UNITED STATES
SECURITIES and EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
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Not Applicable(1) (Address of principal executive offices) |
Not Applicable(1) (Zip Code) |
Not Applicable(1)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol |
Name of each exchange on which registered |
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.
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 such files).
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,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Accelerated filer ☐ |
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Non-accelerated filer ☐ |
Small reporting company |
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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 Exchange Act). Yes ☐ No
The number of outstanding shares of the Registrant’s common stock as of January 20, 2023 was
NEXTGEN HEALTHCARE, INC.
TABLE OF CONTENTS
FORM 10-Q
FOR THE THREE MONTHS ENDED DECEMBER 31, 2022
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Item 1. |
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3 |
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Unaudited Condensed Consolidated Balance Sheets as of December 31, 2022 and March 31, 2022 |
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3 |
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4 |
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5 |
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7 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
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8 |
Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
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29 |
Item 3. |
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42 |
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Item 4. |
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42 |
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Item 1. |
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43 |
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Item 1A. |
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43 |
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Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds. |
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43 |
Item 3. |
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43 |
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Item 4. |
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43 |
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Item 5. |
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43 |
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Item 6. |
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44 |
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46 |
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NEXTGEN HEALTHCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
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December 31, 2022 |
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March 31, 2022 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Restricted cash and cash equivalents |
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Accounts receivable, net |
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Contract assets |
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Income taxes receivable |
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Prepaid expenses and other current assets |
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Total current assets |
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Equipment and improvements, net |
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Capitalized software costs, net |
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Operating lease assets |
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Deferred income taxes, net |
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Contract assets, net of current |
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Intangibles, net |
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Goodwill |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Contract liabilities |
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Accrued compensation and related benefits |
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Income taxes payable |
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Operating lease liabilities |
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Other current liabilities |
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Total current liabilities |
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Contract liabilities, net of current |
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— |
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Deferred compensation |
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Convertible senior notes, net, noncurrent |
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— |
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Operating lease liabilities, net of current |
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Other noncurrent liabilities |
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Total liabilities |
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Shareholders' equity: |
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Common stock, $ |
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Treasury stock, at cost, |
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( |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
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( |
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( |
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Retained earnings |
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Total shareholders' equity |
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Total liabilities and shareholders' equity |
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$ |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
NEXTGEN HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
(Unaudited)
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Three Months Ended December 31, |
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Nine Months Ended December 31, |
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2022 |
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2021 |
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2022 |
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2021 |
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Revenues: |
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Recurring |
$ |
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$ |
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$ |
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$ |
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Software, hardware, and other non-recurring |
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Total revenues |
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Cost of revenue: |
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Recurring |
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Software, hardware, and other non-recurring |
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Amortization of capitalized software costs and acquired intangible assets |
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Total cost of revenue |
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Gross profit |
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Operating expenses: |
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Selling, general and administrative |
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Research and development costs, net |
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Amortization of acquired intangible assets |
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Impairment of assets |
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— |
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Restructuring costs |
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— |
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— |
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Total operating expenses |
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Income from operations |
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Interest income |
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Interest expense |
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( |
) |
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( |
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( |
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( |
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Other income (expense), net |
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( |
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( |
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( |
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Income before provision for income taxes |
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Provision for income taxes |
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Net income |
$ |
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$ |
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$ |
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$ |
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Other comprehensive income: |
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Foreign currency translation, net of tax |
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( |
) |
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( |
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Comprehensive income |
$ |
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$ |
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$ |
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$ |
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Net income per share: |
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Basic |
$ |
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$ |
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$ |
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$ |
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Diluted |
$ |
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$ |
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$ |
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$ |
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Weighted-average shares outstanding: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
NEXTGEN HEALTHCARE, INC.
STATEMENTS OF CONDENSED CONSOLIDATED STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
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Nine Months Ended December 31, 2022 |
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Additional |
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Accumulated Other |
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Total |
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Common Stock |
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Treasury |
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Paid-in |
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Retained |
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Comprehensive |
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Shareholders' |
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Shares |
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Amount |
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Stock |
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Capital |
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Earnings |
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Income |
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Equity |
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Balance, March 31, 2022 |
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$ |
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$ |
( |
) |
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$ |
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$ |
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$ |
( |
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$ |
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Common stock issued under stock plans, net of shares withheld for taxes |
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— |
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( |
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— |
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— |
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( |
) |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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Repurchase of common stock (1) |
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( |
) |
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— |
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( |
) |
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— |
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— |
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— |
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( |
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Components of other comprehensive income: |
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|||||||
Translation adjustments |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Net income |
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— |
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— |
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— |
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— |
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— |
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Balance, June 30, 2022 |
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( |
) |
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( |
) |
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Common stock issued under stock plans, net of shares withheld for taxes |
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( |
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— |
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— |
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( |
) |
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— |
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— |
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( |
) |
Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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Repurchase of common stock (2) |
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( |
) |
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— |
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( |
) |
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— |
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— |
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— |
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( |
) |
Components of other comprehensive income: |
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|||||||
Translation adjustments |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
Net income |
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— |
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— |
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— |
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— |
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Balance, September 30, 2022 |
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( |
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( |
) |
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Common stock issued under stock plans, net of shares withheld for taxes |
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— |
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( |
) |
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— |
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— |
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( |
) |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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Repurchase of common stock(3) |
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( |
) |
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— |
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( |
) |
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— |
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— |
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— |
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( |
) |
Components of other comprehensive income: |
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Translation adjustments |
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— |
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— |
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— |
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— |
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— |
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Net income |
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— |
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— |
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— |
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— |
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— |
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Balance, December 31, 2022 |
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$ |
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$ |
( |
) |
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$ |
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$ |
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$ |
( |
) |
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$ |
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5
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Nine Months Ended December 31, 2021 |
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Additional |
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Accumulated Other |
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Total |
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Common Stock |
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Treasury |
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Paid-in |
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Retained |
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Comprehensive |
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Shareholders' |
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Shares |
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Amount |
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Stock |
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Capital |
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Earnings |
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Income (Loss) |
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Equity |
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|||||||
Balance, March 31, 2021 |
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$ |
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$ |
— |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Common stock issued under stock plans, net of shares withheld for taxes |
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— |
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( |
) |
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— |
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— |
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( |
) |
||
Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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Components of other comprehensive income: |
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|||||||
Translation adjustments |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
Net income |
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— |
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— |
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— |
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— |
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— |
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||
Balance, June 30, 2021 |
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— |
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( |
) |
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|||||
Common stock issued under stock plans, net of shares withheld for taxes |
|
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|
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— |
|
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( |
) |
|
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— |
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— |
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( |
) |
||
Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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||
Components of other comprehensive loss: |
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|||||||
Translation adjustments |
|
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— |
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— |
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— |
|
|
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— |
|
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— |
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||
Net loss |
|
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— |
|
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— |
|
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— |
|
|
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— |
|
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( |
) |
|
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— |
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( |
) |
Balance, September 30, 2021 |
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— |
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( |
) |
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|||||
Common stock issued under stock plans, net of shares withheld for taxes |
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|
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|
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|
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( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|||
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Repurchase of common stock(1) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Components of other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Translation adjustments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Balance, December 31, 2021 |
|
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
NEXTGEN HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
Nine Months Ended December 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
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 |
|
|
( |
) |
|
|
|
|
Gain on disposition of Commercial Dental assets |
|
|
( |
) |
|
|
— |
|
Impairment of assets |
|
|
|
|
|
|
||
Loss on disposal of equipment and improvements |
|
|
|
|
|
|
||
Loss on foreign currency exchange rates |
|
|
( |
) |
|
|
— |
|
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 disposition of Commercial Dental assets |
|
|
|
|
|
— |
|
|
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
||
Proceeds from convertible senior notes |
|
|
|
|
|
— |
|
|
Proceeds from line of credit |
|
|
|
|
|
— |
|
|
Repayments on the line of credit |
|
|
( |
) |
|
|
— |
|
Proceeds from issuance of shares under employee plans |
|
|
|
|
|
|
||
Repurchase of common stock |
|
|
( |
) |
|
|
( |
) |
Payment of debt issuance costs |
|
|
( |
) |
|
|
— |
|
Payment of contingent consideration related to acquisitions |
|
|
— |
|
|
|
( |
) |
Payments for taxes related to net share settlement of equity awards |
|
|
( |
) |
|
|
( |
) |
Net cash provided by (used in) financing activities |
|
|
|
|
|
( |
) |
|
Effect of exchange rate changes on cash, cash equivalents, and restricted cash |
|
|
( |
) |
|
|
— |
|
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 |
|
|
|
|
|
|
||
Accrued purchases of equipment and improvements |
|
|
|
|
|
|
||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
NEXTGEN HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES INDEX
Note |
|
|
|
Page |
|
|
|
|
|
Note 1 |
|
|
9 |
|
Note 2 |
|
|
10 |
|
Note 3 |
|
|
12 |
|
Note 4 |
|
|
13 |
|
Note 5 |
|
|
14 |
|
Note 6 |
|
|
15 |
|
Note 7 |
|
|
17 |
|
Note 8 |
|
|
17 |
|
Note 9 |
|
|
18 |
|
Note 10 |
|
|
18 |
|
Note 11 |
|
|
20 |
|
Note 12 |
|
|
21 |
|
Note 13 |
|
|
22 |
|
Note 14 |
|
|
22 |
|
Note 15 |
|
|
27 |
|
Note 16 |
|
|
27 |
|
Note 17 |
|
|
28 |
8
NEXTGEN HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
(Unaudited)
1. Summary of Significant Accounting Policies
Principles of Consolidation. The condensed consolidated financial statements include the accounts of NextGen Healthcare, Inc. and its wholly-owned subsidiaries (collectively, the “Company”). Each of the terms “we,” “us,” or “our” as used herein refers collectively to the Company, unless otherwise stated. All intercompany accounts and transactions have been eliminated.
Basis of Presentation. The accompanying unaudited condensed consolidated financial statements as of December 31, 2022 and for the three and nine months ended December 31, 2022 have been prepared in accordance with the requirements of Quarterly Report on Form 10-Q and Article 10 of the Securities and Exchange Commission Regulation S-X and therefore do not include all information and notes which would be presented were such condensed consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements presented in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments which are necessary for a fair statement of the results of operations and cash flows for the periods presented. The results of operations for such interim periods are not necessarily indicative of results of operations to be expected for the full year.
Certain prior period amounts have been reclassified to conform to current period presentation. References to amounts in the condensed consolidated financial statement sections are in thousands, except shares and per share data, unless otherwise specified.
