UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2020
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-12537
NEXTGEN HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of incorporation or organization)
18111 Von Karman Avenue, Suite 800, Irvine, California
(Address of principal executive offices)
95-2888568
(IRS Employer Identification No.)
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
Common Stock, $0.01 Par Value
Trading Symbol
NXGN
Name of each exchange on which registered
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,”
and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☑ Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
The aggregate market value of the voting stock held by non-affiliates of the Registrant as of September 30, 2019: $849,511,000 (based on the
closing sales price of the Registrant’s common stock as reported on the NASDAQ Global Select Market on that date of $15.67 per share)*
The Registrant has no non-voting common equity.
The number of outstanding shares of the Registrant’s common stock as of May 26, 2020 was 66,105,068 shares.
* For purposes of this Annual Report on Form 10-K, in addition to those shareholders which fall within the definition of “affiliates” under
Rule 405 of the Securities Act of 1933, as amended, holders of ten percent or more of the Registrant’s common stock are deemed to be
affiliates for purposes of this Report.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement related to the 2020 Annual Shareholders' Meeting to be filed with the Securities and
Exchange Commission within 120 days of the registrant’s fiscal year ended March 31, 2020 are incorporated herein by reference in Part III of
this Annual Report on Form 10-K where indicated.
NEXTGEN HEALTHCARE, INC.
TABLE OF CONTENTS
2020 ANNUAL REPORT ON FORM 10-K
Item
Item 1. Business
Item 1A. Risk Factors
Item 1B.
Item 2.
Item 3.
Item 4.
Unresolved Staff Comments
Properties
Legal Proceedings
Mine and Safety Disclosures
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 5.
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART III
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
PART IV
Page
4
12
29
29
30
30
31
32
33
47
47
47
47
48
49
49
49
49
49
50
50
55
CAUTIONARY STATEMENT
This Annual Report on Form 10-K (this "Report") and certain information incorporated herein by reference contain forward-
looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements
included or incorporated by reference in this Report, other than statements that are purely historical, are forward-looking
statements. Words such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” “estimate,” “will,” “should,” “would,” “could,”
“may,” and similar expressions also identify forward-looking statements. These forward-looking statements include, without
limitation, discussions of the impact of the COVID-19 pandemic and measures taken in response thereto, as well as our
product development plans, business strategies, future operations, financial condition and prospects, developments in and the
impacts of government regulation and legislation and market factors influencing our results. Our expectations, beliefs,
objectives, intentions and strategies regarding our future results are not guarantees of future performance and are subject to
risks and uncertainties, both foreseen and unforeseen, that could cause actual results to differ materially from results
contemplated in our forward-looking statements. These risks and uncertainties include, but are not limited to, our ability to
continue to develop new products and increase systems sales in markets characterized by rapid technological evolution,
consolidation, and competition from larger, better-capitalized competitors. Many other economic, competitive, governmental
and technological factors could affect our ability to achieve our goals, and interested persons are urged to review the risks
factors discussed in “Item 1A. Risk Factors” of this Report, as well as in our other public disclosures and filings with the
Securities and Exchange Commission (“SEC”). Because of these risk factors, as well as other variables affecting our financial
condition and results of operations, past financial performance may not be a reliable indicator of future performance and
historical trends should not be used to anticipate results or trends in future periods. We assume no obligation to update any
forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only
as of the date of the filing of this Report. Each of the terms “NextGen Healthcare,” “NextGen,” “we,” “us,” “our,” or the
“Company” as used throughout this Report refers collectively to NextGen Healthcare, Inc. and its wholly-owned subsidiaries,
unless otherwise indicated.
3
ITEM 1. BUSINESS
Company Overview
PART I
NextGen Healthcare is a leading provider of software and services that empower ambulatory healthcare practices to manage
the risk and complexity of delivering care in the rapidly evolving U.S. healthcare system. Our combination of technological
breadth, depth and domain expertise makes us a preferred solution provider and trusted advisor for our clients. In addition to
highly configurable core clinical and financial capabilities, our portfolio includes tightly integrated solutions that deliver on
ambulatory healthcare imperatives including: population health, care management, patient outreach, telemedicine and
nationwide clinical information exchange.
We serve clients across all 50 states. Our approximately 100,000 providers deliver care in nearly every medical specialty in a
wide variety of practice models including accountable care organizations (“ACOs”), independent physician associations
(“IPAs”), managed service organizations (“MSOs”), Veterans Service Organizations (“VSOs”), and Dental Service
Organizations (“DSOs”). Our clients include some of the largest and most progressive multi-specialty groups in the country.
With the recent addition of behavioral health to our strong medical and oral health capabilities, we continue to extend our
share not only in Federally Qualified Health Centers (“FQHCs”), but also in the emerging integrated care market.
NextGen Healthcare has historically enhanced our offering through both organic and inorganic activities. In October 2015, we
divested our former Hospital Solutions division to focus exclusively on the ambulatory marketplace. In January 2016, we
acquired HealthFusion Holdings, Inc. and its cloud-based electronic health record and practice management solution. In April
2017, we acquired Entrada, Inc. and its cloud-based, mobile platform for clinical documentation and collaboration. In August
2017, we acquired EagleDream Health, Inc. and its cloud-based population health analytics solution. In January 2018, we
acquired Inforth Technologies for its specialty-focused clinical content. In October 2019, we acquired Topaz Information
Systems, LLC for its behavioral health solutions. In December 2019, we acquired Medfusion, Inc. for its Patient Experience
Platform (i.e., patient portal, self-scheduling, and patient pay) capabilities and OTTO Health, LLC for its integrated virtual care
solutions, notably telemedicine. The integration of these acquired technologies has made NextGen Healthcare’s solutions
among the most comprehensive and powerful in the market.
Our company was incorporated in California in 1974. Previously named Quality Systems, Inc., we changed our corporate
name to NextGen Healthcare, Inc. in September 2018. Our principal offices are located at 18111 Von Karman Ave., Suite 800,
Irvine, California, 92612, and our principal website is www.nextgen.com. We operate on a fiscal year ending on March 31.
Industry Background, Regulatory Environment, and Market Opportunity
Over the last decade, the ambulatory healthcare market has experienced significant regulatory change, which has driven the
need for improved technology to enable practice transformation. Recognizing it was imperative to digitize the American health
system to stem the escalating cost of healthcare and improve the quality of care being delivered, Congress enacted the Health
Information Technology for Economic and Clinical Health Act in 2009 (“HITECH Act”). The legislation stimulated healthcare
organizations to not only adopt electronic health records, but to use them to collect discrete data that could be used to drive
quality care. This standardization supported early pay-for-reporting and pay-for-performance programs.
In 2010, the Affordable Care Act (“ACA”) established the roadmap for shifting American healthcare from volume (fee-for-
service) to a value-based care (“VBC”) system that rewards improved outcomes at lower costs (fee-for-value). This was
followed by the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”), bipartisan legislation that further changed
the way Medicare rewards clinicians for value vs. volume. Initially focused on government-funded care, the domain of the
Centers for Medicare & Medicaid Services (“CMS”), these programs are now firmly established on the commercial insurance
side of the industry as well.
VBC created the need for a new category of healthcare information technology (“HIT”) tools that could be used to identify and
treat groups of patients, or cohorts, based on risk. Population Health Management (“PHM”) tools support these needs by
identifying patient risk, engaging patients, coordinating care, and determining when interventions are needed to improve
clinical and financial outcomes. According to estimates from Frost & Sullivan in May 2020, the United States PHM market is
expected to reach $9.4 billion in total revenue by 2022, representing a compound annual growth rate (“CAGR”) of 28% from
2017.
Importantly, the introduction of VBC programs was only an element of the broader approach to reducing healthcare
expenditure. It was also accompanied by significant reductions in Medicare spending with a projected reduction of $253 billion
in payments by 2029, as reported by RevCycle Intelligence in October 2019. The drive to reduce costs initially led to
consolidation in the healthcare system that was followed by a significant shift of care from the inpatient to lower cost outpatient
setting. Ambulatory surgery centers (ASCs) have become an essential component of comprehensive, low cost distributed
care. According to an October 2019 report from ResearchandMarkets, ASCs continue to perform more than half of all U.S.
outpatient surgical procedures and are expected to see greater volumes as the number of outpatient procedures increases by
an estimated 15% by 2028. From 2015 to 2022, the proportion of outpatient cases performed in ASCs is expected to increase
across most service lines with the largest jump (10%) to occur in spine procedures. Among other factors, consumerism is set
to play a major role in driving ASC volume increases, as procedures performed in ASCs cost an average of 58% less than the
same procedure in a hospital outpatient department. The need to sustain revenue has made it extremely important for
4
practices to secure their patient market share, elevating patient loyalty to a significant determinant of provider success. In
addition to being loyal, groups participating in value-based contracts realized that patients also needed to be engaged in their
care and interested in improving their own health. The need to attract, retain and engage patients has made patient
experience one of the most important aspects of evolving care delivery in the United States. Capturing patient market share
and thriving in a market driven by VBC requires both an integrated platform and a full view of the patient population’s clinical
and cost data, neither of which could be accomplished without new technologies to collect and analyze multi-sourced patient
data. Effectively implemented, these new technologies allow organizations to enhance financial viability while exercising the
freedom to join, affiliate, integrate or interoperate in ways that maximize strategic control.
Although the HITECH Act led to the successful adoption of electronic health records, many in the healthcare industry were
dissatisfied with the level of exchange of health information between different providers and across different software
platforms. With the passing of the MACRA law in 2015, the U.S. Congress declared it a national objective to achieve
widespread exchange of health information through interoperable certified EHR technology. Then, in December 2016, the 21st
Century Cures Act (“Cures Act”) was passed and signed into law. Among many other policies, the law includes numerous
provisions intended to encourage nationwide interoperability.
In March 2020, the HHS Office of the National Coordinator for Health Information Technology (“ONC”) released a final
regulation which implements the key interoperability provisions included in the Cures Act. The rule calls on developers of
certified EHRs to adopt standardized application programming interfaces (“APIs”) and to meet a list of other new certification
and maintenance of certification requirements in order to maintain approved federal government certification status.
The ONC rule also implements the information blocking provisions of the Cures Act, including identifying reasonable and
necessary activities that do not constitute information blocking. Under the Cures Act, HHS has the regulatory authority to
investigate and assess civil monetary penalties of up to $1,000,000 against certified health IT developers found to be in
violation of “information blocking.”
The new regulations will require significant compliance efforts for healthcare providers, information networks, exchanges, and
HIT companies. However, CURES also creates opportunities for improving care delivery and outcomes through increased data
exchange between providers, and easier patient access to their own health information. Key to unlocking these benefits is the
introduction of new Fast Healthcare Interoperability Resources (“FHIR”) standards. ONC’s goal is for certified HIT companies
to adopt FHIR-based API standards. Meanwhile, CMS is requiring hospitals to provide electronic admission, discharge and
transfer notification to other healthcare facilities, providers and designated care team members.
Through the expansion of our NextGen® Share interoperability services platform and API partner marketplace, we will address
the increased demand for moving and sharing patient data from the EHR easily, quickly and securely. Interoperability improves
patient experience and care coordination, enhances patient safety, and reduces costs. We are also expanding resources such
as educational webinars, blogs and videos on interoperability to help educate and support healthcare providers.
In recent years, there has been incremental investment to improve the delivery of behavioral healthcare. One of the central
drivers of this investment has been the opioid epidemic which claims more than 70,000 lives a year in the United States. The
integrated care model previously prevalent mainly in FQHCs, a model which calls for integration of behavioral health and
primary care in single care settings, has also gained momentum. Both behavioral health and the integrated care workflows
require broad, purpose built, tailored HIT capabilities, many of which are supported by the NextGen platform.
In late 2019, the emergence of a novel coronavirus, or COVID-19, was reported and in January 2020, the World Health
Organization (“WHO”), declared it a Public Health Emergency of International Concern. In March 2020, the WHO escalated
COVID-19 as a pandemic. According to Johns Hopkins University, as of May 29, 2020, more than 5.9 million cases of COVID-
19 have been reported in over 188 countries with more than 364,000 deaths. In addition to the socioeconomic disruption
caused by the pandemic, both treatment and suppression measures stressed the very fabric of the U.S. healthcare system in
some geographies, exacerbating some of the existing challenges with capacity, balance and reimbursement. Among the
measures to slow the spread of the disease and flatten the curve in line with healthcare system capacity was social/physical
distancing. The need to access care while still social distancing was addressed early on with the limited use of virtual visits
and was energized when the federal government reduced regulatory barriers and addressed payment parity between virtual
and in-person visits. With these tailwinds, telemedicine quickly became regarded as a safer way for patients and providers to
engage each other while also relieving economic pressure on the medical practice. We believe that the uptake of telemedicine
will transcend COVID-19 and that virtual visits will become a permanent and important change in the way care is delivered.
Keeping patients out of the transit system, out of the waiting room and away from other sick patients is simply good medicine.
We also believe that ambulatory practices will emerge from the pandemic with a clearer appreciation of the importance of
business continuity and will turn to NextGen more often for managed services. Consequently, we expect to see increased
subscription of our revenue cycle management services, managed hosting, and our emerging capabilities for managed clinical
and administrative services.
5
Based on these trends, successful clients must undertake the following imperatives:
1. Manage patient experience and engagement
2. Align incentives and energize clinicians
3. Maximize and shape financial outcomes
4. Assume risk and drive commercial advantage
5. Optimize workflows with data exchange
Our Strategy
We empower the accelerating transformation of ambulatory care by delivering solutions that enable groups to be successful
under all models of care, including emerging value-based care in which providers assume risk while minimizing risk. We
primarily serve groups that focus on delivering care in ambulatory settings, and do so across diverse practice sizes,
specialties, and business constructs. In addition to traditional medical specialties, we participate actively with groups that
deliver oral (dental) and behavioral healthcare, and with those that combine these in the emerging model for integrated care.
Our configurability enables groups to drive commercial advantage with creative workflows for patient access, patient-provider
interactions, clinical workflows and care coordination. At the same time, our automation helps drive variability and cost out of
the back office by accommodating exacting regulatory, billing and reporting requirements. We embrace both the art and
science of delivering healthcare in the transforming U.S. healthcare system.
We believe that the ability to interoperate in a complex, heterogeneous healthcare ecosystem is one of the keys to providing
great care and healthy financial outcomes. Because we interoperate with the major stakeholders across the U.S. healthcare
system and power many of the nation’s Health Information Exchanges (“HIEs”), we help keep patient data more secure,
promote continuity of care, lower the cost of care delivery and perhaps most importantly improve the patient experience.
We recognize that patient experience drives patient engagement and that engaged patients have better outcomes.
Consequently, much of our activity over the last few years has been informed by the emergence of the patient as an active,
involved consumer. Our solutions help our clients create a holistic, personalized care experience that drive loyalty and
satisfaction.
We surround our technical solutions with implementation and optimization services and provide business process outsourcing
with managed hosting and revenue cycle management services. With some of our most sophisticated clients, we have been
asked to share the breadth of our experience as they shape their strategies. We believe that this sort of engagement, acting as
a virtual extension of our clients’ leadership teams, is an important step along our journey to becoming a trusted advisor.
As one of the leading healthcare information technology players in the U.S. ambulatory marketplace, we plan to continue
investing in our current capabilities as well as building and/or acquiring new capabilities as we guide our clients through the
market’s transformation. We expect to continue to empower the transformation of care through the following strategic priorities:
Be a learning organization and transform ahead of the industry
Be a trusted advisor for our customers and prospects
Deliver breadth, depth and configurability to enable our clients to effectively execute their strategies
Use automation to drive variability and cost from our clients’ operations
Drive real innovation in patient experience and patient-provider interactions
Help our clients be recognized as interoperability leaders in their regions and areas of specialty
Integrate new capabilities (whether organic or inorganic) more quickly and successfully than others.
6
Our Solutions
NextGen Healthcare’s software and services-based solutions are aligned with our clients’ strategic imperatives (refer to top
row in the image below). The foundation for our integrated ambulatory care platform is a core of our industry-leading electronic
health records (“EHR”) and practice management (“PM”) systems that support clinical and financial activities. These can be
deployed on premise or in the cloud. Our primary cloud infrastructure provider is Amazon Web Services (“AWS”). We optimize
the core with an automation and workflow layer that gives our clients control over how platform capabilities are implemented to
drive their desired outcomes. The workflow layer includes mobile capabilities proven to reduce physician burden. Our cloud-
based population health and analytics engine allows our clients to improve results in both fee-for-service and fee-for-value
environments. In support of extensibility, we surround the core with open, web-based APIs to drive the secure exchange of
health and patient data with connected health solutions. Finally, to ensure our clients get maximum value from our solutions,
we have augmented our technology with key services aligned with their needs, helping to ensure they reach their
organizational goals.
Patient Engagement Solutions boost loyalty and improve outcomes by engaging patients in their own care. Our Patient
Experience Platform empowers patients to manage their own health through direct patient-provider messaging, online
scheduling, automated reminders, easy payment options, and virtual visits. The ability of patients to handle their own
scheduling and billing frees provider staff, restoring valuable time.
NextGen® Patient Portal – Drives patient engagement and satisfaction with easy, intuitive, 24/7 access to
payments, scheduling, complete personal health information, and communication. It facilitates and simplifies
comprehensive information exchange, offering anytime, anywhere access from PCs, tablets, and smart phones.
NextGen Self Scheduling™ A fully-integrated self-scheduling application that empowers patients to schedule the
visit that works best for them with configurations that allow the practice to control virtually every facet of that
interaction from visit-specific screening questions to provider-specific scheduling preferences.
NextGen® Patient Pay – Allows patients one integrated solution that delivers an integrated point of sale, credit card
on file, automated payment collection, online and mobile compatible automated phone pay and kiosk payments.
NextGen Virtual Visits™ (formerly known as OTTO Health) - Delivers a tightly integrated, bi-directional telehealth
experience that allows patients to have a virtual visit with their own provider’s care team. The solution allows for
screen-sharing, document passing, in-visit chat, one-touch access to interpretive services, and a "no-login"
experience for patients.
7
Clinical Care Solutions improve the quality and efficiency of care delivery as well as the patient and provider experience.
They significantly ease the administrative burden and enable the delivery of high quality, personalized care. Providers can
automate patient intake, streamline clinical workflows, and leverage vendor-agnostic interoperability to achieve quality
measures and qualify for incentives.
NextGen® Enterprise EHR – Our electronic health records solution stores and maintains clinical patient information
and offers a workflow 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.
NextGen® Mobile (formerly known as Entrada®) – Enables physicians and other caregivers to quickly and easily
create relevant documentation within the EHR without sacrificing productivity. A true EHR mobile experience, the
platform provides a fast, easy way for caregivers to view and share real-time clinical content and complete key tasks
directly from their mobile device.
NextGen® Office (formerly known as Meditouch®) – A cloud-based EHR and PM solution for physicians and medical
billing services designed to meet the specific needs of smaller practices. Received top score for Overall Satisfaction
and Product Functionality in the 2019 KLAS Small Practice Ambulatory EMR/PM (10 or fewer physicians) Report.
Financial Management Solutions are comprised of software and key analytics that allow clients to drive healthy, predictable
financial outcomes. More than just billing and collection services, financial management involves all functions that effectively
capture revenue at the lowest cost, while providing an efficient experience for the patient. Financial management solutions
help practices improve performance and correct operational inefficiencies, while enhancing the practice’s financial outcomes
throughout the revenue cycle.
NextGen® Enterprise PM – Our practice management offering is a seamlessly integrated, scalable, multi-module
solution that includes a master patient index, enterprise-wide appointment scheduling with referral tracking, and
clinical support. It was recognized as the #1 Practice Management Solution (11-75 Physicians) in 2019 and 2020
Best in KLAS Report.
NextGen® Electronic Healthcare Transactions – Automates the exchange of electronic data among providers,
payers and patients. Included in this offering are insurance eligibility, authorizations, electronic claims, remittance,
patient appointment reminders, and electronic statements.
Population Health Solutions enable our clients’ practices to focus their clinical workforce on the patients with the greatest
need. We do this by providing a single source of truth by aggregating disparate data, including vendor-agnostic clinical data
with paid claims data. Sophisticated analytics are applied to this data to generate insights that enable practices to improve the
quality of care, identify high risk patients who require enriched services, and coordinate the care of patients with chronic
conditions. Cost and utilization analytics allow practices to successfully participate in risk-bearing contracts by providing timely
insights into areas of over-utilization, under-utilization and mis-utilization of healthcare resources.
NextGen® Population Health Analytics (formerly known as Eagle Dream Health) – Delivers robust capabilities for
core population health insights using integrated clinical and claims data to support both broad and deep analysis for
populations of interest (attribute visualization, risk stratification, gaps in care, etc.).
NextGen® Population Health Performance Management – Supports proactive value-based contract management
including network management (leakage/keepage), network design (geospatial view of network), clinical variation
analysis, and a wide range of resource utilization metrics.
NextGen® Population Health Patient Care Management – Enables scalable management of care and payment
reform initiatives driven by collaborative care and workflow automation. Stratifies risk and prioritizes resources. The
platform provides a dynamic patient specific care plan builder as well as a longitudinal care management record, and
dedicated care management future reminder and tasking tools. A unique feature of our offering includes analytics
driven patient outreach facilitating care coordinators’ ability to automate communications with patients based on
quality initiatives and value-based contract commitments.
8
Connected Health Solutions enable better care by ensuring the patient and provider are making decisions based on the
patient’s full medical record. Interoperability is the ability of different information technology systems to communicate and
exchange usable data. In healthcare, it enables caregivers to more effectively work together within and across organizational
boundaries, and informed patients to be better equipped to collaborate on their own care. To provide the highest quality care at
the lowest cost, organizations must capture and share information both within and across organizational boundaries outside
their networks. In addition, interoperability must be frictionless and easy to implement or the opportunity to inform patient care
will be missed. Our integrated, interoperable solutions and services enable providers to leverage their current technology for
better outcomes and truly connected patient care.
NextGen® Connect Integration Engine – Enables patient data from disparate systems to be easily and securely
shared, aggregated, and put to work, regardless of EHR, PM, or other HIT platform or location.
NextGen® Share – A broad and expanding suite of plug-and-play interoperability solutions which help NextGen®
Enterprise EHR users safely and securely exchange clinical content with external providers and organizations. The
platform includes support for secure direct messaging with more than 1.2 million providers and organizations, care
quality integration to enable automated data exchange on behalf of nearly 240 million patients, and clinical data
exchange interfaces with payers.
NextGen® Health Data Hub (HDH) – A fully redesigned data aggregation platform to meet the expanding market
demand for robust data sharing, aggregation, and community access. HDH was built from the ground-up to provide
comprehensive, continuous access to aggregated patient health data on a robust, reliable, platform that will enable
system-wide connectivity, and support the growing enterprise data management needs for HIEs, hospitals and large
ambulatory practices.
NextGen Healthcare provides real-world solutions to our clients to help them achieve their strategic objectives. Often, but not
always, those software solutions are augmented with key services. Through these services we enable clients to perform better
financially and focus on their primary mission of providing efficient and high-quality patient care. We believe COVID-19 will
increase client appetite to outsource non-core services and that NextGen is well-positioned to be their partner in these areas.
Managed Services
NextGen® Managed Cloud Services – Our scalable, cloud hosting services reduce the burden of information
technology expertise from our clients and speed implementations, simplify upgrades, cut technology costs
significantly and provide 24/7 monitoring and support by a broad and constantly expanding team of technical experts
NextGen® Revenue Cycle Management Services (formerly known as NextGen® Financial Suite) – Includes billing
and collections, electronic claims submission and denials management, electronic remittance and payment posting
and accounts receivable follow-up. Our dedicated account management model helps make NextGen Healthcare a
top-performing provider of RCMS as reported in the 2020 KLAS Ambulatory RCM Services Report.
Professional Services – Services include training, project management, functional and detailed specification preparation,
configuration, testing, and installation services. Our consulting services, which include physician, professional, and technical
consulting, assisting clients to optimize their staffing and software solutions, enhance financial and clinical outcomes, achieve
regulatory requirements in the drive to value-based care, and meet the evolving requirements of healthcare reform.
Client Service and Support – Our technical services staff provides support for the dependable and timely resolution of
technical inquiries from clients. Such inquiries 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.
Proprietary Rights
We rely on a combination of patents, copyrights, trademarks, service marks, trade secrets, and contractual restrictions to
establish and protect proprietary rights in our products and services. To protect our proprietary rights, we enter into
confidentiality agreements and invention assignment agreements with our employees with whom such controls are relevant. In
addition, we include intellectual property protective provisions in our client contracts. However, because the software industry
is characterized by rapid technological change, we believe such factors as the technological and creative skills of our
personnel, new product developments, frequent product enhancements, name recognition, and reliable product maintenance
are more important to establishing and maintaining a technology 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 and services and help meet evolving client needs. The failure to license any necessary technology, or to
maintain our existing licenses, could result in reduced functionality 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 assert intellectual property infringement claims against us in the future. Any such claims may result in
costly, time-consuming litigation and may require us to enter into royalty or cross-license arrangements.
9
Competition
The markets for healthcare information systems and services are intensely competitive and highly fragmented. Our traditional
full-suite competitors in the healthcare information systems and services market include: Allscripts Healthcare Solutions, Inc.,
athenahealth, Inc., Cerner Corporation, eClinicalWorks, Epic Systems Corporation, and Greenway Health, LLC. Emerging
smaller competitors also bring competition in specific sectors of the market. Additionally, we face competition from services-
only competitors like business process outsourcers, hosting providers and transcription companies.
The EHR, PM, interoperability, and connectivity markets, in particular, are subject to rapid changes in technology. We expect
that competition in these market segments could increase as new competitors enter the market. We believe our principal
competitive advantages are our ambulatory-only focus, our comprehensive and fully-integrated solution, and our deep domain
expertise, which enables our subject matter experts to serve as trusted advisors to our clients.
Privacy and Security
Our business operations involve hosting, storing, processing and transmitting confidential information including patient health
information and payment card information. In addition to single-tenant environments, we operate unified, multi-tenant platforms
that offer reliability, scalability, performance, security and privacy for our clients. Our infrastructure resides in several
geographically diverse regions across the United States. We maintain a comprehensive security program designed to help
safeguard the confidentiality, integrity and availability of our clients’ data, which includes both organizational and technical
control measures and the security and privacy of our service offerings. We also have systems in place to monitor the safety of
patient information as well as procedures designed to take immediate action.
We have the industry’s most well-known certifications for payment card and healthcare data. Including Payment Card Industry
Data Security Standard (PCI-DSS) Level 1 Service Provider, Security Organization Control 2, or SOC 2 Type II, DirectTrust
Health Information Service Provider (HISP), and HITRUST Common Security Framework (CSF). These certifications give our
clients third-party assurance we are meeting or exceeding Health Insurance Portability and Accountability Act (HIPAA)
guidelines. As a PCI-DSS Level 1 Service Provider, we are committed to upholding industry security standards to cardholder
data. The Level 1 PCI compliance allows us to minimize clients’ PCI scope.
While we have implemented physical, technical, and administrative safeguards designed to help protect our systems, in the
event of a system interruption, security incident, or breach, these safeguards may not prevent future cybersecurity incidents or
breaches. We have a comprehensive and documented Information Security Management Program designed to secure the
data within our infrastructure and provide appropriate reporting disclosure, and response. In addition, all of our associates are
required to complete annual cybersecurity training, HIPAA training, and PCI DSS training. These training modules are
reviewed annually to ensure compliance with the latest regulatory guidelines, laws, and industry best practices.
Managing Cybersecurity Risks
Our business operations involve hosting, storing, processing and transmitting confidential information including patient health
information. We have implemented physical, technical, and administrative safeguards designed to help protect our systems, in
the event of a system interruption, security incident, or breach. However, these safeguards may not prevent future
cybersecurity incidents or breaches. We have a comprehensive and documented Information Security Management Program
designed to secure the data within our infrastructure and provide appropriate reporting disclosure, and response. In addition,
all of our associates are required to complete annual cybersecurity training, HIPAA training, and PCI DSS training. These
training modules are reviewed annually to ensure compliance with the latest regulatory guidelines, laws, and industry best
practices.
Research and Development
The healthcare information systems and services industry is characterized by rapid technological change, requiring us to
engage in continuing investments in our research and development to update, enhance and improve our systems. This
includes expansion of our software and service offerings that support pay-for-performance initiatives around accountable care
organizations, bringing greater ease of use and intuitiveness to our software products, enhancing our managed cloud and
hosting services to lower our clients' total cost of ownership, expanding our interoperability and enterprise analytics
capabilities, and furthering development and enhancements of our portfolio of specialty-focused templates within our electronic
health records software.
10
Sales and Marketing
We sell and market our products primarily through a direct sales force and to a significantly lesser extent, through a reseller
channel. NextGen Healthcare also provides solutions to networks of practices such as MSOs, IPAs, ACOs, ambulatory care
centers (“ACCs”), and community health centers (“CHCs”). Our direct sales force is comprised of sales executives and
account executives, who seek to understand the client strategy and identify the opportunities in their practice and build both a
multistage roadmap to reach the desired end state. For large clients, we use both inside and outside sales where efforts are a
mix of on-site as well as web based. For smaller clients, efforts are all inside sales via web and phone, all of whom deliver
presentations to potential clients by demonstrating our systems and capabilities either on prospective client’s premises or
through video meeting and web-based presentations. System demonstrations for mobile workflow and analytics solutions are
more web-based as these offerings tend to be targeted to larger practices. Both the direct and reseller channel salesforces
concentrate on multi-product/solution sales opportunities. Our sales and marketing employees identify prospective clients
through a variety of means, including: a healthcare data and analytics platform, search engine optimization and value
exchange content on nextgen.com; digital advertising; direct mail and email campaigns; referrals from existing clients and
industry consultants; contacts at professional society meetings and trade shows; webinars; public relations and social media
campaigns; and telemarketing. Resources have shifted more heavily to digital marketing as we meet potential clients where
they are and how they shop for services. Additionally, we focus on thought leadership and content marketing to highlight our
industry knowledge, expertise and the successes of our diverse client base. On the larger end of the range, our sales cycle
can vary significantly and typically ranges from six to 18 months from initial contact to contract execution. Smaller practices on
NextGen Office tend to have significantly shorter sales cycles ranging in weeks. Historically, software licenses are normally
delivered to a client almost immediately upon receipt of an order and we normally receive up-front licensing fees.
Implementation and training services are normally rendered based on a mutually agreed upon timetable. Moving forward, we
expect more of our transactions to move to subscriptions. Clients have the option to purchase hosting and maintenance
services which, are invoiced on a monthly, quarterly or annual basis. Subscriptions are delivered electronically after the
agreement is signed. They generally include implementation and are typically billed monthly after implementation or based on
volume or throughput. We continue to concentrate our direct sales and marketing efforts on the ambulatory market from large
multi-specialty organizations to small-single specialty practices in high-opportunity specialty segments.
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 net revenue during each of the years ended March 31, 2020, 2019 and 2018. In addition, software
license sales to resellers represented less than 10% of total revenue for each of the years ended March 31, 2020, 2019 and
2018. Substantially all of our clients are located in the United States.
Employees
As of March 31, 2020, we had approximately 2,754 full-time employees, of which 758 were based in Bangalore, India and
substantially all other employees were based in the United States. We believe that our future success depends in part upon
recruiting and retaining qualified sales, marketing and technical talent as well as other employees. None of our employees are
covered by a collective bargaining agreement or are represented by a labor union.
Available Information
Our principal website is www.nextgen.com. We make our periodic and current reports, together with amendments to these
reports, filed or furnished 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 as reasonably practicable after such material is electronically filed with, or furnished to,
the SEC. You may access such filings through our Investor Relations website at http://investor.nextgen.com. The SEC
maintains an internet site at www.sec.gov that contains the reports, proxy statements and other information that we file
electronically with the SEC. Our website and 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 the SEC. We also use the following social media
channels as a means of disclosing information about the company, our platform, our planned financial and other
announcements and attendance at upcoming investor and industry conferences:
NextGen Healthcare Twitter Account (https://twitter.com/NextGen?s=20)
NextGen Healthcare Company Blog (https://www.nextgen.com/blog)
NextGen Healthcare Facebook Page (https://www.facebook.com/NextGenHealthcare)
NextGen Healthcare LinkedIn Page (https://www.linkedin.com/company/nextgenhealthcareinc/)
NextGen Healthcare Instagram Page (https://www.instagram.com/nextgenhealthcare/)
NextGen Healthcare YouTube Page (https://www.youtube.com/user/nghisinc)
We encourage our investors and others to review the information we make public in these locations as such information could
be deemed to be material information. Please note that this list may be updated from time to time.
