The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
NEXTGEN HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES INDEX
7
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 June 30, 2022 and for the three months ended June 30, 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 on our critical and significant accounting estimates.
Recent Accounting Standards Not Yet Adopted. Recent accounting pronouncements requiring implementation in current or future periods are discussed below or in the notes, where applicable.
In 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. We are currently evaluating the effect that ASU 2020-04 may have on our contracts that reference LIBOR, such as our amended and restated revolving credit agreement (see Note 9). We have not elected to apply any of the provisions of Topic 848, and we are currently in the process of evaluating the potential impact of adoption of this updated authoritative guidance on our condensed consolidated financial statements.
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. ASU 2021-08 is effective for us in the first quarter of fiscal 2024. We are currently in the process of evaluating the potential impact of adoption of this updated authoritative guidance on our condensed consolidated financial statements, which will also depend on the magnitude of any potential future business combinations.
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.
8
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 June 30, |
|
|
|
|
|
2022 |
|
|
2021 |
|
|
|
Recurring revenues: |
|
|
|
|
|
|
|
|
|
|
Subscription services |
|
$ |
42,759 |
|
|
$ |
38,284 |
|
|
|
Support and maintenance |
|
|
39,138 |
|
|
|
38,486 |
|
|
|
Managed services |
|
|
30,645 |
|
|
|
27,908 |
|
|
|
Transactional and data services |
|
|
27,217 |
|
|
|
27,703 |
|
|
|
Total recurring revenues |
|
|
139,759 |
|
|
|
132,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software, hardware, and other non-recurring revenues: |
|
|
|
|
|
|
|
|
|
|
Software license and hardware |
|
|
6,199 |
|
|
|
7,214 |
|
|
|
Other non-recurring services |
|
|
7,344 |
|
|
|
6,489 |
|
|
|
Total software, hardware and other non-recurring revenues |
|
|
13,543 |
|
|
|
13,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
153,302 |
|
|
$ |
146,084 |
|
|
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
9
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 judgement is required when estimating the total transaction price based on the variable consideration. We may apply certain constraints when appropriate whereby we include in the transaction price estimated variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Such estimates are assessed at the contract level. RCM and related services may not be rendered evenly over the contract period as the timing of services are based on customer collections, which may vary throughout the service period. We recognize revenue for RCM based on the amount of collections received throughout the contract term as it most closely depicts our efforts to transfer our service obligations to the customer. Our managed cloud services represent a single performance obligation to provide cloud hosting services to our customers and related revenue is recognized ratably over the respective noncancelable contract term. Performance obligations related to the transcription services 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 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 June 30, 2022, the aggregate amount of transaction price related to remaining unsatisfied or partially unsatisfied performance obligations over the respective noncancelable contract term was approximately $605,700, of which we expect to recognize approximately 8% as services are rendered or goods are delivered, 52% over the next 12 months, and the remainder thereafter.
As of June 30, 2021, the aggregate amount of transaction price related to remaining unsatisfied or partially unsatisfied performance obligations over the respective noncancelable contract term was approximately $551,200, of which we expect to recognize approximately 10% as services are rendered or goods are delivered, 54% over the next 12 months, and the remainder thereafter.
Contract Balances
Contract balances result from the timing differences between our revenue recognition, invoicing, and cash collections. Such contract balances include accounts receivables, contract assets and liabilities, and other customer deposits and liabilities balances. Accounts receivables include invoiced amounts where the right to receive payment is unconditional and only subject to the passage of time. Contract assets, consisting of unbilled receivables, include amounts where revenue recognized exceeds the amount
10
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 June 30, 2022 and 2021, we recognized $17,724 and $17,781, respectively, of revenues that were included in the contract liability balance or invoiced to customers since the beginning of the corresponding periods.
Our contracts with customers do not include any major financing components.
Costs to Obtain or Fulfill a Contract
We capitalize all incremental costs of obtaining a contract with a customer to the extent that such costs are directly related to a contract and expected to be recoverable. Our sales commissions and related sales incentives are considered incremental costs requiring capitalization. Capitalized contract costs are amortized to expense utilizing a method that is consistent with the transfer of the related goods or services to the customer. The amortization period ranges from less than one year up to five years, based on the period over which the related goods and services are transferred, including consideration of the expected customer renewals and the related useful lives of the products.
Capitalized commissions costs were $33,885 as of June 30, 2022, of which $11,914 is classified as current and included as prepaid expenses and other current assets and $21,971 is classified as long-term and included within other assets on our condensed consolidated balance sheets, based on the expected timing of expense recognition. During the three months ended June 30, 2022 and 2021, we recognized $3,487 and $2,926, respectively, of commissions expense. Commissions expense primarily relates to the amortization of capitalized commissions costs, which is included as a selling, general and administrative expense in the condensed consolidated statements of net income and comprehensive income.
