NextGen Healthcare
Annual Report 2017

Plain-text annual report

QUALITY SYSTEMS, INC FORM 10-K (Annual Report) Filed 05/19/17 for the Period Ending 03/31/17 Address Telephone CIK 18111 VON KARMAN AVENUE SUITE 700 IRVINE, CA 92612 949-255-2600 0000708818 Symbol QSII SIC Code Industry Sector Fiscal Year 7373 - Computer Integrated Systems Design IT Services & Consulting Technology 03/31 http://www.edgar-online.com © Copyright 2017, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use. UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-KþANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended March 31, 2017oroTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Commission file number: 001-12537QUALITY SYSTEMS, INC.(Exact name of registrant as specified in its charter)California(State or other jurisdiction of incorporation or organization) 95-2888568(IRS Employer Identification No.) 18111 Von Karman Avenue, Suite 800, Irvine, California(Address of principal executive offices) 92612(Zip Code)(949) 255-2600(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:Title of each class Name of each exchange on which registeredCommon Stock, $0.01 Par Value NASDAQ Global Select MarketSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No oIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þNo oIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submitand post such files). Yes þ No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, tothe best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growthcompany. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the ExchangeAct.Large accelerated filer   þ  Accelerated filer   o  Non-accelerated filer   o(Do not check if a smallerreporting company) Smaller reporting company   o   Emerging growth company oIf an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act. oIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þThe aggregate market value of the voting stock held by non-affiliates of the Registrant as of September 30, 2016 : $582,893,000 (based on the closing sales price of theRegistrant’s common stock as reported on the NASDAQ Global Select Market on that date of $11.32 per share).*The Registrant has no non-voting common equity.The number of outstanding shares of the Registrant’s common stock as of May 17, 2017 was 62,698,811 shares.* For purposes of this Annual Report on Form 10-K, in addition to those shareholders which fall within the definition of “affiliates” underRule 405 of the Securities Act of 1933, as amended, holders of ten percent or more of the Registrant’s common stock are deemed to beaffiliates for purposes of this Report.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant's definitive proxy statement related to the 2017 Annual Shareholders' Meeting to be filed with the Securities and Exchange Commission within 120days of the registrant’s fiscal year ended March 31, 2017 are incorporated herein by reference in Part III of this Annual Report on Form 10-K where indicated.QUALITY SYSTEMS, INC.TABLE OF CONTENTS2017 ANNUAL REPORT ON FORM 10-KItem  PagePART I    Item 1.Business 3Item 1A.Risk Factors 9Item 1B.Unresolved Staff Comments 24Item 2.Properties 24Item 3.Legal Proceedings 25Item 4.Mine and Safety Disclosures 25    PART II    Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 26Item 6.Selected Financial Data 28Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations 29Item 7A.Quantitative and Qualitative Disclosures about Market Risks 46Item 8.Financial Statements and Supplementary Data 46Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 46Item 9A.Controls and Procedures 46Item 9B.Other Information 47    PART III    Item 10.Directors, Executive Officers and Corporate Governance 48Item 11.Executive Compensation 48Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 48Item 13.Certain Relationships and Related Transactions, and Director Independence 48Item 14.Principal Accountant Fees and Services 48    PART IV    Item 15.Exhibits and Financial Statement Schedules 49Item 16.Form 10-K Summary 49 Signatures 52Table of ContentsCAUTIONARY STATEMENTThis Annual Report on Form 10-K (this "Report") and certain information incorporated herein by reference contain forward-looking statements within the “safeharbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this Report, other thanstatements 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 ofgovernment regulation and legislation and market factors influencing our results. Our expectations, beliefs, objectives, intentions and strategies regarding ourfuture results are not guarantees of future performance and are subject to risks and uncertainties, both foreseen and unforeseen, that could cause actual resultsto differ materially from results contemplated in our forward-looking statements. These risks and uncertainties include, but are not limited to, our ability tocontinue to develop new products and increase systems sales in markets characterized by rapid technological evolution, consolidation, and competition fromlarger, 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 the risks factors discussed in “Item 1A. Risk Factors” of this Report, as well as in our other public disclosures andfilings with the Securities and Exchange Commission (“SEC”). Because of these risk factors, as well as other variables affecting our financial condition andresults of operations, past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipateresults or trends in future periods. We assume no obligation to update any forward-looking statements. You are cautioned not to place undue reliance onforward-looking statements, which speak only as of the date of the filing of this Report. Each of the terms “we,” “us,” “our” or the “Company” as used throughoutthis Report refers collectively to Quality Systems, Inc. and its wholly-owned subsidiaries, unless otherwise indicated.PART IITEM 1. BUSINESSCompany OverviewQuality Systems, Inc., known to our clients as NextGen Healthcare, provides software, services and analytics solutions to the ambulatory care market. We are ahealthcare information technology and services company that delivers the foundational capabilities to organizations that want to promote healthy communities.Our technology provides a customizable platform that empowers physician practice success, enriches the patient care experience and lowers the cost ofhealthcare.We primarily derive revenue by developing and marketing software and services that automate certain aspects of practice management (“PM”) and electronichealth records (“EHR”) for ambulatory care practices. In addition, our software and services facilitate interoperability. Our software can be licensed and deliveredon-premise or in the cloud as software-as-a-service (“SaaS”). Our services include maintenance and support, professional services, and complementaryservices such as managed cloud services, revenue cycle management (“RCM”) and electronic data interchange (“EDI”). We market and sell our solutionsthrough a dedicated sales force and to a much lesser extent, through resellers. Our clients span the entire ambulatory market from large multi-specialty to smallsingle specialty practices and include networks of practices such as physician hospital organizations (“PHOs”), management service organizations (“MSOs”),accountable care organizations (“ACOs”), ambulatory care centers and community health centers.We have a history of enhancing our solutions through both organic and inorganic activities. Over the last few years, we have entered into strategic transactionsto complement and enhance our product portfolio in the ambulatory care market. In October 2015, we divested our former Hospital Solutions division. In January2016, we acquired HealthFusion Holdings, Inc. ("HealthFusion") and in April 2017, we acquired Entrada, Inc. ("Entrada").Quality Systems, Inc. was incorporated in California in 1974. Our principal offices are located at 18111 Von Karman Ave., Suite 800, Irvine, California, 92612.Our websites are located at www.nextgen.com and www.qsii.com. We operate on a fiscal year ending on March 31.Our StrategyWe strive to be the trusted partner for clients of all sizes, integrating services and software into a consolidated solution that enables an efficient and effectivecaregiver and patient experience while driving positive financial outcomes. As a healthcare information technology and services company, we plan to continueinvesting in our current capabilities as well as building and/or acquiring new capabilities as we guide our clients through an evolving healthcare marketplace thatis transitioning from fee-for-service to fee-for-value reimbursement models. With approximately 90,000 providers using our solutions, we are enabling care andbelieve we can truly transform the delivery of care through the following strategic priorities:•Focus on the ambulatory client segment. In October 2015, we sold our former 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 focusedorganization. We believe it is essential to protect, build3Table of Contentsand sell new capabilities within our ambulatory client segment. We are focused on our core by increasing quality and the serviceability of our solutions.We intend to continue to enhance the capabilities of our NextGen Ambulatory flagship product. At the same time, we intend to expand the capability ofthe highly scalable, pure cloud-based and mobile-enabled MediTouch® 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 continueour evolution to plug and play extensibility and information sharing that allows our customers to innovate and deploy high-fidelity extensions to our coreapplications without the costs, risks (security, performance, etc.) or complexity commonly associated with direct binding. We have also introducedplatform-enabled automation capabilities to empower our clients to drive cost out of their processes while supporting their needs to implement thehighly personalized workflows that are required to support value based care. Our acquisition of Entrada and its cloud-based, mobile application in April2017 demonstrates our commitment to innovation that becomes essential for practitioners by improving their clinical productivity with documentationsupport services that seamlessly integrate into their electronic health record. We believe there is significant opportunity to extend the solutions we offerexisting 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 to proactively managethe health of patient populations. We are establishing strong development partnerships with our most innovative customers who are activelyparticipating in shared-risk contracts, and working together with them to create progressive population health capabilities. We support extraordinaryinformation sharing capabilities vital to managing patient populations through Mirth interoperability offerings.Business OrganizationWe continue to evaluate the organizational structure of our company with the objective of achieving greater synergies and further integration of our products andservices, in support of our business strategies. In fiscal year 2016, we initiated a three-phase plan intended to better position our organization for future success.In the first phase, we redesigned the organization to more effectively support the execution of our strategy. This phase included implementing a series of actionswith the objective of enabling a more efficient, integrated and client-centered delivery of the holistic solutions that we believe is required by our ambulatory careclients. During this phase, we transformed our management team with the appointment of a new Chief Executive Officer, Chief Financial Officer, ChiefTechnology Officer, Chief Operating Officer, and Chief Strategy Officer. Under phase two of our reorganization, we have continued to build our infrastructureand enhance our healthcare information technology capabilities to drive future revenue growth. The phase includes a multi-year initiative, called NextGen 2.0, tomerge our business units into a more streamlined, functional-based organization structure and to realign our organizational structure by consolidating the sales,marketing, information services, and software development responsibilities into single, company-wide roles to achieve greater efficiency. The third phase of theplan will consist of developing and marketing the services and solutions that we believe will accelerate revenue growth. The first phase was completed in April2016, when we announced a corporate restructuring plan, which was approved by our Board of Directors.As a result of our ongoing reorganization efforts, we also refined the measurement of our segment data to better reflect our current internal organizationalstructure. Our reportable segments changed effective July 1, 2016 and may change again due to such changes in the organization of our business. Ouroperating segments consist of the Software and Related Solutions segment and the RCM and Related Services segment, which is consistent with thedisaggregated financial information used and evaluated by our chief operating decision maker (consisting of our Chief Executive Officer) to assess performanceand make decisions about the allocation of resources. Revenue and gross profit are the key measures of segment profitability used by our chief operatingdecision maker to measure segment operating performance and to make key business decisions. The revenues and gross profit of each segment are derivedfrom distinct product and services within each segment. The Software and Related Solutions segment aggregates the revenues and gross profit of our software-related products and services, including software license and hardware, software-related subscription services, support and maintenance, EDI and dataservices, and certain professional services, such as implementation, training, and consulting. The RCM and Related Services segment aggregates the revenuesand gross profit of our RCM services and certain related ancillary service offerings. A growing number of our clients are simultaneously utilizing software orservices from more than one of our divisions. To enhance our ability to cross sell products and services, we are further integrating our products and services toprovide a more robust and comprehensive platform.4Table of ContentsThe following table breaks down our reported segment revenue and segment growth (decline) in revenue by division for the fiscal years ended March 31, 2017 ,2016 and 2015 . Additional information regarding our operating segment data is set forth in Item 7, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and in Note 15, “Operating Segment Information” of our notes to consolidated financial statements included elsewhere inthis Report. Segment Revenue BreakdownFiscal Year Ended March 31, Segment Revenue Growth (Decline)Fiscal Year Ended March 31, 2017 2016 2015 2017 2016 2015Software and Related Solutions$423,593 $398,449 $395,259 6.3 % 0.8 % 9.1%RCM and Related Services86,031 86,559 76,962 (0.6)% 12.5 % 15.3%Hospital Solutions (1)— 7,469 18,004 (100)% (58.5)% 15.3%Consolidated$509,624 $492,477 $490,225 3.5 % 0.5 % 10.2%___________________________________(1) The former Hospital Solutions division was divested in October 2015 and therefore, does not represent a distinct operating segment. Historical amounts for HospitalSolutions have not been revised.Industry Background and Market OpportunityWe believe there are significant opportunities and challenges in the ambulatory healthcare market due to changes in regulations and requirements that haveoccurred over the past several years. We have seen Health Information Technology for Economic and Clinical Health portion of the American Recovery andReinvestment Act of 2009 ("HITECH Act") drive the adoption of EHRs, the Patient Protection and Affordable Care Act in 2010 (“ACA”) drive fundamentalchanges to the health insurance industry, and most recently, the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”) is driving value-basedpayment reform. We believe MACRA may be the most important of the three regulations for our market because it permanently changes how ambulatoryhealthcare providers are reimbursed by Medicare. It offers certainty and a timeline for the market’s move away from volume-based, fee-for-service models tovalue-based payment models that reward the delivery of lower cost, high quality care. Because of the scope and complexity of the changes in the 962-pageproposed rule, we are focused on educating our clients and the market about these changes and ensuring that we are providing the solutions needed to thriveunder the new payment systems established by MACRA.HCIT solutions have become the catalyst for propelling healthcare into this outcomes-based era and many of our clients are paving the way. As part of thehealthcare transformation that is taking place, providers will be held accountable for proactively managing the health of entire patient populations and deliveringhigher quality care at lower costs. As such, healthcare organizations are likely to invest in healthcare technology and technology-enabled services that will helpidentify patient risk, engage patients, coordinate care, and determine when intervention is needed to improve clinical and financial outcomes. We are wellpositioned to provide the solutions providers need to reach these goals. Additionally, we believe there will be an increasing demand for revenue cyclemanagement services that are aligned and integrated with clinical technology solutions. This is another positive development for us since our RCM and RelatedServices segment provides revenue cycle solutions that are integrated with, and optimize, our technologies for better results. Through our Mirth products, weprovide our clients with the ability to securely share data, or interoperability, is also essential to transform the healthcare delivery system into one that providesbetter care, smarter spending, and healthier people.Today, our company and our clients are leaders in driving healthcare transformation. As healthcare continues to change, our focus is to help our clients adapt,thrive, and deliver the best patient care possible.Products and ServicesSoftware and SubscriptionsNextGen® Ambulatory Electronic Health Records (NextGen® Ambulatory EHR). Our EHR stores and maintains clinical patient information and offers aworkflow module, prescription management, automatic document and letter generation, patient education, referral tracking, interfaces to billing and lab systems,physician alerts and reminders and reporting and data analysis tools. Its configurable clinical content supports all of the required critical quality measures(“CQMs”) in Quality Reporting Document Architecture (“QRDA”) format. Our EHR version 5.8 offering is ONC 2014 Edition certified as a complete EHR.NextGen® Ambulatory Practice Management Systems (NextGen® PM). Our PM offering is a seamlessly integrated, scalable, multi-module solution thatincludes a master patient index, enterprise-wide appointment scheduling with referral tracking, and clinical support. NextGen® PM is a highly configurable, cost-effective, and proven solution that enables the management of both single and multi-practice settings. It is designed to drive efficiency, increase revenue, andspeed cash flow through greater practice control. It has achieved full accreditation with the Practice Management Systems Accreditation Program (“PMSAP”)from the Electronic Healthcare Network Accreditation Commission (“EHNAC”).NextGen® MediTouch®. MediTouch® is a cloud-based EHR and PM solution for physicians, and medical billing services. The product expands our offering tothe ambulatory client base and enhances our cloud-based technology platform for the needs of5Table of Contentssmaller and growing practices. It will also facilitate providing a broad mix of additional NextGen solutions to the HealthFusion client base. Our MediTouch® EHRis 2014 compliant and ONC certified.NextGen® Interoperability Solutions. NextGen® interoperability, powered by Mirth technology, enables patient data from disparate systems to be easily andsecurely shared, aggregated, and put to work, regardless of EHR, PM, or other HCIT platform or location. Providers have simple access to aggregated,actionable data to better treat patients using a complete longitudinal medical record, manage transitions of care, coordinate care plans, and manage chronicconditions. NextGen® interoperability solutions facilitate improved clinical and financial outcomes across organizations. Interoperability product offerings includeMirth Connect, Mirth Results, Mirth Match, Mirth Mail, Mirth Appliance, and Mirth Care Enterprise.NextGen® Share. This interoperability solution, developed using Mirth technology, helps providers safely and securely send and manage referrals, andaccurately exchange clinical content, all without leaving their NextGen® Ambulatory EHR application. It allows easy, secure exchange of data with third-partyproviders, payers, and organizations.NextGen® HIE. This vendor-agnostic health information exchange (“HIE”) is a Mirth solution. It facilitates cross-enterprise data sharing, enabling individualphysician practices in a given community to selectively share critical data, such as demographics, referrals, medications lists, allergies, diagnoses, lab results,histories and more.NextGen® Patient Portal. NextGen® Patient Portal drives patient engagement and satisfaction with easy, intuitive, 24x7 access to payments, scheduling,personal health information, and communication. It facilitates and simplifies comprehensive information exchange, offering anytime, anywhere access from PCs,tablets, and smart phones.NextGen® Mobile Health Solutions. NextGen® Mobile Health Solutions are anchored by the Entrada platform which enables physicians and other caregiversto quickly and easily create relevant documentation within the EHR without sacrificing productivity. A true EHR mobile experience, the Entrada platform providesa fast, easy way for caregivers to view and share real-time clinical content and complete key EHR tasks from their mobile device. Included in the Mobile HealthSolutions are Mobile Scribe which offers full EHR template support via remote assistance and Rhythm which offers both front-end speech and back-endtranscription within a single mobile workflow.QSIDental Web® (“QDW”). QDW, our cloud-based, SaaS practice management and clinical software solution, is marketed primarily to the multi-location dentalgroup practice market in which the QSI Dental Division remains a dominant player. QDW is at the forefront of web-enabled dental applications and cloudcomputing and represents a significant growth opportunity for us to sell to our existing client base and new clients.NextGen® Electronic Dental Record ("EDR"). NextGen® EDR is our most fully integrated dental solution available, combining setup and user functions,while integrating alerts and communication with our ambulatory PM, and serves as a single database for reporting across EHR and EDR records. Our patientrecords management shared by dentists and physicians increase productivity and safety while reducing costs. Integration with our NextGen® ambulatorysolutions provides a comprehensive community solution for federally qualified health centers (“FQHCs”), community health centers (“CHCs”), corrections, andtribal health practices.ServicesNextGen® Revenue Cycle Management Services (NextGen® RCM Services). Our RCM services partners with private ambulatory and hospital-basedphysicians and groups to implement the NextGen® product suite using best practices and enables clients to tailor scalable RCM services that help themstreamline workflow, identify and fix revenue leaks, increase cash flow, and optimize revenue. RCM services include Billing and collections, Electronic claimssubmission and denials management, Electronic remittance and payment posting and Accounts receivable follow-up. Our dedicated account managementmodel helps make NextGen a top performing provider of RCM services as reported in the KLAS Ambulatory RCM Services Report, most recently released in2016.NextGen® EDI and NextGen® Clearinghouse Solutions. NextGen® EDI provides direct interfaces between our products and external third party systems, aswell as transaction-based services. They help automate paper-based or telephony-intensive manual communications between patients and/or providers and/orpayers. They also help check insurance benefits and identify patient financial responsibility. Our full-service electronic claims clearinghouse solutions helpreduce claim denials through personalized claims processing and electronic remittance advice tools. This helps providers improve claims efficiency, get paidfaster, and manage the full claims life cycle at favorable costs.NextGen® Managed Cloud Services. These new, scalable, cloud hosting services reduce the burden of information technology ("IT"). They speedimplementations, simplify upgrades, cut technology costs significantly, offer the latest technology, and provide 24/7 monitoring and support by an expandedteam of technical experts. Clients can benefit from cloud access to a secure, hosted IT infrastructure and regardless of size, can scale and enjoy the advantagesof a cloud-based environment for its EHR and PM systems, enabling them to focus more on care and the practice, not on IT.Professional Services. We offer a variety of professional services to our clients. Such services include training, project management, functional and detailedspecification preparation, configuration, testing, and installation services. We generally charge for professional services on a time and materials basis, but wealso charge on a fixed fee basis for projects with milestone payments utilizing mutually agreed upon functional and detailed specifications. We offer NextGen®“E-learning”, an on-line learning subscription service, which allows end-users to self-manage their learning. Our consulting services, which include physician,professional, and technical consulting, assist clients with optimizing their staffing and software solutions,6Table of Contentsenhancing financial and clinical outcomes, achieving regulatory requirements in the drive to value-based care, to meet the evolving requirements of healthcarereform.Client Service and Support. Our technical services staff provide support for the dependable and timely resolution of technical inquiries from clients. Suchinquiries are made via telephone, email and the Internet. We offer several levels of support, with the most comprehensive service covering 24 hours a day,seven days a week. The charge for support and maintenance varies, depending upon the related level of service and other factors, including the relatedsoftware license fee. By remaining current on support and maintenance fees, clients also receive access to future unspecified versions of the software, on awhen-available basis, as part of support services. To further improve and simplify our client’s Client Service and Support experience, we recently implementedan Online Client Success Community that allows clients to access support, knowledge articles and documentation, and interact with peers one-on-one, all in oneportal.Proprietary RightsWe rely on a combination of patents, copyrights, trademarks, service marks, trade secret laws and contractual restrictions to establish and protect proprietaryrights in our products and services. To protect our proprietary rights, we enter into confidentiality agreements and invention assignment agreements with ouremployees with whom such controls are relevant. In addition, we include intellectual property protective provisions in our client contracts. However, because thesoftware industry is characterized by rapid technological change, we believe such factors as the technological and creative skills of our personnel, new productdevelopments, frequent product enhancements, name recognition, and reliable product maintenance are more important to establishing and maintaining atechnology leadership position than the various legal protections of our technology.We rely on software that we license from third parties for certain components of our products and services. These components enhance our products andservices and help meet evolving client needs. The failure to license any necessary technology, or to maintain our existing licenses, could result in reducedfunctionality of or reduced demand for our products.Although we believe our products and services, and other proprietary rights, do not infringe upon the proprietary rights of third parties, third parties may assertintellectual property infringement claims against us in the future. Any such claims may result in costly, time-consuming litigation and may require us to enter intoroyalty or cross-license arrangements.CompetitionThe markets for healthcare information systems and services are intensely competitive. The industry is highly fragmented and includes numerous competitors.Our principal existing competitors in the healthcare information systems and services market include: Allscripts Healthcare Solutions, Inc., athenahealth, Inc.,Cerner Corporation, eClinicalWorks, Epic Systems Corporation, GE Healthcare, Greenway Health, LLC, Practice Fusion, and other competitors.The practice management, EHR, interoperability and connectivity markets, in particular, are subject to rapid changes in technology, and we expect thatcompetition in these market segments could increase as new competitors enter the market. We believe our principal competitive advantages are the featuresand capabilities of our products and services, our high level of client support, and our extensive experience in the industry.The RCM market is also intensely competitive as other healthcare information systems companies, such as athenahealth, Inc., GE Healthcare, McKessonCorporation, and Allscripts Healthcare Solutions, Inc., are also in the market of selling both PM and EHR software and medical billing, collection and claimsservices.Research and DevelopmentThe healthcare information management and computer software and hardware industries are characterized by rapid technological change requiring us toengage in continuing investments to update, enhance and improve our systems. During the years ended March 31, 2017 , 2016 and 2015 , we expendedapproximately $86.6 million $80.3 million , and $83.8 million , respectively, on research and development activities, including capitalized software costs of $8.2million , $14.7 million , and $14.6 million , respectively. The majority of such expenditures are currently targeted on our software license and software relatedsubscription services products lines. In addition, a portion of our product enhancements have resulted from software development work performed undercontracts with our clients.Sales and MarketingWe sell and market our products primarily through a direct sales force and to a lesser extent, through a reseller channel. Software license sales to resellersrepresented less than 10% of total revenue for the years ended March 31, 2017 , 2016 and 2015 .Our direct sales force typically makes presentations to potential clients by demonstrating the system and our capabilities on the prospective client’s premises.Sales efforts aimed at smaller practices can be performed on the prospective clients’ premises, or remotely via telephone or Internet-based presentations. Boththe direct and reseller channel sales force are concentrating on more multi-product sales opportunities.7Table of ContentsOur sales and marketing employees identify prospective clients through a variety of means, including referrals from existing clients, industry consultants,contacts at professional society meetings, trade shows and web-based seminars, trade journal advertising, online advertising, public relations and social mediacampaigns, direct mail and email campaigns, and telemarketing. Resources have shifted more heavily to Web-based marketing to take advantage of buyers thatnow tend to do more Web research before contacting a vendor and other benefits of online marketing. In addition, we also focus on thought leadership andcontent marketing to highlight our industry knowledge, expertise and the successes of our client base.Our sales cycle can vary significantly and typically ranges from six to twenty-four months from initial contact to contract execution. Software licenses arenormally delivered to a client almost immediately upon receipt of an order. Implementation and training services are normally rendered based on a mutuallyagreed upon timetable. As part of the fees paid by our clients, we normally receive up-front licensing fees. Clients have the option to purchase hosting andmaintenance services which, if purchased, are invoiced on a monthly, quarterly or annual basis.We continue to concentrate our direct sales and marketing efforts on the ambulatory market from large multi specialty to small single specialty practices andinclude clinically integrated networks of practices such as physician hospital organizations (“PHOs”), management service organizations (“MSOs”), accountablecare organizations (“ACOs”), ambulatory care centers and community health centers. IPAs, PHOs and similar networks to which we have sold systems provideuse of our software to those group and single physician practices associated with the organization or hospital on either a service basis or by directing us tocontract with those practices for the sale of stand-alone systems.We have numerous clients and do not believe that the loss of any single client would adversely affect us. No client accounted for 10% or more of our netrevenue during the years ended March 31, 2017 , 2016 and 2015 . Substantially all of our clients are located in the United States.EmployeesAs of March 31, 2017 , we employed approximately 2,791 individuals, of which 2,771 were full-time employees, and 472 employees were located in Bangalore,India. Aside from our Bangalore facility, which focuses primarily on software development activities, substantially all of our employees and operations are basedin the United States.We believe that our future success depends in part upon recruiting and retaining qualified sales, marketing and technical personnel as well as other employees.None of our employees are covered by a collective bargaining agreement or are represented by a labor union.Available InformationOur principal websites are www.qsii.com and www.Nextgen.com. We make our periodic and current reports, together with amendments to these reports, filed orfurnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, available on our website, free of charge, as soon asreasonably practicable after such material is electronically filed with, or furnished to, the SEC. You may access such filings under the “Investor Relations” buttonon our website. Members of the public may also read and copy any materials we file with, or furnish to, the SEC at the SEC’s Public Reference Room at 100 FStreet, NE, Washington, DC 20549. To obtain information on the operation of the Public Reference Room, please call the SEC at 1-800-SEC-0330. The SECmaintains an Internet site at www.sec.gov that contains the reports, proxy statements and other information that we file electronically with the SEC. Our websiteand the information contained therein or connected thereto is not intended to be incorporated into this Report or any other report or information we file with theSEC.8Table of ContentsITEM 1A. RISK FACTORSYou should carefully consider the risks described below, as well as the other cautionary statements and risks described elsewhere and the other informationcontained in this Report and in our other filings with the SEC, including subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Weoperate in a rapidly changing environment that involves a number of risks. The risks and uncertainties described below are not the only ones we face. Additionalrisks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations. If any of these known orunknown risks actually occur, our business, financial condition or results of operations could be materially and adversely affected, in which case the trading priceof our common stock may decline and you may lose all or part of your investment.Risks Related to Our BusinessWe face significant, evolving competition which, if we fail to properly address, could adversely affect our business, results of operations, financialcondition and price of our stock. The markets for healthcare information systems are intensely competitive, and we face significant competition from anumber of different sources. Several of our competitors have substantially greater name recognition and financial, technical, product development and marketingresources than we do. There has been significant merger and acquisition activity among a number of our competitors in recent years. Some of our largercompetitors, who have greater scale than we do, have and may continue to become more active in our markets both through internal development andacquisitions. Transaction induced pressures, or other related factors may result in price erosion or other negative market dynamics that could adversely affectour business, results of operations, financial condition and price of our stock.We compete in all of our markets with other major healthcare related companies, information management companies, systems integrators and other softwaredevelopers. Competition in our markets occurs on the basis of several factors, including price, innovation, client service, product quality and reliability, scope ofservices, industry acceptance, and others. Competitive pressures and other factors, such as new product introductions by us or our competitors, may result inprice or market share erosion that could adversely affect our business, results of operations and financial condition. Also, there can be no assurance that ourapplications will achieve broad market acceptance or will successfully compete with other available software products. If we fail to distinguish our offerings fromother options available to healthcare providers, the demand for and market share of our offerings may decrease.Saturation or consolidation in the healthcare industry could result in the loss of existing clients, a reduction in our potential client base anddownward pressure on the prices for our products and services. As the healthcare information systems market evolves, saturation of this market with ourproducts or our competitors' products could limit our revenues and opportunities for growth. There has also been increasing consolidation amongst healthcareindustry participants in recent years, creating integrated healthcare delivery systems with greater market power. As provider networks and managed careorganizations consolidate, the number of market participants decreases and competition to provide products and services like ours will become more intense.The importance of establishing relationships with key industry participants will become greater and our inability to make initial sales of our systems to, ormaintain relationships with, newly formed groups and/or healthcare providers that are replacing or substantially modifying their healthcare information systemscould adversely affect our business, results of operations and financial condition. These consolidated industry participants may also try to use their increasedmarket power to negotiate price reductions for our products and services. If we were forced to reduce our prices, our business would become less profitableunless we were able to achieve corresponding reductions in our expenses.Many of our competitors have greater resources than we do. In order to compete successfully, we must keep pace with our competitors inanticipating and responding to the rapid changes involving the industry in which we operate, or our business, results of operations and financialcondition may be adversely affected. The software market generally is characterized by rapid technological change, changing client needs, frequent newproduct introductions and evolving industry standards. The introduction of products incorporating new technologies and the emergence of new industrystandards could render our existing products obsolete and unmarketable. There can be no assurance that we will be successful in developing and marketingnew products that respond to technological changes or evolving industry standards. New product development depends upon significant research anddevelopment expenditures which depend ultimately upon sales growth. Any material shortfall in revenue or research funding could impair our ability to respondto technological advances or opportunities in the marketplace and to remain competitive. If we are unable, for technological or other reasons, to develop andintroduce new products in a timely manner in response to changing market conditions or client requirements, our business, results of operations and financialcondition may be adversely affected.In response to increasing market demand, we are currently developing new generations of targeted software products. There can be no assurance that we willsuccessfully develop these new software products or that these products will operate successfully, or that any such development, even if successful, will becompleted concurrently with or prior to introduction of competing products. Any such failure or delay could adversely affect our competitive position or couldmake our current products obsolete.9Table of ContentsUncertainty in global economic and political conditions may negatively impact our business, operating results or financial condition . Globaleconomic and political uncertainty have caused in the past, and may cause in the future, unfavorable business conditions such as a general tightening in thecredit markets, lower levels of liquidity, increases in the rates of default and bankruptcy and extreme volatility in credit, equity and fixed income markets. Thesemacroeconomic conditions could negatively affect our business, operating results or financial condition in a number of ways. Instability can make it difficult forour clients, our vendors, and us to accurately forecast and plan future business activities, and could cause constrained spending on our products and services,delays and a lengthening of our sales cycles and/or difficulty in collection of our accounts receivable. Current or potential clients may be unable to fund softwarepurchases, which could cause them to delay, decrease or cancel purchases of our products and services or to not pay us or to delay paying us for previouslypurchased products and services. Our clients may cease business operations or conduct business on a greatly reduced basis. Bankruptcies or similarinsolvency events affecting our clients may cause us to incur bad debt expense at levels higher than historically anticipated. Further, economic instability couldlimit our ability to access the capital markets at a time when we would like, or need, to raise capital, which could have an impact on our ability to react tochanging business conditions or new opportunities. Finally, our investment portfolio is generally subject to general credit, liquidity, counterparty, market andinterest rate risks that may be exacerbated by these global financial conditions. If the banking system or the fixed income, credit or equity markets deteriorate orremain volatile, our investment portfolio may be impacted and the values