Use of Estimates. We evaluate our estimates and assumptions 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. Our estimates and assumptions consider the potential economic implications of COVID-19 and other events on our critical and significant accounting estimates.
Recently Adopted Accounting Pronouncements. Recently adopted accounting pronouncements are discussed below or in the notes, where applicable.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in ASU 2020-04 apply only to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued because of reference rate reform. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope (“ASU 2021-01”), which clarifies the application of certain optional expedients and exceptions. Topic 848 may be applied prospectively through December 31, 2022. The adoption of Topic 848 did not have a material impact on our condensed consolidated financial statements as our amended and restated revolving credit agreement contains provisions to accommodate the replacement of the existing LIBOR-based rate with a successor Secured Overnight Financing Rate (“SOFR”) based rate upon a triggering event.
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity ("ASU 2020-06"), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. We have applied the amendments in ASU 2020-06 for the accounting of the convertible senior notes issued on
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805) - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). Under current GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers and other similar contracts that are accounted for in accordance with ASU 2016-10, Revenue from Contracts with Customers (Topic 606), at fair value on the acquisition date. ASU 2021-08 requires acquiring entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The amendments in ASU 2021-08 should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. We have elected to early adopt this guidance as of
Recent Accounting Standards Not Yet Adopted. We do not believe that any other recently issued, but not yet effective accounting standards, if adopted, would have a material impact on our condensed consolidated financial statements.
9
2. Revenue from Contracts with Customers
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, transactional and data services, 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:
|
|
Three Months Ended December 31, |
|
|
Nine Months Ended December 31, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Recurring revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Subscription services |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Support and maintenance |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Managed services |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Transactional 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 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Recurring revenues consists of subscription services, support and maintenance, managed services, and transactional 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
10
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.
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, 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 judgment 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 and other recurring services are satisfied as the corresponding services are provided and revenue is recognized as such services are rendered.
Transactional and data services. Performance obligations related to transactional and data services, including Electronic Data Interchange (“EDI”), patient pay, and other transaction processing services are satisfied at the point in time the services are rendered or delivered. The transfer of control occurs when the transactional and data services are delivered and the customer receives the benefits from the services provided. Revenue is recognized as such services are rendered.
Beginning in fiscal year 2023, to align the presentation of disaggregated revenue with the manner in which management reviews such information, the presentation of disaggregated revenues by major revenue categories was revised to reclassify revenues related to patient pay services and certain other services from the managed services category into the transactional and data services category, which replaced the prior EDI and data services category. The prior period presentation of revenues disaggregated by major revenue categories and by occurrence above has been reclassified to conform with current period presentation.
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 December 31, 2022, the aggregate amount of transaction price related to remaining unsatisfied or partially unsatisfied performance obligations over the respective noncancelable contract term was approximately $
As of December 31, 2021, the aggregate amount of transaction price related to remaining unsatisfied or partially unsatisfied performance obligations over the respective noncancelable contract term was approximately $
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
11
of time. Contract assets, consisting of unbilled receivables, 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 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 condensed 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 condensed 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 three months ended December 31, 2022 and 2021, we recognized $
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
Capitalized commissions costs were $
3. Accounts Receivable
Accounts receivable includes invoiced amounts where the right to receive payment is unconditional and only subject to the passage of time. Allowance for credit losses are reported as a component of accounts receivable as summarized below:
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
||
Accounts receivable, gross |
|
$ |
|
|
$ |
|
||
Allowance for credit losses |
|
|
( |
) |
|
|
( |
) |
Accounts receivable, net |
|
$ |
|
|
$ |
|
||
The following table represents the changes in the allowance for credit losses, as of and for the three months ended December 31, 2022:
Balance as of September 30, 2022 |
|
$ |
( |
) |
Additions charged to costs and expenses |
|
|
( |
) |
Deductions |
|
|
|
|
Balance as of December 31, 2022 |
|
$ |
( |
) |
12
The following table represents the changes in the allowance for credit losses, as of and for the nine months ended December 31, 2022:
Balance as of March 31, 2022 |
|
$ |
( |
) |
Additions charged to costs and expenses |
|
|
( |
) |
Deductions |
|
|
|
|
Balance as of December 31, 2022 |
|
$ |
( |
) |
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 December 31, 2022 and March 31, 2022:
|
|
Balance At |
|
|
Quoted Prices |
|
|
Significant Other |
|
|
Unobservable |
|
||||
|
|
December 31, 2022 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash and cash equivalents (1) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Restricted cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contingent consideration related to acquisitions |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
Balance At |
|
|
Quoted Prices |
|
|
Significant Other |
|
|
Unobservable |
|
||||
|
|
March 31, 2022 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash and cash equivalents (1) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Restricted cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
(1)
|
|
Total Liabilities |
|
|
Balance as of September 30, 2022 |
|
$ |
|
|
Acquisition |
|
|
( |
) |
Fair value adjustments |
|
|
|
|
Balance as of December 31, 2022 |
|
$ |
( |
) |
As of December 31, 2022, the contingent consideration liability balance related to the acquisition of TSI Healthcare, LLC (See Note 6) was $
13
contingent consideration liabilities are included as a component of selling, general and administrative expense in the consolidated statements of net income and comprehensive income.
There are
We believe that the fair value of our 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
Our leasing arrangements are reflected on the balance sheet as right-of-use assets and liabilities pertaining to the rights and obligations created by the leased assets.
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 condensed consolidated balance sheets. Operating right-of-use lease assets are classified as operating lease assets on our condensed consolidated balance sheets. 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.
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.
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 condensed consolidated statements of net income and comprehensive income. Total operating lease costs were $
Components of operating lease costs are summarized as follows:
|
|
Three Months Ended December 31, |
|
|
Nine Months Ended December 31, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Operating lease costs |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Short-term lease costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Variable lease costs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Less: Sublease income |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total operating lease costs |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
14
Supplemental cash flow information related to operating leases is summarized as follows:
|
|
Three Months Ended December 31, |
|
|
Nine Months Ended December 31, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Cash paid for amounts included in the measurement of operating lease liabilities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Operating lease assets obtained in exchange for operating lease liabilities |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|||
We have operating lease agreements for our offices in the United States and India with lease periods expiring between
For the year ended March 31, |
|
|
|
|
2023 (remaining three months) |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Total future lease payments |
|
|
|
|
Less interest |
|
|
( |
) |
Total lease liabilities |
|
$ |
|
|
In the three and nine months ended December 31, 2022 we vacated portions of certain leased locations and recorded impairments of $
In the nine months ended December 31, 2021, we vacated portions of certain leased locations and recorded impairments of $
The impairment analyses were performed at the asset group level and the impairment charges were 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.
6. Business Combinations and Disposals
Acquisition of TSI Healthcare, LLC
On
The preliminary purchase price was $
We accounted for the acquisition as a business combination using the acquisition method of accounting. The purchase price allocation of TSI is deemed to be preliminary. The preliminary 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 as we finalize the valuation or if additional information about the facts and circumstances that existed at the acquisition date become 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.
Identifiable intangible assets acquired from TSI include re-acquired rights, customer relationships, and data health database. The fair values of the acquired intangible assets were determined using the distributor method of the income approach for customer relationships and the multi-period excess earnings method of the income approach for re-acquired rights and the data health
15
database. The valuation model inputs required the application of significant judgment by management. 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 TSI is considered deductible for tax purposes.
|
|
|
|
|
Preliminary |
|
|
|
Purchase Price |
|
|
Initial purchase price |
$ |
|
|
Fair value of contingent consideration |
|
|
|
Payment for option to early terminate lease |
|
|
|
Working capital adjustment |
|
( |
) |
Total preliminary purchase price |
$ |
|
|
|
|
|
|
Preliminary fair value of the net tangible assets acquired and liabilities assumed: |
|
|
|
Cash and cash equivalents |
$ |
|
|
Accounts receivable |
|
|
|
Contract assets |
|
|
|
Prepaid expense and other assets |
|
|
|
Equipment and improvements |
|
|
|
Contract assets, net of current |
|
|
|
Deferred income tax asset |
|
|
|
Operating lease assets |
|
|
|
Other assets |
|
|
|
Accounts payable |
|
( |
) |
Accrued compensation and related benefits |
|
( |
) |
Contract liabilities |
|
( |
) |
Other current liabilities |
|
( |
) |
Operating lease liabilities |
|
( |
) |
Contract liabilities, net of current |
|
( |
) |
Operating lease liabilities, net of current |
|
( |
) |
Total preliminary net tangible assets acquired and liabilities assumed |
|
( |
) |
Preliminary fair value of identifiable intangible assets acquired: |
|
|
|
Goodwill |
|
|
|
Re-acquired rights |
|
|
|
Customer relationships |
|
|
|
Data health database |
|
|
|
Total identifiable intangible assets acquired |
|
|
|
Total preliminary purchase price |
$ |
|
|
The re-acquired rights intangible asset will be amortized over
We incurred $
Disposition of Commercial Dental Assets
On July 26, 2022, we executed an Asset Purchase Agreement for the sale of certain non-strategic dental related (“Commercial Dental”) assets for $
16
7. Goodwill
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. Impairment testing for goodwill is performed at a reporting-unit level, which is defined as an operating segment or one level below an operating segment (referred to as a component). We operate as
We have not identified any events or circumstances as of December 31, 2022 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 December 31, 2022 was $
8. Intangible Assets
Our definite-lived intangible assets, other than capitalized software development costs, are summarized as follows:
|
|
December 31, 2022 |
|
|||||||||||||||||||||
|
|
Customer |
|
|
Trade Names |
|
|
Software |
|
|
Re-acquired Rights |
|
|
Data Health Database |
|
|
Total |
|
||||||
Gross carrying amount |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Accumulated amortization |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net intangible assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
March 31, 2022 |
|
|
|
|
|
|
|
|||||||||||||||
|
|
Customer |
|
|
Trade Names |
|
|
Software |
|
|
Total |
|
|
|
|
|
|
|
||||||
Gross carrying amount |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
|
|
||||||
Accumulated amortization |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
||
Net intangible assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
|
|
||||||
Amortization expense related to the customer relationships, trade names, and re-acquired rights intangible assets recorded as operating expenses in the condensed consolidated statements of net income and comprehensive income was $
Amortization expense related to the customer relationships and trade names intangible assets recorded as operating expenses in the condensed consolidated statements of net income and comprehensive income was $
During the nine months ended December 31, 2022, we retired $
The following table summarizes the remaining estimated amortization of definite-lived intangible assets as of December 31, 2022:
|
|
Estimated Remaining Amortization Expense |
|
|||||||||
|
|
Operating |
|
|
Cost of |
|
|
Total |
|
|||
For the year ended March 31, |
|
|
|
|
|
|
|
|
|
|||
2023 (remaining three months) |
|
$ |
|
|
$ |
|
|
$ |
|
|||
2024 |
|
|
|
|
|
|
|
|
|
|||
2025 |
|
|
|
|
|
|
|
|
|
|||
2026 |
|
|
|
|
|
|
|
|
|
|||
2027 |
|
|
|
|
|
|
|
|
|
|||
2028 and beyond |
|
|
|
|
|
- |
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
17
9. Capitalized Software Costs
Our capitalized software costs are summarized as follows:
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
||
Gross carrying amount |
|
$ |
|
|
$ |
|
||
Accumulated amortization |
|
|
( |
) |
|
|
( |
) |
Net capitalized software costs |
|
$ |
|
|
$ |
|
||
Amortization expense related to capitalized software costs was $
Amortization expense related to capitalized software costs was $
During the nine months ended December 31, 2022, we retired $
The following table presents the remaining estimated amortization of capitalized software costs as of December 31, 2022. 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, |
|
|
|
|
2023 (remaining three months) |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
Total |
|
$ |
|
|
10. Debt
Convertible Senior Notes
On November 1, 2022, we issued $
Noteholders may convert their notes at their option only in the following circumstances:
We will settle conversions by paying or delivering, as applicable, cash and, if applicable, shares of common stock, at our election, based on the applicable conversion rate(s). However, upon conversion of any Notes, the conversion value, which will be determined over an observation period consisting of
18
converted. The initial conversion rate is
The Notes will be redeemable, in whole or in part (subject to certain limitations described below), at our option at any time, and from time to time, on or after November 20, 2025, and before the 61st scheduled trading day immediately before the maturity date, but only if the last reported sale price per share of our common stock exceeds
If certain corporate events that constitute a “Fundamental Change” (as defined in the Indenture) occur, then, subject to certain exceptions, noteholders may require us to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. The definition of Fundamental Change includes certain business combination transactions involving the Company and certain de-listing events with respect to our common stock.