11
ITEM 1A. RISK FACTORS
You should carefully consider the risks described below, as well as the other cautionary statements and risks described
elsewhere and the other information contained 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. We operate in a rapidly changing environment that
involves a number of risks. The risks and uncertainties described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations. If any of
these known or unknown risks actually occur, our business, financial condition or results of operations could be materially and
adversely affected, in which case the trading price of our common stock may decline and you may lose all or part of your
investment.
Risks Related to Our Business
The extent to which the COVID-19 pandemic and measures taken in response thereto could adversely affect our
financial condition, future bookings, and results of operations will depend on future developments, which are highly
uncertain and are difficult to predict. The COVID-19 global pandemic and efforts to control its spread have significantly
curtailed the movement of people, goods and services in the United States and worldwide. The impact of the outbreak has
been rapidly evolving in the United States and other countries, including India where we have significant operations, and has
led to the implementation of various responses, including government-imposed quarantines, travel restrictions, business and
school closures, government-imposed postponements of non-life threatening medical procedures, and other public health
safety measures. We have modified our business practices accordingly (for example, restricting employee travel, moving the
vast majority of our employees to remote working, cancelling and postponing meetings, events, and conferences, and so
forth). There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and our ability to
perform critical functions could be harmed.
The magnitude and duration of the disruption and decline in business activity due to COVID-19 is uncertain. We may
experience a negative financial impact due to a number of factors, including without limitation:
A general decline in business activity including the impact of our clients’ office closures;
A disproportionate impact on the healthcare groups and other healthcare professionals with whom we contract;
Financial pressures on our clients, which may in turn result in their deferment of purchase decisions, or a delay in
collections or non-payment;
Declines in new business bookings as our clients reduce or delay purchasing decisions;
Extensions of the length of sales and implementation cycles;
Disruptions to our supply chains and our third-party vendors, partners, and suppliers
Difficulty accessing the capital and credit markets on favorable terms, or at all, and a severe disruption and instability
in the global financial markets, or deteriorations in credit and financing conditions which could affect our access to
capital necessary to fund business operations and address maturing liabilities on a timely basis;
The potential negative impact on the health or productivity of employees, especially if a significant number of them
are impacted;
Disruptions and expense due to employee terminations;
A deterioration in our ability to ensure business continuity during a disruption;
Social, economic, and labor instability in India where we have significant operations.
The extent to which the COVID-19 pandemic will impact our financial condition and results of operations will depend on future
developments, which are highly uncertain and difficult to predict, including but not limited to the duration and spread of the
pandemic, its severity, the actions to contain the virus or treat its impact, its impact on our strategic investments, and how
quickly and to which extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has
subsided, we may experience material adverse impacts to our business as a result of the global or U.S. economic impact and
any recession that has occurred or may occur in the future. There are no comparable recent events that provide guidance as
to the effect the COVID-19 pandemic may have and, as a result, the ultimate impact of the pandemic on our operations and
financial results is highly uncertain and subject to change.
Additionally, concerns over the economic impact of the COVID-19 pandemic have caused extreme volatility in financial and
capital markets which has and may continue to adversely impact our stock price and may adversely impact our ability to
access capital markets.
The rapid development and fluidity of the pandemic situation precludes any prediction as to the ultimate adverse impact of
COVID-19. This uncertainty has and may continue to affect our results of operations, financial condition and cash flows.
12
We face significant, evolving competition which, if we fail to properly address, could adversely affect our business,
results of operations, financial condition and price of our stock. The markets for healthcare information systems are
intensely competitive, and we face significant competition from a number of different sources. Several of our competitors have
substantially greater name recognition and financial, technical, product development and marketing resources than we do.
There has been significant merger and acquisition activity among a number of our competitors in recent years. Some of our
larger competitors, who have greater scale than we do, have and may continue to become more active in our markets both
through internal development and acquisitions. Transaction induced pressures, or other related factors may result in price
erosion or other negative market dynamics that could adversely affect our 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 software developers. Competition in our markets occurs on the basis of several factors,
including price, innovation, client service, product quality and reliability, scope of services, industry acceptance, and others.
Competitive pressures and other factors, such as new product introductions by us or our competitors, may result in price or
market share erosion that could adversely affect our business, results of operations and financial condition. Also, there can be
no assurance that our applications will achieve broad market acceptance or will successfully compete with other available
software products. If we fail to distinguish our offerings from other 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 and downward pressure on the prices for our products and services. As the healthcare information
systems market evolves, saturation of this market with our products or our competitors' products could limit our revenues and
opportunities for growth. There has also been increasing consolidation amongst healthcare industry participants in recent
years, creating integrated healthcare delivery systems with greater market power. As provider networks and managed care
organizations 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, or maintain relationships with, newly formed groups and/or healthcare
providers that are replacing or substantially modifying their healthcare information systems could adversely affect our
business, results of operations and financial condition. These consolidated industry participants may also try to use their
increased market power to negotiate price reductions for our products and services. If we were forced to reduce our prices, our
business would become less profitable unless 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 in anticipating and responding to the rapid changes involving the industry in which we operate,
or our business, results of operations and financial condition may be adversely affected. The software market generally
is characterized by rapid technological change, changing client needs, frequent new product introductions and evolving
industry standards. The introduction of products incorporating new technologies and the emergence of new industry standards
could render our existing products obsolete and unmarketable. There can be no assurance that we will be successful in
developing and marketing new products that respond to technological changes or evolving industry standards. New product
development depends upon significant research and development expenditures which depend ultimately upon sales growth.
Any material shortfall in revenue or research funding could impair our ability to respond to technological advances or
opportunities in the marketplace and to remain competitive. If we are unable, for technological or other reasons, to develop
and introduce new products in a timely manner in response to changing market conditions or client requirements, our
business, results of operations and financial condition 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 will successfully develop these new software products or that these products will operate
successfully, or that any such development, even if successful, will be completed concurrently with or prior to introduction of
competing products. Any such failure or delay could adversely affect our competitive position or could make our current
products obsolete.
13
Uncertainty in global economic and political conditions may negatively impact our business, operating results or
financial condition. Global economic and political uncertainty have caused in the past, and may cause in the future,
unfavorable business conditions such as a general tightening in the credit markets, lower levels of liquidity, increases in the
rates of default and bankruptcy and extreme volatility in credit, equity and fixed income markets. These macroeconomic
conditions could negatively affect our business, operating results or financial condition in a number of ways. Instability can
make it difficult for our 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 software purchases, 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 previously
purchased products and services. Our clients may cease business operations or conduct business on a greatly reduced basis.
Bankruptcies or similar insolvency events affecting our clients may cause us to incur bad debt expense at levels higher than
historically anticipated. Further, economic instability could limit 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 to changing business conditions or new
opportunities. Finally, our investment portfolio is generally subject to general credit, liquidity, counterparty, market and interest
rate risks that may be exacerbated by these global financial conditions. If the banking system or the fixed income, credit or
equity markets deteriorate or remain 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 to strategic partners, which could be expensive and time-consuming, divert personnel
and other resources from our business and result in adverse publicity that could harm our business. We rely on third
parties to provide services for our business. For example, we use national clearinghouses in the processing of some insurance
claims and we outsource some of our hardware services and the printing and delivery of patient statements for our clients.
These third 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 sales channels 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 these claims do not result in liability to us, defending and investigating these claims could be expensive and time-
consuming, divert personnel and other resources from 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 the markets 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 from which we may not realize anticipated benefits. Historically, we have acquired
numerous businesses, technologies, and products. We may acquire additional businesses, 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 not limited 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 assets with 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 earnings per share;
unanticipated expenses or difficulty in fully or effectively integrating or retaining the acquired technologies, software
products, services, business practices, 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 to renegotiate 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;
14
the possibility that the due diligence process in any such acquisition may not completely identify material issues
associated with product quality, product architecture, product development, intellectual property issues, regulatory
risks, compliance risks, key personnel issues or legal and financial contingencies, including any deficiencies in
internal controls and procedures and the costs associated 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 to take 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 and results 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 growth which 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 qualified individuals in such
capacities within a reasonable timeframe, such failure could have an adverse effect on the operation of our business. In
addition, our ability to manage future increases, if any, in the scope of our operations or personnel will depend on significant
expansion of our research and development, marketing and sales, management and administrative and financial capabilities.
The failure of our management to effectively manage expansion in our business could have 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 sales arising from various sources, including amount other things, government action affecting
reimbursement levels. Our clients and the other entities with which we have business relationships are affected by changes in
statutes, regulations, and limitations on government spending for Medicare, Medicaid, and other programs. 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 reimbursement programs and create other programs that potentially could have an adverse
effect on our business. If we experience significant downward pricing pressure, our revenues 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 to execute our business plan. Our future performance depends in significant part upon
the continued service of our key development and senior management personnel 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 our relationships 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 assurance that 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 operations and financial condition. Furthermore, we may
need to grant additional equity incentives to key employees and provide other forms of incentive compensation to attract and
retain such key personnel. Equity incentives may be dilutive to our per share financial performance. Failure to provide such
types of incentive compensation could jeopardize our recruitment and retention capabilities.
We may be subject to harassment or discrimination claims and legal proceedings, and our inability or failure to
respond to and effectively manage publicity related to such claims could adversely impact our business. Our Code of
Business Conduct and Ethics and other employment policies prohibit harassment and discrimination in the workplace, in
sexual or in any other form. We have ongoing programs for workplace training and compliance, and we investigate and take
disciplinary action with respect to alleged violations. However, actions by our employees could violate those policies. With the
increased use of social media platforms, including blogs, chat platforms, social media websites, and other forms of Internet-
based communications that allow individuals access to a broad audience, there has been an increase in the speed and
accessibility of information dissemination. The dissemination of information via social media, including information about
alleged harassment, discrimination or other claims, could harm our business, brand, reputation, financial condition, and results
of operations, regardless of the information's accuracy.
Our recent strategy shift and the resulting business reorganization plan we are implementing may be disruptive both
internally and externally, and we may not fully realize the anticipated benefits. We recently embarked on a new strategic
plan geared toward realigning our business structure and strategy to rapidly emerging changes in the healthcare industry. As
this process continues, we anticipate that it will result in continued evaluation of our organizational structure in order to achieve
greater efficiency, as well as investments in new market solutions and changes to our culture that we hope will drive revenue
growth and provide increased value to stakeholders and shareholders. There can be no assurance that our current or future
strategic realignment efforts will be successful. Our ability to achieve the anticipated benefits of our strategy shift is subject to
estimates and assumptions, which may vary based on numerous factors and uncertainties, some of which are beyond our
15
control. Reorganization programs entail a variety of known and unknown risks that may 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 and turbulence among our clients and vendors, higher than anticipated separation expenses, litigation,
and the failure to meet financial and operational targets. If we are unable to effectively implement 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 will depend 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, and competition 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 several of our recent acquisitions, we have expanded into the market for cloud-based EHR products. It
remains uncertain whether the market for cloud-based products will expand to the levels of demand and market acceptance
we anticipate, and there can be no assurance that we will be able to successfully scale the acquired companies’ products to
meet our clients’ expectations. In addition, as clients move from fee-for-service to fee-for-value reimbursement strategies in
conjunction with the adoption of population health business models, we may not make appropriate and timely changes to our
service offerings consistent with shifts in market demands and expectations. In order to successfully execute on our growth
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 a significant 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 financial condition 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 and may 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 new software products that meet client expectations, which could result in an impairment of the value of the
related capitalized software costs, an adverse effect on our financial condition and operating results and a negative impact the
future of our business. Additionally, we cannot be assured that we will continue to capitalize 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 have substantial development and other operations in India, and we use offshore third-party partners located in
India and other countries that subject us to regulatory, economic, social and political uncertainties in India and to
laws applicable to U.S. companies operating overseas. We are subject to several risks associated with having a portion of
our assets and operations located in India and by using third party service providers in India and other countries. Many U.S.
companies have benefited from many policies of the Government of India and the Indian state governments in the states in
which we operate, which are designed to promote foreign investment generally and the business process services industry in
particular, including significant 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 in India’s economic liberalization
and deregulation policies and disrupt business and economic conditions in India generally and our business in particular. In
addition, our financial performance and the market price of our common stock may be adversely affected by general economic
conditions and economic and fiscal policy in India, including changes in exchange rates and controls, interest rates and
taxation policies, as well as social stability and political, economic or diplomatic developments affecting India in the future. In
particular, India has experienced significant economic growth over the last several years, but faces major challenges in
sustaining that growth in the years ahead. These challenges include the need for substantial infrastructure development and
improving access to healthcare and education. Our ability to recruit, train and retain qualified employees, develop and operate
our captive facility could be adversely affected if India does not successfully meet these challenges. In addition, U.S.
governing authorities may pressure us to perform work domestically rather than using offshore resources. Furthermore, local
laws and customs in India may differ from those in the U.S. For example, it may be a local custom for businesses to engage in
practices that are prohibited by our internal policies and procedures or U.S. laws and regulations applicable to us, such as the
Foreign Corrupt Practices Act (“FCPA”). The FCPA generally prohibits U.S. companies from giving or offering money, gifts, or
anything of value to a foreign official to obtain or retain business and requires businesses to make and keep accurate books
and records and a system of internal accounting controls. We cannot guarantee that our employees, contractors, and agents
will comply with all of our FCPA compliance policies and procedures. If we or our employees, contractors, or agents fail to
comply with the requirements of the FCPA or similar legislation, government authorities in the U.S. and elsewhere could seek
to impose civil or criminal fines and penalties which could have a material adverse effect on our business, operating results,
and financial condition.
16
We face the risks and uncertainties that are associated with litigation and investigations, which may adversely impact
our marketing, distract management and have a negative impact upon our business, results of operations and
financial condition. We face the risks associated with litigation and investigations concerning the operation of our business,
including claims by clients regarding product and contract disputes, by other third parties asserting infringement of intellectual
property rights, by current and former employees regarding certain employment matters, by certain shareholders, and by
governmental and regulatory bodies for failures to comply with applicable laws. The uncertainty associated with substantial
unresolved disputes may have an adverse effect on our business. In particular, such disputes could impair our relationships
with existing clients and our ability to obtain new clients. Defending litigation and investigative matters may require substantial
cost and may result in a diversion of management's time and attention away from business operations, which could have an
adverse effect on our business, results of operations and financial condition.
Commencing in April 2017, we have received requests for documents and information from the United States Attorney's Office
for the District of Vermont and other government agencies in connection with an investigation concerning the certification we
obtained for our software under the United States Department of Health and Human Services' Electronic Health Record (EHR)
Incentive Program. The requests for information relate to, among other things: (a) data used to determine objectives and
measures under the Meaningful Use (“MU”) and the Physician Quality Reporting System (“PQRS”) programs, (b) EHR
software code used in certifying our software and information, and (c) payments provided for the referral of EHR business. We
continue to cooperate in this investigation. Requests and investigations of this nature may lead to future requests for
information and ultimately the assertion of claims or the commencement of legal proceedings against us, as well as other
material liabilities. In addition, our responses to these and any future requests require time and effort, which can result in
additional cost to us. Given the highly-regulated nature of our industry, we may, from time to time, be subject to subpoenas,
requests for information, or investigations from various government agencies. It is our practice to respond to such matters in a
cooperative, thorough and timely manner.
There can be no assurance that such litigation and investigations 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. In addition, any enforcement action by a government agency may result in fines, damage
awards, regulatory consequences or other sanctions which could have a material adverse effect, individually or collectively, on
the Company’s liquidity, financial condition or results of operations.
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 caused by natural disasters, accidents, power disruptions, telecommunications failures, acts of
terrorism or war, computer viruses, malware, physical or electronic break-ins, or other 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 in delayed or cancelled orders as well as potentially expose us to third party claims. System
failures and disruptions could also impede our transactions processing services and financial reporting.
Our business operations are subject to interruption by, among other, natural disasters, fire, power shortages, terrorist attacks,
and other hostile acts, labor disputes, public health issues, and other issues beyond our control. Such events could decrease
our demand for our products or services or make it difficult or impossible for us to develop and deliver our products or services
to our clients. A significant portion of our research and development activities, our corporate headquarters, our IT systems, and
certain of our other critical business operations are concentrated in a few geographic areas. In the event of a business
disruption in one or more of those areas, we could incur significant losses, require substantial recovery time, and experience
significant expenditures in order to resume 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 carrying value of goodwill may not be recoverable in accordance
with the relevant accounting guidance. In the past, we have recorded sizeable goodwill impairment charges, and we may need
to do so in the future. Declines in business performance or other factors could cause the fair value of any of our operating
segments to be revised downward, resulting in further impairment charges. If the financial outlook for any of our operating
segments warrants additional impairments 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, 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 the County 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 granted on April
10, 2014. An amended complaint was filed on April 25, 2014. The amended complaint generally alleges fraud and deceit,
constructive fraud, negligent misrepresentation and breach of fiduciary duty in connection with statements made to our
shareholders regarding our financial condition and projected future performance. The amended complaint seeks actual
damages, exemplary and punitive damages and costs. We filed a demurrer to the amended complaint. On July 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 and deceit claims. On August 28, 2014, we filed an answer and also filed a cross-complaint against Hussein, alleging
that he breached fiduciary duties owed to the Company, Mr. Razin and Mr. Plochocki. Mr. Razin and Mr. Plochocki have
17
dismissed their claims against Hussein, leaving the Company as the sole plaintiff in the cross-complaint. On June 26, 2015,
we filed a motion for summary judgment with respect to Hussein’s claims, which the Court granted on September 16, 2015,
dismissing all of Hussein’s claims against us. On September 23, 2015, Hussein filed an application for reconsideration of the
Court's summary judgment order, which the Court denied. Hussein filed a renewed application for reconsideration of the
Court’s summary judgment order on August 3, 2017. The Court again denied Hussein’s application. On October 28, 2015, May
9, 2016, and August 5, 2016, Hussein filed a motion for summary judgment, motion for summary adjudication, and motion for
judgment on the pleadings, respectively, seeking to dismiss our cross-complaint. The Court denied each motion. Trial on our
cross-complaint began June 12, 2017. On July 26, 2017, the Court issued a statement of decision granting Hussein’s motion
for judgment on our cross-complaint. Final judgment over Hussein’s claims and our cross-claims was entered on January 9,
2018. Hussein noticed his appeal of the order granting summary judgment over his claims, and we noticed a cross-appeal on
the court’s statement of decision granting Hussein’s motion for judgment on our cross-complaint. On October 8, 2019, the
California State Court of Appeal for the Fourth Appellate District, Division Three, reversed the Superior Court’s grant of
summary judgment against Hussein’s affirmative claims and affirmed the trial court’s judgement after a bench trial against the
Company on its breach of fiduciary duty claims against Hussein. We petitioned the California Court of Appeal to rehear the
matter with respect to Hussein’s affirmative claims. The Court modified its opinion but denied the Company’s rehearing petition
on November 7, 2019. We filed a petition for review with the Supreme Court of California on November 18, 2019, which was
denied on January 15, 2020. As a result, the case returned to the trial court for resolution on February 4, 2020. A schedule for
proceedings before the trial court has not yet been established.
On September 28, 2017, a complaint was filed against our Company and certain of our current and former officers and
directors in the United States District Court for the Central District of California, captioned Kusumam Koshy, derivatively on
behalf of Quality Systems Inc. vs. Craig Barbarosh, George H. Bristol, James C. Malone, Peter M. Neupert, Morris Panner, D.
Russell Pflueger, Steven T. Plochocki, Sheldon Razin, Lance E. Rosenzweig, Paul A. Holt, and Quality Systems, Inc., No.
8:17-cv-01694, by Kusumam Koshy, a purported shareholder of ours. The complaint alleges breach of fiduciary duties and
abuse of control, as well as unjust enrichment and insider selling by individual directors arising out of the allegations described
above under the caption “Hussein Litigation”, and a related, now-settled, federal securities class action, as well as the
Company’s adoption of revised indemnification agreements, and the resignation of certain officers of the Company. The
complaint seeks restitution and disgorgement, court costs and attorneys’ fees, and enhanced corporate governance reforms
and internal control procedures. On January 12, 2018, Defendants filed a motion to dismiss the derivative complaint. On July
25, 2018, the Court dismissed the complaint with prejudice. On August 24, 2018, the plaintiff filed a notice of appeal to the
United States Court of Appeals for the Ninth Circuit. Briefing was completed in May 2019 and a hearing on the appeal was
held on December 12, 2019. On December 19, 2019, the Ninth Circuit affirmed the District Court’s dismissal in its entirety. The
time within which the plaintiff could file a petition for writ of certiorari to the Supreme Court has expired so this matter is now
concluded.
Although we believe the claims to be without merit, our operating results and share price may be negatively impacted due to
the negative publicity, expenses incurred in connection with our defense, management distraction, and/or other factors related
to this litigation. In addition, litigation of this nature may negatively impact 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 the credit agreement, our operations may be interrupted and our business and financial
results could be adversely affected. On March 29, 2018, we entered into a revolving credit agreement with various lenders,
secured by substantially all of our and our material domestic subsidiaries’ existing and future property. The credit agreement
includes certain customary covenants that impose restrictions on our business and financing activities that could limit our
operations or flexibility to take certain actions. The credit agreement also contains certain customary affirmative covenants
requiring us to maintain specified levels of financial performance. Our ability to comply with these covenants may be affected
by events that could be beyond our control. A breach of these covenants could result in an event of default under the credit
agreement which, if not cured or waived, could result in the indebtedness becoming immediately due and payable, which in
turn could result in material adverse consequences that negatively impact our business, the market price for our common
stock, and our ability to obtain financing in the future. In addition, our credit agreement’s covenants, consent requirements, and
other provisions may limit our flexibility to pursue 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 acquisitions, and in implementing our post-
acquisition business strategy with respect to the products acquired in these transactions. Our shift in product focus
following the acquisitions may not yield the desired results. We have recently completed several acquisitions. As a result
of these acquisitions, we have devoted and will continue to need to devote significant management attention and resources to
integrating the acquired companies’ businesses and product platforms into our business. 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 acquired businesses or realize
synergies and benefits from the transactions. Furthermore, the acquisitions have substantially altered our business strategy,
increasing our focus on efforts to expand our client base and cloud-based solution capabilities in the ambulatory market. If we
are unable to successfully integrate acquisitions and implement post-acquisition revisions to our business strategy and product
focus, our business, financial condition, and results of operations may suffer.
18
Risks Related to Our Products and Services
If our principal products, new product developments or implementation, training and support services fail to meet the
needs of our clients due to lack of client acceptance, errors, or other problems, we may fail to realize future growth,
suffer reputational harm and face the risk of losing existing clients. We currently derive substantially all of our net
revenue from sales of our healthcare information systems and related services. We believe that a primary factor in the market
acceptance of our systems has been our ability to meet the needs of users of healthcare information systems. Our future
financial performance will depend in large part on our ability to continue to meet the increasingly sophisticated needs of our
clients through the timely development and successful introduction of new and enhanced versions of our systems and other
complementary products, as well as our ability to provide high quality implementation, training and support services for our
products. We have historically expended a significant percentage of our net revenue on product development and believe that
significant continuing product development 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 existing products and services, or that new products or product enhancements will be developed
and implemented in a timely manner, meet the requirements of healthcare providers, or achieve market acceptance. Also, it is
possible that our technology may contain defects or errors, some of which may remain undetected 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 we
address the problem. If we do not discover errors until after product deployment, we may need to provide enhancements to
correct such errors. Remediating product defects and errors could consume our development and management resources. In
addition, any failure or perceived failure to maintain high-quality and highly-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 market acceptance of our solutions, license termination or renegotiations, and privacy or security
vulnerabilities. If new products or product enhancements are delayed or 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 of our products by clients anticipating our launch, or the launch of our competitors, of new
products. There can be no assurance that material order deferrals in anticipation of new product introductions from us 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 broad market acceptance, or if we fail to develop and introduce in a timely manner new products
and services compatible with such emerging technologies, we may not be able to compete effectively and our ability
to generate revenue will suffer. Our software products are built and depend upon several underlying and evolving relational
database management system platforms such as those developed by Microsoft. To date, the standards and technologies upon
which we have chosen to develop our products have proven to have gained industry acceptance. However, the market for our
software products is subject to ongoing rapid technological developments, quickly evolving industry standards and rapid
changes in client requirements, and there may be 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 product shipments. We depend upon licenses for some of the technology used in our products as well as
other services from third party vendors. Most of these arrangements 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 the products or services made available
to us under these arrangements on commercially reasonable terms or at all. As a result, we may have to discontinue, delay or
reduce product shipments or services provided until we can obtain equivalent technology or services. Most of our third-party
licenses are non-exclusive. Our competitors may obtain the right to use any of the business elements covered by these
arrangements and use these elements to compete directly with us. In addition, if our vendors choose to discontinue providing
their technology or services in the future or are unsuccessful in their continued research and development efforts, we may not
be able to modify or adapt our own products.
19
We may experience interruption at our data centers or client support facilities. We perform data center and/or hosting
services for certain clients, including the storage of critical patient and administrative data at company-owned facilities and
through third party hosting arrangements. In addition, we provide support services to our clients through various client support
facilities. We have invested in reliability features such as multiple power feeds, multiple backup generators and 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 and backup generators, impairment of all telecommunications lines, a
concerted denial of service cyber-attack, a significant data breach, damage, injury or impairment (environmental, accidental,
intentional or pandemic) to the buildings, the equipment inside the buildings housing our data centers, the personnel operating
such facilities or the client data contained therein, or errors by the personnel trained to operate such facilities could cause a
disruption in operations and negatively impact clients who depend on us for data center and system support services.
Likewise, our use of a single cloud vendor could increase our exposure to interruptions if the vendor were to experience a
catastrophic event impacting its service offering. Any interruption in operations at our data centers and/or client support
facilities could damage our reputation, cause us to lose existing clients, hurt our ability to obtain new clients, result in
significant revenue loss, create potential 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 new subscription-based software as a service delivery model which includes monthly subscription
pricing. This model is designed for smaller practices to quickly access the NextGen Ambulatory EHR or NextGen PM products
at a modest monthly per provider price. We currently derive a significant portion of our revenue from traditional software
license, implementation and training fees, as well as the resale of computer hardware, in which our clients pay an initial 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 further penetrate 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 modify our standard upfront
license fee pricing 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 through these means. Shifting to a
significantly greater degree of subscription or bundled pricing could adversely affect our financial condition, cash flows and
quarterly and 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 to third 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 could also be subject to liability for content that may be
accessible through our website or third-party websites linked from our website or through content and information that may be
posted by users in chat rooms, bulletin boards or on websites created by professionals using our applications. Even if these
claims do not result in liability to us, investigating and defending against these claims could be expensive and time consuming
and could divert management’s attention away 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 being secure, clients may curtail or stop using our services, and we may incur significant
liabilities. Our services involve the storage, transmission and processing of clients’ proprietary information and protected
health information of patients. Because of the sensitivity of this information, security features of our software are very
important. If our security measures are breached or fail as a result of third-party action, employee error, malfeasance,
insufficiency, defective design, or otherwise, someone may be able to obtain unauthorized access to client or patient data. As a
result, our reputation could be damaged, our business may suffer, and we could face damages for contract breach, penalties
for violation of applicable laws or regulations and significant costs for remediation and remediation 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 the data
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 perform these activities. Failure of clients to perform these activities may result in claims against us that
this reliance was misplaced, which could expose us to significant expense and harm to our reputation even though our policy
is to enter into business associate agreements with our clients. Although we extensively train and monitor our employees, it is
possible that our employees may, intentionally or unintentionally, breach security measures. Moreover, third parties with whom
we do not have business associate agreements may breach the privacy and security of patient information, potentially causing
us reputational damage and exposing us to liability. Because techniques used to obtain unauthorized access or to sabotage
systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate
these techniques or to implement adequate preventive measures. If an actual or perceived breach of our security occurs, the
market perception of the effectiveness of our security measures could be harmed and we could lose sales and clients. In
addition, 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 such access, we cannot ensure the complete propriety of that access or integrity or
security of such data in our systems.
20
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 could harm our business. We require our clients to provide necessary notices and to obtain
necessary permissions and waivers for use and disclosure of the information that we receive, and we require contractual
assurances from them that they have done so and will do so. If they do not obtain necessary permissions 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
federal privacy laws or other applicable laws. This could impair our functions, processes and databases that reflect, contain, or
are based upon such data and may prevent 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 are beneficial 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 or waiver. 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 of these facilities could damage our reputation and result in
damages being assessed against us. In addition, the other systems with which we may interface, such as the internet and
related systems may be vulnerable to security breaches, viruses, programming errors, or similar disruptive problems. In
addition, our clients and vendors with whom we have business associate agreements, or other parties with whom we do not
have business associate agreements, may be responsible for breaching the security and compromising the privacy of patient
information located on our systems. In addition, although we extensively train and monitor our employees, it is possible that
our own employees may engage in conduct that compromises security or privacy. The effect of these security breaches 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 can be given that they will be entirely free from potential breach. Maintaining and
enhancing our infrastructure security may require us to expend significant capital in the 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 of our clients in our ability to securely transmit confidential information. Our EDI services
and SaaS solutions rely on encryption, authentication and other security technology licensed from third parties to achieve
secure transmission of confidential information. We may not be able to stop unauthorized attempts to gain access to or disrupt
the transmission of communications by our clients. Anyone who is able to circumvent our security measures could
misappropriate confidential user information or interrupt our, or our clients’, operations. In addition, our EDI and SaaS solutions
may be vulnerable to viruses, malware, physical or electronic break-ins and similar disruptions.
High-profile security breaches at other companies have increased in recent years, and security industry experts and
government officials have warned about the risks of hackers and cyber-attacks targeting information technology products and
businesses. Although this is an industry-wide problem that affects other software and hardware companies, we may be
targeted by computer hackers because we are a prominent healthcare information technology company and have high profile
clients. These risks will increase as we continue to grow our cloud offerings, store and process increasingly large amounts of
our clients’ confidential data, including personal health information, and host or manage parts of our clients’ businesses in
cloud-based/multi-tenant information technology environments. We may use third party public cloud providers in connection
with our cloud-based offerings or third-party providers to host our own data, in which case we may have to rely on the
processes, controls and security such third parties have in place to protect the infrastructure.
The costs we would incur to address any security incidents would increase our expenses, and our efforts to resolve these
problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential
clients that may impede our sales, development of solutions, provision of services, or other critical functions. If a cyberattack or
other security incident were to allow unauthorized access to or modification of our clients’ or suppliers’ data, our own data, or
our information technology systems, or if our products or services are perceived as having security vulnerabilities, we could
suffer significant damage to our brand and reputation. This could lead to fewer clients using our products or services and make
it more difficult for us to obtain new clients, resulting in reduced revenue and earnings. These types of security incidents could
also lead to lawsuits, regulatory investigations and claims, and increased legal liability.
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 that have significant market power in the broadband and internet
access marketplace, including incumbent telephone companies, cable companies, mobile communications companies and
government-owned service provides -- all of whom are outside of our control. In the event of any difficulties, outages and
delays by internet service providers, we may be impeded from providing services, resulting in a loss of potential or existing
clients.
21
We may be subject to claims for system errors, warranties or product liability, which could have an adverse effect on
our business, results of operations and financial condition. Our software solutions are intended for use in collecting,
storing and displaying clinical and healthcare-related information used in the diagnosis and treatment of patients and in related
healthcare settings such as admissions and billing. Therefore, users of our software solutions have a greater sensitivity to
errors than the market for software products generally. Any failure by our products to provide accurate and timely information
concerning patients, their medication, treatment and health status, generally, could result in claims against us which could
materially and adversely impact our financial performance, industry reputation and ability to market new system sales. In
addition, a court or government agency may take the position that our delivery of health information directly, including through
licensed practitioners, or delivery of information by a third-party site that a consumer accesses through our websites, exposes
us to assertions of malpractice, other personal injury liability, or other liability for wrongful delivery/handling of healthcare
services or erroneous health information. We maintain insurance to protect against claims associated with the use of our
products as well as liability limitation language in our end-user license agreements, but there can be no assurance that our
insurance coverage or contractual language would adequately cover any claim asserted 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 and resources.
Certain healthcare professionals who use our SaaS products will directly enter health information about their patients including
information that constitutes a record under applicable law that we may store on our computer systems. Numerous federal and
state laws and regulations, the common law and contractual obligations, 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. Any failure 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 may not preclude claims against us for alleged violations of applicable requirements. Also, third-
party sites and/or links that consumers may access through our web sites may not maintain adequate systems to safeguard
this information or may circumvent systems and policies we have put in place. In addition, future laws or changes 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. Such product 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 our services will continue at historic levels. We offer certain electronic claims submission
products and services as part of our product line. While we have implemented certain product features designed to maximize
the accuracy and completeness of claims submissions, these features may not be sufficient to prevent 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. This process 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 will continue to generate revenue at or in excess of prior levels for such
services.