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:
|
|
|
June 30, 2022 |
|
|
March 31, 2022 |
|
|
Accounts receivable, gross |
|
$ |
81,216 |
|
|
$ |
79,945 |
|
|
Allowance for credit losses |
|
|
(3,937 |
) |
|
|
(3,888 |
) |
|
Accounts receivable, net |
|
$ |
77,279 |
|
|
$ |
76,057 |
|
The following table represents the changes in the allowance for credit losses, as of and for the three months ended June 30, 2022:
|
Balance as of March 31, 2022 |
|
$ |
(3,888 |
) |
|
Additions charged to costs and expenses |
|
|
(241 |
) |
|
Deductions |
|
|
192 |
|
|
Balance as of June 30, 2022 |
|
$ |
(3,937 |
) |
11
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 June 30, 2022 and March 31, 2021:
|
|
|
Balance At |
|
|
Quoted Prices
in Active
Markets for
Identical Assets |
|
|
Significant Other
Observable Inputs |
|
|
Unobservable
Inputs |
|
|
|
|
June 30, 2022 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (1) |
|
$ |
40,361 |
|
|
$ |
40,361 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Restricted cash and cash equivalents |
|
|
8,054 |
|
|
|
8,054 |
|
|
|
— |
|
|
|
— |
|
|
|
|
$ |
48,415 |
|
|
$ |
48,415 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
Balance At |
|
|
Quoted Prices
in Active
Markets for
Identical Assets |
|
|
Significant Other
Observable Inputs |
|
|
Unobservable
Inputs |
|
|
|
|
March 31, 2022 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (1) |
|
$ |
59,829 |
|
|
$ |
59,829 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Restricted cash and cash equivalents |
|
|
6,918 |
|
|
|
6,918 |
|
|
|
— |
|
|
|
— |
|
|
|
|
$ |
66,747 |
|
|
$ |
66,747 |
|
|
$ |
— |
|
|
$ |
— |
|
|
(1) |
Cash equivalents consist primarily of money market funds. |
There are no assets or liabilities accounted for utilizing unobservable inputs (Level 3) or measured at fair value using significant other observable inputs (Level 2), as of June 30, 2022.
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.
12
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 $942 and $1,864 for the three months ended June 30, 2022 and 2021, respectively.
Components of operating lease costs are summarized as follows:
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
2022 |
|
|
2021 |
|
|
|
Operating lease costs |
|
$ |
949 |
|
|
$ |
1,833 |
|
|
|
Short-term lease costs |
|
|
— |
|
|
|
6 |
|
|
|
Variable lease costs |
|
|
173 |
|
|
|
157 |
|
|
|
Less: Sublease income |
|
|
(180 |
) |
|
|
(132 |
) |
|
|
Total operating lease costs |
|
$ |
942 |
|
|
$ |
1,864 |
|
|
Supplemental cash flow information related to operating leases is summarized as follows:
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
2022 |
|
|
2021 |
|
|
|
Cash paid for amounts included in the measurement of operating lease liabilities |
|
$ |
2,308 |
|
|
$ |
2,964 |
|
|
|
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 2022 and 2026. As of June 30, 2022, our operating leases had a weighted average remaining lease term of 2.5 years and a weighted average discount rate of 3.7%. Future minimum aggregate lease payments under operating leases as of June 30, 2022 are summarized as follows:
|
For the year ended March 31, |
|
|
|
|
|
2023 |
|
$ |
6,507 |
|
|
2024 |
|
|
6,885 |
|
|
2025 |
|
|
4,387 |
|
|
2026 |
|
|
1,257 |
|
|
Total future lease payments |
|
|
19,036 |
|
|
Less interest |
|
|
(1,296 |
) |
|
Total lease liabilities |
|
$ |
17,740 |
|
During the three months ended June 30, 2022 we recorded impairments of $524 to the operating right-of-use asset and related fixed assets for our previously vacated portion of our St. Louis, MO office related to changes in projected sublease assumptions. During the three months ended June 30, 2021, we vacated our Fairport, NY office and recorded impairments of $382 to our operating right-of-use assets and certain related fixed assets based on projected sublease rental income and the estimated sublease commencement date. These impairment analyses were performed at the asset group level and the impairment charge was estimated by comparing the fair value of each asset group based on the expected cash flows to its respective book value. We determined the discount rate for each asset group based on the approximate interest rate on a collateralized basis with similar remaining terms and payments as of the impairment date. Significant judgment was required to estimate the fair value of each asset group and actual results could vary from the estimates, resulting in potential future adjustments to amounts previously recorded.
13
6. 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 one segment and have a single reporting unit. The measures evaluated by our chief operating decision maker ("CODM"), consisting of the Chief Executive Officer, to assess company performance and make decisions about the allocation of resources include consolidated revenue and consolidated operating results.