The Notes will be our senior, unsecured obligations and will be (i) equal in right of payment with our existing and future senior, unsecured indebtedness; (ii) senior in right of payment to our existing and future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to our existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables.
The Notes are recorded net of issuance costs as noncurrent liabilities in the condensed consolidated balance sheets. The net carrying value of the Notes as of December 31, 2022 is as follows:
|
|
December 31, 2022 |
|
|
Principal amount: |
|
$ |
|
|
Unamortized issuance costs |
|
|
( |
) |
Carrying value, net |
|
$ |
|
|
The debt issuance costs of the Notes are being amortized using the effective interest method. The effective interest rate of the Notes is
Line of Credit
On March 12, 2021, we entered into a $
On May 17, 2022, we entered into that certain Amendment No. 1 to Credit Agreement (the “First Amendment”) with the Administrative Agent and the lenders party thereto to amend the existing Credit Agreement. The First Amendment modifies the Credit Agreement to increase our net leverage ratio maintenance covenant from
19
covenant period option (available upon the consummation of certain acquisitions) from
On October 27, 2022, the Company entered into that certain Amendment No. 2 to Credit Agreement (the “Second Amendment”) with the Administrative Agent and the lenders party thereto. The Second Amendment modifies the Credit Agreement to make certain updates to the conditions restricting the making of certain dividends, distributions, and other restricted payments by the Company so that the Company’s compliance with the net leverage ratio governor contained in such conditions is calculated net of the net cash proceeds of the Notes issued pursuant to the Indenture.
The Credit Agreement matures on
As of December 31, 2022 and March 31, 2022, we had
Interest expense related to the Credit Agreement was $
Interest expense related to the Credit Agreement was $
11. Composition of Certain Financial Statement Captions
Cash, cash equivalents, and restricted cash are summarized as follows:
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
||
Restricted cash and cash equivalents |
|
|
|
|
|
|
||
Cash, cash equivalents, and restricted cash |
|
$ |
|
|
$ |
|
||
Prepaid expenses and other current assets are summarized as follows:
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
||
Prepaid expenses |
|
$ |
|
|
$ |
|
||
Capitalized commissions costs |
|
|
|
|
|
|
||
Other current assets |
|
|
|
|
|
|
||
Prepaid expenses and other current assets |
|
$ |
|
|
$ |
|
||
Equipment and improvements are summarized as follows:
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
||
Computer equipment |
|
$ |
|
|
$ |
|
||
Internal-use software |
|
|
|
|
|
|
||
Leasehold improvements |
|
|
|
|
|
|
||
Furniture and fixtures |
|
|
|
|
|
|
||
Equipment and improvements, gross |
|
|
|
|
|
|
||
Accumulated depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
Equipment and improvements, net |
|
$ |
|
|
$ |
|
||
20
Other assets are summarized as follows:
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
||
Capitalized commission costs |
|
$ |
|
|
$ |
|
||
Deposits |
|
|
|
|
|
|
||
Debt issuance costs |
|
|
|
|
|
|
||
Other noncurrent assets |
|
|
|
|
|
|
||
Other assets |
|
$ |
|
|
$ |
|
||
Accrued compensation and related benefits are summarized as follows:
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
||
Accrued vacation |
|
$ |
|
|
$ |
|
||
Accrued bonus |
|
|
|
|
|
|
||
Deferred payroll taxes |
|
|
- |
|
|
|
|
|
Accrued commissions |
|
|
|
|
|
|
||
Accrued payroll and other |
|
|
|
|
|
|
||
Accrued compensation and related benefits |
|
$ |
|
|
$ |
|
||
Other current and noncurrent liabilities are summarized as follows:
|
|
December 31, 2022 |
|
|
March 31, 2022 |
|
||
Accrued hosting costs |
|
$ |
|
|
$ |
|
||
Care services liabilities |
|
|
|
|
|
|
||
Sales returns reserves and other customer liabilities |
|
|
|
|
|
|
||
Customer credit balances and deposits |
|
|
|
|
|
|
||
Accrued employee benefits and withholdings |
|
|
|
|
|
|
||
Acquisition liabilities |
|
|
|
|
|
- |
|
|
Accrued outsourcing costs |
|
|
|
|
|
|
||
Accrued EDI expense |
|
|
|
|
|
|
||
Accrued self insurance expense |
|
|
|
|
|
|
||
Accrued consulting and outside services |
|
|
|
|
|
|
||
Accrued legal expense |
|
|
|
|
|
|
||
Accrued royalties |
|
|
|
|
|
|
||
Accrued taxes payable |
|
|
|
|
|
|
||
Other accrued expenses |
|
|
|
|
|
|
||
Other current liabilities |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Uncertain tax positions |
|
$ |
|
|
$ |
|
||
Contingent consideration related to acquisitions, noncurrent |
|
|
|
|
$ |
- |
|
|
Other liabilities |
|
|
|
|
|
|
||
Other noncurrent liabilities |
|
$ |
|
|
$ |
|
||
12. Income Taxes
The provision of income taxes was $
The provision of income taxes in the nine months ended December 31, 2022 was $
The decrease in the effective tax rate for the three and nine months ended December 31, 2022 compared to the corresponding prior periods was primarily due to the net benefit of discrete items including an increase to research and development credits and stock based compensation.
The deferred tax assets and liabilities are presented net in the accompanying condensed consolidated balance sheets as noncurrent. We expect to receive the full benefit of the deferred tax assets recorded, with the exception of certain state credits and state net operating loss carryforwards, for which we have recorded a valuation allowance.
We had unrecognized tax benefits of $
21
We are subject to taxation in federal, various state, India, and United Kingdom jurisdictions. We are no longer subject to United States federal income tax examinations for tax years before fiscal year ended 2018. With a few exceptions, we are no longer subject to state or local income tax examinations for tax years before fiscal year ended 2017. We do not anticipate the total unrecognized tax benefits to significantly change due to the settlement of audits or the expiration of statute of limitations
Inflation Reduction Act of 2022
Changes in tax law and rates may affect recorded deferred tax assets and liabilities and our effective tax rate in the future. On August 16, 2022, the United States government enacted the Inflation Reduction Act of 2022 that includes changes to the United States corporate income tax system, including a fifteen percent minimum tax based on “adjusted financial statement income,” which is effective for tax years beginning after December 31, 2022, and a one percent excise tax on repurchases of stock after December 31, 2022. We are continuing to evaluate the Inflation Reduction Act and its requirements, as well as its application to our business.
The presentation of “basic” and “diluted” earnings per share is provided below. Share amounts below are in thousands.
|
|
Three Months Ended December 31, |
|
|
Nine Months Ended December 31, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
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 from equity incentive plans |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted-average shares outstanding — Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income per common share — Diluted |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The computation of diluted net income per share does not include
The computation of diluted net income per share does not include
The dilutive effect of potentially dilutive common shares is reflected in diluted net income per share by application of the if-converted method for the Notes. The shares issuable upon conversion of the Notes, subject to adjustment in some events, are not considered in the calculation of diluted net income per share because their inclusion would have an anti-dilutive effect on net income per share for the three and nine months ended December 31, 2022.
14. Stockholders’ Equity
Equity Incentive Plans
In October 2005, our shareholders approved a stock option and incentive plan (the “2005 Plan”) under which
22
In August 2015, our shareholders approved a stock option and incentive plan (the “2015 Plan”) under which
In September 2021, the Board adopted the 2021 Employment Inducement Equity Incentive Plan (the “Inducement Plan”) and initially reserved
Stock-Based Compensation
The following table summarizes total share-based compensation expense included in the condensed consolidated statements of net income and comprehensive income for the three and nine months ended December 31, 2022 and 2021:
|
Three Months Ended December 31, |
|
|
Nine Months Ended December 31, |
|
||||||||||
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of revenue |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Research and development costs |
|
|
|
|
|
|
|
|
|
|
|
||||
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
||||
Total share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
||||
Income tax benefit |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Decrease in net income |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
23
Share-based compensation expense under our equity incentive plans is based on the number awards that ultimately vest and forfeitures are accounted for as they occur.
