NEXTGEN HEALTHCARE, INC. 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 ended March 31, 2021
("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 the Securities 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 to NextGen 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 Overview
NextGen 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 evolving U.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. Over 100,000 providers use NextGen
Healthcare solutions to 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 addition of
behavioral health to our medical and oral health capabilities, we continue to
extend our share not only in Federally Qualified Health Centers ("FQHCs"), but
also in the growing integrated care market.
NextGen Healthcare has historically enhanced our offering through both organic
and inorganic activities. In October 2015 , we divested our former Hospital
Solutions division to focus exclusively on the ambulatory marketplace. In
January 2016 , we acquired HealthFusion Holdings, Inc. and its cloud-based
electronic health record and practice management solution. In April 2017 , we
acquired Entrada, Inc. and its cloud-based, mobile platform for clinical
documentation and collaboration. In August 2017 , we acquired EagleDream Health,
Inc. and its cloud-based population health analytics solution. In January 2018 ,
we acquired Inforth Technologies for its specialty-focused clinical content. In
October 2019 , we acquired Topaz Information Systems, LLC ("Topaz") for its
behavioral health solutions. In December 2019 , we acquired Medfusion, Inc.
("Medfusion") for its Patient Experience Platform (i.e., patient portal,
self-scheduling, and patient pay) capabilities and OTTO Health, LLC ("OTTO") for
its integrated virtual care solutions, notably telemedicine. The integration of
these acquired technologies has made NextGen Healthcare's solutions among the
most comprehensive in the market.
Our company was incorporated in California in 1974. Previously named Quality
Systems, Inc. , we changed our corporate name to NextGen Healthcare, Inc. in
September 2018 . Our principal executive offices are located at 3525 Piedmont
Rd., NE , Building 6, Suite 700, Atlanta, Georgia , and our principal website is
www.nextgen.com. We operate on a fiscal year ending on March 31 .
23
--------------------------------------------------------------------------------Industry and Regulatory Background, Market Opportunity, and Trends
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 theU.S. 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. Importantly, the introduction of VBC programs was only an element of the broader approach to reducing healthcare expenditure. 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. Among other factors, consumerism is set to play a major role in driving volume increases outside of the hospital. In addition, providers continue to seek new tools and means to connect with patients in new ways. Patients are expecting care to be personalized and tailored to their preferences and are seeking much greater transparency about the costs for visits, medications, and procedures as well as improved convenience and access to care. Along with the continued expansion of telehealth, there will be growth in technologies which facilitate the digital connection between patient and provider. 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 meaningful 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 electronic health records ("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. InJanuary 2020 , theU.S. Department of Health and Human Services ("HHS") officially declared that a public health emergency ("PHE") existed as a result of the COVID-19 pandemic. Then, in March andApril 2020 , HHS issued a series of rules and orders to offer healthcare providers flexibility or waivers from certain regulatory requirements during the PHE. Among other changes, HHS and theCenters for Medicare and Medicaid Services ("CMS") eliminated the patient geographic and originating site restrictions for Medicare telehealth services that outside of the PHE restrict the services to patients in rural geographic areaswho are physically present at a healthcare facility at the time of service. Other flexibilities authorized CMS to reimburse telehealth visits at the same payment rates as in-person office visits during the PHE. State Medicaid programs and commercial insurers instituted similar policies to promote virtual visits as an alternative to in-person care during the pandemic. Now, looking beyond the eventual end of the PHE,Congress is considering legislation that would make some of these temporary telehealth policies permanent. InApril 2021 , bipartisan legislation was introduced in both theU.S. House of Representatives and theU.S. Senate that would permanently expand Medicare's telehealth services program to all geographies and allow patients to receive services from their homes. 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 retain 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$2.2 trillion Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law in lateMarch 2020 . While this law created the "Paycheck Protection Program" for small businesses, which would include many physician groups, the CARES 24
