significant accounting policies in Note 1, "Summary of Significant Accounting Policies," of our notes to consolidated financial statements included in our Annual Report. We discuss our critical accounting policies and estimates in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report. 35
--------------------------------------------------------------------------------
We adopted Accounting Standards Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, using the modified retrospective transition approach, which required the recognition of expected credit losses for our accounts receivable and our contract assets. Refer to Note 3, "Accounts Receivable" of our notes to condensed consolidated financial statements included elsewhere in this Report for additional information. There have been no other material changes in our significant accounting policies or critical accounting policies and estimates since the fiscal year endedMarch 31, 2020 .
© Edgar Online, source