and liquidity of our investments could be adversely affected as well.Our relationships with strategic partners may fail to benefit us as expected. We face risk and/or the possibility of claims from activities related tostrategic partners, which could be expensive and time-consuming, divert personnel and other resources from our business and result in adversepublicity that could harm our business . We rely on third parties to provide services for our business. For example, we use national clearinghouses in theprocessing of some insurance claims and we outsource some of our hardware services and the printing and delivery of patient statements for our clients. Thesethird parties could raise their prices and/or be acquired by our competitors, which could potentially create short and long-term disruptions to our business,negatively impacting our revenue, profit and/or stock price. We also have relationships with certain third parties where these third parties serve as saleschannels through which we generate a portion of our revenue. Due to these third party relationships, we could be subject to claims as a result of the activities,products, or services of these third party service providers even though we were not directly involved in the circumstances leading to those claims. Even if theseclaims do not result in liability to us, defending and investigating these claims could be expensive and time-consuming, divert personnel and other resourcesfrom our business and result in adverse publicity that could harm our business. In addition, our strategic partners may compete with us in some or all of themarkets in which we operate.We have acquired companies, and may engage in future acquisitions, which may be expensive, time consuming, subject to inherent risks and fromwhich we may not realize anticipated benefits. Historically, we have acquired numerous businesses, technologies, and products. We may acquire additionalbusinesses, technologies and products if we determine that these additional businesses, technologies and products are likely to serve our strategic goals.Acquisitions have inherent risks, which may have a material adverse effect on our business, financial condition, operating results or prospects, including, but notlimited to the following:•failure to achieve projected synergies and performance targets;•potentially dilutive issuances of our securities, the incurrence of debt and contingent liabilities and amortization expenses related to intangible assetswith indefinite useful lives, which could adversely affect our results of operations and financial condition;•using cash as acquisition currency may adversely affect interest or investment income, which may in turn adversely affect our earnings and /or earningsper share;•unanticipated expenses or difficulty in fully or effectively integrating or retaining the acquired technologies, software products, services, businesspractices, management teams or personnel, which would prevent us from realizing the intended benefits of the acquisition;•failure to maintain uniform standard controls, policies and procedures across acquired businesses;•difficulty in predicting and responding to issues related to product transition such as development, distribution and client support;•the possible adverse effect of such acquisitions on existing relationships with third party partners and suppliers of technologies and services;•the possibility that staff or clients of the acquired company might not accept new ownership and may transition to different technologies or attempt torenegotiate contract terms or relationships, including maintenance or support agreements;•the assumption of known and unknown liabilities;•the possibility of disputes over post-closing purchase price adjustments such as performance-based earnouts;•the possibility that the due diligence process in any such acquisition may not completely identify material issues associated with product quality, productarchitecture, product development, intellectual property issues, regulatory risks,10Table of Contentscompliance risks, key personnel issues or legal and financial contingencies, including any deficiencies in internal controls and procedures and the costsassociated with remedying such deficiencies;•difficulty in entering geographic and/or business markets in which we have no or limited prior experience;•difficulty in integrating acquired operations due to geographical distance and language and cultural differences;•diversion of management's attention from other business concerns; and•the possibility that acquired assets become impaired, or that acquired assets lead us to determine that existing assets become impaired, requiring us totake a charge to earnings which could be significant.A failure to successfully integrate acquired businesses or technology could, for any of these reasons, have an adverse effect on our financial condition andresults of operations.Our failure to manage growth could harm our business, results of operations and financial condition. We have in the past experienced periods of growthwhich have placed, and may continue to place, a significant strain on our non-cash resources. We have also expanded our overall software development,marketing, sales, client management and training capacity, and may do so in the future. In the event we are unable to identify, hire, train and retain qualifiedindividuals in such capacities within a reasonable timeframe, such failure could have an adverse effect on the operation of our business. In addition, our ability tomanage future increases, if any, in the scope of our operations or personnel will depend on significant expansion of our research and development, marketingand sales, management and administrative and financial capabilities. The failure of our management to effectively manage expansion in our business couldhave an adverse effect on our business, results of operations and financial condition.We may experience reduced revenues and/or be forced to reduce our prices . We may be subject to pricing pressures with respect to our future salesarising from various sources, including amount other things, government action affecting reimbursement levels. Our clients and the other entities with which wehave business relationships are affected by changes in statutes, regulations, and limitations on government spending for Medicare, Medicaid, and otherprograms. Recent government actions and future legislative and administrative changes could limit government spending for Medicare and Medicaid programs,limit payments to healthcare providers, increase emphasis on competition, impose price controls, initiate new and expanded value-based reimbursementprograms and create other programs that potentially could have an adverse effect on our business. If we experience significant downward pricing pressure, ourrevenues may decline along with our ability to absorb overhead costs, which may leave our business less profitable.Our operations are dependent upon attracting and retaining key personnel. If such personnel were to leave unexpectedly, we may not be able toexecute our business plan. Our future performance depends in significant part upon the continued service of our key development and senior managementpersonnel and successful recruitment of new talent. These personnel have specialized knowledge and skills with respect to our business and our industry.Because we have a relatively small number of employees when compared to other leading companies in our industry, our dependence on maintaining ourrelationships with key employees and successful recruiting is particularly significant.The industry in which we operate is characterized by a high level of employee mobility and aggressive recruiting of skilled personnel. There can be no assurancethat our current employees will continue to work for us. Loss of services of key employees could have an adverse effect on our business, results of operationsand financial condition. Furthermore, we may need to grant additional equity incentives to key employees and provide other forms of incentive compensation toattract and retain such key personnel. Equity incentives may be dilutive to our per share financial performance. Failure to provide such types of incentivecompensation could jeopardize our recruitment and retention capabilities.The integration of new key executives into our management team may interfere with our operations. We have appointed several new key executives,including our Chief Executive Officer, Chief Financial Officer, Chief Technology Officer, Chief Strategy Officer, and Chief Operating Officer, and we may hireadditional key management team members. These executives will be required to spend a significant amount of time on certain integration and transition effortsin addition to performing their regular duties and responsibilities. If we fail to complete these integrations and transitions in an efficient manner, or if we fail toprovide sufficient incentives to motivate and retain our key executives, our business and prospects may suffer.Our recent strategy shift and the resulting business reorganization plan we are implementing may be disruptive both internally and externally, andwe may not fully realize the anticipated benefits . We recently embarked on a new strategic plan, which we call NextGen 2.0, geared toward realigning ourbusiness structure and strategy to rapidly emerging changes in the healthcare industry. As NextGen 2.0 continues, we anticipate that it will result in continuedevaluation of our organizational structure in order to achieve greater efficiency, as well as investments in new market solutions and changes to our culture thatwe hope will drive revenue growth and provide increased value to stakeholders and shareholders. There can be no assurance that our current or future strategicrealignment efforts will be successful. Our ability to achieve the anticipated benefits of our strategy shift is subject to estimates and assumptions, which may varybased on numerous factors and uncertainties, some of which are beyond our control. Reorganization programs entail a variety of known and unknown risks thatmay increase our costs or impair our ability to achieve operational efficiencies, such as distraction to management and employees, loss of workforce capabilities,loss of continuity, accounting charges for technology-related write-offs and workforce reduction costs, decreases in employee focus and morale, uncertainty andturbulence among our clients and vendors, higher than anticipated separation expenses, litigation, and the failure to meet financial and operational targets. If weare unable to effectively11Table of Contentsimplement our strategic shift and realign our business to address the rapidly evolving market, we and our shareholders may not realize the anticipated financial,operational, and other benefits from these initiatives.If we are unable to manage our growth in the new markets we may enter, our business and financial results could suffer. Our future financial results willdepend in part on our ability to profitably manage our business in new markets that we may enter. We are engaging in the strategic identification of, andcompetition for, growth and expansion opportunities in new markets or offerings, including but not limited to the areas of interoperability, patient engagements,data analytics and population health. With our recent acquisitions of HealthFusion and Entrada, we have expanded into the market for cloud-based EHRproducts. It remains uncertain whether the market for cloud-based products will expand to the levels of demand and market acceptance we anticipate, and therecan be no assurance that we will be able to successfully scale the HealthFusion and Entrada products to meet our clients’ expectations. In addition, as clientsmove from fee-for-service to fee-for-value reimbursement strategies in conjunction with the adoption of population health business models, we may not makeappropriate and timely changes to our service offerings consistent with shifts in market demands and expectations. In order to successfully execute on ourgrowth initiatives, we will need to, among other things, manage changing business conditions, anticipate and react to changes in the regulatory environment,and develop expertise in areas outside of our business's traditional core competencies. Difficulties in managing future growth in new markets could have asignificant negative impact on our business, financial condition and results of operations.We may not be successful in developing or launching our new software products and services, which could have a negative impact on our financialcondition and results of operations. We invest significant resources in the research and development of new and enhanced software products and services.Over the last few years we have incurred, and will continue to incur, significant internal research and development expenses, a portion of which have been andmay continue to be recorded as capitalized software costs. We cannot provide assurances that we will be successful in our efforts to plan, develop or sell newsoftware products that meet client expectations, which could result in an impairment of the value of the related capitalized software costs, an adverse effect onour financial condition and operating results and a negative impact the future of our business. Additionally, we cannot be assured that we will continue tocapitalize software development costs to the same extent as we have done to date, as the result of changes in development methodologies and other factors.To the extent that we capitalize a lower percentage of total software development costs, our earnings could be reduced.We own a captive facility and use offshore third party partners located in India that subject us to regulatory, economic, social and politicaluncertainties in India and to laws applicable to US companies operating overseas. We are subject to several risks associated with having a portion of ourassets and operations located in India. Many US companies have benefited from many policies of the Government of India and the Indian state governments inthe states in which we operate, which are designed to promote foreign investment generally and the business process services industry in particular, includingsignificant tax incentives, relaxation of regulatory restrictions, liberalized import and export duties and preferential rules on foreign investment and repatriation.There is no assurance that such policies will continue. Various factors, such as changes in the current Government of India, could trigger significant changes inIndia’s economic liberalization and deregulation policies and disrupt business and economic conditions in India generally and our business in particular. Inaddition, our financial performance and the market price of our common stock may be adversely affected by general economic conditions and economic andfiscal policy in India, including changes in exchange rates and controls, interest rates and taxation policies, as well as social stability and political, economic ordiplomatic developments affecting India in the future. In particular, India has experienced significant economic growth over the last several years, but facesmajor challenges in sustaining that growth in the years ahead. These challenges include the need for substantial infrastructure development and improvingaccess to healthcare and education. Our ability to recruit, train and retain qualified employees, develop and operate our captive facility could be adverselyaffected if India does not successfully meet these challenges. In addition, US governing authorities may pressure us to perform work domestically rather thanusing offshore resources. Furthermore, local laws and customs in India may differ from those in the US. For example, it may be a local custom for businesses toengage in practices that are prohibited by our internal policies and procedures or US laws and regulations applicable to us, such as the Foreign CorruptPractices Act (“FCPA”). The FCPA generally prohibits US companies from giving or offering money, gifts, or anything of value to a foreign official to obtain orretain business, and requires businesses to make and keep accurate books and records and a system of internal accounting controls. We cannot guarantee thatour employees, contractors, and agents will comply with all of our FCPA compliance policies and procedures. If we or our employees, contractors, or agents failto comply with the requirements of the FCPA or similar legislation, government authorities in the US and elsewhere could seek to impose civil or criminal finesand penalties which could have a material adverse effect on our business, operating results, and financial condition.We face the risks and uncertainties that are associated with litigation against us, which may adversely impact our marketing, distract managementand have a negative impact upon our business, results of operations and financial condition. We face the risks associated with litigation concerning theoperation of our business, including claims by clients regarding product and contract disputes, by other third parties asserting infringement of intellectualproperty rights, by current and former employees regarding certain employment matters, and by certain shareholders. The uncertainty associated withsubstantial unresolved litigation may have an adverse effect on our business. In particular, such litigation could impair our relationships with existing clients andour ability to obtain new clients. Defending such litigation may require substantial cost and may result in a diversion of management's time and attention awayfrom business operations, which could have an adverse effect on our business, results of operations and financial condition.12Table of ContentsThere can be no assurance that such litigation will not result in liability in excess of our insurance coverage, that our insurance will cover such claims or thatappropriate insurance will continue to be available to us in the future at commercially reasonable rates.We may be impacted by IT system failures or other disruptions. We may be subject to IT systems failures and network disruptions. These may be causedby natural disasters, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins, orother events or disruptions. System redundancy may be ineffective or inadequate, and our disaster recovery planning may not be sufficient for all eventualities.Such failures or disruptions could prevent access to or the delivery of certain of our products or services, compromise our data or our clients’ data, or result indelayed or cancelled orders as well as potentially expose us to third party claims. System failures and disruptions could also impede our transactions processingservices and financial reporting.Our business operations are subject to interruption by, among other, natural disasters, fire, power shortages, terrorist attacks, and other hostile acts, labordisputes, public health issues, and other issues beyond our control. Such events could decrease our demand for our products or services or make it difficult orimpossible for us to develop and deliver our products or services to our clients. A significant portion of our research and development activities, our corporateheadquarters, our IT systems, and certain of our other critical business operations are concentrated in a few geographic areas. In the event of a businessdisruption in one or more of those areas, we could incur significant losses, require substantial recovery time, and experience significant expenditures in order toresume operations, which could materially and adversely impact our business, financial condition, and operating results.We have had to take charges due to asset impairments, and we could suffer further charges due to asset impairment that could reduce our income.We test our goodwill for impairment annually during our first fiscal quarter, and on interim dates should events or changes in circumstances indicate the carryingvalue of goodwill may not be recoverable in accordance with the relevant accounting guidance. During the year ended March 31, 2013, we recorded a $17.4million goodwill impairment charge relating to our Hospital Solutions Division and during the year ended March 31, 2014, we recorded a $26.0 million impairmentcharge relating to certain long-lived assets of our Hospital Solutions Division. Also, we announced a pre-tax non-cash charge of approximately $32.2 millionrecorded in the quarter ended March 31, 2016 relating to the impairment of our previously capitalized investment in the NextGen Now cloud-based softwareproduct that was in the process of development. The impairment charge follows our assessment of the NextGen Now development project and the MediTouchplatform that we obtained through our recent acquisition of HealthFusion. We determined that the MediTouch platform offers the most efficient path to providinga high-quality, robust, cloud-based solution for ambulatory care. Accordingly, we decided to cease further investment in NextGen Now and discontinue allefforts to use or repurpose the NextGen Now platform. Declines in business performance or other factors could cause the fair value of any of our operatingsegments to be revised downward, resulting in further impairment charges. If the financial outlook for any of our operating segments warrants additionalimpairments of goodwill, the resulting write-downs could materially affect our reported net earnings.We face risks related to litigation advanced by a former director and shareholder of ours, a putative class action and a shareholder derivative claim.On October 7, 2013, a complaint was filed against our Company and certain of our officers and directors in the Superior Court of the State of California for theCounty of Orange, captioned Ahmed D. Hussein v. Sheldon Razin, Steven Plochocki, Quality Systems, Inc. and Does 1-10, inclusive, No. 30-2013-00679600-CU-NP-CJC, by Ahmed Hussein, a former director and significant shareholder of our Company. We filed a demurrer to the complaint, which the Court grantedon April 10, 2014. An amended complaint was filed on April 25, 2014. The amended complaint generally alleges fraud and deceit, constructive fraud, negligentmisrepresentation and breach of fiduciary duty in connection with statements made to our shareholders regarding our financial condition and projected futureperformance. The amended complaint seeks actual damages, exemplary and punitive damages and costs. We filed a demurrer to the amended complaint. OnJuly 29, 2014, the Court sustained the demurrer with respect to the breach of fiduciary duty claim, and overruled the demurrer with respect to the fraud anddeceit claims. On August 28, 2014, we filed an answer and also filed a cross-complaint against the plaintiff, alleging that the plaintiff breached fiduciary dutiesowed to the Company, Mr. Razin and Mr. Plochocki. Mr. Razin and Mr. Plochocki have dismissed their claims against Hussein, leaving QSI as the sole plaintiffin the cross-complaint. On June 26, 2015, we filed a motion for summary judgment, which the Court granted on September 16, 2015, dismissing all claimsagainst us. On September 23, 2015, the plaintiff filed an application for reconsideration of the Court's summary judgment order, which the Court denied. OnOctober 28, 2015, the plaintiff filed a motion for summary judgment, seeking to dismiss our cross-complaint, which the Court denied on March 3, 2016. On May9, 2016, the plaintiff filed a motion for summary adjudication, seeking to again dismiss our cross-complaint, which the Court denied on August 5, 2016. OnAugust 5, 2016, the plaintiff filed a motion for judgment on the pleadings, seeking to again dismiss our cross-complaint, which the Court denied on September 2,2016. Trial is set for June 1, 2017 on QSI's cross-complaint.On November 19, 2013, a putative class action complaint was filed on behalf of the shareholders of our Company other than the defendants against us andcertain of our officers and directors in the United States District Court for the Central District of California by one of our shareholders. After the Court appointedlead plaintiffs and lead counsel for this action, and recaptioned the action In re Quality Systems, Inc. Securities Litigation, No. 8L13-cv-01818-CJC(JPRx), leadplaintiffs filed an amended complaint on April 7, 2014. The amended complaint, which is substantially similar to the Hussein litigation described in the paragraphabove, generally alleges that statements made to our shareholders regarding our financial condition and projected future performance were false and misleadingin violation of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and that the individual defendants are liable for suchstatements because they are controlling persons under Section 20(a) of the Exchange Act. The complaint seeks compensatory damages, court costs andattorneys' fees. We filed13Table of Contentsa motion to dismiss the amended complaint on June 20, 2014, which the Court granted on October 20, 2014, dismissing the complaint with prejudice. Plaintiffsfiled a motion for reconsideration of the Court's order, which the Court denied on January 5, 2015. On January 30, 2015, Plaintiffs filed a notice of appeal to theUnited States Court of Appeals for the Ninth Circuit, captioned In re Quality Systems, Inc. Securities Litigation, No. 15-55173. Plaintiffs filed their opening briefand we answered. Oral argument was held on December 5, 2016. The Court's decision remains pending.On January 24, 2014, a complaint was filed against our Company and certain of our officers and current and former directors in the United States District Courtfor the Central District of California, captioned Timothy J. Foss, derivatively on behalf of himself and all others similarly situated, vs. Craig A. Barbarosh, GeorgeH. Bristol, James C. Malone, Peter M. Neupert, Morris Panner, D. Russell Pflueger, Steven T. Plochocki, Sheldon Razin, Lance E. Rosenzweig and QualitySystems, Inc., No. SACV14-00110-DOC-JPPx, by Timothy J. Foss, a shareholder of ours. The complaint arises from the same allegations described aboveunder the captions “Hussein Litigation” and “Federal Securities Class Action” and generally alleges breach of fiduciary duties, abuse of control and grossmismanagement by our directors, in addition to unjust enrichment and insider selling by individual directors. The complaint seeks compensatory damages,restitution and disgorgement of all profits, court costs, attorneys’ fees and implementation of enhanced corporate governance procedures. The parties haveagreed to stay this litigation until the United States Court of Appeals for the Ninth Circuit issues a ruling on the pending appeal in the federal securities classaction litigation described in the paragraph above.Although we believe the claims to be without merit, our operating results and share price may be negatively impacted due to the negative publicity, expensesincurred in connection with our defense, management distraction, and/or other factors related to this litigation. In addition, litigation of this nature may negativelyimpact our ability to attract and retain clients and strategic partners, as well as qualified board members and management personnel.Our credit agreement contains restrictive and financial covenants that may limit our operational flexibility. If we fail to meet our obligations under thecredit agreement, our operations may be interrupted and our business and financial results could be adversely affected. On January 4, 2016, weentered into a revolving credit agreement with various lenders, secured by substantially all of our and our material domestic subsidiaries’ existing and futureproperty. The credit agreement includes certain customary covenants that impose restrictions on our business and financing activities that could limit ouroperations or flexibility to take certain actions. The credit agreement also contains certain customary affirmative covenants requiring us to maintain specifiedlevels of financial performance. Our ability to comply with these covenants may be affected by events that could be beyond our control. A breach of thesecovenants could result in an event of default under the credit agreement which, if not cured or waived, could result in the indebtedness becoming immediatelydue and payable, which in turn could result in material adverse consequences that negatively impact our business, the market price for our common stock, andour ability to obtain financing in the future. In addition, our credit agreement’s covenants, consent requirements, and other provisions may limit our flexibility topursue or fund strategic initiatives or acquisitions that might be in the long-term interests of our Company and shareholders.We may not be successful in integrating and operating our recent HealthFusion and Entrada acquisitions, and in implementing our post-acquisitionbusiness strategy with respect to HealthFusion’s and Entrada’s products. Our shift in product focus following the acquisitions may not yield thedesired results . We acquired HealthFusion on January 4, 2016 and Entrada on April 14, 2017. As a result of these acquisitions, we have devoted and willcontinue to need to devote significant management attention and resources to integrating the acquired companies’ businesses and product platforms into ourbusiness. We may experience problems associated with the acquired companies and their personnel, processes, product, technology, liabilities, commitments,and other matters. There is no assurance that we will be able to successfully integrate the HealthFusion and Entrada businesses or realize synergies andbenefits from the transactions. Furthermore, the acquisitions have substantially altered our business strategy, increasing our focus on efforts to expand our clientbase and cloud-based solution capabilities in the ambulatory market. The HealthFusion acquisition caused us to evaluate the impact of HealthFusion’s existingcloud-based product, MediTouch, on our ongoing efforts to develop and release our NextGen Now cloud-based platform. Our assessment led us to determinethat MediTouch, which was already a production-ready and sellable solution, represented a more prudent investment in our technical future than continuing withthe NextGen Now development plans. Accordingly, we abandoned further development of the previously capitalized NextGen Now platform, and instead haveredeployed research and development capital toward enhancing and scaling the HealthFusion MediTouch cloud-based platform. This shift resulted in a pre-taxnon-cash charge of approximately $32 million relating to the impairment of a portion of our previously capitalized NextGen Now software development costs. Ifwe are unable to successfully integrate HealthFusion and implement post-acquisition revisions to our business strategy and product focus away from NextGenNow development in favor of extending and scaling the MediTouch platform, our business, financial condition, and results of operations may suffer.Risks Related to Our Products and ServicesIf our principal products, new product developments or implementation, training and support services fail to meet the needs of our clients due tolack of client acceptance, errors, or other problems, we may fail to realize future growth, suffer reputational harm and face the risk of losing existingclients. We currently derive substantially all of our net revenue from sales of our healthcare information systems and related services. We believe that a primaryfactor in the market acceptance of our systems has been our ability to meet the needs of users of healthcare information systems. Our future financialperformance will depend in large part on our ability to continue to meet the increasingly sophisticated needs of our clients through the timely development andsuccessful introduction of new and enhanced versions of our systems and other complementary products, as well as our ability to provide high qualityimplementation, training and support services for our14Table of Contentsproducts. We have historically expended a significant percentage of our net revenue on product development and believe that significant continuing productdevelopment efforts will be required to retain our existing clients and sustain our growth. Continued investment in our sales staff and our client implementation,training and support staffs will also be required to retain and grow our client base.There can be no assurance that we will be successful in our client satisfaction or product development efforts, that the market will continue to accept our existingproducts and services, or that new products or product enhancements will be developed and implemented in a timely manner, meet the requirements ofhealthcare providers, or achieve market acceptance. Also, it is possible that our technology may contain defects or errors, some of which may remainundetected for a period of time. If we detect errors before we introduce a solution, we may have to delay deployment for an extended period of time while weaddress the problem. If we do not discover errors until after product deployment, we may need to provide enhancements to correct such errors. Remediatingproduct defects and errors could consume our development and management resources. In addition, any failure or perceived failure to maintain high-quality andhighly-responsive client support could harm our reputation. Quality or performance issues with our products and services may result in product-related liabilities,unexpected expenses and diversion of resources to remedy errors, harm to our reputation, lost sales, delays in commercial releases, delays in or loss of marketacceptance of our solutions, license termination or renegotiations, and privacy or security vulnerabilities. If new products or product enhancements are delayedor do not achieve market acceptance, or if our implementation, training and support services do not achieve a high degree of client satisfaction, our reputation,business, results of operations and financial condition could be adversely affected. At certain times in the past, we have also experienced delays in purchases ofour products by clients anticipating our launch, or the launch of our competitors, of new products. There can be no assurance that material order deferrals inanticipation of new product introductions from ourselves or other entities will not occur.If the emerging technologies and platforms of Microsoft and others upon which we build our products do not gain or continue to maintain broadmarket acceptance, or if we fail to develop and introduce in a timely manner new products and services compatible with such emergingtechnologies, we may not be able to compete effectively and our ability to generate revenue will suffer. Our software products are built and depend uponseveral underlying and evolving relational database management system platforms such as those developed by Microsoft. To date, the standards andtechnologies upon which we have chosen to develop our products have proven to have gained industry acceptance. However, the market for our softwareproducts is subject to ongoing rapid technological developments, quickly evolving industry standards and rapid changes in client requirements, and there maybe existing or future technologies and platforms that achieve industry standard status, which are not compatible with our products .We are dependent on our license rights and other services from third parties, which may cause us to discontinue, delay or reduce productshipments. We depend upon licenses for some of the technology used in our products as well as other services from third party vendors. Most of thesearrangements can be continued/renewed only by mutual consent and may be terminated for any number of reasons. We may not be able to continue using theproducts or services made available to us under these arrangements on commercially reasonable terms or at all. As a result, we may have to discontinue, delayor reduce product shipments or services provided until we can obtain equivalent technology or services. Most of our third party licenses are non-exclusive. Ourcompetitors may obtain the right to use any of the business elements covered by these arrangements and use these elements to compete directly with us. Inaddition, if our vendors choose to discontinue providing their technology or services in the future or are unsuccessful in their continued research anddevelopment efforts, we may not be able to modify or adapt our own products.We may experience interruption at our data centers or client support facilities. We perform data center and/or hosting services for certain clients, includingthe storage of critical patient and administrative data at company-owned facilities and through third party hosting arrangements. In addition, we provide supportservices to our clients through various client support facilities. We have invested in reliability features such as multiple power feeds, multiple backup generatorsand redundant telecommunications lines, as well as technical (such as multiple overlapping security applications, access control and other countermeasures)and physical security safeguards, and structured our operations to reduce the likelihood of disruptions. However, complete failure of all local public power andbackup generators, impairment of all telecommunications lines, a concerted denial of service cyber-attack, a significant data breach, damage, injury orimpairment (environmental, accidental, intentional or pandemic) to the buildings, the equipment inside the buildings housing our data centers, the personneloperating such facilities or the client data contained therein, or errors by the personnel trained to operate such facilities could cause a disruption in operationsand negatively impact clients who depend on us for data center and system support services. Any interruption in operations at our data centers and/or clientsupport facilities could damage our reputation, cause us to lose existing clients, hurt our ability to obtain new clients, result in significant revenue loss, createpotential liabilities for our clients and us and increase insurance and other operating costs.We face the possibility of having to adopt new pricing strategies, such as subscription pricing or bundling. In April 2009, we announced a newsubscription based software as a service delivery model which includes monthly subscription pricing. This model is designed for smaller practices to quicklyaccess the NextGen® Ambulatory EHR or NextGen® PM products at a modest monthly per provider price. We currently derive substantially all of our systemsrevenue from traditional software license, implementation and training fees, as well as the resale of computer hardware. Today, the majority of our clients pay aninitial license fee for the use of our products, in addition to a periodic maintenance fee. While the intent of the new subscription based delivery model is to furtherpenetrate the smaller practice market, there can be no assurance that this delivery model will not become increasingly popular with both small and large clients.In addition, we have experienced increasing demand for bundling our software and systems with RCM service arrangements, which has required us to modifyour standard upfront license fee15Table of Contentspricing model and could impact software maintenance revenue streams prospectively. If the marketplace increasingly demands subscription or bundled pricing,we may be forced to further adjust our sales, marketing and pricing strategies accordingly, by offering a higher percentage of our products and services throughthese means. Shifting to a significantly greater degree of subscription or bundled pricing could adversely affect our financial condition, cash flows and quarterlyand annual revenue and results of operations, as our revenue would initially decrease substantially.We face the possibility of claims based upon our website content, which may cause us expense and management distraction . We could be subject tothird party claims based on the nature and content of information supplied on our website by us or third parties, including content providers or users. We couldalso be subject to liability for content that may be accessible through our website or third party websites linked from our website or through content andinformation that may be posted by users in chat rooms, bulletin boards or on websites created by professionals using our applications. Even if these claims donot result in liability to us, investigating and defending against these claims could be expensive and time consuming and could divert management’s attentionaway from our operations.If our security measures are breached or fail and unauthorized access is obtained to a client’s data, our services may be perceived as not beingsecure, clients may curtail or stop using our services, and we may incur significant liabilities. Our services involve the storage, transmission andprocessing of clients’ proprietary information and protected health information of patients. Because of the sensitivity of this information, security features of oursoftware are very important. If our security measures are breached or fail as a result of third party action, employee error, malfeasance, insufficiency, defectivedesign, or otherwise, someone may be able to obtain unauthorized access to client or patient data. As a result, our reputation could be damaged, our businessmay suffer, and we could face damages for contract breach, penalties for violation of applicable laws or regulations and significant costs for remediation andremediation efforts to prevent future occurrences. We rely upon our clients as users of our system for key activities to promote security of the system and thedata within it, such as administration of client-side access credentialing and control of client-side display of data. On occasion, our clients have failed to performthese activities. Failure of clients to perform these activities may result in claims against us that this reliance was misplaced, which could expose us to significantexpense and harm to our reputation even though our policy is to enter into business associate agreements with our clients. Although we extensively train andmonitor our employees, it is possible that our employees may, intentionally or unintentionally, breach security measures. Moreover, third parties with whom wedo not have business associate agreements may breach the privacy and security of patient information, potentially causing us reputational damage andexposing us to liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognizeduntil launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures. If an actual or perceivedbreach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose sales and clients. Inaddition, our clients may authorize or enable third parties to access their client data or the data of their patients on our systems. Because we do not control suchaccess, we cannot ensure the complete propriety of that access or integrity or security of such data in our systems.Failure by our clients to obtain proper permissions and waivers may result in claims against us or may limit or prevent our use of data, which couldharm our business. We require our clients to provide necessary notices and to obtain necessary permissions and waivers