-------------------------------------------------------------------------------- Act also increased funding for thePublic Health and Social Services Emergency Fund by$127 billion , with$100 billion of that earmarked to reimburse eligible hospitals and healthcare providers for healthcare-related expenses or lost revenues not otherwise reimbursed that are directly attributable to COVID-19. The law also provided$1.32 billion in supplemental funding to community health centers. The Consolidated Appropriations Act, 2021 was passed byCongress and signed into law inDecember 2020 . This$2.3 trillion legislative package combines the$1.4 trillion fiscal year 2021 appropriations bills with a$900 billion coronavirus aid package. The law adds$3 billion in additional funding forHHS's Provider Relief Fund , which was established by the CARES Act (March 2020 ) and previously funded with$175 billion to reimburse providers for healthcare related expenses and lost revenue attributable to the pandemic. The law also provides a three-year extension (federal fiscal years 2021, 2022, 2023) of federal grant funding for community health centers and provides$4.25 billion in supplemental grant funding for substance abuse disorder, mental health, and behavioral health programs run byHHS's Substance Abuse and Mental Health Services Administration ("SAMHSA"). Support for telehealth services was included through provisions that permanently remove Medicare's patient geographic and site limitations and an appropriation of$250 million for theFederal Communications Commission's ("FCC's") COVID-19 Telehealth Program, which grants non-profit healthcare providers financial support to implement telehealth solutions. InMarch 2021 , PresidentJoe Biden signed into law the$1.9 trillion American Rescue Plan Act. This legislation includes additional coronavirus-related relief measures and is the latest in a series of pandemic-related aid legislation enacted sinceMarch 2020 . Among other provisions, this law provides$7.6 billion in supplemental federal grant funding for FQHCs. As a comparison, the CARES Act provided$1.3 billion in supplemental federal grant funding for FQHCs. In addition, this law provides$3.5 billion in funding for block grant programs that address mental health and substance use disorders and are administered by HHS's SAMHSA. The new regulations will require significant compliance efforts for not only healthcare information technology ("HIT") companies, networks, and exchanges, but also for healthcare providers. However, the Cures Act 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, which ONC requires certified HIT companies to adopt through APIs. Meanwhile, CMS is requiring hospitals to provide electronic admission, discharge and transfer notification to other healthcare facilities, providers and designated care team members. All healthcare providers are required to comply with the information blocking rules as of the initialApril 5, 2021 compliance date. As ofDecember 31, 2022 , providers participating in federal programs that require the use of certified HIT will need to use the new "2015 Edition Cures Update" certified version of EHR software to comply with the Cures Act certification requirements. Through enhanced interoperability functionality and standardized APIs, the Spring '21 release of NextGen® Enterprise will help healthcare providers meet these dual mandates included in the Cures Act. 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 80,000 lives a year inthe United States . The integrated care model prevalent 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 theNextGen Healthcare platform. As a result of the COVID-19 pandemic, ambulatory practices have come to appreciate the importance of business continuity, particularly in administrative business functions which are non-core to medical care and may turn toNextGen Healthcare more often for managed services.
COVID-19 Pandemic
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. The need to access care while still social distancing was addressed early on with the limited use of telemedicine (also known as 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. At present, we are conducting business as usual with certain modifications to employee travel, employee work locations, and marketing events, among other modifications. We continue to monitor the broader implications of the global COVID-19 pandemic and may take further actions that we determine are in the best interests of our employees, customers, partners, suppliers, and shareholders. 25 --------------------------------------------------------------------------------
Our Strategy
We empower the transformation of ambulatory care by delivering solutions that
enable groups to be successful under all models of care, including emerging
value-based care models that include down-side risk. We primarily serve
organizations that provide care in an ambulatory setting and do so across
diverse practice sizes, specialties, and business models. Furthermore, we
support the advances in integrated care that focuses on the whole person. Our
platform is uniquely positioned to successfully enable our clients to expand
access to care, enhance the coordination and management of care, and optimize
patient outcomes through an integrated medical record that extends across their
medical, mental, and oral health and care needs.