A significant increase in the utilization of direct links between healthcare providers and payers could adversely affect our
transaction volume and financial results. 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 are economically 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 financial condition. We are heavily dependent on the maintenance and protection of our intellectual
property and we rely largely on technical security measures, license agreements, confidentiality procedures and employee
nondisclosure agreements to protect our intellectual property. The majority of our software is not patented and existing
copyright laws offer only limited practical protection.
22
There can be no assurance that the legal protections and precautions we take will be adequate to prevent misappropriation of
our technology or that competitors will not independently develop technologies equivalent or superior to ours. Further, the laws
of some foreign countries do not protect our proprietary rights to as great 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 not assert 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 a license agreement or royalty arrangement or other
financial arrangement with the party asserting the claim. Responding to and defending any such claims may distract the
attention of our management and adversely affect our business, results of operations and financial condition. In addition,
claims may be brought against 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 our products and services. We have been, and may be in the future, subject to intellectual
property infringement claims as the number of our competitors grows and our applications' functionality is viewed as similar or
overlapping with competitive products. We do not believe that we have infringed or are infringing on any proprietary rights of
third parties. However, claims are occasionally asserted against us, and we cannot assure you that infringement claims will not
be asserted against us in the future. Also, we cannot assure you that any such claims will be unsuccessful. We could incur
substantial costs and diversion of management resources defending any infringement claims - even if we are ultimately
successful in the defense of such matters. Furthermore, a party making a claim against us could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief that could effectively block our ability to provide products or
services. In addition, we cannot assure you that licenses for any intellectual property of third parties that might be required for
our products or services 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 our technology and offerings, we need to periodically upgrade and maintain the products
deployed to our clients. This process can require a significant amount of our internal time and resources and can be
complicated and time consuming for our clients. Certain upgrades may also pose the risk of system delays or failure. If our
periodic upgrades and maintenance cause disruptions to our clients, we may lose revenue-generating transactions, our clients
may elect to use other solutions and we may also be the subject of negative publicity that may adversely affect our business
and reputation.
Risks Related to Regulation
There is significant uncertainty in the healthcare industry in which we operate, and the current governmental laws
and regulations as well as any future modifications to the regulatory environment, may adversely impact our
business, financial condition and results of operations. The healthcare industry 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 rates and certain capital expenditures.
For example, the Health Insurance Portability and Accountability Act of 1996, as modified by HITECH provisions of the ARRA
(collectively, “HIPAA”), continues to have a direct impact on the health care industry by requiring national provider identifiers
and standardized transactions/code sets, operating rules and necessary security and privacy measures in order to ensure the
appropriate level of privacy of protected health information. These regulatory factors affect the purchasing 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 in 2010. This comprehensive health care reform legislation included provisions to
control health care costs, improve health care quality, and expand access to affordable health insurance. The Medicare Access
and CHIP Reauthorization Act of 2015 (“MACRA”), which became law in 2015, repealed the sustainable growth rate (“SGR”)
formula and created two new value-based payment systems for Medicare physicians. Together with ongoing statutory and
budgetary policy developments at a federal level, these health care reform laws include changes in Medicare and Medicaid
payment policies and other health care delivery administrative reforms that could potentially negatively impact our business
and the business of our clients. Because not all the administrative rules implementing health care reform under these laws
have been finalized, and because of ongoing federal fiscal budgetary pressures yet to be resolved for federal health 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
operational results or the manner in which we operate our business. Health care industry participants may respond by
reducing their investments or postponing investment decisions, including investments in our solutions and services.
In March 2020, the U.S. Congress passed several laws in response to the coronavirus pandemic. Included in these laws are
multiple provisions that are likely to have a significant impact on healthcare providers. Because regulations implementing
these provisions have yet to be released and health care providers are subject to future legislative changes, the industry is
likely to be subject to additional coronavirus-related legislative and regulatory changes in 2020.
23
Healthcare providers may react to these proposals, and the uncertainty surrounding such proposals, by curtailing or deferring
investments, including those for our systems and related services. Cost-containment measures instituted by healthcare
providers as a result of regulatory reform or otherwise could result in a reduction 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 other hand, changes in
the regulatory environment have increased and may continue to increase the needs of healthcare organizations for cost-
effective data management and thereby enhance the overall market for healthcare management information systems. We
cannot predict what effect, if any, such proposals or healthcare 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 and services, 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 facilitate our 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 with these regulations could be
costly and distract management’s attention and divert other company resources, and any noncompliance by us could result in
civil and 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 us individually-identifiable health information related to the treatment, payment, and operations of providers’
practices. Government and industry legislation and rulemaking, especially HIPAA, HITECH and standards and requirements
published by industry groups such as the Joint Commission require the use of standard transactions, standard identifiers,
security and other standards and requirements for the transmission of certain electronic health information. These standards
and requirements impose additional obligations and burdens on us, limiting the use and disclosure of individually-identifiable
health information, and require us to enter into business associate agreements with our clients and vendors. Failure by us to
enter into adequate business associate agreements with any client or vendor would place us in violation of applicable
standards and requirements and could expose us to liability. Our business associates may interpret HIPAA requirements
differently than we do, and we may not be able to adequately address the risks created by such interpretations. These new
rules, and any future changes to privacy and security rules, may increase the cost of compliance and could subject us to
additional enforcement actions, which could further increase our costs and adversely affect the way in which we do business.
Interoperability Standards. Our clients are concerned with and often require that our software solutions and health care
devices be interoperable with other third-party health care information technology suppliers. With the passing of the MACRA in
2015, the U.S. Congress declared it a national objective to achieve widespread exchange of health information through
interoperable certified EHR technology nationwide by December 31, 2018. The 21st Century Cures Act, which was passed and
signed into law in December 2016, includes numerous provisions intended to encourage this nationwide interoperability.
In February 2019, HHS’s Office of the National Coordinator for Health Information Technology (“ONC”) released a proposed
rule titled, “21st Century Cures Act: Interoperability, Information Blocking, and the ONC Health IT Certification Program.”
Following an extended public comment period, in March 2020 ONC released the final rule which implements the key
interoperability provisions included in the Cures Act. Specifically, it calls on developers of certified EHRs and health IT products
to adopt standardized application programming interfaces (“APIs”), which will help allow individuals to securely and easily
access structured and unstructured EHI formats using smartphones and other mobile devices. This provision and others
included in the rule create a lengthy list of new certification and maintenance of certification requirements that developers of
EHRs and other health IT products have to meet in order to maintain approved federal government certification status.
Meeting and maintaining this certification status will require additional development costs.
The ONC rule also implements the information blocking provisions of the 21st Century Cures Act, including identifying
reasonable and necessary activities that do not constitute information blocking. Under the 21st Century Cures Act, the U.S.
Department of Health and Human Services (“HHS”) has the regulatory authority to investigate and assess civil monetary
penalties of up to $1,000,000 against certified health IT developers found to be in violation of “information blocking”. This new
oversight and authority to investigate claims of information blocking creates significant risks for us and our clients and could
potentially create substantial new compliance costs.
Other regulatory provisions included in the ONC Cures Act final rule could create compliance costs and/or regulatory risks for
the company. Because these regulations are subject to future changes and/or significant enforcement discretion by federal
agencies, the ultimate impact of these regulation is unknown.
24
FDA Regulation of Software as a Medical Device. The U.S. Food and Drug Administration (“FDA”) has the statutory
authority to regulate medical software if it falls within the definition of a “device” under the Federal Food, Drug, and Cosmetic
Act (“FFDCA”). However, the FDA has exercised enforcement discretion for software said to be “low risk.” The December 2016
21st Century Cures Act clarified the FDA’s regulation of medical software by amending the definition of “device” in the FFDCA
to exclude certain software functions, including electronic health record software functionality and administrative software
functionality. In December 2017, the FDA issued draft guidance documents to clarify how it intends to interpret and enforce
these provisions of the Cures Act. In 2017, the FDA also issued a Digital Health Innovation Action Plan and launched a
voluntary “Software Precertification (Pre-Cert) Pilot Program” for software developers. Then in September 2019 the FDA
issued several different digital health-focused final and draft guidance documents. Although we believe that our products are
currently not subject to FDA regulation, we continue to follow the FDA’s guidance in this area, which is subject to change and
in some critical areas only currently exists in draft form. As a result, our software may potentially be subject to regulation by the
FDA as a medical device. Such regulation could require the registration of the applicable manufacturing facility and software
and hardware products, application of detailed record-keeping and manufacturing standards, application of the medical device
excise tax, and FDA approval or clearance prior to marketing. An approval or clearance requirement could create delays in
marketing, and the FDA could require supplemental filings or 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 may impact us and our clients. Some of these provisions may have a positive impact, by expanding
the use of electronic health records and other health information technology solutions 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 business and 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,
significant government financial resources are being invested in healthcare, including financial incentives to healthcare
providers who can demonstrate meaningful use of certified EHR technology since 2011. While we expect the ARRA, the
PPACA, and the MACRA to continue to create 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 access hospitals as they adopt, implement, upgrade, or demonstrate meaningful use of
certified EHR technology. HITECH, and subsequently MACRA, also authorized CMS to apply payment adjustments, or
penalties, to Medicare eligible professionals and eligible hospitals that are not meaningful users under the Medicare EHR
Incentive 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 avoid financial penalties for implementing and using our services, there can be no guaranty that our
clients will achieve meaningful use (or its equivalent under MACRA’s Merit Based Incentive Payment System, Promoting
Interoperability) or actually receive such planned financial incentives for our services. We also cannot predict the speed at
which healthcare providers will adopt electronic health record systems in response to these government incentives, whether
healthcare providers will select our products and services or whether healthcare providers will implement an electronic health
record system at all. In addition, the financial incentives associated with the meaningful use program are tied to provider
participation in Medicare and Medicaid, and we cannot predict whether providers will continue to participate in these programs.
Any delay in the purchase and implementation of electronic health records systems by healthcare providers in response to
government programs, or the failure of healthcare providers to purchase an electronic health record system, could have an
adverse effect on our business, financial condition and results of operations. It is also possible that additional regulations or
government programs related to electronic health records, amendment or repeal of current healthcare laws and regulations or
the delay in regulatory implementation could require us to undertake additional efforts to meet meaningful use standards,
materially impact our ability to compete in the evolving healthcare IT market, materially impact healthcare providers' decisions
to implement electronic health records systems or have other impacts that would be unfavorable to our business. The costs of
achieving and maintaining certified electronic health record technology (“CEHRT”) are also significant and because the
definition of CEHRT and its use requirements for clients are subject to regulatory changes, these programs and future
regulatory changes to them could adversely impact our business.
Several of our solutions also support Accountable Care Organizations (“ACOs”). In 2020, Medicare’s largest ACO program, the
Shared Savings Program, consisted of 517 ACOs serving 11.2 million assigned beneficiaries across the country. In December
2018, the Centers for Medicare & Medicaid Services (“CMS”) issued a final rule that dramatically redesigns and sets a new
direction for Shared Savings Program, renaming it “Pathways to Success.” Because it is unknown how ACOs will react to
CMS’s Pathways to Success program redesign and several of the redesigned program’s policies will not be fully implemented
for ACOs until 2021, we cannot predict the impact the regulatory change will have on our clients and our business.
25
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 to disclose information in connection with submission and payment of physician claims for
reimbursement. In some cases, these laws also forbid abuse of existing systems for such submission and payment. Any failure
of our revenue cycle management services to comply with these laws and regulations could result in substantial liability
including, but not limited to, criminal liability, could adversely affect demand for our services and could force us to expend
significant capital, research and development and other resources to address the failure. Errors by us or our systems with
respect to entry, formatting, preparation or transmission of claim information may be determined or alleged to be in violation of
these laws and regulations. Determination by a court or regulatory agency that our services violate these 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
portions of our business, require us to refund portions of our services fees, cause us to be disqualified from serving clients
doing business with government payers and have an adverse effect on our business.
In most cases where we are permitted to do so, we calculate charges for our revenue cycle management services based on a
percentage of the collections that our clients receive as a result 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 percentage calculation provides us or our
employees with incentive to commit or overlook fraud or abuse in connection with submission and payment of reimbursement
claims. The U.S. Centers for Medicare and Medicaid Services has stated that it is concerned that percentage-based billing
services may encourage billing companies 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 government offers rewards for reporting of Medicare fraud which could encourage others to subject us to a
charge of fraudulent claims, including charges that are ultimately proven 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 the defrauding 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,
the whistleblower plaintiff may pursue its allegation independently. Some states have adopted similar state whistleblower and
false claims provisions. Qui tam actions under the FCA and similar state laws may lead to significant fines, penalties,
settlements or other sanctions, including exclusion from Medicare or other federal 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 may be subject to additional federal and state statutes and regulations in connection with
offering services and products via the internet. On an increasingly frequent basis, federal and state legislators are proposing
laws and regulations that apply to internet commerce and communications. Areas being affected by these regulations include
user privacy, pricing, content, taxation, copyright protection, distribution, and quality of products and services. To the extent
that our products and 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 of which could adversely affect our business, financial condition, cash flows, revenue,
results of operations, and debt covenant compliance. Based on our reading and interpretations of relevant guidance,
principles or concepts issued by, among other authorities, the American Institute of Certified Public Accountants, the Financial
Accounting Standards Board and the Commission, we believe our current business arrangements, transactions, and related
estimates and disclosures have been properly reported. However, there continue to be issued interpretations and guidance for
applying the relevant standards to a wide range of sales and licensing contract terms and business arrangements that are
prevalent in the software industry. Future interpretations or changes by the regulators of existing accounting standards or
changes in our business practices could result in changes in our revenue recognition and/or other accounting 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 our business, 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 and regulations promulgated by the SEC to implement
Section 404, we are required to include in our Form 10-K a report by our management regarding the effectiveness of our
internal control over financial reporting. The report includes, among other things, an assessment of the effectiveness of our
internal control over financial reporting. The assessment must include disclosure of any material weakness in our internal
control over financial reporting identified by management.
As part of the evaluation undertaken by management and our independent registered public accountants pursuant to
Section 404, our internal control over financial reporting was effective as of our most recent fiscal year end. However, if we fail
to maintain an effective system of disclosure controls or internal controls over financial reporting, we may discover material
weaknesses that we would then be required to disclose. Any material weaknesses identified in our internal controls could have
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 by regulatory authorities. This could result in a loss of investor confidence in the accuracy and
completeness of our financial reports, which may have an adverse effect on our stock price.
26
No evaluation process can provide complete assurance that our internal controls will detect and correct all failures within our
company to disclose material information otherwise required to be reported. The effectiveness of our controls and procedures
could also be limited by simple errors or faulty judgments. In addition, if we continue to expand, through either organic growth
or through acquisitions (or both), the challenges involved in implementing appropriate controls will 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 internal control processes which may result in the expenditure of additional human and financial
resources.
Risks Related to Ownership of Our Common Stock
The unpredictability of our quarterly operating results may cause the price of our common stock to fluctuate or
decline. Our revenue may fluctuate in the 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;
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 a result, 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 a quarter such
that the loss or deferral of even one such sale can adversely affect our quarterly revenue and profitability. Clients often defer
systems purchases until 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 decision concerning which products and
services to purchase. These are major decisions for healthcare providers and, accordingly, the sales cycle for our systems can
vary significantly and typically ranges from six to twenty-four months from initial contact to contract execution/shipment.
Because a significant percentage of our expenses are relatively fixed, a variation in the timing of systems sales,
implementations and installations can cause significant variations in operating results from quarter to quarter. As a result, we
believe that interim period-to-period comparisons of our results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Further, our historical operating results are not necessarily indicative of future
performance for any particular period. We currently recognize revenue in accordance with the applicable accounting guidance
as defined by the FASB. There can be no assurance that application and subsequent interpretations of these pronouncements
will not further modify our revenue recognition policies, or that such modifications would 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 operating results may
27
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 in litigation 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 extreme volatility that often has been unrelated to the operating performance of particular
companies. These broad market and industry fluctuations may adversely affect the 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 its securities. We may in the future be the target of similar litigation. Securities litigation could result in
substantial costs and divert management’s attention and resources.
One of our current directors is a significant shareholder, which makes it possible for him to have significant influence
over the outcome of all matters submitted to our shareholders for approval and which influence may be alleged to
conflict with our interests and the interests of our other shareholders. One of our directors is a significant shareholder
who beneficially owns approximately 15% of the outstanding shares of our common stock at March 31, 2020. California law
and our Bylaws permit our shareholders to cumulate their votes, the effect of which is to provide shareholders with sufficiently
large concentrations of our shares the opportunity to assure themselves one or more seats on our Board of Directors. The
amounts 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 number of 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 the event that cumulative voting is invoked, it is possible
that any significant shareholders will each have sufficient votes to assure themselves of one or more seats on our Board of
Directors. With or without cumulative voting, any significant shareholders will have substantial influence over the outcome of all
matters submitted to our shareholders for approval, including the election of our directors and other corporate actions. This
influence may be alleged 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 to elect a different slate of directors than what our Company proposed to
shareholders. We spent approximately $1.3 million to defend against the proxy contest and elect the Company's slate of
directors. In addition, such influence by a significant shareholder could have the effect of discouraging others from attempting
to acquire our Company or create actual or perceived governance instabilities that could adversely affect the price of our
common stock.
28
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters is located in Irvine, California. We believe that our existing facilities are in good condition and
adequate for our current business requirements. Should we continue to grow, we may be required to lease or acquire
additional space. We believe that suitable additional space is available, if needed, at commercially reasonable market rates
and terms.
As of March 31, 2020, we leased an aggregate of approximately 591,700 square feet of space with lease agreements expiring
at various dates, of which approximately 462,500 square feet of space are utilized for continuing operations and 129,200
square feet of space are being subleased or have been vacated as part of our reorganization efforts, as described further in
Note 16, "Restructuring Plan" of our notes to consolidated financial statements included elsewhere in this Report:
Primary Operating Locations
Bangalore, India
Horsham, Pennsylvania
Irvine, California
St. Louis, Missouri
Hunt Valley, Maryland
Atlanta, Georgia
San Diego, California
Cary, North Carolina
Fairport, New York
Traverse City, Michigan
Total Primary Operating Locations
Vacated or Subleased Locations, or Portions Thereof
Horsham, Pennsylvania
North Canton, Ohio
San Diego, California
Solana Beach, California
Phoenix, Arizona
Irvine, California
Brentwood, Tennessee
St. Louis, Missouri
Atlanta, Georgia
Total Vacated or Subleased Locations
Total Leased Properties
(1)
(2)
Location of our corporate office
Primary locations of our research and development functions
Notes
(2)
(2)
(1) (2)
(2)
(2)
Square Feet
137,700
80,400
71,800
42,300
34,000
27,000
24,800
24,200
15,300
5,000
462,500
29,600
22,100
15,200
12,000
11,400
11,300
10,500
8,600
8,500
129,200
591,700
29
ITEM 3. LEGAL PROCEEDINGS
We have experienced legal claims by clients regarding product and contract disputes, by other third parties asserting that we
have infringed their intellectual property rights, by current and former employees regarding certain employment matters and by
certain shareholders. We believe that these claims are without merit and intend to defend against them vigorously; however,
we could incur substantial costs and diversion of management resources defending any such claim, 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 to the submission of fraudulent claims for reimbursement from governmental payers. We
have received, and from time to time may receive, inquiries or subpoenas from federal and state agencies. Under the False
Claims Act (“FCA”), private parties have the right to bring qui tam, or “whistleblower,” suits against entities that submit, or
cause to be submitted, fraudulent claims for reimbursement. Qui tam or whistleblower actions initiated under the FCA may be
pending but placed under seal by the court to 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 of regulatory and litigation risks within “Item 1A.
Risk Factors” and to Note 15, “Commitments, Guarantees and Contingencies” of our notes to consolidated financial
statements included elsewhere in this Report for a discussion of current legal proceedings.
ITEM 4. MINE AND SAFETY DISCLOSURES
Not applicable.
30
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Price and Holders
Our common stock is traded under the symbol “NXGN” on the NASDAQ Global Select Market.
At May 26, 2020, there were approximately 663 holders of record of our common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
The information included under Item 12 of this Report, "Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters," is incorporated herein by reference.
Performance Graph
The following graph compares the cumulative total returns of our common stock, the NASDAQ Composite Index and the
NASDAQ Computer & Data Processing Services Stock Index over the five-year period ended March 31, 2020 assuming $100
was invested on March 31, 2015 with all dividends, if any, reinvested. The returns shown are based on historical results and
are not intended to be indicative of future stock prices or future performance. This performance graph shall not be 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 otherwise subject 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 of 1933, as amended or the Exchange Act.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among NextGen Healthcare, Inc., The NASDAQ Composite Index
And The NASDAQ Computer & Data Processing Index
$250
$200
$150
$100
$50
$0
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
NextGen Healthcare, Inc.
Nasdaq Composite
Nasdaq Computer & Data Processing
* $100 invested on March 31, 2015 in stock or index, including reinvestment of dividends. Fiscal year ended March 31.
31
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data, with respect to our consolidated statements of net income and comprehensive income
data for each of the five years in the period ended March 31, 2020 and the consolidated balance sheets data as of the end of
each such fiscal year, are not necessarily indicative of results of future operations and should be read in conjunction with our
consolidated financial statements and the related notes thereto and Item 7, "Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included elsewhere in this Report.
Consolidated Financial Data
(In thousands, except per share data)
Statements of comprehensive income data:
Revenue
Cost of revenue
Gross profit
Selling, general and administrative
Research and development costs, net
Amortization of acquired intangible assets
Impairment of assets
Restructuring costs
Income from operations
Interest income
Interest expense
Other income (expense), net
Income (loss) before provision for income taxes
Provision for (benefit of) income taxes
Net income
Basic net income per share
Diluted net income per share
Basic weighted average shares outstanding
Diluted weighted average shares outstanding
Dividends declared per common share
$
$
$
$
$
2020
540,239 $
267,439
272,800
165,174
83,295
4,143
12,571
2,505
5,112
256
(1,955)
846
4,259
(3,239)
7,498
$
0.11 $
0.11 $
65,474
65,612
— $
Fiscal Year Ended March 31,
2018
2017
2019
529,173 $
246,697
282,476
164,879
80,994
4,344
—
640
31,619
216
(2,814)
267
29,288
4,794
24,494
$
0.38 $
0.38 $
64,417
64,600
— $
531,019 $ 509,624 $
223,134
241,535
286,490
289,484
163,623
193,226
78,341
81,259
10,435
7,810
—
3,757
7,078
611
2,821
55
(3,323 )
37
(410 )
(2,830 )
2,420 $
0.04 $
0.04 $
63,435
63,440
— $
23,609
5,368
18,241 $
0.30 $
0.29 $
61,818
62,010
— $
27,013
14
(3,156 )
(262 )
2016
492,477
225,615
266,862
156,234
65,661
5,367
32,238
—
7,362
428
(1,304)
(166)
6,320
663
5,657
0.09
0.09
60,635
61,233
0.53
March 31,
2020
March 31,
2019
March 31,
2018
March 31,
2017
March 31,
2016
Balance sheet data:
Cash, cash equivalents, and marketable securities $
Working capital
Total assets
Long-term line of credit
Total liabilities
Total shareholders’ equity
138,012 $
116,797
720,116
129,000
319,622
400,494
33,079 $
31,619
532,895
11,000
156,949
375,946
28,845 $
7,070
515,755
37,000
192,345
323,410
37,673 $
18,108
473,221
15,000
168,178
305,043
36,473
45,931
530,790
105,000
261,413
269,377
32
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters discussed in this management’s discussion and analysis of
financial condition and results of operations (“MD&A”), including discussions of our product development plans, business
strategies and market factors influencing our results, may include forward-looking statements that involve certain risks and
uncertainties. Actual results may differ from those anticipated by us as a result of various factors, both foreseen and
unforeseen, including, but not limited to, the impact of the COVID-19 pandemic and measures taken in response thereto, as
well as our ability to continue to develop new products and increase systems sales in markets characterized by rapid
technological evolution, consolidation and competition from larger, better-capitalized competitors. Many other economic,
competitive, governmental and technological factors could affect our ability to achieve our goals and interested persons are
urged to review any risks that may be described in Item 1A., “Risk Factors” as set forth herein, 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 in its entirety by, the consolidated financial statements and
related notes thereto included elsewhere in this Report. Historical results of operations, percentage margin fluctuations and
any trends that may be inferred from the discussion below are not necessarily indicative of the operating results for any future
period. For information regarding the year ended March 31, 2018, including a year-to-year comparison of our financial
condition and results of operations for the years ended March 31, 2019 and March 31, 2018, refer to Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year
ended March 31, 2019, filed with the SEC on May 29, 2019.
Company Overview
NextGen Healthcare is a leading provider of software and services that empower ambulatory healthcare practices to manage
the risk and complexity of delivering care in the rapidly evolving U.S. healthcare system. Our combination of technological
breadth, depth and domain expertise makes us a preferred solution provider and trusted advisor for our clients. In addition to
highly configurable core clinical and financial capabilities, our portfolio includes tightly integrated solutions that deliver on
ambulatory healthcare imperatives including: population health, care management, patient outreach, telemedicine and
nationwide clinical information exchange.
We serve clients across all 50 states. Our approximately 100,000 providers deliver care in nearly every medical specialty in a
wide variety of practice models including accountable care organizations (“ACOs”), independent physician associations
(“IPAs”), managed service organizations (“MSOs”), Veterans Service Organizations (“VSOs”), and Dental Service
Organizations (“DSOs”). Our clients include some of the largest and most progressive multi-specialty groups in the country.
With the recent addition of behavioral health to our strong medical and oral health capabilities, we continue to extend our
share not only in Federally Qualified Health Centers (“FQHCs”), but also in the emerging integrated care market.
NextGen Healthcare has historically enhanced our offering through both organic and inorganic activities. In October 2015, we
divested our former Hospital Solutions division to focus exclusively on the ambulatory marketplace. In January 2016, we
acquired HealthFusion Holdings, Inc. and its cloud-based electronic health record and practice management solution. In April
2017, we acquired Entrada, Inc. and its cloud-based, mobile platform for clinical documentation and collaboration. In August
2017, we acquired EagleDream Health, Inc. and its cloud-based population health analytics solution. In January 2018, we
acquired Inforth Technologies for its specialty-focused clinical content. In October 2019, we acquired Topaz Information
Systems, LLC for its behavioral health solutions. In December 2019, we acquired Medfusion, Inc. for its Patient Experience
Platform (i.e., patient portal, self-scheduling, and patient pay) capabilities and OTTO Health, LLC for its integrated virtual care
solutions, notably telemedicine. The integration of these acquired technologies has made NextGen Healthcare’s solutions
among the most comprehensive and powerful in the market.
Our company was incorporated in California in 1974. Previously named Quality Systems, Inc., we changed our corporate
name to NextGen Healthcare, Inc. in September 2018. Our principal offices are located at 18111 Von Karman Ave., Suite 800,
Irvine, California, 92612, and our principal website is www.nextgen.com. We operate on a fiscal year ending on March 31.
33
Industry Background, Regulatory Environment, and Market Opportunity
We believe that the trends and events described below have contributed to our consolidated results of operations and may
continue to impact our future results.
Over the last decade, the ambulatory healthcare market has experienced significant regulatory change, which has driven the
need for improved technology to enable practice transformation. Recognizing it was imperative to digitize the American health
system to stem the escalating cost of healthcare and improve the quality of care being delivered, Congress enacted the Health
Information Technology for Economic and Clinical Health Act in 2009 (“HITECH Act”). The legislation stimulated healthcare
organizations to not only adopt electronic health records, but to use them to collect discrete data that could be used to drive
quality care. This standardization supported early pay-for-reporting and pay-for-performance programs.
In 2010, the Affordable Care Act (“ACA”) established the roadmap for shifting American healthcare from volume (fee-for-
service) to a value-based care (“VBC”) system that rewards improved outcomes at lower costs (fee-for-value). This was
followed by the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”), bipartisan legislation that further changed
the way Medicare rewards clinicians for value vs. volume. Initially focused on government-funded care, the domain of the
Centers for Medicare & Medicaid Services (“CMS”), these programs are now firmly established on the commercial insurance
side of the industry as well.
VBC created the need for a new category of healthcare information technology (“HIT”) tools that could be used to identify and
treat groups of patients, or cohorts, based on risk. Population Health Management (“PHM”) tools support these needs by
identifying patient risk, engaging patients, coordinating care, and determining when interventions are needed to improve
clinical and financial outcomes. According to estimates from Frost & Sullivan in May 2020, the United States PHM market is
expected to reach $9.4 billion in total revenue by 2022, representing a compound annual growth rate (“CAGR”) of 28% from
2017.
Importantly, the introduction of VBC programs was only an element of the broader approach to reducing healthcare
expenditure. It was also accompanied by significant reductions in Medicare spending with a projected reduction of $253 billion
in payments by 2029, as reported by RevCycle Intelligence in October 2019. The drive to reduce costs initially led to
consolidation in the healthcare system that was followed by a significant shift of care from the inpatient to lower cost outpatient
setting. Ambulatory surgery centers (ASCs) have become an essential component of comprehensive, low cost distributed
care. According to an October 2019 report from ResearchandMarkets, ASCs continue to perform more than half of all U.S.
outpatient surgical procedures and are expected to see greater volumes as the number of outpatient procedures increases by
an estimated 15% by 2028. From 2015 to 2022, the proportion of outpatient cases performed in ASCs is expected to increase
across most service lines with the largest jump (10%) to occur in spine procedures. Among other factors, consumerism is set
to play a major role in driving ASC volume increases, as procedures performed in ASCs cost an average of 58% less than the
same procedure in a hospital outpatient department. The need to sustain revenue has made it extremely important for
practices to secure their patient market share, elevating patient loyalty to a significant determinant of provider success. In
addition to being loyal, groups participating in value-based contracts realized that patients also needed to be engaged in their
care and interested in improving their own health. The need to attract, retain and engage patients has made patient
experience one of the most important aspects of evolving care delivery in the United States. Capturing patient market share
and thriving in a market driven by VBC requires both an integrated platform and a full view of the patient population’s clinical
and cost data, neither of which could be accomplished without new technologies to collect and analyze multi-sourced patient
data. Effectively implemented, these new technologies allow organizations to enhance financial viability while exercising the
freedom to join, affiliate, integrate or interoperate in ways that maximize strategic control.
Although the HITECH Act led to the successful adoption of electronic health records, many in the healthcare industry were
dissatisfied with the level of exchange of health information between different providers and across different software
platforms. With the passing of the MACRA law in 2015, the U.S. Congress declared it a national objective to achieve
widespread exchange of health information through interoperable certified EHR technology. Then, in December 2016, the 21st
Century Cures Act (“Cures Act”) was passed and signed into law. Among many other policies, the law includes numerous
provisions intended to encourage nationwide interoperability.
In March 2020, the HHS Office of the National Coordinator for Health Information Technology (“ONC”) released a final
regulation which implements the key interoperability provisions included in the Cures Act. The rule calls on developers of
certified EHRs to adopt standardized application programming interfaces (“APIs”) and to meet a list of other new certification
and maintenance of certification requirements in order to maintain approved federal government certification status.
The ONC rule also implements the information blocking provisions of the Cures Act, including identifying reasonable and
necessary activities that do not constitute information blocking. Under the Cures Act, HHS has the regulatory authority to
investigate and assess civil monetary penalties of up to $1,000,000 against certified health IT developers found to be in
violation of “information blocking.”
The new regulations will require significant compliance efforts for healthcare providers, information networks, exchanges, and
HIT companies. However, CURES also creates opportunities for improving care delivery and outcomes through increased data
exchange between providers, and easier patient access to their own health information. Key to unlocking these benefits is the
introduction of new Fast Healthcare Interoperability Resources (“FHIR”) standards. ONC’s goal is for certified HIT companies
to adopt FHIR-based API standards. Meanwhile, CMS is requiring hospitals to provide electronic admission, discharge and
transfer notification to other healthcare facilities, providers and designated care team members.
34
Through the expansion of our NextGen® Share interoperability services platform and API partner marketplace, we will address
the increased demand for moving and sharing patient data from the EHR easily, quickly and securely. Interoperability improves
patient experience and care coordination, enhances patient safety, and reduces costs. We are also expanding resources such
as educational webinars, blogs and videos on interoperability to help educate and support healthcare providers.
In recent years, there has been incremental investment to improve the delivery of behavioral healthcare. One of the central
drivers of this investment has been the opioid epidemic which claims more than 70,000 lives a year in the United States. The
integrated care model previously prevalent mainly in FQHCs, a model which calls for integration of behavioral health and
primary care in single care settings, has also gained momentum. Both behavioral health and the integrated care workflows
require broad, purpose built, tailored HIT capabilities, many of which are supported by the NextGen platform.
