NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except
shares and per share data)
(Unaudited)
1. Summary of Significant Accounting Policies
Principles of Consolidation.
The consolidated financial statements include the accounts of Quality Systems, Inc. and its wholly-owned subsidiaries (collectively, the “Company”). Each of the terms “we,” “us,” or “our” as used herein refers collectively to the Company, unless otherwise stated. All intercompany accounts and transactions have been eliminated.
Basis of Presentation.
The accompanying unaudited consolidated financial statements as of
December 31, 2016
and for the
three and nine months ended
December 31, 2016
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 consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These 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, 2016
. In the opinion of management, the accompanying 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.
References to amounts in the consolidated financial statement sections are in thousands, except shares and per share data, unless otherwise specified.
Significant Accounting Policies
.
Effective July 1, 2016, we revised our reportable operating segments (see Note 14). There have been no other material changes to the significant accounting policies from those disclosed in our Annual Report on Form 10-K for the fiscal year ended
March 31, 2016
.
Share-Based Compensation.
The following table shows total share-based compensation expense included in the consolidated statements of comprehensive income for the
three and nine months ended December 31,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Nine Months Ended December 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Costs and expenses:
|
|
|
|
|
|
|
|
Cost of revenue
|
$
|
144
|
|
|
$
|
101
|
|
|
$
|
459
|
|
|
$
|
300
|
|
Research and development costs, net
|
273
|
|
|
67
|
|
|
690
|
|
|
280
|
|
Selling, general and administrative
|
1,584
|
|
|
575
|
|
|
4,028
|
|
|
1,748
|
|
Total share-based compensation
|
2,001
|
|
|
743
|
|
|
5,177
|
|
|
2,328
|
|
Income tax benefit
|
(718
|
)
|
|
(225
|
)
|
|
(1,825
|
)
|
|
(701
|
)
|
Decrease in net income
|
$
|
1,283
|
|
|
$
|
518
|
|
|
$
|
3,352
|
|
|
$
|
1,627
|
|
Recent Accounting Standards.
Recent accounting pronouncements requiring implementation in future periods are discussed below or in the notes, where applicable.
In November 2016, the FASB issued Accounting Standards Update ("ASU") 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
(“ASU 2016-18”).
ASU 2016-18 provides guidance on the classification of restricted cash and cash equivalents in the statement of cash flows. Although it does not provide a definition of restricted cash or restricted cash equivalents, it states that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. ASU 2016-18 is effective for us in the first quarter of fiscal 2019, and we do not expect the adoption of this new standard to have a material impact on our consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory
("ASU 2016-16"). ASU 2016-16 requires the recognition of current and deferred income taxes for intra-entity asset transfers when the transaction occurs. ASU 2016-16 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. ASU 2016-16 is effective for us in the first quarter of fiscal 2019, and we are currently in the process of evaluating the potential impact of adoption of this updated authoritative guidance on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Classification of Certain Cash Receipts and Cash Payments.
ASU 2016-15 is intended to add and clarify guidance on the classification of certain cash receipts and cash payments in the statement of cash flows to eliminate diversity in practice related to how such cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. ASU 2016-15 is effective for us in the first quarter of fiscal 2019, and we do not expect the adoption of this new standard to have a material impact on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
("ASU 2016-09"). ASU 2016-09 simplifies the accounting for and reporting on share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The amendments in this update are to be applied differently upon adoption with certain amendments being applied prospectively, retrospectively and under a modified retrospective transition method. We expect to adopt ASU 2016-09 in the first quarter of fiscal 2018, and we do not expect the adoption of this new standard to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
(“ASU 2016-02”), which is intended to improve financial reporting about leasing transactions. The new guidance will require lessees to recognize on their balance sheets the assets and liabilities for the rights and obligations created by leases and to disclose key information about the leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. ASU 2016-02 is effective for us in the first quarter of fiscal 2020. We are currently in the process of evaluating the potential impact of adoption of this updated authoritative guidance on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05,
Customer’s Accounting for Fees Paid in a Cloud Arrangement
("ASU 2015-05"), which requires a customer to determine whether a cloud computing arrangement contains a software license that should be accounted for as internal-use software or as a service contract. ASU 2015-05 is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. Upon adoption, an entity has the option to apply the provisions of ASU 2015-05 either prospectively to all arrangements entered into or materially modified, or retrospectively. The adoption of this new standard did not have material impact on our consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15,
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
("ASU 2014-15"), which incorporates and expands upon certain principles that currently exist in U.S. auditing standards. ASU 2014-15 provides guidance regarding management's responsibility to evaluate whether there is substantial doubt about an organization's ability to continue as a going concern and to provide related footnote disclosures. The new standard requires management to perform interim and annual evaluations and sets forth principles for considering the mitigating effect of management's plans. The standard mandates certain disclosures when conditions give rise to substantial doubt about a company’s ability to continue as a going concern within one year from the financial statement issuance date. ASU 2014-15 is effective for us commencing fiscal year ending March 31, 2017. The adoption of this new standard has not had, and is not expected to have, an impact on our consolidated financial statements
.
In May 2014, the FASB, along with the International Accounting Standards Board, issued ASU 2014-09,
Revenue from Contracts with Customers
("ASU 2014-09"), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASU 2014-09 provides enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies reporting using International Financial Reporting Standards and GAAP. The core principle of this updated guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also requires additional disclosure about revenue and provides improved guidance for multiple element arrangements. In July 2015 decision, the FASB issued ASU 2015-14,
Deferral of Effective Date
("ASU 2015-14") to delay the effective date by one year. In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606) –Principal versus Agent Consideration
("ASU 2016-08"). In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing
("ASU 2016-10”). In May 2016, the FASB issued ASU 2016-11,
Revenue from Contracts with Customers (Topic 606) and Derivatives and Hedging (Topic 815) – Rescission of SEC Guidance Because of ASU 2014-09 and 2014-16
("ASU 2016-11") and ASU 2016-12,
Revenue from Contracts with Customers (Topic 606) –Narrow Scope Improvements and Practical Expedients
("ASU 2016-12"). The new ASUs do not change the core principle of the guidance in Topic 606 (as amended by ASU 2014-09), but rather help to provide further interpretive clarifications on the new guidance in ASU 2014-09. ASU 2014-09, as amended by ASU 2015-14, is effective for us in the first quarter of fiscal 2019. Companies are permitted to adopt this new guidance following either a full retrospective or modified retrospective approach.