for use and disclosure of theinformation that we receive, and we require contractual assurances from them that they have done so and will do so. If they do not obtain necessarypermissions and waivers, then our use and disclosure of information that we receive from them or on their behalf may be limited or prohibited by state or federalprivacy laws or other applicable laws. This could impair our functions, processes and databases that reflect, contain, or are based upon such data and mayprevent use of such data. In addition, this could interfere with or prevent creation or use of rules and analyses or limit other data-driven activities that arebeneficial to our business. Moreover, we may be subject to claims or liability for use or disclosure of information by reason of lack of valid notice, permission orwaiver. These claims or liabilities could subject us to unexpected costs and adversely affect our operating results.We face the possibility of damages resulting from internal and external security breaches . In the course of our business operations, we store, process,compile and transmit confidential information, including patient health information, in our processing centers and other facilities. A breach of security in any ofthese facilities could damage our reputation and result in damages being assessed against us. In addition, the other systems with which we may interface, suchas the Internet and related systems may be vulnerable to security breaches, viruses, programming errors, or similar disruptive problems. In addition, our clientsand vendors with whom we have business associate agreements, or other parties with whom we do not have business associate agreements, may beresponsible for breaching the security and compromising the privacy of patient information located on our systems. In addition, although we extensively train andmonitor our employees, it is possible that our own employees may engage in conduct that compromises security or privacy. The effect of these securitybreaches and related issues could disrupt our ability to perform certain key business functions and could potentially reduce demand for our services.Accordingly, we have expended significant resources toward establishing and enhancing the security of our related infrastructures, although no assurance canbe given that they will be entirely free from potential breach. Maintaining and enhancing our infrastructure security may require us to expend significant capital inthe future.The success of our strategy to offer our electronic data interchange (“EDI”) services and software as a service (“SaaS”) solutions depends on the confidence ofour clients in our ability to securely transmit confidential information. Our EDI services and SaaS solutions rely on encryption, authentication and other securitytechnology licensed from third parties to achieve secure transmission of confidential information. We may not be able to stop unauthorized attempts to gainaccess to or disrupt the transmission of communications by our clients. Anyone who is able to circumvent our security measures could misappropriate16Table of Contentsconfidential user information or interrupt our, or our clients’, operations. In addition, our EDI and SaaS solutions may be vulnerable to viruses, physical orelectronic break-ins and similar disruptions.Any failure to provide secure infrastructure and/or electronic communication services could result in a lack of trust by our clients causing them to seek out othervendors and/or damage our reputation in the market, making it difficult to obtain new clients.Our business depends on continued and unimpeded access to the Internet by us and our clients, which is not within our control. We deliver Internet-based services and, accordingly, depend on our ability and the ability of our clients to access the Internet. This access is currently provided by third parties thathave significant market power in the broadband and Internet access marketplace, including incumbent telephone companies, cable companies, mobilecommunications companies and government-owned service provides -- all of whom are outside of our control. In the event of any difficulties, outages and delaysby Internet service providers, we may be impeded from providing services, resulting in a loss of potential or existing clients.We may be subject to claims for system errors, warranties or product liability, which could have an adverse effect on our business, results ofoperations and financial condition. Our software solutions are intended for use in collecting, storing and displaying clinical and healthcare-related informationused in the diagnosis and treatment of patients and in related healthcare settings such as admissions and billing. Therefore, users of our software solutionshave a greater sensitivity to errors than the market for software products generally. Any failure by our products to provide accurate and timely informationconcerning patients, their medication, treatment and health status, generally, could result in claims against us which could materially and adversely impact ourfinancial performance, industry reputation and ability to market new system sales. In addition, a court or government agency may take the position that ourdelivery of health information directly, including through licensed practitioners, or delivery of information by a third party site that a consumer accesses throughour websites, exposes us to assertions of malpractice, other personal injury liability, or other liability for wrongful delivery/handling of healthcare services orerroneous health information. We maintain insurance to protect against claims associated with the use of our products as well as liability limitation language inour end-user license agreements, but there can be no assurance that our insurance coverage or contractual language would adequately cover any claimasserted against us. A successful claim brought against us in excess of or outside of our insurance coverage could have an adverse effect on our business,results of operations and financial condition. Even unsuccessful claims could result in our expenditure of funds for litigation and management time andresources.Certain healthcare professionals who use our SaaS products will directly enter health information about their patients including information that constitutes arecord under applicable law that we may store on our computer systems. Numerous federal and state laws and regulations, the common law and contractualobligations, govern collection, dissemination, use and confidentiality of patient-identifiable health information, including:•state and federal privacy and confidentiality laws;•our contracts with clients and partners;•state laws regulating healthcare professionals;•Medicaid laws;•the HIPAA and related rules proposed by CMS; and•CMS standards for Internet transmission of health data.HIPAA establishes elements including, but not limited to, federal privacy and security standards for the use and protection of Protected Health Information. Anyfailure by us or by our personnel or partners to comply with applicable requirements may result in a material liability to us.Although we have systems and policies in place for safeguarding Protected Health Information from unauthorized disclosure, these systems and policies maynot preclude claims against us for alleged violations of applicable requirements. Also, third party sites and/or links that consumers may access through our websites may not maintain adequate systems to safeguard this information, or may circumvent systems and policies we have put in place. In addition, future laws orchanges in current laws may necessitate costly adaptations to our policies, procedures, or systems.There can be no assurance that we will not be subject to product liability claims, that such claims will not result in liability in excess of our insurance coverage,that our insurance will cover such claims or that appropriate insurance will continue to be available to us in the future at commercially reasonable rates. Suchproduct liability claims could adversely affect our business, results of operations and financial condition.We are subject to the effect of payer and provider conduct which we cannot control and accordingly, there is no assurance that revenue for ourservices will continue at historic levels . We offer certain electronic claims submission products and services as part of our product line. While we haveimplemented certain product features designed to maximize the accuracy and completeness of claims submissions, these features may not be sufficient toprevent inaccurate claims data from being submitted to payers. Should inaccurate claims data be submitted to payers, we may be subject to liability claims.Electronic data transmission services are offered by certain payers to healthcare providers that establish a direct link between the provider and payer. Thisprocess reduces revenue to third party EDI service providers such as us. As a result of this, and other market factors, we are unable to ensure that we willcontinue to generate revenue at or in excess of prior levels for such services.17Table of ContentsA significant increase in the utilization of direct links between healthcare providers and payers could adversely affect our transaction volume and financialresults. In addition, we cannot provide assurance that we will be able to maintain our existing links to payers or develop new connections on terms that areeconomically satisfactory to us, if at all.Proprietary rights are material to our success, and the misappropriation of these rights could adversely affect our business and our financialcondition. We are heavily dependent on the maintenance and protection of our intellectual property and we rely largely on technical security measures, licenseagreements, confidentiality procedures and employee nondisclosure agreements to protect our intellectual property. The majority of our software is not patentedand existing copyright laws offer only limited practical protection.There can be no assurance that the legal protections and precautions we take will be adequate to prevent misappropriation of our technology or that competitorswill not independently develop technologies equivalent or superior to ours. Further, the laws of some foreign countries do not protect our proprietary rights to asgreat an extent as do the laws of the United States and are often not enforced as vigorously as those in the United States.We do not believe that our operations or products infringe on the intellectual property rights of others. However, there can be no assurance that others will notassert infringement or trade secret claims against us with respect to our current or future products or that any such assertion will not require us to enter into alicense agreement or royalty arrangement or other financial arrangement with the party asserting the claim. Responding to and defending any such claims maydistract the attention of our management and adversely affect our business, results of operations and financial condition. In addition, claims may be broughtagainst third parties from which we purchase software, and such claims could adversely affect our ability to access third party software for our systems.If we are deemed to infringe on the proprietary rights of third parties, we could incur unanticipated expense and be prevented from providing ourproducts and services. We have been, and may be in the future, subject to intellectual property infringement claims as the number of our competitors growsand our applications' functionality is viewed as similar or overlapping with competitive products. We do not believe that we have infringed or are infringing on anyproprietary rights of third parties. However, claims are occasionally asserted against us, and we cannot assure you that infringement claims will not be assertedagainst us in the future. Also, we cannot assure you that any such claims will be unsuccessful. We could incur substantial costs and diversion of managementresources defending any infringement claims - even if we are ultimately successful in the defense of such matters. Furthermore, a party making a claim againstus could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief that could effectively block our ability to provideproducts or services. In addition, we cannot assure you that licenses for any intellectual property of third parties that might be required for our products orservices will be available on commercially reasonable terms, or at all.We face risks related to the periodic maintenance and upgrades that need to be made to our products. As we continue to develop and improve upon ourtechnology and offerings, we need to periodically upgrade and maintain the products deployed to our clients. This process can require a significant amount ofour internal time and resources, and be complicated and time consuming for our clients. Certain upgrades may also pose the risk of system delays or failure. Ifour periodic upgrades and maintenance cause disruptions to our clients, we may lose revenue-generating transactions, our clients may elect to use othersolutions and we may also be the subject of negative publicity that may adversely affect our business and reputation.Risks Related to RegulationThere is significant uncertainty in the healthcare industry in which we operate, and the current governmental laws and regulations as well as anyfuture modifications to the regulatory environment, may adversely impact our business, financial condition and results of operations. The healthcareindustry is subject to changing political, economic and regulatory influences that may affect the procurement processes and operation of healthcare facilities.During the past several years, the healthcare industry has been subject to an increase in governmental regulation of, among other things, reimbursement ratesand certain capital expenditures.For example, the Health Insurance Portability and Accountability Act of 1996, as modified by HITECH provisions of the ARRA (collectively, “HIPAA”), continuesto have a direct impact on the health care industry by requiring national provider identifiers and standardized transactions/code sets, operating rules andnecessary security and privacy measures in order to ensure the appropriate level of privacy of protected health information. These regulatory factors affect thepurchasing practices and operation of health care organizations.The Patient Protection and Affordable Care Act (“PPACA”), which was amended by the Health Care and Education Reconciliation Act of 2010, became law in2010. This comprehensive health care reform legislation included provisions to control health care costs, improve health care quality, and expand access toaffordable health insurance. The Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”), which became law in 2015, repealed the sustainablegrowth rate (“SGR”) formula and created two new value-based payment systems for Medicare physicians. Together with ongoing statutory and budgetary policydevelopments at a federal level, these health care reform laws include changes in Medicare and Medicaid payment policies and other health care deliveryadministrative reforms that could potentially negatively impact our business and the business of our clients. Because not all the administrative rulesimplementing health care reform under these laws have been finalized, and because of ongoing federal fiscal budgetary pressures yet to be resolved for federalhealth programs, the full impact of the health care reform legislation and of further statutory actions to reform healthcare payment on our business is unknown,but there can be no assurances that health care reform legislation will not adversely impact either our operational18Table of Contentsresults or the manner in which we operate our business. Health care industry participants may respond by reducing their investments or postponing investmentdecisions, including investments in our solutions and services.The results of the 2016 Congressional and Presidential elections have created new uncertainties. President Donald Trump and leaders of the 115 th Congresshave stated their intention to make significant changes to existing healthcare laws and regulations, but the future outlook for the various healthcare reformproposals under discussion remains uncertain.Healthcare providers may react to these proposals, and the uncertainty surrounding such proposals, by curtailing or deferring investments, including those forour systems and related services. Cost-containment measures instituted by healthcare providers as a result of regulatory reform or otherwise could result in areduction in the allocation of capital funds. Such a reduction could have an adverse effect on our ability to sell our systems and related services. On the otherhand, changes in the regulatory environment have increased and may continue to increase the needs of healthcare organizations for cost-effective datamanagement and thereby enhance the overall market for healthcare management information systems. We cannot predict what effect, if any, such proposals orhealthcare reforms might have on our business, financial condition and results of operations.As existing regulations mature and become better defined, we anticipate that these regulations will continue to directly affect certain of our products andservices, but we cannot fully predict the effect at this time. We have taken steps to modify our products, services and internal practices as necessary to facilitateour compliance with the regulations, but there can be no assurance that we will be able to do so in a timely or complete manner. Achieving compliance withthese regulations could be costly and distract management’s attention and divert other company resources, and any noncompliance by us could result in civiland criminal penalties.Developments of additional federal and state regulations and policies have the potential to positively or negatively affect our business.Other specific risks include, but are not limited to, risks relating to:Privacy and Security of Patient Information. As part of the operation of our business, we may have access to or our clients may provide to usindividually-identifiable health information related to the treatment, payment, and operations of providers’ practices. Government and industry legislation andrulemaking, especially HIPAA, HITECH and standards and requirements published by industry groups such as the Joint Commission require the use of standardtransactions, standard identifiers, security and other standards and requirements for the transmission of certain electronic health information. These standardsand requirements impose additional obligations and burdens on us, limiting the use and disclosure of individually-identifiable health information, and require usto enter into business associate agreements with our clients and vendors. Failure by us to enter into adequate business associate agreements with any client orvendor would place us in violation of applicable standards and requirements and could expose us to liability. Our business associates may interpret HIPAArequirements differently than we do, and we may not be able to adequately address the risks created by such interpretations. These new rules, and any futurechanges to privacy and security rules, may increase the cost of compliance and could subject us to additional enforcement actions, which could further increaseour costs and adversely affect the way in which we do business.ICD-10 Medical Coding Transition. The CMS mandated that all providers, payers, clearinghouses and billing services implement the use of newpatient codes for medical coding, referred to as ICD-10 codes, on or before October 1, 2015. The ICD-10 transition mandate substantially increased the numberof medical billing codes by which providers seek reimbursement, increasing the complexity of submitting claims for reimbursement. The ICD-10 code set is alsosubject to annual updates from CMS. Our efforts to provide services and solutions that enable our clients to continue their compliance with the ICD-10 andpotential subsequent mandates could be time consuming and expensive. In addition, due to the effort and expense of complying with the ICD-10 mandate andpotential subsequent mandates, our clients may postpone or cancel decisions to purchase our solutions and services. Either of the foregoing, or any futurechanges to the required ICD-10 code set, could have a material adverse effect on our business, financial condition and results of operations.Interoperability Standards. Our clients are concerned with and often require that our software solutions and health care devices be interoperable withother third party health care information technology suppliers. With the passing of the MACRA in 2015, the U.S. Congress declared it a national objective toachieve widespread exchange of health information through interoperable certified EHR technology nationwide by December 31, 2018. The 21 st Century CuresAct, which was passed and signed into law in December 2016, includes numerous provisions intended to encourage this nationwide interoperability. As a resultof the 21 st Century Cures Act, the U.S. Department of Health and Human Services (“HHS”) has the regulatory authority to investigate and assess civil monetarypenalties of up to $1,000,000 against health IT developers and/or providers found to be in violation of “information blocking”. This new oversight and authority toinvestigate claims of “information blocking” creates significant risks for us and our clients. The legislation also requires HHS to add new certificationrequirements related to interoperability as a condition of a health IT developer achieving or maintaining approved federal government certification status. If oursoftware solutions, health care devices or services are not consistent with interoperability standards imposed by governmental/regulatory authorities ordemanded by market forces, we could be forced to incur substantial additional development costs to conform.FDA Regulation. Although the 21 st Century Cures Act took steps to expressly limit the authority of the U.S. Food and Drug Administration (“FDA”) toregulate as a medical device electronic health record software functionality, administrative software functionality, and other specified categories of medicalsoftware functionality, our software may potentially be subject to regulation by the FDA as a medical device. Such regulation could require the registration of theapplicable manufacturing facility19Table of Contentsand software and hardware products, application of detailed record-keeping and manufacturing standards, application of the medical device excise tax, and FDAapproval or clearance prior to marketing. An approval or clearance requirement could create delays in marketing, and the FDA could require supplemental filingsor object to certain of these applications, the result of which could adversely affect our business, financial condition and results of operations.Health Reform. The health reform laws discussed above and that may be enacted in the future contain and may contain various provisions which mayimpact us and our clients. Some of these provisions may have a positive impact, by expanding the use of electronic health records in certain federal programs,for example, while others, such as reductions in reimbursement for certain types of providers, may have a negative impact due to fewer available resources.Increases in fraud and abuse penalties may also adversely affect participants in the health care sector, including us.We may not see the benefits from government funding programs initiated to accelerate the adoption and utilization of health information technology.While government programs have been implemented to improve the efficiency and quality of the healthcare sector, including expenditures to stimulate businessand accelerate the adoption and utilization of healthcare technology, we may not see the anticipated benefits of such programs. Under the ARRA, the PPACA,and the MACRA, unprecedented government financial resources are being invested in healthcare, including significant financial incentives to healthcareproviders who can demonstrate meaningful use of certified EHR technology since 2011. While we expect the ARRA, the PPACA, and the MACRA to continue tocreate sales opportunities over the next several years, we are unsure of the immediate or long-term impact of these government actions.HITECH established the Medicare and Medicaid EHR Incentive Programs to provide incentive payments for eligible professionals, hospitals, and critical accesshospitals as they adopt, implement, upgrade, or demonstrate meaningful use of certified EHR technology. HITECH, and subsequently MACRA, also authorizedCMS to apply payment adjustments, or penalties, to Medicare eligible professionals and eligible hospitals that are not meaningful users under the Medicare EHRIncentive Program.Although we believe that our service offerings will meet the requirements of HITECH and MACRA to allow our clients to qualify for financial incentives and avoidfinancial penalties for implementing and using our services, there can be no guaranty that our clients will achieve meaningful use or actually receive suchplanned financial incentives for our services. We also cannot predict the speed at which healthcare providers will adopt electronic health record systems inresponse to these government incentives, whether healthcare providers will select our products and services or whether healthcare providers will implement anelectronic health record system at all. In addition, the financial incentives associated with the meaningful use program are tied to provider participation inMedicare and Medicaid, and we cannot predict whether providers will continue to participate in these programs. Any delay in the purchase and implementationof electronic health records systems by healthcare providers in response to government programs, or the failure of healthcare providers to purchase anelectronic health record system, could have an adverse effect on our business, financial condition and results of operations. It is also possible that additionalregulations or government programs related to electronic health records, amendment or repeal of current healthcare laws and regulations or the delay inregulatory implementation could require us to undertake additional efforts to meet meaningful use standards, materially impact our ability to compete in theevolving healthcare IT market, materially impact healthcare providers' decisions to implement electronic health records systems or have other impacts thatwould be unfavorable to our business.We may be subject to false or fraudulent claim laws . There are numerous federal and state laws that forbid submission of false information or the failure todisclose information in connection with submission and payment of physician claims for reimbursement. In some cases, these laws also forbid abuse of existingsystems for such submission and payment. Any failure of our RCM services to comply with these laws and regulations could result in substantial liabilityincluding, but not limited to, criminal liability, could adversely affect demand for our services and could force us to expend significant capital, research anddevelopment and other resources to address the failure. Errors by us or our systems with respect to entry, formatting, preparation or transmission of claiminformation may be determined or alleged to be in violation of these laws and regulations. Determination by a court or regulatory agency that our services violatethese laws could subject us to civil or criminal penalties, invalidate all or portions of some of our client contracts, require us to change or terminate some portionsof our business, require us to refund portions of our services fees, cause us to be disqualified from serving clients doing business with government payers andhave an adverse effect on our business.In most cases where we are permitted to do so, we calculate charges for our RCM services based on a percentage of the collections that our clients receive as aresult of our services. To the extent that violations or liability for violations of these laws and regulations require intent, it may be alleged that this percentagecalculation provides us or our employees with incentive to commit or overlook fraud or abuse in connection with submission and payment of reimbursementclaims. The U.S. Centers for Medicare and Medicaid Services has stated that it is concerned that percentage-based billing services may encourage billingcompanies to commit or to overlook fraudulent or abusive practices.A portion of our business involves billing of Medicare claims on behalf of its clients. In an effort to combat fraudulent Medicare claims, the federal governmentoffers rewards for reporting of Medicare fraud which could encourage others to subject us to a charge of fraudulent claims, including charges that are ultimatelyproven to be without merit.Additionally, under the False Claims Act (“FCA”), the federal government allows private individuals to file a complaint or otherwise report actions alleging thedefrauding of the federal government by an entity. These suits, known as qui tam actions or “whistleblower” suits may be brought by, with only a few exceptions,any private citizen who believes that he has material information of a false claim that has not been previously disclosed. If the federal government intervenes,the individual that filed the initial complaint may share in any settlement or judgment. If the federal government does not intervene in the action, the20Table of Contentswhistleblower plaintiff may pursue its allegation independently. Some states have adopted similar state whistleblower and false claims provisions. Qui tamactions under the FCA and similar state laws may lead to significant fines, penalties, settlements or other sanctions, including exclusion from Medicare or otherfederal or state healthcare programs.If our products fail to comply with evolving government and industry standards and regulations, we may have difficulty selling our products. We maybe subject to additional federal and state statutes and regulations in connection with offering services and products via the Internet. On an increasingly frequentbasis, federal and state legislators are proposing laws and regulations that apply to Internet commerce and communications. Areas being affected by theseregulations include user privacy, pricing, content, taxation, copyright protection, distribution, and quality of products and services. To the extent that our productsand services are subject to these laws and regulations, the sale of our products and services could be harmed.We are subject to changes in and interpretations of financial accounting matters that govern the measurement of our performance, one or more ofwhich could adversely affect our business, financial condition, cash flows, revenue, results of operations, and debt covenant compliance . Based onour reading and interpretations of relevant guidance, principles or concepts issued by, among other authorities, the American Institute of Certified PublicAccountants, the Financial Accounting Standards Board and the Commission, we believe our current business arrangements, transactions, and relatedestimates and disclosures have been properly reported. However, there continue to be issued interpretations and guidance for applying the relevant standardsto a wide range of sales and licensing contract terms and business arrangements that are prevalent in the software industry. Future interpretations or changesby the regulators of existing accounting standards or changes in our business practices could result in changes in our revenue recognition and/or otheraccounting policies and practices that could adversely affect our business, financial condition, cash flows, revenue and results of operations. In addition,changes in accounting rules could alter the application of certain terms in our credit agreement, thereby impacting our ability to comply with our debt covenants.Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have an adverse effect on ourbusiness, and our per share price may be adversely affected. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”) and the rules andregulations promulgated by the SEC to implement Section 404, we are required to include in our Form 10-K a report by our management regarding theeffectiveness of our internal control over financial reporting. The report includes, among other things, an assessment of the effectiveness of our internal controlover financial reporting. The assessment must include disclosure of any material weakness in our internal control over financial reporting identified bymanagement.As part of the evaluation undertaken by management and our independent registered public accountants pursuant to Section 404, our internal control overfinancial reporting was effective as of March 31, 2017 . However, if we fail to maintain an effective system of disclosure controls or internal controls over financialreporting, we may discover material weaknesses that we would then be required to disclose. Any material weaknesses identified in our internal controls couldhave an adverse effect on our business. We may not be able to accurately or timely report on our financial results, and we might be subject to investigation byregulatory authorities. This could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which may have an adverseeffect on our stock price.No evaluation process can provide complete assurance that our internal controls will detect and correct all failures within our company to disclose materialinformation otherwise required to be reported. The effectiveness of our controls and procedures could also be limited by simple errors or faulty judgments. Inaddition, if we continue to expand, through either organic growth or through acquisitions (or both), the challenges involved in implementing appropriate controlswill increase and may require that we evolve some or all of our internal control processes.It is also possible that the overall scope of Section 404 may be revised in the future, thereby causing ourselves to review, revise or reevaluate our internalcontrol processes which may result in the expenditure of additional human and financial resources.Risks Related to Ownership of Our Common StockThe unpredictability of our quarterly operating results may cause the price of our common stock to fluctuate or decline. Our revenue may fluctuate inthe future from quarter to quarter and period to period, as a result of a number of factors including, without limitation:•the size and timing of orders from clients;•the specific mix of software, hardware and services in client orders;•the length of sales cycles and installation processes;•the ability of our clients to obtain financing for the purchase of our products;•changes in pricing policies or price reductions by us or our competitors;•the timing of new product announcements and product introductions by us or our competitors;•changes in revenue recognition or other accounting guidelines employed by us and/or established by the Financial Accounting Standards Board("FASB") or other rule-making bodies;•changes in government healthcare policies and regulations, such as the shift from fee-for-service reimbursement to value-based reimbursement;21Table of Contents•accounting policies concerning the timing of the recognition of revenue;•the availability and cost of system components;•the financial stability of clients;•market acceptance of new products, applications and product enhancements;•our ability to develop, introduce and market new products, applications and product enhancements;•our success in expanding our sales and marketing programs;•deferrals of client orders in anticipation of new products, applications, product enhancements, or public/private sector initiatives;•execution of or changes to our strategy;•personnel changes; and•general market/economic factors.Our software products are generally shipped as orders are received and accordingly, we have historically operated with a minimal backlog of license fees. As aresult, a portion of our revenue in any quarter is dependent on orders booked and shipped in that quarter and is not predictable with any degree of certainty.Furthermore, our systems can be relatively large and expensive, and individual systems sales can represent a significant portion of our revenue and profits for aquarter such that the loss or deferral of even one such sale can adversely affect our quarterly revenue and profitability. Clients often defer systems purchasesuntil our quarter end, so quarterly revenue from system sales generally cannot be predicted and frequently are not known until after the quarter has concluded.Our sales are dependent upon clients’ initial decisions to replace or substantially modify their existing information systems, and subsequently, their decisionconcerning which products and services to purchase. These are major decisions for healthcare providers and, accordingly, the sales cycle for our systems canvary significantly and typically ranges from six to twenty-four months from initial contact to contract execution/shipment. Because a significant percentage of ourexpenses are relatively fixed, a variation in the timing of systems sales, implementations and installations can cause significant variations in operating resultsfrom quarter to quarter. As a result, we believe that interim period-to-period comparisons of our results of operations are not necessarily meaningful and shouldnot be relied upon as indications of future performance. Further, our historical operating results are not necessarily indicative of future performance for anyparticular period. We currently recognize revenue in accordance with the applicable accounting guidance as defined by the FASB. There can be no assurancethat application and subsequent interpretations of these pronouncements will not further modify our revenue recognition policies, or that such modificationswould not adversely affect our operating results reported in any particular quarter or year. Due to all of the foregoing factors, it is possible that our operatingresults may be below the expectations of public market analysts and investors. In such event, the price of our common stock would likely be adversely affected.Our common stock price has been volatile, which could result in substantial losses for investors purchasing shares of our common stock and inlitigation against us. Volatility may be caused by a number of factors including but not limited to:•actual or anticipated quarterly variations in operating results;•rumors about our performance, software solutions, or merger and acquisition activity;•changes in expectations of future financial performance or changes in estimates of securities analysts;•governmental regulatory action;•health care reform measures;•client relationship developments;•purchases or sales of company stock;•activities by one or more of our major shareholders concerning our policies and operations;•changes occurring in the markets in general;•macroeconomic conditions, both nationally and internationally; and•other factors, many of which are beyond our control.Furthermore, the stock market in general, and the market for software, healthcare and high technology companies in particular, has experienced extremevolatility that often has been unrelated to the operating performance of particular companies. These broad market and industry fluctuations may adversely affectthe trading price of our common stock, regardless of actual operating performance.Moreover, in the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of itssecurities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention andresources.22Table of ContentsOne of our current directors, and one of our former directors are each significant shareholders, which makes it possible for them to have significantinfluence over the outcome of all matters submitted to our shareholders for approval and which influence may be alleged to conflict with ourinterests and the interests of our other shareholders. One of our directors is a significant shareholder who beneficially owns approximately 16.4% of theoutstanding shares of our common stock at March 31, 2017 . In addition, a former director, who owns approximately 9.1% (based on the most recently availablepublicly filed information) of the outstanding shares of our common stock at March 31, 2017 , likely maintains a large enough ownership stake to reelect himselfto our Board of Directors under cumulative voting. California law and our Bylaws permit our shareholders to cumulate their votes, the effect of which is to provideshareholders with sufficiently large concentrations of our shares the opportunity to assure themselves one or more seats on our Board of Directors. Theamounts required to assure a seat on our Board of Directors can vary based upon the number of shares outstanding, the number of shares voting, the numberof directors to be elected, the number of “broker non-votes,” and the number of shares held by the shareholder exercising the cumulative voting rights. In theevent that cumulative voting is invoked, it is likely that these two individuals that are significant shareholders will each have sufficient votes to assure themselvesof one or more seats on our Board of Directors. With or without cumulative voting, these two significant shareholders will have substantial influence over theoutcome of all matters submitted to our shareholders for approval, including the election of our directors and other corporate actions. This influence may bealleged to conflict with our interests and the interests of our other shareholders. For example, in fiscal year 2013, the former director launched a proxy contest toelect a different slate of directors than what our Company proposed to shareholders. We spent approximately $1.3 million to defend against the proxy contestand elect the Company's slate of directors. In addition, such influence by one or both of these shareholders could have the effect of discouraging others fromattempting to acquire our Company or create actual or perceived governance instabilities that could adversely affect the price of our common stock.We have suspended our payment of dividends. Our future practice concerning the payment of dividends is uncertain, which could adversely affectthe price of our stock. Our credit agreement contains restrictions on our ability to declare and pay dividends. Accordingly, we suspended payment of dividendsfollowing our previously declared January 4, 2016 dividend payment, and we announced that we do not expect to pay dividends for at least the next twelvemonths from that time. Prior to suspending dividends, we had paid a quarterly dividend commencing with the conclusion of our first fiscal quarter of 2008(June 30, 2007), with our Board of Directors declaring a quarterly cash dividend ranging from $0.125 to its most recent level of $0.175 per share on ouroutstanding shares of common stock, each quarter thereafter. Our dividends were generally distributable on or about the fifth day of each of the months ofOctober, January, April and July. With our payment of dividends currently suspended, the payment of future dividends, if any, will be at