Effective and frictionless interoperability is essential to all models of care.
Our experience powering many of the nation's Health Information Exchanges
("HIE's") places us in a unique position to enable our clients to leverage this
technology to lower the cost of care and improve the patient and provider
experience by providing an integrated community patient record.
Patient experience is directly correlated to patient engagement and an engaged patient is a key to positive outcomes. Today's patient is also an active consumer of their healthcare, each searching for the best experience. Our platform enables our clients to create a personalized care experience that enhances trust and drives patient loyalty.
Our longstanding success in the ambulatory market has enabled us to build significant expertise across many relevant disciples that are clients actively request. We partner with our clients to operate and optimize their IT systems and operations, enhance revenue cycle processes, service line expansion and operations, as well as advise on long-term strategy.
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 unwanted 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.
26
--------------------------------------------------------------------------------
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) for the three months endedJune 30, 2021 and 2020 (certain percentages below may not sum due to rounding): Three Months Ended June 30, 2021 2020 Revenues: Recurring 90.6 % 91.3 % Software, hardware, and other non-recurring 9.4 8.7 Total revenues 100.0 100.0 Cost of revenue: Recurring 39.1 38.5 Software, hardware, and other non-recurring 5.1
4.6
Amortization of capitalized software costs and acquired intangible assets 5.5 7.6 Total cost of revenue 49.8 50.7 Gross profit 50.2 49.3 Operating expenses: Selling, general and administrative 33.2
31.1
Research and development costs, net 13.2
13.9
Amortization of acquired intangible assets 0.6 0.8 Impairment of assets 0.3 0.0 Restructuring costs 0.4 2.0 Total operating expenses 47.6 47.9 Income from operations 2.6 1.4 Interest income 0.0 0.0 Interest expense (0.2 ) (0.8 ) Other income (expense), net 0.0 0.0 Income before provision for income taxes 2.3 0.6 Provision for income taxes 0.4 1.2 Net income (loss) 1.9 % (0.6 )% Revenues
The following table presents our disaggregated revenues for the three months
ended
Three Months Ended June 30,
2021 2020
Recurring revenues:
Subscription services $ 38,284 $ 35,360
Support and maintenance 38,486 38,547
Managed services 29,431 22,493
Electronic data interchange and data services 26,180 23,122
Total recurring revenues 132,381 119,522
Software, hardware, and other non-recurring revenues: Software license and hardware
7,214 4,740
Other non-recurring services 6,489 6,617
Total software, hardware and other non-recurring revenues 13,703 11,357
Total revenues $ 146,084 $ 130,879
Recurring revenues as a percentage of total revenues 90.6 % 91.3 %
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
27
--------------------------------------------------------------------------------
Consolidated revenue for the three months ended June 30, 2021 increased $15.2
million compared to the prior year period due to a $12.9 million increase in
recurring revenues and a $2.3 million increase in software, hardware and other
non-recurring revenues. The increase in recurring revenues was due to a $6.9
million increase in managed services, $2.9 million increase in subscription
services, and $3.1 million increase in EDI and data services. The increase in
managed services revenue was primarily due to an increase in revenue cycle
management ("RCM") revenues as patient volumes have returned to more normalized
levels after being negatively impacted by the COVID-19 pandemic in the prior
year and an increase in managed cloud services revenue from higher recent
bookings. The increase in subscription services was primarily due to growth in
subscriptions associated with our virtual visits, which benefited from higher
demand driven by the COVID-19 pandemic plus increases in revenue from our core
NextGen, NextGen Office, and connected health cloud-based solutions associated
with higher recent bookings. EDI and data services increased due to higher
patient and transaction volumes compared to the prior year, which was negatively
impacted by the COVID-19 pandemic. The increase in non-recurring services
revenue was primarily driven by an increase in software license revenue due to
higher bookings.
