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 our product development
plans, business strategies, future operations, financial condition and
prospects, developments in and the impacts of government regulation and
legislation, including, without limitation, The American Recovery and
Reinvestment Act, the Patient Protection and Affordable Care Act, and the
Medicare Access and CHIP Reauthorization Act of 2015, uncertainties related to
the future impact of United States tax reform, 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, 2019 ("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.
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
Our clients span the ambulatory care market from small single specialty practices to larger multi-specialty organizations. We have fully integrated our solutions so that our clients are able to provide their patients with comprehensive services utilizing a single platform. Our highly interoperable platform allows ambulatory practices to thrive especially in complex, heterogeneous healthcare communities where frictionless clinical data exchange is required to coordinate and optimize patient care.NextGen Healthcare has historically enhanced our solutions 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 capabilities andOTTO Health, LLC ("OTTO") for its integrated virtual care solutions. The integration of these acquired technologies have madeNextGen Healthcare's solutions among the most comprehensive and powerful in the market. The Company was incorporated inCalifornia in 1974. Previously namedQuality Systems, Inc. , the Company changed its corporate name toNextGen Healthcare, Inc. inSeptember 2018 . Our principal offices are located at18111 Von Karman Ave. , Suite 800,Irvine, California , 92612, and our principal website is www.nextgen.com. We operate on a fiscal year ending onMarch 31 .
Trends and Events in Our Business
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 practice transformation and technology advancements. Recognizing that 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. 25
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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
the Centers 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. The United States PHM market was estimated at $3.1 billion in 2018 and
is expected to more than double by 2022.
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 $218
billion in payments by 2028, as reported by RevCycle Intelligence. 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 the outpatient
setting as more care is being moved to this lower cost environment. Ambulatory
care settings have become an essential component of comprehensive, low cost
distributed care. In 2018, outpatient volumes reached over 3.5 billion
encounters and are forecasted to grow 15% by 2028, as reported by Becker's
Health IT and CIO Report. The independent physicians' practices segment is
expected to generate more revenue than non-affiliated hospitals as it accepts
electronic health records integrated PHM programs for better primary and
follow-up care, as reported by Frost & Sullivan . The need to sustain revenue has
made it extremely important for practices to secure their patient market share,
elevating patient loyalty to be a significant determinant of provider success.
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.
In order to maintain financial success with shifting reimbursement rules and
shrinking reimbursement, we believe demand for managed services, including
revenue cycle management ("RCM") services, hosting, transcription and scribe
services, aligned and integrated with clinical technology solutions, will
increase in the coming years.
Based on these trends, successful clients must undertake the following
imperatives: 1) ensure healthy predictable financial outcomes, 2) provide high
quality care at a lower cost in a risk-bearing environment, 3) ensure engaged
and loyal patients, and 4) optimize clinician productivity while deploying HIT
solutions, 5) support frictionless interoperability.
Our Strategy
We strive to be the trusted partner for clients of all sizes, integrating services and software into a consolidated solution that enables an efficient and effective caregiver and patient experience while driving positive financial outcomes. As a healthcare information technology and services company, we plan to continue investing in our current capabilities as well as building and/or acquiring new capabilities as we guide our clients through an evolving healthcare marketplace that is transitioning from fee-for-service to fee-for-value reimbursement models. With approximately 90,000 providers using our solutions, we are enabling care and believe we can truly transform the delivery of care through the following strategic priorities:
• Focus on the ambulatory client segment. In
Hospital Solutions division to focus on our core ambulatory clients.
Further, a recent operational reorganization better allows us to serve the
needs of our ambulatory clients through a simpler, more nimble, and focused
organization. We believe it is essential to protect, build and sell new
capabilities within our ambulatory client segment. We are focused on our
core by increasing quality and the serviceability of our solutions. Weintend to continue to enhance the capabilities of our NextGen Ambulatory
flagship product. At the same time, we intend to expand the capability of
the highly scalable, pure cloud-based and mobile-enabled NextGen® Office
platform.