the discretion of ourBoard of Directors after taking into account various factors, including without limitation, our credit agreement, operating cash flows, financial condition, operatingresults, and sufficiency of funds based on our then-current and anticipated cash needs and capital requirements. Unfulfilled expectations regarding futuredividends could adversely affect the price of our stock.23Table of ContentsITEM 1B. UNRESOLVED STAFF COMMENTSNone.ITEM 2. PROPERTIESOur corporate headquarters is located in Irvine, California. We believe that our existing facilities are in good condition and adequate for our current businessrequirements. Should we continue to grow, we may be required to lease or acquire additional space. We believe that suitable additional space is available, ifneeded, at commercially reasonable market rates and terms.As of March 31, 2017 , we leased an aggregate of approximately 551,200 square feet of space with lease agreements expiring at various dates, of whichapproximately 446,300 square feet of space are utilized for continuing operations and 104,900 square feet of space are being subleased or have been vacatedas part of our reorganization efforts, as detailed further below: Square Feet NotesPrimary Operating Locations  Horsham, Pennsylvania92,800(2) (4)Irvine, California83,100(1) (2) (4)Bangalore, India73,800(4)St. Louis, Missouri54,900(3)San Diego, California40,000 (2) (4)Atlanta, Georgia35,500 (2) (4)Hunt Valley, Maryland34,000(3)North Canton, Ohio22,100(3)South Jordan, Utah7,300(3)Other locations2,800 Total Primary Operating Locations446,300    Vacated or Subleased Locations  Austin, Texas43,700 Costa Mesa, California25,100 Horsham, Pennsylvania17,200 Solana Beach, California12,000 Other locations6,900 Total Vacated or Subleased Locations104,900    Total Leased Properties551,200 _______________________(1) Location of our corporate office(2) Primary locations of the Software and Related Solutions operating segment(3) Primary locations of the RCM and Related Services operating segment(4) Locations of our research and development functions24Table of ContentsITEM 3. LEGAL PROCEEDINGSWe have experienced legal claims by clients regarding product and contract disputes, by other third parties asserting that we have infringed their intellectualproperty rights, by current and former employees regarding certain employment matters and by certain shareholders. We believe that these claims are withoutmerit and intend to defend against them vigorously; however, we could incur substantial costs and diversion of management resources defending any suchclaim, even if we are ultimately successful in the defense of such matter. Litigation is inherently uncertain and always difficult to predict.Additionally, we are subject to the regulation and oversight of various federal and state governmental agencies that enforce fraud and abuse programs related tothe submission of fraudulent claims for reimbursement from governmental payers. We have received, and from time to time may receive, inquiries or subpoenasfrom federal and state agencies. Under the FCA, private parties have the right to bring qui tam, or “whistleblower,” suits against entities that submit, or cause tobe submitted, fraudulent claims for reimbursement. Qui tam or whistleblower actions initiated under the FCA may be pending but placed under seal by the courtto comply with the FCA’s requirements for filing such suits. As a result, they could lead to proceedings without our knowledge. We refer you to the discussion ofregulatory and litigation risks within “Item 1A. Risk Factors” and to Note 14, “Commitments, Guarantees and Contingencies” of our notes to consolidatedfinancial statements included elsewhere in this Report for a discussion of current legal proceedings.ITEM 4. MINE AND SAFETY DISCLOSURESNot applicable25Table of ContentsPART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESMarket Price and HoldersOur common stock is traded on the NASDAQ Global Select Market under the symbol “QSII.”The following table sets forth for the quarters indicated the high and low sales prices for each period indicated, as reported on the NASDAQ Global SelectMarket: High LowThree Months Ended   June 30, 2015$17.95 $15.33September 30, 2015$17.06 $12.01December 31, 2015$16.74 $12.11March 31, 2016$17.50 $12.51June 30, 2016$15.31 $11.10September 30, 2016$13.04 $11.13December 31, 2016$14.18 $10.61March 31, 2017$15.90 $13.07At May 17, 2017 , there were approximately 288 holders of record of our common stock.DividendsOur future practice concerning the payment of dividends is uncertain. We entered into a revolving credit agreement in January 2016 (refer to Note 9, “Line ofCredit” of our notes to consolidated financial statements included elsewhere in this Report for additional information), which contains restrictions on our ability todeclare and pay dividends. Accordingly, we suspended payment of dividends following our previously declared January 4, 2016 dividend payment, and weannounced that we do not expect to pay dividends for at least the next twelve months from that time. The payment of future dividends, if any, will be at thediscretion of our Board of Directors after taking into account various factors, including without limitation, our credit agreement, operating cash flows, financialcondition, operating results, and sufficiency of funds based on our then-current and anticipated cash needs and capital requirements.Prior to suspending dividends, we had paid a quarterly dividend commencing with the conclusion of our first fiscal quarter of 2008 (June 30, 2007), with ourBoard of Directors declaring a quarterly cash dividend ranging from $0.125 to its most recent level of $0.175 per share on our outstanding shares of commonstock, each quarter thereafter. Our dividends were generally distributable on or about the fifth day of each of the months of October, January, April and July. OurBoard of Directors declared the following dividends during the last two years:Declaration Date Record Date Payment Date Per Share Dividend       May 20, 2015 June 12, 2015 July 6, 2015 $0.175July 22, 2015 September 11, 2015 October 5, 2015 0.175October 21, 2015 December 11, 2015 January 4, 2016 0.175Fiscal year 2016   $0.525Securities Authorized for Issuance Under Equity Compensation PlansThe information included under Item 12 of this Report, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters," isincorporated herein by reference.Table of ContentsPerformance GraphThe following graph compares the cumulative total returns of our common stock, the NASDAQ Composite Index and the NASDAQ Computer & Data ProcessingServices Stock Index over the five-year period ended March 31, 2017 assuming $100 was invested on March 31, 2012 with all dividends, if any, reinvested. Thereturns shown are based on historical results and are not intended to be indicative of future stock prices or future performance. This performance graph shall notbe deemed to be “soliciting material” or “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwisesubject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of the Company under the Securities Act of1933, as amended or the Exchange Act.COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*Among Quality Systems, Inc., The NASDAQ Composite IndexAnd The NASDAQ Computer & Data Processing Index______________________*$100 invested on March 31, 2012 in stock or index, including reinvestment of dividends. Fiscal year ended March 31.27Table of ContentsITEM 6. SELECTED FINANCIAL DATAThe following selected financial data, with respect to our consolidated statements of net income and comprehensive income data for each of the five years in theperiod ended March 31, 2017 and the consolidated balance sheets data as of the end of each such fiscal year, are not necessarily indicative of results of futureoperations and should be read in conjunction with our consolidated financial statements and the related notes thereto and Item 7, "Management’s Discussionand Analysis of Financial Condition and Results of Operations” included elsewhere in this Report.Consolidated Financial Data(In thousands, except per share data) Fiscal Year Ended March 31, 2017 2016 2015 2014 2013Statements of net income and comprehensive income data:         Revenue$509,624 $492,477 $490,225 $444,667 $460,229Cost of revenue223,134 225,615 223,164 220,163 189,652Gross profit286,490 266,862 267,061 224,504 270,577Selling, general and administrative163,623 156,234 158,172 149,214 148,353Research and development costs, net78,341 65,661 69,240 41,524 30,865Amortization of acquired intangible assets10,435 5,367 3,693 4,805 4,859Impairment of assets— 32,238 — 5,873 17,400Restructuring costs7,078 — — — —Income from operations27,013 7,362 35,956 23,088 69,100Interest income14 428 111 269 76Interest expense(3,156) (1,304) (341) — (183)Other expense, net(262) (166) (62) (356) (79)Income before provision for income taxes23,609 6,320 35,664 23,001 68,914Provision for income taxes5,368 663 8,332 7,321 26,190Net income$18,241 $5,657 $27,332 $15,680 $42,724Basic net income per share$0.30 $0.09 $0.45 $0.26 $0.72Diluted net income per share$0.29 $0.09 $0.45 $0.26 $0.72Basic weighted average shares outstanding61,818 60,635 60,259 59,918 59,392Diluted weighted average shares outstanding62,010 61,233 60,849 60,134 59,462Dividends declared per common share$— $0.525 $0.70 $0.70 $0.70 March 31, 2017 March 31, 2016 March 31, 2015 March 31, 2014 March 31, 2013Balance sheet data:         Cash, cash equivalents, and marketable securities$37,673 $36,473 $130,585 $113,801 $118,011Working capital$18,108 $45,931 $100,893 $124,782 $158,156Total assets$473,221 $530,790 $460,521 $451,351 $452,126Long-term line of credit$15,000 $105,000 $— $— $—Total liabilities$168,178 $261,413 $176,981 $156,261 $145,077Total shareholders’ equity$305,043 $269,377 $283,540 $295,090 $307,04928Table of ContentsITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSExcept for the historical information contained herein, the matters discussed in this management’s discussion and analysis of financial condition and results ofoperations (“MD&A”), including discussions of our product development plans, business strategies and market factors influencing our results, may includeforward-looking statements that involve certain risks and uncertainties. Actual results may differ from those anticipated by us as a result of various factors, bothforeseen and unforeseen, including, but not limited to, our ability to continue to develop new products and increase systems sales in markets characterized byrapid technological evolution, consolidation and competition from larger, better-capitalized competitors. Many other economic, competitive, governmental andtechnological 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. RiskFactors” as set forth herein, as well as in our other public disclosures and filings with the Securities and Exchange Commission ("SEC").This MD&A is provided as a supplement to the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K("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 inits entirety by, the consolidated financial statements and related notes thereto included elsewhere in this Report. Historical results of operations, percentagemargin 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 OverviewQuality Systems, Inc., known to our clients as NextGen Healthcare, provides software, services and analytics solutions to the ambulatory care market. We are ahealthcare information technology and services company that delivers the foundational capabilities to organizations that want to promote healthy communities.Our technology provides a customizable platform that empowers physician practice success, enriches the patient care experience and lowers the cost ofhealthcare.We primarily derive revenue by developing and marketing software and services that automate certain aspects of practice management (“PM”) and electronichealth records (“EHR”) for ambulatory care practices. In addition, our software and services facilitate interoperability. Our software can be licensed and deliveredon-premise or in the cloud as software-as-a-service (“SaaS”). Our services include maintenance and support, professional services, and complementaryservices such as managed cloud services, revenue cycle management (“RCM”) and electronic data interchange (“EDI”). We market and sell our solutionsthrough a dedicated sales force and to a much lesser extent, through resellers. Our clients span the entire ambulatory market from large multi-specialty to smallsingle specialty practices and include networks of practices such as physician hospital organizations (“PHOs”), management service organizations (“MSOs”),accountable care organizations (“ACOs”), ambulatory care centers and community health centers.We have a history of enhancing our solutions through both organic and inorganic activities. Over the last few years, we have entered into strategic transactionsto complement and enhance our product portfolio in the ambulatory care market. In October 2015, we divested our former Hospital Solutions division. In January2016, we acquired HealthFusion Holdings, Inc. ("HealthFusion") and in April 2017, we acquired Entrada, Inc. ("Entrada").Quality Systems, Inc. was incorporated in California in 1974. Our principal offices are located at 18111 Von Karman Ave., Suite 800, Irvine, California, 92612.Our websites are located at www.nextgen.com and www.qsii.com. We operate on a fiscal year ending on March 31.Critical Accounting Policies and EstimatesThe discussion and analysis of our consolidated financial statements and results of operations is based upon our consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these consolidatedfinancial statements requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenue and expenses, and relateddisclosures. We base our assumptions, estimates and judgments on historical experience, current trends, and other factors we believe to be reasonable underthe 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 consolidated financial statements are presented fairly and in accordance with GAAP. Actual resultscould differ materially from our estimates under different assumptions or conditions. To the extent that there are material differences between our estimates andactual results, our financial condition or results of operations will be affected.Our significant accounting policies, as described in Note 2, “Summary of Significant Accounting Policies” of our notes to consolidated financial statementsincluded elsewhere in this Report, should be read in conjunction with management’s discussion and analysis of financial condition and results of operations. Webelieve that the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial results because applicationof such policies require significant judgment regarding the effects of matters that are inherently uncertain and that affect our consolidated financial statements.29Table of ContentsRevenue RecognitionWe generate revenue from sales of licensing rights and subscriptions to our software products, hardware and third party software products, support andmaintenance services, revenue cycle management and related services ("RCM"), electronic data interchange and data services (“EDI”), and professionalservices, such as implementation, training, and consulting performed for clients who use our products.We generally recognize revenue provided that persuasive evidence of an arrangement exists, fees are considered fixed or determinable, delivery of the productor service has occurred, and collection is considered probable. Revenue from the delivered elements (generally software licenses) are generally recognizedupon physical or electronic delivery. In certain transactions where collection is not considered probable, the revenue is deferred until collection occurs. If the feeis not fixed or determinable, then the revenue recognized in each period (subject to application of other revenue recognition criteria) will be the lesser of theaggregate amounts due and payable or the amount of the arrangement fee that would have been recognized if the fees were being recognized using theresidual method. We assess whether fees are considered fixed or determinable at the inception of the arrangement and negotiated fees generally are based ona specific volume of products to be delivered and not subject to change based on variable pricing mechanisms, such as the number of units copied or distributedor the expected number of users.A typical system sale may contain multiple elements, but most often includes software licenses, maintenance and support, implementation and training.Revenue on arrangements involving multiple elements is generally allocated to each element using the residual method when evidence of fair value only existsfor the undelivered elements. The fair value of an element is based on vendor-specific objective evidence (“VSOE”), which is based on the price charged whenthe same element is sold separately. We generally establish VSOE for the related undelivered elements based on the bell-shaped curve method. VSOE isestablished on maintenance for certain clients based on stated renewal rates only if the rate is determined to be substantive and falls within our customarypricing practices. VSOE calculations are updated and reviewed on a quarterly or annual basis, depending on the nature of the product or service.Under the residual method, we defer revenue related to the undelivered elements based on VSOE of fair value of each undelivered element and allocate theremainder of the contract price, net of all discounts, to the delivered elements. If VSOE of fair value of any undelivered element does not exist, all revenue isdeferred until VSOE of fair value of the undelivered element is established or the element has been delivered.Revenue related to arrangements that include hosting services is recognized in accordance to the revenue recognition criteria described above only if the clienthas the contractual right to take possession of the software at any time without incurring a significant penalty, and it is feasible for the client to either host thesoftware on its own equipment or through another third party. Otherwise, the arrangement is accounted for as a service contract in which the entire arrangementis deferred and recognized over the period that the hosting services are being provided.From time to time, we offer future purchase discounts on our products and services as part of our arrangements. Such discounts that are incremental to therange of discounts reflected in the pricing of the other elements of the arrangement, that are incremental to the range of discounts typically given in comparabletransactions, and that are significant, are assessed as an additional element of the arrangement. Revenue deferred related to future purchase options are notrecognized until either the client exercises the discount offer or the offer expires.Revenue from professional services, including implementation, training, and consulting services, are generally recognized as the corresponding services areperformed. Revenue from software related subscription services and support and maintenance revenue are recognized ratably over the contractual serviceperiod. Revenue from EDI and data services and other transaction processing services are recognized at the time the services are provided to clients. Revenuefrom RCM and related services is derived from services fees for ongoing billing, collections, and other related services, and are generally calculated as apercentage of total client collections. We recognize RCM and related services revenue at the time collections are made by the client as the services fees are notfixed or determinable until such time.We record revenue net of sales tax obligation in the consolidated statements of net income and comprehensive income.The amount and timing of revenue recognized in a given period is affected by our judgment as to whether an arrangement includes multiple elements and if so,the allocation of revenue to each element. We generally apply the residual method for the revenue recognition of our multiple element arrangements andestimate the fair value of the undelivered elements based on VSOE. Establishing VSOE on our undelivered elements requires judgment. We establish VSOE foreach undelivered element as the price charged when the same element is sold separately and generally evidenced when a substantial majority of historicalstandalone transactions fall within a reasonably narrow range using the bell-shaped curve method. In our determination of VSOE, we also consider service type,client type, and other variables. Our revenue recognition is based on our ability to maintain VSOE. Although not currently expected, certain events may occur,such as modification to or lack of consistency in our selling and pricing practices that could result in changes to our determination of VSOE. VSOE calculationsare updated and reviewed on a quarterly or annual basis, depending on the nature of the product or service.We also must apply judgment in determining the appropriate timing and recognition of certain revenue deferrals. In certain transactions where collection risk ishigh, the revenue is deferred until collection occurs. If the fee is not fixed or determinable, then30Table of Contentsthe revenue recognized in each period (subject to application of other revenue recognition criteria) will be the lesser of the aggregate amounts due and payableor the amount of the arrangement fee that would have been recognized if the fees were being recognized using the residual method. We assess whether feesare considered fixed or determinable at the inception of the arrangement and negotiated fees generally are based on a specific volume of products to bedelivered and not subject to change based on variable pricing mechanisms, such as the number of units copied or distributed or the expected number of users.Although we currently believe that our approach to estimates and judgments as described herein is reasonable, actual results could differ and we may beexposed to increases or decreases in revenue that could be material.Reserves on Accounts ReceivableWe maintain reserves for potential sales returns and uncollectible accounts receivable. In aggregate, such reserves reduce our gross accounts receivable to itsestimated net realizable value.Our standard contracts generally do not contain provisions for clients to return products or services. However, we historically have accepted sales returns undercertain circumstances. Accordingly, we estimate sales return reserves, including reserves for returns and other credits, based upon the rate of historical returnsby revenue type in relation to the corresponding gross revenues and recognize revenue, net of an allowance for sales returns. If we are unable to estimate thereturns, revenue recognition may be delayed until the rights of return period lapses, provided also, that all other criteria for revenue recognition have been met. Ifwe experience changes in practices related to sales returns or changes in actual return rates that deviate from the historical data on which our reserves hadbeen established, our revenues may be adversely affected.Allowances for doubtful accounts and other uncollectible accounts receivable related to estimated losses resulting from our clients’ inability to make requiredpayments are established based on our historical experience of bad debt expense and the aging of our accounts receivable balances, net of deferred revenueand specifically reserved accounts. Specific reserves are based on our estimate of the probability of collection for certain troubled accounts. Accounts are writtenoff as uncollectible only after we have expended extensive collection efforts.Our allowances for doubtful accounts are based on our assessment of the collectibility of client accounts. We regularly review the adequacy of these allowancesby considering internal factors such as historical experience, credit quality and age of the client receivable balances as well as external factors such aseconomic conditions that may affect a client’s ability to pay and review of major third-party credit-rating agencies, as needed. If a major client’s creditworthinessor financial condition were to deteriorate, if actual defaults are higher than our historical experience, or if other circumstances arise, our estimates of therecoverability of amounts due to us could be overstated, and additional allowances could be required, which could have an adverse impact on our operatingresults.Although we currently believe that our approach to estimates and judgments as described herein is reasonable, actual results could differ and we may beexposed to increases or decreases in required reserves that could be material.Software Development CostsSoftware development costs, consisting primarily of employee salaries and benefits, incurred in the research and development of new software products andenhancements to existing software products for external sale are expensed as incurred, and reported as net research and development costs in theconsolidated statements of net income and comprehensive income, until technological feasibility has been established. After technological feasibility isestablished, any additional external software development costs are capitalized. Amortization of capitalized software is recorded using the greater of the ratio ofcurrent revenues to the total of current and expected revenues of the related product or the straight-line method over the estimated economic life of the relatedproduct, which is typically three years. The total of capitalized software costs incurred in the development of products for external sale are reported ascapitalized software costs within our consolidated balance sheets.We also incur costs to develop software applications for our internal-use and costs for the development of Software as a Service ("SaaS") based products soldto our clients. The development costs of our SaaS-based products are considered internal-use for accounting purposes. Our internal-use capitalized costs arestated at cost and amortized using the straight-line method over the estimated useful lives of the assets, which is typically three to seven years. Applicationdevelopment stage costs generally include costs associated with internal-use software configuration, coding, installation and testing. Costs related to thepreliminaryproject stage and post-implementation activities are expensed as incurred. Costs of significant upgrades and enhancements that result in additional functionalityare also capitalized, whereas costs incurred for maintenance and minor upgrades and enhancements are expensed as incurred. Capitalized software costs fordeveloping SaaS-based products are reported as capitalized software costs within our consolidated balance sheets and capitalized software costs fordeveloping our internal-use software applications are reported as equipment and improvements within our consolidated balance sheets.We periodically reassess the estimated economic life and the recoverability of our capitalized software costs. If a determination is made that capitalized amountsare not recoverable based on the estimated net cash flows to be generated from sales of the applicable software product, the amount by which the unamortizedcapitalized costs of a software product exceed the net realizable value is written off as a charge to earnings. The net realizable value is the estimated futuregross revenues from that product31Table of Contentsreduced by the estimated future costs of completing and disposing of that product, including the costs of performing maintenance and client support required tosatisfy our responsibility at the time of sale.During the year ended March 31, 2016, we recorded a $32.2 million non-cash impairment charge after making a determination that the previously capitalizedsoftware costs related to the NextGen Now development project was not recoverable. Refer to the "Impairment of Assets" section below for additionalinformation.Although we currently believe that our approach to estimates and judgments as described herein is reasonable, actual results could differ and we may beexposed to increases or decreases in revenue that could be material.Business CombinationsWe completed our acquisition of HealthFusion during the year ended March 31, 2017 , which was accounted for as a purchase business combination using theacquisition method of accounting.In accordance with the acquisition method of accounting for business combinations, we allocate the purchase price of acquired businesses to the tangible andintangible assets acquired and liabilities assumed based on estimated fair values. Our purchase price allocation methodology contains uncertainties because itrequires us to make assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities, including, but not limited to, intangibleassets, goodwill, and contingent consideration liabilities. We estimate the fair value of assets and liabilities based upon quoted market prices, the carrying valueof the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses depending on the nature of theassets being sold. We estimate the fair value of the contingent consideration liabilities based on the probability of achieving certain business milestones and/ormanagement's forecast of expected results. The process for estimating fair values in many cases requires the use of significant estimates, assumptions andjudgments, including determining the timing and estimates of future cash flows and developing appropriate discount rates. Unanticipated events orcircumstances may occur which could affect the accuracy of our fair value estimates, including assumptions regarding industry economic factors and businessstrategies. Any adjustments to fair value subsequent to the measurement period are reflected in the consolidated statements of net income and comprehensiveincome.We currently do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to complete thepurchase price allocation and estimate the fair value of acquired assets and liabilities. However, if actual results are not consistent with our estimates orassumptions, we may be exposed to losses or gains that could be materialGoodwillGoodwill acquired in a business combination is measured as the excess of the purchase price, or consideration transferred, over the net acquisition date fairvalues of the assets acquired and the liabilities assumed. Goodwill is not amortized as it has been determined to have an indefinite useful life.We test goodwill for impairment annually during our first fiscal quarter, referred to as the annual test date. We will also test for impairment between annual testdates if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Impairment testing for goodwill is performed at areporting-unit level, which is defined as an operating segment or one level below an operating segment (referred to as a component). A component of anoperating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment managementregularly reviews the operating results of that component.As part of our annual goodwill impairment test, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reportingunit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we conducta two-step quantitative goodwill impairment test. The first step of the impairment test involves comparing the fair values of the applicable reporting units withtheir carrying values. If the carrying amount of the reporting unit exceeds the reporting unit's fair value, we perform the second step of the goodwill impairmenttest. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit's goodwill with the carrying value ofthat goodwill. The amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units,assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated primarilythrough the use of a discounted cash flow methodology. This analysis requires significant judgments, including estimation of future cash flows, which isdependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, anddetermination of our weighted average cost of capital.32Table of ContentsThe estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions, and other factors.Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit.We currently do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to test forimpairment losses on goodwill. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to future impairmentcharges that could be material.Intangible AssetsIntangible assets consist of trade names and contracts, customer relationships, and software technology, all of which arose in connection with our acquisitions.These intangible assets are recorded at fair value and are stated net of accumulated amortization. We currently amortize intangible assets using a method thatreflects the pattern in which the economic benefits of the intangible asset are consumed.Although currently we believe that our approach to estimates and judgments as described herein is reasonable, actual results could differ and we may beexposed to decreases in the fair value of our intangible assets, resulting in impairment charges that could be material. We test intangible assets for impairment ifwe believe indicators of impairment exist.Share-Based CompensationWe record share-based compensation related to our employee stock options plans, employee share purchase plans, restricted stock awards, and restrictedperformance stock awards and shares. See Note 13, “Share-Based Awards,” of our notes to consolidated financial statements included elsewhere in this Reportfor a complete discussion of our stock-based compensation plans.Share-based compensation expense associated with the stock options under our equity incentive plans is based on the number of options expected to vest. Weestimate the fair value of stock options on the date of grant using the Black Scholes option-pricing model based on required inputs, including expected term,volatility, risk-free rate, and expected dividend yield. Expected term is estimated based upon the historical exercise behavior and represents the period of timethat options granted are expected to be outstanding and therefore the proportion of awards that is expected to vest. Volatility is estimated by using the weighted-average historical volatility of our common stock, which approximates expected volatility. The risk-free rate is the implied yield available on the U.S. Treasuryzero-coupon issues with remaining terms equal to the expected term. The expected dividend yield is the average dividend rate during a period equal to theexpected term of the option. The fair value vest is recognized ratably as expense over the requisite service period in our consolidated statements of net incomeand comprehensive income.Share-based compensation expense associated with restricted stock awards is estimated using the market price of the common stock on the date of grant.Share-based compensation expense associated with the restricted performance stock awards and shares is based on the grant date fair value measured at theunderlying closing share price on the date of grant using a Monte Carlo-based valuation model.We currently do not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions we use to determine share-based compensation expense. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to changes in share-basedcompensation expense that could be material.33Table of ContentsTrends and Events in Our BusinessWe believe that the following trends and events as described below have contributed to our consolidated results of operations and may continue to impact ourfuture results.We believe healthcare is more heavily influenced by regulatory and national health projects than by the cycles of our economy. The healthcare industry hasbeen significantly impacted by the Obama Administration's broad healthcare reform efforts, including the Health Information Technology for Economic andClinical Health portion of the American Recovery and Reinvestment Act of 2009 ("HITECH Act") and the Patient Protection and Affordable Care Act ("ACA") thatprovided significant incentives to health care organizations for "Meaningful Use" adoption and interoperable electronic health record solutions.We also believe that healthcare reform, including the repeal of the sustainable growth rate (SGR) formula as part of the Medicare Access and CHIPReauthorization Act of 2015 ("MACRA"), and a movement towards a value-based, pay-for-performance model and quality initiative efforts will stimulate demandfor robust electronic health record solutions as well as new health information technology solutions from bundled billing capabilities to patient engagement andpopulation health management. We believe MACRA may be the most important of the three regulations for our market because it permanently changes howambulatory healthcare providers are reimbursed by Medicare. It offers certainty and a timeline for the market’s move away from volume-based, fee-for-servicemodels to value-based payment models that reward the delivery of lower cost, high quality care.While we expect to benefit from the increasing demands for greater efficiency as well as government support for increased adoption of electronic health records,the market for physician based electronic health records software is becoming increasingly saturated while physician group practices are rapidly beingconsolidated by hospitals, insurance payers and other entities. Hospital software providers are leveraging their position with their hospital clients to gain marketshare with hospital owned physician practices. Insurance providers and large physician groups are also consolidating physician offices creating additionalopportunity for ambulatory software providers like us. Our strategy is to focus on addressing the growing needs of accountable care organizations aroundinteroperability, patient engagements, population health, and data analytics.We believe that our core strength lies in the central role our software products and services play in the delivery of healthcare by the primary physician in anambulatory setting. We intend to remain at the forefront of upcoming new regulatory requirements and meaningful use requirements for stimulus payments. Weintend to continue the development and enhancement of our software solutions to support healthcare reform, such as the recently enacted MACRA, whichpromotes the transition from fee-for-service to value-based, pay-for-performance and patient-centric and quality initiatives such as accountable careorganizations. Key elements of our future software development will be to expand our interoperability capabilities enhancing the competitiveness of our softwareofferings, make our products more intuitive and easy to use, and to enhance the capability of our MediTouch® Platform to allow us to deliver our software overthe cloud to larger ambulatory care practices.We have a history of enhancing our solutions through both organic and inorganic activities. Over the last few years, we have entered into strategic transactionsto complement and enhance our product portfolio in the ambulatory care market. In October 2015, we divested our former Hospital Solutions division. In January2016, we acquired HealthFusion Holdings, Inc. ("HealthFusion") and in April 2017, we acquired Entrada, Inc. ("Entrada").We continue to evaluate the organizational structure of our company with the objective of achieving greater synergies and further integration of our products andservices, in support of our business strategies. In fiscal year 2016, we initiated a three-phase plan intended to better position our organization for future success.In the first phase, we redesigned the organization to more effectively support the execution of our strategy. This phase included implementing a series of actionswith the objective of enabling a more efficient, integrated and client-centered delivery of the holistic solutions that we believe is required by our ambulatory careclients. During this phase, we transformed our management team with the appointment of a new Chief Executive Officer, Chief Financial Officer, ChiefTechnology Officer, Chief Operating Officer, and Chief Strategy Officer. Under phase two of our reorganization, we have continued to build our infrastructureand enhance our healthcare information technology capabilities to drive future revenue growth. The phase includes a multi-year initiative, called NextGen 2.0, tomerge our business units into a more streamlined, functional-based organization structure and to realign our organizational structure by consolidating the sales,marketing, information services, and software development responsibilities into single, company-wide roles to achieve greater efficiency. The third phase of theplan will consist of developing and marketing the services and solutions that we believe will accelerate revenue growth. The first phase was completed in April2016, when we announced a corporate restructuring plan, which was approved by our Board of Directors.The overall plan also includes a multi-year initiative, called NextGen 2.0, to merge our business units into a more streamlined, functional-based organizationstructure and to realign our organizational structure by consolidating the sales, marketing, information services, and software development responsibilities intosingle, company-wide roles to achieve greater efficiency.Under our reorganization plan, we incurred approximately $7,078 of reorganization-related charges in the year ended March 31, 2017 , consisting principally ofseverance, other one-time termination benefits, and facilities-related costs.We have and intend to continue investments in our infrastructure, including but not limited to maintaining and expanding sales, marketing and productdevelopment activities to improve patient care and reduce healthcare costs, providing industry-leading, integrated clinical and administrative healthcare datasystems, services, and expertise to clinical, medical, technology, and healthcare business professionals while continuing our strong commitment of service insupport of our client satisfaction programs. These investments in our infrastructure will continue while maintaining reasonable expense discipline. We strive toadd new clients and expand our relationship with existing clients through delivery of add-on and complementary products and34Table of Contentsservices and believe that our client base that is using our software on a daily basis is a strategic asset. We intend to leverage this strategic asset by expandingour product and service offerings towards this client base.Led by our vision and mission, we are resetting our strategy and structure to deliver value to our clients. To achieve a lower-cost, increased capability structure,our new management team is building what we believe is an aligned, client-focused organization, supported by a recurring revenue stream and a large anddiverse existing client base.