Bookings reflect the estimated annual value of our executed contracts, adjusted
to include the effect of pre-acquisition bookings, and are believed to provide a
broad indicator of the general direction and progress of the business. Total
bookings were $34.3 million and $25.6 million for the three months ended June
30, 2021 and 2020, respectively. The increase is primarily due to higher
bookings of software and other non-recurring services and higher managed cloud
services bookings, partially offset lower bookings of virtual visits
subscriptions as the prior year benefited from the onset of the COVID-19
pandemic.
Cost of Revenue and Gross Profit
The following table presents our consolidated cost of revenue and gross profit
for the three months ended
Three Months Ended June 30,
2021 2020
Cost of revenue:
Recurring $ 57,160 $ 50,429
Software, hardware, and other non-recurring 7,497 6,041
Amortization of capitalized software costs and
acquired intangible assets 8,084 9,899
Total cost of revenue $ 72,741 $ 66,369
Gross profit $ 73,343 $ 64,510
Gross margin % 50.2 % 49.3 %
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 7,
"Intangible Assets" and Note 8, "Capitalized Software Costs" of our notes to
condensed 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.
Share-based compensation expense included in cost of revenue was
Gross profit for the three months endedJune 30, 2021 increased$8.8 million compared to the prior year due to a$15.2 million increase in revenues as discussed above, offset by a$6.4 million increase in cost of revenue associated with the higher revenues. Our gross margin increased to 50.2% for the three months endedJune 30, 2021 compared to 49.3% in the prior year. The$6.7 million increase in recurring cost of revenue for the three months endedJune 30, 2021 compared to the prior year periods was due to higher cost of managed services directly associated with higher revenues as noted above, higher costs of subscription sales primarily due to higher salaries and benefits from increased employee headcount and third party costs needed to meet increased demand, and higher costs of EDI services due to higher transactional volume. Software, hardware, and other non-recurring services revenue costs increased$1.5 million compared to the prior period primarily due to an increase in consulting costs associated with higher volume of professional services projects.
Selling, General and Administrative Expense
The following table presents our selling, general and administrative expense for
the three months ended
Three Months
Ended
2021 2020
Selling, general and administrative$ 48,486 $ 40,737 Selling, general and administrative, as a percentage of revenue 33.2 % 31.1 % 28
--------------------------------------------------------------------------------
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$4.9 million and$4.1 million for the three months endedJune 30, 2021 and 2020, respectively. The increase in share-based compensation for the three months endedJune 30, 2021 compared to the same prior year period is primarily due to incremental expense incurred from the accelerated vesting of certain equity awards associated with the departure of our Chief Executive Officer. Refer to Note 13, "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$7.7 million for the three months endedJune 30, 2021 , compared to the prior year period. These increases were primarily due to increased legal fees associated with our ongoing shareholder litigation matters, severance costs related to the departure of our Chief Executive Officer, increase in costs of our 401(k) employer match that was temporarily suspended in the prior year as a cost-savings measure after the onset of the COVID-19 pandemic, increase in stock based compensation expense as noted above, and increases in travel and conferences costs as these activities begin to resume at moderate levels.
Research and Development Costs, net
The following table presents our consolidated net research and development costs, capitalized software costs, and gross expenditures prior to capitalization, for the three months endedJune 30, 2021 and 2020 (in thousands): Three Months Ended June 30, 2021 2020 Gross expenditures$ 24,859 $ 23,834 Capitalized software costs (5,538 ) (5,612 ) Research and development costs, net$ 19,321
Research and development costs, as a percentage of revenue
13.2 % 13.9 %
Capitalized software costs as a percentage of gross
expenditures 22.3 % 23.5 %
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 condensed consolidated statements of net income and
comprehensive income, and ultimately also affects the future amortization of our
previously capitalized software development costs. Refer to Note 8, "Capitalized
Software Costs" of our notes to condensed 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
$1.0 million and $0.9 million for the three months ended June 30, 2021 and 2020,
respectively.