Based on these trends, successful clients must undertake the following imperatives:
1. Manage patient experience and engagement
2. Align incentives and energize clinicians
3. Maximize and shape financial outcomes
4. Assume risk and drive commercial advantage
5. Optimize workflows with data exchange
Our Strategy
We empower the accelerating transformation of ambulatory care by delivering solutions that enable groups to be successful
under all models of care, including emerging value-based care in which providers assume risk while minimizing risk. We
primarily serve groups that focus on delivering care in ambulatory settings, and do so across diverse practice sizes,
specialties, and business constructs. In addition to traditional medical specialties, we participate actively with groups that
deliver oral (dental) and behavioral healthcare, and with those that combine these in the emerging model for integrated care.
Our configurability enables groups to drive commercial advantage with creative workflows for patient access, patient-provider
interactions, clinical workflows and care coordination. At the same time, our automation helps drive variability and cost out of
the back office by accommodating exacting regulatory, billing and reporting requirements. We embrace both the art and
science of delivering healthcare in the transforming U.S. healthcare system.
We believe that the ability to interoperate in a complex, heterogeneous healthcare ecosystem is one of the keys to providing
great care and healthy financial outcomes. Because we interoperate with the major stakeholders across the U.S. healthcare
system and power many of the nation’s Health Information Exchanges (“HIEs”), we help keep patient data more secure,
promote continuity of care, lower the cost of care delivery and perhaps most importantly improve the patient experience.
We recognize that patient experience drives patient engagement and that engaged patients have better outcomes.
Consequently, much of our activity over the last few years has been informed by the emergence of the patient as an active,
involved consumer. Our solutions help our clients create a holistic, personalized care experience that drive loyalty and
satisfaction.
We surround our technical solutions with implementation and optimization services and provide business process outsourcing
with managed hosting and revenue cycle management services. With some of our most sophisticated clients, we have been
asked to share the breadth of our experience as they shape their strategies. We believe that this sort of engagement, acting as
a virtual extension of our clients’ leadership teams, is an important step along our journey to becoming a trusted advisor.
As one of the leading healthcare information technology players in the U.S. ambulatory marketplace, we plan to continue
investing in our current capabilities as well as building and/or acquiring new capabilities as we guide our clients through the
market’s transformation. We expect to continue to empower the transformation of care through the following strategic priorities:
Be a learning organization and transform ahead of the industry
Be a trusted advisor for our customers and prospects
Deliver breadth, depth and configurability to enable our clients to effectively execute their strategies
Use automation to drive variability and cost from our clients’ operations
Drive real innovation in patient experience and patient-provider interactions
Help our clients be recognized as interoperability leaders in their regions and areas of specialty
Integrate new capabilities (whether organic or inorganic) more quickly and successfully than others.
35
COVID-19 Update
In late 2019, the emergence of a novel coronavirus, or COVID-19, was reported and in January 2020, the World Health
Organization (“WHO”), declared it a Public Health Emergency of International Concern. In March 2020, the WHO escalated
COVID-19 as a pandemic. We proactively responded to the pandemic by creating an executive task force to monitor the
COVID-19 situation daily and immediately restricted non-essential travel and migrated to a fully remote workforce while
maintaining complete operational effectiveness. Shortly thereafter, and in line with guidance provided by government agencies
and international organizations, we restricted all travel, mandated a work-from-home policy across our global workforce, and
moved all in-person client-facing events to virtual ones.
According to Johns Hopkins University, as of May 29, 2020, more than 5.9 million cases of COVID-19 have been reported in
over 188 countries with more than 364,000 deaths. In addition to the socioeconomic disruption caused by the pandemic, both
treatment and suppression measures stressed the very fabric of the U.S. healthcare system in some geographies,
exacerbating some of the existing challenges with capacity, balance and reimbursement. Among the measures to slow the
spread of the disease and flatten the curve in line with healthcare system capacity was social/physical distancing. The need to
access care while still social distancing was addressed early on with the limited use of virtual visits and was energized when
the federal government reduced regulatory barriers and addressed payment parity between virtual and in-person visits. With
these tailwinds, telemedicine quickly became regarded as a safer way for patients and providers to engage each other while
also relieving economic pressure on the medical practice. We believe that the uptake of telemedicine will transcend COVID-19
and that virtual visits will become a permanent and important change in the way care is delivered. Keeping patients out of the
transit system, out of the waiting room and away from other sick patients is simply good medicine.
We also believe that ambulatory practices will emerge from the pandemic with a clearer appreciation of the importance of
business continuity and will turn to NextGen more often for managed services. Consequently, we expect to see increased
subscription of our revenue cycle management services, managed hosting, and our emerging capabilities for managed clinical
and administrative services.
Since the mid-March 2020 timing of government orders to shelter in place and restrict non-essential medical services, the
COVID-19 pandemic has caused declines in patient volume. This has negatively impacted our revenue in the fourth quarter of
2020, most notably for purchases of software and hardware. The impact of the disruption will continue to heavily impact the
first half of fiscal 2021 primarily in managed services and EDI, which are volume driven, and purchases of software and
hardware due to client management being focused on business continuity. Assuming the impact of the pandemic and related
restrictive measures begin to subside late in the fiscal first half, we expect that patient volume and thus revenue will likely
return to more normal levels throughout late fiscal 2021. Based on our overall financial health and the opportunity in front of
us, we have made some important decisions on how to approach the first two quarters of fiscal 2021, which include executing
cost reductions with a primary goal of mitigating COVID-19 based impacts to earnings. Most of these cost reductions are
temporary as we believe that preserving our employee base, organizational momentum, and robust capabilities for the near
future will be a win for the Company and our shareholders. The net effect of the aforementioned actions will result in earnings
being down markedly and negative free cash flow (calculated as net cash provided by operating activities, less net of cash
used for the additions of capitalized software costs and equipment and improvements) in the first half of the fiscal year. We
believe we will be well positioned to weather the initial storm and increase earnings, revenue, and opportunity as volume
begins to return in the second half of the year.
The broader implications of the global emergence of COVID-19 on our business, operating results, and overall financial
performance remain uncertain and it depends on certain developments, including the duration and spread of the outbreak,
impact on our clients and our sales cycles, impact on our partners or employees, and impact on the economic environment
and financial markets, all of which are uncertain and cannot be predicted. We are conducting business as usual with certain
modifications to employee travel, employee work locations, and marketing events, among other modifications. We have
observed other companies taking precautionary and preemptive actions to address COVID-19, and the effects it has had and
is expected to have on business and the economy. We expect that our customers and potential customers will take actions to
reduce operating expenses and moderate cash flows, including by delaying sales and requesting extended billing and
payment terms. We will continue to actively monitor the situation and may take further actions that we determine are in the
best interests of our employees, customers, partners, suppliers, and shareholders.
36
Results of Operations
The following table sets forth the percentage of revenue represented by each item in our consolidated statements of net
income and comprehensive income for the years ended March 31, 2020 and 2019 (certain percentages below may not sum
due to rounding):
Revenues:
Recurring
Software, hardware, and other non-recurring
Total revenues
Cost of revenue:
Recurring
Software, hardware, and other non-recurring
Amortization of capitalized software costs and acquired intangible assets
Total cost of revenue
Gross profit
Operating expenses:
Selling, general and administrative
Research and development costs, net
Amortization of acquired intangible assets
Impairment of assets
Restructuring costs
Total operating expenses
Income from operations
Interest income
Interest expense
Other income, net
Income before provision for (benefit of) income taxes
Provision for (benefit of) income taxes
Net income
Revenues
Fiscal Year Ended March 31,
2020
2019
90.6 %
9.4
100.0
89.6%
10.4
100.0
38.0
5.0
6.6
49.5
50.5
30.6
15.4
0.8
2.3
0.5
49.5
0.9
0.0
(0.4 )
0.2
0.8
(0.6 )
1.4 %
36.2
5.0
5.4
46.6
53.4
31.2
15.3
0.8
0.0
0.1
47.4
6.0
0.0
(0.5)
0.1
5.5
0.9
4.6%
The following table presents our consolidated revenues for the years ended March 31, 2020 and 2019 (in thousands):
Recurring revenues:
Subscription services
Support and maintenance
Managed services
Electronic data interchange and data services
Total recurring revenues
Software, hardware, and other non-recurring revenues:
Software license and hardware
Other non-recurring services
Total software, hardware and other non-recurring revenues
Fiscal Year Ended March 31,
2020
2019
$
127,602 $
158,619
104,549
98,543
489,313
27,270
23,656
50,926
117,502
160,798
98,203
97,418
473,921
35,122
20,130
55,252
Total revenues
$
540,239 $
529,173
Recurring revenues as a percentage of total revenues
90.6 %
89.6%
We generate revenue from sales of licensing rights and subscriptions to our software solutions, hardware and third-party
software products, support and maintenance, managed services, electronic data interchange (“EDI”) and data services, and
other non-recurring services, including implementation, training, and consulting services performed for clients who use our
products.
37
Consolidated revenue for the year ended March 31, 2020 increased $11.1 million compared to the prior year due to a $15.4
million increase in recurring revenues, partially offset by a $4.3 million decrease in software, hardware and other non-recurring
revenues. The increase in recurring revenues was primarily due to $10.1 million higher subscription services driven by
incremental revenue related to our acquisitions of Topaz and Medfusion and growth in subscriptions associated with our
population health and analytics, core NextGen, and NextGen Office cloud-based solutions, $6.3 million higher managed
services revenue related to recent growth in RCM and managed cloud services bookings and incremental patient pay services
related to the Medfusion acquisition, and $1.1 million higher EDI and data services associated with growth in EDI transaction
volume from the addition of new clients and further penetration of our existing client base, for which growth in revenue was
partially muted by incremental revenues recognized in the prior year from the sales of certain clinical data. The increase in
recurring revenues was partially offset by $2.2 million lower support and maintenance revenue from client attrition. The
decrease in software, hardware, and other non-recurring revenues was primarily due to a $7.9 million decline in software
license and hardware revenue from lower software bookings, including the impact from COVID-19 in our fiscal fourth quarter,
partially offset by a $3.5 million increase in professional services.
Bookings reflect the estimated annual value of our executed contracts, which we believe may provide a broad indicator of the
general direction and progress of the business. Total bookings on a comparable basis, adjusted to include the effect of pre-
acquisition bookings, were $130.9 million for the year ended March 31, 2020 compared to $135.6 million in the prior year,
primarily reflecting a decline in software bookings, partially offset by higher bookings of subscriptions and EDI services. Total
bookings for the year ended March 31, 2018 were $120.5 million. In May 2020, we also announced a move to reduce our
perpetual license revenue in favor of recurring subscription revenue.
Cost of Revenue and Gross Profit
The following table presents our consolidated cost of revenue and gross profit for the years ended March 31, 2020 and 2019
(in thousands):
Cost of revenue:
Recurring
Software, hardware, and other non-recurring
Amortization of capitalized software costs and acquired intangible assets
Total cost of revenue
Gross profit
Gross margin %
Fiscal Year Ended March 31,
2020
2019
$
$
$
205,057
26,904
35,478
267,439
$
$
191,496
26,711
28,490
246,697
272,800
$
50.5 %
282,476
53.4%
Cost of revenue consists primarily of compensation expense, including share-based compensation, for personnel that deliver
our products and services. Cost of revenue also includes amortization of capitalized software costs and acquired technology,
third party consultant and outsourcing costs, costs associated with our EDI business partners and clearinghouses, hosting
service costs, third party software costs and royalties, and other costs directly associated with delivering our products and
services. Refer to Note 8, "Intangible Assets" and Note 9, "Capitalized Software Costs" of our notes to consolidated financial
statements included elsewhere in this Report for additional information on current period amortization of capitalized software
costs and acquired technology and an estimate of future expected amortization. As noted above, we announced in May 2020 a
move to reduce our perpetual license revenue in favor of recurring subscription revenue, which will impact our gross margin
percentages as we will book less high-margin perpetual licenses than we have historically, but ultimately it will produce high-
margin recurring revenue. When combined with incremental amortization of capitalized software costs and acquired intangible
assets, it will further reduce our expected gross margin percentage.
Share-based compensation expense included in cost of revenue was $2.1 million and $1.3 million for the years ended March
31, 2020 and 2019, respectively.
Gross profit for the year ended March 31, 2020 decreased $9.7 million compared to the prior year and gross margin
percentage decreased to 50.5% for the year ended March 31, 2020 compared to 53.4% in the prior year period. The declines
in gross profit and gross margin were primarily attributable to a decline in higher margin software license revenue as noted
above, combined with $7.0 million higher amortization of previously capitalized software development costs and higher
amortization of software technology intangible assets associated with the recent acquisitions of Medfusion, OTTO, Topaz,
Inforth, EagleDream, and Entrada, partially offset by higher recurring revenues.
38
Selling, General and Administrative Expense
The following table presents our consolidated selling, general and administrative expense for the years ended March 31, 2020
and 2019 (in thousands):
Selling, general and administrative
Selling, general and administrative, as a percentage of revenue
Fiscal Year Ended March 31,
2020
2019
$
165,174
$
30.6 %
164,879
31.2%
Selling, general and administrative expense consist of compensation expense, including share-based compensation, for
management and administrative personnel, selling and marketing expense, facilities costs, depreciation, professional service
fees, including legal and accounting services, legal settlements, acquisition and transaction-related costs, and other general
corporate and administrative expenses.
Share-based compensation expense included in selling, general and administrative expenses was $13.8 million and $11.9
million for the years ended March 31, 2020 and 2019, respectively. The increase in share-based compensation expense for
the year ended March 31, 2020 compared to the prior years is due to increased utilization of share-based awards to
incentivize our executives and employees. Refer to Note 14, "Share-Based Awards" of our notes to consolidated financial
statements included elsewhere in this Report for additional information on equity award grants.
Selling, general and administrative expenses increased $0.3 million for the year ended March 31, 2020 compared to the prior
year primarily due to lower bad debt and depreciation expense, lower payroll costs associated with our restructuring plans, and
lower spend related to conferences, travel, marketing, and communications, offset by the impact of a $5.7 million net benefit
recorded in the prior year from insurance recoveries related to the settlement of the Federal Securities Class Action complaint
and higher share-based compensation expenses noted above.
Research and Development Costs, net
The following table presents our consolidated net research and development costs, capitalized software costs, and gross
expenditures prior to capitalization, for the years ended March 31, 2020 and 2019 (in thousands):
Gross expenditures
Capitalized software costs
Research and development costs, net
Fiscal Year Ended March 31,
2020
2019
$
$
102,727 $
(19,432 )
83,295 $
101,565
(20,571)
80,994
Research and development costs, as a percentage of revenue
Capitalized software costs as a percentage of gross expenditures
15.4 %
18.9 %
15.3%
20.3%
Gross research and development expenditures, including costs expensed and costs capitalized, consist of compensation
expense, including share-based compensation for research and development personnel, certain third-party consultant fees,
software maintenance costs, and other costs related to new product development and enhancement to our existing products.
The healthcare information systems and services industry is characterized by rapid technological change, requiring us to
engage in continuing investments in our research and development to update, enhance and improve our systems. This
includes expansion of our software and service offerings that support pay-for-performance initiatives around accountable care
organizations, bringing greater ease of use and intuitiveness to our software products, enhancing our managed cloud and
hosting services to lower our clients' total cost of ownership, expanding our interoperability and enterprise analytics
capabilities, and furthering development and enhancements of our portfolio of specialty-focused templates within our electronic
health records software.
The capitalization of software development costs results in a reduction to our reported net research and development costs.
Our software capitalization rate, or capitalized software costs as a percentage of gross expenditures, has varied historically
and may continue to vary based on the nature and status of specific projects and initiatives in progress. Although changes in
software capitalization rates have no impact on our overall cash flows, it results in fluctuations in the amount of software
development costs being expensed up front and the amount of net research and development costs reported in our
consolidated statement of net income and comprehensive income.
Share-based compensation expense included in research and development costs was $3.9 million and $2.9 million for the
years ended March 31, 2020 and 2019, respectively.
Net research and development costs for the year ended March 31, 2020 increased $2.3 million compared to the prior year due
to a $1.2 million increase in our gross expenditures and $1.1 million lower capitalization of software costs. The increase in
gross expenditures is primarily the result of incremental costs incurred for the development of the next versions of our software
solutions and enhancements to our existing solutions, including increased hosting fees, higher utilization of our Bangalore
39
development center resources, and increased share-based compensation expense, partially offset by lower consulting and
outside services costs and lower US-based payroll costs due to reductions in our headcount.
Our software capitalization rate fluctuates due to differences in the nature and status of our projects and initiatives during a
given year, which affects the amount of development costs that may be capitalized and ultimately also affects the future
amortization of our previously capitalized software development costs.
Amortization of Acquired Intangible Assets
The following table presents our amortization of acquired intangible assets for the years ended March 31, 2020 and 2019 (in
thousands):
Amortization of acquired intangible assets
Fiscal Year Ended March 31,
2020
2019
$
4,143
$
4,344
Amortization of acquired intangible assets included in operating expense consist of the amortization related to our customer
relationships and trade names intangible assets acquired as part of our business combinations. Refer to Note 8, "Intangible
Assets" of our notes to consolidated financial statements included elsewhere in this Report for an estimate of future expected
amortization.
Amortization of acquired intangible assets for the year ended March 31, 2020 decreased $0.2 million, compared to the prior
year period due to certain acquired intangible assets becoming fully amortized, partially offset by additional amortization of the
customer relationships and trade names intangible assets acquired from Medfusion.
Impairment of Assets
During the year ended March 31, 2020, we recorded impairments of $9.4 million to our operating right-of-use assets and
certain related fixed assets associated with the vacated locations, or portions thereof, in North Canton, San Diego, Horsham,
St. Louis, Irvine, Atlanta, Brentwood, and Phoenix, in connection with our restructuring plans, based on projected sublease
rental income and estimated sublease commencement dates. We are actively marketing each of these vacated locations for
sublease. The impairment analysis was performed at the asset group level and the impairment charge was estimated by
comparing the fair value of each asset group based on the expected cash flows to its respective book value. We determined
the discount rate for each asset group based on the approximate interest rate on a collateralized basis with similar remaining
terms and payments as of the impairment date. Significant judgment was required to estimate the fair value of each asset
group and actual results could vary from the estimates, resulting in potential future adjustments to amounts previously
recorded.
During the year ended March 31, 2020, we also recorded $3.2 million of impairments related to the write down of previously
capitalized software development costs for certain technology that will no longer be utilized in any future software solutions.
Restructuring Costs
In June 2019, we implemented a business restructuring plan as part of our continued efforts to preserve and grow the value of
the Company through client-focused innovations while reducing our cost structure. As part of the restructuring, we reduced our
total workforce by approximately 4% primarily within the research and development function and intend to expand on our
research and development resources in India. We recorded $2.5 million of restructuring costs in the year ended March 31,
2020 within operating expenses in our consolidated statements of comprehensive income. The restructuring costs consisted
primarily of payroll-related costs, such as severance, outplacement costs, and continuing healthcare coverage, associated with
the involuntary separation of employees pursuant to a one-time benefit arrangement.
During the year ended March 31, 2019, we recorded $0.6 million of restructuring costs related to adjustments to the estimated
fair value of remaining lease obligations for vacated properties associated with our prior restructuring plan. The restructuring
costs were comprised of facilities-related costs associated with accruals for the remaining lease obligations at certain
locations, including Solana Beach, Costa Mesa, and a portion of Horsham with contractual lease terms ending between
January 2018 and September 2023. We estimated the remaining lease obligations at fair value as of the cease-use date for
each location based on the future contractual lease obligations, reduced by projected sublease rentals that could be
reasonably obtained for the locations after a period of marketing, and adjusted for the effect deferred 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. As of March 31, 2019, the remaining lease obligation, net of estimated projected sublease rentals, was $1.8
million.
Refer to Note 5, "Leases,” of our notes to consolidated financial statements included elsewhere in this Report for estimated
timing of payments related to remaining lease obligations.
40
Interest Expense
The following table presents our interest expense for the years ended March 31, 2020 and 2019 (in thousands):
Interest income
Interest expense
Other income, net
Fiscal Year Ended March 31,
2020
2019
$
$
256
(1,955 )
846
216
(2,814)
267
Interest expense relates to our revolving credit agreement and the related amortization of deferred debt issuance costs. Refer
to Note 10, “Line of Credit” of our notes to consolidated financial statements included elsewhere in this Report for additional
information.
Interest expense for the year ended March 31, 2020 decreased $0.9 million compared to the prior year. The changes in
interest expense is primarily caused by fluctuations in outstanding balances under our revolving credit agreement and the
related amortization of debt issuance costs. As of March 31, 2020, we had $129.0 million in outstanding loans under the
revolving credit agreement.
Other income for the year ended March 31, 2020 increased $0.6 million compared to the prior year, which was primarily
associated with fluctuations in the India foreign exchange rates.
Provision for (Benefit of) Income Taxes
The following table presents our provision for (benefit of) income taxes for the years ended March 31, 2020 and 2019 (in
thousands):
Provision for (benefit of) income taxes
Effective tax rate
Fiscal Year Ended March 31,
2020
2019
$
(3,239 )
$
-76.1 %
4,794
16.4%
The change in the effective tax rate for the year ended March 31, 2020 compared to the prior year period was driven primarily
by a decrease in pretax income for the current year. The effective tax rate for the year ended March 31, 2020 also benefitted
from a release of uncertain tax position reserves on prior year tax settlements, certain return to provision adjustments, and
state income taxes, which was partially offset by nondeductible expenses for the year ended March 31, 2020.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), signed into law on March 27, 2020, has resulted in
significant changes to the U.S. federal corporate tax law. Additionally, several state and foreign jurisdictions have enacted
additional legislation and or comply with federal changes. As the enactment dates of this law was prior to the end of our
reporting period, we have considered the applicable tax law changes in our current and deferred income tax expense as of
March 31, 2020. We will continue analyzing the applications of the CARES Act and include the material impact to future
income tax provisions, if applicable.
Net Income
The following table presents our net income (in thousands) and net income per share and for the years ended March 31, 2020
and 2019:
Net income
Net income per share:
Basic
Diluted
Fiscal Year Ended March 31,
2020
2019
7,498 $
24,494
0.11
0.11
$
$
0.38
0.38
$
$
$
As a result of the foregoing changes in revenue and expense, net income for the fiscal year ended March 31, 2020 decreased
$17.0 million compared to the prior year period.
41
Liquidity and Capital Resources
The following table presents selected financial statistics and information for the years ended March 31, 2020 and 2019 (in
thousands):
Cash and cash equivalents
Unused portion of revolving credit agreement (1)
Total liquidity
Net income
Net cash provided by operating activities
Fiscal Year Ended March 31,
2020
2019
$
$
$
$
138,012
171,000
309,012
7,498
85,601
$
$
$
$
33,079
289,000
322,079
24,494
50,475
(1) As of March 31, 2020, we had outstanding borrowings of $129.0 million under our $300.0 million revolving credit agreement.
Our outstanding borrowings under our revolving credit agreement was $129.0 million as of March 31, 2020 compared to $11.0
million as of March 31, 2019.
Our principal sources of liquidity are our cash generated from operations, driven mostly by our net income and working capital
management, our cash and cash equivalents, and our revolving credit agreement.
We believe that our cash and cash equivalents on hand at March 31, 2020, together with our cash flows from operating
activities and liquidity provided by our revolving credit agreement, will be sufficient to meet our working capital and capital
expenditure requirements for the next twelve months. Due to the ongoing uncertainties of the impact of the COVID-19
pandemic on the industry in which we operate, we proactively implemented certain precautionary measures, including cost
containment and strengthening our cash position by increasing the outstanding borrowings under our revolving credit
agreement during the year ended March 31, 2020 and borrowing an additional $50.0 million in April 2020. The impact of
COVID-19 is rapidly evolving and widespread, and therefore, it is not possible to fully identify, measure, and predict the various
impacts that COVID-19 may have on our financial condition, results of operations, cash flows, and liquidity requirements. We
will continue to assess the potential effects of the COVID-19 pandemic on our business and actively manage our response
accordingly.
Cash and Cash Equivalents
As of March 31, 2020, our cash and cash equivalents balance of $138.0 million compares to $33.1 million as of March 31,
2019.
We may continue to use a portion of our funds as well as available financing from our revolving credit agreement for future
acquisitions or other similar business activities, although the specific timing and amount of funds to be used is not currently
determinable. We intend to expend some of our available funds for the development of products complementary to our existing
product line as well as new versions of certain of our products. These developments are intended to take advantage of more
powerful technologies and to increase the integration of our products.
Our investment policy is determined by our Board of Directors. Excess cash, if any, may be invested in very liquid short term
assets including tax exempt and taxable money market funds, certificates of deposit and short term municipal bonds with
average maturities of 365 days or less at the time of purchase. Our Board of Directors continues to review alternate uses for
our cash including an expansion of our investment policy and other items. Any or all of these programs could significantly
impact our investment income in future periods.
Cash Flows from Operating Activities
The following table summarizes our consolidated statements of cash flows for the years ended March 31, 2020 and 2019 (in
thousands):
Net income
Non-cash expenses
Cash from net income, as adjusted
Change in contract assets and liabilities, net
Change in accounts receivable
Change in other assets and liabilities
Net cash provided by operating activities
Fiscal Year Ended March 31,
2020
2019
$
7,498 $
$
$
85,902
93,400
1,325
4,937
(14,061 )
85,601
$
$
24,494
66,662
91,156
(4,943)
(6,178)
(29,560)
50,475
42
For the year ended March 31, 2020, cash provided by operating activities increased $35.1 million compared to the prior year,
consisting of $15.5 million increase from net changes in other assets and liabilities, $17.4 million increase from net changes in
accounts receivable and contract balances, and $2.2 million increase from higher net income, as adjusted for non-cash
expenses. Cash from operating activities benefited from changes in other assets and liabilities due to payments in the prior
year related to the $19.0 million settlement of the Federal Securities Class Action complaint, which was partially offset by the
impact of operating lease liabilities from the adoption of ASC 842 (refer to Note 5, "Leases" of our notes to consolidated
financial statements included elsewhere in this Report for additional information) and net decreases in cash from changes in
income taxes receivable and payable. Net changes to accounts receivable and contract balances resulted in a benefit to cash
from operating activities as we continue to focus our efforts on collections and resolution of aged balances. Non-cash
expenses increased primarily due to higher amortization of operating lease assets, higher amortization of previously
capitalized software costs, impairment charges related to our vacated lease locations and capitalized software costs, as
described above, higher share-based compensation expenses, and changes in deferred taxes, while net income for the year
ended March 31, 2020 decreased $17.0 million compared to the prior year, as described above.
Cash Flows from Investing Activities
Net cash used in investing activities for the years ended March 31, 2020 and 2019 was $96.1 million and $25.5 million,
respectively. The $70.6 million net increase in cash used in investing activities compared to the prior year is primarily due to
cash payments for our acquisitions of Topaz, Medfusion and OTTO, net of cash acquired, of $71.7 million and $2.5 million
higher additions to equipment and improvements, offset by $2.5 million of proceeds from over-funded corporate-owned life
insurance policies and $1.1 million lower capitalization of software development costs.
Cash Flows from Financing Activities
Net cash provided by financing activities for the year ended March 31, 2020 was $116.3 million compared to net cash used in
financing activities of $21.6 million in the prior year. The increase in cash from financing activities is due to $118.0 million of net
borrowings against our revolving credit facility, comprised of $137.0 million of additional borrowings and $19.0 million of
principal repayments and $2.4 million of net proceeds from the issuance of shares under employee plans, partially offset by
$4.1 million of payments for taxes related to net share settlement of equity awards. In comparison, during the prior year, net
payments on our revolving credit facility were $26.0 million, consisting of $52.0 million of principal repayments and $26.0
million of additional borrowings and $3.2 million of payments for taxes related to net share settlement of equity awards,
partially offset by $7.5 million of net proceeds from the issuance of shares under employee plans.
Contractual Obligations
As of March 31, 2020, we had minimum purchase commitments of $17.3 million related to payments due under certain non-
cancelable agreements to purchase goods and services.
The following table summarizes our other significant contractual obligations at March 31, 2020 and the effect that such
obligations are expected to have on our liquidity and cash in future periods (in thousands):
Contractual Obligations
Operating lease obligations
Remaining lease obligations for vacated
properties (1)
Line of credit obligations (Note 10)
Total
For the year ended March 31,
Total
$ 43,017 $
2021
2022
2023
2024
2025
2026
and
beyond
9,408 $ 9,186 $
9,248 $ 7,955 $ 5,948 $ 1,272
11,898
129,000
$ 183,915
3,182
—
$ 12,590
2,935
2,255
— 129,000
$140,503
$ 12,121
1,677 1,337
—
—
$ 9,632 $ 7,285
512
—
$ 1,784
(1) Remaining lease obligations for vacated properties relates to remaining lease obligations at certain locations, including Brentwood, Solana
Beach, North Canton, Phoenix and portions of Atlanta, Irvine, Horsham, San Diego and St. Louis, that we have vacated and are actively
marketing the locations for sublease as part of our reorganization efforts. Refer to Note 16, "Restructuring Plan" of our notes to consolidated
financial statements included elsewhere in this Report for additional information. Total obligations have not been reduced by projected
sublease rentals or by minimum sublease rentals of $0.9 million due in future periods under non-cancelable subleases.
The deferred compensation liability as of March 31, 2020 was $5.3 million, which is not included in the table above as the
timing of future benefit payments to employees is not determinable.
The uncertain tax position liability as of March 31, 2020 was $4.2 million, which is not included in the table above as the timing
of expected payments is not determinable.
New Accounting Pronouncements
Refer to Note 2, “Summary of Significant Accounting Policies” of our notes to consolidated financial statements included
elsewhere in this Report for a discussion of new accounting standards.
43
Critical Accounting Policies and Estimates
The discussion and analysis of our consolidated financial statements and results of operations is based upon our consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United
States of America ("GAAP"). The preparation of these consolidated financial statements requires us to make estimates and
judgments that affect our reported amounts of assets, liabilities, revenue and expenses, and related disclosures. We base our
assumptions, estimates and judgments on historical experience, current trends, and other factors we believe to be reasonable
under the circumstances, and we evaluate these estimates on an ongoing basis. On a regular basis, we review the accounting
policies and update our assumptions, estimates, and judgments, as needed, to ensure that our consolidated financial
statements are presented fairly and in accordance with GAAP. Actual results could differ materially from our estimates under
different assumptions or conditions. To the extent that there are material differences between our estimates and actual results,
our financial condition or results of operations will be affected.
Our significant accounting policies, as described in Note 2, “Summary of Significant Accounting Policies” of our notes to
consolidated financial statements included elsewhere in this Report, should be read in conjunction with management’s
discussion and analysis of financial condition and results of operations. We believe that the following accounting policies are
the most critical to aid in fully understanding and evaluating our reported financial results because application of such policies
require significant judgment regarding the effects of matters that are inherently uncertain and that affect our consolidated
financial statements.
Revenue Recognition
Application of the revenue recognition guidance requires a significant amount of judgments and estimates, which may impact
the amount and timing of revenue recognition and related disclosures. Refer to Note 3, "Revenue from Contracts with
Customers" of our notes to consolidated financial statements included elsewhere in this Report for additional information
regarding our revenue recognition policies, significant judgements, and estimates.
Software Development Costs
Software development costs, consisting primarily of employee salaries and benefits and certain third party costs, incurred in
the development of new software solutions and enhancements to existing software solutions for external sale are expensed as
incurred, and reported as net research and development costs in the consolidated statements of net income and
comprehensive income, until technological feasibility has been established. After technological feasibility is established, any
additional software development costs are capitalized. Amortization of capitalized software is recorded on straight-line basis
over the estimated economic life of the related product, which is typically three years. The total of capitalized software costs
incurred in the development of products for external sale are reported as capitalized software costs within our consolidated
balance sheets.
We also incur costs related to the development of software applications for our internal-use and for the development of
software-as-a-service ("SaaS") based solutions sold to our clients. The development costs of our SaaS-based solutions are
considered internal-use for accounting purposes. Our internal-use capitalized development costs are stated at cost and
amortized on a straight-line basis over the estimated useful lives of the assets, which is typically three years. Application
development stage costs generally include costs associated with internal-use software configuration, coding, installation and
testing. Costs related to the preliminary project stage and post-implementation activities are expensed as incurred. Costs of
significant upgrades and enhancements that result in additional functionality are also capitalized, whereas costs incurred for
maintenance and minor upgrades and enhancements are expensed as incurred. Capitalized software costs for the
development of SaaS-based solutions are reported as capitalized software costs within our consolidated balance sheets and
capitalized software costs for the development of 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 we determine
that capitalized amounts are not recoverable based on the expected net cash flows to be generated from sales of the
applicable software solutions, the amount by which the unamortized capitalized costs exceed the net realizable value is written
off as a charge to earnings. The net realizable value is the estimated as the expected future gross revenues from that product
reduced by the estimated future costs of completing and disposing of that product, including the costs of performing
maintenance and client support required to satisfy our responsibility at the time of sale. In addition to the assessment of net
realizable value, we review and adjust the remaining estimated lives of our capitalized software costs, if necessary. We also
perform a periodic review of our software solutions and dispose of fully amortized capitalized software costs after such
products are determined to be no longer used by our clients.