Stock Options
The following table summarizes the stock option transactions during the nine months ended December 31, 2022:
|
|
|
|
|
Weighted- |
|
|
Weighted- |
|
|
|
|
||||
|
|
|
|
|
Average |
|
|
Average |
|
|
Aggregate |
|
||||
|
|
|
|
|
Exercise |
|
|
Remaining |
|
|
Intrinsic |
|
||||
|
|
Number of |
|
|
Price |
|
|
Contractual |
|
|
Value |
|
||||
|
|
Shares |
|
|
per Share |
|
|
Life (years) |
|
|
(in thousands) |
|
||||
Outstanding, March 31, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Exercised |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Expired |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Outstanding, December 31, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Vested and expected to vest, December 31, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Exercisable, December 31, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Share-based compensation expense related to stock options was $
Non-vested stock option award activity during the nine months ended December 31, 2022 is summarized as follows:
|
|
|
|
|
Weighted- |
|
||
|
|
|
|
|
Average |
|
||
|
|
|
|
|
Grant-Date |
|
||
|
|
Number of |
|
|
Fair Value |
|
||
|
|
Shares |
|
|
per Share |
|
||
Outstanding, March 31, 2022 |
|
|
|
|
$ |
|
||
Vested |
|
|
( |
) |
|
|
|
|
Outstanding, December 31, 2022 |
|
|
- |
|
|
$ |
- |
|
The total fair value of options vested during the nine months ended December 31, 2022 and 2021 was $
Restricted Stock Awards
Restricted stock awards activity during the nine months ended December 31, 2022 is summarized as follows:
|
|
|
|
|
Weighted- |
|
||
|
|
|
|
|
Average |
|
||
|
|
|
|
|
Grant-Date |
|
||
|
|
Number of |
|
|
Fair Value |
|
||
|
|
Shares |
|
|
per Share |
|
||
Outstanding, March 31, 2022 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
|
|
||
Vested |
|
|
( |
) |
|
|
|
|
Canceled |
|
|
( |
) |
|
|
|
|
Outstanding, December 31, 2022 |
|
|
|
|
$ |
|
||
Share-based compensation expense related to restricted stock awards was $
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 to
24
As of December 31, 2022, $
The total fair value of restricted stock awards vested as of the vesting dates were $
Net Share Settlements
Restricted stock awards and performance stock units are generally net share-settled upon vesting to cover the required withholding taxes, and the remaining share amount is transferred to the employee. The majority of restricted stock awards and performance stock units that vested during the nine months ended December 31, 2022 and 2021 were net-share settled such that we withheld shares with value equivalent to the employees’ applicable income tax obligations for the applicable income and other employment taxes and remitted the equivalent amount of cash to the appropriate taxing authorities. Total payments for the employees’ applicable income tax obligations are reflected as a financing activity within the accompanying consolidated statements of cash flows. The total shares withheld during the three months ended December 31, 2022 and 2021 were
Performance Stock Units and Awards
On October 23, 2018, the Compensation Committee of the Board approved
On December 26, 2019 and January 27, 2020, the Compensation Committee of the Board approved a total of
On October 26, 2020, the Compensation Committee of the Board approved
On September 20, 2021, the Compensation Committee of the Board approved an award of
25
share-price milestone tranche is amortized over the longer of the derived service period or the explicit service period. The weighted-average grant date fair value of the award was $
On October 26, 2021, the Compensation Committee of the Board approved
On October 25, 2022, the Compensation Committee of the Board approved
Share-based compensation expense related to the performance stock units and awards was $
As of December 31, 2022, $
Employee Share Purchase Plan
On August 11, 2014, our shareholders approved an Employee Share Purchase Plan (the “Purchase Plan”) under which
Share-based compensation expense recorded for the employee share purchase plan was $
Share Repurchase Program
In October 2021, the Board of Directors ("Board") authorized a share repurchase program under which we may repurchase up to $
The timing and amount of any share repurchases under the share repurchase program will be determined by our management at its discretion based on ongoing assessments of the capital needs of the business, the market price of our common stock and general market conditions. Share repurchases under the program may be made through a variety of methods, which may include open market purchases, in block trades, accelerated share repurchase transactions, exchange transactions, or any combination of such methods. Repurchases may also be made under Rule 10b5-1 plans, which permit shares of common stock to be repurchased through pre-determined criteria. The program does not obligate the Company to acquire any particular amount of our common stock, and the share repurchase program may be suspended or discontinued at any time at our discretion.
During the three months ended December 31, 2022, we repurchased
26
15. Concentration of Credit Risk
We had cash deposits at United States banks and financial institutions which exceeded federally insured limits at December 31, 2022. We are exposed to credit loss for amounts in excess of insured limits in the event of non-performance by the institutions; however, we do not anticipate non-performance by these institutions.
16. 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
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.
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.
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” appearing in our most recent Annual Report on Form 10-K for the fiscal year ended March 31, 2022 (“Annual Report”).
27
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. After the court sustained our demurrer to the initial complaint, Hussein filed an amended complaint 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. Hussein’s breach of fiduciary duty claims were dismissed on demurrer, and we filed an answer and cross-complaint against Hussein, alleging that he breached fiduciary duties owed to the Company. On September 16, 2015, the Court granted summary judgment with respect to Hussein’s remaining claims, dismissing all claims against us. The cross-complaint against Hussein went to trial, but the Court granted judgment in favor of Hussein on our cross-complaint. Final judgment over Hussein’s claims and our cross-claims was entered on January 9, 2018. Hussein appealed the order granting summary judgment over his claims, and we appealed the court’s 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 on Hussein’s affirmative claims and affirmed the trial court’s judgment on the Company’s breach of fiduciary duty claims against Hussein. As a result, the case has returned to the trial court for resolution of Hussein’s claims against us. On July 29, 2021, the jury rendered a verdict in favor of the Company and the individual defendants on all counts. Hussein filed a Motion for New Trial, which the Court denied.
Hussein has appealed the jury verdict in favor of the Company and the individual defendants. Hussein, the Company, and the individual defendants have appealed the trial court’s denial of requests for recovery of costs arising from the litigation. The parties are currently briefing the various appeals. We expect the California State Court of Appeal for the Fourth Appellate District, Division Three, to hear arguments and issue its ruling on the various appeals in 2023.
Other Regulatory and Litigation 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) our EHR product and its performance, including defects that relate to patient safety or meaningful use certifications, (c) the software code used in certifying our EHR software and information, and (d) marketing programs and payments provided for the referral of EHR business. We continue to respond to the government’s requests and are engaged in discussions on the status and potential resolution of their ongoing investigation. Recently, the United States Attorney’s Office informed NextGen of the existence of a sealed qui tam lawsuit concerning the issues NextGen has been discussing with their Office. NextGen does not have a copy of the lawsuit because it remains under seal.
This investigation and the sealed qui tam lawsuit may lead to future requests for information and ultimately litigation of the existing and potentially additional claims by or on behalf of the United States against NextGen, which themselves may lead to material damages, penalties, fines, judgments, or other liabilities. In addition, our responses to these and any future requests and the defense of any litigation will require time and effort, which will result in additional cost to us. At this time, we are unable to estimate the probability of the outcome of this matter or the range of reasonably possible loss, if any. However, the unfavorable resolution of this matter could have a material adverse effect on our business, results of operations, financial condition or cash flows.
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.
17. Restructuring Costs
During the nine months ended December 31, 2022, we recorded restructuring costs of $
During the nine months ended December 31, 2021, we recorded restructuring costs of $
28
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q ("Report") and certain information incorporated herein by reference contain forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this Report, other than statements that are purely historical, are forward-looking statements. Words such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” “estimate,” “will,” “should,” “would,” “could,” “may,” and similar expressions also identify forward-looking statements. These forward-looking statements include, without limitation, discussions of the impact of the COVID-19 pandemic and measures taken in response thereto, as well as our product development plans, business strategies, future operations, financial condition and prospects, share repurchases, developments in and the impacts of government regulation and legislation and market factors influencing our results. Our expectations, beliefs, objectives, intentions and strategies regarding our future results are not guarantees of future performance and are subject to risks and uncertainties, both foreseen and unforeseen, that could cause actual results to differ materially from results contemplated in our forward-looking statements. These risks and uncertainties include, but are not limited to, our ability to continue to develop new products and increase systems sales in markets characterized by rapid technological evolution, consolidation, and competition from larger, better-capitalized competitors. Many other economic, competitive, governmental and technological factors could affect our ability to achieve our goals, and interested persons are urged to review any risks that may be described in “Item 1A. Risk Factors” as set forth herein and other risk factors appearing in our most recent Annual Report on Form 10-K for the fiscal year ended March 31, 2022 (“Annual Report”), as supplemented by additional risk factors, if any, in our interim filings on our Quarterly Reports on Form 10-Q, as well as in our other public disclosures and filings with the Securities and Exchange Commission ("SEC"). Because of these risk factors, as well as other variables affecting our financial condition and results of operations, past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. We assume no obligation to update any forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of the filing of this Report. Each of the terms “NextGen Healthcare,” “NextGen,” “we,” “us,” “our,” or the “Company” as used throughout this Report refers collectively to NextGen Healthcare, Inc. and its wholly-owned subsidiaries, unless otherwise indicated.
This management's discussion and analysis of financial condition and results of operations ("MD&A") is provided as a supplement to the condensed consolidated financial statements and notes thereto included elsewhere in this Report in order to enhance your understanding of our results of operations and financial condition and should be read in conjunction with, and is qualified in its entirety by, the condensed consolidated financial statements and related notes thereto included elsewhere in this Report. Historical results of operations, percentage margin fluctuations and any trends that may be inferred from the discussion below are not necessarily indicative of the operating results for any future period.
Company Overview
NextGen Healthcare is a leading provider of innovative, cloud-based, healthcare technology solutions that empower healthcare practices to manage the risk and complexity of delivering care in the United States 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 consumerism, digitization, risk allocation, regulatory influence, and integrated care and health equity.
We serve clients across all 50 states. Over 100,000 providers use NextGen Healthcare solutions to deliver care in nearly every medical specialty in a wide variety of practice models including accountable care organizations (“ACOs”), independent physician associations (“IPAs”), managed service organizations (“MSOs”), Veterans service organizations (“VSOs”), and dental service organizations (“DSOs”). Our clients range from some of the largest and most progressive multi-specialty groups in the country to sole practitioners with a wide variety of business models. With the addition of behavioral health to our medical and oral health capabilities, we continue to extend our share not only in federally qualified health centers (“FQHCs”) but also in the growing integrated care market.
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, and in 2021, we changed our state of incorporation to Delaware. As a remote-first company, we no longer maintain a principal executive office. Our principal website is www.nextgen.com. We operate on a fiscal year ending on March 31.
Our Vision, Mission and Strategy
NextGen Healthcare’s vision is better healthcare outcomes for all. We strive to achieve this vision by delivering innovative solutions and insights aimed at creating healthier communities. We focus on improving care delivered in ambulatory settings but do so recognizing that the entire healthcare ecosystem needs to work in concert to achieve the quadruple aim… “to improved patient experience, improved provider experience, improve the health of a population, and reduce per capita health care costs.”