We have established a cross-functional team to assess the potential impact of the new revenue standard. Our assessment process consists of reviewing our current accounting policies and practices to identify potential differences that would result from applying the requirements of the new standard to our revenue contracts and identifying appropriate changes to our business processes, systems and controls to support revenue recognition and disclosure requirements under the new standard. Our initial assessment of the impact of the new revenue standard on our current business processes, systems and controls are expected to be completed during fiscal 2017. Additionally, we are currently evaluating the potential impact that the implementation of this new revenue
standard will have on our consolidated financial statements as well as selection of the method of adoption. We currently do not expect to implement this new standard prior to the required effective date.
We do not believe that any other recently issued, but not yet effective accounting standards, if adopted, would have a material impact on our consolidated financial statements.
2. 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, 2016
and
March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Unobservable Inputs (Level 3)
|
|
December 31,
2016
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Cash and cash equivalents
(1)
|
$
|
23,994
|
|
|
$
|
23,994
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restricted cash and cash equivalents
|
4,647
|
|
|
4,647
|
|
|
—
|
|
|
—
|
|
|
$
|
28,641
|
|
|
$
|
28,641
|
|
|
$
|
—
|
|
|
$
|
—
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Contingent consideration related to acquisitions
|
$
|
18,367
|
|
|
$
|
—
|
|
|
$
|
18,367
|
|
|
$
|
—
|
|
|
$
|
18,367
|
|
|
$
|
—
|
|
|
$
|
18,367
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Unobservable Inputs (Level 3)
|
|
March 31,
2016
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Cash and cash equivalents
(1)
|
$
|
27,176
|
|
|
$
|
27,176
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restricted cash and cash equivalents
|
5,320
|
|
|
5,320
|
|
|
—
|
|
|
—
|
|
Marketable securities
(2)
|
9,297
|
|
|
9,297
|
|
|
—
|
|
|
—
|
|
|
$
|
41,793
|
|
|
$
|
41,793
|
|
|
$
|
—
|
|
|
$
|
—
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Contingent consideration related to acquisitions
|
$
|
23,843
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,843
|
|
|
$
|
23,843
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,843
|
|
___________________________________
(1)
Cash equivalents consist primarily of money market funds.
(2)
Marketable securities consist of available-for-sale money market instruments and fixed-income securities, including certificates of deposit, corporate bonds and notes, and municipal securities.
The contingent consideration liability as of
December 31, 2016
relates to the acquisition of HealthFusion (see Note 3). Prior to
December 31, 2016
, we had assessed the fair value of the contingent consideration liability on a recurring basis and any adjustments to fair value subsequent to the measurement period were reflected in the consolidated statements of comprehensive income. Key assumptions included discount rates and probability-adjusted achievement estimates of certain revenue targets that were not observable in the market. The categorization of the framework used to measure fair value of the contingent consideration liability was previously considered to be within the Level 3 valuation hierarchy due to the subjective nature of the unobservable inputs used. As of the end of the measurement period on December 31, 2016, the actual revenue achievement rate was utilized to compute the ending contingent consideration liability. Accordingly, the contingent consideration liability was transferred into the Level 2 valuation hierarchy because the fair value was determined based on other significant observable inputs.
The following table presents activity in our financial assets and liabilities measured at fair value using significant unobservable inputs (Level 3), as of and for the
nine months ended
December 31, 2016
:
|
|
|
|
|
|
|
|
Total Liabilities
|
Balance at April 1, 2016
|
|
$
|
23,843
|
|
Settlement of contingent consideration related to Mirth
|
|
(9,273
|
)
|
Fair value adjustments
|
|
3,797
|
|
Transfer of HealthFusion contingent consideration to Level 2
|
|
(18,367
|
)
|
Balance at December 31, 2016
|
|
$
|
—
|
|
During the
nine months ended
December 31, 2016
, we issued shares of common stock to settle
$9,273
in contingent consideration liabilities related to the acquisition of Mirth and recorded
$3,797
of fair value adjustments to contingent consideration liabilities, of which
$3,367
was related to HealthFusion and
$430
was related to Mirth. During the
three months ended
December 31, 2016
, we recorded a benefit of $2,033 for fair value adjustments of contingent consideration liabilities related to HealthFusion. The fair value adjustments to contingent consideration liabilities are included as a component of selling, general and administrative expense in the consolidated statements of comprehensive income.
We believe that the fair value of other financial assets and liabilities, including accounts receivable, accounts payable, and line of credit, approximate their respective carrying values due to their nominal credit risk.
Non-Recurring Fair Value Measurements
We have certain assets, including goodwill and other intangible assets, which are measured at fair value on a non-recurring basis and are adjusted to fair value only if an impairment charge is recognized. The categorization of the framework used to measure fair value of the assets is considered to be within the Level 3 valuation hierarchy due to the subjective nature of the unobservable inputs used. During the
nine months ended December 31,
2016
, we recorded certain adjustments to HealthFusion goodwill (see Note 3).
3. Business Combinations
HealthFusion Acquisition
On January 4, 2016, we completed our acquisition of HealthFusion Holdings, Inc. ("HealthFusion") pursuant to the Agreement and Plan of Merger (the “Merger Agreement"), dated October 30, 2015. HealthFusion provides Web-based, cloud computing software for physicians, medical billing service providers, and hospitals. Its flagship product, MediTouch®, is a fully-integrated, cloud-based software suite consisting of clearinghouse, practice management, electronic health records, and patient portals with rich functionality to enable mobility, workflow automation, and advanced reporting and analytics aimed primarily at small-to-mid-size physician practices. The acquisition of HealthFusion is part of our strategy to expand its client base and cloud-based solution capabilities in the ambulatory market. Over time, we plan to expand the HealthFusion platform to satisfy the needs of practices of increasing size and complexity.
The preliminary purchase price totals
$183,049
, which includes preliminary working capital and other customary adjustments and the fair value of contingent consideration related to an additional
$25,000
of cash in the form of an earnout, subject to HealthFusion achieving certain revenue targets through December 31, 2016. The initial estimated fair value of contingent consideration of
$16,700
was based on a Monte Carlo-based valuation model that considered, among other assumptions and inputs, our estimate of projected HealthFusion revenues. As of
December 31, 2016
, the fair value of the contingent consideration was
$18,367
.