• Platform as a service. With the introduction of our API 2.0 framework and
our continued leverage of the Mirth interoperability platform, we will
continue our evolution to plug and play extensibility and information
sharing that allows our customers to innovate and deploy high-fidelity
extensions to our core applications without the costs, risks (security,
performance, etc.) or complexity commonly associated with direct binding.
We have also introduced platform-enabled automation capabilities to empower
our clients to drive cost out of their processes while supporting their
needs to implement the highly personalized workflows that are required to
support value based care. Our acquisition of Entrada and its cloud-based,
mobile application in
that becomes essential for practitioners by improving their clinical
productivity with documentation support services that seamlessly integrate
into their electronic health record. We believe there is significant
opportunity to extend the solutions we offer existing and new clients
through value-added services such as RCM and EDI.
• Population health software and services. We are migrating into
applications, analytics and services that will enable our clients toproactively manage the health of patient populations. We are establishing
strong development partnerships with our most innovative customers who are
actively participating in shared-risk contracts, and working together with
them to create progressive population health capabilities. We support
extraordinary information sharing capabilities vital to managing patient
populations through our interoperability offerings.
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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. We adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) and its subsequent amendments (together "ASC 842") during the quarter endedJune 30, 2019 using the transition approach provided for under ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which allowed us to apply the new lease standard as ofApril 1, 2019 , rather than the beginning of the earliest period presented. ASC 842 supersedes ASC 840 and requires the recognition of leased arrangements on the balance sheet as right-of-use assets and liabilities pertaining to the rights and obligations created by the leased assets. Refer to Note 4, "Leases" of our notes to condensed consolidated financial statements included elsewhere in this Report for additional information regarding our adoption of ASC 842. There have been no other material changes in our significant accounting policies or critical accounting policies and estimates since the fiscal year endedMarch 31, 2019 . Results of Operations The following table sets forth the percentage of revenue represented by each item in our condensed consolidated statements of comprehensive income for the three and nine months endedDecember 31, 2019 and 2018 (certain percentages below may not sum due to rounding): Three Months Ended December 31, Nine Months Ended December 31, 2019 2018 2019 2018 Revenues: Recurring 90.6 % 89.7 % 90.3 % 89.7 % Software, hardware, and other non-recurring 9.4 10.3 9.7 10.3 Total revenues 100.0 100.0 100.0 100.0 Cost of revenue: Recurring 37.9 36.7 37.9 36.3 Software, hardware, and other non-recurring 5.1 5.0 4.9 5.3 Amortization of capitalized software costs and acquired intangible assets 6.5 5.4 6.5 5.2 Total cost of revenue 49.5 47.1 49.3 46.8 Gross profit 50.5 52.9 50.7 53.2 Operating expenses: Selling, general and administrative 31.1 31.6 30.2 30.5 Research and development costs, net 14.5 15.8 15.3 15.5 Amortization of acquired intangible assets 0.7 0.8 0.7 0.8 Impairment of assets 1.4 0.0 1.1 0.0 Restructuring costs 0.4 0.0 0.6 0.0 Total operating expenses 48.2 48.2 47.9 46.8 Income from operations 2.4 4.7 2.8 6.4 Interest income 0.0 0.0 0.0 0.0 Interest expense (0.3 ) (0.6 ) (0.3 ) (0.6 ) Other income (expense), net 0.1 (0.2 ) 0.1 0.1 Income before provision for (benefit of) income taxes 2.2 4.0 2.6 5.9 Provision for (benefit of) income taxes (1.0 ) 0.3 (0.3 ) 0.7 Net income 3.2 % 3.7 % 2.9 % 5.2 % 27
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Revenues
The following table presents our disaggregated revenues for the three and nine
months ended
Three Months Ended December
31, Nine Months Ended December 31,
2019 2018 2019 2018
Recurring revenues:
Subscription services $ 33,163 $ 30,035 $ 94,718 $ 87,618
Support and maintenance 39,936 39,714 118,948 120,556
Managed services 26,830 24,251 77,730 74,048
Electronic data interchange and data
services 24,858 23,446 73,427 71,548
Total recurring revenues 124,787 117,446 364,823 353,770
Software, hardware, and other
non-recurring revenues:
Software license and hardware 7,210 9,217 22,563 26,013
Other non-recurring services 5,743 4,204 16,471 14,605
Total software, hardware and other
non-recurring revenues 12,953 13,421 39,034 40,618
Total revenues $ 137,740 $ 130,867 $ 403,857 $ 394,388
Recurring revenues as a percentage of
total revenues 90.6 % 89.7 % 90.3 % 89.7 %
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 who use our products.