29
Our long-term strategy is to position NextGen Healthcare as both the essential, integrated, delivery platform and the most trusted advisor for the ambulatory practices of the future. To that end, we primarily serve organizations that provide or orchestrate care in ambulatory settings and do so across diverse practice sizes, specialties, care modalities, and business models. These customers include conventional practices as well as new market entrants.
We plan to continue investing in our current capabilities as well as building and/or acquiring new capabilities. 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 capabilities (i.e., patient portal, self-scheduling, and patient pay) and OTTO Health, LLC for its virtual care solutions, notably telemedicine. In November 2022, we acquired TSI Healthcare, LLC ("TSI") for its purpose-built clinical content and differentiated service offerings, which expands the addressable market served by our Enterprise domain, including new specialties, such as rheumatology, pulmonology and cardiology. The integration of these acquired technologies has made NextGen Healthcare’s solutions among the most comprehensive in the market. Further, we are also actively innovating our business models and exploring new high-growth market domains as we extend our position as the essential, integrated, delivery platform and trusted impact partner for the ambulatory practices of the future.
Market Opportunity, and Trends
The scale and scope of the healthcare industry continues to expand. Annual United States healthcare spend today represents nearly $4.1 trillion and ~20% of GDP. A significant portion of this spend is directed towards the treatment of chronic conditions and administering an increasingly complex system with diverse stakeholders. While there are several convergent market forces reshaping the healthcare industry landscape, we are focused on six trends we believe will materially impact the markets we participate in and our customer value proposition:
NextGen Healthcare is well positioned to play a key role in guiding our clients through short-term and long-term changes that impact healthcare in the United States and is committed to helping them deliver better outcomes.
Our Value Proposition
NextGen Healthcare’s value proposition to our clients can be summarized by the four “I’s” as follows:
30
NextGen Healthcare delivers value to our clients in several ways. Our solutions enable our clients to address current needs while preparing for the needs of the future including expanding access to health services, enhancing the coordination and management of care, and optimizing patient outcomes while also ensuring the sustainability of their practices. Specifically, we offer a range of solutions to allow clinicians to practice anywhere and in new and innovative collaboration models.
NextGen Healthcare provides integrated cloud-based solutions and services that align with our client’s strategic imperatives. Ultimately, this value is reflected in the overall insights and impact delivered to the client. The foundation for our integrated ambulatory care platform is a core of our industry-leading EHR and practice management (“PM”) systems that support clinical, financial and patient engagement activities.
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 and voice-enabled capabilities proven to reduce physician burden. Recognizing that engaged patients are key to positive outcomes, our patient experience platform enables our clients to create personalized care experiences that enhance trust and drive patient loyalty. Further, we support the advances in integrated care that focuses on the whole person with solutions supporting behavioral and oral health. 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 application programming interfaces (“APIs”) to drive the secure exchange of health and patient data with connected health solutions. Our commitment to interoperability, defragmenting care and our experience powering many of the nation’s HIE’s places us in a unique position to enable our clients to leverage this technology to lower the cost of care and improve the patient and provider experience by providing an integrated community patient record.
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. We partner with our clients to optimize their information technology (“IT”) operations, enhance revenue cycle processes across fee-for-service and fee-for-value models, service line expansion and operations, as well as advise on long-term strategy.
Positioning NextGen Healthcare for Growth. As NextGen Healthcare applies this value proposition framework across the ambulatory care market, we incorporate some or all our current solution offerings within three broad domains illustrated in Figure 1 below:
31
Figure 1: NextGen Healthcare Solutions Domains
Results of Operations
The following table sets forth the percentage of revenue represented by each item in our condensed consolidated statements of net income for the three and nine months ended December 31, 2022 and 2021 (certain percentages below may not sum due to rounding):
|
|
Three Months Ended December 31, |
|
|
Nine Months Ended December 31, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Recurring |
|
|
91.9 |
% |
|
|
89.8 |
% |
|
|
91.0 |
% |
|
|
90.4 |
% |
Software, hardware, and other non-recurring |
|
|
8.1 |
|
|
|
10.2 |
|
|
|
9.0 |
|
|
|
9.6 |
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Recurring |
|
|
41.4 |
|
|
|
38.8 |
|
|
|
40.9 |
|
|
|
38.7 |
|
Software, hardware, and other non-recurring |
|
|
7.1 |
|
|
|
5.3 |
|
|
|
7.0 |
|
|
|
5.2 |
|
Amortization of capitalized software costs and acquired intangible assets |
|
|
4.2 |
|
|
|
5.5 |
|
|
|
4.4 |
|
|
|
5.4 |
|
Total cost of revenue |
|
|
52.7 |
|
|
|
49.6 |
|
|
|
52.2 |
|
|
|
49.3 |
|
Gross profit |
|
|
47.3 |
|
|
|
50.4 |
|
|
|
47.8 |
|
|
|
50.7 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Selling, general and administrative |
|
|
28.5 |
|
|
|
31.6 |
|
|
|
29.5 |
|
|
|
35.9 |
|
Research and development costs, net |
|
|
12.1 |
|
|
|
13.0 |
|
|
|
13.1 |
|
|
|
12.9 |
|
Amortization of acquired intangible assets |
|
|
0.6 |
|
|
|
0.6 |
|
|
|
0.5 |
|
|
|
0.6 |
|
Impairment of assets |
|
|
0.2 |
|
|
|
0.0 |
|
|
|
0.3 |
|
|
|
0.4 |
|
Restructuring costs |
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.1 |
|
|
|
0.1 |
|
Total operating expenses |
|
|
41.4 |
|
|
|
45.1 |
|
|
|
43.5 |
|
|
|
49.8 |
|
Income from operations |
|
|
5.9 |
|
|
|
5.3 |
|
|
|
4.2 |
|
|
|
0.9 |
|
Interest income |
|
|
0.9 |
|
|
|
0.0 |
|
|
|
0.3 |
|
|
|
0.0 |
|
Interest expense |
|
|
(1.4 |
) |
|
|
(0.2 |
) |
|
|
(0.6 |
) |
|
|
(0.2 |
) |
Other income (expense), net |
|
|
0.0 |
|
|
|
0.0 |
|
|
|
2.2 |
|
|
|
0.0 |
|
Income before provision for income taxes |
|
|
5.5 |
|
|
|
5.2 |
|
|
|
6.1 |
|
|
|
0.7 |
|
Provision for income taxes |
|
|
0.6 |
|
|
|
1.7 |
|
|
|
1.4 |
|
|
|
0.4 |
|
Net income |
|
|
4.8 |
% |
|
|
3.5 |
% |
|
|
4.8 |
% |
|
|
0.3 |
% |
32
Revenues
The following table presents our disaggregated revenues for the three and nine months ended December 31, 2022 and 2021 (in thousands):
|
|
Three Months Ended December 31, |
|
|
Nine Months Ended December 31, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Recurring revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Subscription services |
|
$ |
45,850 |
|
|
$ |
41,158 |
|
|
$ |
132,025 |
|
|
$ |
120,581 |
|
Support and maintenance |
|
|
37,382 |
|
|
|
38,246 |
|
|
|
114,670 |
|
|
|
115,736 |
|
Managed services |
|
|
32,963 |
|
|
|
27,521 |
|
|
|
94,663 |
|
|
|
83,636 |
|
Transactional and data services |
|
|
32,525 |
|
|
|
27,571 |
|
|
|
90,624 |
|
|
|
82,533 |
|
Total recurring revenues |
|
|
148,720 |
|
|
|
134,496 |
|
|
|
431,982 |
|
|
|
402,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Software, hardware, and other non-recurring revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Software license and hardware |
|
|
5,258 |
|
|
|
8,920 |
|
|
|
19,373 |
|
|
|
24,202 |
|
Other non-recurring services |
|
|
7,899 |
|
|
|
6,305 |
|
|
|
23,267 |
|
|
|
18,403 |
|
Total software, hardware and other non-recurring revenues |
|
|
13,157 |
|
|
|
15,225 |
|
|
|
42,640 |
|
|
|
42,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenues |
|
$ |
161,877 |
|
|
$ |
149,721 |
|
|
$ |
474,622 |
|
|
$ |
445,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Recurring revenues as a percentage of total revenues |
|
|
91.9 |
% |
|
|
89.8 |
% |
|
|
91.0 |
% |
|
|
90.4 |
% |
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, transactional and data services, and other non-recurring services, including implementation, training, and consulting services performed for clients who use our products.
Beginning in fiscal year 2023, in order to align the presentation of disaggregated revenue with the manner in which management reviews such information, we revised our presentation of disaggregated revenues by major revenue categories to reclassify revenues related to patient pay services and certain other services from the managed services category into the transactional and data services category, which replaced the prior Electronic Data Interchange (“EDI”) and data services category. The prior period presentation of revenues disaggregated by our major revenue categories and by occurrence above have been reclassified to conform to current year presentation.
Consolidated revenue for the three months ended December 31, 2022 increased $12.2 million compared to the prior year period due to a $14.2 million increase in recurring revenues, offset by a $2.0 million decrease in software, hardware and other non-recurring revenues. The increase in recurring revenues was driven by a $5.4 million increase in managed services, $5.0 million increase in transactional and data services, and a $4.7 million increase in subscription services, partially offset by a $0.9 million decrease in support and maintenance. The increase in managed services revenue was primarily due to higher patient volumes and billings compared to the prior year, as well as an increase in hosting services associated with higher recent bookings. The increase in transactional and data services revenue was primarily driven by higher transaction volumes associated with our patient pay and EDI services. The increase in subscription services reflect the incremental revenues associated with the acquisition of TSI and higher connected health subscriptions from higher recent bookings. Support and maintenance decreased primarily due to net client attrition, our continued shift to subscription-based solutions, and the negative impact to revenues associated with the acquisition of TSI, which was one of our value-added resellers, and the disposition of our Commercial Dental assets, as described in Note 6, "Business Combinations and Disposals" of our notes to condensed consolidated financial statements included elsewhere in this Report. The decrease in software, hardware, and other non-recurring revenues was primarily due to a decrease in software license revenue due to lower bookings, partially offset by higher professional services revenue from more hours incurred and projects completed in the current year period.