The acquisition was initially funded by a draw against the revolving credit agreement (see Note 7), a portion of which was subsequently repaid from existing cash on hand.
We accounted for the HealthFusion acquisition as a purchase business combination using the acquisition method of accounting. The preliminary purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their preliminary estimated fair values as of the acquisition date. The preliminary fair values of acquired assets and liabilities assumed represent management’s estimate of fair value and are subject to change if additional information, such as changes to deferred taxes and/or working capital, becomes available. We expect to finalize the purchase price allocation as soon as practicable within the measurement period, but not later than one year following the acquisition date.
The preliminary estimated fair value of the acquired tangible and intangible assets and liabilities assumed were determined using multiple valuation approaches depending on the type of tangible or intangible asset acquired, including but not limited to the income approach, the excess earnings method and the relief from royalty method approach.
The preliminary amount of goodwill represents the excess of the preliminary purchase price over the preliminary 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 HealthFusion was determined as the excess of the preliminary purchase price over the net acquisition date fair values of the acquired assets and the liabilities assumed, and is not deductible for tax purposes. HealthFusion operates under our Software and Related Solutions segment. During the
nine months ended
December 31, 2016
, we recorded a
$2,949
adjustment to HealthFusion goodwill related to changes in deferred taxes based on the filing of final tax returns.
The total preliminary purchase price for the HealthFusion acquisition is summarized as follows:
|
|
|
|
|
Initial purchase price
|
$
|
165,000
|
|
Contingent consideration
|
16,700
|
|
Preliminary working capital and other adjustments
|
1,349
|
|
Total preliminary purchase price
|
$
|
183,049
|
|
|
|
|
|
|
|
January 4, 2016
|
Preliminary fair value of the net tangible assets acquired and liabilities assumed:
|
|
Acquired cash and cash equivalents
|
$
|
2,225
|
|
Accounts receivable, net
|
1,514
|
|
Prepaid expenses and other current assets
|
4,645
|
|
Equipment and improvements, net
|
767
|
|
Capitalized software costs, net
|
307
|
|
Other assets
|
700
|
|
Accounts payable
|
(1,085
|
)
|
Accrued compensation and related benefits
|
(533
|
)
|
Deferred revenue
|
(1,067
|
)
|
Deferred income taxes, net
|
(9,078
|
)
|
Other liabilities
|
(2,721
|
)
|
Total preliminary net tangible assets acquired and liabilities assumed
|
(4,326
|
)
|
Preliminary fair value of identifiable intangible assets acquired:
|
|
Software technology
|
42,500
|
|
Customer relationships
|
28,500
|
|
Trade name
|
4,000
|
|
Goodwill
|
112,375
|
|
Total preliminary identifiable intangible assets acquired
|
187,375
|
|
Total preliminary purchase price
|
$
|
183,049
|
|
4.
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. We have not identified any events or circumstances as of
December 31, 2016
that would require an interim goodwill impairment test. During the
nine months ended
December 31, 2016
, we recorded certain adjustment to HealthFusion goodwill (see Note 3).
We do not amortize goodwill as it has been determined to have an indefinite useful life.
We have also determined that the change in reportable operating segments as a result of our ongoing reorganization efforts (see Note 14) did not have a significant impact on the amount of goodwill that is allocated to each reporting unit and each reportable operating segment
.
Goodwill by reportable operating segment consists of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
March 31,
2016
|
Software and Related Solutions
|
$
|
153,598
|
|
|
$
|
156,547
|
|
RCM and Related Services
|
32,290
|
|
|
32,290
|
|
Total goodwill
|
$
|
185,888
|
|
|
$
|
188,837
|
|
5.
Intangible Assets
Our definite-lived intangible assets, other than capitalized software development costs, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Customer Relationships
|
|
Trade Name and Contracts
|
|
Software Technology
|
|
Total
|
Gross carrying amount
|
$
|
50,550
|
|
|
$
|
5,480
|
|
|
$
|
67,810
|
|
|
$
|
123,840
|
|
Accumulated amortization
|
(26,693
|
)
|
|
(1,821
|
)
|
|
(20,604
|
)
|
|
(49,118
|
)
|
Net intangible assets
|
$
|
23,857
|
|
|
$
|
3,659
|
|
|
$
|
47,206
|
|
|
$
|
74,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
Customer Relationships
|
|
Trade Name and Contracts
|
|
Software Technology
|
|
Total
|
Gross carrying amount
|
$
|
50,550
|
|
|
$
|
7,368
|
|
|
$
|
67,810
|
|
|
$
|
125,728
|
|
Accumulated amortization
|
(19,618
|
)
|
|
(2,895
|
)
|
|
(11,540
|
)
|
|
(34,053
|
)
|
Net intangible assets
|
$
|
30,932
|
|
|
$
|
4,473
|
|
|
$
|
56,270
|
|
|
$
|
91,675
|
|
Amortization expense related to customer relationships and trade name and contracts recorded as operating expenses in the consolidated statements of comprehensive income was
$2,568
and
$898
for the
three months ended
December 31, 2016
and
2015
, respectively. Amortization expense related to software technology recorded as cost of revenue was
$3,007
and
$903
for the
three months ended
December 31, 2016
and
2015
, respectively.
Amortization expense related to customer relationships and trade name and contracts recorded as operating expenses in the consolidated statements of comprehensive income was
$7,889
and
$2,692
for the
nine months ended
December 31, 2016
and
2015
, respectively. Amortization expense related to software technology recorded as cost of revenue was
$9,064
and
$2,710
for the
nine months ended
December 31, 2016
and
2015
, respectively.