As part of our annual goodwill impairment test, we may elect to first assess qualitative factors to determine whether it is more likely than not that the fair value of our single reporting unit is less than its carrying amount. We assess events or changes in circumstances in totality, including macroeconomic and industry conditions, market and competitive environment, changes in customers or customer mix, cost factors, loss of key personnel, significant changes in legislative environment or other legal factors, changes in the use of our acquired assets, changes in our strategic direction, significant changes in projected future results of operations, changes in the composition or carrying amount of our net assets, and changes in our stock price. Based on our assessment, if we conclude that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then additional impairment testing is not required. Otherwise, if we determine that a quantitative impairment test should be performed, we then evaluate goodwill for impairment by comparing the estimated fair value of the reporting unit with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary. If, however, the fair value of the reporting unit is less than book value, then an impairment charge is recorded for the difference between the reporting unit’s fair value and carrying amount, not to exceed the carrying amount of the goodwill.
During the quarter ended June 30, 2022, we performed a qualitative assessment, which indicated that it was more likely than not that the fair value of goodwill exceeded its net carrying value and, therefore, additional impairment testing was not deemed necessary. We do not amortize goodwill as it has been determined to have an indefinite useful life. The carrying amount of goodwill as of June 30, 2022 and March 31, 2021 was $267,212.
7. Intangible Assets
Our definite-lived intangible assets, other than capitalized software development costs, are summarized as follows:
|
|
|
June 30, 2022 |
|
|
|
|
Customer
Relationships |
|
|
Trade Names |
|
|
Software
Technology |
|
|
Total |
|
|
Gross carrying amount |
|
$ |
39,200 |
|
|
$ |
250 |
|
|
$ |
49,000 |
|
|
$ |
88,450 |
|
|
Accumulated amortization |
|
|
(30,516 |
) |
|
|
(129 |
) |
|
|
(35,988 |
) |
|
|
(66,633 |
) |
|
Net intangible assets |
|
$ |
8,684 |
|
|
$ |
121 |
|
|
$ |
13,012 |
|
|
$ |
21,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2022 |
|
|
|
|
Customer
Relationships |
|
|
Trade Names |
|
|
Software
Technology |
|
|
Total |
|
|
Gross carrying amount |
|
$ |
39,200 |
|
|
$ |
250 |
|
|
$ |
49,000 |
|
|
$ |
88,450 |
|
|
Accumulated amortization |
|
|
(29,824 |
) |
|
|
(116 |
) |
|
|
(34,207 |
) |
|
|
(64,147 |
) |
|
Net intangible assets |
|
$ |
9,376 |
|
|
$ |
134 |
|
|
$ |
14,793 |
|
|
$ |
24,303 |
|
Amortization expense related to customer relationships and trade names recorded as operating expenses in the condensed consolidated statements of net income and comprehensive income was $705 and $881 for the three months ended June 30, 2022 and 2021, respectively. Amortization expense related to software technology recorded as cost of revenue was $1,781 and $2,218 for the three months ended June 30, 2022 and 2021, respectively.
14
The following table summarizes the remaining estimated amortization of definite-lived intangible assets as of June 30, 2022:
|
|
|
Estimated Remaining Amortization Expense |
|
|
|
|
Operating
Expense |
|
|
Cost of
Revenue |
|
|
Total |
|
|
For the year ended March 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
2023 |
|
$ |
2,115 |
|
|
$ |
3,373 |
|
|
$ |
5,488 |
|
|
2024 |
|
|
2,279 |
|
|
|
3,573 |
|
|
|
5,852 |
|
|
2025 |
|
|
1,846 |
|
|
|
3,573 |
|
|
|
5,419 |
|
|
2026 |
|
|
1,377 |
|
|
|
2,251 |
|
|
|
3,628 |
|
|
2027 |
|
|
631 |
|
|
|
242 |
|
|
|
873 |
|
|
2028 and beyond |
|
|
557 |
|
|
|
- |
|
|
|
557 |
|
|
Total |
|
$ |
8,805 |
|
|
$ |
13,012 |
|
|
$ |
21,817 |
|
8. Capitalized Software Costs
Our capitalized software costs are summarized as follows:
|
|
|
June 30, 2022 |
|
|
March 31, 2022 |
|
|
Gross carrying amount |
|
$ |
118,759 |
|
|
$ |
110,155 |
|
|
Accumulated amortization |
|
|
(71,157 |
) |
|
|
(66,197 |
) |
|
Net capitalized software costs |
|
$ |
47,602 |
|
|
$ |
43,958 |
|
Amortization expense related to capitalized software costs was $5,354 and $5,866 for the three months ended June 30, 2022 and 2021, respectively, and is recorded as cost of revenue in the condensed consolidated statements of net income and comprehensive income. During the three months ended, we retired $393 of fully amortized capitalized software costs that are no longer being utilized by our client base.