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 effectivecaregiver and patient experience while driving positive financial outcomes. As a healthcare information technology and services company, we plan to continueinvesting in our current capabilities as well as building and/or acquiring new capabilities as we guide our clients through an evolving healthcare marketplace thatis transitioning from fee-for-service to fee-for-value reimbursement models. With approximately 90,000 providers using our solutions, we are enabling care andbelieve we can truly transform the delivery of care through the following strategic priorities, including focus on the ambulatory client segment, platform as aservice, and population health software and services. Refer to “Item 1. Business” included elsewhere in this Report for additional information on each of ourstrategic priorities.As a healthcare information technology and services company, we plan to continue investing in our current capabilities as well as building and/or acquiring newcapabilities as we guide our clients from fee-for-service to fee-for-value payer reimbursement models. With approximately 90,000 providers using our solutions,we are enabling care and believe we can truly transform the delivery of care.35Table of ContentsResults of OperationsThe following table sets forth the percentage of revenue represented by each item in our consolidated statements of net income and comprehensive income forthe years ended March 31, 2017 , 2016 , and 2015 (certain percentages below may not sum due to rounding): Fiscal Year Ended March 31, 2017 2016 2015Revenues:     Software license and hardware12.9% 14.3% 16.7%Software related subscription services17.1 11.2 9.1Total software, hardware and related29.9 25.6 25.8Support and maintenance31.2 33.5 34.5Revenue cycle management and related services16.2 16.9 15.1Electronic data interchange and data services17.5 16.7 15.6Professional services5.2 7.3 9.0Total revenues100.0 100.0 100.0Cost of revenue:     Software license and hardware4.8 5.6 5.9Software related subscription services7.2 5.4 4.2Total software, hardware and related12.0 11.0 10.1Support and maintenance5.6 6.4 5.9Revenue cycle management and related services11.1 11.7 11.1Electronic data interchange and data services10.0 10.2 9.8Professional services5.1 6.6 8.6Total cost of revenue43.8 45.8 45.5Gross profit56.2 54.2 54.5Operating expenses:     Selling, general and administrative32.1 31.7 32.3Research and development costs, net15.4 13.3 14.1Amortization of acquired intangible assets2.0 1.1 0.8Impairment of assets— 6.5 —Restructuring costs1.4 — —Total operating expenses50.9 52.7 47.1Income from operations5.3 1.5 7.3Interest income— 0.1 —Interest expense(0.6) (0.3) (0.1)Other expense, net(0.1) — —Income before provision for income taxes4.6 1.3 7.3Provision for income taxes1.1 0.1 1.7Net income3.6% 1.1% 5.6%36Table of ContentsRevenuesThe following table presents our consolidated revenues for the years ended March 31, 2017 , 2016 , and 2015 (in thousands): Fiscal Year Ended March 31, 2017 2016 2015Revenues:     Software license and hardware$65,547 $70,523 $81,649Software related subscription services87,050 55,403 44,592Total software, hardware and related152,597 125,926 126,241      Support and maintenance158,803 165,200 169,219Revenue cycle management and related services82,552 83,006 74,237Electronic data interchange and data services88,951 82,343 76,358Professional services26,721 36,002 44,170Total revenues$509,624 $492,477 $490,225We generate revenue from sales of licensing rights and subscriptions to our software products, hardware and third party software products, support andmaintenance services, revenue cycle management and related services ("RCM"), electronic data interchange and data services (“EDI”), and professionalservices, such as implementation, training, and consulting performed for clients who use our products.Consolidated revenue for the year ended March 31, 2017 increased $17.1 million compared to the prior year due mostly to a $31.6 million increase in softwarerelated subscription services and $6.6 million increase in EDI, partially offset by a $9.3 million decrease in professional services, $6.4 million decrease in supportand maintenance, $5.0 million decrease in software license and hardware, and $0.5 million decrease in RCM. The increase in software related subscriptionservices was primarily driven by a full year of sales related to the MediTouch® cloud-based solution acquired from HealthFusion in January 2016, combined withgrowth in subscriptions related to our interoperability, patient portal, and QSIDental Web product offerings as we continue to expand our client base. Theincrease in EDI is partially attributed to the acquisition of HealthFusion and growth in EDI transaction volume due to addition of new clients and furtherpenetration of our existing client base. The decline in software license and hardware revenue was mostly caused by a shift in market dynamics toward cloud-based solutions and away from perpetual license arrangements, which has also resulted in lower demand for our professional services, includingimplementation, training, and consulting services. The decline in support and maintenance is due primarily to the disposition of the former Hospital Solutionsdivision in October 2015, which accounted for $5.3 million of the decrease, and net attrition in products sold with accompanying maintenance. The lower RCMrevenue is due to customer attrition and a decline in new bookings.Consolidated revenue for the year ended March 31, 2016 increased $2.3 million compared to the year ended March 31, 2015 due to higher software relatedsubscription services, RCM, and EDI revenue, partially offset by lower software license and hardware, professional services, and support and maintenancerevenue. The $11.1 million decline in software license and hardware revenue compared to the year ended March 31, 2015 reflects the increasingly saturatedend-market for electronic health records software and the disposition of the former Hospital Solutions division, which contributed to $1.9 million of the totaldecrease in software license and hardware revenue. Software related subscription services revenue increased $10.8 million compared to the year ended March31, 2015 primarily due to additional revenues from the acquisition of HealthFusion, combined with growth in subscriptions related to our interoperability, patientportal, and QSIDental Web product offerings, offset by a $1.9 million decrease primarily related to the disposition of the former Hospital Solutions division.Support and maintenance revenue decreased $4.0 million, which consists of a $4.9 million decrease related to the former Hospital Solutions division, partiallyoffset by growth in support and maintenance related to our interoperability solutions and other ambulatory software products. RCM and EDI revenue grew by $8.8 million and $6.0 million, respectively, compared to the year ended March 31, 2015, due to addition of new clients and further penetration of our existingclient base. The acquisition of HealthFusion also partially contributed to the increase in EDI revenues. Professional services revenue decreased $8.2million compared to the year ended March 31, 2015, due to the recent decline in system sales, resulting in lower client demand for our core software productsand related implementation, training, and consulting services. The disposition of the former Hospital Solutions division also contributed to $1.7 million of thedecrease in professional services revenue compared to the year ended March 31, 2015.Consolidated bookings reflect the estimated annual value of our executed contracts and are adjusted to include the effect of pre-acquisition bookings forHealthFusion and exclude the historical impact of the former Hospital Solutions division. For the year ended March 31, 2017, consolidated bookings were$125.5 million, which decreased compared to $141.7 million in the prior year primarily due to lower sales of perpetual license arrangements associated with ashift in market dynamics and a decline in new RCM bookings, as described above. Consolidated bookings decreased in the year ended March 31, 2016compared to $175.4 million in the year ended March 31, 2015, which was primarily driven by lower sales of perpetual license arrangements.37Table of ContentsRecurring service revenue, consisting of software related subscription services, support and maintenance, RCM, and EDI, represented 82% , 78% , and 74% oftotal revenue for the years ended March 31, 2017 , 2016 , and 2015 , respectively.We expect to benefit from the growth of a replacement market driven by an expected consolidation of electronic health records vendors. We also anticipate thecreation of new opportunities in connection with the evolution of healthcare from a fee-for-services reimbursement model to a pay-for-performance model aroundthe management of patient populations. Through our acquisition of HealthFusion in January 2016, we obtained a highly scalable, pure cloud-based and mobile-enabled platform with capabilities that we intend to expand to serve the requirements of larger ambulatory practices. When combined with our Mirth-brandedproducts, we can offer our clients a full suite of cloud-based solutions that better enable our clients to focus on care delivery. While it remains difficult to assessthe relative impact or the timing of positive and negative trends affecting the aforementioned market opportunities, we believe we are well positioned to remain aleader in serving the evolving market needs for healthcare information technology.Gross ProfitThe following table presents our consolidated cost of revenue and gross profit for the years ended March 31, 2017 , 2016 , and 2015 (in thousands): Fiscal Year Ended March 31, 2017 2016 2015Total cost of revenue$223,134 $225,615 $223,164Gross profit286,490 266,862 267,061Gross margin %56.2% 54.2% 54.5%Cost of revenue consists primarily of compensation expense, including share-based compensation, for personnel that deliver our products and services. Cost ofrevenue also includes amortization of capitalized software costs and acquired technology, third party consultant and outsourcing costs, costs associated with ourEDI business partners and clearinghouses, hosting service costs, third party software costs and royalties, and other costs directly associated with delivering ourproducts and services. Refer to Note 7, "Intangible Assets" and Note 8, "Capitalized Software Costs" of our notes to consolidated financial statements includedelsewhere in this Report for additional information on current period amortization of capitalized software costs and acquired technology and an estimate of futureexpected amortization.Share-based compensation expense included in cost of revenue was $0.5 million , $0.4 million , and $0.4 million for the years ended March 31, 2017 , 2016 ,and 2015 , respectively, and is included in the amounts in the table above.Gross profit for the year ended March 31, 2017 increased $19.6 million compared to the prior year due primarily to the higher revenues as discussed above,combined with a $2.5 million decrease in cost of revenue. Cost of revenue decreased due to lower payroll costs associated with delivering support andmaintenance and professional services and lower amortization of previously capitalized software development costs that became fully amortized during the year,partially offset by higher amortization of the software technology intangible asset acquired from HealthFusion. The increase in the gross margin percentage to56.2% for the year ended March 31, 2017 compared to 54.2% in the prior year period primarily reflects higher profitability related to sales of the MediTouch®cloud-based solution acquired from HealthFusion in January 2016, offset by lower profitability of professional services as the demand for such services havedeclined at a quicker pace than the associated payroll costs.Gross profit decreased $0.2 million for the year ended March 31, 2016 compared to the year ended March 31, 2015 due primarily to a decline in high-marginsoftware license sales associated with the market saturation noted above and a decline in gross profit associated with the disposition of the former HospitalSolutions division, offset by increases in gross profit associated with higher software and related subscription services, RCM, and EDI revenues andcontributions to gross profit from the acquisition of HealthFusion.Selling, General and Administrative ExpenseThe following table presents our consolidated selling, general and administrative expense for the years ended March 31, 2017 , 2016 , and 2015 (in thousands): Fiscal Year Ended March 31, 2017 2016 2015Selling, general and administrative$163,623 $156,234 $158,172Selling, general and administrative, as a percentage of revenue32.1% 31.7% 32.3%Selling, general and administrative expense consist of compensation expense, including share-based compensation, for management and administrativepersonnel, selling and marketing expense, facilities costs, depreciation, professional service fees, including legal and accounting services, acquisition andtransaction-related costs, and other general corporate and administrative expenses.38Table of ContentsShare-based compensation expense included in selling, general and administrative expenses was $6.1 million , $2.6 million , and $2.7 million for the yearsended March 31, 2017 , 2016 , and 2015 , respectively, and is included in the amounts in the table above. The increase in share-based compensation expensefor the year ended March 31, 2017 compared to the prior year is due to higher issuances of equity awards to officers and employees as incentive compensation.Refer to Note 13, "Share-Based Awards" of our notes to consolidated financial statements included elsewhere in this Report for additional information on equityaward grants.Selling, general and administrative expenses increased $7.4 million for the year ended March 31, 2017 compared to the prior year primarily due to higherincremental costs associated with HealthFusion acquired in January 2016, higher legal expense related to shareholder litigation, partially offset by lower payrollcosts associated with our reorganization efforts and lower acquisition costs.Selling, general and administrative expenses for the year ended March 31, 2016 decreased $1.9 million compared to the year ended March 31, 2015 primarilydue to a $6.3 million decrease in legal expenses associated mostly with shareholder litigation defense costs (net of insurance recoveries), a $2.1million decrease in sales commissions related to a decline in new system sales, a $1.5 million decrease in equipment and software maintenance expense, anda $0.7 million decrease in facilities and utilities expense, offset by a $2.7 million increase in bad debt expense, a $2.7 million increase in salaries andbenefits, $2.3 million higher transaction costs associated mostly with the acquisition of HealthFusion and a $1.8 million loss on the disposition of the formerHospital Solutions division (including related incremental direct costs).Research and Development Costs, netThe following table presents our consolidated net research and development costs, capitalized software costs, and gross expenditures prior to capitalization, forthe years ended March 31, 2017 , 2016 , and 2015 (in thousands): Fiscal Year Ended March 31, 2017 2016 2015Gross expenditures$86,590 $80,336 $83,841Capitalized software costs(8,249) (14,675) (14,601)Research and development costs, net$78,341 $65,661 $69,240      Research and development costs, net, as a percentage of revenue15.4% 13.3% 14.1%Capitalized software costs as a percentage of gross expenditures9.5% 18.3% 17.4%Gross research and development expenditures, including costs expensed and costs capitalized, consist of compensation expense, including share-basedcompensation for research and development personnel, certain third-party consultant fees, software maintenance costs, and other costs related to new productdevelopment and enhancement to our existing products. We intend to continue to invest heavily in research and development expenses as we continue to bringadditional 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, orcapitalized software costs as a percentage of gross expenditures, has varied historically and may continue to vary based on the nature and status of specificprojects and initiatives in progress. Although changes in software capitalization rates have no impact on our overall cash flows, it results in fluctuations in theamount of software development costs being expensed up front and the amount of net research and development costs reported in our consolidated statementof net income and comprehensive income.Share-based compensation expense included in research and development costs was $1.0 million , $0.3 million , and $0.4 million for the years ended March 31,2017 , 2016 , and 2015 , respectively, and is included in the amounts in the table above.Net research and development costs for the year ended March 31, 2017 increased $12.7 million compared to the prior year due to a $6.3 million increase in ourgross expenditures, combined with a $6.4 million decrease in capitalized software costs. The increase in gross expenditures is primarily the result of incrementalcosts from HealthFusion and higher costs related to development of the next versions of our software products, partially offset by lower gross expenditures fromthe discontinuation of the former NextGen Now development project during the fourth quarter of fiscal 2016 and lower personnel costs associated with ourreorganization efforts. The reduction in capitalized software costs and rate of software capitalization is primarily due to the discontinuation of the former NextGenNow development project and the recent releases of the next major version of our core software products. Our software capitalization rate fluctuates due todifferences 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.Net research and development costs for the year ended March 31, 2016 decreased $3.6 million compared to the year ended March 31, 2015 primarily due tolower gross expenditures related to the former NextGen Now development project, which was discontinued during the fourth quarter of fiscal 2016. Refer to the"Impairment of Assets" section below for additional information.39Table of ContentsAmortization of Acquired Intangible AssetsThe following table presents our amortization of acquired intangible assets for the years ended March 31, 2017 , 2016 , and 2015 (in thousands): Fiscal Year Ended March 31, 2017 2016 2015Amortization of acquired intangible assets$10,435 $5,367 $3,693Amortization of acquired intangible assets included in operating expense consist of the amortization related to our customer relationships, trade name, andcontracts intangible assets acquired as part of our business combinations. Refer to Note 7, "Intangible Assets" of our notes to consolidated financial statementsincluded elsewhere in this Report for an estimate of future expected amortization.Amortization of acquired intangible assets for the year ended March 31, 2017 increased $5.1 million , compared to the prior year period due to additionalamortization of the customer relationships and trade name intangible assets related to the acquisition of HealthFusion. Amortization of acquired intangibleassets for the year ended March 31, 2016 increased $1.7 million compared to the prior year due to additional amortization of the customer relationships andtrade name intangible assets related to the acquisition of HealthFusion.Impairment of AssetsDuring the year ended March 31, 2016, we recorded a non-cash impairment charge of $32.2 million that is reflected within the impairment of assets caption inour consolidated statements of net income and comprehensive income. The impairment relates to the previously capitalized investment in the former NextGenNow development project, which we had deemed to have zero net realizable value. The impairment charge did not result in any cash expenditures. Theimpairment charge followed our assessment of the NextGen Now development project and the MediTouch platform that we obtained through our acquisition ofHealthFusion. We had determined that the MediTouch platform offered the most efficient path to providing a high-quality, robust, cloud-based solution forambulatory care and decided to cease further investment in NextGen Now and immediately discontinued all efforts to use or repurpose the NextGen Nowplatform. Restructuring CostsDuring the year ended March 31, 2017 , we recorded $7.1 million of restructuring costs within operating expenses in our consolidated statements of net incomeand comprehensive income. The restructuring costs resulted from a restructuring plan that we announced in April 2016, and such costs consist primarily ofpayroll-related costs, such as severance, outplacement costs, and continuing healthcare coverage, associated with the involuntary separation of employeespursuant to a one-time benefit arrangement. Also included in restructuring costs was $1.7 million of facilities-related costs associated with accruals for theremaining lease obligations at certain locations, including Solana Beach, Costa Mesa, and a portion of Horsham with contractual lease terms ending betweenJanuary 2018 and September 2023. We have vacated each of the locations or portions thereof and are actively marketing the locations for sublease. As ofMarch 31, 2017 , the remaining restructuring liability associated with payroll-related costs was $0.6 million, which we expect to settle in the first quarter of fiscal2018, and the remaining lease obligation, net of estimated projected sublease rentals, was $2.3 million. Refer to Note 14, "Commitments, Guarantees, andContingencies," of our notes to consolidated financial statements included elsewhere in this Report for estimated timing of payments related to remaining leaseobligations. The restructuring plan was substantially complete by the end of fiscal 2017.The restructuring is part of a three-phase plan initiated in fiscal year 2016 that was intended to better position our organization for future success. In the firstphase, we redesigned the organization to more effectively support the execution of our strategy. This phase included implementing a series of actions with theobjective of enabling a more efficient, integrated and client-centered delivery of the holistic solutions that we believe is required by our ambulatory careclients. During this phase, we transformed our management team with the appointment of a new Chief Executive Officer, Chief Financial Officer, ChiefTechnology Officer, Chief Operating Officer, and Chief Strategy Officer. Under phase two of our reorganization, we have continued to build our infrastructureand enhance our healthcare information technology capabilities to drive future revenue growth. The third phase of the plan will consist of developing andmarketing the services and solutions that we believe will accelerate revenue growth.The overall plan also includes a multi-year initiative, called NextGen 2.0, to merge our business units into a more streamlined, functional-based organizationstructure and to realign our organizational structure by consolidating the sales, marketing, information services, and software development responsibilities intosingle, company-wide roles to achieve greater efficiency. As a result, our reportable segments have changed and may change again due to such changes in theorganization of our business.Refer to Note 15, "Restructuring Plan" of our notes to consolidated financial statements included elsewhere in this Report for additional information.40Table of ContentsInterest and Other Income and ExpenseThe following table presents our interest expense for the for the years ended March 31, 2017 , 2016 , and 2015 (in thousands): Fiscal Year Ended March 31, 2017 2016 2015Interest income$14 $428 $111Interest expense(3,156) (1,304) (341)Other expense, net(262) (166) (62)Interest income relates primarily to our marketable securities. Interest expense relates to our revolving credit agreement that was entered into in January 2016and the related amortization of deferred debt issuance costs. Refer to Note 9, “Line of Credit” of our notes to consolidated financial statements includedelsewhere in this Report for additional information. Other expense and income relates primarily to net realized gains and losses on our marketable securities.Interest expense for the year ended March 31, 2017 increased $1.9 million compared to the prior year, and interest expense for the year ended March 31, 2016increased $1.0 million compared to the year ended March 31, 2015. The increases in interest expense is associated with our revolving credit agreement enteredinto in January 2016 and the related amortization of deferred debt issuance costs. As of March 31, 2017 , we had $15.0 million in outstanding loans under therevolving credit agreement.All other fluctuations in interest and other income and expense are not deemed significant.Provision for Income TaxesThe following table presents our provision for income taxes for the years ended March 31, 2017 , 2016 , and 2015 (in thousands): Fiscal Year Ended March 31, 2017 2016 2015Provision for income taxes$5,368 $663 $8,332Effective tax rate22.7% 10.5% 23.4%The effective tax rate for the year ended March 31, 2017 increased compared to the prior year primarily because the lower income before taxes in the prior yearcaused the rate reconciling items to have a more significant impact to the effective tax rate.The effective tax rate for the year ended March 31, 2016 decreased compared to the year ended March 31, 2015 primarily as a result of favorable tax benefitsfrom the federal research and development tax credit and other permanent items having a more significant effective tax rate impact due to lower income beforetaxes for the year ended March 31, 2016. The Internal Revenue Service statute related to research and development credits expired on December 31, 2014 andwas retroactively reinstated and made permanent in December 2015. The research and development credits claimed for the year ended March 31, 2016represent credits for the twelve-month period.Refer to Note 11, “Income Tax” of our notes to consolidated financial statements included elsewhere in this Report for a reconciliation of the federal statutoryincome tax rate to our effective tax rate.Net IncomeThe following table presents our net income (in thousands) and net income per share and for the years ended March 31, 2017 , 2016 , and 2015 : Fiscal Year Ended March 31, 2017 2016 2015Net income$18,241 $5,657 $27,332Net income per share:     Basic$0.30 $0.09 $0.45Diluted$0.29 $0.09 $0.45As a result of the foregoing changes in revenue and expense, net income for the fiscal year ended March 31, 2017 increased $12.6 million compared to the prioryear period.As a result of the foregoing changes in revenue and expense, net income for the year ended March 31, 2016 decreased $21.7 million compared to the yearended March 31, 2015. The significant decrease is primarily due to the $32.2 million impairment of previously capitalized software costs related to the formerNextGen Now development project, offset by a decrease in provision for income taxes as a result of lower pre-tax net income.41Table of ContentsOperating Segment InformationEffective July 1, 2016, we revised our reportable operating segments. As part of our ongoing reorganization efforts, we refined the measurement of our segmentdata to better reflect our current internal organizational structure whereby certain functions that formerly existed within each individual operating segment havechanged. Our operating segments consist of the Software and Related Solutions segment and the RCM and Related Services segment, which is consistent withthe disaggregated financial information used and evaluated by our chief operating decision maker (consisting of our Chief Executive Officer) to assessperformance and make decisions about the allocation of resources. Revenue and gross profit are the key measures of segment profitability used by our chiefoperating decision maker to measure segment operating performance and to make key business decisions. The revenues and gross profit of each segment arederived from distinct product and services within each segment. The Software and Related Solutions segment aggregates the revenues and gross profit of oursoftware-related products and services, including software license and hardware, software-related subscription services, support and maintenance, EDI anddata services, and certain professional services, such as implementation, training, and consulting. The RCM and Related Services segment aggregates therevenues and gross profit of our RCM services and certain related ancillary service offerings.Operating segment data for the years ended March 31, 2017 , 2016 , and 2015 is summarized in the table below. Prior period data has been retroactivelyreclassified to present all segment information on a comparable basis. The change in reportable segments has no impact to consolidated revenues andconsolidated cost of revenue, nor does it affect our presentation of revenue and cost of revenue on the consolidated statements of net income andcomprehensive income. Fiscal Year Ended March 31, 2017 2016 2015Revenue:     Software and Related Solutions$423,593 $398,449 $395,259RCM and Related Services86,031 86,559 76,962Hospital Solutions (1)— 7,469 18,004Consolidated revenue$509,624 $492,477 $490,225      Gross profit:     Software and Related Solutions$278,121 $252,136 $256,922RCM and Related Services28,274 27,694 21,514Hospital Solutions (1)— 2,568 4,876Unallocated cost of revenue (2)(19,905) (15,536) (16,251)Consolidated gross profit$286,490 $266,862 $267,061___________________________________(1) The former Hospital Solutions division was divested in October 2015 and therefore, does not represent a distinct operating segment. Historical amounts for HospitalSolutions have not been revised.(2) Consists of amortization of acquired software technology and amortization of capitalized software costs not allocated to the operating segments for the purposes ofmeasuring performance.Software and Related SolutionsSoftware and Related Solutions revenue for the year ended March 31, 2017 increased $25.1 million and gross profit increased $26.0 million compared to theprior year. The increase in revenues was driven by an increase in our software related subscription services and EDI revenue, partially offset by lowerprofessional services, support and maintenance, and software license and hardware revenue, as described above in further details in the "Revenues" section.The increase in gross profit is due primarily to the increases in revenue combined with a decrease in cost of revenue, as described above in further detail in the"Gross Profit" section.Software and Related Solutions revenue for the year ended March 31, 2016 increased $3.2 million while gross profit decreased $4.8 million compared to theyear ended March 31, 2015. The increase in revenues was driven by higher software related subscription services and EDI revenue, partially offset by lowersoftware license and hardware, professional services, and support and maintenance revenue. The decrease in gross profit is due primarily to a decline in high-margin software license sales that reflects the increasingly saturated end-market for electronic health records software, partially offset by increases in grossprofit related to higher software related subscription services revenue.Our goals for Software and Related Solutions include further enhancement of our existing products, including expansion of our software and service offeringsthat 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 analyticscapabilities, and further development and enhancements of our portfolio of specialty focused templates within our electronic health records software. We intendto remain at the forefront of upcoming new regulatory requirements, including meaningful use requirements for stimulus payments and42Table of Contentsrecent healthcare reform that is driving the transition towards pay-for-performance, value-based reimbursement models. We believe that the expandedrequirements for continued eligibility for incentive payments under meaningful use rules will result in an expanded replacement market for electronic healthrecords software. We also intend to continue selling additional software and services to existing clients, expanding penetration of connectivity and other servicesto new and existing clients, and capitalizing on growth and cross selling opportunities within RCM and Related Services. Our acquisitions of Entrada andHealthFusion will allow us expand our client base and cloud-based solution capabilities in the ambulatory market and meet the needs of practices of increasingsize and complexity. Our acquisitions of Mirth and Gennius improve our competitiveness in the markets and provide new clients and expanded markets forSoftware and Related Solutions and also support our strategy to focus on accountable care organizations around interoperability, patient engagements,population health and collaborative care management, and enterprise analytics. We believe we are well-positioned within the evolving healthcare market todeliver products and services that address the growing importance of quality collaborative care and shift from fee-for-service to value-based, pay-for-performance care.We believe that our operating results are attributed to a strong brand name and reputation within the marketplace for healthcare information technology softwareand services and investments in sales and marketing activities, including new marketing campaigns, Internet advertising investments, tradeshow attendance andother expanded advertising and marketing expenditures.RCM and Related ServicesRCM and Related Services revenue for the year ended March 31, 2017 decreased $0.5 million and gross profit increased $0.6 million compared to the prioryear. The lower RCM revenue is due to customer attrition and a decline in new bookings. The increase in gross profit is due to a reduction in employee-relatedcosts, partially offset by the lower revenues.RCM and Related Services revenue for the year ended March 31, 2016 increased $9.6 million and gross profit increased $6.2 million compared to the yearended March 31, 2015. The increase in RCM revenue was driven by the addition of new clients during the year and organic growth achieved through crossselling and ramping up of RCM services provided to our existing clients, which also resulted in higher gross profit.We believe that a significant opportunity exists to continue cross selling RCM services to our existing clients. The portion of existing NextGen clients who areusing RCM services is approximately 10%. We are actively pursuing efforts to achieve faster growth from expanded efforts to leverage our existing sales forcetowards selling RCM services. We also believe that ongoing increases in the complexity of medical billing and collections processes, including the migration tovalue-based reimbursement models, will create additional opportunities for RCM and Related Services.Liquidity and Capital ResourcesThe following table presents selected financial statistics and information for the years ended March 31, 2017 , 2016 , and 2015 (in thousands): Fiscal Year Ended March 31, 2017 2016 2015Cash and cash equivalents and marketable securities$37,673 $36,473 $130.585Unused portion of revolving credit agreement (1)235,000 145,000 —Total liquidity$272,673 $181,473 $130,585      Net income$18,241 $5,657 $27,332Net cash provided by operating activities$110,592 $40,796 $82,758_________________________(1) As of March 31, 2017 , we had our outstanding loans of $15.0 million under our $250.0 million revolving credit agreement.Our principal sources of liquidity are our cash generated from operations, driven mostly by our net income and working capital management, our cash and cashequivalents, and our revolving credit agreement. In April 2017, we acquired Entrada for total cash consideration of approximately $34.0 million, subject to certainadjustments in accordance with the terms of the Agreement and Plan of Merger, which was primarily funded by a draw down of our revolving credit agreement.In May 2017, we paid $18.8 million to settle the contingent consideration liability related to the acquisition of HealthFusion.Cash and Cash EquivalentsAs of March 31, 2017 , our cash and cash equivalents balance of $37.7 million compares to $36.5 million of cash, cash equivalents and marketable securities asof March 31, 2016 . Our outstanding loans under our revolving credit agreement was $15.0 million as of March 31, 2017 .43Table of ContentsWe 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 businessactivities, 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 thedevelopment of products complementary to our existing product line as well as new versions of certain of our products. These developments are intended totake 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 andtaxable money market funds, certificates of deposit and short term municipal bonds with average maturities of 365 days or less at the time of purchase. OurBoard 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 programscould significantly impact our investment income in future periods.We believe that our cash and cash equivalents and marketable securities on hand at March 31, 2017 , together with our cash flows from operations and liquidityprovided by our revolving credit agreement, will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months.Cash Flows from Operating ActivitiesThe following table summarizes our consolidated statements of cash flows for the years ended March 31, 2017 , 2016 , and 2015 (in thousands): Fiscal Year Ended March 31, 2017 2016 2015Net income$18,241 $5,657 $27,332Non-cash expenses62,147 81,013 23,546Cash from net income, as adjusted$80,388 $86,670 $50,878      Change in deferred revenue$(5,493) $(8,390) $(5,610)Change in accounts receivable5,535 9,929 4,744Change in other assets and liabilities30,162 (47,413) 32,746Net cash provided by operating activities$110,592 $40,796 $82,758For the year ended March 31, 2017 , cash provided by operating activities increased $69.8 million compared to the prior year period. The increase in cash flowswas primarily due to $77.6 million changes other assets and liabilities, as noted in the table above, of which $75.2 million was associated with changes inincome taxes receivable and payable. Net cash provided from net income, as adjusted for non-cash expenses, decreased $6.3 million because the increase of$12.6 million in net income was offset by $18.9 million lower non-cash expenses. The decrease in non-cash expenses was due to a non-cash impairmentcharge of $32.2 million related to the discontinuation of the former NGNow development project recorded in the prior year, partially offset by higher amortizationof intangibles associated with the acquisition of HealthFusion. Refer to the "Net Income" section above for additional details regarding the fluctuations in netincome. Cash provided by operating activities increased $5.5 million due to an overall decline in accounts receivable from prior year as a result of higher currentyear collections and aggressive working capital management, which was offset by a $5.5 million associated with a decline in deferred revenue caused by lowersystem sales and a shift in market dynamics toward cloud-based solutions.For the year ended March 31, 2016, cash provided by operating activities declined $42.0 million compared to the year ended March 31, 2015, which was causedby a $77.8 million decline attributed to changes in assets and liabilities, partially offset by an increase of $35.8 million in cash flows due to higher net income,excluding non-cash expenses. The reduction in cash flows due to changes in assets and liabilities is mostly attributed to payments of income taxes during theperiod and payments of accrued bonuses in the current fiscal year related to the fiscal 2015 incentive compensation plans.Cash Flows from Investing ActivitiesNet cash used in investing activities for the years ended March 31, 2017 , 2016 , and 2015 was $11.4 million , $190.4 million , and $24.5 million , respectively.The $179.0 million net decrease in cash used in investing activities for the year ended March 31, 2017 compared to the prior year is primarily due to $163.8million of cash paid (net of cash acquired) for the acquisition of HealthFusion in January 2016, $7.1 million higher net proceeds from sales of marketablesecurities used to make principal payments on our revolving line of credit, $6.4 million decrease in additions to capitalized software associated with thediscontinuation of the former NextGen Now development project, and $1.8 million decrease in additions to equipment and improvements.The $165.9 million net increase in cash used in investing activities for the year ended March 31, 2016 compared to the year ended March 31, 2015 is primarilydue to the $163.8 million of cash paid (net of cash acquired) for the acquisition of HealthFusion, $7.5 million increase in additions to equipment andimprovements, $0.1 million increase in additions to capitalized44Table of Contentssoftware, offset by a $3.2 million net proceeds from sales of marketable securities, and $2.3 million in cash paid for the acquisition of Gennius in the year endedMarch 31, 2015.Cash Flows from Financing ActivitiesNet cash used in financing activities for the year ended March 31, 2017 was $88.7 million compared to net cash provided by financing activities of $57.8 millionin the prior year. The $146.5 million net increase in cash used in financing activities is due to $90.0 million in principal repayments on our revolving line of creditin the current year, compared to net proceeds of $105.0 million related to our revolving credit agreement in the prior year, partially offset by $42.9 million individends paid to shareholders and payments of $5.4 million in debt issuance and other related fees in the prior year.Net cash provided by financing activities for the year ended March 31, 2016 was $57.8 million, and cash used in financing activities for the year ended March31, 2015 was $42.4 million. The increase in cash flows from financing activities during the year ended March 31, 2016 compared to the year ended March 31,2015 is primarily related to our revolving credit agreement, in which we received proceeds of $173.5 million, made principal payments of $68.5 million, andpaid $5.4 million in debt issuance and other related fees.Contractual ObligationsThe following table summarizes our significant contractual obligations at March 31, 2017 and the effect that such obligations are expected to have on ourliquidity and cash in future periods (in thousands):For the year ended March 31,Contractual ObligationsTotal20182019202020212,0222023 andbeyondOperating lease obligations$60,109$8,136$8,350$8,067$8,037$7,713$19,806Remaining lease obligations for vacated properties (1)6,5992,4871,413794816551538Line of credit obligations (Note 9)15,000———15,000——Contingent consideration liabilities18,81718,817—————Purchase commitments (2)3,8001,2501,2501,300  —Total$104,325$30,690$11,013$10,161$23,853$8,264$20,344_______________________(1) Remaining lease obligations for vacated properties relates to remaining lease obligations at certain locations, including Austin, Solana Beach, Costa Mesa, and a portion ofHorsham, that we have vacated and are actively marketing the locations for sublease as part of our reorganization efforts. Refer to Note 16 for additional details. Totalobligations have not been reduced by projected sublease rentals or by minimum sublease rentals of $1.6 million due in future periods under non-cancelable subleases.