The following table summarizes the remaining estimated amortization of definite-lived intangible assets as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization Expense Recorded As:
|
|
Operating Expense
|
|
Cost of Revenue
|
|
Total
|
For the year ended March 31,
|
|
|
|
|
|
2017 (remaining three months)
|
2,527
|
|
|
2,963
|
|
|
5,490
|
|
2018
|
7,264
|
|
|
11,851
|
|
|
19,115
|
|
2019
|
4,852
|
|
|
11,851
|
|
|
16,703
|
|
2020
|
3,855
|
|
|
11,851
|
|
|
15,706
|
|
2021
|
3,006
|
|
|
7,968
|
|
|
10,974
|
|
2022 and beyond
|
6,012
|
|
|
722
|
|
|
6,734
|
|
Total
|
$
|
27,516
|
|
|
$
|
47,206
|
|
|
$
|
74,722
|
|
6. Capitalized Software Costs
Our capitalized software costs are summarized as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
March 31,
2016
|
Gross carrying amount
|
$
|
103,070
|
|
|
$
|
96,699
|
|
Accumulated amortization
|
(90,075
|
)
|
|
(83,449
|
)
|
Net capitalized software costs
|
$
|
12,995
|
|
|
$
|
13,250
|
|
Amortization expense related to capitalized software costs was
$1,807
and
$2,499
for the
three months ended
December 31, 2016
and
2015
, respectively, and is recorded as cost of revenue in the consolidated statements of comprehensive income. Amortization
expense related to capitalized software costs was
$6,626
and
$7,428
for the
nine months ended
December 31, 2016
and
2015
, respectively.
The following table presents the remaining estimated amortization of capitalized software costs as of
December 31, 2016
. 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,
|
|
2017 (remaining three months)
|
$
|
1,500
|
|
2018
|
5,300
|
|
2019
|
4,300
|
|
2020
|
1,895
|
|
Total
|
$
|
12,995
|
|
7. Line of Credit
On January 4, 2016, we entered into a
$250,000
revolving credit agreement (“Credit Agreement”) with JP Morgan Chase Bank, N.A., as administrative agent, U.S. Bank National Association, as syndication agent, and certain other lenders. The Credit Agreement is secured by substantially all of our existing and future property and material domestic subsidiaries. The Credit Agreement provides a subfacility of up to
$10,000
for letters of credit and a subfacility of up to
$10,000
for swing-line loans. The Credit Agreement matures on January 4, 2021 and the full balance of the revolving loans and all other obligations under the agreement must be paid at that time. The revolving loans under the Credit Agreement will be available for letters of credit, working capital and general corporate purposes. We were in compliance with all covenants under the Credit Agreement as of
December 31, 2016
.
As of
December 31, 2016
, we had
$25,000
in outstanding loans and
$225,000
of unused credit under the Credit Agreement.
During the
three months ended
December 31, 2016
, we recorded
$359
of interest expense and
$269
in amortization of deferred debt issuance costs related to the Credit Agreement. During the
nine months ended
December 31, 2016
, we recorded
$1,631
of interest expense and
$807
in amortization of deferred debt issuance costs related to the Credit Agreement.
8. Composition of Certain Financial Statement Captions
Accounts receivable may include amounts invoiced for undelivered products and services at each period end. Undelivered products and services are included as a component of the deferred revenue balance on the accompanying consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
March 31,
2016
|
Accounts receivable, gross
|
$
|
86,388
|
|
|
$
|
104,467
|
|
Sales return reserve
|
(8,623
|
)
|
|
(7,541
|
)
|
Allowance for doubtful accounts
|
(2,249
|
)
|
|
(2,902
|
)
|
Accounts receivable, net
|
$
|
75,516
|
|
|
$
|
94,024
|
|
Inventory is comprised of computer systems and components.
Prepaid expenses and other current assets are summarized as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
March 31,
2016
|
Prepaid expenses
|
$
|
13,448
|
|
|
$
|
11,804
|
|
Other current assets
|
2,496
|
|
|
3,106
|
|
Prepaid expenses and other current assets
|
$
|
15,944
|
|
|
$
|
14,910
|
|
Equipment and improvements are summarized as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
March 31,
2016
|
Computer equipment
|
$
|
21,483
|
|
|
$
|
32,213
|
|
Internal-use software
|
10,899
|
|
|
10,201
|
|
Furniture and fixtures
|
10,561
|
|
|
9,799
|
|
Leasehold improvements
|
16,538
|
|
|
13,408
|
|
Equipment and improvements, gross
|
59,481
|
|
|
65,621
|
|
Accumulated depreciation and amortization
|
(33,384
|
)
|
|
(39,831
|
)
|
Equipment and improvements, net
|
$
|
26,097
|
|
|
$
|
25,790
|
|
The current portion of deferred revenues are summarized as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
March 31,
2016
|
Professional services
|
$
|
22,005
|
|
|
$
|
23,128
|
|
Software license, hardware and other
|
10,469
|
|
|
14,913
|
|
Support and maintenance
|
8,948
|
|
|
11,902
|
|
Software related subscription services
|
8,341
|
|
|
7,992
|
|
Deferred revenue
|
$
|
49,763
|
|
|
$
|
57,935
|
|
Accrued compensation and related benefits are summarized as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
March 31,
2016
|
Payroll, bonus and commission
|
$
|
10,617
|
|
|
$
|
9,683
|
|
Vacation
|
8,003
|
|
|
8,987
|
|
Accrued compensation and related benefits
|
$
|
18,620
|
|
|
$
|
18,670
|
|
Other current and noncurrent liabilities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
March 31,
2016
|
Contingent consideration and other liabilities related to acquisitions
|
$
|
18,367
|
|
|
$
|
24,153
|
|
Care services liabilities
|
4,647
|
|
|
5,339
|
|
Customer credit balances and deposits
|
3,973
|
|
|
4,123
|
|
Accrued EDI expense
|
2,270
|
|
|
2,604
|
|
Accrued consulting and outside services
|
2,194
|
|
|
3,650
|
|
Accrued self insurance expense
|
1,898
|
|
|
1,862
|
|
Accrued outsourcing costs
|
1,613
|
|
|
1,604
|
|
Deferred rent
|
1,409
|
|
|
828
|
|
Accrued legal expense
|
758
|
|
|
864
|
|
Accrued royalties
|
740
|
|
|
2,341
|
|
Employee benefit plan withholdings
|
639
|
|
|
213
|
|
Sales tax payable
|
333
|
|
|
655
|
|
Other accrued expenses
|
5,497
|
|
|
2,002
|
|
Other current liabilities
|
$
|
44,338
|
|
|
$
|
50,238
|
|
|
|
|
|
Deferred rent
|
$
|
9,538
|
|
|
$
|
6,577
|
|
Uncertain tax position and related liabilities
|
4,729
|
|
|
4,084
|
|
Other noncurrent liabilities
|
$
|
14,267
|
|
|
$
|
10,661
|
|
9. Income Taxes
The provision for income taxes for the
three months ended
December 31, 2016
was
$2,342
and the provision for income taxes for the three months ended
December 31, 2015
was
$1,141
. The effective tax rates were
18.3%
and
13.5%
for the
three months ended
December 31, 2016
and
2015
, respectively. The effective rate for the
three months ended
December 31, 2016
increased compared to the prior year period primarily due to the impact of lower qualifying production activity deductions in the current period, certain
non-deductible acquisition-related costs, and a discrete valuation allowance, offset by federal and state research and development credit and other discrete adjustments.