Consolidated revenue for the nine months ended December 31, 2022 increased $29.5 million compared to the prior year period due to an increase in recurring revenues. Software, hardware and other non-recurring revenues was flat compared to the prior year period. The increase in recurring revenues was driven by a $11.4 million increase in subscription services, $11.0 million increase in managed services, $8.1 million in transactional and data services, offset by a $1.0 million decrease in support and maintenance. The increase in subscription services reflect the incremental revenues associated with the acquisition of TSI and higher subscriptions of our NextGen Office and Insights solutions, including interoperability, virtual visits, mobile, financial analytics, and NextGen Enterprise solutions, due to higher recent bookings. The increase in managed services revenue was primarily due to an increase in hosting services and RCM services revenues associated with higher recent bookings. The increase in transactional and data services revenue was primarily driven by higher transaction volumes associated with our patient pay and EDI services. Support and maintenance decreased primarily due to net client attrition, our continued shift to subscription-based solutions, and the negative impact to revenues associated with the acquisition of TSI and the disposition of our Commercial Dental assets. Software, hardware, and other non-recurring revenues were flat at $42.6 million as the increased professional services revenue from more hours
33
incurred and projects completed in the current year period were offset by a decrease in software license revenue from lower bookings.
Bookings reflect the estimated annual value of our executed contracts, adjusted to include the effect of pre-acquisition bookings if applicable, and are believed to provide a broad indicator of the general direction and progress of the business. Total bookings were $44.8 million and $37.7 million for the three months ended December 31, 2022 and 2021, respectively. The increase is primarily due to higher bookings of population health subscriptions and patient pay services, partially offset by lower software and maintenance bookings.
Total bookings were $121.5 million and $111.2 million for the nine months ended December 31, 2022 and 2021, respectively. The increase is due to higher bookings of patient pay services and EDI and data services, partially offset by lower bookings of software and maintenance and subscriptions of mobile, virtual visits, and NextGen Office.
We continue to see overall practice volumes at healthy, pre-pandemic levels. This reflects in our volume- and transaction-based solutions, as noted above, and reflects an ongoing industry trend of procedure volumes migrating out of higher cost settings, like hospitals, favoring lower cost care settings and independent healthcare providers. We also continue to see healthy activity levels in our current pipeline. Sales development activities, such as lead generation and demos, indicate a positive demand environment. We have not been significantly impacted by the current economic concerns and general market conditions, and we continue to constructively engage prospects and our clients to find ways to achieve better outcomes for all.
Cost of Revenue and Gross Profit
The following table presents our consolidated cost of revenue and gross profit for the three and nine months ended December 31, 2022 and 2021 (in thousands):
|
|
Three Months Ended December 31, |
|
|
Nine Months Ended December 31, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Recurring |
|
$ |
67,047 |
|
|
$ |
58,033 |
|
|
$ |
194,330 |
|
|
$ |
172,312 |
|
Software, hardware, and other non-recurring |
|
|
11,515 |
|
|
|
7,978 |
|
|
|
32,988 |
|
|
|
23,085 |
|
Amortization of capitalized software costs and acquired intangible assets |
|
|
6,787 |
|
|
|
8,193 |
|
|
|
20,665 |
|
|
|
24,246 |
|
Total cost of revenue |
|
$ |
85,349 |
|
|
$ |
74,204 |
|
|
$ |
247,983 |
|
|
$ |
219,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross profit |
|
$ |
76,528 |
|
|
$ |
75,517 |
|
|
$ |
226,639 |
|
|
$ |
225,448 |
|
Gross margin % |
|
|
47.3 |
% |
|
|
50.4 |
% |
|
|
47.8 |
% |
|
|
50.7 |
% |
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 condensed consolidated financial statements included elsewhere in this Report for additional information on current period amortization of capitalized software costs and acquired technology and an estimate of future expected amortization.
Share-based compensation expense included in cost of revenue was $0.7 million and $0.6 million for the three months ended December 31, 2022 and 2021, respectively. Share-based compensation expense included in cost of revenue was $2.3 million and $1.6 million for the nine months ended December 31, 2022 and 2021, respectively.
Gross profit for the three months ended December 31, 2022 was $76.5 million compared to $75.5 million in the prior year due to a $12.2 million increase in revenues as discussed above, offset by a $11.1 million increase in cost of revenue as discussed further below. Our gross margin decreased to 47.3% for the three months ended December 31, 2022 compared 50.4% in the prior year period.
Gross profit for the nine months ended December 31, 2022 was $226.6 million compared to $225.4 million in the prior year period due to a $29.5 million increase in revenues as discussed above, offset by a $28.3 million increase in cost of revenue as discussed further below. Our gross margin decreased to 47.8% for the nine months ended December 31, 2022 compared to 50.7% in the prior year period.
The increase in cost of revenue for the three and nine months ended December 31, 2022 compared to the prior year period was primarily due to higher costs of patient pay services directly associated with higher recent revenues and bookings. Other recurring cost of revenue, including subscription services, managed services, and EDI and data services costs, also increased driven by higher revenues and bookings, resulting in higher hosting costs and higher salaries and benefits from increased employee headcount associated with delivering our software solutions and services. Software, hardware, and other non-recurring services
34
revenue costs increased compared to the prior periods primarily due to higher salaries and benefits from increased employee headcount and an increase in consulting costs associated with the delivery of our professional services as we accelerate Spring’21 migration. These increases in cost of revenue were partially offset by lower amortization of capitalized software costs and acquired intangible assets, as noted above.
Our gross margin for the three and nine months ended December 31, 2022 compared to the prior year period decreased primarily due to increased investments in professional services as we accelerate Spring’21 migration and a shift in product mix to lower margin transactional and data services, including patient pay services, and higher managed services, as noted above.
Selling, General and Administrative Expense
The following table presents our selling, general and administrative expense for the three and nine months ended December 31, 2022 and 2021 (in thousands):
|
|
Three Months Ended December 31, |
|
|
Nine Months Ended December 31, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Selling, general and administrative |
|
$ |
46,177 |
|
|
$ |
47,238 |
|
|
$ |
140,097 |
|
|
$ |
159,615 |
|
Selling, general and administrative, as a percentage of revenue |
|
|
28.5 |
% |
|
|
31.6 |
% |
|
|
29.5 |
% |
|
|
35.9 |
% |
Selling, general and administrative expense consists of compensation expense, including share-based compensation, for management and administrative personnel, selling and marketing expense, facilities costs, depreciation, professional service fees, including legal 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 $6.7 million and $5.3 million for the three months ended December 31, 2022 and 2021, respectively. Share-based compensation expense included in selling, general and administrative expenses was $19.4 million and $13.7 million for the nine months ended December 31, 2022 and 2021, respectively. Refer to Note 14, "Stockholders’ Equity" of our notes to condensed consolidated financial statements included elsewhere in this Report for additional information of our share-based awards and related incentive plans.
Selling, general and administrative expenses decreased $1.1 million in the three months ended December 31, 2022 compared to the prior year. The decrease in expense from the prior year period was primarily driven by lower incentive bonus expense and lower facilities and infrastructure costs, partially offset by increased share-based compensation expense, as noted above, higher travel, conferences, and conventions costs, and incremental acquisition costs associated with the acquisition of TSI.
Selling, general and administrative expenses decreased $19.5 million in the nine months ended December 31, 2022 compared to the prior year. The decrease in expense from the prior year period was primarily driven by higher legal and related costs for our shareholder litigation matter incurred in the prior year period, including a $11.4 million payment related to the indemnification of certain expenses related to the Hussein matter and approximately $9.3 million of incremental proxy contest expenses associated with our prior year annual shareholders’ meeting. Incentive bonus expense and facilities and infrastructure costs also decreased compared to the prior year period, which was partially offset by increased share-based compensation expense, as noted above, higher travel, conferences, and conventions costs as these activities resume, higher legal fees associated with our regulatory matter, and incremental acquisition costs associated with the acquisition of TSI.
Research and Development Costs, net
The following table presents our consolidated net research and development costs, capitalized software costs, and gross expenditures prior to capitalization, for the three and nine months ended December 31, 2022 and 2021 (in thousands):
|
|
Three Months Ended December 31, |
|
|
Nine Months Ended December 31, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Gross expenditures |
|
$ |
28,111 |
|
|
$ |
25,514 |
|
|
$ |
89,179 |
|
|
$ |
75,066 |
|
Capitalized software costs |
|
|
(8,490 |
) |
|
|
(6,124 |
) |
|
|
(26,906 |
) |
|
|
(17,837 |
) |
Research and development costs, net |
|
$ |
19,621 |
|
|
$ |
19,390 |
|
|
$ |
62,273 |
|
|
$ |
57,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Research and development costs, as a percentage of revenue |
|
|
12.1 |
% |
|
|
13.0 |
% |
|
|
13.1 |
% |
|
|
12.9 |
% |
Capitalized software costs as a percentage of gross expenditures |
|
|
30.2 |
% |
|
|
24.0 |
% |
|
|
30.2 |
% |
|
|
23.8 |
% |
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.
35
The healthcare information systems and services industry is characterized by rapid technological change, requiring us to engage in continuing investments in our research and development to update, enhance and improve our systems. This includes expansion of our software and service offerings that support pay-for-performance initiatives around accountable care organizations, bringing greater ease of use and intuitiveness to our software products, enhancing our managed cloud and hosting services to lower our clients' total cost of ownership, expanding our interoperability and enterprise analytics capabilities, and furthering development and enhancements of our portfolio of specialty-focused templates within our electronic health records software.
The capitalization of software development costs results in a reduction to our reported net research and development costs. Our software capitalization rate, or capitalized software costs as a percentage of gross expenditures, has varied historically and may continue to vary based on the nature and status of specific projects and initiatives in progress. Although changes in software capitalization rates have no impact on our overall cash flows, it results in fluctuations in the amount of software development costs that may be capitalized or expensed up front and the amount of net research and development costs reported in our condensed consolidated statements of net income and comprehensive income, and ultimately also affects the future amortization of our previously capitalized software development costs. Refer to Note 9, "Capitalized Software Costs" of our notes to condensed consolidated financial statements included elsewhere in this Report for additional information on current period amortization of capitalized software costs and an estimate of future expected amortization.
Share-based compensation expense included in research and development costs was $1.7 million and $1.2 million for the three months ended December 31, 2022 and 2021, respectively. Share-based compensation expense included in research and development costs was $4.9 million and $3.4 million for the nine months ended December 31, 2022 and 2021, respectively.
Net research and development costs for the three months ended December 31, 2022 increased $0.2 million compared to the prior year period due to $2.6 million higher gross expenditures, offset by $2.4 million higher capitalization of software costs.
Net research and development costs for the nine months ended December 31, 2022 increased $5.0 million compared to the prior year period due to $14.1 million higher gross expenditures, offset by $9.1 million higher capitalization of software costs.