The following table presents the remaining estimated amortization of capitalized software costs as of June 30, 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 |
|
$ |
20,300 |
|
|
2024 |
|
|
15,900 |
|
|
2025 |
|
|
8,000 |
|
|
2026 |
|
|
3,402 |
|
|
Total |
|
$ |
47,602 |
|
9. Line of Credit
On March 12, 2021, we entered into a $300,000 second amended and restated revolving credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent (in such capacity, the “Administrative Agent”), U.S. Bank National Association and Bank of the West, as co-syndication agents, and certain other agents and lenders. The Credit Agreement replaces our prior $300,000 amended and restated revolving credit agreement, originally entered into on January 4, 2016 and amended on March 29, 2018. 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 also provides us with the ability to obtain up to $150,000 in the aggregate of additional revolving credit commitments and/or term loans thereunder (i.e., in excess of $300,000) upon satisfaction of certain conditions, including receipt of commitments from new or existing lenders to provide such additional revolving credit commitments and/or term loans.
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 3.75x to 4.00x and increase the related adjusted covenant period option (available upon the consummation of certain acquisitions) from 4.25x to 4.75x, in each case, commencing with the reporting period ending June 30, 2022. The First Amendment also makes certain updates to the conditions restricting the making of certain dividends, distributions, and other restricted payments by the Company so that such conditions are based on the our net leverage ratio (as set forth in the Credit Agreement) rather than our total leverage ratio, to increase the dollar cap for such restricted payments that can be made without satisfying leverage conditions from $11,500 to $25,000, and to increase flexibility in cash netting calculations in connection with the making of restricted payments.
15
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. The Credit Agreement is secured by substantially all of our existing and future property and our material domestic subsidiaries. The revolving loans under the Credit Agreement will be available for letters of credit, permitted acquisitions, working capital and general corporate purposes. We were in compliance with all financial and non-financial covenants under the Credit Agreement as of June 30, 2022.
As of June 30, 2022 and March 31, 2022, we had no outstanding loans and $300,000 of unused credit under the Credit Agreement.
Interest expense related to the Credit Agreement was $203 and $190 for the three months ended June 30, 2022 and 2021, respectively. Amortization of deferred debt issuance costs was $127 and $127 for the three months ended June 30, 2022 and 2021, respectively.
10. Composition of Certain Financial Statement Captions
Cash, cash equivalents, and restricted cash are summarized as follows:
|
|
|
June 30, 2022 |
|
|
March 31, 2022 |
|
|
Cash and cash equivalents |
|
$ |
40,361 |
|
|
$ |
59,829 |
|
|
Restricted cash and cash equivalents |
|
|
8,054 |
|
|
|
6,918 |
|
|
Cash, cash equivalents, and restricted cash |
|
$ |
48,415 |
|
|
$ |
66,747 |
|
Prepaid expenses and other current assets are summarized as follows:
|
|
|
June 30, 2022 |
|
|
March 31, 2022 |
|
|
Prepaid expenses |
|
$ |
21,145 |
|
|
$ |
24,229 |
|
|
Capitalized commissions costs |
|
|
11,914 |
|
|
|
11,698 |
|
|
Other current assets |
|
|
952 |
|
|
|
1,175 |
|
|
Prepaid expenses and other current assets |
|
$ |
34,011 |
|
|
$ |
37,102 |
|
Equipment and improvements are summarized as follows:
|
|
|
June 30, 2022 |
|
|
March 31, 2022 |
|
|
Computer equipment |
|
$ |
36,544 |
|
|
$ |
36,293 |
|
|
Internal-use software |
|
|
19,265 |
|
|
|
19,001 |
|
|
Leasehold improvements |
|
|
12,692 |
|
|
|
13,227 |
|
|
Furniture and fixtures |
|
|
8,315 |
|
|
|
9,579 |
|
|
Equipment and improvements, gross |
|
|
76,816 |
|
|
|
78,100 |
|
|
Accumulated depreciation and amortization |
|
|
(68,490 |
) |
|
|
(68,980 |
) |
|
Equipment and improvements, net |
|
$ |
8,326 |
|
|
$ |
9,120 |
|
Other assets are summarized as follows:
|
|
|
June 30, 2022 |
|
|
March 31, 2022 |
|
|
Capitalized commission costs |
|
$ |
21,971 |
|
|
$ |
21,654 |
|
|
Deposits |
|
|
7,049 |
|
|
|
5,793 |
|
|
Debt issuance costs |
|
|
2,179 |
|
|
|
2,006 |
|
|
Other noncurrent assets |
|
|
8,680 |
|
|
|
9,573 |
|
|
Other assets |
|
$ |
39,879 |
|
|
$ |
39,026 |
|
16
Accrued compensation and related benefits are summarized as follows:
|
|
|
June 30, 2022 |
|
|
March 31, 2022 |
|
|
Accrued vacation |
|
$ |
12,376 |
|
|
$ |
11,785 |
|
|
Accrued bonus |
|
|
6,644 |
|
|
|
27,311 |
|
|
Deferred payroll taxes |
|
|
3,806 |
|
|
|
3,817 |
|
|
Accrued commissions |
|
|
2,776 |
|
|
|
5,353 |
|
|
Accrued payroll and other |
|
|
365 |
|
|
|
470 |
|
|
Accrued compensation and related benefits |
|
$ |
25,967 |
|
|
$ |
48,736 |
|
Other current and noncurrent liabilities are summarized as follows:
|
|
|
June 30, 2022 |
|
|
March 31, 2022 |
|
|
Care services liabilities |
|
$ |
8,054 |
|
|
$ |
6,918 |
|
|
Accrued hosting costs |
|
|
6,084 |
|
|
|
12,510 |
|
|
Sales returns reserves and other customer liabilities |
|
|
5,956 |
|
|
|
5,725 |
|
|
Customer credit balances and deposits |