Consolidated revenue for the three months endedDecember 31, 2019 increased$6.9 million compared to the prior year period due to a$7.4 million increase in recurring revenues, partially offset by a$0.5 million decrease in software, hardware and other non-recurring revenues. Consolidated revenue for the nine months endedDecember 31, 2019 increased$9.5 million compared to the prior year period due to a$11.1 million increase in recurring revenues, partially offset by a$1.6 million decrease in software, hardware and other non-recurring revenues. The increase in recurring revenues for the three and nine months endedDecember 31, 2019 compared to the prior year period was primarily driven by subscription services revenue related to our acquisitions of Topaz andMedfusion during the quarter and higher subscriptions associated with our population health and analytics and NextGen Office cloud-based solutions. Our managed services revenue increased due to higher revenues from both revenue cycle management and managed cloud services. The increase in our EDI and data services revenue was due mostly to growth in the transaction volume. The decrease in support and maintenance revenue for the nine months endedDecember 31, 2019 compared to 2019 was due to higher client attrition. The decrease in software, hardware, and other non-recurring revenues for the three and nine months endedDecember 31, 2019 compared to the prior year period was primarily due to lower software bookings, partially offset by an increase in professional services revenue. 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 decreased to$30.6 million for the three months endedDecember 31, 2019 compared to$32.8 million in the prior year primarily due to a lower software and professional services bookings, partially offset by higher subscriptions bookings.
Total bookings were
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--------------------------------------------------------------------------------Cost of Revenue and Gross Profit
The following table presents our consolidated cost of revenue and gross profit for the three and nine months endedDecember 31, 2019 and 2018 (in thousands): Three Months Ended December 31, Nine Months Ended December 31, 2019 2018 2019 2018 Cost of revenue: Recurring$ 52,197 $ 47,997 $ 153,065 $ 143,322 Software, hardware, and other non-recurring 6,975 6,576 19,816 20,752 Amortization of capitalized software costs and acquired intangible assets 8,963 7,098 26,219 20,566 Total cost of revenue$ 68,135 $ 61,671 $ 199,100 $ 184,640 Gross profit$ 69,605 $ 69,196 $ 204,757 $ 209,748 Gross margin % 50.5 % 52.9 % 50.7 % 53.2 % 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$0.5 million and$0.4 million for the three months endedDecember 31, 2019 and 2018. Share-based compensation expense included in cost of revenue was$1.5 and$0.9 million for the nine months endedDecember 31, 2019 and 2018. Gross profit for the three months endedDecember 31, 2019 increased$0.4 million compared to the prior year period due to a$6.9 million increase in revenues as discussed above, offset by a$6.5 million increase in cost of revenue. Our gross margin decreased to 50.5% for the three months endedDecember 31, 2019 compared to 52.9% in the prior year. Gross profit for the nine months endedDecember 31, 2019 decreased$5.0 million compared to the prior year period due to a$14.5 million increase in cost of revenue, partially offset by a$9.5 million increase in revenues as discussed above. Our gross margin decreased to 50.7% for the nine months endedDecember 31, 2019 compared to 53.2% in the prior year. The increase in cost of revenue for the three and nine months endedDecember 31, 2019 compared to the prior year period is primarily due to higher amortization of previously capitalized software costs, higher third party outsourcing costs and personnel costs related to our delivering our managed services, higher hosting services costs, an increase in cost of subscription services associated with higher related subscription services revenues, and an increase in direct EDI costs associated with higher transaction volume, partially offset by lower personnel costs related to delivering our support and maintenance services. The decline in gross margin was primarily driven by the higher amortization of previously capitalized software costs.