Although we currently believe that our approach to estimates and judgments as described herein is reasonable, actual results
could differ and we may be exposed to increases or decreases in revenue that could be material.
Business Combinations
During the year ended March 31, 2020, we completed the acquisitions of Topaz, Medfusion, and OTTO, and during the year
ended March 31, 2018, we completed the acquisitions of Entrada, EagleDream and Inforth. We accounted for the acquisitions
as purchase business combinations using the acquisition method of accounting.
44
In accordance with the acquisition method of accounting for business combinations, we allocated the purchase price of
acquired businesses to the tangible and intangible assets acquired and liabilities assumed based on estimated fair values. Our
purchase price allocation methodology contains uncertainties because it requires us to make assumptions and to apply
judgment to estimate the fair value of acquired assets and liabilities, including, but not limited to, intangible assets, goodwill,
and contingent consideration liabilities. We estimate the fair value of assets and liabilities based upon the carrying value of the
acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses
depending on the nature of the assets being sold. We estimate the fair value of the contingent consideration liabilities, as
needed, based on our projection of expected results and the estimated probability of achievement. The process to develop the
estimate of fair values in many cases requires the use of significant estimates, assumptions and judgments, including
determining the timing and estimates of future cash flows and developing appropriate discount rates. Unanticipated events or
circumstances may occur which could affect the accuracy of our fair value estimates, including assumptions regarding industry
economic factors and business strategies. We finalize the purchase price allocation as soon as practicable within the
measurement period, but not later than one year following the acquisition date. Any adjustments to fair value subsequent to
the measurement period are reflected in the consolidated statements of net income and comprehensive income.
Goodwill
Goodwill acquired in a business combination is measured as the excess of the purchase price, or consideration transferred,
over the net acquisition date 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.
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 reporting unit 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 conduct a two-step quantitative goodwill impairment test. The first
step of the impairment test involves comparing the fair values of the applicable reporting units with their 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
impairment test. 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 of that 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 primarily through the use of a discounted cash flow
methodology. This analysis requires significant judgments, including estimation of future cash flows, which is dependent 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, and determination of our weighted average cost of capital.
The 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 test goodwill for impairment annually during our first fiscal quarter, referred to as the annual test date. Based on our
qualitative assessment for the current fiscal year, we have determined that there was no impairment to our goodwill as of June
30, 2019. We will also test for impairment between annual test dates if an event occurs or circumstances change that would
indicate the carrying amount may be impaired.
During the years ended March 31, 2020 and March 31, 2019, we did not identify any events or circumstances that would
require an interim goodwill impairment test. We currently also 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 for impairment losses on goodwill. However, if actual
results are not consistent with our estimates or assumptions, we may be exposed to future impairment charges that could be
material.
Intangible Assets
Intangible assets consist of trade names, customer relationships, and software technology, all of which are associated with our
acquisitions.
The intangible assets are recorded at fair value and are reported net of accumulated amortization. We currently amortize the
intangible assets over periods ranging from 5 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 intangible assets at least annually or whenever
adverse events or changes in circumstances indicate that impairment 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 of such assets, impairment is
deemed to have occurred and a loss is recognized to reduce the carrying value of the intangible assets to fair value, which is
determined by discounting estimated future cash flows. In addition to the impairment assessment, we routinely review the
remaining estimated lives of our intangible assets and record adjustments, if deemed necessary.
45
Although currently we believe that our approach to estimates and judgments as described herein is reasonable, actual results
could differ and we may be exposed to decreases in the fair value of our intangible assets, resulting in impairment charges
that could be material. We test intangible assets for impairment if we believe indicators of impairment exist.
Share-Based Compensation
We record share-based compensation related to share-based awards granted under our employee stock options and incentive
plans. See Note 14, “Share-Based Awards,” of our notes to consolidated financial statements included elsewhere in this
Report for a complete discussion of our stock-based compensation plans.
Share-based compensation expense associated with stock options granted under our equity incentive plans is based on the
number of options that ultimately vest and adjusted, if needed, as forfeitures occur. We estimate 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 time that 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. Treasury zero-coupon issues with
remaining terms equal to the expected term. The expected dividend yield is the average dividend rate during a period equal to
the expected term of the option. The fair value vest is recognized ratably as expense over the requisite service period in our
consolidated statements of net income and 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 restricted performance stock awards
and units are based on the grant date fair value measured at the underlying 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-based compensation expense that could be material.
Reserves on Accounts Receivable
We maintain reserves for potential sales returns and uncollectible accounts receivable. Accounts receivable are reported net of
uncollectible accounts receivable our consolidated balance sheets.
Our standard contracts generally do not contain provisions for clients to return products or services. However, we historically
have accepted sales returns under limited circumstances. We estimate expected sales returns and other forms of variable
consideration considering our customary business practice and contract-specific facts and circumstances, and we consider
such estimated potential returns as variable consideration when allocating the transaction price to the extent it is probable that
there will not be a significant reversal of cumulative revenue recognized.
Allowances for doubtful accounts and other uncollectible accounts receivable related to estimated losses resulting from our
clients’ inability to make required payments are established based on our assessment of the collectability of client accounts,
including review of our historical experience of bad debt expense and the aging of our accounts receivable balances, net of
specifically reserved accounts and amounts billed prior to revenue recognition. Specific reserves are based on our estimate of
the probability of collection for certain accounts. We regularly review the adequacy of these allowances by considering internal
factors such as historical experience, credit quality and age of the client receivable balances as well as external factors such
as economic conditions that may affect a client’s ability to pay and review of major third-party credit-rating agencies, as
needed. Accounts are written off as uncollectible only after we have expended extensive collection efforts. If a major client’s
creditworthiness or financial condition were to deteriorate, if actual defaults are higher than our historical experience, or if other
circumstances arise, our estimates of the recoverability of amounts due to us could be overstated, and additional allowances
could be required, which could have an adverse impact on our operating results.
Although we currently believe that our approach to estimates and judgments as described herein is reasonable, actual results
could differ and we may be exposed to increases or decreases in required reserves that could be material.
Leases
We adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) and its subsequent amendments (together “ASC
842”) during the quarter ended June 30, 2019 using the transition approach provided for under ASU No. 2018-11, Leases
(Topic 842): Targeted Improvements, which allowed us to apply the new lease standard as of April 1, 2019, rather than the
beginning of the earliest period presented. ASC 842 supersedes ASC 840 and requires the recognition of leased
arrangements on the balance sheet as right-of-use assets and liabilities pertaining to the rights and obligations created by the
leased assets. Refer to Note 5, "Leases" of our notes to consolidated financial statements included elsewhere in this Report
for additional information regarding our adoption of ASC 842.
46
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 2020 and March 31, 2019, we were subject to minimal market risk on our cash and cash equivalents as we
maintained our balances in very liquid funds with maturities of 90 days or less at the time of purchase.
As of March 31, 2020 and March 31, 2019, we had $129.0 million and $11.0 million, respectively, in outstanding borrowings
under our revolving credit agreement. The revolving borrowings under our revolving credit agreement bear interest at our
option of either, (a) for base rate loans, a base rate based on the highest of (i) 0%, (ii) the rate of interest publicly announced
by the administrative agent as its prime rate in effect at its principal office in New York City, (iii) the overnight bank funding rate
(not to be less than zero) as determined by the Federal Reserve Bank of New York plus 0.50% or (iv) the LIBOR-based rate
for one, two, three or six months Eurodollar deposits plus 1%, and (b) for Eurodollar loans, the LIBOR-based rate for one, two,
three or six months (as selected by us) Eurodollar deposits plus 1.00%, plus, in each case, an applicable margin based on our
total leverage ratio from time to time, ranging from 0.50% to 1.50% for base rate loans, and from 1.50% to 2.50% for
Eurodollar loans. Accordingly, we are 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%) change in the interest rate on our outstanding loans as of
March 31, 2020 would result in a corresponding change in our annual interest expense of approximately $1.3 million. Refer to
Note 10, “Line of Credit” of our notes to consolidated financial statements included elsewhere in this Report for additional
information.
As of March 31, 2020 and March 31, 2019, we had international operations that exposed us to the risk of fluctuations in foreign
currency exchange rates against the 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 DATA
See 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 DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) have evaluated
the effectiveness 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, 2020, the end of the period covered by this Report
(the “Evaluation Date”). They have concluded that, as of the Evaluation Date, these disclosure controls and procedures were
effective to ensure that material information relating to the Company and its consolidated subsidiaries would 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 Officer have concluded that our disclosure controls and procedures are designed, and are effective, to give
reasonable assurance that the information required to be disclosed 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 and forms of the Securities and
Exchange Commission. They have also concluded that our disclosure controls and procedures are effective to ensure that
information 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 Reporting
During the year ended March 31, 2020, we completed the acquisitions of Topaz Information Systems, LLC ("Topaz") in
October 2019, Medfusion, Inc. (“Medfusion”) in December 2019, and OTTO Health, LLC (“OTTO”) in December 2019, each of
which are now wholly-owned subsidiaries of the Company. In conducting our evaluation of the effectiveness of our internal
controls over financial reporting as of March 31, 2020, we have elected to exclude Topaz, Medfusion, and OTTO from our
evaluation for fiscal year 2020, based upon Securities and Exchange Commission staff guidance. As of and for the year ended
March 31, 2020, the assets and revenues of the acquired companies in aggregate that are not included in our evaluation
represented less than 1% of consolidated assets and less than 2% of consolidated revenues.
47
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined
in Rule 13a-15(f) under the Exchange 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, principal financial officer
and principal accounting officer, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation 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 generally accepted accounting principles, and that receipts and expenditures of our company are being
made only in accordance with authorizations of our management and directors; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate
because of changes in conditions or that the degree of compliance with 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, 2020. In making our assessment of internal control over financial reporting, management used the criteria set forth
in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation, our management concluded that our internal control over financial reporting was
effective as of March 31, 2020.
The effectiveness of the Company’s internal control over financial reporting as of March 31, 2020 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report contained in Item
15(a)(1) of Part IV of this Report, "Exhibits and Financial Statement Schedules."
Changes in Internal Control over Financial Reporting
During the quarter ended March 31, 2020, there were no changes in our “internal control over financial reporting” (as defined
in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
48
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is incorporated herein by reference from our definitive proxy statement for our 2020
Annual Shareholders’ Meeting to be filed with the Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference from our definitive proxy statement for our 2020
Annual Shareholders’ Meeting to be filed with the Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by Item 12 is incorporated herein by reference from our definitive proxy statement for our 2020
Annual Shareholders’ Meeting to be filed with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is incorporated herein by reference from our definitive proxy statement for our 2020
Annual Shareholders’ Meeting to be filed with the Securities and Exchange Commission.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is incorporated herein by reference from our definitive proxy statement for our 2020
Annual Shareholders’ Meeting to be filed with the Securities and Exchange Commission.
49
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this Annual Report on Form 10-K:
PART IV
(1) Index to Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of March 31, 2020 and 2019
Consolidated Statements of Net Income and Comprehensive Income — Years Ended March 31, 2020, 2019
and 2018
Consolidated Statements of Shareholders’ Equity — Years Ended March 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows — Years Ended March 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
(2) The following supplementary financial statement schedule of NextGen Healthcare, Inc., required to be included
in Item 15(a)(2) on Form 10-K is filed as part of this Report.
Schedule II — Valuation and Qualifying Accounts — Years Ended March 31, 2020, 2019 and 2018
Schedules other than that listed above have been omitted since they are either not required, not applicable, or
because the information 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 this Report.
Index to Exhibits
ITEM 16. FORM 10-K SUMMARY
None.
Page
57
60
61
62
63
65
94
51
50
INDEX TO EXHIBITS
Exhibit
Number
Exhibit Description
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
10.1
10.2
10.3
10.4
10.5
10.6
Restated Articles of Incorporation of Quality Systems, Inc.
filed with the Secretary of State of California on
September 8, 1989 (Registration No. 333-00161)
Certificate of Amendment to Articles of Incorporation of
Quality Systems, Inc. filed with the Secretary of State of
California effective March 4, 2005
Certificate of Amendment to Articles of Incorporation of
Quality Systems, Inc. filed with the Secretary of State of
California effective October 6, 2005
Certificate of Amendment to Articles of Incorporation of
Quality Systems, Inc. filed with the Secretary of State of
California effective March 3, 2006
Certificate of Amendment to Articles of Incorporation of
Quality Systems, Inc. filed with the Secretary of State of
California effective October 6, 2011
Restated Articles of Incorporation of NextGen Healthcare,
Inc., filed with the Secretary of State of California effective
September 6, 2018
Amended and Restated Bylaws of Quality Systems, Inc.,
effective October 30, 2008
Amended and Restated Bylaws of NextGen Healthcare,
Inc., effective September 6, 2018
Agreement and Plan of Merger, dated September 6, 2018,
to change the name of Quality Systems, Inc. to NextGen
Healthcare, Inc.
Agreement and Plan of Merger, dated October 30, 2015, by
and among Quality Systems, Inc., Ivory Merger Sub, Inc.,
HealthFusion Holdings, Inc. and Seth Flam, Sol Lizerbram,
and Jonathan Flam, as the Securityholder Representative
Committee.
Agreement and Plan of Merger, dated April 11, 2017, by and
among Quality Systems, Inc., Engage Merger Sub, Inc.,
Entrada, Inc. and FCA Venture Partners V, LP, as the
Company Stockholders' Representative
Agreement and Plan of Merger, dated July 31, 2017, by and
among Quality Systems, Inc., Peacock Merger Sub, Inc.,
EagleDream Health, Inc. and Algimantas K. Chesonis
Agreement and Plan of Merger, dated November 12, 2019,
by and among NextGen Healthcare, Inc., Renegade Merger
Sub, Inc., MedFusion, Inc., and Project Renegade LLC, as
the Equityholders Representative
Credit Agreement, dated as of January 4, 2016, among
Quality Systems, Inc., JPMorgan Chase Bank, N.A., as
administrative agent, U.S. Bank National Association, as
syndication agent, and Bank of the West, KeyBank National
Association and Wells Fargo Bank, National Association, as
co-documentation agents
51
Filed
Herewith
Incorporated by Reference
Form Exhibit
Filing Date
S-1
3.1
11-Jan-96
10-K
3.1.1
14-Jun-05
8-K
3.01
11-Oct-05
8-K
3.1
6-Mar-06
8-K
3.1
6-Oct-11
8-K
3.1
10-Sep-18
8-K
3.1
31-Oct-08
8-K
3.2
10-Sep-18
8-K
2.1
10-Sep-18
8-K
2.1
30-Oct-15
8-K
2.1
12-Apr-17
8-K
2.1
1-Aug-17
8-K
2.1
18-Nov-19
10-Q
10.1
29-Jan-16
Exhibit
Number
10.7
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
Exhibit Description
Amended and Restated Credit Agreement, dated as of
March 29, 2018, among Quality Systems, Inc., JPMorgan
Chase Bank, N.A., as administrative agent, U.S. Bank
National Association, as syndication agent, and Bank of the
West, KeyBank National Association and Wells Fargo Bank,
National Association, as co-documentation agents
Second Amended and Restated 2005 Stock Option and
Incentive Plan
Form of Incentive Stock Option Agreement for 2005 Stock
Incentive Plan
Form of Nonqualified Stock Option Agreement for 2005
Stock Incentive Plan
Form of Outside Director's Restricted Stock Unit Agreement
under Second Amended and Restated 2005 Stock Option
and Incentive Plan
Form of Executive Officer Restricted Stock Agreement
under Second Amended and Restated 2005 Stock Option
and Incentive Plan
Form of Performance-Based Restricted Stock Unit
Agreement under Second Amended and Restated 2005
Stock Option and Incentive Plan
Form of Outside Directors Amended and Restated
Restricted Stock Agreement under 2010 Outside Director
Compensation Program
10.15*
Quality Systems, Inc. 2015 Equity Incentive Plan
10.16*
Quality Systems, Inc. Amended 2015 Equity Incentive Plan
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
NextGen Healthcare, Inc. 2015 Equity Incentive Plan, as
amended
Form of Stock Option Grant Notice, Option Agreement and
Notice of Exercise for 2015 Equity Incentive Plan
Form of Employee Restricted Stock Award Grant Notice and
Restricted Stock Award Agreement for 2015 Equity Incentive
Plan
Form of Outside Director Restricted Stock Award Grant
Notice and Restricted Stock Award Agreement for 2015
Equity Incentive Plan
Form of Employee Restricted Stock Award Grant Notice and
Restricted Stock Award Agreement for 2015 Equity Incentive
Plan, as amended
Form of Outside Director Restricted Stock Award Grant
Notice and Restricted Stock Award Agreement for 2015
Equity Incentive Plan, as amended
Form of Stock Option Grant Notice, Option Agreement and
Notice of Exercise for 2015 Equtiy Incentive Plan, as
amended.
52
Filed
Herewith
Incorporated by Reference
Form Exhibit
8-K
10.1
Filing Date
4-Apr-18
DEF14A Appendix I
1-Jul-11
8-K
10.3
5-Jun-07
8-K
10.2
5-Jun-07
8-K
10.1
15-Aug-11
8-K
10.2
28-May-13
10-K
10.17
29-May-14
8-K
10.2
2-Feb-10
8-K
8-K
8-K
10.1
10.1
10.2
14-Aug-15
23-Aug-17
16-Aug-19
8-K
10.4
14-Aug-15
8-K
10.2
14-Aug-15
8-K
10.3
14-Aug-15
8-K
10.3
16-Aug-19
8-K
10.4
16-Aug-19
8-K
10.5
16-Aug-19
Exhibit
Number
10.24*
10.25*
Exhibit Description
Form of Performance Stock Award Grant Notice and
Performance/Restricted Stock Award Agreement for 2015
Equity Incentive Plan, entered into with the Company's
named executive officers effective December 29, 2016.
Form of Restricted Stock Award Grant Notice and
Performance/Restricted Stock Award Agreement for 2015
Equity Incentive Plan, entered into with the Company's
named executive officers effective December 29, 2016.
Filed
Herewith
Incorporated by Reference
Form Exhibit
8-K
10.2
Filing Date
3-Jan-17
8-K
10.3
3-Jan-17
10.26*
Quality Systems, Inc. 2014 Employee Share Purchase Plan
DEF14A Annex A
27-Jun-14
8-K
10.1
4-Jun-15
8-K
10.1
23-Jan-19
8-K
8-K
8-K
8-K
8-K
10.1
28-Jan-16
10.1
18-Feb-16
10.1
1-Dec-17
10.2
23-Jan-19
10.1
16-Aug-19
8-K
10-K
10.1
10.8
28-Jan-13
30-May-13
8-K
10.1
17-Jul-13
10.27*
10.28
10.29*
10.30*
10.31*
10.32*
10.33*
Executive Employment Agreement, dated June 3, 2015,
between Quality Systems, Inc. and John R. Frantz
Executive Employment Agreement Addendum, dated as of
January 22, 2019, between NextGen Healthcare, Inc. and
John R. Frantz
Employment Offer Letter, dated January 27, 2016, between
David Metcalfe and Quality Systems, Inc.
Employment Offer Letter, dated February 16, 2016, between
James R. Arnold and Quality Systems, Inc.
Employment Offer Letter, dated February 16, 2016, between
Jeffrey D. Linton and Quality Systems, Inc.
Separation Agreement, dated as of January 21, 2019,
between NextGen Healthcare, Inc. and Scott Bostick
NextGen Healthcare, Inc, FY2020 Director Compensation
Plan
10.34*
Form of Indemnification Agreement (Directors and Officers)
10.35*
10.36*
21
23.1
31.1
31.2
32.1
2009 Quality Systems, Inc. Amended and Restated
Deferred Compensation Plan.
Agreement by and among Quality Systems, Inc., the Clinton
Group, Inc. and certain of its affiliates, dated as of July 17,
2013
List of subsidiaries.
Consent of Independent Registered Public Accounting Firm
— PricewaterhouseCoopers LLP.
Certification of Principal Executive Officer Required by
Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer Required by
Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**
Inline XBRL Instance Document – the instance document
does not appear in the Interactive Data File because its
XBRL tags are embedded within the Inline XBRL document.
101.SCH** Inline XBRL Taxonomy Extension Schema Document
53
X
X
X
X
X
Incorporated by Reference
Filed
Herewith
Form Exhibit
Filing Date
Exhibit
Number
101.CAL**
Exhibit Description
Inline XBRL Taxonomy Extension Calculation Linkbase
Document
101.DEF**
Inline XBRL Taxonomy Extension Definition Linkbase
Document
101.LAB** Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE**
104
Inline XBRL Taxonomy Extension Presentation Linkbase
Document
The cover page from the Company’s Annual Report on
Form 10-K for the year ended March 31, 2020, has been
formatted in Inline XBRL.
* 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 of 1933, 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 liability under these sections.
54
Pursuant 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 its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
By:
/s/ John R. Frantz
John R. Frantz
Chief Executive Officer (Principal Executive
Officer)
By:
/s/ James R. Arnold, Jr.
James R. Arnold, Jr.
Chief Financial Officer (Principal Financial
Officer)
By: /s/ David Ahmadzai
David Ahmadzai
Chief Accounting Officer (Principal
Accounting Officer)
Date: June 1, 2020
55
KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose signature appears below hereby constitutes
and appoints John R. Frantz, James R. Arnold, Jr., and David Ahmadzai, 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 sign any 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, with the
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 act and 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 ratifying and 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 capacities and on the dates indicated.
Signature
Title
Chairman of the Board and Director
Vice Chairman of the Board and Director
Date
June 1, 2020
June 1, 2020
Chief Executive Officer (Principal Executive Officer) and Director
June 1, 2020
Chief Financial Officer (Principal Financial Officer)
June 1, 2020
Chief Accounting Officer (Principal Accounting Officer)
June 1, 2020
Director
Director
Director
Director
Chairman Emeritus and Director
June 1, 2020
June 1, 2020
June 1, 2020
June 1, 2020
June 1, 2020
June 1, 2020
/s/ Jeffrey H. Margolis
Jeffrey H. Margolis
/s/ Craig A. Barbarosh
Craig A. Barbarosh
/s/ John R. Frantz
John R. Frantz
/s/ James R. Arnold, Jr.
James R. Arnold, Jr.
/s/ David Ahmadzai
David Ahmadzai
/s/ George H. Bristol
George H. Bristol
/s/ Julie D. Klapstein
Julie D. Klapstein
/s/ James C. Malone
James C. Malone
/s/ Morris Panner
Morris Panner
/s/ Sheldon Razin
Sheldon Razin
/s/ Lance E. Rosenzweig
Lance E. Rosenzweig
Director
56
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of NextGen Healthcare, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of NextGen Healthcare, Inc. and its subsidiaries
(the “Company”) as of March 31, 2020 and 2019, and the related consolidated statements of net income and
comprehensive income, of shareholders’ equity, and of cash flows for each of the three years in the period ended
March 31, 2020, including the related notes and financial statement schedule listed in the index appearing under
item 15 (a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the
Company's internal control over financial reporting as of March 31, 2020, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of March 31, 2020 and 2019, and the results of its operations and its cash
flows for each of the three years in the period ended March 31, 2020 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of March 31, 2020, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it
accounts for leases in 2020 and the manner in which it accounts for revenue from contracts with customers in
2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over
financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing
under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and
on the Company's internal control over financial reporting based on our audits. We are a public accounting firm
registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are
free of material misstatement, whether due to error or fraud, and whether effective internal control over financial
reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded
Topaz, Medfusion and OTTO from its assessment of internal control over financial reporting as of March 31, 2020
because they were acquired by the Company in purchase business combinations during the year ended March 31,
2020. We have also excluded Topaz, Medfusion and OTTO from our audit of internal control over financial
57
reporting. Topaz, Medfusion and OTTO are wholly-owned subsidiaries whose total assets and total revenues
excluded from management’s assessment and our audit of internal control over financial reporting collectively
represent less than 1% and less than 2%, respectively, of the related consolidated financial statement amounts as
of and for the year ended March 31, 2020.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, 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 of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated
financial statements that were communicated or required to be communicated to the audit committee and that (i)
relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our
especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter
in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by
communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the
accounts or disclosures to which they relate.
Revenue Recognition - Customer Contracts with Multiple Performance Obligations
As described in Note 3 to the consolidated financial statements, the Company recorded total revenues of $540
million for the year ended March 31, 2020. The Company’s contracts with customers may include multiple
performance obligations that consist of various combinations of software solutions and related services, which are
generally capable of being distinct and accounted for as separate performance obligations. The total transaction
price is allocated to each performance obligation within a contract based on estimated standalone selling prices.
Standalone selling prices are generally determined based on the prices charged to customers, except for certain
software licenses that are based on the residual approach because their standalone selling prices are highly variable
and certain maintenance customers that are based on substantive renewal rates.
The principal considerations for our determination that performing procedures relating to revenue recognition,
specifically customer contracts with multiple performance obligations, is a critical audit matter are there was
significant judgment by management in identifying distinct performance obligations for each contract and in
determining the amount to be allocated to each performance obligation. This in turn led to a high degree of
auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to
whether management appropriately (i) identified all performance obligations and (ii) allocated the transaction
price to each performance obligation within the contract.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming
our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness
of controls relating to the revenue recognition process, including controls related to management’s identification
of performance obligations, determination of the estimated standalone selling price, and allocation of transaction
price. These procedures also included, among others, reviewing contracts with customers for a sample of contracts
and i) testing management’s identification of distinct performance obligations in its contracts with customers, ii)
58
testing management’s estimate of standalone selling prices and (iii) testing management’s allocation of
transaction price to the performance obligations.
Acquisition of Medfusion, Inc.
As described in Notes 2 and 6 to the consolidated financial statements, in December 2019, the Company
completed its acquisition of Medfusion, Inc. for net consideration of $43 million, which resulted in $21 million of
intangible assets being recorded. Management allocated the purchase price of the acquired business to the
tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the
acquisition date using multiple valuation approaches depending on the type and nature of the tangible or
intangible asset acquired or liability assumed, including but not limited to the income approach, the excess
earnings method and the relief from royalty method approach. The purchase price allocation methodology
contains uncertainties as it requires management to make assumptions and to apply judgment to estimate the fair
value of acquired assets and liabilities, including, but not limited to, intangible assets and goodwill. As disclosed
by management, the process for estimating fair values in many cases requires the use of significant estimates,
assumptions, and judgments, including determining the timing and estimates of future cash flows and developing
appropriate discount rates.
The principal considerations for our determination that performing procedures relating to the acquisition of
Medfusion, Inc. is a critical audit matter are there was significant judgment by management when developing the
estimated fair value of acquired intangible assets. This in turn led to significant auditor judgment and subjectivity
in performing procedures relating to the valuation of acquired intangible assets and significant audit effort was
necessary in evaluating the significant assumptions relating to the estimate, including the timing and amounts of
future cash flows. In addition, the audit effort involved the use of professionals with specialized skill and
knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming
our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness
of controls (i) relating to the acquisition accounting, including controls over management’s valuation of the
intangible assets and (ii) over development of the assumptions related to the valuation of the intangible assets,
including the timing and estimates of future cash flows. These procedures also included, among others, reading
the purchase agreement, testing management’s process for estimating the fair value of intangible assets and
testing management’s cash flow projections used to develop the estimate of the fair value of the intangible assets.
Testing management’s process included evaluating the appropriateness of the valuation methods and the
reasonableness of significant assumptions, including the timing and estimates of future cash flows. Evaluating the
reasonableness of the timing and estimates of future cash flows involved considering the past performance of the
acquired business, as well as economic and industry forecasts. Professionals with specialized skill and knowledge
were used to assist in evaluating the appropriateness of the valuation methods used and the reasonableness of
certain significant assumptions.
/s/ PricewaterhouseCoopers LLP
Irvine, California
June 1, 2020
We have served as the Company’s auditor since 2009.
59
NEXTGEN HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
March 31, 2020
March 31, 2019
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash and cash equivalents
Accounts receivable, net
Contract assets
Income taxes receivable
Prepaid expenses and other current assets
Total current assets
Equipment and improvements, net
Capitalized software costs, net
Operating lease assets
Deferred income taxes, net
Contract assets, net of current
Intangibles, net
Goodwill
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable
Contract liabilities
Accrued compensation and related benefits
Income taxes payable
Operating lease liabilities
Other current liabilities
Total current liabilities
Deferred compensation
Line of credit
Operating lease liabilities, net of current
Other noncurrent liabilities
Total liabilities
Commitments and contingencies (Note 15)
Shareholders' equity:
Common stock
$0.01 par value; authorized 100,000 shares; issued and outstanding
66,134 and 64,838 shares at March 31, 2020 and March 31, 2019,
respectively
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity
$
$
$
$
138,012 $
2,307
80,006
12,529
856
26,305
260,015
19,836
37,004
31,004
10,620
3,007
57,809
267,165
33,656
720,116 $
10,521 $
56,786
23,792
148
10,619
41,352
143,218
5,300
129,000
38,823
3,281
319,622
661
282,857
(2,143 )
119,119
400,494
720,116 $
33,079
1,443
87,459
13,242
3,682
20,946
159,851
21,404
37,855
—
6,194
3,747
52,595
218,771
32,478
532,895
5,432
56,009
25,663
64
—
41,064
128,232
5,905
11,000
—
11,812
156,949
648
264,908
(1,231)
111,621
375,946
532,895
The accompanying notes are an integral part of these consolidated financial statements.
60
NEXTGEN HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
Revenues:
Recurring
Software, hardware, and other non-recurring
Total revenues
$
Cost of revenue:
Recurring
Software, hardware, and other non-recurring
Amortization of capitalized software costs and acquired intangible
assets
Total cost of revenue
Gross profit
Operating expenses:
Selling, general and administrative
Research and development costs, net
Amortization of acquired intangible assets
Impairment of assets
Restructuring costs
Total operating expenses
Income from operations
Interest income
Interest expense
Other income, net
Income before provision for (benefit of) income taxes
Provision for (benefit of) income taxes
Net income
Other comprehensive income:
Foreign currency translation, net of tax
Comprehensive income
Net income per share:
Basic
Diluted
Weighted-average shares outstanding:
Basic
Diluted
$
$
$
$
Fiscal Year Ended March 31,
2019
2020
2018
489,313
50,926
$
540,239
205,057
26,904
35,478
267,439
272,800
165,174
83,295
4,143
12,571
2,505
267,688
5,112
256
(1,955)
846
4,259
(3,239)
7,498 $
473,921 $
55,252
529,173
191,496
26,711
28,490
246,697
282,476
164,879
80,994
4,344
—
640
250,857
31,619
216
(2,814 )
267
29,288
4,794
24,494 $
(912)
6,586 $
(831 )
23,663 $
0.11
0.11
$
$
0.38 $
0.38 $
476,214
54,805
531,019
194,360
25,085
22,090
241,535
289,484
193,226
81,259
7,810
3,757
611
286,663
2,821
55
(3,323)
37
(410)
(2,830)
2,420
(42)
2,378
0.04
0.04
65,474
65,612
64,417
64,600
63,435
63,440
The accompanying notes are an integral part of these consolidated financial statements.
61
NEXTGEN HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
Common Stock
Shares Amount
625
62,455
Additional
Paid-in
Capital
228,549
Accumulated
Other
Total
Retained Comprehensive Shareholders'
Earnings
76,227
305,043
Equity
(358 )
Loss
1,540
—
15
—
3,818
12,196
—
—
(101)
61
—
—
63,995
—
—
—
2,420
640 244,462 78,708
—
—
843
—
8
—
4,344
16,102
—
—
—
—
—
(42 )
—
(400 )
—
—
3,833
12,196
(40)
(42)
2,420
323,410
4,352
16,102
—
—
—
8,419
—
8,419
—
—
64,838
—
—
648
—
—
264,908
—
24,494
111,621
(831 )
—
(1,231 )
(831)
24,494
375,946
1,296
—
13
—
(1,745)
19,694
—
—
—
—
(1,732)
19,694
Balance, March 31, 2017
Common stock issued under stock plans,
net of shares withheld for taxes
Stock-based compensation
Cumulative effect adjustment related to the
adoption of ASU 2016-09
Components of other comprehensive
income:
Translation adjustments
Net income
Balance, March 31, 2018
Common stock issued under stock plans,
net of shares withheld for taxes
Stock-based compensation
Cumulative effect adjustment related to the
adoption of ASC 606
Components of other comprehensive
income:
Translation adjustments
Net income
Balance, March 31, 2019
Common stock issued under stock plans,
net of shares withheld for taxes
Stock-based compensation
Components of other comprehensive
income:
Translation adjustments
Net income
Balance, March 31, 2020
—
—
66,134 $
—
—
—
—
661 $ 282,857 $ 119,119 $
—
7,498
(912 )
—
(2,143 ) $
(912)
7,498
400,494
The accompanying notes are an integral part of these consolidated financial statements.