The provision for income taxes for the
nine months ended
December 31, 2016
was
$3,950
and the provision for income taxes for the
nine months ended
December 31, 2015
was
$8,233
. The effective tax rates were
22.2%
and
27.3%
for the
nine months ended
December 31, 2016
and
2015
, respectively. The effective rate for the
nine months ended
December 31, 2016
decreased compared to the prior year period primarily due to favorable discrete adjustments for federal and state research and development credit, offset by non-deductible acquisition-related costs, lower qualifying production activity deductions in the current period, and other discrete adjustments.
The deferred tax assets and liabilities have been shown net in the accompanying 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, state net operating loss carryforwards, and foreign accumulated minimum tax credits, for which we have recorded a valuation allowance.
Uncertain tax positions
We had liabilities of
$4,729
and
$4,084
for unrecognized tax benefits related to various federal, state and local income tax matters as of
December 31, 2016
and
March 31, 2016
, respectively. If recognized, this amount would reduce our effective tax rate.
We are no longer subject to U.S. federal income tax examinations for tax years before 2013. With few exceptions, we are no longer subject to state income tax examinations for tax years before 2012. We do not anticipate that total unrecognized tax benefits will significantly change due to the settlement of audits or the expiration of statute of limitations
within the next twelve months
.
10. Earnings per Share
The dual 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,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Earnings per share — Basic:
|
|
|
|
|
|
|
|
Net income
|
$
|
10,486
|
|
|
$
|
7,302
|
|
|
$
|
13,826
|
|
|
$
|
21,979
|
|
Weighted-average shares outstanding — Basic
|
62,093
|
|
|
60,867
|
|
|
61,645
|
|
|
60,548
|
|
Net income per common share — Basic
|
$
|
0.17
|
|
|
$
|
0.12
|
|
|
$
|
0.22
|
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
Earnings per share — Diluted:
|
|
|
|
|
|
|
|
Net income
|
$
|
10,486
|
|
|
$
|
7,302
|
|
|
$
|
13,826
|
|
|
$
|
21,979
|
|
Weighted-average shares outstanding
|
62,093
|
|
|
60,867
|
|
|
61,645
|
|
|
60,548
|
|
Effect of potentially dilutive securities
|
—
|
|
|
412
|
|
|
255
|
|
|
642
|
|
Weighted-average shares outstanding — Diluted
|
62,093
|
|
|
61,279
|
|
|
61,900
|
|
|
61,190
|
|
Net income per common share — Diluted
|
$
|
0.17
|
|
|
$
|
0.12
|
|
|
$
|
0.22
|
|
|
$
|
0.36
|
|
The computation of diluted net income per share does not include
3,054
and
3,015
options to acquire shares of common stock for the
three and nine months ended
December 31, 2016
, respectively, because their inclusion would have an anti-dilutive effect on net income per share.
The computation of diluted net income per share does not include
1,839
and
1,789
options to acquire shares of common stock for the
three and nine months ended
December 31, 2015
, respectively, because their inclusion would have an anti-dilutive effect on net income per share.
11. Share-Based Awards
Employee Stock Option and Incentive Plans
In October 2005, our shareholders approved a stock option and incentive plan (the “2005 Plan”) under which
4,800,000
shares of common stock were reserved for the issuance of awards, including incentive stock options and non-qualified stock options, stock appreciation rights, restricted stock, unrestricted stock, restricted stock units, performance shares, performance units (including performance options) and other share-based awards. The 2005 Plan provides that our employees and directors may, at the discretion of the Board of Directors ("Board") or a duly designated compensation committee, be granted certain share-based awards. In the case of option awards granted under the 2005 Plan, the exercise price of each option is determined based on the date of grant and expire no later than
10 years
from the date of grant. Awards granted pursuant to the 2005 Plan are subject to the vesting schedule or performance metrics set forth in the agreements pursuant to which they are granted. Upon a change of control of our Company, as such term is defined in the 2005 Plan, awards under the 2005 Plan will fully vest under certain circumstances. The 2005 Plan expired on May 25, 2015. As of
December 31, 2016
, there were
969,565
outstanding options and
567
outstanding shares of restricted stock awards under the 2005 Plan.
In August 2015, our shareholders approved a stock option and incentive plan (the “2015 Plan”) under which
11,500,000
shares of common stock were reserved for the issuance of awards, including incentive stock options and non-qualified stock options, stock appreciation rights, restricted stock awards and restricted stock unit awards, performance stock awards and other share-based awards. The 2015 Plan provides that our employees and directors may, at the discretion of the Board of Directors or a duly designated compensation committee, be granted certain share-based awards. In the case of option awards granted under the 2015 Plan, the exercise price of each option is determined based on the date of grant and expire no later than
10 years
from the date of grant. Awards granted pursuant to the 2015 Plan are subject to the vesting schedule or performance metrics set forth in the agreements pursuant to which they are granted. Upon a change of control of our Company, as such term is defined in the 2015 Plan, awards under the 2015 Plan will fully vest under certain circumstances. As of
December 31, 2016
, there were
1,994,750
outstanding options,
933,165
outstanding shares of restricted stock awards,
123,082
outstanding shares of performance stock awards, and
8,079,983
shares available for future grant under the 2015 Plan.