Selling, General and Administrative Expense
The following table presents our consolidated selling, general and
administrative expense for the three and nine months ended
Three Months Ended December 31, Nine Months Ended December 31,
2019 2018 2019 2018
Selling, general and administrative $ 42,841 $ 41,304 $ 122,015 $ 120,169
Selling, general and administrative, as
a percentage of revenue 31.1 % 31.6 % 30.2 % 30.5 %
Selling, general and administrative expense consists of compensation expense,
including share-based compensation, for management and administrative personnel,
selling and marketing expense, facilities costs, depreciation, professional
service fees, including legal, consulting, and accounting services, acquisition
and transaction-related costs, and other general corporate and administrative
expenses.
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-------------------------------------------------------------------------------- Share-based compensation expense included in selling, general and administrative expenses was$3.1 million and$3.5 million for the three months endedDecember 31, 2019 and 2018, respectively. Share-based compensation expense included in selling, general and administrative expenses was$9.5 million and$8.8 million for the nine months endedDecember 31, 2019 and 2018, respectively. The increase in share-based compensation for the nine months endedDecember 31, 2019 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 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$1.5 million for the three months endedDecember 31, 2019 compared to the prior year period primarily due to a$1.6 million higher acquisition costs related to acquisitions of Topaz,Medfusion , and OTTO. Selling, general and administrative expenses increased$1.8 million for the nine months endedDecember 31, 2019 compared to the prior year period due to the$5.7 million net benefit recorded in the prior year from insurance recoveries related to the settlement of the Federal Securities Class Action complaint, offset by$2.9 lower employee severance and exit costs and lower salaries and benefits due to a reduction in employee headcount as a result of our business restructuring plan announced earlier in the year, and a net decrease in all other costs.
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 and nine months ended
Three Months Ended December 31, Nine Months Ended December 31,
2019 2018 2019 2018
Gross expenditures $ 24,910 $ 25,156 $ 76,651 $ 76,034
Capitalized software costs (4,884 ) (4,474 ) (14,785 ) (14,853 )
Research and development costs, net
Research and development costs, as a percentage of revenue 14.5 % 15.8 % 15.3 % 15.5 % Capitalized software costs as a percentage of gross expenditures 19.6 % 17.8 % 19.3 % 19.5 % 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. We intend to continue to invest heavily in research and development expenses as we continue to bring additional functionality and features to the medical community and develop a new integrated inpatient and outpatient, web-based software platform. 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 being expensed up front and the amount of net research and development costs reported in our condensed consolidated statement of net income and comprehensive income. Share-based compensation expense included in research and development costs was$1.0 million and$0.9 million for the three months endedDecember 31, 2019 and 2018, respectively. Share-based compensation expense included in research and development costs was$2.8 million and$2.2 million for the nine months endedDecember 31, 2019 and 2018, respectively. Net research and development costs for the three months endedDecember 31, 2019 decreased$0.7 million compared to the prior year period due to$0.4 million higher capitalization of software costs and$0.3 million lower gross expenditures. Net research and development costs for the nine months endedDecember 31, 2019 increased$0.6 million compared to the prior year period due to a$0.6 million increase in gross expenditures. The increase in gross expenditures for the nine months endedDecember 31, 2019 compared to the prior year period was primarily due to higher utilization of ourBangalore development center resources and increased hosting costs, partially offset by lower salaries and benefits due to a reduction in employee headcount as a result of our business restructuring plan announced earlier this year. 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. 30 --------------------------------------------------------------------------------
Amortization of Acquired Intangible Assets
The following table presents our amortization of acquired intangible assets for
the three and nine months ended
Three Months Ended December 31, Nine Months Ended December 31,
2019 2018 2019 2018
Amortization of acquired intangible assets
Amortization of acquired intangible assets included in operating expense consist of the amortization related to our customer relationships, trademarks, and contracts 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 and nine months endedDecember 31, 2019 decreased$0.1 million and$0.6 million , respectively compared to the prior year periods due to certain acquired intangible assets being fully amortized in the prior fiscal year.