62
NEXTGEN HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Year Ended March 31,
2019
2020
2018
$
7,498
$
24,494 $
2,420
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of capitalized software costs
Amortization of debt issuance costs
Amortization of other intangibles
Change in fair value of contingent consideration
Deferred income taxes
Depreciation
Excess tax deficiency (benefit) from share-based compensation
Impairment of assets
Loss on disposal of equipment and improvements
Non-cash operating lease costs
Provision for bad debts
Share-based compensation
Changes in assets and liabilities, net of amounts acquired:
Accounts receivable
Contract assets
Accounts payable
Contract liabilities
Accrued compensation and related benefits
Income taxes
Deferred compensation
Operating lease liabilities
Other assets and liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Additions to capitalized software costs
Additions to equipment and improvements
Payments for acquisitions, net of cash acquired
Proceeds from over-funded corporate-owned life insurance policies
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from line of credit
Repayments on line of credit
Payment of debt issuance costs
Payment of contingent consideration related to acquisitions
Proceeds from issuance of shares under employee plans
Payments for taxes related to net share settlement of equity awards
Net cash provided by (used in) financing activities
Net increase (decrease) in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash at beginning of period
Cash, cash equivalents, and restricted cash at end of period
Supplemental disclosures of cash flow information:
Cash paid for income taxes
Cash refunds from income taxes
Cash paid for interest
Cash paid for amounts included in the measurement of operating lease
liabilities
Operating lease assets obtained in exchange for operating lease liabilities
Non-cash additions to capitalized software
Accrued purchases of equipment and improvements
$
$
17,085
710
22,536
(950)
(5,379)
8,172
(53)
12,571
41
8,108
3,367
19,694
4,937
1,458
3,330
(133)
(2,419)
2,454
(605)
(9,684)
(7,137)
85,601
(19,432)
(7,449)
(71,691)
2,500
(96,072)
137,000
(19,000)
—
—
2,409
(4,141)
116,268
105,797
34,522
140,319
2,599
2,728
1,266
11,527
8,494
—
173
$
$
11,338
710
21,496
1,000
245
10,298
(365 )
—
194
—
5,644
16,102
(6,178 )
(812 )
1,070
(4,131 )
(2,992 )
4,049
(181 )
—
(31,506 )
50,475
(20,571 )
(4,952 )
—
—
(25,523 )
26,000
(52,000 )
—
—
7,533
(3,181 )
(21,648 )
3,304
31,218
34,522 $
1,570 $
675
1,819
—
—
2,304
149
6,518
1,610
23,380
—
312
10,498
328
3,757
169
—
5,913
12,297
(5,409 )
—
(1,232 )
847
2,228
(8,530 )
(543 )
—
19,480
74,043
(18,865 )
(9,801 )
(62,867 )
—
(91,533 )
50,000
(28,000 )
(1,105 )
(18,817 )
4,889
(848 )
6,119
(11,371 )
42,589
31,218
6,379
1,874
1,953
—
—
—
72
The accompanying notes are an integral part of these consolidated statements.
63
NEXTGEN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES INDEX
Note
Organization of Business
Summary of Significant Accounting Policies
Revenue from Contracts with Customers
Fair Value Measurements
Leases
Business Combinations
Goodwill
Intangible Assets
Capitalized Software Costs
Note 1
Note 2
Note 3
Note 4
Note 5
Note 6
Note 7
Note 8
Note 9
Note 10 Line of Credit
Note 11 Composition of Certain Financial Statement Captions
Note 12 Income Taxes
Note 13 Employee Benefit Plans
Note 14 Share-Based Awards
Note 15 Commitments, Guarantees and Contingencies
Note 16 Restructuring Plan
Note 17 Selected Quarterly Operating Results (unaudited)
Note 18 Subsequent Events
Page
65
65
70
74
75
77
80
81
81
82
83
84
87
87
90
92
93
93
64
NEXTGEN HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
1. Organization of Business
Description of Business
NextGen Healthcare is a leading provider of ambulatory-focused healthcare software and services solutions. In pursuit of our
mission to empower the transformation of ambulatory care, we provide innovative technology-based solutions that help our
clients succeed while they are managing more complexity and assuming greater financial risk.
Our clients span the ambulatory care market from small single specialty practices to larger multi-specialty organizations. We
have fully integrated our solutions so that our clients are able to provide their patients with comprehensive services utilizing a
single platform. Our highly interoperable platform allows ambulatory practices to thrive especially in complex, heterogeneous
healthcare communities where frictionless clinical data exchange is required to coordinate and optimize patient care.
NextGen Healthcare has historically enhanced our solutions through both organic and inorganic activities. In October 2015, we
divested our former Hospital Solutions division to focus exclusively on the ambulatory marketplace. In January 2016, we
acquired HealthFusion Holdings, Inc. and its cloud-based electronic health record and practice management solution. In April
2017, we acquired Entrada, Inc. and its cloud-based, mobile platform for clinical documentation and collaboration. In August
2017, we acquired EagleDream Health, Inc. and its cloud-based population health analytics solution. In January 2018, we
acquired Inforth Technologies for its specialty-focused clinical content. In October 2019, we acquired Topaz Information
Systems, LLC ("Topaz") for its behavioral health solutions. In December 2019, we acquired Medfusion, Inc. (“Medfusion”) for
its patient experience platform capabilities and, also in December 2019, we acquired OTTO Health, LLC (“OTTO”) for its
integrated virtual care solutions. The integration of these acquired technologies have made NextGen Healthcare’s solutions
among the most comprehensive and powerful in the market.
The Company was incorporated in California in 1974. Previously named Quality Systems, Inc., the Company changed its
corporate name to NextGen Healthcare, Inc. in September 2018. Our principal offices are located at 18111 Von Karman Ave.,
Suite 800, Irvine, California, 92612, and our principal website is www.nextgen.com. We operate on a fiscal year ending on
March 31.
2. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include the accounts of NextGen Healthcare, Inc. and its
wholly-owned subsidiaries (collectively, the “Company”). Each of the terms “NextGen Healthcare,” “NextGen,” “we,” “us,” or
“our” as used herein refers collectively to the Company, unless otherwise stated. All intercompany accounts and transactions
have been eliminated.
Business Segments. We operated as one segment for the years ended March 31, 2020 and 2019. The measures evaluated
by our chief operating decision maker ("CODM"), consisting of our Chief Executive Officer, to assess company performance
and make decisions about the allocation of resources include consolidated revenue and consolidated operating results.
Basis of Presentation. Certain prior period amounts have been reclassified to conform to current year presentation.
References to amounts in the consolidated financial 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 the United States of America (“GAAP”), which requires us to make estimates and assumptions
that affect the amounts reported and disclosed in the consolidated financial 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 of which form the basis for making judgments about the carrying values of assets and liabilities and recording revenue
and expenses during the period.
65
The extent to which COVID-19 impacts our business and financial results will depend on numerous evolving factors including,
but not limited to, the magnitude and duration of COVID-19; the impact on our employees; the extent to which it will impact
worldwide macroeconomic conditions, including interest rates, employment rates, and health insurance coverage; the speed of
the anticipated recovery; and governmental and business reactions to the pandemic. We assessed certain accounting matters
that generally require consideration of forecasted financial information in context with the information reasonably available to
the Company and the unknown future impacts of COVID-19 at March 31, 2020 and through the date of this Annual Report on
Form 10-K. The accounting matters assessed included, but were not limited to, our allowances for doubtful accounts and the
carrying value of goodwill and other long-lived assets. While there was not a material impact to our consolidated financial
statements at and for the year ended March 31, 2020, our future assessment of the magnitude and duration of COVID-19, as
well as other factors could result in material impacts to our consolidated financial statements in future reporting periods.
Revenue Recognition. We adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers:
Topic 606 (“ASC 606”) and all related amendments as of April 1, 2018 using the modified retrospective method for all contracts
not completed as of the date of adoption. ASC 606 supersedes the revenue recognition requirements in Accounting Standards
Codification Topic 605, Revenue Recognition (“ASC 605”), and requires entities to recognize revenue when control of the
promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects
to be entitled to in exchange for those goods or services. Refer to Note 3, "Revenue from Contracts with Customers" for
additional information regarding our revenue recognition policies under ASC 606.
Cash and Cash Equivalents. Cash and cash equivalents consist primarily of cash and money market funds with original
maturities of less than 90 days. At March 31, 2020 and March 31, 2019, we had cash and cash equivalents of $138,012 and
$33,079, respectively. We also had cash deposits held at United States banks and financial institutions at March 31, 2020 of
which $137,319 was in excess of the Federal Deposit Insurance Corporation insurance 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 the institutions;
however, we do not anticipate nonperformance by these institutions.
Money market funds in which we hold a portion of our excess cash are invested in very high grade commercial and
governmental instruments, and therefore bear low 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 the disbursement of certain state social and care services programs. We record an offsetting
liability when we initially receive such cash from the programs. We relieve both restricted cash and cash equivalents and the
related liability when amounts are disbursed. We earn an administrative fee based on a percentage of the funds disbursed on
behalf of the government social and care service programs.
Reserves on Accounts Receivable. We maintain reserves for estimated potential sales returns and uncollectible accounts
receivable. Accounts receivable are reported net of uncollectible accounts receivable on our consolidated balance sheets.
Our standard contracts generally do not contain provisions for clients to return products or services. However, we historically
have accepted sales returns under limited circumstances. We estimate expected sales returns and other forms of variable
consideration considering our customary business practice and contract-specific facts and circumstances, and we consider
such estimated potential returns as variable consideration when allocating the transaction price to the extent it is probable that
there will not be a significant reversal of cumulative revenue recognized.
Allowances for doubtful accounts and other uncollectible accounts receivable related to estimated losses resulting from our
clients’ inability to make required payments are established based on our assessment of the collectability of client accounts,
including review of our historical experience of bad debt expense and the aging of our accounts receivable balances, net of
specifically reserved accounts and amounts billed prior to revenue recognition. Specific reserves are based on our estimate of
the probability of collection for certain accounts. We regularly review the adequacy of these allowances by considering internal
factors such as historical experience, credit quality and age of the client receivable balances as well as external factors such
as economic conditions that may affect a client’s ability to pay and review of major third-party credit-rating agencies, as
needed. Accounts are written off as uncollectible only after we have expended extensive collection efforts.
Equipment and Improvements. Equipment and improvements are stated at cost less accumulated depreciation and
amortization. Repair and maintenance costs that do not improve service potential or extend economic life are expensed as
incurred. Depreciation and amortization of equipment and improvements are recorded 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 following ranges:
Computer equipment - 3 to 5 years
Furniture and fixtures - 3 to 7 years
Leasehold improvements - lesser of lease term or estimated useful life of asset
Depreciation expense related to our equipment and improvements was $8,172, $10,298, and $10,498 for the years ended
March 31, 2020, 2019, and 2018, respectively.
66
Capitalized Software Costs. Software development costs, consisting primarily of employee salaries and benefits and certain
third party costs, incurred in the development of new software solutions and enhancements to existing software solutions for
external sale are expensed as incurred, and reported as net research and development costs in the consolidated statements
of net income and comprehensive income, until technological feasibility has been established. After technological feasibility is
established, any additional software development costs are capitalized. Amortization of capitalized software is recorded on a
straight-line basis over the estimated economic life of the related product, which is typically three years. The total of capitalized
software costs incurred in the development of products for external sale are reported as capitalized software costs within our
consolidated balance sheets.
We also incur costs related to the development of software applications for our internal-use and for the development of
software-as-a-service ("SaaS") based solutions sold to our clients. The development costs of our SaaS-based solutions are
considered internal-use for accounting purposes. Our internal-use capitalized development costs are stated at cost and
amortized on a straight-line basis over the estimated useful lives of the assets, which is typically three years. Application
development stage costs generally include costs associated with internal-use software configuration, coding, installation and
testing. Costs related to the preliminary project stage and post-implementation activities are expensed as incurred. Costs of
significant upgrades and enhancements that result in additional functionality are also capitalized, whereas costs incurred for
maintenance and minor upgrades and enhancements are expensed as incurred. Capitalized software costs for the
development of SaaS-based solutions are reported as capitalized software costs within our consolidated balance sheets and
capitalized software costs for the development of 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 we determine
that capitalized amounts are not recoverable based on the expected net cash flows to be generated from sales of the
applicable software solutions, the amount by which the unamortized capitalized costs exceed the net realizable value is written
off as a charge to earnings. The net realizable value is estimated as the expected future gross revenues from that product
reduced by the estimated future costs of completing and disposing of that product, including the costs of performing
maintenance and client support required to satisfy our responsibility at the time of sale. In addition to the assessment of net
realizable value, we review and adjust the remaining estimated lives of our capitalized software costs, if necessary. We also
perform a periodic review of our software solutions and dispose of fully amortized capitalized software costs after such
products are determined to be no longer used by our clients.
Business Combinations. In accordance with the accounting for business combinations, we allocate the purchase price of the
acquired business to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values
as of the acquisition date. The fair values of acquired assets and liabilities assumed represent our best estimate of fair value.
The estimated fair value of the acquired tangible and intangible assets and liabilities assumed were determined using multiple
valuation approaches depending on the type and nature of tangible or intangible asset acquired or liabilities assumed,
including but not limited to the income approach, the excess earnings method and the relief from royalty method
approach. The purchase price allocation methodology contains uncertainties as it requires us to make assumptions and to
apply judgment to estimate the fair value of acquired assets and liabilities, including, but not limited to, intangible assets,
goodwill, deferred revenue, and contingent consideration liabilities. We estimate the fair value of the contingent consideration
liabilities, as needed, based on our projection of expected results and the estimated probability of achievement. The process to
develop the estimate of fair values in many cases requires the use of significant estimates, assumptions and judgments,
including determining the timing and estimates of future cash flows and developing appropriate discount rates. Unanticipated
events or circumstances may occur which could affect the accuracy of our fair value estimates, including assumptions
regarding industry economic factors and business strategies. We expect to finalize the purchase price allocation as soon as
practicable within the measurement period, but not later than one year following the acquisition date. Any adjustments to fair
value subsequent to the measurement period are reflected in the consolidated statements of net income and comprehensive
income.
Goodwill. Goodwill acquired in a business combination is measured as the excess of the purchase price, or consideration
transferred, over the net acquisition date 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.
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 reporting unit 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 conduct a two-step quantitative goodwill impairment test. The first
step of the impairment test involves comparing the fair values of the applicable reporting units with their 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
impairment test. 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 of that goodwill. The amount by which the carrying value of the goodwill
exceeds its implied fair value, if any, is recognized as an impairment loss.
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 test dates if an event occurs or circumstances change that would indicate the carrying amount
may be impaired.
Intangible Assets. Intangible assets consist of trade names, customer relationships, and software technology, all of which are
associated with our acquisitions.
67
The intangible assets are recorded at fair value and are reported net of accumulated amortization. We currently amortize the
intangible assets over periods ranging from 5 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 intangible assets at least annually or whenever
adverse events or changes in circumstances indicate that impairment 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 of such assets, impairment is
deemed to have occurred and a loss is recognized to reduce the carrying value of the intangible assets to fair value, which is
determined by discounting estimated future cash flows. In addition to the impairment assessment, we routinely review the
remaining estimated lives of our intangible assets and record adjustments, if deemed necessary.
Long-Lived Assets. We assess our long-lived assets for potential impairment periodically or whenever adverse events or
changes in circumstances indicate that impairment may have occurred. If necessary, recoverability of the assets is evaluated
based on the future undiscounted cash flows expected to result from the use of the related assets compared to the carrying
value of such assets. If impairment is deemed to have occurred, a loss is recognized to reduce the carrying value of the long-
lived assets to fair value, which is determined by discounting the 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 of assets and liabilities for financial and tax reporting. The deferred income tax assets and
liabilities represent the future state and federal tax return consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled. Deferred income taxes are also recognized for operating
losses that are available to offset future taxable income and tax credits that are available to offset future income taxes. At each
reporting period, we assess the realizable value of deferred tax assets based on, among other things, estimates of future
taxable income and adjust the related valuation allowance as necessary. We make a number of assumptions and estimates in
determining the appropriate amount of expense to record for income taxes. The assumptions and estimates consider the
taxing jurisdiction in which we operate as well as current tax regulations. Accruals are established for estimates 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 shows and conventions, were approximately $6,044, $8,226, and $9,073 for the years ended March
31, 2020, 2019, and 2018, respectively, and were included in selling, general and administrative expenses in the
accompanying consolidated statements of net income and comprehensive income.
Earnings 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,
2019
2018
2020
Earnings per share — Basic:
Net income
Weighted-average shares outstanding — Basic
Net income per common share — Basic
Earnings per share — Diluted:
Net income
Weighted-average shares outstanding
Effect of potentially dilutive securities
Weighted-average shares outstanding — Diluted
Net income per common share — Diluted
$
$
$
7,498
65,474
$
0.11 $
24,494 $
64,417
0.38 $
$
7,498
65,474
138
65,612
$
0.11 $
24,494 $
64,417
183
64,600
0.38 $
2,420
63,435
0.04
2,420
63,435
5
63,440
0.04
The computation of diluted net income per share does not include 1,807, 1,963 and 2,984 options for the years ended March
31, 2020, 2019, and 2018, respectively, 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 and comprehensive income for the fiscal year ended March 31, 2020, 2019, and 2018:
Costs and expenses:
Cost of revenue
Research and development costs
Selling, general and administrative
Total share-based compensation
Estimated income tax benefit
Decrease in net income
Fiscal Year Ended March 31,
2019
2018
2020
$
$
2,051 $
3,875
13,768
19,694
(4,726)
14,968 $
1,252 $
2,919
11,931
16,102
(3,859 )
12,243 $
938
2,038
9,220
12,196
(4,125)
8,071
68
Recently Adopted Accounting Pronouncements. Recently adopted accounting pronouncements are discussed below or in
the notes, where applicable.
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02,
Leases (Topic 842) (“ASU 2016-02”), which was intended to improve financial reporting about leasing transactions. The new
guidance requires lessees to recognize on their balance sheets the assets and liabilities for the rights and obligations created
by leases and to disclose key information about the leasing arrangements. We have implemented the necessary changes to
our policies, processes, and internal controls over financial reporting to meet the requirements under the new guidance related
to identifying and measuring right-of-use assets and lease liabilities, including related disclosures.
We adopted ASU 2016-02 and its subsequent amendments (together “ASC 842”) using the cumulative-effect adjustment
transition method, which is the additional transition method described within ASU 2018-11, Leases (Topic 842): Targeted
Improvements, issued by the FASB in July 2018, which allowed us to apply the new lease standard as of April 1, 2019, rather
than the beginning of the earliest period presented. We elected the package of practical expedients that permitted us to not
reassess: (1) whether any expired contracts are or contain leases; (2) the lease classification for any existing or expired
leases, and (3) the initial direct costs for our existing leases.
Upon adoption of ASC 842, we recognized operating lease right-of-use assets of $38,784, operating lease liabilities of $8,873,
and long-term operating lease liabilities of $42,114 on our consolidated balance sheet as of April 1, 2019, and corresponding
reductions to other current liabilities of $2,342 and other noncurrent liabilities of $9,861 associated with previously recognized
deferred rent and remaining lease obligations. There was no cumulative-effect adjustment required to retained earnings. The
adoption of ASC 842 did not have a significant effect on our consolidated results of operations or cash flows. Comparative
information in this Annual Report on Form 10-K has not been adjusted and continues to be reported under the previous lease
accounting rules. Refer to Note 5 for additional details.
Recent Accounting Standards Not Yet Adopted. Recent accounting pronouncements requiring implementation in current or
future periods are discussed below or in the notes, where applicable.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,
which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions
to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU
2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early
adoption is permitted, including adoption in an interim period. ASU 2019-12 is effective for us in the first quarter of fiscal 2022.
We are currently in the process of evaluating the potential impact of adoption of this updated authoritative guidance on our
consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
(“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting
arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain
internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for
annual periods, and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is
permitted, including adoption in an interim period. ASU 2018-15 is effective for us in the first quarter of fiscal 2021, and we
currently do not expect the adoption of this new standard to have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework–Changes to the
Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 modifies certain disclosure
requirements on fair value measurements in Topic 820, Fair Value Measurement. ASU 2018-13 is effective for annual periods,
and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted, including
adoption in an interim period. ASU 2018-13 is effective for us in the first quarter of fiscal 2021, and we currently do not expect
the adoption of this new standard to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles–Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 removes the requirement to compare the implied fair value of goodwill
with its carrying amount as part of Step two of the goodwill impairment test. Instead, an entity should perform its annual, or
interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize
an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. ASU 2017-04 is
effective prospectively for annual and interim periods beginning after December 15, 2019, and early adoption is permitted on
goodwill impairment tests performed on testing dates after January 1, 2017. ASU 2017-04 is effective for us in the first quarter
of fiscal 2021, and we currently do not expect the adoption of this new standard to have a material impact on our consolidated
financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments. ASU 2016-13 provides new guidance regarding the measurement and recognition of credit
losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU
2016-13 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019.
Early adoption is permitted, including adoption in an interim period. ASU 2016-13 is effective for us in the first quarter of fiscal
69
2021, and we currently do not expect the adoption of this new standard to have a material impact on our consolidated financial
statements.
We do not believe that any other recently issued, but not yet effective accounting standards, if adopted, would have a material
impact on our consolidated financial statements.
3. Revenue from Contracts with Customers
Adoption of ASC 606
We adopted ASC 606 and all related amendments as of April 1, 2018 using the modified retrospective method for all contracts
not completed as of the date of adoption. Results for reporting periods beginning after April 1, 2018 are presented under ASC
606, while prior period comparative information has not been adjusted and continues to be reported under the accounting
standards in effect for those prior periods.
The adjustments to reflect the cumulative effect of the changes to the balances of our previously reported consolidated
balance sheet as of March 31, 2018 for the adoption of ASC 606 are summarized as follows:
As Reported
March 31, 2018
ASC 606 Transition
Adjustments
Adjusted
April 1, 2018
ASSETS
Accounts receivable, net
Contract assets
Prepaid expenses and other current assets
Deferred income taxes, net
Contract assets, net of current
Other assets
$
LIABILITIES
Contract liabilities
Accrued compensation and related benefits
Other current liabilities
Contract liabilities, net of current
SHAREHOLDERS' EQUITY
Retained earnings
$
84,962
—
17,360
9,219
—
18,795
54,079
27,910
48,317
1,173
78,708
2,380 $
13,446
(223 )
(2,884 )
2,731
6,679
4,174
745
9,964
(1,173 )
87,342
13,446
17,137
6,335
2,731
25,474
58,253
28,655
58,281
—
8,419
87,127
We recorded a net increase to retained earnings of $8,419 as of April 1, 2018 due to the cumulative impact of adopting ASC
606, with the impact primarily related to (i) revenue cycle management (“RCM”) and related services revenue whereby
revenue recognition may be accelerated under ASC 606 for software, subscriptions, support and maintenance, and
professional services included with RCM arrangements as the timing of revenue recognition is based upon the transfer of
value of the promised goods or services to our clients, which may occur prior to the time that client collections occur, (ii) the
amortization of capitalized direct sales commissions costs over a longer period of time under ASC 606, and (iii) the income tax
impact of the cumulative transition adjustment. Further, we recorded reclassifications to present certain unbilled amounts as
contract assets and sales returns reserves and certain customer liabilities as other current liabilities, which were both
previously recorded within accounts receivables on our consolidated balance sheets.
70
We applied the practical expedient permitting the recognition of revenue in the amount to which the entity has a right to invoice
based on the actual usage by the customers for our electronic data interchange (“EDI”) services and other transaction-based
services. We have reflected the aggregate effect of all contract modifications occurring prior to the ASC 606 adoption date
when (i) identifying the satisfied and unsatisfied performance obligations, (ii) determining the transaction price, and (iii)
allocating the transaction price to the satisfied and unsatisfied performance obligations.
The adoption of ASC 606 had no transition impact on cash provided by or used in operating, financing or investing activities
reported in our consolidated statement of cash flows.
The impact of the adoption of ASC 606 on our consolidated balance sheet and consolidated statements of net income and
comprehensive income for the year ended March 31, 2019, assuming that the previous revenue recognition guidance in ASC
605 had been in effect, is summarized as follows:
ASSETS
$
Accounts receivable, net
Contract assets
Income taxes receivable
Prepaid expenses and other current assets
Deferred income taxes, net
Contract assets, net of current
Other assets
LIABILITIES
Contract liabilities
Accrued compensation and related benefits
Other current liabilities
Contract liabilities, net of current
SHAREHOLDERS' EQUITY
Retained earnings
Revenues:
Recurring
Software, hardware, and other non-recurring
$
Total revenue
Total cost of revenue
Gross profit
Operating expenses:
Selling, general and administrative
Research and development costs, net
Amortization of acquired intangibles
Restructuring costs
Total operating expenses
Income from operations
Interest and other income, net
Income before provision for income taxes
Provision for income taxes
Net income
$
As reported under
ASC 606
Adjustments due to As disclosed under
adoption of ASC 606
ASC 605
March 31, 2019
87,459 $
13,242
3,682
20,946
6,194
3,747
32,478
56,009
25,663
41,064
—
1,220 $
(13,242 )
409
692
4,457
(3,747 )
(12,611 )
(1,348 )
712
(7,838 )
888
88,679
—
4,091
21,638
10,651
—
19,867
54,661
26,375
33,226
888
111,621
(15,236 )
96,385
Fiscal Year Ended March 31, 2019
As reported under
ASC 606
Adjustments due to As disclosed under
adoption of ASC 606
ASC 605
$
473,921
55,252
529,173
246,697
282,476
164,879
80,994
4,344
640
250,857
31,619
(2,331)
29,288
4,794
24,494 $
(430 ) $
(1,448 )
(1,878 )
159
(2,037 )
6,762
—
—
—
6,762
(8,799 )
—
(8,799 )
(1,982 )
(6,817 ) $
473,491
53,804
527,295
246,856
280,439
171,641
80,994
4,344
640
257,619
22,820
(2,331)
20,489
2,812
17,677
As of March 31, 2019, the reported balances include the cumulative effect adjustments of adopting ASC 606.
71
Revenue Recognition and Performance Obligations
We generate revenue from sales of licensing rights and subscriptions to our software solutions, hardware and third-party
software products, support and maintenance, managed services, EDI, and other non-recurring services, including
implementation, training, and consulting services. Our contracts with customers may include multiple performance obligations
that consist of various combinations of our software solutions and related services, which are generally capable of being
distinct and accounted for as separate performance obligations.
The total transaction price is allocated to each performance obligation within a contract based on estimated standalone selling
prices. We generally determine standalone selling prices based on the prices charged to customers, except for certain
software licenses that are based on the residual approach because their standalone selling prices are highly variable and
certain maintenance customers that are based on substantive renewal rates. In instances where standalone selling price is not
sufficiently observable, such as RCM services and software licenses included in our RCM arrangements, we estimate
standalone selling price utilizing an expected cost plus a margin approach. When standalone selling prices are not observable,
significant judgment is required in estimating the standalone selling price for each performance obligation.
Revenue is recognized when control of the promised goods or services is transferred to our customers in an amount that
reflects the consideration that we expect to be entitled to in exchange for those goods or services.
We exclude sales tax from the measurement of the transaction price and record revenue net of taxes collected from customers
and subsequently remitted to governmental authorities.
The following table presents our revenues disaggregated by our major revenue categories and by occurrence:
Recurring revenues:
Subscription services
Support and maintenance
Managed services
Electronic data interchange and data services
Total recurring revenues
Fiscal Year Ended March 31,
2019
2018
2020
$
$
127,602
158,619
104,549
98,543
489,313
117,502 $
160,798
98,203
97,418
473,921
106,325
163,805
113,311
92,773
476,214
Software, hardware, and other non-recurring revenues:
Software license and hardware
Other non-recurring services
Total software, hardware and other non-recurring revenues
27,270
23,656
50,926
35,122
20,130
55,252
34,017
20,788
54,805
Total revenues
$
540,239 $
529,173 $
531,019
Recurring revenues consists of subscription services, support and maintenance, managed services, and EDI and data
services. Software, hardware, and other non-recurring revenues consists of revenue from sales of software license and
hardware and certain non-recurring services, such as implementation, training, and consulting performed for clients who use
our products.
We generally recognize revenue for our most significant performance obligations as follows:
Subscription services. Performance obligations involving subscription services, which include annual libraries, are satisfied
over time as the customer simultaneously receives and consumes the benefits of the services throughout the contract period.
Our subscription services primarily include our software-as-a-service (“SaaS”) based offerings, such as our electronic health
records and practice management, mobile, patient portal, and population health management solutions. Our SaaS-based
offerings may include multiple goods and services, such as providing access to our technology-based solutions together with
our managed cloud hosting services. These offerings are concurrently delivered with the same pattern of transfer to our
customers and are accounted for as a single performance obligation because the technology-based solutions and other goods
and services included within our overall SaaS-based offerings are each individually not capable of being distinct as the
customer receives benefits based on the combined offering. Our annual libraries primarily consist of providing stand-ready
access to certain content, knowledgebase, databases, and SaaS-based educational tools, which are frequently updated to
meet the most current standards and requirements, to be utilized in conjunction with our core solutions. We recognize revenue
related to these subscription services, including annual libraries, ratably over the respective noncancelable contract term.
Support and maintenance. Performance obligations involving support and maintenance are satisfied over time as the
customer simultaneously receives and consumes the benefits of the maintenance services provided. Our support and
maintenance services may consist of separate performance obligations, such as unspecified upgrades or enhancements and
technical support, which are considered stand-ready in nature and can be offered at various points during the service period.
Since the efforts associated with the combined support and maintenance services are rendered concurrently and provided
evenly throughout the service period, we consider the series of support and maintenance services to be a single performance
obligation. Therefore, we recognize revenue related to these services ratably over the respective noncancelable contract term.
72
Managed services. Managed services consist primarily of RCM and related services, but also includes our hosting services,
which we refer to as managed cloud services, transcription services, patient pay services, and certain other recurring services.
Performance obligations associated with RCM services are satisfied over time as the customer simultaneously receives and
consumes the benefits of the services executed throughout the contract period. The majority of service fees under our RCM
arrangements are variable consideration contingent upon collections by our clients. We estimate the variable consideration
which we expect to be entitled to over the noncancelable contract term associated with our RCM service arrangements. The
estimate of variable consideration included in the transaction price typically involves estimating the amounts we will ultimately
collect on behalf of our clients and the relative fee we charge that is generally calculated as a percentage of those collections.
Inputs to these estimates include, but are not limited to, historical service fees and collections amounts, timing of historical
collections relative to the timing of when claims are submitted by our clients to their respective payers, macroeconomic trends,
and anticipated changes in the number of providers. Significant judgement is required when estimating the total transaction
price based on the variable consideration. We may apply certain constraints when appropriate whereby we include in the
transaction price estimated variable consideration only to the extent that it is probable that a significant reversal in the amount
of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is
subsequently resolved. Such estimates are assessed at the contract level. RCM and related services may not be rendered
evenly over the contract period as the timing of services are based on customer collections, which may vary throughout the
service period. We recognize revenue for RCM based on the amount of collections received throughout the contract term as it
most closely depicts our efforts to transfer our service obligations to the customer. Our managed cloud services represent a
single performance obligation to provide cloud hosting services to our customers and related revenue is recognized ratably
over the respective noncancelable contract term. Performance obligations related to the transcription services, patient pay
services, and other recurring services are satisfied as the corresponding services are provided and revenue is recognized as
such services are rendered.
Electronic data interchange and data services. Performance obligations related to EDI and other transaction processing
services are satisfied at the point in time the services are rendered. The transfer of control occurs when the transaction
processing services are delivered and the customer receives the benefits from the services provided.
Software license and hardware. Software license and hardware are considered point-in-time performance obligations as
control is transferred to customers upon the delivery of the software license and hardware. Our software licenses are
considered functional licenses, and revenue recognition generally occurs on the date of contract execution as the customer is
provided with immediate access to the license. We generally determine the amount of consideration allocated to the software
license performance obligation using the residual approach, except for certain RCM arrangements where the amount allocated
to the software license performance obligation is determined based on estimated relative standalone selling prices. For
hardware, we recognize revenue upon transfer of such hardware or devices to the customer.