The increase in gross expenditures in the three and nine months ended December 31, 2022 compared to the prior year was primarily driven by an increase in consulting costs and higher personnel costs due to our annual merit increases and increased headcount, partially offset by lower incentive bonus expense. Our software capitalization rate fluctuates due to differences in the nature and status of our projects and initiatives during a given year, which affects the amount of development costs that may be capitalized.
Amortization of Acquired Intangible Assets
The following table presents our amortization of acquired intangible assets for the three and nine months ended December 31, 2022 and 2021 (in thousands):
|
|
Three Months Ended December 31, |
|
|
Nine Months Ended December 31, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Amortization of acquired intangible assets |
|
$ |
919 |
|
|
$ |
881 |
|
|
$ |
2,329 |
|
|
$ |
2,643 |
|
Amortization of acquired intangible assets included in operating expense consists of the amortization related to our customer relationships, trade names, and re-acquired rights intangible assets acquired as part of our business combinations. Refer to Note 8, "Intangible Assets" of our notes to condensed consolidated financial statements included elsewhere in this Report for an estimate of future expected amortization.
Amortization of acquired intangible assets was flat for the three ended December 31, 2022 compared to the prior year period and decreased $0.3 million for the nine months ended December 31, 2022 compared to the prior year period because the declining amortization of the customer relationships intangible assets associated with Medfusion and HealthFusion that are amortized under an accelerated method of amortization were partially offset by the amortization of customer relationships and re-acquired rights assets associated with our acquisition of TSI.
Restructuring Costs and Impairment of Assets
During the nine months ended December 31, 2022, we recorded restructuring costs of $0.3 million, consisting of payroll-related costs, such as severance, outplacement costs, and continuing healthcare coverage, associated with the involuntary separation of employees pursuant to a one-time benefit arrangement, within operating expenses in our consolidated statements of net income and comprehensive income. The payroll-related costs were substantially paid as of December 31, 2022.
During the nine months ended December 31, 2021, we recorded restructuring costs of $0.5 million within operating expenses in our condensed consolidated statements of net income and comprehensive income. The payroll-related costs were substantially paid as of December 31, 2021.
36
In the three and nine months ended December 31, 2022 we vacated portions of certain leased locations and recorded impairments of $0.2 million and $1.6 million, respectively, to our right-of-use assets and certain related fixed assets associated with the vacated locations, or portions thereof, in St. Louis, Atlanta, Horsham, Hunt Valley, Chapel Hill and Bangalore based on projected sublease rental income and estimated sublease commencement dates and the remeasurement of our operating lease liability associated with the modification of our St. Louis lease and the early termination of our Horsham lease.
In the nine months ended December 31, 2021, we vacated portions of certain leased locations and recorded impairments of $1.6 million, to our right-of-use assets and certain related fixed assets associated with the vacated locations, or portions thereof, in Irvine and Fairport based on projected sublease rental income and estimated sublease commencement dates.
The impairment analyses were performed at the asset group level and the impairment charges were estimated by comparing the fair value of each asset group based on the expected cash flows to its respective book value. We determined the discount rate for each asset group based on the approximate interest rate on a collateralized basis with similar remaining terms and payments as of the impairment date. Significant judgment was required to estimate the fair value of each asset group and actual results could vary from the estimates, resulting in potential future adjustments to amounts previously recorded.
Interest and Other Income and Expense
The following table presents our interest and other income and expense for the three and nine months ended December 31, 2022 and 2021 (in thousands):
|
|
Three Months Ended December 31, |
|
|
Nine Months Ended December 31, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Interest income |
|
$ |
1,530 |
|
|
$ |
50 |
|
|
$ |
1,650 |
|
|
$ |
79 |
|
Interest expense |
|
|
(2,239 |
) |
|
|
(321 |
) |
|
|
(2,894 |
) |
|
|
(958 |
) |
Other income (expense), net |
|
|
(21 |
) |
|
|
(9 |
) |
|
|
10,266 |
|
|
|
(43 |
) |
Interest expense relates to our convertible senior notes and revolving credit agreement, as well as the related amortization of deferred debt issuance costs. Refer to Note 10, “Debt” of our notes to condensed consolidated financial statements included elsewhere in this Report for additional information.
The increase in interest expense for the three and nine months ended December 31, 2022 compared to the prior year period is primarily related to the $275.0 million aggregate principal amount of 3.75% Convertible Senior Notes due 2027 that we issued on November 1, 2022, as described in more detail in Note 10, “Debt” of our notes to condensed consolidated financial statements included elsewhere in this Report. Interest expense changes are also caused by fluctuations in outstanding balances under our revolving credit agreement and the related amortization of debt issuance costs. As of December 31, 2022 and December 31, 2021, we had no outstanding balances under the revolving credit agreement.
Interest income is earned from funds in our money market accounts. The fluctuation of other income and expense compared to the prior year period are primarily due to changes to the India foreign exchange rates.
The change in other income (expense), net for the nine months ended December 31, 2022 is due to the $10.3 million gain from our disposition of our Commercial Dental assets. Refer to Note 6, "Business Combinations and Disposals" of our notes to condensed consolidated financial statements included elsewhere in this Report for additional information.
Provision for Income Taxes
The following table presents our provision for income taxes for the three and nine months ended December 31, 2022 and 2021 (in thousands):
|
|
Three Months Ended December 31, |
|
|
Nine Months Ended December 31, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Provision for income taxes |
|
$ |
1,019 |
|
|
$ |
2,535 |
|
|
$ |
6,479 |
|
|
$ |
1,653 |
|
Effective tax rate |
|
|
11.5 |
% |
|
|
32.8 |
% |
|
|
22.3 |
% |
|
|
56.6 |
% |
The decrease in the effective tax rate for the three and nine months ended December 31, 2022 compared to the corresponding prior periods was primarily due to the net benefit of discrete items including an increase to research and development credits and stock based compensation.
37
Liquidity and Capital Resources
The following table presents selected financial statistics and information for the nine months ended December 31, 2022 and 2021 (in thousands):
|
|
Nine Months Ended December 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Cash and cash equivalents |
|
$ |
241,550 |
|
|
$ |
49,429 |
|
Unused portion of revolving credit agreement (1) |
|
|
300,000 |
|
|
|
300,000 |
|
Total liquidity |
|
$ |
541,550 |
|
|
$ |
349,429 |
|
|
|
|
|
|
|
|
||
Net income |
|
$ |
22,586 |
|
|
$ |
1,270 |
|
Net cash provided by operating activities |
|
$ |
35,977 |
|
|
$ |
36,636 |
|
We had no outstanding borrowings under our revolving credit agreement as of December 31, 2022, March 31, 2022, and December 31, 2021. 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, as well as our revolving credit agreement and convertible senior notes.
We believe that our cash and cash equivalents balance as of December 31, 2022, together with our cash flows from operating activities and liquidity provided by our debt agreements, will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months.
The extent to which COVID-19 and other macroeconomic factors may impact our business, financial results, cash flows, and liquidity requirements depend on numerous evolving factors including, but not limited to, the magnitude and duration of COVID-19; the impact on our employees; worldwide macroeconomic conditions, including interest rates, employment rates, and health insurance coverage; and governmental and business reactions to the pandemic and other macroeconomic factors. We continue to monitor the broader implications of the global COVID-19 pandemic and other macroeconomic factors and may take further actions that we determine are in the best interests of our employees, customers, partners, suppliers, and shareholders.
Cash and Cash Equivalents
As of December 31, 2022, our cash and cash equivalents balance of $241.6 million compares to $59.8 million as of March 31, 2022 and $49.4 million as of December 31, 2021. As described in more detail below, the increase in cash and cash equivalents is primarily due to net proceeds from our convertible senior notes.
We may continue to use a portion of our funds as well as available financing from our revolving credit agreement and convertible senior notes, to the extent permissible, for share repurchases, future acquisitions, or other similar business activities, although the specific timing and amount of funds to be used is not currently determinable. We intend to expend some of our available funds for the development of products complementary to our existing product line as well as new versions of certain of our products. These developments are intended to take advantage of more powerful technologies and to increase the integration of our products.
Our investment policy is determined by our Board of Directors. Excess cash, if any, may be invested in very liquid short term assets including tax exempt and taxable money market funds, certificates of deposit and short term municipal bonds with average maturities of 365 days or less at the time of purchase. Our Board of Directors continues to review alternate uses for our cash including an expansion of our investment policy and other items. Any or all of these programs could significantly impact our investment income in future periods.
Cash Flows from Operating Activities
The following table summarizes our condensed consolidated statements of cash flows for the nine months ended December 31, 2022 and 2021 (in thousands):
|
|
Nine Months Ended December 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Net income |
|
$ |
22,586 |
|
|
$ |
1,270 |
|
Non-cash expenses |
|
|
48,121 |
|
|
|
59,489 |
|
Cash from net income, as adjusted |
|
$ |
70,707 |
|
|
$ |
60,759 |
|
Change in contract assets and liabilities, net |
|
|
2,248 |
|
|
|
(2,770 |
) |
Change in accounts receivable |
|
|
(2,625 |
) |
|
|
6,319 |
|
Change in all other assets and liabilities |
|
|
(34,353 |
) |
|
|
(27,672 |
) |
Net cash provided by operating activities |
|
$ |
35,977 |
|
|
$ |
36,636 |
|
38
For the nine months ended December 31, 2022, cash provided by operating activities decreased $0.7 million compared to the prior year period, primarily due to a $8.9 million decrease in cash from changes in accounts receivable and a $6.6 million decrease in cash from changes in other assets and liabilities, partially offset by $9.9 million higher cash from net income, as adjusted for a $11.4 million decrease in non-cash expenses, and an increase in cash of $5.0 million from net changes in contract assets and liabilities. The decrease in cash from changes in accounts receivable is primarily related to growth in subscriptions and milestone invoicing from higher bookings, partially offset by continued efforts to resolve aged balances and improve collections. The decrease in cash from changes in other assets and liabilities is primarily due to a decrease in cash from higher payments of cash incentive bonuses compared to the prior year due to a higher rate of bonus achievement for the prior fiscal year, partially offset by changes in our income tax assets and liabilities, including our uncertain tax positions tax liability, and a decrease in rent payments compared to the prior year period as we have early terminated a number of our leases in the current year period. Net income increased $21.3 million compared to the prior year period, as described in the sections above. Non-cash expenses decreased primarily due to a $10.3 million gain from the disposition of our Commercial Dental assets reflected in the current year period. The increase in cash from changes in net contract assets and liabilities was primarily due to lower software bookings and the termination of a number of RCM contracts in the current year period, partially offset by the timing of invoicing and recognition of annual licenses that are billed at the beginning of each year.