Net research and development costs for the three months ended
29
--------------------------------------------------------------------------------Amortization of Acquired Intangible Assets
The following table presents our amortization of acquired intangible assets for
the three months ended
Three Months Ended June 30,
2021 2020
Amortization of acquired intangible assets
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 7, "Intangible Assets" of our notes to condensed 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, 2021 decreased$0.2 million compared to the prior year periods due to lower amortization of the customer relationships intangible assets associated withMedfusion and HealthFusion as these assets are amortized under the accelerated method of amortization.
Restructuring Costs and Impairment of Assets
In the three months endedJune 30, 2021 and 2020, we recorded restructuring costs of$0.5 million and$2.6 million , respectively, 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, within operating expenses in our condensed consolidated statements of net income and comprehensive income. During the three months endedJune 30, 2021 , we vacated ourFairport, NY office and recorded impairments of$0.4 million to our operating right-of-use assets and certain related fixed assets based on projected sublease rental income and the estimated sublease commencement date.
Interest and Other Income and Expense
The following table presents our interest expense for the three months ended
Three Months Ended June 30,
2021 2020
Interest income $ 12 $ 6
Interest expense (317 ) (1,107 )
Other income (expense), net (22 ) 16
Interest expense relates to our revolving credit agreement and the related
amortization of deferred debt issuance costs. Refer to Note 9, "Line of Credit"
of our notes to condensed consolidated financial statements included elsewhere
in this Report for additional information.
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 of June 30, 2021 , we had no outstanding
balances under the revolving credit agreement, compared to $179.0 outstanding as
of June 30, 2020 . The fluctuations of other income and expense compared to the
prior year periods are primarily due to changes to the India foreign exchange
rates.
Provision for Income Taxes
The following table presents our provision for income taxes for the three months
ended
Three Months Ended June 30,
2021 2020
Provision for income taxes $ 559 $ 1,616
Effective tax rate 16.4 % 204.0 %
The decrease in the effective tax rate for the three months ended June 30, 2021
compared to the prior year period was primarily due to the annualized projected
loss before taxes in the prior year, which caused the rate reconciling items to
have a more significant impact on the effective tax rate. The decrease in the
effective tax rate was also driven from the net benefit of discrete items in the
current period compared to the prior year net expense for discrete items.
30
--------------------------------------------------------------------------------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, 2021 and 2020: Three Months Ended June 30, 2021 2020 Net income (loss)$ 2,848 $ (824 ) Net income (loss) per share: Basic$ 0.04 $ (0.01 ) Diluted$ 0.04 $ (0.01 ) As a result of the foregoing changes in revenue and expense, net income (loss) for the three months endedJune 30, 2021 increased$3.7 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,
2021 2020
Cash and cash equivalents $ 63,002 $ 192,323
Unused portion of revolving credit agreement (1) 300,000 121,000
Total liquidity $ 363,002 $ 313,323
Net income (loss) $ 2,848 $ (824 )
Net cash provided by operating activities $ 313 $ 17,672 (1) As of
million revolving credit agreement.
We had no outstanding borrowings under our revolving credit agreement as of
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, 2021 , 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. During the challenging and uncertain period brought on by the initial phases of the COVID-19 pandemic, we made some important decisions, including cost reduction activities with a primary goal of preserving cash and protecting the employee base. Most of these cost reductions were temporary as we believed that preserving our employee base, organizational momentum, and robust capabilities was the right decision for our Company and our shareholders. We had proactively strengthened our cash position by increasing the outstanding borrowings under our revolving credit agreement as ofJune 30, 2020 , which was subsequently repaid based on the reassessment of our short-term cash flow and working capital requirements. We have no outstanding borrowings under our revolving credit agreement as ofJune 30, 2021 . At present, we are conducting business as usual with certain modifications to employee travel, employee work locations, and marketing events, among other modifications. However, the extent to which COVID-19 may continue to impact our business, financial results, cash flows, and liquidity requirements depends on numerous evolving factors including, but not limited to, the magnitude and duration of COVID-19; the impact on our employees; the extent to which it impacts worldwide macroeconomic conditions, including interest rates, employment rates, and health insurance coverage; the speed of the recovery; and governmental and business reactions to the pandemic. 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.