Other non-recurring services. Performance obligations related to other non-recurring services, including implementation,
training, and consulting services, are generally satisfied as the corresponding services are provided. Once the services have
been provided to the customer, the transfer of control has occurred. Therefore, we recognize revenue as such services are
rendered.
Transaction Price Allocated to Remaining Performance Obligations
As of March 31, 2020, the aggregate amount of transaction price related to remaining unsatisfied or partially unsatisfied
performance obligations over the respective noncancelable contract term was approximately $483,200 of which we expect to
recognize approximately 9% as services are rendered or goods are delivered, 50% over the next 12 months, and the
remainder thereafter.
As of March 31, 2019, the aggregate amount of transaction price related to remaining unsatisfied or partially unsatisfied
performance obligations over the respective noncancelable contract term was approximately $451,100, of which we expect to
recognize approximately 10% as services are rendered or goods are delivered, 45% over the next 12 months, and the
remainder thereafter.
Contract Balances
Contract balances result from the timing differences between our revenue recognition, invoicing, and cash collections. Such
contract balances include accounts receivables, contract assets and liabilities, and other customer deposits and liabilities
balances. Accounts receivables include invoiced amounts where the right to receive payment is unconditional and only subject
to the passage of time. Contract assets include amounts where revenue recognized exceeds the amount invoiced to the
customer and the right to payment is not solely subject to the passage of time. Contract assets are generally associated with
our sales of software licenses, but may also be associated with other performance obligations such as subscription services,
support and maintenance, annual libraries, and professional services, where control has been transferred to our customers but
the associated payments are based on future customer collections (in the case of our RCM service arrangements) or based on
future milestone payment due dates. In such instances, the revenue recognized may exceed the amount invoiced to the
customer and such balances are included in contract assets since our right to receive payment is not unconditional, but rather
is conditional upon customer collections or the continued functionality of the software and our ongoing support and
maintenance obligations. Contract liabilities consist mainly of fees invoiced or paid by our clients for which the associated
services have not been performed and revenues have not been recognized. Contract assets and contract liabilities are
73
reported in a net position on an individual contract basis at the end of each reporting period. Contract assets are classified as
current or long-term on our consolidated balance sheets based on the timing of when we expect to complete the related
performance obligations and invoice the customer. Contract liabilities are classified as current on our consolidated balance
sheets since the revenue recognition associated with the related customer payments and invoicing is expected to occur within
the next twelve months. During the years ended March 31, 2020 and 2019, we recognized $70,779 and $65,847, respectively,
of revenues that were included in the contract liability balance at the beginning of the corresponding periods.
Our contracts with customers do not include any major financing components.
Costs to Obtain or Fulfill a Contract
We capitalize all incremental costs of obtaining a contract with a customer to the extent that such costs are directly related to a
contract and expected to be recoverable. Our sales commissions and related sales incentives are considered incremental
costs requiring capitalization. Capitalized contract costs are amortized to expense utilizing a method that is consistent with the
transfer of the related goods or services to the customer. The amortization period ranges from less than one year up to five
years, based on the period over which the related goods and services are transferred, including consideration of the expected
customer renewals and the related useful lives of the products.
Capitalized commissions costs were $24,590 as of March 31, 2020, of which $7,053 is classified as current and included as
prepaid expenses and other current assets and $17,537 is classified as long-term and included within other assets on our
consolidated balance sheets, based on the expected timing of expense recognition. Capitalized commissions costs were
$19,597 as of March 31, 2019, of which $4,816 was classified as current and $14,781 was classified as long-term.
During the years ended March 31, 2020 and 2019, we recognized $8,006 and $6,292, respectively, of commissions expense.
During the year ended March 31, 2018, we recognized $11,166 of commissions expense under ASC 605. Commissions
expense primarily relate to the amortization of capitalized commissions costs, which is included as a selling, general and
administrative expense in the consolidated statement of comprehensive income.
4. Fair Value Measurements
The following tables set forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for
at fair value on a recurring basis at March 31, 2020 and March 31, 2019:
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Balance At
March 31, 2020
Significant Other
Observable Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
ASSETS
Cash and cash equivalents (1)
Restricted cash and cash equivalents
$
$
138,012
2,307
140,319
$
$
138,012
2,307
140,319
$
$
LIABILITIES
Contingent consideration related to acquisitions $
$
1,900 $
$
1,900
— $
— $
— $
—
— $
— $
— $
—
—
—
1,900
1,900
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Balance At
March 31, 2019
Significant Other
Observable Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
ASSETS
Cash and cash equivalents (1)
Restricted cash and cash equivalents
$
$
LIABILITIES
Contingent consideration related to acquisitions $
$
(1) Cash equivalents consist primarily of money market funds.
33,079 $
1,443
34,522 $
$
1,000
1,000 $
33,079 $
1,443
34,522 $
— $
— $
— $
—
— $
— $
— $
—
—
—
1,000
1,000
74
The following table presents activity in our financial assets and liabilities measured at fair value using significant unobservable
inputs (Level 3), as of and for the year ended March 31, 2020:
Balance at March 31, 2018
Fair value adjustments
Balance at March 31, 2019
Acquisition (Note 6)
Fair value adjustments
Balance at March 31, 2020
Total Liabilities
—
1,000
1,000
1,850
(950)
1,900
$
$
$
As of March 31, 2020, the contingent consideration liability balance was $1,900, which was related to the acquisition of Topaz
Information Systems, LLC. As of March 31, 2019, the contingent consideration liability balance was $1,000, which was related
to the acquisition of Inforth Technologies.
During the year ended March 31, 2020, we recorded a net benefit of $950 from fair value adjustments, of which a $1,000
benefit was related to the contingent consideration liability from the acquisition of Inforth Technologies and was based on
actual earnout achievement through the end of the measurement period, resulting in zero expected earnout payments, and
$50 was related to the accretion of the present value discount of the contingent consideration liability from the acquisition of
Topaz Information Systems, LLC. Refer to Note 6 for additional details.
The categorization of the framework used to measure fair value of the contingent consideration liabilities were considered to
be within the Level 3 valuation hierarchy due to the subjective nature of the unobservable inputs used. We had assessed the
fair value of the contingent consideration liability on a recurring basis and any adjustments to fair value subsequent to the
measurement period were reflected in the consolidated statements of net income and comprehensive income. Key
assumptions included probability-adjusted achievement estimates of applicable bookings targets that were not observable in
the market. The fair value adjustments to contingent consideration liabilities are included as a component of selling, general
and administrative expense in the consolidated 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 their respective carrying values due to their nominal credit risk.
Non-Recurring Fair Value Measurements
We 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 value only 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 3 valuation hierarchy due to the subjective nature of the
unobservable inputs used.
5. Leases
We have operating lease agreements for our offices in the United States and India with lease periods expiring between 2020
and 2026. ASC 842 requires the recognition of leasing arrangements on the balance sheet as right-of-use assets and liabilities
pertaining to the rights and obligations created by the leased assets. We determine whether an arrangement is a lease at
inception and classify it as finance or operating. All of our existing material leases are classified as operating leases. Our
leases do not contain any residual value guarantees.
Right-of-use lease assets and corresponding lease liabilities are recognized at commencement date based on the present
value of lease payments over the expected lease term. Since the interest rate implicit in our lease arrangements is not readily
determinable, we determine an incremental borrowing rate for each lease based on the approximate interest rate on a
collateralized basis with similar remaining terms and payments as of the lease commencement date to determine the present
value of future lease payments. Our lease terms may include options to extend or terminate the lease. Currently, it is not
reasonably certain that we will exercise those options and therefore, we utilize the initial, noncancelable, lease term to
calculate the lease assets and corresponding liabilities for all our leases. We have certain insignificant short-term leases with
an initial term of twelve months or less that are not recorded in our consolidated balance sheets. Operating right-of-use lease
assets are classified as operating lease assets on our consolidated balance sheets.
Our lease agreements generally contain lease and non-lease components. Non-lease components primarily include payments
for maintenance and utilities. We have applied the practical expedient to combine fixed payments for non-lease components
with our lease payments for all of our leases and account for them together as a single lease component, which increases the
amount of our lease assets and corresponding liabilities. Payments under our lease arrangements are primarily fixed,
however, certain lease agreements contain variable payments, which are expensed as incurred and not included in the
operating lease assets and liabilities.
75
Operating lease costs are recognized on a straight-line basis over the lease term and included as a selling, general and
administrative expense in the consolidated statements of net income and comprehensive income. Total operating lease costs
were $10,309, $8,174, and $7,551 for the years ended March 31, 2020, 2019, and 2018, respectively.
Components of operating lease costs are summarized as follows:
Operating lease costs
Short-term lease costs
Variable lease costs
Less: Sublease income
Total operating lease costs
Supplemental cash flow information related to operating leases is summarized as follows:
Cash paid for amounts included in the measurement of operating lease liabilities
Operating lease assets obtained in exchange for operating lease liabilities
Fiscal Year Ended
March 31, 2020
9,558
102
827
(178)
10,309
Fiscal Year Ended
March 31, 2020
11,527
8,494
$
$
$
As of March 31, 2020, our operating leases had a weighted average remaining lease term of 4.3 years and a weighted
average discount rate of 4.2%. Future minimum aggregate lease payments under operating leases as of March 31, 2020 are
summarized as follows:
For the year ended March 31,
2021
2022
2023
2024
2025
Thereafter
Total future lease payments
Less interest
Total lease liabilities
$
$
Future minimum lease payments (including interest) under non-cancelable operating leases as of March 31, 2019 are
summarized as follows:
For the year ended March 31,
2020
2021
2022
2023
2024
Thereafter
Total obligations and commitments
$
$
12,590
12,121
11,504
9,632
7,285
1,785
54,917
(5,475)
49,442
10,511
10,701
10,161
9,660
7,730
8,097
56,860
During the year ended March 31, 2020, we recorded impairments of $9,373 to our operating right-of-use assets and certain
related fixed assets associated with the vacated locations, or portions thereof, in North Canton, San Diego, Horsham, St.
Louis, Irvine, Atlanta, Brentwood, and Phoenix, based on projected sublease rental income and estimated sublease
commencement dates. Refer to Note 16 for additional information.
76
6. Business Combinations
Acquisitions During the Year Ended March 31, 2020
On October 4, 2019, we completed the acquisition of Topaz Information Systems, LLC ("Topaz") pursuant to the Membership
Interest Purchase Agreement, dated October 4, 2019. Topaz is based in Phoenix, AZ and provides healthcare solutions to
behavioral health and social services organizations that utilize the NextGen platform. Its extensive clinical content and domain
expertise has been instrumental in our ability to compete and win. By combining our companies, we will be positioned to
provide the platform and domain expertise to deliver integrated and collaborative care in a re-energized behavioral health
market. The preliminary purchase price of Topaz is summarized in the table below. The acquisition of Topaz was funded by
cash flows from operations.
On December 6, 2019, we completed the acquisition of Medfusion, Inc. (“Medfusion”) pursuant to the Agreement and Plan of
Merger, dated November 12, 2019. Headquartered in Cary, North Carolina, Medfusion provides software application services
which enable healthcare providers to better serve its patients through enhanced communication. Services are delivered
through a standard web browser and typically include features such as appointment scheduling, patient preregistration,
prescription renewal, ask a clinician, website development, patient payment, and online bill payment. Medfusion is a portal and
patient pay player with a focus on ambulatory services. The preliminary purchase price of Medfusion is summarized in the
table below. The acquisition of Medfusion was funded by a combination of borrowings against our revolving credit agreement
(see Note 10) and cash flows from operations.
On December 17, 2019, we completed the acquisition of OTTO Health, LLC (“OTTO”), pursuant to the Agreement and Plan of
Merger, dated December 11, 2019. Based in Boulder, Colorado, OTTO is a telehealth platform that seamlessly integrates into
EHR systems allowing providers to have video visits with their patients as part of their normal workflows. OTTO partners
closely with EHR providers to create a streamlined user experience, while maintaining the EHR/PM system as the single
source of truth. The preliminary purchase price of OTTO is summarized in the table below. The acquisition of OTTO was
funded by a combination of borrowings against our revolving credit agreement (see Note 10) and cash flows from operations.
We accounted for the acquisitions as business combinations using the acquisition method of accounting. The purchase price
allocation of the Topaz, Medfusion, and OTTO acquisitions are deemed to be preliminary. The purchase price was allocated to
the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition
date. The preliminary fair values of acquired assets and liabilities assumed represent management’s estimate of fair value and
are subject to change if additional information, such as changes to deferred taxes and/or working capital, becomes available.
We expect to finalize the purchase price allocation as soon as practicable within the measurement period, but not later than
one year following the acquisition date.
Goodwill represents the excess of the purchase price over the net identifiable assets acquired and liabilities assumed.
Goodwill primarily represents, among other 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 which qualify as separate amortizable intangible assets.
Goodwill arising from the acquisitions of OTTO and Topaz are considered deductible for tax purposes, and goodwill arising
from the acquisition of Medfusion is not deductible for tax purposes.
77
The total preliminary purchase price for the acquisitions of Topaz, Medfusion, and OTTO are summarized as follows:
Initial preliminary purchase price
Settlement of pre-existing net liabilities
Fair value of contingent consideration
Preliminary working capital adjustment
Total preliminary purchase price
Preliminary fair value of the net tangible assets acquired and liabilities
assumed:
Acquired cash and cash equivalents
Accounts receivable
Prepaid expense and other assets
Equipment and improvements
Operating lease assets
Accounts payable
Accrued compensation and related benefits
Contract liabilities
Deferred income tax liability
Operating lease liabilities
Operating lease liabilities, net of current
Other liabilities
Total preliminary net tangible assets acquired and liabilities
assumed
Preliminary fair value of identifiable intangible assets acquired:
Goodwill
Software technology
Customer relationships
Trade names
Total preliminary identifiable intangible assets acquired
Total preliminary purchase price
$
$
$
$
Topaz
Preliminary
Purchase
Price
Medfusion
Preliminary
Purchase
Price
OTTO
Preliminary
Purchase
Price
8,000
1,671
1,850
(344)
11,177
$
$
43,000 $
24
—
(247 )
42,777 $
22,000
19
—
(59)
21,960
$
353
1,528
139
194
534
(224)
(155)
(370)
—
(240)
(360)
(102)
204 $
986
387
434
—
(1,360 )
(270 )
(529 )
(953 )
—
—
(496 )
1,297
(1,597 )
5,380
4,500
—
—
9,880
$
11,177
23,524
13,800
6,800
250
44,374
42,777 $
102
51
79
—
—
(2)
(123)
(11)
—
—
—
(26)
70
19,490
2,400
—
—
21,890
21,960
Under the provisions of the Topaz acquisition, we may pay up to an additional $2,000 of cash contingent consideration in the
form of an earnout, subject to Topaz achieving certain operational targets through April 2021. The initial fair value of contingent
consideration of $1,850 reflects an estimated earnout payment of $2,000 on a present value basis and was estimated based
on the weighted probability of achieving the operational targets utilizing assumptions and inputs from Topaz management. As
of March 31, 2020, the fair value of the contingent consideration was $1,900 (see Note 4). Additionally, the preliminary
purchase price of Topaz includes $1,671 for the settlement of pre-existing liabilities related to pre-acquisition amounts due for
products and services previously purchased from us and recognized by Topaz as accounts payable. As a result of the
acquisition, these accounts payable balances were effectively settled and accounted for as additional purchase consideration.
The software technology intangible assets acquired from Topaz will be amortized over 6 years.
In connection with the Medfusion acquisition, the acquired software technology intangible assets will be amortized over 6
years, acquired customer relationships intangible assets will be amortized over 10 years, and acquired trade names intangible
assets will be amortized over 5 years. The weighted average amortization period for the acquired Medfusion intangible assets
is 7.3 years.
The software technology intangible assets acquired from OTTO will be amortized over 7 years.
The revenues, earnings, and pro forma effects of the Topaz, Medfusion, and OTTO acquisitions are not, and would not have
been, material to our results of operations, individually and in aggregate, and the disclosure of such information is
impracticable as we have already integrated certain aspects of each acquisition within our overall operations and expect for
each acquisition to be fully integrated within a short timeframe.
78
Acquisitions During the Year Ended March 31, 2018
On January 31, 2018, we completed the acquisition of Inforth Technologies, LLC ("Inforth") pursuant to the Membership
Interest Purchase Agreement, dated January 31, 2018. Headquartered in Traverse City, MI, Inforth was one of our premier
clinical content and technical services partners specializing in comprehensive solutions for physician practices. The purchase
price of Inforth totaled $4,337 and was funded by cash flows from operations. The acquisition of Inforth also included
contingent consideration up to an additional $4,000 of cash in the form of an earnout, as amended and subject to Inforth
achieving certain applicable bookings targets through March 31, 2020. The initial estimated fair value of the contingent
consideration was zero based on a Monte Carlo-based valuation model that considered, among other assumptions and inputs,
our estimate of projected Inforth applicable bookings. As of March 31, 2020, the fair value of the contingent consideration was
zero, reflecting no expected earnout payments (see Note 4).
On August 16, 2017, we completed the acquisition of EagleDream Health, Inc. ("EagleDream") pursuant to the Agreement and
Plan of Merger, dated July 31, 2017. Headquartered in Rochester, NY, EagleDream provides cloud-based analytics that drives
meaningful insight across clinical, financial and administrative data to optimize practice performance. The purchase price of
EagleDream totaled $25,609, which included certain working capital and other customary adjustments, and was partially
funded by a draw against our revolving credit agreement (see Note 10).
On April 14, 2017, we completed our acquisition of Entrada, Inc. ("Entrada") pursuant to the terms of the Agreement and Plan
of Merger, dated April 11, 2017. Based in Nashville, TN, 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 wherever care happens. Entrada’s best-
in-class mobile application integrates with multiple clinical platforms and all major electronic health record systems. Entrada
enables organizations to maximize their existing technology investments while simultaneously enhancing physician and staff
productivity. The acquisition of Entrada and its cloud-based, mobile application is part of our commitment to deliver systematic
solutions that meet its clients' transforming work requirements to become increasingly nimble and mobile. The purchase price
of Entrada totaled $33,958, which included certain working capital and other customary adjustments and was primarily funded
by a draw against our revolving credit agreement (see Note 10).
We accounted for the acquisitions noted above as business combinations using the acquisition method of accounting. The
purchase price allocations of the Inforth, EagleDream, and Entrada acquisitions are considered final.
The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their
estimated fair values as of the acquisition dates. Goodwill represents the excess of the purchase price over the net identifiable
assets acquired and liabilities assumed. Goodwill primarily represents, among other 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 which qualify as
separate amortizable intangible assets. Goodwill arising from the acquisition of Inforth is considered deductible for tax
purposes, and goodwill arising from the acquisitions of EagleDream and Entrada are not deductible for tax purposes.
79
The final purchase price for the acquisitions of Inforth, EagleDream, and Entrada are summarized as follows:
Initial purchase price
Settlement of pre-existing net liabilities
Working capital adjustment and other adjustments
Total purchase price
Fair value of the net tangible assets acquired and liabilities assumed:
Acquired cash and cash equivalents
Accounts receivable
Prepaid expense and other assets
Equipment and improvements
Capitalized software costs
Deferred income tax asset
Accounts payable
Accrued compensation and related benefits
Contract liabilities
Deferred income tax liability
Other liabilities
Total net tangible assets acquired and liabilities assumed
Fair value of identifiable intangible assets acquired:
Goodwill
Software technology
Customer relationships
Trade names
Total identifiable intangible assets acquired
Total purchase price
Inforth
EagleDream
Entrada
4,000
337
—
4,337
$
$
25 $
6
—
—
—
—
—
(49)
—
—
(22)
(40)
1,177
3,200
—
—
4,377
$
4,337
26,000 $
—
(391 )
25,609 $
573 $
217
20
—
—
—
(115 )
(691 )
(394 )
(1,707 )
(122 )
(2,219 )
14,428
12,800
600
—
27,828
25,609 $
34,000
—
(42)
33,958
102
1,836
145
163
364
117
(639)
(120)
(234)
—
(444)
1,290
17,268
10,500
3,300
1,600
32,668
33,958
$
$
$
$
The software technology intangible assets acquired from Inforth will amortized over 5 years. The customer relationships and
software technology intangible assets acquired from EagleDream will be amortized over 8 years and 5 years, respectively. The
weighted average amortization period for the acquired EagleDream intangible assets is 5.1 years. The customer relationships,
trade names, and software technology intangible assets acquired from Entrada will being amortized over 10 years, 5 years,
and 5 years, respectively. The weighted average amortization period for the acquired Entrada intangible assets is 6.1 years.
The revenues, earnings, and pro forma effects of the Inforth, EagleDream, and Entrada acquisitions would not have been
material to our results of operations, individually and in aggregate, and are therefore not presented.
7. Goodwill
We test goodwill for impairment annually during our first fiscal quarter, referred to as the annual test date. Based on our
qualitative assessment for the current fiscal year, we have determined that there was no impairment to our goodwill as of June
30, 2019. We will also test for impairment between annual test dates if an event occurs or circumstances change that would
indicate the carrying amount may be impaired.
During the years ended March 31, 2020 and March 31, 2019, we did not identify any events or circumstances that would
require an interim goodwill impairment test.
We do not amortize goodwill as it has been determined to have an indefinite useful life. The carrying amount of goodwill as of
March 31, 2020 was $267,165. The carrying amount of goodwill as of March 31, 2019 was $218,771.
80
8. Intangible Assets
Our definite-lived intangible assets, other than capitalized software development costs, are summarized as follows:
Gross carrying amount
Accumulated amortization
Net intangible assets
Gross carrying amount
Accumulated amortization
Net intangible assets
March 31, 2020
Customer
Software
Relationships Trade Names Technology
$
$
39,200 $
(21,951)
17,249 $
250 $
(17 )
233 $
113,700 $
(73,373)
40,327 $
Total
153,150
(95,341)
57,809
Customer
March 31, 2019
Software
Relationships Technology
$
54,450 $
(39,875 )
14,575 $
94,310 $
(56,290)
38,020 $
$
Total
148,760
(96,165)
52,595
Amortization expense related to customer relationships and trade names recorded as operating expenses in the consolidated
statements of net income and comprehensive income was $4,143, $4,344, and $$7,810 for the years ended March 31, 2020,
2019 and 2018, respectively. Amortization expense related to software technology recorded as cost of revenue was $18,393,
$17,152, and $15,570 for the years ended March 31, 2020, 2019, and 2018, respectively.
The following table summarizes the remaining estimated amortization of definite-lived intangible assets as of March 31, 2020:
For the year ended March 31,
2021
2022
2023
2024
2025
2026 and beyond
Total
9. Capitalized Software Costs
Our capitalized software costs are summarized as follows:
Gross carrying amount
Accumulated amortization
Net capitalized software costs
Estimated Remaining Amortization Expense
Cost of
Operating
Revenue
Expense
Total
$
4,449 $
3,525
2,820
2,279
1,846
2,563
$
17,482
$
16,661 $
8,873
5,154
3,573
3,573
2,493
40,327 $
21,110
12,398
7,974
5,852
5,419
5,056
57,809
March 31, 2020 March 31, 2019
$
$
75,212 $
(38,208 )
37,004 $
59,782
(21,927)
37,855
During the year ended March 31, 2020, we recorded $3,198 of impairments related to the write down of previously capitalized
software development costs for certain technology that will no longer be utilized in any future software solutions. During the
year ended March 31, 2019, we retired $13,453 of fully amortized capitalized software costs that are no longer being utilized
by our client base. Amortization expense related to capitalized software costs was $17,085, $11,338, and $6,518 for the years
ended March 31, 2020, 2019, and 2018, respectively, and is recorded as cost of revenue in the consolidated statements of net
income and comprehensive income.
81
The following table presents the remaining estimated amortization of capitalized software costs as of March 31, 2020. The
estimated amortization is comprised of (i) amortization of released products and (ii) the expected amortization for products that
are not yet available for sale based on their estimated economic lives and projected general release dates.
For the year ended March 31,
2021
2022
2023
2024
Total
10. Line of Credit
$
$
22,000
10,300
4,500
204
37,004
On March 29, 2018, we entered into a $300,000 amended and restated revolving credit agreement (the “Credit Agreement”)
with JPMorgan Chase Bank, N.A., as administrative agent, U.S. Bank National Association, as syndication agent, and certain
other agents and lenders. The Credit Agreement replaces our prior $250,000 revolving credit agreement originally entered into
on January 4, 2016 (“Original Credit Agreement”). The Credit Agreement provides a subfacility of up to $10,000 for letters of
credit and a subfacility of up to $10,000 for swing-line loans and also includes a $100,000 accordion feature that provides us
with the ability to obtain up to $400,000 in the aggregate of revolving credit commitments and/or term loans upon satisfaction
of certain conditions.
The Credit Agreement matures on March 29, 2023 and the full balance of the revolving loans and all other obligations under
the agreement must be paid at that time. In addition, we are required to prepay the revolving loan balance if at any time the
aggregate principal amount outstanding under the Credit Agreement exceeds the aggregate commitments thereunder. The
Credit Agreement is secured by substantially all of our existing and future property. The revolving loans under the Credit
Agreement will be available for letters of credit, permitted acquisitions, working capital and general corporate purposes.
The revolving loans under the Credit Agreement bear interest at our option of either, (a) for base rate loans, a base rate based
on the highest of (i) 0%, (ii) the rate of interest publicly announced by the administrative agent as its prime rate in effect at its
principal office in New York City, (iii) the overnight bank funding rate (not to be less than zero) as determined by the Federal
Reserve Bank of New York plus 0.50% or (iv) the LIBOR-based rate for one, two, three or six months Eurodollar deposits plus
1%, and (b) for Eurodollar loans, the LIBOR-based rate for one, two, three or six months (as selected by us) Eurodollar
deposits plus 1.00%, plus, in each case, an applicable margin based on our total leverage ratio from time to time, ranging from
0.50% to 1.50% for base rate loans, and from 1.50% to 2.50% for Eurodollar loans. We will also 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 on
our total leverage ratio from time to time.
The revolving loans under the Credit Agreement are subject to customary representations, warranties and ongoing affirmative
and negative covenants and agreements. The negative covenants 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 leaseback transactions.
The Credit Agreement also requires us to maintain (1) a maximum net leverage ratio of 3.00 to 1.00 and (2) a minimum fixed
charge coverage ratio of 3.00 to 1.00 at the end of each fiscal quarter through the term of the loan. We were in compliance
with all financial and non-financial covenants under the Credit Agreement as of March 31, 2020.
As of March 31, 2020, we had $129,000 in outstanding loans and $171,000 of unused credit under the Credit Agreement. As
of March 31, 2019, we had $11,000 in outstanding loans and $289,000 of unused credit under the Original Credit Agreement.
The interest rates as of March 31, 2020 and 2019 was approximately 2.3% and 4.0%, respectively.
During the years ended March 31, 2020, 2019, and 2018, we recorded $1,274, $2,055, and $1,812 of interest expense
(excluding amortization of deferred debt issuance costs), respectively, and the weighted average interest rates were
approximately 2.4%, 3.7%, and 2.8% respectively.
As of March 31, 2020 and 2019, total unamortized debt issuance costs were $2,124 and $2,834, respectively. Costs incurred
in connection with securing the Credit Agreement, including fees paid to legal advisors and third parties, are deferred and
amortized to interest expense over the term of the Credit Agreement. Deferred debt issuance costs are reported as a
component of other assets on the consolidated balance sheets. During the years ended March 31, 2020, 2019, and 2018, we
recorded $710, $710, and $1,610, respectively, in amortization of deferred debt issuance costs.
82
11. Composition of Certain Financial Statement Captions
Cash, cash equivalents, and restricted cash are summarized as follows:
Cash and cash equivalents
Restricted cash and cash equivalents
Cash, cash equivalents, and restricted cash
March 31, 2020
March 31, 2019
$
$
138,012 $
2,307
140,319 $
33,079
1,443
34,522
Accounts receivable includes billed amounts where the right to receive payment is unconditional and only subject to the
passage of time. Undelivered products and services are included as a component of the contract liabilities balance on the
accompanying consolidated balance sheets.
Accounts receivable, gross
Allowance for doubtful accounts
Accounts receivable, net
Prepaid expenses and other current assets are summarized as follows:
Prepaid expenses
Capitalized commissions costs
Other current assets
Prepaid expenses and other current assets
Equipment and improvements are summarized as follows:
Computer equipment
Internal-use software
Furniture and fixtures
Leasehold improvements
Equipment and improvements, gross
Accumulated depreciation and amortization
Equipment and improvements, net
Other assets are summarized as follows:
Capitalized commission costs
Deposits
Debt issuance costs
Other noncurrent assets
Other assets
Accrued compensation and related benefits are summarized as follows:
Accrued vacation
Accrued bonus
Accrued commissions
Accrued payroll
Accrued compensation and related benefits
March 31, 2020
March 31, 2019
$
$
83,555 $
(3,549 )
80,006 $
93,513
(6,054)
87,459
March 31, 2020
March 31, 2019
18,025 $
7,053
1,227
26,305 $
15,548
4,816
582
20,946
March 31, 2020
March 31, 2019
34,756 $
17,796
12,477
13,681
78,710
(58,874 )
19,836 $
28,923
17,084
11,660
15,150
72,817
(51,413)
21,404
March 31, 2020
March 31, 2019
17,537 $
6,074
2,124
7,921
33,656 $
14,781
5,318
2,834
9,545
32,478
March 31, 2020
March 31, 2019
10,469 $
10,396
2,087
840
23,792 $
9,893
11,598
3,418
754
25,663
$
$
$
$
$
$
$
$
83
Other current and noncurrent liabilities are summarized as follows:
March 31, 2020
March 31, 2019
Sales returns reserves and other customer liabilities
Accrued hosting costs
Customer credit balances and deposits
Accrued EDI expense
Accrued royalties
Accrued employee benefits and withholdings
Accrued consulting and outside services
Accrued outsourcing costs
Care services liabilities
Accrued legal expense
Accrued self insurance expense
Sales tax payable
Contingent consideration related to acquisitions
Deferred rent and related lease obligations
Other accrued expenses
Other current liabilities
Contingent consideration related to acquisitions
Uncertain tax positions
Deferred rent and related lease obligations
Other liabilities
Other noncurrent liabilities
$
$
$
$
6,395 $
4,652
4,260
3,511
3,113
3,002
2,520
2,378
2,307
2,119
2,054
1,222
—
—
3,819
41,352 $
1,900 $
1,203
—
178
3,281 $
7,838
4,674
3,988
2,037
3,090
2,426
3,874
2,128
1,443
699
2,225
509
1,000
2,196
2,937
41,064
—
1,677
9,927
208
11,812
12. Income Taxes
The provision for (benefit of) income taxes consists of the following components:
Fiscal Year Ended March 31,
2019
2018
2020
Current:
Federal taxes
State taxes
Foreign taxes
Total current taxes
Deferred:
Federal taxes
State taxes
Foreign taxes
Total deferred taxes
Provision for (benefit of) income taxes
$
$
$
$
408
858
874
2,140
(3,578) $
(1,682)
(119)
(5,379)
(3,239)
$
$
1,159
(238 )
744
1,665
$
3,752
(428 )
(195 )
3,129
4,794 $
(2,788)
(1,073)
678
(3,183)
2,949
(2,510)
(86)
353
(2,830)
84
The provision for (benefit of) income taxes differs from the amount computed at the federal statutory rate as follows:
Tax expense at United States federal statutory rate (1)
Items affecting federal income tax rate:
Research and development tax credits
Return to provision true-ups
Impact of foreign operations
Impact of audit settlements
Impact of valuation allowance
Qualified production activities income deduction
Foreign transition tax - Tax Reform
Revaluation of deferred tax balances - Tax Reform
Impact of amended returns
Compensation
Impact of deferred adjustments
Acquisition expenses
State income taxes
Non-deductible expenses
Impact of uncertain tax positions
Provision for (benefit of) income taxes
Fiscal Year Ended March 31,
2019
2018
2020
$
895
$
6,150 $
(129)
(4,705)
(1,868)
(683)
(61)
(49)
—
—
—
67
125
159
229
687
903
1,062
(3,239) $
(4,647 )
(149 )
(304 )
967
(33 )
—
210
231
391
(169 )
132
(2 )
1,502
140
375
4,794 $
(4,179)
(2,229)
(365)
428
(101)
(4)
1,381
2,328
196
620
415
304
1,291
98
(2,884)
(2,830)
$
(1) Federal statutory rate was 21.0%, 21.0% and 31.5% for March 31, 2020, 2019 and 2018, respectively.