|
|
5,665 |
|
|
|
4,622 |
|
|
Accrued consulting and outside services |
|
|
3,756 |
|
|
|
4,799 |
|
|
Accrued employee benefits and withholdings |
|
|
3,463 |
|
|
|
3,535 |
|
|
Accrued self insurance expense |
|
|
2,485 |
|
|
|
2,208 |
|
|
Accrued outsourcing costs |
|
|
2,391 |
|
|
|
2,264 |
|
|
Accrued EDI expense |
|
|
1,976 |
|
|
|
2,168 |
|
|
Accrued legal expense |
|
|
1,453 |
|
|
|
1,439 |
|
|
Accrued royalties |
|
|
717 |
|
|
|
3,557 |
|
|
Accrued taxes payable |
|
|
478 |
|
|
|
540 |
|
|
Other accrued expenses |
|
|
2,709 |
|
|
|
3,248 |
|
|
Other current liabilities |
|
$ |
45,187 |
|
|
$ |
53,533 |
|
|
|
|
|
|
|
|
|
|
|
|
Uncertain tax positions |
|
$ |
4,189 |
|
|
$ |
4,196 |
|
|
Other liabilities |
|
|
373 |
|
|
|
374 |
|
|
Other noncurrent liabilities |
|
$ |
4,562 |
|
|
$ |
4,570 |
|
11. Income Taxes
The benefit of income taxes was $247 in the three months ended June 30, 2022, reflecting an effective tax rate benefit of 27.4%. The provision for income taxes was $559 in the three months ended June 30, 2021, reflecting an effective tax rate of 16.4%.
The decrease in the effective tax rate for the three months ended June 30, 2022 compared to the prior period was primarily due to the impact of reduced pre-tax book income impact on rate reconciling items and the increased net benefit of discrete items in the current period compared to the prior year, offset by a net decrease of the research and development credit, foreign rate differential benefit, and higher nondeductible officer 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 $6,097 and $6,112 related to various federal, state, and local income tax matters as of June 30, 2022 and March 31, 2022, respectively. If recognized, this amount would reduce our effective tax rate.
We are subject to taxation in federal, various state, Indian, 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 within the next twelve months.
17
12. Earnings per Share
The presentation of “basic” and “diluted” earnings per share is provided below. Share amounts below are in thousands.
|
|
|
Three Months Ended June 30, |
|
|
|
|
2022 |
|
|
2021 |
|
|
Earnings per share — Basic: |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,148 |
|
|
$ |
2,848 |
|
|
Weighted-average shares outstanding — Basic |
|
|
67,588 |
|
|
|
67,175 |
|
|
Net income per common share — Basic |
|
$ |
0.02 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share — Diluted: |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,148 |
|
|
$ |
2,848 |
|
|
Weighted-average shares outstanding |
|
|
67,588 |
|
|
|
67,175 |
|
|
Effect of potentially dilutive securities |
|
|
695 |
|
|
|
624 |
|
|
Weighted-average shares outstanding — Diluted |
|
|
68,283 |
|
|
|
67,799 |
|
|
Net income per common share — Diluted |
|
$ |
0.02 |
|
|
$ |
0.04 |
|
The computation of diluted net income per share does not include 26 and 238 options to acquire shares of common stock for the three months ended June 30, 2022 and June 30, 2021, respectively, because their inclusion would have an anti-dilutive effect on net income per share.
13. Stockholders’ Equity
Equity 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 June 30, 2022, there were 34,100 outstanding options under the 2005 Plan.
In August 2015, our shareholders approved a stock option and incentive plan (the “2015 Plan”) under which 11,500,000 shares of common stock were reserved for the issuance of awards, including incentive stock options and non-qualified stock options, stock appreciation rights, restricted stock awards and restricted stock unit awards, performance stock awards and other share-based awards. In August 2017, our shareholders approved an amendment to the 2015 Plan, to, among other items, increase the number of shares of common stock reserved for issuance thereunder by 6,000,000 shares, which was further amended in August 2019 as approved by our shareholders, to, among other items, increase the number of shares of common stock reserved for issuance thereunder by an additional 3,575,000 shares. In October 2021, our shareholders approved an amendment and restatement of the Company’s 2015 Equity Incentive Plan (the “Amended 2015 Plan”), to, among other items, increase the number of common stock reserved for issuance thereunder by an additional 1,850,000 shares. The Amended 2015 Plan provides that our employees and directors may, at the discretion of the Board or a duly designated compensation committee, be granted certain share-based awards. In the case of option awards granted under the Amended 2015 Plan, the exercise price of each option is determined based on the date of grant and expire no later than 10 years from the date of grant. Awards granted pursuant to the Amended 2015 Plan are subject to the vesting schedule or performance metrics set forth in the agreements pursuant to which they are granted. Upon a change of control of our Company, as such term is defined in the Amended 2015 Plan, awards under the Amended 2015 Plan will fully vest under certain circumstances. As of June 30, 2022, there were 1,332,613 outstanding options, 2,794,093 outstanding shares of restricted stock awards, certain outstanding performance stock unit awards as described further below, and 1,259,395 shares available for future grant under the Amended 2015 Plan.