31
-------------------------------------------------------------------------------- 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,
2021 2020
Net income (loss) $ 2,848 $ (824 )
Non-cash expenses 20,151 22,037
Cash from net income, as adjusted $ 22,999 $ 21,213
Change in contract assets and liabilities, net (1,501 ) (6,708 ) Change in accounts receivable 3,407
2,286
Change in all other assets and liabilities (24,592 )
881
Net cash provided by operating activities $ 313$ 17,672 For the three months endedJune 30, 2021 , cash provided by operating activities decreased$17.4 million compared to the prior year period, primarily due to decreases of$25.4 million in changes in other assets and liabilities, partially offset by increases of$5.2 million due to net changes in contract assets and liabilities,$1.8 million higher cash from net income, as adjusted for non-cash expenses, and$1.1 million increases from change in accounts receivable. The decrease in cash from net changes in other assets and liabilities is primarily due to higher payments of cash incentive bonuses compared to the prior year due to a higher rate of bonus achievement, decrease in cash from changes in accounts payable due to timing of invoice payments, and decreases in prepaid expenses, primarily prepaid insurance, third party annual licenses, and prepaid hosting and subscriptions. The increase in cash from changes in net contract assets and liabilities was primarily due to lower maintenance invoicing due to client attrition. Net income for the three months increased$3.7 million compared to the prior year period, as described in the "Net Income" section above. Non-cash expenses decreased primarily due to lower amortization of intangible assets. Accounts receivable balances continue to decrease from our efforts to collect and resolve aged balances, resulting in a corresponding increase in cash provided by operating activities of$3.4 million and$2.3 million in the three months endedJune 30, 2021 and 2020, respectively.
Cash Flows from Investing Activities
Net cash used in investing activities for the three months ended
Cash Flows from Financing Activities
Net cash used in financing activities for the three months endedJune 30, 2021 was$2.3 million compared with$48.6 million cash provided by financing activities in the prior year period. The decrease in cash provided by financing activities is primarily due to borrowings of$50.0 million in the prior year period, compared to no borrowings in the current year period. 32 --------------------------------------------------------------------------------
Contractual Obligations
We have minimum purchase commitments of
The following table summarizes our significant contractual obligations at
For the year ended March 31,
2022
(remaining
Contractual Obligations Total nine months) 2023 2024 2025 2026 2027 and beyond
Operating lease
obligations $ 18,654 $ 6,141 $ 4,954 $ 4,072 $ 2,453 $ 1,034 $ -
Remaining lease
obligations for vacated
properties (1) 11,646 4,620 3,266 2,200 1,337 223 -
Total $ 30,300 $ 10,761 $ 8,220 $ 6,272 $ 3,790 $ 1,257 $ -
(1) Remaining lease obligations for vacated properties relates to remaining lease
obligations at certain locations, including Cary,
North Canton,
sublease as part of our reorganization efforts. Refer to Note 16,
"Restructuring Plan" of our notes to condensed 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
non-cancelable subleases.
The deferred compensation liability as ofJune 30, 2021 was$7.4 million , which is not included in the table above as the timing of future benefit payments to employees is not determinable. The impact of our uncertain tax positions is not included in the table above as the timing of expected payments is not determinable. Refer to Note 11, "Income Taxes" of our notes to condensed consolidated financial statements included elsewhere in this Report for additional information.
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. There have been no other material changes in our significant accounting policies or critical accounting policies and estimates since the fiscal year endedMarch 31, 2021 . 33
--------------------------------------------------------------------------------
© Edgar Online, source