Restructuring Costs and Impairment of Assets
InJune 2019 , we implemented a business restructuring plan as part of our continued efforts to preserve and grow the value of the Company through client-focused innovations while reducing our cost structure. As part of the restructuring, we reduced our total workforce by approximately 4% primarily within the research and development function and intend to expand on our research and development resources inIndia . We recorded$0.5 million and$2.4 million of restructuring costs in the three and nine months endedDecember 31, 2019 , respectively, within operating expenses in our condensed consolidated statements of comprehensive income. The restructuring costs consisted 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. These amounts were accrued when it was probable that the benefits would be paid, and the amounts were reasonably estimable. As ofDecember 31, 2019 , the remaining liability associated with payroll-related costs was$0.3 million , which we expect to be substantially paid during the fourth quarter of fiscal 2020. In connection with the restructuring plan, we also vacated portions of certain leased locations and recorded impairments of$1.9 million and$4.4 million in the three and nine months endedDecember 31, 2019 , respectively, to our operating right-of-use assets and certain related fixed assets associated with the vacated locations, or portions thereof, in North Canton,San Diego , Horsham,St. Louis ,Irvine , andAtlanta based on projected sublease rental income and estimated sublease commencement dates. 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. Refer to Note 16, "Restructuring Plan" of our notes to condensed consolidated financial statements included elsewhere in this Report for further details.
Interest and Other Income and Expense
The following table presents our interest expense for the three and nine months
ended
Three Months Ended December 31, Nine Months Ended December 31,
2019 2018 2019 2018
Interest income $ 30 $ 44 $ 145 $ 113
Interest expense (435 ) (720 ) (1,294 ) (2,219 )
Other income (expense), net 137 (227 ) 214 384
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 December 31, 2019 , we had $37.0
million of outstanding balances under the revolving credit agreement, compared
to an outstanding balance of $11.0 million as of March 31, 2019 and $27.0
million as of December 31, 2018 . The fluctuations of other income and expense
compared to the prior year periods are primarily due to changes to the India
foreign exchange rates.
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Provision for Income Taxes
The following table presents our provision for income taxes for the three and
nine months ended
Three Months Ended December 31, Nine Months Ended December 31,
2019 2018 2019 2018
Provision for (benefit of) income taxes (1,403 )
$ (1,274 ) $ 2,794 Effective tax rate -46.6 % 8.6 % -12.2 % 12.0 % The decrease in the effective tax rate for the three and nine months endedDecember 31, 2019 compared to the prior year periods was primarily due to the increased net benefit of the research and development credits, partially offset by nondeductible stock option expense, nondeductible officer's compensation, and reserves for uncertain tax position. Additionally, due to the differences in the amount of income before taxes, the impact of the rate reconciliation items on the effective tax rates were more significant in the three and nine months endedDecember 31, 2019 . Net Income
The following table presents our net income (in thousands) and net income per
share and for the three months ended
Three Months Ended December 31, Nine Months Ended December 31,
2019 2018 2019 2018
Net income $ 4,415 $ 4,824 $ 11,740 $ 20,566
Net income per share:
Basic $ 0.07 $ 0.07 $ 0.18 $ 0.32
Diluted $ 0.07 $ 0.07 $ 0.18 $ 0.32
As a result of the foregoing changes in revenue and expense, net income for the
three months ended
As a result of the foregoing changes in revenue and expense, net income for the nine months endedDecember 31, 2019 decreased$8.8 million compared to the prior period.
Liquidity and Capital Resources
The following table presents selected financial statistics and information for
the nine months ended
Nine Months Ended December 31,
2019 2018
Cash and cash equivalents $ 26,790 $ 30,054
Unused portion of revolving credit agreement (1) 263,000 273,000
Total liquidity $ 289,790 $ 303,054
Net income $ 11,740 $ 20,566
Net cash provided by operating activities $ 64,371 $ 33,279 (1) 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.