The net deferred tax assets and liabilities in the accompanying consolidated balance sheets consist of the following:
Deferred tax assets:
Compensation and benefits
Operating lease liabilities
Deferred revenue
Research and development credit
Net operating losses
Allowance for doubtful accounts
Foreign deferred taxes
Deferred rent
Other
Total deferred tax assets
Deferred tax liabilities:
Intangibles assets
Capitalized software
Prepaid expense
Operating right-of-use assets
Accelerated depreciation
Accounts receivable
Other
Total deferred tax liabilities
Valuation allowance
Deferred tax assets, net
March 31, 2020 March 31, 2019
$
$
$
11,966 $
11,430
10,546
9,643
8,812
1,819
1,574
—
—
55,790
(12,477 ) $
(9,931 )
(7,842 )
(6,667 )
(1,405 )
(1,251 )
(145 )
(39,718 )
(5,452 )
10,620 $
10,707
—
7,171
10,089
5,320
2,156
1,455
3,143
690
40,731
(15,806)
(4,900)
(6,407)
—
(1,606)
(2,255)
—
(30,974)
(3,563)
6,194
The deferred tax assets and liabilities have been shown net in the accompanying consolidated balance sheets as noncurrent.
As of March 31, 2020 and 2019, we had federal net operating loss (“NOL”) carryforwards of $24,216 and $17,419,
respectively. The federal NOL carryforwards were inherited in connection with our acquisitions of HealthFusion in January
2016, Gennius in March 2015, Entrada in April 2017, EagleDream in August 2017, and Medfusion in December 2019. The
NOL carryforwards expire in various amounts starting in fiscal 2030 for both federal and state tax purposes. As of March 31,
2020, we had state NOL carryforwards of approximately $3,727 (tax effected), related to the HealthFusion, Entrada,
EagleDream, and Medfusion acquisitions state NOL tax attribute. The utilization of the federal NOL carryforwards is subject to
limitations under the rules regarding changes in stock ownership as determined by the Internal Revenue Code.
85
As of March 31, 2020 and 2019, the research and development tax credit carryforward available to offset future federal and
state taxes was $12,399 and $11,072, respectively. The federal credits include credits inherited in connection with our
acquisition of Medfusion in December 2019. The credits expire in various amounts starting in fiscal 2021.
We expect to receive the full benefit of the deferred tax assets recorded with the exception of certain state credits and NOL
carryforwards for which we have recorded a valuation allowance.
Notwithstanding the United States taxation of the deemed repatriated foreign earnings as a result of the one-time Transition
Tax, we intend to continue investing these earnings indefinitely outside of the United States. If we determine that all or a
portion of our foreign earnings are no longer to be indefinitely reinvested, we may be subject to additional foreign withholding
taxes and state income taxes in the United States beyond the Tax Reform’s one-time Transition Tax. In the event that we
distribute the foreign earnings to the United States, we will incur and record foreign withholding related taxes and U.S. state
taxes of approximately $2,600 and $500, respectively.
The Taxation Laws (Amendment) Act, 2019 was enacted on December 12, 2019 to lower corporate tax rates in India. We
opted not to elect for the reduced tax rate for various factors for the year ended March 31, 2020.
Uncertain tax positions
A reconciliation of the beginning and ending amount of unrecognized tax benefits, which is recorded within other noncurrent
liabilities in our consolidated balance sheet, is as follows:
Balance as of March 31, 2018
Additions for prior year tax positions
Reductions for prior year tax positions
Balance as of March 31, 2019
Additions for prior year tax positions
Additions for current year tax positions
Reductions for prior year tax positions
Balance as of March 31, 2020
$
$
2,419
1,405
(930)
2,894
1,372
781
(855)
4,192
During the year ended March 31, 2020, we recorded additional net liabilities of $1,298 related to various federal and state tax
planning benefits recorded in the current year for prior year tax positions. If recognized, the total amount of unrecognized tax
benefit that would decrease the income tax provision is $4,192.
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 $174 and $209 of accrued interest related to income tax matters
as of March 31, 2020 and 2019, respectively. We recognized interest income of $35 for the year ended March 31, 2020 and
interest expense of $19, and $86 in the years ended March 31, 2019 and 2018, respectively, related to income tax matters in
the consolidated statements of net income and comprehensive income. No penalties related to income tax matters were
accrued or recognized in our consolidated financial statements for all periods presented.
We are no longer subject to United States federal income tax examinations for tax years before fiscal year ended 2016. With a
few exceptions, we are no longer subject to state or local income tax examinations for tax years before fiscal year ended 2015.
During fiscal year ended March 31, 2020, our income tax examination by the Internal Revenue Service was formally
completed for the tax years March 31, 2014 through March 31, 2016. We do not anticipate that total unrecognized tax benefits
will significantly change due to the settlement of audits or the expiration of statute of limitations within the next twelve months.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), signed into law on March 27, 2020, has resulted in
significant changes to the U.S. federal corporate tax law. Additionally, several state and foreign jurisdictions have enacted
additional legislation and or comply with federal changes. As the enactment dates of this law was prior to the end of our
reporting period, we have considered the applicable tax law changes in our current and deferred income tax expense as of
March 31, 2020. We will continue analyzing the applications of the CARES Act and include the material impact to future
income tax provisions, if applicable.
86
13. Employee Benefit Plans
We provide a 401(k) plan to substantially all of our employees. Participating employees may defer up to the Internal Revenue
Service limit per year based on the Internal Revenue Code. The annual contribution is determined by a formula set by our
Board of Directors ("Board") and may include matching and/or discretionary contributions. The amount of the Company match
is discretionary and subject to change. The retirement plans may be amended or discontinued at the discretion of the Board.
Net contributions of $4,658, $5,206 and $4,205 were made by the Company to the 401(k) plan for the years ended March 31,
2020, 2019, and 2018, 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% of their 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 on behalf of participating employees, and the amount of the
Company match is discretionary and subject to change. Each employee's deferrals together with earnings 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 $5,300 and $5,905 at March 31, 2020 and 2019, respectively. To offset this
liability, we have purchased life insurance policies 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 help make 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 plan participant.
The cash surrender value of the life insurance policies for deferred compensation was $7,029 and $9,546 at March 31, 2020
and 2019, respectively. The values of the life insurance policies and our related obligations are included on the accompanying
consolidated balance sheets in long-term other assets and long-term deferred compensation, respectively. We made
contributions of $74, $71 and $66 to the Deferral Plan for the years ended March 31, 2020, 2019, and 2018, respectively.
14. Share-Based Awards
Employee Stock Option and Incentive Plans
In October 2005, our shareholders approved a stock option and incentive plan (the “2005 Plan”) under which 4,800,000 shares
of common stock were reserved for 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 our employees and directors
may, at the discretion of the 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 expire no 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 in the agreements pursuant to which they are granted. Upon a change 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 2005 Plan expired on May 25, 2015. As of March 31, 2020, there were 227,020 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 reserved for the issuance of awards, including incentive stock options and non-qualified stock options,
stock appreciation rights, restricted stock awards and restricted stock unit awards, performance stock awards and other share-
based awards. In August 2017, our shareholders approved an amendment to the 2015 Equity, (the “Amended 2015 Plan”), to,
among other items, increase the number of shares of common stock reserved for issuance thereunder by 6,000,000, which
was further amended in August 2019 as approved by our shareholders, to, among other items, increase the number of shares
of common stock reserved for issuance thereunder by an additional 3,575,000. The Amended 2015 Plan provides that our
employees and directors may, at the discretion of the Board or a duly designated compensation committee, be granted certain
share-based awards. In the case of option awards granted under the Amended 2015 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 granted pursuant to
the Amended 2015 Plan are subject to the vesting schedule or performance metrics set forth in the agreements pursuant to
which they are granted. Upon a change of control of our Company, as such term is defined in the Amended 2015 Plan, awards
under the Amended 2015 Plan will fully vest under certain circumstances. As of March 31, 2020, there were 2,774,330
outstanding options, 2,312,779 outstanding shares of restricted stock awards, 23,186 outstanding shares of performance stock
awards, and 6,884,156 shares available for future grant under the Amended 2015 Plan.
87
The following table summarizes the stock option transactions during the years ended March 31, 2020, 2019, and 2018:
Employee Stock Options Summary
Outstanding, March 31, 2017
Granted
Exercised
Forfeited/Canceled
Outstanding, March 31, 2018
Granted
Exercised
Forfeited/Canceled
Expired
Outstanding, March 31, 2019
Exercised
Forfeited/Canceled
Expired
Outstanding, March 31, 2020
Vested and expected to vest, March 31, 2020
Exercisable, March 31, 2020
Average
Weighted- Weighted-
Average
Exercise
Price
per Share
$
$
Remaining
Contractual
Life (years)
6.2
7.5
5.8
3.1
6.2
6.8
4.7
4.9
$
$
5.5
4.3
1.5
4.7
4.6
4.3
$
$
$
$
$
15.41
14.56
16.62
18.90
15.51
16.40
15.49
18.00
28.15
15.36
15.87
23.38
43.04
14.83
14.83
14.83
Number of
Shares
2,885,415 $
1,479,000 $
(216,405) $
(477,840) $
3,670,170 $
326,130 $
(375,645) $
(451,730) $
(2,400) $
3,166,525 $
(55,325) $
(75,450) $
(34,400) $
$
$
$
3,001,350
2,825,186
1,909,678
Aggregate
Intrinsic
Value
(in thousands)
3,150
119
766
1,589
7,040
138
—
—
—
Share-based compensation expense related to stock options was $3,826, $3,936, and $2,953 for the years ended March 31,
2020, 2019, and 2018, respectively.
There were no stock options granted during the year ended March 31, 2020. During the years ended March 31, 2019 and
2018, we granted total stock options of 326,130 and 1,479,000, respectively, to purchase shares of common stock under the
Amended 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
May 30, 2018
August 3, 2018
November 2, 2018
Fiscal year 2019 grants
June 13, 2017
May 24, 2017
August 4, 2017
October 31, 2017
December 4, 2017
Fiscal year 2018 grants
Number of
Shares
Exercise
Price
$
241,130
$
60,000
25,000
$
326,130
249,000
60,000
25,000
915,000
230,000
1,479,000
$
$
$
$
$
16.83
21.27
15.09
16.37
14.57
16.13
14.07
14.38
Vesting
Terms (1)
Four Years June 1, 2026
Four Years August 3, 2026
Four Years November 2, 2026
Expiration
Four Years June 13, 2025
Four Years May 24, 2025
Four Years August 4, 2025
Four Years October 31, 2025
Four Years December 4, 2025
(1) Unless otherwise indicated, options vest in equal annual installments on each grant anniversary date commencing one year following the
date of grant
We utilize the Black-Scholes valuation model for estimating the fair value of share-based compensation with the following
assumptions:
Expected term
Expected volatility
Expected dividends
Risk-free rate
Year Ended
Year Ended
March 31, 2019 March 31, 2018
6.1 - 6.3 years 5.6 - 6.1 years
34.6% - 36.8% 37.0% - 37.7%
0.0%
2.8% - 3.1%
0.0%
1.9% - 2.2%
The weighted-average grant date fair value of stock options granted during the years ended March 31, 2019 and 2018 was
$7.18 and $5.59 per share, respectively.
88
Non-vested stock option award activity during the years ended March 31, 2020, 2019, and 2018 is summarized as follows:
Non-Vested Stock Option Award Summary
Outstanding, March 31, 2017
Granted
Vested
Forfeited/Canceled
Outstanding, March 31, 2018
Granted
Vested
Forfeited/Canceled
Outstanding, March 31, 2019
Vested
Forfeited/Canceled
Outstanding, March 31, 2020
Weighted-
Average
Grant-Date
Fair Value
per Share
Number of
Shares
2,073,295 $
1,479,000
(621,440 )
(273,850 )
2,657,005 $
326,130
(778,900 )
(358,380 )
1,845,855 $
(745,033 )
(9,150 )
1,091,672 $
5.09
5.59
4.92
4.57
5.18
7.18
5.12
5.36
5.52
5.29
6.42
5.67
As of March 31, 2020, $4,191 of total unrecognized compensation costs related to stock options is expected to be recognized
over a weighted-average period of 1.4 years. This amount does not include the cost of new options that may be granted in
future periods or any changes in our forfeiture percentage. The total fair value of options vested during the years ended March
31, 2020, 2019, and 2018 was $3,940, $3,985, and $3,059, respectively.
Restricted stock awards activity during the years ended March 31, 2020, 2019, and 2018 is summarized as follows:
Restricted Stock
Outstanding, March 31, 2017
Granted
Vested
Canceled
Outstanding, March 31, 2018
Granted
Vested
Canceled
Outstanding, March 31, 2019
Granted
Vested
Canceled
Outstanding, March 31, 2020
Weighted-
Average
Grant-Date
Fair Value
per Share
Number of
Shares
902,948 $
1,424,441
(386,226 )
(120,253 )
1,820,910 $
885,845
(642,695 )
(348,102 )
1,715,958 $
1,529,831
(764,290 )
(168,719 )
2,312,780 $
12.92
15.00
14.26
14.29
14.52
18.14
14.63
14.79
16.29
16.93
16.05
17.06
16.74
Share-based compensation expense related to restricted stock awards was $14,706, $10,875, and $8,536 for the years ended
March 31, 2020, 2019, and 2018, 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. The fair value of the restricted stock awards is amortized on a straight-line basis over the
vesting period, which is generally between one to three years.
As of March 31, 2020, $28,225 of total unrecognized compensation costs related to restricted stock awards is expected to be
recognized over a weighted-average period of 1.9 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 23,186 shares are currently outstanding. The performance stock awards vest in four equal
increments on each of the first four anniversaries of the grant date, subject in each case to the executive officer’s continued
service and achievement of certain Company performance goals, including strong stock price performance. Share-based
compensation expense related to the performance stock awards was $246 for the year ended March 31, 2020.
89
On October 23, 2018, the Compensation Committee of the Board approved 248,140 performance stock unit awards to be
granted to certain executives and non-executive members of the executive leadership team, which vest only in the event
certain performance goals are achieved and with continuous service through the date the goals are certified. Approximately
34% of the performance stock units are tied to our cumulative 3-year total shareholder return, 33% are tied to our fiscal year
2021 revenue, and 33% are tied to our fiscal year 2021 adjusted earnings per share goals, each as specifically defined in the
equity award agreements. The number of shares to be issued may vary between 50% and 200% of the number of
performance stock units depending on performance, and no such shares will be issued if threshold performance is not
achieved. The weighted-average grant date fair value of the awards was $17.84 per share, which was estimated using a
Monte Carlo-based valuation model for the awards based on total shareholder return and using a probability-adjusted
achievement rate combined with the market price of the common stock on the date of grant for the awards based on revenue
and earnings per share targets. Share-based compensation expense related to the performance stock unit awards was $123
and $534 for the years ended March 31, 2020 and 2019, respectively.
On December 26, 2019 and January 27, 2020, the Compensation Committee of the Board approved a total of
279,587 performance stock unit awards to be granted to certain executives and non-executive members of the executive
leadership team, which vest only in the event certain performance goals are achieved and with continuous service through the
date the goals are certified. Approximately 80% of the performance stock units are tied to the Company’s fiscal year 2021
revenue goal and 20% are tied to the Company’s fiscal year 2022 revenue goal. Performance stock unit awards funded for
fiscal year 2021 and fiscal year 2022 revenue performance will be modified for cumulative 3-year total shareholder return
(“TSR”) on the three-year grant anniversary, which is also the cliff vest date. The number of shares to be issued may vary
between 50% and 150% of the number of performance stock units depending on performance, and no such shares will be
issued if threshold performance is not achieved. The weighted-average grant date fair value of the awards was $16.02 per
share, which was estimated using a Monte Carlo-based valuation model for the awards based on total shareholder return and
using a probability-adjusted achievement rate combined with the market price of the common stock on the date of grant for the
awards based on revenue targets. Share-based compensation expense related to the performance stock unit awards was
$309 for the year ended March 31, 2020.
Employee Share Purchase Plan
On August 11, 2014, our shareholders approved an Employee Share Purchase Plan (the “Purchase Plan”) under which
4,000,000 shares of common stock were reserved for future grant. The Purchase Plan allows eligible employees to purchase
shares through payroll deductions of up to 15% of total base salary at a 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 shares purchased 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 single purchase date and no more than $25 in total fair market value of shares during any one calendar year. As of March
31, 2020, we have issued 586,102 shares under the Purchase Plan and 3,413,898 shares are available for future issuance.
Share-based compensation expense recorded for the employee share purchase plan was $484, $481, and $362 for the years
ended March 31, 2020, 2019, and 2018, respectively.
15. Commitments, Guarantees and Contingencies
Commitments and Guarantees
Our software license agreements include a performance guarantee that our software products will substantially operate as
described in the applicable program documentation for a period of 365 days after delivery. To date, we have not incurred any
significant costs associated with our performance guarantee or other related warranties and do not expect to incur significant
warranty costs in the future. Therefore, no accrual has been made for potential costs associated with these 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 the performance guarantees. To date, we have not incurred any significant costs
associated with these warranties and do not expect to incur significant warranty costs in the future. Therefore, no accrual has
been made for potential costs associated with these warranties.
We historically have accepted sales returns under limited circumstances. We estimate expected sales returns and other forms
of variable consideration considering our customary business practice and contract-specific facts and circumstances, and we
consider such estimated potential returns as variable consideration when allocating the transaction price to the extent it is
probable that there will not be a significant reversal of cumulative revenue recognized.
90
Our standard sales agreements contain an indemnification provision pursuant to which we shall indemnify, hold harmless, and
reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with any United States
patent, any copyright or other intellectual property infringement claim 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 these indemnification agreements, we
believe that our estimated exposure on these agreements is currently minimal. Accordingly, we have no liabilities recorded for
these indemnification obligations.
Hussein Litigation
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 the County 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 granted on April 10, 2014. An
amended complaint was filed on April 25, 2014. The amended complaint generally alleges fraud and deceit, constructive fraud,
negligent misrepresentation and breach of fiduciary duty in connection with statements made to our shareholders regarding
our financial condition and projected future performance. The amended complaint seeks actual damages, exemplary and
punitive damages and costs. We filed a demurrer to the amended complaint. On July 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 and deceit
claims. On August 28, 2014, we filed an answer and also filed a cross-complaint against Hussein, alleging that he breached
fiduciary duties owed to the Company, Mr. Razin and Mr. Plochocki. Mr. Razin and Mr. Plochocki have dismissed their claims
against Hussein, leaving the Company as the sole plaintiff in the cross-complaint. On June 26, 2015, we filed a motion for
summary judgment with respect to Hussein’s claims, which the Court granted on September 16, 2015, dismissing all of
Hussein’s claims against us. On September 23, 2015, Hussein filed an application for reconsideration of the Court's summary
judgment order, which the Court denied. Hussein filed a renewed application for reconsideration of the Court’s summary
judgment order on August 3, 2017. The Court again denied Hussein’s application. On October 28, 2015, May 9, 2016, and
August 5, 2016, Hussein filed a motion for summary judgment, motion for summary adjudication, and motion for judgment on
the pleadings, respectively, seeking to dismiss our cross-complaint. The Court denied each motion. Trial on our cross-
complaint began June 12, 2017. On July 26, 2017, the Court issued a statement of decision granting Hussein’s motion for
judgment on our cross-complaint. Final judgment over Hussein’s claims and our cross-claims was entered on January 9, 2018.
Hussein has noticed his appeal of the order granting summary judgment over his claims, and we noticed a cross-appeal on the
court’s statement of decision granting Hussein’s motion for judgment on our cross-complaint. On October 8, 2019, the
California State Court of Appeal for the Fourth Appellate District, Division Three, reversed the Superior Court’s grant of
summary judgment against Hussein’s affirmative claims and affirmed the trial court’s judgement after a bench trial against the
Company on its breach of fiduciary duty claims against Hussein. We petitioned the California Court of Appeal to rehear the
matter with respect to Hussein’s affirmative claims. The Court modified its opinion but denied the Company’s rehearing petition
on November 7, 2019. We filed a petition for review with the Supreme Court of California on November 18, 2019, which was
denied on January 15, 2020. As a result, the case has returned to the trial court for resolution. A schedule for proceedings
before the trial court has not yet been established. At this time, we are unable to estimate the probability or the amount of
liability, if any, related to this claim.
Shareholder Derivative Litigation
On September 28, 2017, a complaint was filed against our Company and certain of our current and former officers and
directors in the United States District Court for the Central District of California, captioned Kusumam Koshy, derivatively on
behalf of Quality Systems Inc. vs. Craig Barbarosh, George H. Bristol, James C. Malone, Peter M. Neupert, Morris Panner, D.
Russell Pflueger, Steven T. Plochocki, Sheldon Razin, Lance E. Rosenzweig, Paul A. Holt, and Quality Systems, Inc., No.
8:17-cv-01694, by Kusumam Koshy, a purported shareholder of ours. The complaint alleges breach of fiduciary duties and
abuse of control, as well as unjust enrichment and insider selling by individual directors arising out of the allegations described
above under the caption “Hussein Litigation” and a related, now-settled, federal securities class action, as well as the
Company’s adoption of revised indemnification agreements, and the resignation of certain officers of the Company. The
complaint seeks restitution and disgorgement, court costs and attorneys’ fees, and enhanced corporate governance reforms
and internal control procedures. On January 12, 2018, Defendants filed a motion to dismiss the derivative complaint. On July
25, 2018, the Court dismissed the complaint with prejudice. On August 24, 2018, the plaintiff filed a notice of appeal to the
United States Court of Appeals for the Ninth Circuit. Briefing was completed in May 2019 and a hearing on the appeal was
held on December 12, 2019. On December 19, 2019, the Ninth Circuit affirmed the District Court’s dismissal in its entirety. The
time within which the plaintiff could file a petition for writ of certiorari to the Supreme Court has expired so this matter is now
concluded.
91
Other Regulatory Matters
Commencing in April 2017, we have received requests for documents and information from the United States Attorney's Office
for the District of Vermont and other government agencies in connection with an investigation concerning the certification we
obtained for our software under the United States Department of Health and Human Services' Electronic Health Record (EHR)
Incentive Program. The requests for information relate to, among other things: (a) data used to determine objectives and
measures under the Meaningful Use (MU) and the Physician Quality Reporting System (PQRS) programs, (b) EHR software
code used in certifying our software and information, and (c) payments provided for the referral of EHR business. We continue
to cooperate in this investigation. Requests and investigations of this nature may lead to future requests for information and
ultimately the assertion of claims or the commencement of legal proceedings against us, as well as other material liabilities. In
addition, our responses to these and any future requests require time and effort, which can result in additional cost to us. At
this time, we are unable to estimate the probability or the amount of liability, if any, related to this matter. Given the highly-
regulated nature of our industry, we may, from time to time, be subject to subpoenas, requests for information, or
investigations from various government agencies. It is our practice to respond to such matters in a cooperative, thorough and
timely manner. At this time, we are unable to estimate the probability or the amount of liability, if any, related to this matter.
16. Restructuring Plan
In June 2019, we implemented a business restructuring plan as part of our continued efforts to preserve and grow the value of
the Company through client-focused innovations while reducing our cost structure. As part of the restructuring, we reduced our
total workforce by approximately 4% primarily within the research and development function and intend to expand on our
research and development resources in India. We recorded $2,505 of restructuring costs in the year ended March 31, 2020
within operating expenses in our consolidated statements of comprehensive income. The restructuring costs consisted
primarily of payroll-related costs, such as severance, outplacement costs, and continuing healthcare coverage, associated with
the involuntary separation of employees pursuant to a one-time benefit arrangement. These amounts were accrued when it
was probable that the benefits would be paid, and the amounts were reasonably estimable. The payroll-related costs have
been substantially paid as of March 31, 2020.
In connection with the restructuring plan, we also vacated portions of certain leased locations and recorded impairments of
$9,373 in the year ended March 31, 2020 to our operating right-of-use assets and certain related fixed assets associated with
the vacated locations, or portions thereof, in North Canton, San Diego, Horsham, St. Louis, Irvine, Atlanta, Brentwood, and
Phoenix, based on projected sublease rental income and estimated sublease commencement dates. We are actively
marketing each of these vacated locations for sublease. The impairment analysis was performed at the asset group level and
the impairment charge was estimated by comparing the fair value of each asset group based on the expected cash flows to its
respective book value. We determined the discount rate for each asset group based on the approximate interest rate on a
collateralized basis with similar remaining terms and payments as of the impairment date. Significant judgment was required to
estimate the fair value of each asset group and actual results could vary from the estimates, resulting in potential future
adjustments to amounts previously recorded.
During the years ended March 31, 2019 and 2018, we recorded $640 and $611, respectively, of restructuring costs related to
adjustments to the estimated fair value of remaining lease obligations for vacated properties associated with our prior
restructuring plan. The restructuring costs were comprised of facilities-related costs associated with accruals for the remaining
lease obligations at certain locations, including Solana Beach, Costa Mesa, and a portion of Horsham with contractual lease
terms ending between January 2018 and September 2023. We estimated the remaining lease obligations at fair value as of
the cease-use date for each location based on the future contractual lease obligations, reduced by projected sublease rentals
that could be reasonably obtained for the locations after a period of marketing, and adjusted for the effect deferred 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. As of March 31, 2019, the remaining lease obligation, net of estimated projected sublease rentals, was $1,762.
Refer to Note 5 for estimated timing of payments related to remaining lease obligations.
92
17. Selected Quarterly Operating Results (unaudited)
The following table presents quarterly unaudited consolidated financial information for the eight quarters preceding March 31,
2020. Such information is presented on the same basis as the annual information presented in the accompanying consolidated
financial statements. In management’s opinion, this information reflects all adjustments that are necessary for a fair statement
of the results for these periods.
Revenues:
Recurring
Software, hardware, and other non-
recurring
Total revenues
Cost of revenue:
Recurring
Software, hardware, and other non-
recurring
Amortization of capitalized software costs
and acquired intangible assets
Total cost of revenue
Gross profit
Operating expenses:
Selling, general and administrative
Research and development costs, net
Amortization of acquired intangible assets
Impairment of assets
Restructuring costs
Total operating expenses
Income (loss) from operations
Interest income
Interest expense
Other income (expense), net
Income (loss) before provision for (benefit of)
income taxes
Provision for (benefit of) income taxes
Net income (loss)
Net income (loss) per share:
Basic (1)
Diluted (1)
Weighted-average shares outstanding:
3/31/20
12/31/19
9/30/19
6/30/19
3/31/19 12/31/18 9/30/18
6/30/18
Quarter Ended
$ 124,490 $124,787 $120,589 $ 119,447 $120,151 $ 117,446 $ 116,317 $120,007
11,892
136,382
12,953
137,740
13,667
134,256
12,414
131,861
14,634 13,421 14,004
134,785 130,867 130,321
13,193
133,200
51,992
52,197
50,328
50,540
48,174 47,997 47,172
48,153
7,088
6,975
6,563
6,278
5,959
6,576
7,022
7,154
9,259
68,339
68,043
43,159
21,429
1,449
8,218
77
74,332
(6,289 )
111
(661 )
632
8,963
68,135
69,605
42,841
20,026
964
1,948
546
66,325
3,280
30
(435 )
137
8,843
65,734
68,522
39,046
19,789
865
1,916
175
61,791
6,731
36
(387 )
210
8,413
65,231
66,630
40,128
22,051
865
489
1,707
65,240
1,390
79
(472 )
(133 )
7,924
7,098
6,924
62,057 61,671 61,118
72,728 69,196 69,203
1,028
—
640
1,027
—
—
44,710 41,304 34,229
19,813 20,682 18,371
1,121
—
—
66,191 63,013 53,721
6,183 15,482
40
(769 )
237
6,537
103
(595 )
(117 )
44
(720 )
(227 )
6,544
61,851
71,349
44,636
22,128
1,168
—
—
67,932
3,417
29
(730 )
374
(6,207 )
(1,965 )
$ (4,242 ) $
3,012
(1,403 )
4,415 $
6,590
509
6,081 $
864
(380 )
1,244 $
5,928
2,000
456
3,928 $ 4,824 $ 13,094 $
5,280 14,990
1,896
3,090
442
2,648
$
$
(0.06 ) $
(0.06 ) $
0.07 $
0.07 $
0.09 $
0.09 $
0.02 $
0.02 $
0.06 $
0.06 $
0.07 $
0.07 $
0.20 $
0.20 $
0.04
0.04
Basic
Diluted
65,988
65,988
65,493
65,664
65,401
65,560
65,015
65,353
64,749 64,637 64,265
64,917 64,776 64,857
64,019
64,054
(1) Quarterly net income (loss) per share may not sum to annual net income (loss) per share due to rounding.
18. Subsequent Events
In April 2020, we borrowed an additional $50,000 against the Credit Agreement and our total outstanding loans were
$179,000.
In May 2020, we announced a decision to execute a reduction in our workforce of less than 3% as well as other temporary
cost reductions in response to the COVID-19 pandemic.
93
(in thousands)
For the year ended
March 31, 2020
March 31, 2019
March 31, 2018
(in thousands)
For the year ended
March 31, 2020
March 31, 2019
March 31, 2018
(in thousands)
For the year ended
March 31, 2020
March 31, 2019
March 31, 2018
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
Sales Return Reserve
Additions
Charged
Against
Revenue Deductions
Balance at
Beginning
of Year
$
$
$
4,759 $
5,520 $
7,213 $
7,094 $
4,969 $
3,964 $
(7,662) $
(5,730) $
(5,657) $
Balance at
End of Year
4,191
4,759
5,520
Allowance for Doubtful Accounts
Balance at
Beginning
of Year
Additions
Charged to
Costs and
Expenses Deductions
$
$
$
6,054 $
3,876 $
2,757 $
3,367 $
5,644 $
5,913 $
(5,872) $
(3,466) $
(4,794) $
Balance at
End of Year
3,549
6,054
3,876
Valuation Allowance for Deferred Taxes
Additions
Charged to
Costs and
Expenses
327
$
$
708
$
Acquisition
Related
Additions Deductions
$
$
— $
1,590 $
— $
922 $
(28 ) $
(38 ) $
(102 ) $
Balance at
End of Year
5,452
3,563
2,893
Balance at
Beginning
of Year
$
$
$
3,563
2,893
2,073
94
NEXTGEN HEALTHCARE, INC.
LIST OF SUBSIDIARIES
Exhibit 21
Name of Subsidiary
NextGen Healthcare Information Systems, LLC
NXGN Management LLC (f/k/a QSI Management LLC)
NextGen Cares Foundation, Inc.
NextGen RCM Services, LLC
Topaz Information Systems, LLC
Medfusion, Inc.
OTTO Health, LLC
NextGen Healthcare India Pvt. Ltd.
NextGen Interoperability Solutions Limited (f/k/a Mirth Ltd)
State or Other Jurisdiction of Incorporation or Organization
California
California
California
Missouri
Arizona
North Carolina
Colorado
India
United Kingdom
95
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-
234308,333-22145, 333-63131, 333-67115, 333-129752, 333-198181, and 333-206419) of NextGen Healthcare,
Inc. of our report dated June 1, 2020 relating to the financial statements and financial statement schedule and the
effectiveness of internal control over financial reporting, which appears in this Form 10-K.
Exhibit 23.1
/s/ PricewaterhouseCoopers LLP
Irvine, California
June 1, 2020
96
EXHIBIT 31.1
Certification of Principal Executive Officer Required by
Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended,
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, John R. Frantz, certify that:
1.
I have reviewed this Annual Report on Form 10-K of NextGen Healthcare, Inc.;
2.
3.
4.
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 the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act 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 the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure 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, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance 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 effectiveness of 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 fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’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 to adversely 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 over financial reporting.
Date: June 1, 2020
By: /s/ John R. Frantz
John R. Frantz
Chief Executive Officer
(Principal Executive Officer)
97
EXHIBIT 31.2
Certification of Principal Financial Officer Required by
Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended,
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, James R. Arnold, Jr., certify that:
1.
I have reviewed this Annual Report on Form 10-K of NextGen Healthcare, Inc.;
2.
3.
4.
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 the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act 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 the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure 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, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance 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 effectiveness of 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 fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’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 to adversely 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 over financial reporting.
Date: June 1, 2020
By: /s/ James R. Arnold, Jr.
James R. Arnold, Jr.
Chief Financial Officer
(Principal Financial Officer)
98
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report on Form 10-K of NextGen Healthcare, Inc. (the “Company”) for the year ended
March 31, 2020 (the “Report”), the undersigned hereby certify in their capacities as Chief Executive Officer and Chief Financial
Officer of the Company, respectively, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1.
2.
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as amended; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: June 1, 2020
Date: June 1, 2020
By: /s/ John R. Frantz
John R. Frantz
Chief Executive Officer
(Principal Executive Officer)
By: /s/ James R. Arnold, Jr.
James R. Arnold, Jr.
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 the signatures that appear in typed form within the electronic version of this written statement required by
Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and
Exchange Commission or its staff upon request.
99