(2) Purchase commitments relates to payments due under certain non-cancelable agreements to purchase goods and services.The deferred compensation liability as of March 31, 2017 was $6.6 million , which is not included in the table above as the timing of future benefit payments toemployees is not determinable.The uncertain tax position liability as of March 31, 2017 was $4.8 million , which is not included in the table above as the timing of expected payments is notdeterminable.New Accounting PronouncementsRefer to Note 2, “Summary of Significant Accounting Policies” of our notes to consolidated financial statements included elsewhere in this Report for adiscussion of new accounting standards.45Table of ContentsITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.As of March 31, 2017 and March 31, 2016 , we were subject to minimal market risk on our cash and cash equivalents as we maintained our balances in veryliquid funds with maturities of 90 days or less at the time of purchase.As of March 31, 2017 and March 31, 2016 , we had $15.0 million and $105.0 million , respectively, in outstanding loans under our revolving credit agreement.The revolving loans under the agreement bear interest at our option of either, (a) a base rate based on the highest of (i) the rate of interest per annum publiclyannounced from time to time by JPMorgan Chase Bank, N.A., as its prime rate, (ii) the greater of (A) the federal funds effective rate and (B) the overnight bankfunding rate (as determined by the Federal Reserve Bank of New York) plus 0.50% and (iii) the one-month British Bankers Association London InterbankOffered Rate ("LIBOR") plus 1.00%) plus an applicable margin based on our leverage ratio from time to time, ranging from 0.50% to 1.50%, or (b) a LIBOR-based rate (subject to a floor of 0.00%) plus an applicable margin based on our leverage ratio from time to time, ranging from 1.50% to 2.50%. Accordingly, weare exposed to interest rate risk, primarily changes in LIBOR, due to our loans under the revolving credit agreement. A one hundred basis point (1.00%) changein the interest rate on our outstanding loans as of March 31, 2017 would result in a corresponding change in our annual interest expense of approximately $0.2million . Refer to Note 9, “Line of Credit” of our notes to consolidated financial statements included elsewhere in this Report for additional information.As of March 31, 2017 and March 31, 2016 , we had international operations that exposed us to the risk of fluctuations in foreign currency exchange rates againstthe U.S. dollar. However, the impact of foreign currency fluctuations has not been material to our financial position or operating results.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATASee our consolidated financial statements identified in the Index to Financial Statements appearing under “Item 15. Exhibits and Financial Statement Schedules”of this Report.ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A. CONTROLS AND PROCEDURES.Evaluation of Disclosure Controls and ProceduresOur Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively) have evaluated theeffectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Security Exchange Act of 1934, as amended,the "Exchange Act") as of March 31, 2017 , the end of the period covered by this Report (the “Evaluation Date”). They have concluded that, as of the EvaluationDate, these disclosure controls and procedures were effective to ensure that material information relating to the Company and its consolidated subsidiarieswould be made known to them by others within those entities and would be disclosed on a timely basis. The Chief Executive Officer and Chief Financial Officerhave concluded that our disclosure controls and procedures are designed, and are effective, to give reasonable assurance that the information required to bedisclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the rules andforms of the Securities and Exchange Commission. They have also concluded that the our disclosure controls and procedures are effective to ensure thatinformation required to be disclosed in the reports that are filed or submitted under the Exchange Act are accumulated and communicated to our management,including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.Management’s Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under theExchange Act. Internal control over financial reporting is a process designed by, or under the supervision and with the participation of our management,including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles.Our internal control over financial reporting is supported by written policies and procedures, that:(1)pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;(2)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of our company are being made only in accordance with authorizations of ourmanagement and directors; and(3)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have amaterial effect on our financial statements.46Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliancewith the policies or procedures may deteriorate.Management of the Company has assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2017 in making ourassessment of internal control over financial reporting, management used the criteria set forth in Internal Control — Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, our management concluded that our internal control overfinancial reporting was effective as of March 31, 2017 .The effectiveness of the Company’s internal control over financial reporting as of March 31, 2017 has been audited by PricewaterhouseCoopers LLP, anindependent registered public accounting firm, as stated in their report contained in Item 15(a)(1) of Part IV of this Report, "Exhibits and Financial StatementSchedules."Changes in Internal Control over Financial ReportingDuring the quarter ended March 31, 2017 , there were no changes in our “internal control over financial reporting” (as defined in Rule 13a-15(f) under theExchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.ITEM 9B. OTHER INFORMATIONNone.47Table of ContentsPART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by Item 10 is incorporated herein by reference from our definitive proxy statement for our 2017 Annual Shareholders’ Meeting to befiled with the Securities and Exchange Commission.ITEM 11. EXECUTIVE COMPENSATIONThe information required by Item 11 is incorporated herein by reference from our definitive proxy statement for our 2017 Annual Shareholders’ Meeting to befiled with the Securities and Exchange Commission.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe information required by Item 12 is incorporated herein by reference from our definitive proxy statement for our 2017 Annual Shareholders’ Meeting to befiled with the Securities and Exchange Commission.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by Item 13 is incorporated herein by reference from our definitive proxy statement for our 2017 Annual Shareholders’ Meeting to befiled with the Securities and Exchange Commission.ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information required by Item 14 is incorporated herein by reference from our definitive proxy statement for our 2017 Annual Shareholders’ Meeting to befiled with the Securities and Exchange Commission.Table of ContentsPART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES(a) Documents filed as part of this Annual Report on Form 10-K: Page(1) Index to Financial Statements: Report of Independent Registered Public Accounting Firm53  Consolidated Balance Sheets as of March 31, 2017 and 201654  Consolidated Statements of Net Income and Comprehensive Income — Years Ended March 31, 2017, 2016 and 201555  Consolidated Statements of Shareholders’ Equity — Years Ended March 31, 2017, 2016 and 201556  Consolidated Statements of Cash Flows — Years Ended March 31, 2017, 2016 and 201557  Notes to Consolidated Financial Statements59 (2) The following supplementary financial statement schedule of Quality Systems, Inc., required to be included in Item 15(a)(2) onForm 10-K is filed as part of this Report. Schedule II — Valuation and Qualifying Accounts82 Schedules other than that listed above have been omitted since they are either not required, not applicable, or because theinformation required is included in the Consolidated Financial Statements or the notes thereto. (3) The exhibits listed in the Index to Exhibits hereof are attached hereto or incorporated herein by reference and filed as a part of thisReport. Index to Exhibits83ITEM 16. FORM 10-K SUMMARYNone.49Table of ContentsINDEX TO EXHIBITS    Incorporated by ReferenceExhibit Number Exhibit DescriptionFiledHerewithFormExhibitFiling Date       3.1 Restated Articles of Incorporation of Quality Systems, Inc. filed with the Secretaryof State of California on September 8, 1989(Registration No. 333-00161) S-13.1January 11, 19963.2 Certificate of Amendment to Articles of Incorporation of Quality Systems, Inc.filed with the Secretary of State of California effective March 4, 2005 10-K3.1.1June 14, 20053.3 Certificate of Amendment to Articles of Incorporation of Quality Systems, Inc.filed with the Secretary of State of California effective October 6, 2005 8-K3.01October 11, 20053.4 Certificate of Amendment to Articles of Incorporation of Quality Systems, Inc.filed with the Secretary of State of California effective March 3, 2006 8-K3.1March 6, 20063.5 Amended and Restated Bylaws of Quality Systems, Inc., effective October 30,2008 8-K3.1October 31, 20083.6 Certificate of Amendment to Articles of Incorporation of Quality Systems, Inc.filed with the Secretary of State of California effective October 6, 2011 8-K3.1October 6, 201110.1*Form of Non-Qualified Stock Option Agreement for Amended and Restated 1998Stock Option Plan 10-Q10.2December 23, 200410.2*Form of Incentive Stock Option Agreement for Amended and Restated 1998Stock Option Plan 10-Q10.1December 23, 200410.3*Amended and Restated 1998 Stock Option Plan 10-K10.10.1June 14, 200510.4*Second Amended and Restated 2005 Stock Option and Incentive Plan DEF14AAppendix IJuly 1, 201110.5*Form of Nonqualified Stock Option Agreement for 2005 Stock Incentive Plan 8-K10.2June 5, 200710.6*Form of Incentive Stock Option Agreement for 2005 Stock Incentive Plan 8-K10.3June 5, 200710.7*2009 Quality Systems, Inc. Amended and Restated Deferred CompensationPlan. 10-K10.8May 30, 201310.8*Form of Outside Directors Amended and Restated Restricted Stock Agreement 8-K10.2February 2, 201010.9*Form of Outside Director's Restricted Stock Unit Agreement 8-K10.1August 15, 201110.10*Employment Arrangement dated September 19, 2012 between Quality Systems,Inc., and Daniel Morefield 8-K10.1September 25, 201210.11*Form of Indemnification Agreement 8-K10.1January 28, 201310.12*Form of Executive Officer Restricted Stock Agreement 8-K10.2May 28, 201310.13*Description of 2014 Director Compensation Program 8-K10.3May 28, 201310.14*Agreement by and among Quality Systems, Inc., the Clinton Group, Inc. andcertain of its affiliates, dated as of July 17, 2013 8-K10.1July 17, 201310.15*Share Purchase Agreement by and among Quality Systems, Inc., each of theshareholders of Mirth Corporation identified on Annex A thereto, and JonTeichrow dated as of September 9, 2013 10-Q2.1October 31, 201310.16*Form of Performance-Based Restricted Stock Unit Agreement. 10-K10.17May 29, 201410.17*Quality Systems, Inc. 2014 Employee Share Purchase Plan DEF14AAnnex AJune 27, 201410.18*Executive Employment Agreement, dated June 3, 2015, between QualitySystems, Inc. and John R. Frantz 8-K10.1June 4, 201510.19*Separation Agreement and General Release, dated June 24, 2015, betweenQuality Systems, Inc. and Steven Plochocki 8-K10.1June 24, 201510.20*Quality Systems, Inc. 2015 Equity Incentive Plan 8-K10.1August 14, 201510.21*Form of Employee Restricted Stock Award Grant Notice and Restricted StockAward Agreement for 2015 Equity Incentive Plan 8-K10.2August 14, 201510.22*Form of Outside Director Restricted Stock Award Grant Notice and RestrictedStock Award Agreement for 2015 Equity Incentive Plan 8-K10.3August 14, 201510.23*Form of Stock Option Grant Notice, Option Agreement and Notice of Exercise for2015 Equity Incentive Plan 8-K10.4August 14, 201550Table of Contents10.24*Agreement and Plan of Merger, dated October 30, 2015, by and among QualitySystems, Inc., Ivory Merger Sub, Inc., HealthFusion Holdings, Inc. and SethFlam, Sol Lizerbram, and Jonathan Flam, as the Securityholder RepresentativeCommittee. 8-K2.1October 30, 201510.25 Description of 2016 Director Compensation Program 8-K10.1December 8, 201510.26*Credit Agreement, dated as of January 4, 2016, among Quality Systems, Inc.,JPMorgan Chase Bank, N.A., as administrative agent, U.S. Bank NationalAssociation, as syndication agent, and Bank of the West, KeyBank NationalAssociation and Wells Fargo Bank, National Association, as co-documentationagents 10-Q10.1January 29, 201610.27*Employment Offer Letter, dated January 27, 2016, between David Metcalfe andQuality Systems, Inc. 8-K10.1January 28, 201610.28*Employment Offer Letter, dated February 16, 2016, between James R. Arnoldand Quality Systems, Inc. 8-K10.1February 18, 201610.29 Description of 2017 Director Compensation Program 8-K10.1August 18, 201610.30*Form of Change of Control Severance Agreement, entered into with theCompany's named executive officers effective December 27, 2016. 8-K10.1January 3, 201710.31*Form of Performance Stock Award Grant Notice and Performance/RestrictedStock Award Agreement for 2015 Equity Incentive Plan, entered into with theCompany's named executive officers effective December 29, 2016. 8-K10.2January 3, 201710.32*Form of Restricted Stock Award Grant Notice and Performance/Restricted StockAward Agreement for 2015 Equity Incentive Plan, entered into with theCompany's named executive officers effective December 29, 2016. 8-K10.3January 3, 201710.33*Separation Agreement and General Release, dated March 31, 2017, betweenDaniel J. Morefield and Quality Systems, Inc. 8-K10.1April 4, 201710.34 Agreement and Plan of Merger, dated April 11, 2017, by and among QualitySystems, Inc., Engage Merger Sub, Inc., Entrada, Inc. and FCA Venture PartnersV, LP, as the Company Stockholders' Representative 8-K2.1April 12, 2017       21 List of subsidiaries.X   23.1 Consent of Independent Registered Public Accounting Firm —PricewaterhouseCoopers LLP.X   31.1 Certification of Principal Executive Officer Required by Rule 13a-14(a) of theSecurities Exchange Act of 1934, as amended, as Adopted Pursuant toSection 302 of the Sarbanes-Oxley Act of 2002.X   31.2 Certification of Principal Financial Officer Required by Rule 13a-14(a) of theSecurities Exchange Act of 1934, as amended, as Adopted Pursuant toSection 302 of the Sarbanes-Oxley Act of 2002.X   32.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-OxleyAct of 2002.X          101.INS**XBRL Instance    101.SCH**XBRL Taxonomy Extension Schema    101.CAL**XBRL Taxonomy Extension Calculation    101.DEF**XBRL Taxonomy Extension Definition    101.LAB**XBRL Taxonomy Extension Label    101.PRE**XBRL Taxonomy Extension Presentation    ____________________*This exhibit is a management contract or a compensatory plan or arrangement.**XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities and Exchange Act of1933, as amended, is deemed not filed for purposes of section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise is not subject to liabilityunder these section.51Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on itsbehalf by the undersigned, thereunto duly authorized. By: /s/ John R. Frantz John R. Frantz Chief Executive Officer (Principal Executive Officer)      By: /s/ James R. Arnold  James R. Arnold  Chief Financial Officer (Principal Financial Officer)             Date: May 19, 2017KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose signature appears below hereby constitutes and appoints John R. Frantzand James R. Arnold, each of them acting individually, as his attorney-in-fact, each with the full power of substitution, for him in any and all capacities, to signany and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, withthe Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every actand thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could do in person, hereby ratifyingand confirming our signatures as they may be signed by our said attorney-in-fact and any and all amendments to this Annual Report on Form 10-K.Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed by the following persons on our behalf in the capacitiesand on the dates indicated.Signature Title Date /s/ Jeffrey H. Margolis Chairman of the Board and Director May 19, 2017Jeffrey H. Margolis     /s/ Craig A. Barbarosh Vice Chairman of the Board and Director May 19, 2017Craig A. Barbarosh     /s/ John R. Frantz Chief Executive Officer (Principal Executive Officer) and Director May 19, 2017John R. Frantz     /s/ James R. Arnold Chief Financial Officer (Principal Financial Officer) May 19, 2017James R. Arnold     /s/ George H. Bristol Director May 19, 2017George H. Bristol       /s/ James C. Malone Director May 19, 2017James C. Malone       /s/ Morris Panner Director May 19, 2017Morris Panner     /s/ D. Russell Pflueger Director May 19, 2017D. Russell Pflueger       /s/ Sheldon Razin Chairman Emeritus and Director May 19, 2017Sheldon Razin         /s/ Lance E. Rosenzweig Director  May 19, 2017Lance E. Rosenzweig    52Table of ContentsReport of Independent Registered Public Accounting FirmTo the Board of Directors and Shareholders of Quality Systems, Inc.In our opinion, the consolidated financial statements listed in the accompanying index appearing under Item 15(a)(1) present fairly, in all material respects, thefinancial position of Quality Systems, Inc. and its subsidiaries at March 31, 2017 and March 31, 2016, and the results of their operations and their cash flows foreach of the three years in the period ended March 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Inaddition, in our opinion, the financial statement schedule listed in the accompanying index appearing under Item 15(a)(2) presents fairly, in all material respects,the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in allmaterial respects, effective internal control over financial reporting as of March 31, 2017, based on criteria established in Internal Control - Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for thesefinancial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectivenessof internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Ourresponsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financialreporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of materialmisstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements includedexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significantestimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting includedobtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in thecircumstances. We believe that our audits provide a reasonable basis for our opinions.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactionsand dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance withthe policies or procedures may deteriorate./s/ PricewaterhouseCoopers LLPIrvine, CaliforniaMay 19, 201753Table of ContentsQUALITY SYSTEMS, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except per share data) March 31, 2017 March 31, 2016ASSETS   Current assets:   Cash and cash equivalents$37,673 $27,176Restricted cash and cash equivalents (Note 2)4,916 5,320Marketable securities— 9,297Accounts receivable, net (Note 10)83,407 94,024Inventory158 555Income taxes receivable2,679 32,709Prepaid expenses and other current assets17,969 14,910Total current assets146,802 183,991Equipment and improvements, net27,426 25,790Capitalized software costs, net13,607 13,250Deferred income taxes, net11,265 8,198Intangibles, net69,213 91,675Goodwill185,898 188,837Other assets19,010 19,049Total assets$473,221 $530,790    LIABILITIES AND SHAREHOLDERS' EQUITY   Current liabilities:   Accounts payable$4,618 $11,126Deferred revenue52,383 57,935Accrued compensation and related benefits24,513 18,670Income taxes payable405 91Other current liabilities46,775 50,238Total current liabilities128,694 138,060Deferred revenue, net of current1,394 1,335Deferred compensation6,629 6,357Line of credit15,000 105,000Other noncurrent liabilities16,461 10,661Total liabilities168,178 261,413Commitments and contingencies (Note 14) Shareholders' equity:   Common stock   $0.01 par value; authorized 100,000 shares; issued and outstanding 62,455 and 60,978 shares atMarch 31, 2017 and March 31, 2016, respectively625 610Additional paid-in capital228,549 211,262Accumulated other comprehensive loss(358) (481)Retained earnings76,227 57,986Total shareholders' equity305,043 269,377Total liabilities and shareholders' equity$473,221 $530,790The accompanying notes are an integral part of these consolidated financial statements.54Table of ContentsQUALITY SYSTEMS, INC.CONSOLIDATED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME(In thousands, except per share data) Fiscal Year Ended March 31, 2017 2016 2015Revenues:     Software license and hardware$65,547 $70,523 $81,649Software related subscription services87,050 55,403 44,592Total software, hardware and related152,597 125,926 126,241Support and maintenance158,803 165,200 169,219Revenue cycle management and related services82,552 83,006 74,237Electronic data interchange and data services88,951 82,343 76,358Professional services26,721 36,002 44,170Total revenues509,624 492,477 490,225Cost of revenue:     Software license and hardware24,654 27,506 28,803Software related subscription services36,744 26,622 20,672Total software, hardware and related61,398 54,128 49,475Support and maintenance28,317 31,329 28,866Revenue cycle management and related services56,370 57,591 54,406Electronic data interchange and data services51,102 50,153 48,244Professional services25,947 32,414 42,173Total cost of revenue223,134 225,615 223,164Gross profit286,490 266,862 267,061Operating expenses:     Selling, general and administrative163,623 156,234 158,172Research and development costs, net78,341 65,661 69,240Amortization of acquired intangible assets10,435 5,367 3,693Impairment of assets— 32,238 —Restructuring costs7,078 — —Total operating expenses259,477 259,500 231,105Income from operations27,013 7,362 35,956Interest income14 428 111Interest expense(3,156) (1,304) (341)Other expense, net(262) (166) (62)Income before provision for income taxes23,609 6,320 35,664Provision for income taxes5,368 663 8,332Net income$18,241 $5,657 $27,332Other comprehensive income:     Foreign currency translation, net of tax80 (382) (117)Unrealized gain on marketable securities, net of tax43 93 107Comprehensive income$18,364 $5,368 $27,322Net income per share:     Basic$0.30 $0.09 $0.45Diluted$0.29 $0.09 $0.45Weighted-average shares outstanding:     Basic61,818 60,635 60,259Diluted62,010 61,233 60,849Dividends declared per common share$— $0.525 $0.70The accompanying notes are an integral part of these consolidated financial statements.55Table of ContentsQUALITY SYSTEMS, INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY(In thousands) Common Stock Additional Paid-inCapital Retained Earnings Accumulated OtherComprehensive Loss TotalShareholders’Equity Shares Amount    Balance, March 31, 201460,206 $602 $194,739 $99,931 $(182) $295,090Common stock issued under stock plans, net of shares withheldfor taxes79 1 383 — — 384Common stock issued for earnout settlement18 — 284 — — 284Tax benefit related to stock options— — (228) — — (228)Stock-based compensation— — 3,472 — — 3,472Dividends declared— — — (42,784) — (42,784)Components of other comprehensive income (loss):           Unrealized gain on marketable securities— — — — 107 107Translation adjustments— — — — (117) (117)Net income— — — 27,332 — 27,332Balance, March 31, 201560,303 603 198,650 84,479 (192) 283,540Common stock issued under stock plans, net of shares withheldfor taxes241 3 989 — — 992Common stock issued for earnout settlement434 4 9,269 — — 9,273Tax benefit related to stock options— — (941) — — (941)Stock-based compensation— — 3,295 — — 3,295Dividends declared— — — (32,150) — (32,150)Components of other comprehensive income (loss):           Unrealized gain on marketable securities— — — — 93 93Translation adjustments— — — — (382) (382)Net income— — — 5,657 — 5,657Balance, March 31, 201660,978 610 211,262 57,986 (481) 269,377Common stock issued under stock plans, net of shares withheldfor taxes1,043 11 1,299 — — 1,310Common stock issued for earnout settlement434 4 9,269 — — 9,273Tax benefit related to stock options— — (879) — — (879)Stock-based compensation— — 7,598 — — 7,598Components of other comprehensive income:           Unrealized gain on marketable securities— — — — 43 43Translation adjustments— — — — 80 80Net income— — — 18,241 — 18,241Balance, March 31, 201762,455 $625 $228,549 $76,227 $(358) $305,043The accompanying notes are an integral part of these consolidated financial statements.56Table of ContentsQUALITY SYSTEMS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Fiscal Year Ended March 31, 2017 2016 2015Cash flows from operating activities:     Net income$18,241 $5,657 $27,332Adjustments to reconcile net income to net cash provided by operating activities:     Depreciation10,080 8,834 9,323Amortization of capitalized software costs7,892 9,891 12,817Amortization of other intangibles22,462 11,014 7,127Amortization of debt issuance costs1,076 258 —Loss on disposal of equipment and improvements530 205 51Provision for bad debts5,082 3,573 855Provision for inventory obsolescence418 48 25Share-based compensation7,598 3,295 3,472Deferred income taxes(129) 10,030 (12,061)Change in fair value of contingent consideration4,247 261 1,937Restructuring costs, net of amounts paid2,891 — —Loss on disposition of Hospital Solutions Division— 1,366 —Impairment of assets— 32,238 —Changes in assets and liabilities, net of amounts acquired:     Accounts receivable5,535 9,929 4,744Inventory(21) 17 187Accounts payable(6,590) (271) 1,281Deferred revenue(5,493) (8,390) (5,610)Accrued compensation and related benefits5,237 (5,914) 8,098Income taxes34,740 (40,471) 18,178Deferred compensation272 607 941Other assets and liabilities(3,476) (1,381) 4,061Net cash provided by operating activities110,592 40,796 82,758Cash flows from investing activities:     Additions to capitalized software costs(8,249) (14,675) (14,601)Additions to equipment and improvements(12,165) (14,013) (6,531)Proceeds from sales and maturities of marketable securities9,291 8,795 11,077Purchases of marketable securities— (6,637) (12,123)Payments for acquisitions, net of cash acquired(282) (163,843) (2,345)Net cash used in investing activities(11,405) (190,373) (24,523)Cash flows from financing activities:     Proceeds from line of credit— 173,509 —Principal repayments on line of credit(90,000) (68,509) —Proceeds from issuance of shares under employee plans1,310 992 383Dividends paid— (42,850) (42,770)Payment of debt issuance costs— (5,382) —Net cash provided by (used in) financing activities(88,690) 57,760 (42,387)Net increase (decrease) in cash and cash equivalents10,497 (91,817) 15,848Cash and cash equivalents at beginning of period27,176 118,993 103,145Cash and cash equivalents at end of period$37,673 $27,176 $118,99357Table of ContentsQUALITY SYSTEMS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)(In thousands) Fiscal Year Ended March 31, 2017 2016 2015Supplemental disclosures of cash flow information:     Cash paid for income taxes$4,800 $33,246 $3,814Cash refunds from income taxes29,575 2,344 1,291Cash paid for interest1,958 781 —Common stock issued for settlement of share-based contingent consideration9,273 9,273 —Non-cash investing and financing activities:     Tenant improvement allowance from landlord$4,813 $2,933 $—Dividends declared but not paid— — 10,700Unpaid additions to equipment and improvements82 295 849      On January 4, 2016, we acquired HealthFusion in a transaction summarized as follows:Fair value of net assets acquired$— $198,258 $—Cash paid, net of cash acquired— (163,843) —Unpaid portion of purchase price— (282) —Fair value of contingent consideration— (16,700) —Liabilities assumed$— $17,433 $—      On March 11, 2015, we acquired Gennius in a transaction summarized as follows:Fair value of net assets acquired$— $— $2,571Cash paid— — (2,345)Liabilities assumed$— $— $226The accompanying notes are an integral part of these consolidated financial statements.58Table of ContentsQUALITY SYSTEMS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSMARCH 31, 2017 and 2016(In thousands, except shares and per share data)1. Organization of BusinessDescription of BusinessQuality Systems, Inc., primarily through its NextGen Healthcare subsidiary, provides technology-based solutions and services to the ambulatory care market inthe United States. Our solutions provide our clients with the ability to redesign patient care and other workflow processes while improving productivity throughthe facilitation of managed access to patient information. We help promote healthy communities by empowering physician practice success and enriching thepatient care experience while lowering the cost of healthcare.We primarily derive revenue by developing and marketing software and services that automate certain aspects of practice management (“PM”) and electronichealth records (“EHR”) for medical and dental practices. Our software can be licensed on a perpetual, on-premise basis, hosted in a private cloud or, in certaininstances, as a software-as-a-service (“SaaS”) solution. We market and sell our solutions through a dedicated sales force and to a much lesser extent, throughresellers. Our clients include single and small practice physicians, networks of practices such as physician hospital organizations (“PHOs”), management serviceorganizations (“MSOs”), accountable care organizations (“ACOs”), ambulatory care centers, community health centers and medical and dental schools. We alsoprovide implementation, training, support and maintenance for software and complementary services such as revenue cycle management (“RCM”) andelectronic data interchange (“EDI”).We have a history of developing new and enhanced technologies. Over the course of a number of years, we have also made strategic acquisitions tocomplement and enhance our product portfolio in the ambulatory care, RCM, and hospital markets. In October 2015, we divested our former Hospital SolutionsDivision. In January 2016, we acquired HealthFusion Holdings, Inc. ("HealthFusion") and in April 2017, we acquired Entrada, Inc. ("Entrada").Quality Systems, Inc. was incorporated in California in 1974. Our principal offices are located at 18111 Von Karman Ave., Suite 800, Irvine, California, 92612.Our websites are located at www.nextgen.com and www.qsii.com. We operate on a fiscal year ending on March 31.2. Summary of Significant Accounting PoliciesPrinciples of Consolidation. The consolidated financial statements include the accounts of Quality Systems, Inc. and its wholly-owned subsidiaries(collectively, the “Company”). Each of the terms “we,” “us,” or “our” as used herein refers collectively to the Company, unless otherwise stated. All intercompanyaccounts and transactions have been eliminated.Business Segments. The Company has prepared operating segment information based on the manner in which management disaggregates the Company’soperations for making internal operating decisions. Effective July 1, 2016, we revised our reportable operating segments. See Note 15 for additional details.Basis of Presentation. Certain prior period amounts have been reclassified to conform to current year presentation. References to amounts in the consolidatedfinancial statement sections are in thousands, except shares and per share data, unless otherwise specified.Use of Estimates. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in theUnited States of America (“GAAP”), which requires us to make estimates and assumptions that affect the amounts reported and disclosed in the consolidatedfinancial statements and the accompanying notes. Actual results could differ materially from these estimates. We evaluate our estimates on an ongoing basis.We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values of assets and liabilities and recording revenue and expenses during the period.Revenue Recognition . We generate revenue from sales of licensing rights and subscriptions to our software products, hardware and third party softwareproducts, support and maintenance services, RCM, EDI, and professional services, such as implementation, training, and consulting performed for clients whouse our products.We generally recognize revenue provided that persuasive evidence of an arrangement exists, fees are considered fixed or determinable, delivery of the productor service has occurred, and collection is considered probable. Revenue from the delivered elements (generally software licenses) are generally recognizedupon physical or electronic delivery. In certain transactions where collection is not considered probable, the revenue is deferred until collection occurs. If the feeis not fixed or determinable, then the revenue recognized in each period (subject to application of other revenue recognition criteria) will be the lesser of theaggregate amounts due and payable or the amount of the arrangement fee that would have been recognized if the fees were being recognized using theresidual method. We assess whether fees are considered fixed or determinable at the inception of the arrangement and negotiated fees generally are based ona specific volume of products to be delivered and not subject to59Table of Contentschange based on variable pricing mechanisms, such as the number of units copied or distributed or the expected number of users.A typical system sale may contain multiple elements, but most often includes software licenses, maintenance and support, implementation and training.Revenue on arrangements involving multiple elements is generally allocated to each element using the residual method when evidence of fair value only existsfor the undelivered elements. The fair value of an element is based on vendor-specific objective evidence (“VSOE”), which is based on the price charged whenthe same element is sold separately. We generally establish VSOE for the related undelivered elements based on the bell-shaped curve method. VSOE isestablished on maintenance for certain clients based on stated renewal rates only if the rate is determined to be substantive and falls within our customarypricing practices. VSOE calculations are updated and reviewed on a quarterly or annual basis, depending on the nature of the product or service.Under the residual method, we defer revenue related to the undelivered elements based on VSOE of fair value of each undelivered element and allocate theremainder of the contract price, net of all discounts, to the delivered elements. If VSOE of fair value of any undelivered element does not exist, all revenue isdeferred until VSOE of fair value of the undelivered element is established or the element has been delivered.Revenue related to arrangements that include hosting services is recognized in accordance to the revenue recognition criteria described above only if the clienthas the contractual right to take possession of the software at any time without incurring a significant penalty, and it is feasible for the client to either host thesoftware on its own equipment or through another third party. Otherwise, the arrangement is accounted for as a service contract in which the entire arrangementis deferred and recognized over the period that the hosting services are being provided.From time to time, we offer future purchase discounts on our products and services as part of our arrangements. Such discounts that are incremental to therange of discounts reflected in the pricing of the other elements of the arrangement, that are incremental to the range of discounts typically given in comparabletransactions, and that are significant, are assessed as an additional element of the arrangement. Revenue deferred related to future purchase options are notrecognized until either the client exercises the discount offer or the offer expires.Revenue from professional services, including implementation, training, and consulting services, are generally recognized as the corresponding services areperformed. Revenue from software related subscription services and support and maintenance revenue are recognized ratably over the contractual serviceperiod. Revenue from EDI and data services and other transaction processing services are recognized at the time the services are provided to clients. Revenuefrom RCM and related services is derived from services fees for ongoing billing, collections, and other related services, and are generally calculated as apercentage of total client collections. We recognize RCM and related services revenue at the time collections are made by the client as the services fees are notfixed or determinable until such time.We record revenue net of sales tax obligation in the consolidated statements of net income and comprehensive income.Cash and Cash Equivalents. Cash and cash equivalents consist primarily of cash and money market funds with original maturities of less than 90 days. Wehad cash deposits held at U.S. banks and financial institutions at March 31, 2017 of which $36,572 was in excess of the Federal Deposit Insurance Corporationinsurance limit of $250 per owner. Our cash deposits are exposed to credit loss for amounts in excess of insured limits in the event of nonperformance by theinstitutions; however, we do not anticipate nonperformance by these institutions.Money market funds in which we hold a portion of our excess cash are invest in very high grade commercial and governmental instruments, and therefore bearlow market risk.Restricted Cash and Cash Equivalents. Restricted cash and cash equivalents consist of cash that is being held by the Company acting as an agent for thedisbursement of certain state social and care services programs. We record an offsetting liability when we initially receive such cash from the programs. Werelieve both restricted cash and cash equivalents and the related liability when amounts are disbursed. We earn an administrative fee based on a percentage ofthe funds disbursed on behalf of the government social and care service programs.Marketable Securities . Marketable securities are classified as available-for-sale and are recorded at fair value, based on quoted market rates when observableor valuation analysis when appropriate. Unrealized gains and losses, are included in shareholders’ equity. Realized gains and losses on investments areincluded in other income and expense.Accounts Receivable Reserves. We maintain reserves for potential sales returns and uncollectible accounts receivable. In aggregate, such reserves reduceour gross accounts receivable to estimated net realizable value.Our standard contracts generally do not contain provisions for clients to return products or services. However, we historically have accepted sales returns undercertain circumstances. Accordingly, we estimate sales return reserves, including reserves for returns and other credits, based upon the rate of historical returnsby revenue type in relation to the corresponding gross revenues and recognize revenue, net of an allowance for sales returns. If we are unable to estimate thereturns, revenue recognition may be delayed until the rights of return period lapses, provided also, that all other criteria for revenue recognition have been met. Ifwe experience changes in practices related to sales returns or changes in actual return rates that deviate from the historical data on which our reserves hadbeen established, our revenues may be adversely affected.Allowances for doubtful accounts and other uncollectible accounts receivable related to estimated losses resulting from our clients’ inability to make requiredpayments are established based on our historical experience of bad debt expense and the60Table of Contentsaging of our accounts receivable balances, net of deferred revenue and specifically reserved accounts. Specific reserves are based on our estimate of theprobability of collection for certain troubled accounts. Accounts are written off as uncollectible only after we have expended extensive collection efforts.Our allowances for doubtful accounts are based on our assessment of the collectibility of client accounts. We regularly review the adequacy of these allowancesby considering internal factors such as historical experience, credit quality and age of the client receivable balances as well as external factors such aseconomic conditions that may affect a client’s ability to pay and review of major third-party credit-rating agencies, as needed.Inventory. Inventory consists of hardware for specific client orders and spare parts and are valued at lower of cost (first-in, first-out) and net realizable value.Our provision for inventory obsolescence reduces our inventory to net realizable value.Equipment and Improvements. Equipment and improvements are stated at cost less accumulated depreciation and amortization. Repair and maintenancecosts that do not improve service potential or extend economic life are expensed as incurred. Depreciation and amortization of equipment and improvements arerecorded over the estimated useful lives of the assets, or the related lease terms if shorter, by the straight-line method. Useful lives generally have the followingranges:•Computer equipment - 3 to 5 years•Furniture and fixtures - 3 to 7 years•Leasehold improvements - lesser of lease term or estimated useful life of assetDepreciation expense related to our equipment and improvements was $10,080 , $8,834 , and $9,323 for the years ended March 31, 2017 , 2016 , and 2015 ,respectively.Capitalized Software Costs. Software development costs, consisting primarily of employee salaries and benefits, incurred in the research and development ofnew software products and enhancements to existing software products for external sale are expensed as incurred, and reported as net research anddevelopment costs in the consolidated statements of net income and comprehensive income, until technological feasibility has been established. Aftertechnological feasibility is established, additional external-sale software development costs are capitalized. Amortization of capitalized software is recorded usingthe greater of the ratio of current revenues to the total of current and expected revenues of the related product or the straight-line method over the estimatedeconomic life of the related product, which is typically three years. We perform ongoing assessments of the net realizable value of such capitalized softwarecosts. If a determination is made that capitalized amounts are not recoverable based on the projected undiscounted cash flows to be generated from theapplicable software, any excess unamortized capitalized software costs are written off. In addition to the assessment of net realizable value, we routinely reviewthe remaining estimated lives of our capitalized software costs and record adjustments, if deemed necessary. The total of capitalized software costs incurred inthe development of products for external sale are reported as capitalized software costs within our consolidated balance sheets.We also incur costs to develop software applications for our internal-use and costs for the development of Software as a Service ("SaaS") based products soldto our clients. The development costs of our SaaS-based products are considered internal-use for accounting purposes. Our internal-use capitalized costs arestated at cost and amortized using the straight-line method over the estimated useful lives of the assets, which is typically three to seven years. Applicationdevelopment stage costs generally include costs associated with internal-use software configuration, coding, installation and testing. Costs related to thepreliminaryproject stage and post-implementation activities are expensed as incurred. Costs of significant upgrades and enhancements that result in additional functionalityare also capitalized, whereas costs incurred for maintenance and minor upgrades and enhancements are expensed as incurred. Capitalized software costs fordeveloping SaaS-based products are reported as capitalized software costs within our consolidated balance sheets and capitalized software costs fordeveloping our internal-use software applications are reported as equipment and improvements within our consolidated balance sheets.During the year ended March 31, 2016, we recorded a $32,238 non-cash impairment charge after making a determination that the previously capitalizedsoftware costs related to the NextGen Now development project was not recoverable. Refer to Note 8 for additional information.Business Combinations. In accordance with the accounting for business combinations, we allocate the purchase price of the acquired business to the tangibleand intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The fair values of acquired assets andliabilities assumed represent our best estimate of fair value. The estimated fair value of the acquired tangible and intangible assets and liabilities assumed weredetermined using multiple valuation approaches depending on the type and nature of tangible or intangible asset acquired, including but not limited to theincome approach, the excess earnings method and the relief from royalty method approach. The purchase price allocation methodology contains uncertaintiesas it requires us make assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities, including, but not limited to, intangibleassets, goodwill, deferred revenue, and contingent consideration liabilities. We estimate the fair value of the contingent consideration liabilities based on theprobability of achieving certain business, strategic, or financial milestones and our projection of expected results, as needed. Unanticipated events orcircumstances may occur which could affect the accuracy of our fair value estimates, including assumptions regarding industry economic factors and businessstrategies. Any adjustments to fair value subsequent to the measurement period are reflected in the consolidated statements of net income and comprehensiveincome.Goodwill. Goodwill acquired in a business combination is measured as the excess of the purchase price, or consideration transferred, over the net acquisitiondate fair values of the assets acquired and the liabilities assumed. Goodwill is not amortized as it has been determined to have an indefinite useful life.61Table of ContentsWe test goodwill for impairment annually during our first fiscal quarter, referred to as the annual test date. Based on our assessment, we have determined thatthere was no impairment to our goodwill as of June 30, 2016. We will also test for impairment between annual test dates if an event occurs or circumstanceschange that would indicate the carrying amount may be impaired. Impairment testing for goodwill is performed at a reporting-unit level, which is defined as anoperating segment or one level below an operating segment (referred to as a component). A component of an operating segment is a reporting unit if thecomponent constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of thatcomponent.As part of our annual goodwill impairment test, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reportingunit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we conducta two-step quantitative goodwill impairment test. The first step of the impairment test involves comparing the fair values of the applicable reporting units withtheir carrying values. If the carrying amount of the reporting unit exceeds the reporting unit's fair value, we perform the second step of the goodwill impairmenttest. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit's goodwill with the carrying value ofthat goodwill. The amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss. During the years ended March 31, 2017 and March 31, 2016 , we did not identify any events or circumstances that would require an interim goodwill impairmenttest.Intangible Assets. Intangible assets consist of customer relationships, trade names and contracts, and software technology. These intangible assets arerecorded at fair value and are reported net of accumulated amortization. We currently amortize the intangible assets over periods ranging from 7 months to 10 years using a method that reflects the pattern in which the economic benefits of the intangible asset are consumed. We assess the recoverability of intangibleassets at least annually or whenever adverse events or changes in circumstances indicate that impairment may have occurred. If the future undiscounted cashflows expected to result from the use of the related assets are less than the carrying value of such assets, impairment is deemed to have occurred and a loss isrecognized to reduce the carrying value of the intangible assets to fair value, which is determined by discounting estimated future cash flows. In addition to theimpairment assessment, we routinely review the remaining estimated lives of our intangible assets and record adjustments, if deemed necessary.We determined that there was no impairment to our intangible assets as of March 31, 2017 and March 31, 2016 .Long-Lived Assets. We assess the recoverability of long-lived assets at least annually or whenever adverse events or changes in circumstances indicate thatimpairment may have occurred. If the future undiscounted cash flows expected to result from the use of the related assets are less than the carrying value ofsuch assets, impairment is deemed to have occurred and a loss is recognized to reduce the carrying value of the long-lived assets to fair value, which isdetermined by discounting estimated future cash flows. In addition to the impairment assessment, we routinely review the remaining estimated lives of our long-lived assets and record adjustments, if deemed necessary.Income Taxes. Income taxes are provided based on current taxable income and the future tax consequences of temporary differences between the basis ofassets and liabilities for financial and tax reporting. The deferred income tax assets and liabilities represent the future state and federal tax return consequencesof those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred income taxes are alsorecognized for operating losses that are available to offset future taxable income and tax credits that are available to offset future income taxes. At eachreporting period, we assess the realizable value of deferred tax assets based on, among other things, estimates of future taxable income and adjusts the relatedvaluation allowance as necessary. We make a number of assumptions and estimates in determining the appropriate amount of expense to record for incometaxes. The assumptions and estimates consider the taxing jurisdiction in which we operate as well as current tax regulations. Accruals are established forestimates of tax effects for certain transactions and future projected profitability based on our interpretation of existing facts and circumstances.Advertising Costs. Advertising costs are expensed as incurred. We do not have any direct-response advertising. Advertising costs, which include trade showsand conventions, were approximately $7,111 , $7,890 , and $7,079 for the years ended March 31, 2017 , 2016 , and 2015 , respectively, and were included inselling, general and administrative expenses in the accompanying consolidated statements of net income and comprehensive income.62Table of ContentsEarnings per Share. We provide a dual presentation of “basic” and “diluted” earnings per share (“EPS”). Shares below are in thousands. Fiscal Year Ended March 31, 2017 2016 2015Earnings per share — Basic:     Net income$18,241 $5,657 $27,332Weighted-average shares outstanding — Basic61,818 60,635 60,259Net income per common share — Basic$0.30 $0.09 $0.45      Earnings per share — Diluted:     Net income$18,241 $5,657 $27,332      Weighted-average shares outstanding61,818 60,635 60,259Effect of potentially dilutive securities192 598 590Weighted-average shares outstanding — Diluted62,010 61,233 60,849Net income per common share — Diluted$0.29 $0.09 $0.45The computation of diluted net income per share does not include 2,999 , 1,926 and 1,656 options for the years ended March 31, 2017 , 2016 , and 2015respectively, because their inclusion would have an anti-dilutive effect on net income per share.Share-Based Compensation. The following table shows total share-based compensation expense included in the consolidated statements of net income andcomprehensive income for the for the fiscal year ended March 31, 2017 , 2016 , and 2015 : Fiscal Year Ended March 31, 2017 2016 2015Costs and expenses:     Cost of revenue$514 $404 $373Research and development costs, net973 318 396Selling, general and administrative6,111 2,573 2,703Total share-based compensation7,598 3,295 3,472Income tax benefit(2,637) (1,018) (1,054)Decrease in net income$4,961 $2,277 $2,418Recent Accounting Standards. Recent accounting pronouncements requiring implementation in future periods are discussed below or in the notes, whereapplicable. We do not believe that any other recently issued, but not yet effective accounting standards, if adopted, would have a material impact on ourconsolidated financial statements.In January 2017, the FASB issued Accounting Standards Update ("ASU") 2017-04, Intangibles–Goodwill and Other (Topic 350): Simplifying the Test forGoodwill Impairment (“ASU 2017-04”). ASU 2017-04 removes the requirement to compare the implied fair value of goodwill with its carrying amount as part ofStep two of the goodwill impairment test. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of areporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fairvalue. ASU 2017-04 is effective prospectively for annual and interim periods beginning after December 15, 2019, and early adoption is permitted on goodwillimpairment tests performed on testing dates after January 1, 2017. ASU 2017-04 is effective for us in the fourth quarter of fiscal 2020, and we currently do notexpect the adoption of this new standard to have a material impact on our consolidated financial statements.In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for asacquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periodswithin those periods. Early adoption is permitted in two scenarios as identified in the new standard. ASU 2017-01 is effective for us in the first quarter of fiscal2019, and we currently do not expect the adoption of this new standard to have a material impact on our consolidated financial statements.63Table of ContentsIn November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). ASU 2016-18 provides guidanceon the classification of restricted cash and cash equivalents in the statement of cash flows. Although it does not provide a definition of restricted cash orrestricted cash equivalents, it states that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cashequivalents when reconciling the beginning-of-period and end-of period total amounts shown on the statement of cash flows. ASU 2016-18 is effective forinterim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. ASU 2016-18 iseffective for us in the first quarter of fiscal 2019, and we currently do not expect the adoption of this new standard to have a material impact on our consolidatedfinancial statements.In October 2016, the FASB issued ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory ("ASU 2016-16"). ASU 2016-16 requiresthe recognition of current and deferred income taxes for intra-entity asset transfers when the transaction occurs. ASU 2016-16 is effective for interim and annualreporting periods beginning after December 15, 2017. Early adoption is permitted. ASU 2016-16 is effective for us in the first quarter of fiscal 2019, and we arecurrently in the process of evaluating the potential impact of adoption of this updated authoritative guidance on our consolidated financial statements.In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 is intended to add and clarifyguidance on the classification of certain cash receipts and cash payments in the statement of cash flows to eliminate diversity in practice related to how suchcash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for interim and annual reporting periodsbeginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. ASU 2016-15 is effective for us in the first quarter offiscal 2019, and we currently do not expect the adoption of this new standard to have a material impact on our consolidated financial statements.In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based PaymentAccounting ("ASU 2016-09"). ASU 2016-09 simplifies the accounting for and reporting on share-based payment transactions, including the income taxconsequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for interim andannual reporting periods beginning after December 15, 2016, with early adoption permitted. The amendments in this update are to be applied differently uponadoption with certain amendments being applied prospectively, retrospectively and under a modified retrospective transition method. We expect to adopt ASU2016-09 in the first quarter of fiscal 2018, and we currently do not expect the adoption of this new standard to have a material impact on our consolidatedfinancial statements.In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which is intended to improve financial reporting about leasingtransactions. The new guidance will require lessees to recognize on their balance sheets the assets and liabilities for the rights and obligations created by leasesand to disclose key information about the leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018,with early adoption permitted. ASU 2016-02 is effective for us in the first quarter of fiscal 2020. We are currently in the process of evaluating the potential impactof adoption of this updated authoritative guidance on our consolidated financial statements.In April 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Arrangement ("ASU 2015-05"), which requires a customer todetermine whether a cloud computing arrangement contains a software license that should be accounted for as internal-use software or as a service contract.ASU 2015-05 is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. Upon adoption, an entityhas the option to apply the provisions of ASU 2015-05 either prospectively to all arrangements entered into or materially modified, or retrospectively. Theadoption of this new standard did not have material impact on our consolidated financial statements.In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern ("ASU 2014-15"), whichincorporates and expands upon certain principles that currently exist in U.S. auditing standards. ASU 2014-15 provides guidance regarding management'sresponsibility to evaluate whether there is substantial doubt about an organization's ability to continue as a going concern and to provide related footnotedisclosures. The new standard requires management to perform interim and annual evaluations and sets forth principles for considering the mitigating effect ofmanagement's plans. The standard mandates certain disclosures when conditions give rise to substantial doubt about a company’s ability to continue as a goingconcern within one year from the financial statement issuance date. ASU 2014-15 is effective for us commencing fiscal year ending March 31, 2017. Theadoption of this new standard has not had, and is not expected to have, an impact on our consolidated financial statements .In May 2014, the FASB, along with the International Accounting Standards Board, issued ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASU 2014-09 provides enhancements to the quality andconsistency of how revenue is reported while also improving comparability in the financial statements of companies reporting using International FinancialReporting Standards and GAAP. The core principle of this updated guidance is that an entity should recognize revenue to depict the transfer of promised goodsor services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The newrevenue standard also requires additional disclosure about revenue and provides improved guidance for multiple element arrangements. In July 2015 decision,the FASB issued ASU 2015-14, Deferral of Effective Date ("ASU 2015-14") to delay the effective date by one year. In addition, the FASB issued ASU 2016-08,ASU 2016-10, ASU 2016-11, ASU 2016-12, and ASU 2016-20, all of which do not change the core principle of the guidance, but rather help to provide furtherinterpretive clarifications on the new revenue standard. Companies are permitted to adopt this new guidance following either a full retrospective or modifiedretrospective approach. 64Table of ContentsWe have performed an initial assessment of the potential impacts to our business processes, systems, and controls that could result from the implementation ofthe new revenue standard. Additionally, based on our initial assessment, we currently believe that impact on our consolidated financial statements could bematerial. We expect that revenue related to hardware, EDI, maintenance, and certain subscriptions would remain substantially unchanged, and we are theprocess of evaluating the impact of the new revenue standard on our other revenue streams. We continue to evaluate all potential impacts of this new revenuestandard, including our method of adoption, and our preliminary assessments are subject to change. We expect to implement this new revenue standard when itbecomes effective for us in the first quarter of fiscal 2019.3. Cash and Cash EquivalentsAt March 31, 2017 and March 31, 2016 , we had cash and cash equivalents of $37,673 and $27,176 , respectively. Cash and cash equivalents consist primarilyof cash and money market funds with original maturities of less than 90 days.4. Fair Value MeasurementsThe following tables set forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis atMarch 31, 2017 and March 31, 2016 : Balance at Quoted Prices inActive Markets forIdentical Assets(Level 1) Significant OtherObservable Inputs(Level 2) Unobservable Inputs(Level 3) March 31, 2017   ASSETS       Cash and cash equivalents (1)$37,673 $37,673 $— $—Restricted cash and cash equivalents4,916 4,916 — — $42,589 $42,589 $— $—LIABILITIES       Contingent consideration related to acquisitions$18,817 $— $18,817 $— $18,817 $— $18,817 $— Balance at Quoted Prices inActive Markets forIdentical Assets(Level 1) Significant OtherObservable Inputs (Level2) Unobservable Inputs(Level 3) March 31, 2016   ASSETS       Cash and cash equivalents (1)$27,176 $27,176 $— $—Restricted cash and cash equivalents5,320 5,320 — —Marketable securities (2)9,297 9,297 — — $41,793 $41,793 $— $—LIABILITIES       Contingent consideration related to acquisitions$23,843 $— $— $23,843 $23,843 $— $— $23,843___________________________________(1) Cash equivalents consist primarily of money market funds.(2) Marketable securities consist of available-for-sale money market instruments and fixed-income securities, including certificates of deposit, corporate bonds and notes, andmunicipal securities.The contingent consideration liability as of March 31, 2017 relates to the acquisition of HealthFusion (see Note 5). Prior to March 31, 2017 , the categorization ofthe framework used to measure fair value of the contingent consideration liability was considered to be within the Level 3 valuation hierarchy due to thesubjective nature of the unobservable inputs used. We had assessed the fair value of the contingent consideration liability on a recurring basis and anyadjustments to fair value subsequent to the measurement period were reflected in the consolidated statements of net income and comprehensive income. Keyassumptions included discount rates and probability-adjusted achievement estimates of certain revenue targets that were not observable in the market. As of theend of the HealthFusion contingent consideration liability measurement period on December 31, 2016, the actual revenue target achievement rate was utilizedto compute the ending contingent consideration liability. Accordingly, the contingent consideration liability was transferred into the Level 2 valuation hierarchybecause the fair value was determined based on other significant observable inputs.65Table of ContentsThe following table presents activity in our financial assets and liabilities measured at fair value using significant unobservable inputs (Level 3), as of and for theyears ended March 31, 2017 :  Total LiabilitiesBalance at March 31, 2015 $16,155Contingent consideration related to acquisition of HealthFusion (Note 5) 16,700Settlement of share-based contingent consideration related to Mirth (9,273)Fair value adjustments, net 261Balance at March 31, 2016 $23,843Settlement of share-based contingent consideration related to Mirth (9,273)Fair value adjustments, net 4,247Transfer of HealthFusion contingent consideration to Level 2 (18,817)Balance at March 31, 2017 $—During the year ended March 31, 2017 , we issued shares of common stock to settle $9,273 in contingent consideration liabilities related to the acquisition ofMirth and recorded $4,247 of net fair value adjustments to contingent consideration liabilities, of which $3,817 was related to HealthFusion and $430 was relatedto Mirth. The fair value adjustments to contingent consideration liabilities are included as a component of selling, general and administrative expense in theconsolidated statements of net income and comprehensive income.We believe that the fair value of other financial assets and liabilities, including accounts receivable, accounts payable, and line of credit, approximate theirrespective carrying values due to their nominal credit risk.Non-Recurring Fair Value MeasurementsWe have certain assets, including goodwill and other intangible assets, which are measured at fair value on a non-recurring basis and are adjusted to fair valueonly if an impairment charge is recognized. The categorization of the framework used to measure fair value of the assets is considered to be within the Level 3valuation hierarchy due to the subjective nature of the unobservable inputs used. During the year ended March 31, 2017 , we recorded certain adjustments toHealthFusion goodwill (see Note 5).5. Business Combinations and DisposalsHealthFusion AcquisitionOn January 4, 2016, we completed our acquisition of HealthFusion Holdings, Inc. ("HealthFusion") pursuant to the Agreement and Plan of Merger (the “MergerAgreement"), dated October 30, 2015. HealthFusion provides Web-based, cloud computing software for physicians, medical billing service providers, andhospitals. Its flagship product, MediTouch®, is a fully-integrated, cloud-based software suite consisting of clearinghouse, practice management, electronic healthrecords, and patient portals with rich functionality to enable mobility, workflow automation, and advanced reporting and analytics aimed primarily at small-to-mid-size physician practices. The acquisition of HealthFusion is part of our strategy to expand its client base and cloud-based solution capabilities in the ambulatorymarket. Over time, we plan to expand the HealthFusion platform to satisfy the needs of practices of increasing size and complexity.The purchase price totaled $183,049 , which included working capital and other customary adjustments and the fair value of contingent consideration related toan additional $25,000 of cash in the form of an earnout, subject to HealthFusion achieving certain revenue targets through December 31, 2016. The initialestimated fair value of contingent consideration of $16,700 was based on a Monte Carlo-based valuation model that considered, among other assumptions andinputs, our estimate of projected HealthFusion revenues. As of March 31, 2017 , the fair value of the contingent consideration was $18,817 .The acquisition was initially funded by a draw against the revolving credit agreement (see Note 9), a portion of which was subsequently repaid from existingcash on hand.We accounted for the HealthFusion acquisition as a purchase business combination using the acquisition method of accounting. The purchase price wasallocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The fair values ofacquired assets and liabilities assumed represent management’s estimate of fair value.The estimated fair value of the acquired tangible and intangible assets and liabilities assumed were determined using multiple valuation approaches dependingon the type of tangible or intangible asset acquired, including but not limited to the income approach, the excess earnings method and the relief from royaltymethod approach.The goodwill represents the excess of the purchase price over the net identifiable assets acquired and liabilities assumed. Goodwill primarily represents, amongother factors, the value of synergies expected to be realized and the assemblage of all assets that enable us to create new client relationships, neither of whichqualify as separate amortizable intangible assets.66Table of ContentsGoodwill arising from the acquisition of HealthFusion was determined as the excess of the purchase price over the net acquisition date fair values of theacquired assets and the liabilities assumed, and is not deductible for tax purposes. HealthFusion operates under our Software and Related Solutions segment.During the years ended March 31, 2017 , we recorded a $2,938 adjustment to HealthFusion goodwill related to changes in deferred taxes based on the filing offinal tax returns. The purchase price for the HealthFusion acquisition was considered final as of March 31, 2017.The total purchase price for the HealthFusion acquisition is summarized as follows:Initial purchase price$165,000Contingent consideration16,700Working capital and other adjustments1,349Total purchase price$183,049 January 4, 2016Fair value of the net tangible assets acquired and liabilities assumed: Acquired cash and cash equivalents$2,225Accounts receivable, net1,514Prepaid expenses and other current assets4,645Equipment and improvements, net767Capitalized software costs, net307Other assets700Accounts payable(1,085)Accrued compensation and related benefits(533)Deferred revenue(1,067)Deferred income taxes, net(9,089)Other liabilities(2,721)Total net tangible assets acquired and liabilities assumed(4,337)Fair value of identifiable intangible assets acquired: Software technology42,500Customer relationships28,500Trade name4,000Goodwill112,386Total identifiable intangible assets acquired187,386Total purchase price$183,049Including the effect of certain acquisition-related fair value adjustments, amortization of acquired intangible assets, and interest expense associated with therevolving credit agreement, the acquisition of HealthFusion contributed revenues of $8,781 and estimated net loss of $1,149 to our consolidated results for theyear ended March 31, 2016 .The following table presents unaudited supplemental pro forma consolidated revenue and net income as if the acquisition of HealthFusion had occurred on April1, 2014 (the beginning of the comparable prior annual reporting period). Pro formayear endedMarch 31, 2016(unaudited) Pro formayear endedMarch 31, 2015(unaudited)Combined revenues518,708 516,579Combined net income134 12,471The pro forma revenue and net income were derived by combining our historical results with HealthFusion's historical results, after applying our accountingpolicies and making adjustments related to the amortization of acquired intangible assets and interest expense associated with the revolving credit agreement.Specifically, the pro forma combined net income for the year ended March 31, 2016 includes $14,900 of estimated amortization of acquired intangible assetsand $3,600 of estimated interest expense. For the year ended March 31, 2015, the pro forma combined net income includes $15,800 of estimated amortizationof acquired intangible assets, $8,300 of estimated acquisition-related fair value adjustments, and $5,200 of estimated interest expense. Acquisition-relatedtransaction costs incurred prior to the acquisition date have been eliminated from pro forma67Table of Contentscombined net income and we also considered the estimated inconsequential tax effects of the acquisition for the purposes of preparing the unauditedsupplemental pro forma information.Hospital DispositionOn October 22, 2015, we closed an Asset Purchase Agreement (the “Purchase Agreement”) with Quadramed Affinity Corporation in which we sold andassigned substantially all assets and liabilities of the former Hospital Solutions division. We believe that the Hospital disposition will allow us to focus our effortsand resources on our core ambulatory business. The financial terms of the transaction and the amount of consideration received were not significant. Since theHospital disposition did not and is not expected to have a major effect on our operations and financial results, separate discontinued operations reporting is notprovided.We incurred a loss on the Hospital disposition of $1,366 in the year ended March 31, 2016 , which was recorded in our consolidated statements of net incomeand comprehensive income as a component of selling, general and administrative expense. The loss was measured as the total consideration received andexpected to be received less the lower of carrying value or fair value of the former Hospital Solutions division. Additionally, we incurred $387 in directincremental costs of disposition and $335 in severance and other employee-related costs in connection with the Hospital disposition during the year endedMarch 31, 2016 , which were recorded in our consolidated statements of net income and comprehensive income as a component of selling, general andadministrative expense.6. GoodwillWe do not amortize goodwill as it has been determined to have an indefinite useful life. During the year ended March 31, 2017 , we recorded certainadjustments to HealthFusion goodwill (see Note 5).We have also determined that the change in reportable operating segments as a result of our ongoing reorganization efforts (see Note 15) did not have asignificant impact on the amount of goodwill that is allocated to each reporting unit and each reportable operating segment . Goodwill by reportable operatingsegment consists of the following: March 31, 2017 March 31, 2016Software and Related Solutions$153,608 $156,547RCM and Related Services32,290 32,290Total goodwill$185,898 $188,8377. Intangible AssetsIn connection with the HealthFusion acquisition, we recorded $75,000 of intangible assets related to customer relationships, trade names and softwaretechnology (see Note 5 for additional information). We are amortizing the HealthFusion customer relationships over 10 years and trade names and softwaretechnology over 5 years. The weighted average amortization period for the total amount of intangible assets acquired is 6.9 years.Our definite-lived intangible assets, other than capitalized software development costs, are summarized as follows: March 31, 2017 CustomerRelationships Trade Name andContracts SoftwareTechnology TotalGross carrying amount$50,550 $5,480 $67,810 $123,840Accumulated amortization(28,972) (2,088) (23,567) (54,627)Net intangible assets$21,578 $3,392 $44,243 $69,213 March 31, 2016 CustomerRelationships Trade Name andContracts SoftwareTechnology TotalGross carrying amount$50,550 $7,368 $67,810 $125,728Accumulated amortization(19,618) (2,895) (11,540) (34,053)Net intangible assets$30,932 $4,473 $56,270 $91,675Amortization expense related to customer relationships and trade name and contracts recorded as operating expenses in the consolidated statements of netincome and comprehensive income was $10,435 , $5,368 , and $3,709 for the years ended March 31, 2017 , 2016 and 2015 , respectively. Amortizationexpense related to software technology recorded as cost of revenue was $12,027 , $5,646 , and $3,418 for the years ended March 31, 2017 , 2016 , and 2015 ,respectively.68Table of ContentsThe following table summarizes the remaining estimated amortization of definite-lived intangible assets as of March 31, 2017 : Estimated Remaining Amortization Expense: OperatingExpense Cost of Revenue TotalFor the year ended March 31,     20187,264 11,851 19,11520194,852 11,851 16,70320203,855 11,851 15,70620213,006 7,968 10,97420221,868 180 2,0482023 and beyond4,125 542 4,667Total$24,970 $44,243 $69,2138. Capitalized Software CostsOur capitalized software costs are summarized as follows: March 31, 2017 March 31, 2016Gross carrying amount$104,948 $96,699Accumulated amortization(91,341) (83,449)Net capitalized software costs$13,607 $13,250Amortization expense related to capitalized software costs was $7,892 , $9,891 , and $12,817 for the years ended March 31, 2017 , 2016 , and 2015 ,respectively, and is recorded as cost of revenue in the consolidated statements of net income and comprehensive income.The following table presents the remaining estimated amortization of capitalized software costs as of March 31, 2017 . The estimated amortization is comprisedof (i) amortization of released products and (ii) the expected amortization for products that are not yet available for sale based on their estimated economic livesand projected general release dates.For the year ended March 31, 2018$6,20020195,20020202,0002021207Total$13,607During the year ended March 31, 2016, we recorded a non-cash impairment charge of $32,238 that is reflected within the impairment of assets caption in ourconsolidated statements of net income and comprehensive income. The impairment relates to the previously capitalized investment in the NextGen Nowdevelopment project, which we deemed to have zero net realizable value. The impairment charge did not result in any cash expenditures. The impairmentcharge followed our assessment of the NextGen Now development project and the MediTouch platform that we obtained through our acquisition ofHealthFusion. We had determined that the MediTouch platform offered the most efficient path to providing a high-quality, robust, cloud-based solution forambulatory care and decided to cease further investment in NextGen Now and immediately discontinued all efforts to use or repurpose the NextGen Nowplatform. 9. Line of CreditOn January 4, 2016, we entered into a $250,000 revolving credit agreement (“Credit Agreement”) with JP Morgan Chase Bank, N.A., as administrative agent,U.S. Bank National Association, as syndication agent, and certain other lenders. The Credit Agreement is secured by substantially all of our existing and futureproperty and material domestic subsidiaries. The Credit Agreement provides a subfacility of up to $10,000 for letters of credit and a subfacility of up to $10,000for swing-line loans. The Credit Agreement matures on January 4, 2021 and the full balance of the revolving loans and all other obligations under the agreementmust be paid at that time. The revolving loans under the Credit Agreement will be available for letters of credit, working capital and general corporate purposes.We were in compliance with all financial and non-financial covenants under the Credit Agreement as of March 31, 2017 .69Table of ContentsThe revolving loans under the Credit Agreement bear interest at our option of either, (a) a base rate based on the highest of (i) the rate of interest per annumpublicly announced from time to time by JPMorgan Chase Bank, N.A., as its prime rate, (ii) the greater of (A) the federal funds effective rate and (B) theovernight bank funding rate (as determined by the Federal Reserve Bank of New York) plus 0.50% and (iii) the one-month British Bankers Association LondonInterbank Offered Rate ("LIBOR") plus 1.00%) plus an applicable margin based on our leverage ratio from time to time, ranging from 0.50% to 1.50%, or (b) aLIBOR-based rate (subject to a floor of 0.00%) plus an applicable margin based on our leverage ratio from time to time, ranging from 1.50% to 2.50%. We willalso pay a commitment fee of between 0.25% and 0.45%, payable quarterly in arrears, on the average daily unused amount of the revolving facility based onour leverage ratio from time to time.The revolving loans are subject to customary representations, warranties and ongoing affirmative and negative covenants and agreements. The negativecovenants include, among other things, limitations on indebtedness, liens, asset sales, mergers and acquisitions, investments, transactions with affiliates,dividends and other restricted payments, subordinated indebtedness and amendments to subordinated indebtedness documents and sale and leasebacktransactions. The Credit Agreement also requires us to maintain (1) a maximum leverage ratio of (a) 3.00 to 1.00 for any such fiscal quarter ending on or prior toSeptember 30, 2016, (b) 2.75 to 1.00 for any such fiscal quarter ending after September 30, 2016 and on or prior to September 30, 2017 and (c) 2.50 to 1.00 forany such fiscal quarter ending after September 30, 2017; and (2) a minimum fixed charge coverage ratio of 3.00 to 1.00 at the end of each fiscal quarter throughthe term of the loan.As of March 31, 2017 , we had $15,000 in outstanding loans and $235,000 of unused credit under the Credit Agreement. As of March 31, 2016 , we had $105,000 in outstanding loans and $145,000 of unused credit under the Credit Agreement.The interest rates as of March 31, 2017 and 2016 wasapproximately 2.3% and 2.4% , respectively.During the years ended March 31, 2017 and 2016 we recorded $1,899 and $969 of interest expense, respectively, and the weighted average interest rateswere approximately 2.4% and 3.2% , respectively.Debt issuance costs and other related fees paid to legal advisors and third parties in connection with securing the Credit Agreement totaled $5,382 . Thedeferred debt issuance costs are reported as a component of other assets on the consolidated balance sheet and are being amortized to interest expense overthe term of the Credit Agreement. During the years ended March 31, 2017 and 2016 we recorded $1,076 and 258 , respectively, in amortization of deferreddebt issuance costs related to the Credit Agreement.10. Composition of Certain Financial Statement CaptionsAccounts receivable may include amounts invoiced for undelivered products and services at each period end. Undelivered products and services are includedas a component of the deferred revenue balance on the accompanying consolidated balance sheets. March 31, 2017 March 31, 2016Accounts receivable, gross$93,377 $104,467Sales return reserve(7,213) (7,541)Allowance for doubtful accounts(2,757) (2,902)Accounts receivable, net$83,407 $94,024Inventory is comprised of finished goods of computer systems and components.Prepaid expenses and other current assets are summarized as follows: March 31, 2017 March 31, 2016Prepaid expenses$14,884 $11,804Other current assets3,085 3,106Prepaid expenses and other current assets$17,969 $14,91070Table of ContentsEquipment and improvements are summarized as follows: March 31, 2017 March 31, 2016Computer equipment$22,014 $32,213Internal-use software13,053 10,201Furniture and fixtures10,472 9,799Leasehold improvements16,360 13,408Equipment and improvements, gross61,899 65,621Accumulated depreciation and amortization(34,473) (39,831)Equipment and improvements, net$27,426 $25,790The current portion of deferred revenues are summarized as follows: March 31, 2017 March 31, 2016Professional services$21,889 $23,128Software license, hardware and other12,680 14,913Support and maintenance9,691 11,902Software related subscription services8,123 7,992Deferred revenue$52,383 $57,935Accrued compensation and related benefits are summarized as follows: March 31, 2017 March 31, 2016Payroll, bonus and commission$15,836 $9,683Vacation8,677 8,987Accrued compensation and related benefits$24,513 $18,670Other current and noncurrent liabilities are summarized as follows: March 31, 2017 March 31, 2016Contingent consideration and other liabilities related to acquisitions$18,817 $24,153Care services liabilities4,957 5,339Customer credit balances and deposits4,124 4,123Accrued consulting and outside services2,496 3,650Accrued EDI expense2,490 2,604Accrued royalties2,033 2,341Accrued self insurance expense1,697 1,862Accrued outsourcing costs1,588 1,604Deferred rent1,370 828Lease obligations1,057 —Accrued legal expense853 864Employee benefit plan withholdings739 213Sales tax payable448 655Other accrued expenses4,106 2,002Other current liabilities$46,775 $50,238    Deferred rent and lease obligations$11,402 $6,577Uncertain tax positions4,762 3,955Other liabilities297 129Other noncurrent liabilities$16,461 $10,66171Table of Contents11. Income TaxesThe provision for income taxes consists of the following components: Fiscal Year Ended March 31, 2017 2016 2015Current:     Federal taxes$3,443 $(9,338) $18,055State taxes1,556 (403) 1,887Foreign taxes498 374 262Total current taxes5,497 (9,367) 20,204Deferred:     Federal taxes$824 $10,474 $(9,804)State taxes(879) (100) (1,771)Foreign taxes(74) (344) (297)Total deferred taxes(129) 10,030 (11,872)Provision for income taxes$5,368 $663 $8,332The provision for income taxes differs from the amount computed at the federal statutory rate as follows: Fiscal Year Ended March 31, 2017 2016 2015Current:     Federal income tax statutory rate35.0% 35.0% 35.0%Increase (decrease) resulting from:     Research and development tax credits(12.5) (23.4) (4.4)Qualified production activities income deduction(3.2) — (5.4)Foreign rate differential(1.7) (10.2) (1.6)Net operating loss carryback— 9.1 —Other non-recurring adjustments for state taxes— — (1.8)Meals and entertainment0.8 3.7 0.8Stock option deduction0.8 3.7 0.6State income taxes, net of federal benefit1.4 (5.2) 2.0Acquisition expenses5.7 (3.6) —Other(3.6) 1.4 (1.8)Effective income tax rate22.7% 10.5% 23.4%72Table of ContentsThe net deferred tax assets and liabilities in the accompanying consolidated balance sheets consist of the following: March 31, 2017 March 31, 2016Deferred tax assets:   Net operating losses$11,811 $17,920Deferred revenue7,337 10,682Accrued compensation and benefits7,063 5,868Deferred rent5,446 2,760Research and development credit4,328 3,611Compensatory stock option expense4,028 2,664Allowance for doubtful accounts3,974 4,176Deferred compensation2,642 2,586Foreign deferred taxes1,173 1,098State income taxes329 445Inventory valuation232 68Other169 265Total deferred tax assets48,532 52,143Deferred tax liabilities:   Intangible assets$(18,038) $(22,972)Capitalized software costs(7,494) (9,644)Accounts receivable(5,538) (5,096)Accelerated depreciation(2,348) (2,434)Prepaid expenses(1,776) (1,249)Total deferred tax liabilities(35,194) (41,395)Valuation allowance(2,073) (2,551)Deferred tax assets, net$11,265 $8,198The deferred tax assets and liabilities have been shown net in the accompanying consolidated balance sheets as noncurrent.As of March 31, 2017 and March 31, 2016 , we had federal net operating loss (“NOL”) carryforwards of $31,032 and $45,202 , respectively. The federal NOLcarryforwards were inherited in connection with our acquisition of HealthFusion in January 2016 and Gennius in March 2015. The NOL carryforwards expire invarious amounts starting on 2029 for both federal and state tax purposes. As of March 31, 2017 , we had state NOL carryforwards of approximately $950 ,related to the HealthFusion acquisition state NOL tax attribute. The utilization of the federal NOL carryforwards is subject to limitations under the rules regardingchanges in stock ownership as determined by the Internal Revenue Code.As of March 31, 2017 and March 31, 2016 , the research and development tax credit carryforward available to offset future federal and state taxes was $4,328and $3,611 respectively. The credits expire in various amounts starting in 2019.We expect to receive the full benefit of the deferred tax assets recorded with the exception of certain state credits and state NOL carryforwards for which wehave recorded a valuation allowance.We have not recorded any U.S. income tax or foreign withholding tax on the earnings of our India foreign subsidiary as these amounts are intended to beindefinitely reinvested. As of March 31, 2017 , the cumulative amount of undistributed earnings of our foreign subsidiary was $7,555 . Determination of thepotential amount of unrecognized deferred U.S. income tax liability and foreign withholding tax is not practicable because of the complexities associated with itshypothetical calculation. 