In September 2021, the Board adopted the 2021 Employment Inducement Equity Incentive Plan (the “Inducement Plan”) and initially reserved 1,500,000 shares of common stock for issuance under the Inducement Plan. The Inducement Plan was adopted by the Board without stockholder approval pursuant to Rule 5635(c)(4) of the Nasdaq Listing Rules. In accordance with Rule 5635(c)(4) of the Nasdaq Listing Rules, awards under the Inducement Plan may only be made to an employee who has not previously been an employee or member of the Board or the Board of Directors or any parent or subsidiary, or following a bona fide period of non-employment by the Company or a parent or subsidiary, if he or she is granted such award in connection with his or her commencement of employment with the Company or a subsidiary and such grant is an inducement material to his or her
18
entering into employment with the Company or such subsidiary. The terms of the Inducement Plan are substantially similar to the terms of our Amended 2015 Plan, with the exception that incentive stock options may not be granted under the Inducement Plan. As of June 30, 2022, there were 1,037,614 outstanding shares of restricted stock awards, 450,000 outstanding performance stock unit awards, and 12,386 shares available for future grant under the Inducement Plan.
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 months ended June 30, 2022 and 2021:
|
|
Three Months Ended June 30, |
|
|
|
|
2022 |
|
|
2021 |
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
Cost of revenue |
$ |
563 |
|
|
$ |
504 |
|
|
|
Research and development costs |
|
1,583 |
|
|
|
1,043 |
|
|
|
Selling, general and administrative |
|
6,620 |
|
|
|
4,865 |
|
|
|
Total share-based compensation |
|
8,766 |
|
|
|
6,412 |
|
|
|
Income tax benefit |
|
(2,045 |
) |
|
|
(1,582 |
) |
|
|
Decrease in net income |
$ |
6,721 |
|
|
$ |
4,830 |
|
|
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 three months ended June 30, 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 |
|
|
1,453,739 |
|
|
$ |
14.80 |
|
|
|
2.9 |
|
|
$ |
8,886 |
|
|
Exercised |
|
|
(85,026 |
) |
|
|
14.64 |
|
|
|
2.1 |
|
|
|
440 |
|
|
Expired |
|
|
(2,000 |
) |
|
|
15.99 |
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2022 |
|
|
1,366,713 |
|
|
$ |
14.81 |
|
|
|
2.7 |
|
|
$ |
3,670 |
|
|
Vested and expected to vest, June 30, 2022 |
|
|
1,364,971 |
|
|
$ |
14.81 |
|
|
|
2.7 |
|
|
$ |
3,667 |
|
|
Exercisable, June 30, 2022 |
|
|
1,355,463 |
|
|
$ |
14.79 |
|
|
|
2.7 |
|
|
$ |
3,655 |
|
Share-based compensation expense related to stock options was $66 and $709 for the three months ended June 30, 2022 and 2021, respectively.
Non-vested stock option award activity during the three months ended June 30, 2022 is summarized as follows:
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
Grant-Date |
|
|
|
|
Number of |
|
|
Fair Value |
|
|
|
|
Shares |
|
|
per Share |
|
|
Outstanding, March 31, 2022 |
|
|
50,382 |
|
|
$ |
6.98 |
|
|
Vested |
|
|
(39,132 |
) |
|
|
6.92 |
|
|
Outstanding, June 30, 2022 |
|
|
11,250 |
|
|
$ |
7.20 |
|
As of June 30, 2022, $17 of total unrecognized compensation costs related to stock options is expected to be recognized over a weighted-average period of 0.2 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 three months ended June 30, 2022 and 2021 was $271 and $800, respectively.
19
Restricted Stock Awards
Restricted stock awards activity during the three months ended June 30, 2022 is summarized as follows:
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
Grant-Date |
|
|
|
|
Number of |
|
|
Fair Value |
|
|
|
|
Shares |
|
|
per Share |
|
|
Outstanding, March 31, 2022 |
|
|
3,242,763 |
|
|
$ |
15.30 |
|
|
Granted |
|
|
1,252,308 |
|
|
|
17.83 |
|
|
Vested |
|
|
(612,365 |
) |
|
|
15.14 |
|
|
Canceled |
|
|
(50,999 |
) |
|
|
16.51 |
|
|
Outstanding, June 30, 2022 |
|
|
3,831,707 |
|
|
$ |
16.13 |
|
Share-based compensation expense related to restricted stock awards was $6,279 and $6,458 for the three months ended June 30, 2022 and 2021, respectively.