The following table summarizes the stock option transactions during the
nine months ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise
Price
per Share
|
|
Weighted-
Average
Remaining
Contractual
Life (years)
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
Outstanding, April 1, 2016
|
|
2,447,286
|
|
|
$
|
19.55
|
|
|
6.3
|
|
$
|
574
|
|
Granted
|
|
1,056,500
|
|
|
12.82
|
|
|
7.4
|
|
|
Forfeited/Canceled
|
|
(539,471
|
)
|
|
22.13
|
|
|
4.7
|
|
|
|
Outstanding, December 31, 2016
|
|
2,964,315
|
|
|
$
|
16.68
|
|
|
6.4
|
|
$
|
377
|
|
Vested and expected to vest, September 30, 2016
|
|
2,652,038
|
|
|
$
|
16.93
|
|
|
6.3
|
|
$
|
329
|
|
Exercisable, December 31, 2016
|
|
586,120
|
|
|
$
|
25.05
|
|
|
3.9
|
|
$
|
11
|
|
We utilize the Black-Scholes valuation model for estimating the fair value of share-based compensation with the following assumptions:
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Nine Months Ended December 31,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Expected term
|
6.3 years
|
|
3.9 years
|
|
6.0 - 6.6 years
|
|
3.8 - 3.9 years
|
Expected volatility
|
37.1%
|
|
38.9%
|
|
36.9% - 37.4%
|
|
38.3% - 38.9%
|
Expected dividends
|
—%
|
|
5.3%
|
|
—%
|
|
4.1% - 5.3%
|
Risk-free rate
|
1.5%
|
|
1.3%
|
|
1.2% - 1.5%
|
|
1.3% - 1.6%
|
The weighted-average grant date fair value of stock options granted during the
nine months ended
December 31, 2016
and
2015
was
$4.92
and
$3.33
per share, respectively.
During the
nine months ended
December 31, 2016
, a total of
1,056,500
options to purchase shares of common stock were granted under the 2015 Plan at an exercise price equal to the market price of our common stock on the date of grant, as summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Grant Date
|
|
Number of Shares
|
|
Exercise Price
|
|
Vesting Terms
(1)
|
|
Expiration
|
November 1, 2016
|
|
50,000
|
|
|
$
|
12.71
|
|
|
Four years
|
|
November 1, 2024
|
July 11, 2016
|
|
150,000
|
|
|
$
|
12.60
|
|
|
Four years
|
|
July 11, 2024
|
May 31, 2016
|
|
100,000
|
|
|
$
|
12.71
|
|
|
Five years
|
|
May 31, 2024
|
May 25, 2016
|
|
216,500
|
|
|
$
|
12.78
|
|
|
Four years
|
|
May 25, 2024
|
May 24, 2016
|
|
540,000
|
|
|
$
|
12.93
|
|
|
Four years
|
|
May 24, 2024
|
Fiscal year 2017 grants
|
|
1,056,500
|
|
|
|
|
|
|
|
__________________________________
(1)
Options vest in equal annual installments on each grant anniversary date commencing one year following the date of grant.
Non-vested stock option award activity during the
nine months ended
December 31, 2016
is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Non-Vested
Number of
Shares
|
|
Weighted-
Average
Grant-Date
Fair Value
per Share
|
Outstanding, April 1, 2016
|
|
1,859,750
|
|
|
$
|
4.67
|
|
Granted
|
|
1,056,500
|
|
|
4.92
|
|
Vested
|
|
(276,595
|
)
|
|
4.30
|
|
Forfeited/Canceled
|
|
(261,460
|
)
|
|
4.38
|
|
Outstanding, December 31, 2016
|
|
2,378,195
|
|
|
$
|
4.72
|
|
As of
December 31, 2016
,
$8,662
of total unrecognized compensation costs related to stock options is expected to be recognized over a weighted-average period of
3.2
years. This amount does not include the cost of new options that may be granted in future periods or any changes in our forfeiture percentage. The total fair value of options vested during the
nine months ended
December 31, 2016
and
2015
was
$1,189
and
$1,564
, respectively.
Restricted stock awards activity during the
nine months ended
December 31, 2016
is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
Average
Grant-Date
Fair Value
per Share
|
Outstanding, April 1, 2016
|
|
191,247
|
|
|
$
|
14.44
|
|
Granted
|
|
857,456
|
|
|
12.81
|
|
Vested
|
|
(68,309
|
)
|
|
14.29
|
|
Canceled
|
|
(46,662
|
)
|
|
12.78
|
|
Outstanding, December 31, 2016
|
|
933,732
|
|
|
$
|
12.80
|
|
Share-based compensation expense related to restricted stock awards was
$1,054
and
$249
for the
three months ended
December 31, 2016
and
2015
, respectively. Share-based compensation expense related to restricted stock awards was
$2,571
and
$664
for the
nine months ended
December 31, 2016
and
2015
, respectively.
The weighted-average grant date fair value for the restricted stock awards was estimated using the market price of the common stock on the date of grant. The fair value of the restricted stock awards is amortized on a straight-line basis over the vesting period, which is generally two years.
As of
December 31, 2016
,
$9,930
of total unrecognized compensation costs related to restricted stock awards is expected to be recognized over a weighted-average period of
2.2
years. This amount does not include the cost of new restricted stock awards that may be granted in future periods.
On December 29, 2016, the Compensation Committee of the Board granted
123,082
performance stock awards to certain executive officers. The performance stock awards vest in four equal increments on each of the first four anniversaries of the grant date, subject in each case to the executive officer’s continued service and achievement of certain Company performance goals, including strong Company stock price performance. Share-based compensation expense related to the performance stock awards was not significant for the
three and nine months ended December 31,
2016
.
Employee Share Purchase Plan
On August 11, 2014, our shareholders approved an Employee Share Purchase Plan (the “Purchase Plan”) under which
4,000,000
shares of common stock were reserved for future grant. The Purchase Plan allows eligible employees to purchase shares through payroll deductions of up to
15%
of total base salary at a price equal to
90%
of the lower of the fair market values of the shares as of the beginning or the end of the corresponding offering period. Any shares purchased under the Purchase Plan are subject to a six-month holding period. Employees are limited to purchasing no more than
1,500
shares on any single purchase date and no more than
$25,000
in total fair market value of shares during any one calendar year. As of
December 31, 2016
, we have issued
209,876
shares under the Purchase Plan and
3,790,124
shares are available for future issuance.