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--------------------------------------------------------------------------------Cash and Cash Equivalents
As ofDecember 31, 2019 , our cash and cash equivalents balance of$26.8 million reflects a$6.3 million decrease compared to$33.1 million as ofMarch 31, 2019 . We had$37.0 million of outstanding loans under our revolving credit agreement as ofDecember 31, 2019 . 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.
We believe that our cash and cash equivalents on hand at
Cash Flows from Operating Activities
The following table summarizes our condensed consolidated statements of cash
flows for the nine months ended
Nine Months Ended December 31,
2019 2018
Net income $ 11,740 $ 20,566
Non-cash expenses 63,480 46,736
Cash from net income, as adjusted $ 75,220 $ 67,302
Change in contract assets and liabilities, net (2,933 ) (6,516 )
Change in accounts receivable 6,184 242
Change in other assets and liabilities (14,100 ) (27,749 )
Net cash provided by operating activities $ 64,371 $ 33,279
For the nine months ended December 31, 2019 , cash provided by operating
activities increased $31.1 million compared to the prior year period, of which
$13.6 million is due to changes in other assets and liabilities, $7.9 million
due to higher cash from net income as adjusted for $16.7 million higher non-cash
expenses, $5.9 million from decreases in accounts receivable, and $3.6 million
from net changes in contract assets and liabilities. The increase in cash from
net changes in other assets and liabilities is primarily due to payments in the
prior year related to the $19.0 million settlement of the Federal Securities
Class Action complaint. Non-cash expenses increased primarily due to higher
amortization of operating lease assets, higher amortization of previously
capitalized software costs, impairment charges related to our vacated lease
locations, and higher share-based compensation expenses while net income for the
nine months ended December 31, 2019 decreased $8.8 million compared to the prior
year period, as described in the "Net Income" section above. Accounts receivable
balances decreased due to continued efforts to collect and resolve aged
balances, resulting in a corresponding increase in cash from collections in the
nine months ended December 31, 2019 . The increase 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 and a higher amount of
invoices issued in the fourth quarter of fiscal year 2019.
Cash Flows from Investing Activities
Net cash used in investing activities for the nine months endedDecember 31, 2019 was$90.8 million compared with$19.0 million in the prior year period. The increase in net cash used in investing activities is primarily due to cash payments for our acquisitions of Topaz,Medfusion and OTTO, net of cash acquired, of$71.6 million , and$2.8 million higher additions to equipment and improvements in the current year, offset by$2.5 million of refunds from our corporate-owned life insurance policies. 33 --------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net cash provided by financing activities for the nine months endedDecember 31, 2019 was$24.4 million compared with$8.1 million cash used in financing activities in the prior year period. The increase in cash provided by financing activities is primarily due to net additional borrowings of$26.0 million on our line of credit in the current year, compared to$10.0 million in principal repayments on our line of credit in the prior year, partially offset by$2.4 million lower proceeds from the issuance of shares under employee plans.
Contractual Obligations
We have minimum purchase commitments of
The following table summarizes our significant contractual obligations at
For the year ended March 31,
2020 (remaining 2025 and
Contractual Obligations Total three months) 2021 2022 2023 2024 beyond Operating lease obligations$ 47,135 $ 2,483$ 9,873 $ 9,640 $ 9,491 $ 8,179 $ 7,469 Remaining lease obligations for vacated properties (1) 10,956 669 2,717 2,481 2,036 1,453 1,600 Line of credit obligations (Note 9) 37,000 - - - 37,000 - - Total$ 95,091 $ 3,152$ 12,590 $ 12,121 $ 48,527 $ 9,632 $ 9,069
(1) Remaining lease obligations for vacated properties relates to remaining lease
obligations at certain locations, including
portions of
that we have vacated and are actively marketing the locations for sublease as
part of our reorganization efforts. Total obligations have not been reduced
by projected sublease rentals or by minimum sublease rentals of
million due in future periods under non-cancelable subleases.
The deferred compensation liability as of
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.
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