The weighted-average grant date fair value for the restricted stock awards was estimated using the market price of the common stock on the date of grant. The fair value of the restricted stock awards is amortized on a straight-line basis over the vesting period, which is generally between one to three years.
As of June 30, 2022, $51,094 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.
The total fair value of restricted stock awards vested as of the vesting dates were $11,091 and $8,670 for the three months ended June 30, 2022 and 2021.
Net Share Settlements
Restricted stock awards 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 that vested during the three months ended June 30, 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 June 30, 2022 and 2021 were 202,512 and 177,318, respectively, and were based on the value of the restricted stock awards on their vesting date as determined by our closing stock price. These net-share settlements had the effect of share repurchases by us as they reduced the number of shares that would have otherwise been issued at the vesting date.
Performance Stock Units and Awards
On October 23, 2018, the Compensation Committee of the Board approved 248,140 performance stock unit awards to be granted to certain executives and non-executive members of the executive leadership team, of which no shares are currently outstanding and no shares were ultimately earned or issued during the performance period. Approximately 34% of the performance stock units were tied to our cumulative 3-year total shareholder return, 33% were tied to our fiscal year 2021 revenue, and 33% were tied to our fiscal year 2021 adjusted earnings per share goals, each as specifically defined in the equity award agreements. The number of shares to be issued was to vary between 50% and 200% of the number of performance stock units depending on performance, and no such shares were to be issued if threshold performance was not achieved. The weighted-average grant date fair value of the awards was $17.84 per share, which was estimated using a Monte Carlo-based valuation model for the awards based on total shareholder return and using a probability-adjusted achievement rate combined with the market price of the common stock on the date of grant for the awards based on revenue and earnings per share targets.
On December 26, 2019 and January 27, 2020, the Compensation Committee of the Board approved a total of 279,587 performance stock unit awards to be granted to certain executives and non-executive members of the executive leadership team, which vest only in the event certain performance goals are achieved and with continuous service through the date the goals are certified. Approximately 80% of the performance stock units are tied to the Company’s fiscal year 2021 revenue goal and 20% are tied to the Company’s fiscal year 2022 revenue goal. Performance stock unit awards funded for fiscal year 2021 and fiscal year 2022 revenue performance will be modified for cumulative 3-year total shareholder return (“TSR”) on the three-year grant anniversary, which is also the cliff vest date. The number of shares to be issued may vary between 42.5% and 172.5% of the number of performance stock units depending on performance, and no such shares will be issued if threshold performance is not achieved. The weighted-average grant date fair value of the awards was $16.02 per share, which was estimated using a Monte Carlo-based valuation model
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for the awards based on total shareholder return and using a probability adjusted achievement rate combined with the market price of the common stock on the date of grant for the awards based on revenue targets.
On October 26, 2020, the Compensation Committee of the Board approved 408,861 performance stock unit awards to be granted to certain executives and non-executive members of the executive leadership team, which vest only in the event certain performance goals are achieved and with continuous service through the date the goals are certified. Approximately 80% of the performance stock units are tied to the Company’s fiscal year 2022 revenue goal and 20% are tied to the Company’s fiscal year 2023 revenue goal. Performance stock unit awards funded for fiscal year 2022 and fiscal year 2023 revenue performance will be modified for cumulative 3-year TSR on the three-year grant date anniversary, which is also the cliff vest date. The number of shares to be issued may vary between 8.5% and 199.5% of the number of target performance stock units depending on performance, and no such shares will be issued if threshold performance is not achieved. The weighted-average grant date fair value of the awards was $16.25 per share, which was estimated using a Monte Carlo-based valuation model for the awards based on total shareholder return and using a probability adjusted achievement rate combined with the market price of the common stock on the date of grant for the awards based on revenue targets.
On September 20, 2021, the Compensation Committee of the Board approved an award of 450,000 performance stock units to be granted to our Chief Executive Officer under the Inducement Plan. The award has a grant date of September 22, 2021 and portions of the award vest upon both the attainment of five separate pre-determined stock price milestones during a five-year performance period and continued service over a period of three years following the grant date. The fair value and derived service period for each share-price milestone tranche was estimated separately using a Monte-Carlo based valuation model. The expense for each 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 $10.52 per share.
On October 26, 2021, the Compensation Committee of the Board approved 476,713 performance stock units to be granted to certain members of the executive leadership team. The awards have a grant date of November 2, 2021 and portions of the award vest upon both the attainment of four separate pre-determined stock price milestones through September 22, 2026 and continued service over a period of three years following the grant date. The fair value and derived service period for each share-price milestone tranche was estimated separately using a Monte-Carlo based valuation model. The expense for each 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 $13.02 per share.