Cash Flows from Investing Activities
Net cash used in investing activities for the nine months ended December 31, 2022 was $65.2 million compared with $19.9 million in the prior year period. The increase in net cash used in investing activities is primarily due to $47.5 million of cash paid (net of cash acquired) for the acquisition of TSI and a $9.1 million increase in additions to capitalized software in the current period, partially offset by $11.3 million in cash proceeds from the disposition of our Commercial Dental assets.
Cash Flows from Financing Activities
Net cash provided by financing activities for the nine months ended December 31, 2022 was $212.1 million compared with $41.0 million cash used in financing activities in the prior year period. The increase in cash provided by financing activities is primarily due to $275.0 million in proceeds from our convertible senior notes, net of $8.5 million in debt issuance costs, partially offset by a $14.0 million increase in share repurchases in the current year period.
Contractual Obligations
Convertible Senior Notes
On November 1, 2022, we issued $275.0 million in aggregate principal amount of 3.75% Convertible Senior Notes due 2027 (“Notes”). The Notes were issued pursuant to, and are governed by, an indenture, dated as of November 1, 2022, between the Company and U.S. Bank Trust Company, National Association, as trustee. Net proceeds from the issuance of the Notes were approximately $266.5 million, after deducting issuance costs totaling $8.5 million.
The Notes will accrue interest at a rate of 3.75% per annum, payable semi-annually in arrears on May 15 and November 15 of each year, beginning on May 15, 2023. The Notes will mature on November 15, 2027, unless earlier repurchased, redeemed or converted.
Approximately $10.7 million in interest payments are due within the next 12 months for our Notes. There are no required principal payments on the Notes prior to their maturity.
Refer to Note 10, “Debt” of our notes to condensed consolidated financial statements included elsewhere in this Report for additional information.
Line of Credit
On March 12, 2021, we entered into a $300 million second amended and restated revolving credit agreement (the “Credit Agreement”). The Credit Agreement matures on March 12, 2026 and the full balance of the revolving loans and all other obligations under the Credit 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.
On May 17, 2022, we entered into an amendment to the Credit Agreement, which, among other changes, provides more favorable terms and flexibility with regards to our ability to obtain additional revolving credit commitments and/or term loans thereunder, including amendments to the net leverage ratio and definition of restricted payments.
On October 27, 2022, the Company entered into that certain Amendment No. 2 to Credit Agreement (the “Second Amendment”) with the Administrative Agent and the lenders party thereto. The Second Amendment modifies the Credit Agreement to make certain updates to the conditions restricting the making of certain dividends, distributions, and other restricted payments by the Company so that the Company’s compliance with the net leverage ratio governor contained in such conditions is calculated net of the net cash proceeds of the Notes issued pursuant to the Indenture.
39
As of December 31, 2022, we had no outstanding borrowings under the Credit Agreement.
Refer to Note 10, “Debt” of our notes to condensed consolidated financial statements included elsewhere in this Report for additional information.
Non-cancelable Operating Leases
As of December 31, 2022, the total amount of future lease payments under operating leases was $9.8 million, of which $4.6 million is short-term. Our operating leases have a weighted average remaining lease term of 2.2 years. Included in our total future lease payments are $7.3 million of remaining lease obligations for vacated properties, of which $3.5 million is short-term. Remaining lease obligations for vacated properties relates to certain locations, including Cary, Brentwood, North Canton, Fairport, St. Louis and portions of Atlanta, Horsham, Hunt Valley, Irvine, Chapel Hill and Bangalore that we have vacated as part of our reorganization efforts and are actively marketing for sublease. Refer to Note 5, “Leases” of our notes to consolidated financial statements included elsewhere in this Report for additional information. The remaining obligations have not been reduced by projected sublease rentals or by minimum sublease rentals of $2.3 million due in future periods under non-cancelable subleases.
Purchase Obligations
As of December 31, 2022, we had minimum purchase commitments of $160.5 million related to payments due under certain non-cancelable agreements to purchase goods and services, of which $32.6 million is due within the next 12 months.
Share Repurchase Program
In October 2021, the Board authorized a share repurchase program under which we may repurchase up to $60.0 million of our outstanding shares of common stock through March 2023. The timing and amount of any share repurchases under the share repurchase program will be determined by our management at its discretion based on ongoing assessments of the capital needs of the business, the market price of our common stock and general market conditions. The program does not obligate the Company to acquire any particular amount of our common stock, and the share repurchase program may be suspended or discontinued at any time at our discretion.
On October 25, 2022, our Board of Directors authorized a new share repurchase program under which we may repurchase up to an additional $100.0 million of outstanding shares of our common stock through March 2025.
During the three months ended December 31, 2022, we repurchased 2,103,049 shares of common stock for a total of $40.0 million at a weighted-average share repurchase price of approximately $19.02. As of December 31, 2022, $74.3 million remained available for share repurchases pursuant to the Company’s share repurchase programs.
Deferred Compensation
Deferred compensation liability was $7.6 million, for which timing of future benefit payments to employees is not determinable. 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. The cash surrender value of the life insurance policies for deferred compensation was $7.4 million.
Income Taxes
We have an uncertain tax position liability of $4.7 million as of December 31, 2022, for which timing of expected payments is not determinable.
Off-Balance Sheet Arrangements
During the nine months ended, we did not have any relationships with unconsolidated organizations, financial partnerships, or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other limited purposes.
New Accounting Pronouncements
Refer to Note 1, “Summary of Significant Accounting Policies” of our notes to condensed consolidated financial statements included elsewhere in this Report for a discussion of new accounting standards.
Critical Accounting Policies and Estimates
The discussion and analysis of our condensed consolidated financial statements and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these condensed consolidated financial statements requires
40
us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenue and expenses, and related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends, and other factors we believe to be reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. On a regular basis, we review the accounting policies and update our assumptions, estimates, and judgments, as needed, to ensure that our condensed consolidated financial statements are presented fairly and in accordance with GAAP. Actual results could differ materially from our estimates under different assumptions or conditions. To the extent that there are material differences between our estimates and actual results, our financial condition or results of operations will be affected.
We describe our significant accounting policies in Note 1, “Summary of Significant Accounting Policies,” of our notes to consolidated financial statements included in our Annual Report. We discuss our critical accounting policies and estimates in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report.
There have been no other material changes in our significant accounting policies or critical accounting policies and estimates since the fiscal year ended March 31, 2022.
41
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As of December 31, 2022, 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 December 31, 2022, we had no outstanding loans under our revolving credit agreement. The revolving loans under the Credit Agreement bear interest at either, at our option of either, (a) for base rate loans, a base rate based on the highest of (i) 1%, (ii) the “prime rate” quoted in the Wall Street Journal for the United States of America, (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 month Eurodollar deposits plus 1%, and (b) for Eurodollar loans, the LIBOR-based rate for one, two, three or six months (as selected by the Company) Eurodollar deposits plus, in each case, an applicable margin based on our net leverage ratio from time to time, ranging from 0.50% to 1.75% for base rate loans, and from 1.50% to 2.75% for Eurodollar loans. Accordingly, we are exposed to interest rate risk, primarily changes in LIBOR (including the transition away from LIBOR), due to our loans under the revolving credit agreement. Refer to Note 10, “Debt” of our notes to condensed consolidated financial statements included elsewhere in this Report for additional information.
As of December 31, 2022, we had international operations that exposed us to the risk of fluctuations in foreign currency exchange rates against the United States dollar. However, the impact of foreign currency fluctuations has not been material to our financial position or operating results.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively) 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 December 31, 2022, the end of the period covered by this Quarterly Report on Form 10-Q (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.
Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2022, 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.
42
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The information required by Item 1 is incorporated herein by reference from Note 16, “Commitments, Guarantees and Contingencies” of our notes to condensed consolidated financial statements in this Report.
ITEM 1A. RISK FACTORS.
Our business is subject to many risks and uncertainties, which may materially and adversely affect our future business, prospects, financial condition, and results of operations. These risk factors are disclosed in “Item 1A. Risk Factors” in our Annual Report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Month |
|
Total Number of Shares Purchased (1) |
|
|
Average Price Paid per Share |
|
|
Total Number of Shares Purchased as Part of Publicly Announced Programs (1) |
|
|
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program |
|
||||
October 1 - 31 |
|
|
— |
|
|
$ |
- |
|
|
|
— |
|
|
$ |
- |
|
November 1 -30 |
|
|
2,103 |
|
|
$ |
19.02 |
|
|
|
2,103 |
|
|
$ |
74,303 |
|
December 1 - 31 |
|
|
— |
|
|
$ |
- |
|
|
|
— |
|
|
$ |
- |
|
Total |
|
|
2,103 |
|
|
|
|
|
|
2,103 |
|
|
|
|
||
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not Applicable.
ITEM 5. OTHER INFORMATION.
None.
43
ITEM 6. EXHIBITS.
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|
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Incorporated by Reference |
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Exhibit Number |
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Exhibit Description |
|
Filed Herewith |
|
Form |
|
Exhibit |
|
Filing Date |
|
4.1 |
|
|
|
8-K |
|
|
4.1 |
|
1-Nov-22 |
||
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|
|
|
|
|
|
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|
|
4.2 |
|
|
|
8-K |
|
|
4.1 |
|
1-Nov-22 |
||
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|
|
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|
|
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|
|
|
10.1 |
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|
8-K |
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10.1 |
|
1-Nov-22 |
||
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10.2 |
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X |
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||
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31.1 |
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X |
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31.2 |
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X |
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||
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32.1 |
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X |
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||
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101.INS** |
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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. |
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101.SCH** |
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Inline XBRL Taxonomy Extension Schema Document |
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101.CAL** |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF** |
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Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB** |
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Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE** |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 |
|
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2022, has been formatted in Inline XBRL. |
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44
** 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.
45
SIGNATURES
Pursuant to the requirements 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.
|
|
NEXTGEN HEALTHCARE, INC. |
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|
|
Date: January 24, 2023 |
By: |
/s/ David Sides |
|
|
|
David Sides |
|
|
|
|
Chief Executive Officer (Principal Executive Officer)
|
Date: January 24, 2023 |
By: |
/s/ James R. Arnold, Jr. |
|
|
|
James R. Arnold, Jr. |
|
|
|
|
Chief Financial Officer (Principal Financial Officer)
|
Date: January 24, 2023 |
By: |
/s/ David Ahmadzai |
|
|
|
David Ahmadzai |
|
|
|
|
Chief Accounting Officer (Principal Accounting Officer)
|
46