Share-based compensation expense recorded for the employee share purchase plan was
$70
and
$70
for the
three months ended
December 31, 2016
and
2015
, respectively. Share-based compensation expense recorded for the employee share purchase plan was
$277
and
$216
for the
nine months ended
December 31, 2016
and
2015
, respectively.
12. Concentration of Credit Risk
We had cash deposits at U.S. banks and financial institutions which exceeded federally insured limits at
December 31, 2016
. 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.
13. Commitments, Guarantees and Contingencies
Commitments and Guarantees
Our software license agreements include a performance guarantee that our software products will substantially operate as described in the applicable program documentation for a period of
365 days
after delivery. To date, we have not incurred any significant costs associated with our performance guarantee or other related warranties and do not expect to incur significant warranty costs in the future. Therefore, no accrual has been made for potential costs associated with these warranties. Certain arrangements also include performance guarantees related to response time, availability for operational use, and other performance-related guarantees. Certain arrangements also include penalties in the form of maintenance credits should the performance of the software fail to meet the performance guarantees. To date, we have not incurred any significant costs associated with these warranties and do not expect to incur significant warranty costs in the future. Therefore, no accrual has been made for potential costs associated with these warranties.
We have historically offered short-term rights of return in certain sales arrangements. If we are able to estimate returns for these types of arrangements and all other criteria for revenue recognition have been met, revenue is recognized and these arrangements are recorded in the consolidated financial statements. If we are unable to estimate returns for these types of arrangements, revenue is not recognized in the consolidated financial statements until the rights of return expire, provided also, that all other criteria of revenue recognition have been met.
Our standard sales agreements contain an indemnification provision pursuant to which we shall indemnify, hold harmless, and reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with any United States patent, any copyright or other intellectual property infringement claim by any third-party with respect to our software. As we have not incurred any significant costs to defend lawsuits or settle claims related to these indemnification agreements, we believe that our estimated exposure on these agreements is currently minimal. Accordingly, we have no liabilities recorded for these indemnification obligations.
Hussein Litigation
On October 7, 2013, a complaint was filed against our Company and certain of our officers and directors in the Superior Court of the State of California for the County of Orange, captioned Ahmed D. Hussein v. Sheldon Razin, Steven Plochocki, Quality Systems, Inc. and Does 1-10, inclusive, No. 30-2013-00679600-CU-NP-CJC, by Ahmed Hussein, a former director and significant shareholder of our Company. We filed a demurrer to the complaint, which the Court granted on April 10, 2014. An amended complaint was filed on April 25, 2014. The amended complaint generally alleges fraud and deceit, constructive fraud, negligent misrepresentation and breach of fiduciary duty in connection with statements made to our shareholders regarding our financial condition and projected future performance. The amended complaint seeks actual damages, exemplary and punitive damages and costs. We filed a demurrer to the amended complaint. On July 29, 2014, the Court sustained the demurrer with respect to the breach of fiduciary duty claim, and overruled the demurrer with respect to the fraud and deceit claims. On August 28, 2014, we filed an answer and also filed a cross-complaint against the plaintiff, alleging that the plaintiff breached fiduciary duties owed to the Company, Mr. Razin and Mr. Plochocki. Mr. Razin and Mr. Plochocki have dismissed their claims against Hussein, leaving QSI as the sole plaintiff in the cross-complaint. On June 26, 2015, we filed a motion for summary judgment, which the Court granted on September 16, 2015, dismissing all claims against us. On September 23, 2015, the plaintiff filed an application for reconsideration of the Court's summary judgment order, which the Court denied. On October 28, 2015, the plaintiff filed a motion for summary judgment, seeking to dismiss our cross-complaint, which the Court denied on March 3, 2016. On May 9, 2016, the plaintiff filed a motion for summary adjudication, seeking to again dismiss our cross-complaint, which the Court denied on August 5, 2016. On August 5, 2016, the plaintiff filed a motion for judgment on the pleadings, seeking to again
dismiss our cross-complaint, which the Court denied on September 2, 2016. Trial is set for April 10, 2017 on QSI's cross-complaint. At this time, we are unable to estimate the probability or the amount of liability, if any, related to this claim.
Federal Securities Class Action
On November 19, 2013, a putative class action complaint was filed on behalf of the shareholders of our Company other than the defendants against us and certain of our officers and directors in the United States District Court for the Central District of California by one of our shareholders. After the Court appointed lead plaintiffs and lead counsel for this action, and recaptioned the action In re Quality Systems, Inc. Securities Litigation, No. 8L13-cv-01818-CJC(JPRx), lead plaintiffs filed an amended complaint on April 7, 2014. The amended complaint, which is substantially similar to the litigation described above under the caption “Hussein Litigation,” generally alleges that statements made to our shareholders regarding our financial condition and projected future performance were false and misleading in violation of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and that the individual defendants are liable for such statements because they are controlling persons under Section 20(a) of the Exchange Act. The complaint seeks compensatory damages, court costs and attorneys' fees. We filed a motion to dismiss the amended complaint on June 20, 2014, which the Court granted on October 20, 2014, dismissing the complaint with prejudice. Plaintiffs filed a motion for reconsideration of the Court's order, which the Court denied on January 5, 2015. On January 30, 2015, Plaintiffs filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit, captioned In re Quality Systems, Inc. Securities Litigation, No. 15-55173. Plaintiffs filed their opening brief and we answered. Oral argument was held on December 5, 2016. The Court's decision remains pending. We believe that the plaintiffs' claims are without merit and continue to defend against them vigorously. At this time, we are unable to estimate the probability or the amount of liability, if any, related to this claim.