Share-based compensation expense related to the performance stock units and awards was $2,202 for the three months ended June 30, 2022 and a benefit of $957 for three months ended June 30, 2021. The benefit recognized in the prior year period was primarily due to the cancellation of awards associated with the resignation of our former Chief Executive Officer.
As of June 30, 2022, $9,876 of total estimated unrecognized compensation costs related to performance stock units and awards is expected to be recognized over a weighted-average period of 1.9 years. This amount does not include the cost of new performance stock units and awards that may be granted in future periods.
Employee Share Purchase Plan
On August 11, 2014, our shareholders approved an Employee Share Purchase Plan (the “Purchase Plan”) under which 4,000,000 shares of common stock were reserved for future grant. The Purchase Plan allows eligible employees to purchase shares through payroll deductions of up to 15% of total base salary at a price equal to 90% of the lower of the fair market values of the shares as of the beginning or the end of the corresponding offering period. Any shares purchased under the Purchase Plan are subject to a six-month holding period. Employees are limited to purchasing no more than 1,500 shares on any single purchase date and no more than $25 in total fair market value of shares during any one calendar year. As of June 30, 2022, we have issued 942,271 shares under the Purchase Plan and 3,057,729 shares are available for future issuance.
Share-based compensation expense recorded for the employee share purchase plan was $219 and $201 for the three months ended June 30, 2022 and 2021, respectively.
Share Repurchase Program
In October 2021, the Board authorized a share repurchase program under which we may repurchase up to $60,000 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. 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.
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During the three months ended June 30, 2022, we repurchased 147,990 shares of common stock for a total of $2,505 at a weighted-average share repurchase price of approximately $16.93. As of June 30, 2022, $21,621 remained available for share repurchases pursuant to the Company’s share repurchase program.
14. Concentration of Credit Risk
We had cash deposits at United States banks and financial institutions which exceeded federally insured limits at June 30, 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.
15. Commitments, Guarantees and Contingencies
Commitments and Guarantees
Our software license agreements include a performance guarantee that our software products will substantially operate as described in the applicable program documentation for a period of 365 days after delivery. To date, we have not incurred any significant costs associated with our performance guarantee or other related warranties and do not expect to incur significant warranty costs in the future. Therefore, no accrual has been made for potential costs associated with these warranties. Certain arrangements also include performance guarantees related to response time, availability for operational use, and other performance-related guarantees. Certain arrangements also include penalties in the form of maintenance credits should the performance of the software fail to meet the performance guarantees. To date, we have not incurred any significant costs associated with these warranties and do not expect to incur significant warranty costs in the future. Therefore, no accrual has been made for potential costs associated with these warranties.
We historically have accepted sales returns under limited circumstances. We estimate expected sales returns and other forms of variable consideration considering our customary business practice and contract-specific facts and circumstances, and we consider such estimated potential returns as variable consideration when allocating the transaction price to the extent it is probable that there will not be a significant reversal of cumulative revenue recognized.
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”).
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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 judgement 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. Trial commenced on July 6, 2021. 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.
Separately, Hussein has issued an arbitration demand seeking indemnification for the fees he incurred defending against our cross-complaint. Following briefing and a hearing at the liability phase of the arbitration, the arbitrator held that Hussein is entitled to indemnification for “expenses” (as that term is defined in Hussein’s indemnification agreement with NextGen) incurred in defense of NextGen’s cross-complaint against him. The arbitrator reserved all other claims related to costs and damages for a second phase of the arbitration. On June 10, 2021, the arbitrator heard arguments on the quantum of indemnifiable expenses. On September 2, 2021, the arbitrator awarded Hussein indemnification for fees and costs incurred defending the cross-complaint. After trebling the fees incurred pursuant to Hussein’s supplemental agreement with his attorneys, and adding in interest and costs, the arbitrator calculated that the Company owes Mr. Hussein $11,370 in indemnification, which we subsequently paid on September 30, 2021.
Other Regulatory Matters
Commencing in April 2017, we have received requests for documents and information from the United States Attorney's Office for the District of Vermont and other government agencies in connection with an investigation concerning the certification we obtained for our software under the United States Department of Health and Human Services' Electronic Health Record (EHR) Incentive Program. The requests for information relate to, among other things: (a) data used to determine objectives and measures under the Meaningful Use (MU) and the Physician Quality Reporting System (PQRS) programs, (b) 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 request and are engaged in discussions on the status of their investigation, which is still ongoing. Requests and investigations of this nature may lead to future requests for information and ultimately the assertion of claims or the commencement of legal proceedings against us, which themselves may lead to material fines, penalties or other liabilities. In addition, our responses to these and any future requests require time and effort, which can result in additional cost to us. At this time, we are unable to estimate the probability 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.
16. Subsequent Event
On July 26, 2022, we sold certain, non-strategic, dental-related assets in accordance with the terms of the Asset Purchase Agreement, subject to customary close procedures and certain adjustments to the closing cash consideration, which we are in the process of determining.
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