73Table of ContentsUncertain tax positionsA reconciliation of the beginning and ending amount of unrecognized tax benefits, which is recorded within other noncurrent liabilities in our consolidatedbalance sheet, is as follows:Balance as of March 31, 2015$3,763Additions for prior year tax positions235Reductions for prior year tax positions(43)Balance as of March 31, 2016$3,955Additions for prior year tax positions920Additions for current year tax positions139Reductions for prior year tax positions(252)Balance as of March 31, 2017$4,762During the year ended March 31, 2017 , we recorded additional net liabilities of $668 mostly related to various state tax planning benefits recorded in the currentyear for prior year tax positions. The total amount of unrecognized tax benefit that, if recognized, would decrease the income tax provision is $4,762 .Our practice is to recognize interest related to income tax matters as interest expense in the consolidated statements of net income and comprehensive income.We had approximately $297 and $129 of accrued interest related to income tax matters as of March 31, 2017 and 2016 , respectively. We recognized $170 and$57 of interest related to income tax matters in the consolidated statements of net income and comprehensive income in the years ended March 31, 2017 and2016 , respectively, and $309 in the year ended March 31, 2015. No penalties related to income tax matters were accrued or recognized in our consolidatedfinancial statements for all periods presented.We are no longer subject to U.S. federal income tax examinations for tax years before fiscal years ended 2014. With a few exceptions, we are no longer subjectto state or local income tax examinations for tax years before fiscal years ended 2013. We do not anticipate that total unrecognized tax benefits will significantlychange due to the settlement of audits or the expiration of statute of limitations within the next twelve months .12. Employee Benefit PlansWe provide a 401(k) plan to substantially all of our employees. Participating employees may defer up to the IRS limit per year based on the IRC. The annualcontribution is determined by a formula set by our Board of Directors and may include matching and/or discretionary contributions. The amount of the Companymatch is discretionary and subject to change. The retirement plans may be amended or discontinued at the discretion of the Board of Directors. Contributions of$2,735 , $1,063 and $949 were made by the Company to the 401(k) plan for the years ended March 31, 2017 , 2016 , and 2015 , respectively.We have a deferred compensation plan (the “Deferral Plan”) for the benefit of those employees who qualify. Participating employees may defer up to 75% oftheir salary and 100% of their annual bonus for a Deferral Plan year. In addition, we may, but are not required to, make contributions into the Deferral Plan onbehalf of participating employees, and the amount of the Company match is discretionary and subject to change. Each employee's deferrals together withearnings thereon are accrued as part of our long-term liabilities. Investment decisions are made by each participating employee from a family of mutual funds.The deferred compensation liability was $6,629 and $6,357 at March 31, 2017 and 2016 , respectively. To offset this liability, we have purchased life insurancepolicies on some of the participants. The Company is the owner and beneficiary of the policies and the cash values are intended to produce cash needed to helpmake the benefit payments to employees when they retire or otherwise leave the Company. We intend to hold the life insurance policy until the death of the planparticipant. The cash surrender value of the life insurance policies for deferred compensation was $8,115 and $7,155 at March 31, 2017 and 2016 , respectively.The values of the life insurance policies and our related obligations are included on the accompanying consolidated balance sheets in long-term other assetsand long-term deferred compensation, respectively. We made contributions of $65 , $120 and $86 to the Deferral Plan for the years ended March 31, 2017 ,2016 , and 2015 , respectively.13. Share-Based AwardsEmployee Stock Option and Incentive PlansIn October 2005, our shareholders approved a stock option and incentive plan (the “2005 Plan”) under which 4,800,000 shares of common stock were reservedfor the issuance of awards, including incentive stock options and non-qualified stock options, stock appreciation rights, restricted stock, unrestricted stock,restricted stock units, performance shares, performance units (including performance options) and other share-based awards. The 2005 Plan provides that ouremployees and directors may, at the discretion of the Board of Directors ("Board") or a duly designated compensation committee, be granted certain share-based awards. In the case of option awards granted under the 2005 Plan, the exercise price of each option is determined based on the date of grant and expireno later than 10 years from the date of grant. Awards granted pursuant to the 2005 Plan are subject to the vesting schedule or performance metrics set forth inthe agreements pursuant to which they are granted. Upon achange of control of our Company, as such term is defined in the 2005 Plan, awards under the 2005 Plan will fully vest under certain circumstances. The 2005Plan expired on May 25, 2015. As of March 31, 2017 , there were 885,665 outstanding options under the 2005 Plan.In August 2015, our shareholders approved a stock option and incentive plan (the “2015 Plan”) under which 11,500,000 shares of common stock were reservedfor the issuance of awards, including incentive stock options and non-qualified stock options, stock appreciation rights, restricted stock awards and restrictedstock unit awards, performance stock awards and other share-based awards. The 2015 Plan provides that our employees and directors may, at the discretion ofthe Board of Directors or a duly designated compensation committee, be granted certain share-based awards. In the case of option awards granted under the2015 Plan, the exercise price of each option is determined based on the date of grant and expire no later than 10 years from the date of grant. Awards grantedpursuant to the 2015 Plan are subject to the vesting schedule or performance metrics set forth in the agreements pursuant to which they are granted. Upon achange of control of our Company, as such term is defined in the 2015 Plan, awards under the 2015 Plan will fully vest under certain circumstances. As ofMarch 31, 2017 , there were 1,999,750 outstanding options, 902,948 outstanding shares of restricted stock awards, 118,999 outstanding shares of performancestock awards, and 7,876,341 shares available for future grant under the 2015 Plan.The following table summarizes the stock option transactions during the years ended March 31, 2017 , 2016 , and 2015 :Weighted-Weighted-  Number ofShares AverageExercisePriceper Share AverageRemainingContractualLife (years) AggregateIntrinsicValue(in thousands)Outstanding, March 31, 2014 1,370,101 $27.85 5.8  Granted 469,650 15.97 7.2  Forfeited/Canceled 203,575 24.85 4.9  Outstanding, March 31, 2015 1,636,176 $24.82 5.5 $8Granted 1,414,000 $15.51 7.6  Exercised (800) $15.99 6.2 $1Forfeited/Canceled (572,090) $24.65 4.6  Expired (30,000) $22.81    Outstanding, March 31, 2016 2,447,286 $19.55 6.3 $574Granted 1,146,500 11.30 7.2  Forfeited/Canceled (708,371) 16.86 3.4 Outstanding, March 31, 2017 2,885,415 $15.41 6.2 $3,150Vested and expected to vest, March 31, 2017 2,613,171 $16.87 6.1 $2,496Exercisable, March 31, 2017 812,120 $22.16 4.7 $125We utilize the Black-Scholes valuation model for estimating the fair value of share-based compensation with the following assumptions: Year Ended Year Ended Year Ended March 31, 2017 March 31, 2016 March 31, 2015Expected term6.0 - 6.6 years 3.8 - 3.9 years 4.8 yearsExpected volatility36.9% - 37.4% 38.3% - 41.1% 36.1% - 36.6%Expected dividends—% 0.0% - 5.3% 4.3% - 4.4%Risk-free rate1.2% - 2.1% 1.1% - 1.6% 1.6% - 1.7%74Table of ContentsDuring the years ended March 31, 2017 , 2016 , and 2015 , a total of 1,146,500 , 1,414,000 , and 469,650 options, respectively, to purchase shares of commonstock were granted under the 2015 Plan at an exercise price equal to the market price of our common stock on the date of grant, as summarized below:Option Grant Date Number of Shares Exercise Price Vesting Terms (1) ExpirationJanuary 31, 2017 90,000 $15.01 Four years January 31, 2025November 1, 2016 50,000 $12.71 Four years November 1, 2024July 11, 2016 150,000 $12.60 Four years July 11, 2024May 31, 2016 100,000 $12.71 Five years May 31, 2024May 25, 2016 216,500 $12.78 Four years May 25, 2024May 24, 2016 540,000 $12.93 Four years May 24, 2024Fiscal year 2017 grants 1,146,500               March 1, 2016 450,000 $15.60 Four years March 1, 2024February 1, 2016 200,000 $14.20 Four years February 1, 2024January 4, 2016 200,000 $16.85 (2) January 4, 2024August 17, 2015 150,000 $12.80 (3) August 17, 2023May 22, 2015 414,000 $16.64 Five years May 22, 2023Fiscal year 2016 grants 1,414,000               March 11, 2015 10,000 $15.84 Five years March 11, 2023September 2, 2014 20,000 $15.63 Five years September 2, 2022June 3, 2014 439,650 $15.99 Five years June 3, 2022Fiscal year 2015 grants 469,650      __________________________________(1) Options vest in equal annual installments on each grant anniversary date commencing one year following the date of grant.(2) 100,000 options fully vest on March 31, 2017 and the remaining 100,000 options vest on March 31, 2018.(3) Option vests in five equal annual installments beginning on July 1, 2016.The weighted-average grant date fair value of stock options granted during the years ended March 31, 2017 , 2016 , and 2015 was $5.00 , $4.44 , and $3.50 pershare, respectively.Non-vested stock option award activity during the years ended March 31, 2017 , 2016 , and 2015 is summarized as follows:  Number ofShares Weighted-AverageGrant-DateFair Valueper ShareNon-vested, March 31, 2014 991,560 $7.73Granted 469,650 3.50Vested (269,785) 8.24Forfeited/Canceled (123,135) 6.57Non-vested, March 31, 2015 1,068,290 $5.81Granted 1,414,000 4.44Vested (311,740) 5.44Forfeited/Canceled (310,800) 5.45Non-vested, March 31, 2016 1,859,750 $4.67Granted 1,146,500 5.00Vested (540,595) 3.87Forfeited/Canceled (392,360) 4.50Non-vested, March 31, 2017 2,073,295 $5.09As of March 31, 2017 , $7,834 of total unrecognized compensation costs related to stock options is expected to be recognized over a weighted-average periodof 3 years. This amount does not include the cost of new options that may be granted in future75Table of Contentsperiods or any changes in our forfeiture percentage. The total fair value of options vested during the years ended March 31, 2017 , 2016 , and 2015 was $2,090, $1,697 , and $2,224 , respectively.Restricted stock awards activity during the years ended March 31, 2017 is summarized as follows:  Number ofShares Weighted-AverageGrant-DateFair Valueper ShareOutstanding, March 31, 2014 64,571 $20.74Granted 48,414 $15.77Vested (34,780) $21.33Outstanding, March 31, 2015 78,205 $17.94Granted 165,634 $14.06Vested (51,092) $20.14Canceled (1,500) $17.95Outstanding, March 31, 2016 191,247 $14.44Granted 909,456 12.93Vested (92,543) 15.25Canceled (105,212) 13.00Outstanding, March 31, 2017 902,948 $12.92Share-based compensation expense related to restricted stock awards was $3,691 , $940 , and $877 for the years ended March 31, 2017 , 2016 , and 2015 ,respectively.The weighted-average grant date fair value for the restricted stock awards was estimated using the market price of the common stock on the date of grant. Thefair value of the restricted stock awards is amortized on a straight-line basis over the vesting period, which is generally between one and three years.As of March 31, 2017 , $8,810 of total unrecognized compensation costs related to restricted stock awards is expected to be recognized over a weighted-average period of 2 years. This amount does not include the cost of new restricted stock awards that may be granted in future periods.On December 29, 2016, the Compensation Committee of the Board granted 123,082 performance stock awards to certain executive officers, of which 118,999share are currently outstanding. The performance stock awards vest in four equal increments on each of the first four anniversaries of the grant date, subject ineach case to the executive officer’s continued service and achievement of certain Company performance goals, including strong Company stock priceperformance. Share-based compensation expense related to the performance stock awards was $78 for the for the fiscal year ended March 31, 2017 .Employee Share Purchase PlanOn August 11, 2014, our shareholders approved an Employee Share Purchase Plan (the “Purchase Plan”) under which 4,000,000 shares of common stockwere reserved for future grant. The Purchase Plan allows eligible employees to purchase shares through payroll deductions of up to 15% of total base salary ata price equal to 90% of the lower of the fair market values of the shares as of the beginning or the end of the corresponding offering period. Any sharespurchased under the Purchase Plan are subject to a six-month holding period. Employees are limited to purchasing no more than 1,500 shares on any singlepurchase date and no more than $25,000 in total fair market value of shares during any one calendar year. As of March 31, 2017 , we have issued 238,622shares under the Purchase Plan and 3,761,378 shares are available for future issuance.Share-based compensation expense recorded for the employee share purchase plan was $359 , $291 , and $116 for the years ended March 31, 2017 , 2016 ,and 2015 , respectively.14. Commitments, Guarantees and ContingenciesWe lease facilities and offices under irrevocable operating lease agreements expiring at various dates with rent escalation clauses. Rent expense related tothese leases is recognized on a straight-line basis over the lease terms. Rent expense for the years ended March 31, 2017 , 2016 , and 2015 was $8,610 ,$7,309 and $7,416 , respectively.76Table of ContentsThe following table summarizes our significant contractual obligations at March 31, 2017 and the effect that such obligations are expected to have on ourliquidity and cash in future periods:For the year ended March 31,Contractual ObligationsTotal20182019202020212,0222023 andbeyondOperating lease obligations$60,109$8,136$8,350$8,067$8,037$7,713$19,806Remaining lease obligations for vacated properties (1)6,5992,4871,413794816551538Line of credit obligations (Note 9)15,000———15,000——Contingent consideration liabilities18,81718,817—————Purchase commitments (2)3,8001,2501,2501,300  —Total$104,325$30,690$11,013$10,161$23,853$8,264$20,344_______________________(1) Remaining lease obligations for vacated properties relates to remaining lease obligations at certain locations, including Austin, Solana Beach, Costa Mesa, and a portion ofHorsham, that we have vacated and are actively marketing the locations for sublease as part of our reorganization efforts. Refer to Note 16 for additional details. Totalobligations have not been reduced by projected sublease rentals or by minimum sublease rentals of $1.6 million due in future periods under non-cancelable subleases.(2) Purchase commitments relates to payments due under certain non-cancelable agreements to purchase goods and services.The deferred compensation liability as of March 31, 2017 was $6,629 , which is not included in the table above as the timing of future benefit payments toemployees is not readily determinable.The uncertain tax position liability as of March 31, 2017 was $4,762 , which is not included in the table above as the timing of expected payments is not readilydeterminable.Commitments and GuaranteesOur software license agreements include a performance guarantee that our software products will substantially operate as described in the applicable programdocumentation for a period of 365 days after delivery. To date, we have not incurred any significant costs associated with our performance guarantee or otherrelated warranties and do not expect to incur significant warranty costs in the future. Therefore, no accrual has been made for potential costs associated withthese warranties. Certain arrangements also include performance guarantees related to response time, availability for operational use, and other performance-related guarantees. Certain arrangements also include penalties in the form of maintenance credits should the performance of the software fail to meet theperformance guarantees. To date, we have not incurred any significant costs associated with these warranties and do not expect to incur significant warrantycosts in the future. Therefore, no accrual has been made for potential costs associated with these warranties.We have historically offered short-term rights of return in certain sales arrangements. If we are able to estimate returns for these types of arrangements and allother criteria for revenue recognition have been met, revenue is recognized and these arrangements are recorded in the consolidated financial statements. If weare unable to estimate returns for these types of arrangements, revenue is not recognized in the consolidated financial statements until the rights of returnexpire, provided also, that all other criteria of revenue recognition have been met.Our standard sales agreements contain an indemnification provision pursuant to which we shall indemnify, hold harmless, and reimburse the indemnified partyfor losses suffered or incurred by the indemnified party in connection with any United States patent, any copyright or other intellectual property infringementclaim by any third-party with respect to our software. As we have not incurred any significant costs to defend lawsuits or settle claims related to theseindemnification agreements, we believe that our estimated exposure on these agreements is currently minimal. Accordingly, we have no liabilities recorded forthese indemnification obligations.Hussein LitigationOn October 7, 2013, a complaint was filed against our Company and certain of our officers and directors in the Superior Court of the State of California for theCounty of Orange, captioned Ahmed D. Hussein v. Sheldon Razin, Steven Plochocki, Quality Systems, Inc. and Does 1-10, inclusive, No. 30-2013-00679600-CU-NP-CJC, by Ahmed Hussein, a former director and significant shareholder of our Company. We filed a demurrer to the complaint, which the Court grantedon April 10, 2014. An amended complaint was filed on April 25, 2014. The amended complaint generally alleges fraud and deceit, constructive fraud, negligentmisrepresentation and breach of fiduciary duty in connection with statements made to our shareholders regarding our financial condition and projected futureperformance. The amended complaint seeks actual damages, exemplary and punitive damages and costs. We filed a demurrer to the amended complaint. OnJuly 29, 2014, the Court sustained the demurrer with respect to the breach of fiduciary duty claim, and overruled the demurrer with respect to the fraud anddeceit claims. On August 28, 2014, we filed an answer and also filed a cross-complaint against the plaintiff, alleging that the plaintiff breached fiduciary dutiesowed to the Company, Mr. Razin and Mr. Plochocki. Mr. Razin and Mr. Plochocki have dismissed their claims against Hussein, leaving QSI as the sole plaintiffin the cross-complaint. On June 26, 2015, we filed a motion for summary judgment, which the Court granted on September 16, 2015, dismissing all claimsagainst us. On September 23, 2015, the plaintiff filed an77Table of Contentsapplication for reconsideration of the Court's summary judgment order, which the Court denied. On October 28, 2015, the plaintiff filed a motion for summaryjudgment, seeking to dismiss our cross-complaint, which the Court denied on March 3, 2016. On May 9, 2016, the plaintiff filed a motion for summaryadjudication, seeking to again dismiss our cross-complaint, which the Court denied on August 5, 2016. On August 5, 2016, the plaintiff filed a motion forjudgment on the pleadings, seeking to again dismiss our cross-complaint, which the Court denied on September 2, 2016. Trial is set for June 1, 2017 on QSI'scross-complaint. At this time, we are unable to estimate the probability or the amount of liability, if any, related to this claim.Federal Securities Class ActionOn November 19, 2013, a putative class action complaint was filed on behalf of the shareholders of our Company other than the defendants against us andcertain of our officers and directors in the United States District Court for the Central District of California by one of our shareholders. After the Court appointedlead plaintiffs and lead counsel for this action, and recaptioned the action In re Quality Systems, Inc. Securities Litigation, No. 8L13-cv-01818-CJC(JPRx), leadplaintiffs filed an amended complaint on April 7, 2014. The amended complaint, which is substantially similar to the litigation described above under the caption“Hussein Litigation,” generally alleges that statements made to our shareholders regarding our financial condition and projected future performance were falseand misleading in violation of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and that the individual defendants areliable for such statements because they are controlling persons under Section 20(a) of the Exchange Act. The complaint seeks compensatory damages, courtcosts and attorneys' fees. We filed a motion to dismiss the amended complaint on June 20, 2014, which the Court granted on October 20, 2014, dismissing thecomplaint with prejudice. Plaintiffs filed a motion for reconsideration of the Court's order, which the Court denied on January 5, 2015. On January 30, 2015,Plaintiffs filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit, captioned In re Quality Systems, Inc. Securities Litigation, No. 15-55173. Plaintiffs filed their opening brief and we answered. Oral argument was held on December 5, 2016. The Court's decision remains pending. We believethat the plaintiffs' claims are without merit and continue to defend against them vigorously. At this time, we are unable to estimate the probability or the amountof liability, if any, related to this claim.Shareholder Derivative LitigationOn January 24, 2014, a complaint was filed against our Company and certain of our officers and current and former directors in the United States District Courtfor the Central District of California, captioned Timothy J. Foss, derivatively on behalf of himself and all others similarly situated, vs. Craig A. Barbarosh, GeorgeH. Bristol, James C. Malone, Peter M. Neupert, Morris Panner, D. Russell Pflueger, Steven T. Plochocki, Sheldon Razin, Lance E. Rosenzweig and QualitySystems, Inc., No. SACV14-00110-DOC-JPPx, by Timothy J. Foss, a shareholder of ours. The complaint arises from the same allegations as the Husseinlitigation and federal securities class action litigation described above and generally alleges breach of fiduciary duties, abuse of control and grossmismanagement by our directors, in addition to unjust enrichment and insider selling by individual directors. The complaint seeks compensatory damages,restitution and disgorgement of all profits, court costs, attorneys’ fees and implementation of enhanced corporate governance procedures. The parties haveagreed to stay this litigation until the United States Court of Appeals for the Ninth Circuit issues a ruling on the pending appeal described above under thecaption “Federal Securities Class Action”. We believe that the plaintiff’s claims are without merit and intend to defend against them vigorously. At this time, weare unable to estimate the probability or the amount of liability, if any, related to this claim.15. Operating Segment InformationEffective July 1, 2016, we revised our reportable operating segments. As part of our ongoing reorganization efforts, we refined the measurement of our segmentdata to better reflect our current internal organizational structure whereby certain functions that formerly existed within each individual operating segment havechanged. Our operating segments consist of the Software and Related Solutions segment and the RCM and Related Services segment, which is consistent withthe disaggregated financial information used and evaluated by our chief operating decision maker (consisting of our Chief Executive Officer) to assessperformance and make decisions about the allocation of resources. Revenue and gross profit are the key measures of segment profitability used by our chiefoperating decision maker to measure segment operating performance and to make key business decisions. The revenues and gross profit of each segment arederived from distinct product and services within each segment. The Software and Related Solutions segment aggregates the revenues and gross profit of oursoftware-related products and services, including software license and hardware, software-related subscription services, support and maintenance, EDI anddata services, and certain professional services, such as implementation, training, and consulting. The RCM and Related Services segment aggregates therevenues and gross profit of our RCM services and certain related ancillary service offerings.Certain functional roles that do not engage in revenue generating activities, such as product solutions and strategy, research and development, and certaincorporate general and administrative functions, including finance, human resources, marketing, and legal, are considered to be shared-services and are notcontrolled by segment-level leadership. Although the segments may derive direct benefits as a result of such shared-services functions, our chief operatingdecision maker evaluates performance based upon stand-alone segment revenues and gross profit. Accordingly, the shared-services functions are notconsidered separate operating segments, and the related operating expenses are not included within our operating segments disclosure. Additionally, totalassets are managed at a consolidated level and thus are also not included within our operating segments disclosure. Accounting policies for each of ouroperating segments are the same as those applied to our consolidated financial statements.Operating segment data for the fiscal years ended March 31, 2017 , 2016 and 2015 is summarized in the table below. Prior period data has been retroactivelyreclassified to present all segment information on a comparable basis. The change in78Table of Contentsreportable segments has no impact to consolidated revenues and consolidated cost of revenue, nor does it affect our presentation of revenue and cost ofrevenue on the consolidated statements of net income and comprehensive income.  Fiscal Year Ended March 31,  2017 2016 2015Revenue:      Software and Related Solutions $423,593 $398,449 $395,259RCM and Related Services 86,031 86,559 76,962Hospital Solutions (1) — 7,469 18,004Consolidated revenue $509,624 $492,477 $490,225       Gross profit:      Software and Related Solutions $278,121 $252,136 $256,922RCM and Related Services 28,274 27,694 21,514Hospital Solutions (1) — 2,568 4,876Unallocated cost of revenue (2) (19,905) (15,536) (16,251)Consolidated gross profit $286,490 $266,862 $267,061___________________________________(1) The former Hospital Solutions division was divested in October 2015 and therefore, does not represent a distinct operating segment. Historical amounts for HospitalSolutions have not been revised.(2) Consists of amortization of acquired software technology and amortization of capitalized software costs not allocated to the operating segments for the purposes ofmeasuring performance.16. Restructuring PlanWe continue to evaluate the organizational structure of our company with the objective of achieving greater synergies and further integration of our products andservices, in support of our business strategies. In fiscal year 2016, we initiated a three-phase plan intended to better position our organization for future success.In the first phase, we redesigned the organization to more effectively support the execution of our strategy. This phase included implementing a series of actionswith the objective of enabling a more efficient, integrated and client-centered delivery of the holistic solutions that we believe is required by our ambulatory careclients. During this phase, we transformed our management team with the appointment of a new Chief Executive Officer, Chief Financial Officer, ChiefTechnology Officer, Chief Operating Officer, and Chief Strategy Officer. Under phase two of our reorganization, we have continued to build our infrastructureand enhance our healthcare information technology capabilities to drive future revenue growth. The third phase of the plan will consist of developing andmarketing the services and solutions that we believe will accelerate revenue growth.The overall plan also includes a multi-year initiative, called NextGen 2.0, to merge our business units into a more streamlined, functional-based organizationstructure and to realign our organizational structure by consolidating the sales, marketing, information services, and software development responsibilities intosingle, company-wide roles to achieve greater efficiency. As a result, our reportable segments have changed.The first phase was completed in April 2016, when we announced a corporate restructuring plan, which was approved by our Board of Directors. For the fiscalyear ended March 31, 2017 , we recorded $7,078 of restructuring costs within operating expenses in our consolidated statements of net income andcomprehensive income. The restructuring costs consist primarily of payroll-related costs, such as severance, outplacement costs, and continuing healthcarecoverage, associated with the involuntary separation of employees pursuant to a one-time benefit arrangement, which were accrued when it was probable thatthe benefits will be paid and the amount were reasonably estimable. Also included in restructuring costs was $1,661 of facilities-related costs associated withaccruals for the remaining lease obligations at certain locations, including Solana Beach, Costa Mesa, and a portion of Horsham with contractual lease termsending between January 2018 and September 2023. We have vacated each of the locations or portions thereof and are actively marketing the locations forsublease. We estimated the remaining lease obligations at fair value as of the cease-use date for each location based on the future contractual leaseobligations, reduced by projected sublease rentals that could be reasonably obtained for the locations after a period of marketing, and adjusted for the effectdeferred rents that have been recognized under the lease. The effect of discounting future cash flows using a credit-adjusted risk free rate was not significant.Sublease income and commencement dates were estimated based on data available from rental activity in the local markets. Significant judgment was requiredto estimate the remaining lease obligations at fair value and actual results could vary from the estimates, resulting in potential future adjustments to amountspreviously recorded.As of March 31, 2017 , the remaining restructuring liability associated with payroll-related costs was $606 , which we expect to settle in the first quarter of fiscal2018, and the remaining lease obligation, net of estimated projected sublease rentals, was79Table of Contents$2,285 . Refer to Note 14 for estimated timing of payments related to remaining lease obligations. The restructuring plan was substantially complete by the endof fiscal 2017.17. Subsequent EventsOn April 14, 2017, we completed our acquisition of Entrada pursuant to the terms of the Agreement and Plan of Merger, dated April 11, 2017 (the "Agreement").Entrada is a leading provider of cloud-based solutions that are reshaping the way care is delivered by leveraging the power of mobile whenever and wherevercare happens. Entrada’s best-in-class mobile application integrates with multiple clinical platforms and all major electronic health record systems. Entradaenables organizations to maximize their existing technology investments while simultaneously enhancing physician and staff productivity. Our acquisition ofEntrada and its cloud-based, mobile application demonstrates our commitment to deliver systematic solutions that meet our clients' transforming workrequirements to become increasingly nimble and mobile. Total cash consideration paid was $34,000, subject to certain adjustments in accordance with theterms of the Agreement. This acquisition was primarily funded by a draw down of the Credit Agreement. We are in the process of determining the purchase priceallocation for this acquisition.80Table of Contents18. Selected Quarterly Operating Results (unaudited)The following table presents quarterly unaudited consolidated financial information for the eight quarters preceding March 31, 2017 . Such information ispresented on the same basis as the annual information presented in the accompanying consolidated financial statements. In management’s opinion, thisinformation reflects all adjustments that are necessary for a fair statement of the results for these periods. Quarter Ended(Unaudited)3/31/2017 12/31/2016 9/30/2016 6/30/2016 3/31/2016 12/31/2015 9/30/2015 6/30/2015Revenues:               Software license and hardware$16,581 $16,995 $17,182 $14,789 $18,497 $16,150 $19,687 $16,189Software related subscription services23,139 22,546 21,490 19,875 19,015 11,705 12,437 12,246Total software, hardware and related39,720 39,541 38,672 34,664 37,512 27,855 32,124 28,435Support and maintenance41,898 39,924 38,974 38,007 39,792 39,519 42,176 43,713Revenue cycle management and relatedservices20,515 20,048 20,936 21,053 20,376 21,594 20,793 20,243Electronic data interchange and data services23,424 21,790 21,613 22,124 20,930 20,643 20,581 20,189Professional services6,828 6,565 6,971 6,357 9,302 7,421 9,695 9,584Total revenues132,385 127,868 127,166 122,205 127,912 117,032 125,369 122,164Cost of revenue:               Software license and hardware5,427 5,680 6,427 7,120 7,357 6,530 6,578 7,041Software related subscription services9,637 9,345 8,675 9,087 9,168 5,533 5,963 5,958Total software, hardware and related15,064 15,025 15,102 16,207 16,525 12,063 12,541 12,999Support and maintenance7,414 7,299 7,036 6,568 7,455 7,537 8,394 7,943Revenue cycle management and relatedservices14,318 13,462 14,359 14,231 14,018 14,381 14,680 14,512Electronic data interchange and data services12,870 12,662 12,807 12,763 12,851 12,437 12,539 12,326Professional services6,304 5,904 6,693 7,046 8,406 7,367 8,444 8,197Total cost of revenue55,970 54,352 55,997 56,815 59,255 53,785 56,598 55,977Gross profit76,415 73,516 71,169 65,390 68,657 63,247 68,771 66,187Operating expenses:               Selling, general and administrative (1)42,710 37,542 42,790 40,581 40,272 39,395 37,396 39,171Research and development costs, net22,111 19,714 18,292 18,224 16,077 14,518 17,981 17,085Amortization of acquired intangible assets2,546 2,568 2,617 2,704 2,675 897 898 897Impairment of assets (2)— — — — 32,238 — — —Restructuring costs2,393 231 701 3,753 — — — —Total operating expenses69,760 60,055 64,400 65,262 91,262 54,810 56,275 57,153Income (loss) from operations6,655 13,461 6,769 128 (22,605) 8,437 12,496 9,034Interest income5 — 1 8 27 55 44 302Interest expense(711) (629) (803) (1,013) (1,295) (6) (3) —Other expense, net(116) (4) (55) (87) (19) (43) (54) (50)Income (loss) before provision for (benefit of)income taxes5,833 12,828 5,912 (964) (23,892) 8,443 12,483 9,286Provision for (benefit of) income taxes1,418 2,342 1,925 (317) (7,570) 1,141 4,168 2,924Net income (loss)$4,415 $10,486 $3,987 $(647) $(16,322) $7,302 $8,315 $6,362Net income (loss) per share:               Basic (3)0.07 0.17 0.06 (0.01) (0.27) 0.12 0.14 0.11Diluted (3)0.07 0.17 0.06 (0.01) (0.27) 0.12 0.14 0.10Weighted-average shares outstanding:               Basic62,345 62,093 61,658 61,179 60,899 60,867 60,461 60,312Diluted62,348 62,093 62,052 61,676 60,899 61,279 61,194 61,064Dividends declared per common share$— $— $— $— $— $0.175 $0.175 $0.175____________________(1) Selling, general and administrative for the quarter ended 12/31/2015 includes the loss on the disposition of the former Hospital Solutions division (including direct incrementalcosts, severance, and other employee-related costs incurred in connection with the disposition). Refer to Note 5 for additional details.(2) Impairment of assets for the quarter ended 3/31/2016 relates to the impairment of our previously capitalized software costs of the NextGen Now development project. Referto Note 8 for additional details.(3) Quarterly net income (loss) per share may not sum to annual net income (loss) per share due to rounding.81Table of ContentsSCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS Sales Return Reserve(in thousands)For the year endedBalance atBeginning of Year Additions ChargedAgainst Revenue Deductions Balance at End ofYearMarch 31, 2017$7,541 $11,330 $(11,658) $7,213March 31, 2016$8,835 $6,737 $(8,031) $7,541March 31, 2015$10,530 $8,038 $(9,733) $8,835 Allowance for Doubtful Accounts(in thousands)For the year endedBalance atBeginning of Year Additions Chargedto Costs andExpenses Deductions Balance at End ofYearMarch 31, 2017$2,902 $5,082 $(5,227) $2,757March 31, 2016$3,303 $3,573 $(3,974) $2,902March 31, 2015$6,295 $855 $(3,847) $3,303 Valuation Allowance on Deferred Tax Assets(in thousands)For the year endedBalance atBeginning of Year Additions Chargedto Costs andExpenses Acquisition-relatedAdditions Deductions Balance at End ofYearMarch 31, 2017$2,551 $— $(267) $(211) $2,073March 31, 2016$1,840 $112 $599 $— $2,551March 31, 2015$2,288 $— $— $(448) $1,84082Table of ContentsINDEX TO EXHIBITS ATTACHED TO THIS REPORTExhibitNumber Description 21 List of subsidiaries. 23.1 Consent of Independent Registered Public Accounting Firm — PricewaterhouseCoopers LLP. 31.1 Certification of Principal Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as AdoptedPursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Principal Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as AdoptedPursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002. 101.INS* XBRL Instance 101.SCH* XBRL Taxonomy Extension Schema 101.CAL* XBRL Taxonomy Extension Calculation   101.DEF* XBRL Taxonomy Extension Definition 101.LAB* XBRL Taxonomy Extension Label 101.PRE* XBRL Taxonomy Extension Presentation____________________*XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities andExchange Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities and Exchange Act of 1934, as amended, andotherwise is not subject to liability under these section.83QUALITY SYSTEMS, INC.LIST OF SUBSIDIARIES1.HealthFusion Holdings, Inc.2.HealthFusion Inc.3.Matrix Management Solutions, LLC4.Mirth, LLC5.Mirth Limited6.NextGen Healthcare Information Systems, LLC7.NextGen RCM Services, LLC8.NextGen Healthcare India Pvt. Ltd.9.QSI Management, LLC10.ViaTrack Systems, LLCEXHIBIT 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-63131, No. 333-67115, No. 333-129752, No. 333-198181, and No. 333-206419) of Quality Systems, Inc. of our report dated May 19, 2017 relating to the financial statements, financial statement schedules, andthe effectiveness of internal control over financial reporting, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLPIrvine, CaliforniaMay 19, 2017EXHIBIT 31.1Certification of Principal Executive Officer Required byRule 13a-14(a) of the Securities Exchange Act of 1934, as amended,as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002I, John R. Frantz, certify that:1.I have reviewed this Annual Report on Form 10-K of Quality Systems, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.Date:May 19, 2017By:/s/ John R. Frantz   John R. Frantz   Chief Executive Officer   (Principal Executive Officer)EXHIBIT 31.2Certification of Principal Financial Officer Required byRule 13a-14(a) of the Securities Exchange Act of 1934, as amended,as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002I, James R. Arnold, certify that:1.I have reviewed this Annual Report on Form 10-K of Quality Systems, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.Date:May 19, 2017By:/s/ James R. Arnold   James R. Arnold   Chief Financial Officer   (Principal Financial Officer)EXHIBIT 32.1CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICERPURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 10-K of Quality Systems, Inc. (the “Company”) for the year ended March 31, 2017 (the “Report”), theundersigned hereby certify in their capacities as Chief Executive Officer and Chief Financial Officer of the Company, respectively, pursuant to 18 U.S.C. section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:1.the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and2.the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany.Date:May 19, 2017By: /s/ John R. Frantz   John R. Frantz   Chief Executive Officer   (Principal Executive Officer)    Date:May 19, 2017By: /s/ James R. Arnold   James R. Arnold   Chief Financial Officer   (Principal Financial Officer)A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting thesignatures that appear in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and willbe retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

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