Shareholder Derivative Litigation
On January 24, 2014, a complaint was filed against our Company and certain of our officers and current and former directors in the United States District Court for the Central District of California, captioned Timothy J. Foss, derivatively on behalf of himself and all others similarly situated, vs. Craig A. Barbarosh, George H. Bristol, James C. Malone, Peter M. Neupert, Morris Panner, D. Russell Pflueger, Steven T. Plochocki, Sheldon Razin, Lance E. Rosenzweig and Quality Systems, Inc., No. SACV14-00110-DOC-JPPx, by Timothy J. Foss, a shareholder of ours. The complaint arises from the same allegations described above under the captions “Hussein Litigation” and “Federal Securities Class Action” and generally alleges breach of fiduciary duties, abuse of control and gross mismanagement by our directors, in addition to unjust enrichment and insider selling by individual directors. The complaint seeks compensatory damages, restitution and disgorgement of all profits, court costs, attorneys’ fees and implementation of enhanced corporate governance procedures. The parties have agreed to stay this litigation until the United States Court of Appeals for the Ninth Circuit issues a ruling on the pending appeal described above under the caption “Federal Securities Class Action”. We believe that the plaintiff’s claims are without merit and intend to defend against them vigorously. At this time, we are unable to estimate the probability or the amount of liability, if any, related to this claim.
14. Operating Segment Information
Effective July 1, 2016, we revised our reportable operating segments. As part of our ongoing reorganization efforts, we refined the measurement of our segment data to better reflect our current internal organizational structure whereby certain functions that formerly existed within each individual operating segment have changed. Our operating segments now consist of the Software and Related Solutions segment and the RCM and Related Services segment, which is consistent with the disaggregated financial information used and evaluated by our chief operating decision maker (consisting of our Chief Executive Officer) to assess performance and make decisions about the allocation of resources. Revenue and gross profit are the key measures of segment profitability used by our chief operating decision maker to measure segment operating performance and to make key business decisions. The revenues and gross profit of each segment are derived from distinct product and services within each segment. The Software and Related Solutions segment aggregates the revenues and gross profit of our software-related products and services, including software license and hardware, software-related subscription services, support and maintenance, EDI and data services, and certain professional services, such as implementation, training, and consulting. The RCM and Related Services segment aggregates the revenues and gross profit of our RCM services and certain related ancillary service offerings.
Certain functional roles that do not engage in revenue generating activities, such as product solutions and strategy, research and development, and certain corporate general and administrative functions, including finance, human resources, marketing, and legal, are considered to be shared-services and are not controlled by segment-level leadership. Although the segments may derive direct benefits as a result of such shared-services functions, our chief operating decision maker evaluates performance based upon stand-alone segment revenues and gross profit. Accordingly, the shared-services functions are not considered separate operating segments, and the related operating expenses are not included within our operating segments disclosure. Additionally, total assets are managed at a consolidated level and thus are also not included within our operating segments disclosure. Accounting policies for each of our operating segments are the same as those applied to our consolidated financial statements.
Operating segment data for the
three and nine months ended December 31,
2016
and
2015
is summarized in the table below. Prior period data has been retroactively reclassified to present all segment information on a comparable basis. The change in reportable segments has no impact to consolidated revenues and consolidated cost of revenue, nor does it affect our presentation of revenue and cost of revenue on the consolidated statements of comprehensive income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Nine Months Ended December 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenue:
|
|
|
|
|
|
|
|
|
Software and Related Solutions
|
|
$
|
106,958
|
|
|
$
|
93,927
|
|
|
$
|
312,854
|
|
|
$
|
291,783
|
|
RCM and Related Services
|
|
20,910
|
|
|
22,486
|
|
|
64,385
|
|
|
65,313
|
|
Hospital Solutions
(1)
|
|
—
|
|
|
619
|
|
|
—
|
|
|
7,469
|
|
Consolidated revenue
|
|
$
|
127,868
|
|
|
$
|
117,032
|
|
|
$
|
377,239
|
|
|
$
|
364,565
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss):
|
|
|
|
|
|
|
|
|
Software and Related Solutions
|
|
$
|
71,252
|
|
|
$
|
58,949
|
|
|
$
|
204,414
|
|
|
$
|
184,982
|
|
RCM and Related Services
|
|
7,077
|
|
|
7,769
|
|
|
21,337
|
|
|
20,792
|
|
Hospital Solutions
(1)
|
|
—
|
|
|
(69
|
)
|
|
—
|
|
|
2,569
|
|
Unallocated cost of revenue
(2)
|
|
(4,813
|
)
|
|
(3,402
|
)
|
|
(15,676
|
)
|
|
(10,138
|
)
|
Consolidated gross profit
|
|
$
|
73,516
|
|
|
$
|
63,247
|
|
|
$
|
210,075
|
|
|
$
|
198,205
|
|
___________________________________
(1)
The former Hospital Solutions Division was divested in October 2015 and therefore, does not represent a distinct operating segment. Historical amounts for Hospital Solutions have not been revised.
(2)
Consists of amortization of acquired software technology and amortization of capitalized software costs not allocated to the operating segments for the purposes of measuring performance.
15. Restructuring Plan
In fiscal year 2016, we initiated a three-phase plan intended to better position our organization for future success. We implemented a series of actions with the objective of achieving greater synergies and further integration of our products and services in support of our business strategies, and enabling a more efficient, integrated and client-centered delivery of the holistic solutions that we believe is required by our ambulatory care clients. We also transformed our management team with the appointment of a new chief executive officer, chief financial officer, chief technology officer, chief strategy officer, and chief client officer. In the first phase, we redesigned the organization to more effectively support the execution of our strategy. Under phase two of our reorganization, we will continue to build our infrastructure and enhance our healthcare information technology capabilities to drive future revenue growth. The third phase of the plan will consist of developing and marketing the services and solutions that we believe will accelerate revenue growth.
The overall plan also includes a multi-year initiative, called NextGen 2.0, to merge our business units into a more streamlined, functional-based organization structure and to realign our organizational structure by consolidating the sales, marketing, information services, and software development responsibilities into single, company-wide roles in order to achieve greater efficiency. As a result, our reportable segments have changed and may change again due to such changes in the organization of our business.
The first phase was completed in April 2016, when we announced a corporate restructuring plan, which was approved by our Board of Directors. During the
three and nine months ended
December 31, 2016
, we recorded
$231
and
$4,685
, respectively, of restructuring costs within operating expenses in our consolidated statements of comprehensive income. The restructuring costs consist primarily of payroll-related costs, such as severance, outplacement costs, and continuing healthcare coverage, associated with the involuntary separation of employees pursuant to a one-time benefit arrangement, which were accrued when it was probable that the benefits will be paid and the amount were reasonably estimable. The remaining restructuring liability as of
December 31, 2016
was not significant. The restructuring plan is expected to be complete by the end of fiscal 2017.