NEXTGEN HEALTHCARE,

NXGN
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NEXTGEN HEALTHCARE : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

06/01/2020 | 04:43pm


Except for the historical information contained herein, the matters discussed in
this management's discussion and analysis of financial condition and results of
operations ("MD&A"), including discussions of our product development plans,
business strategies and market factors influencing our results, may include
forward-looking statements that involve certain risks and uncertainties. Actual
results may differ from those anticipated by us as a result of various factors,
both foreseen and unforeseen, including, but not limited to, the impact of the
COVID-19 pandemic and measures taken in response thereto, as well as our ability
to continue to develop new products and increase systems sales in markets
characterized by rapid technological evolution, consolidation and competition
from larger, better-capitalized competitors. Many other economic, competitive,
governmental and technological factors could affect our ability to achieve our
goals and interested persons are urged to review any risks that may be described
in Item 1A., "Risk Factors" as set forth herein, as well as in our other public
disclosures and filings with the Securities and Exchange Commission ("SEC").

This MD&A is provided as a supplement to the consolidated financial statements
and notes thereto included elsewhere in this Annual Report on Form 10-K
("Report") in order to enhance your understanding of our results of operations
and financial condition and should be read in conjunction with, and is qualified
in its entirety by, the consolidated financial statements and related notes
thereto included elsewhere in this Report. Historical results of operations,
percentage margin fluctuations and any trends that may be inferred from the
discussion below are not necessarily indicative of the operating results for any
future period. For information regarding the year ended March 31, 2018,
including a year-to-year comparison of our financial condition and results of
operations for the years ended March 31, 2019 and March 31, 2018, refer to Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" of our Annual Report on Form 10-K for the year ended March 31, 2019,
filed with the SEC on May 29, 2019.


Company Overview




NextGen Healthcare is a leading provider of software and services that empower
ambulatory healthcare practices to manage the risk and complexity of delivering
care in the rapidly evolving U.S. healthcare system. Our combination of
technological breadth, depth and domain expertise makes us a preferred solution
provider and trusted advisor for our clients. In addition to highly configurable
core clinical and financial capabilities, our portfolio includes tightly
integrated solutions that deliver on ambulatory healthcare imperatives
including: population health, care management, patient outreach, telemedicine
and nationwide clinical information exchange.

We serve clients across all 50 states. Our approximately 100,000 providers
deliver care in nearly every medical specialty in a wide variety of practice
models including accountable care organizations ("ACOs"), independent physician
associations ("IPAs"), managed service organizations ("MSOs"), Veterans Service
Organizations ("VSOs"), and Dental Service Organizations ("DSOs"). Our clients
include some of the largest and most progressive multi-specialty groups in the
country. With the recent addition of behavioral health to our strong medical and
oral health capabilities, we continue to extend our share not only in Federally
Qualified Health Centers ("FQHCs"), but also in the emerging integrated care
market.

NextGen Healthcare has historically enhanced our offering through both organic
and inorganic activities. In October 2015, we divested our former Hospital
Solutions division to focus exclusively on the ambulatory marketplace. In
January 2016, we acquired HealthFusion Holdings, Inc. and its cloud-based
electronic health record and practice management solution. In April 2017, we
acquired Entrada, Inc. and its cloud-based, mobile platform for clinical
documentation and collaboration. In August 2017, we acquired EagleDream Health,
Inc.
and its cloud-based population health analytics solution. In January 2018,
we acquired Inforth Technologies for its specialty-focused clinical content. In
October 2019, we acquired Topaz Information Systems, LLC for its behavioral
health solutions. In December 2019, we acquired Medfusion, Inc. for its Patient
Experience Platform (i.e., patient portal, self-scheduling, and patient pay)
capabilities and OTTO Health, LLC for its integrated virtual care solutions,
notably telemedicine. The integration of these acquired technologies has made
NextGen Healthcare's solutions among the most comprehensive and powerful in the
market.


Our company was incorporated in California in 1974. Previously named Quality
Systems, Inc.
, we changed our corporate name to NextGen Healthcare, Inc. in
September 2018. Our principal offices are located at 18111 Von Karman Ave.,
Suite 800, Irvine, California, 92612, and our principal website is
www.nextgen.com. We operate on a fiscal year ending on March 31.



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Industry Background, Regulatory Environment, and Market Opportunity



We believe that the trends and events described below have contributed to our
consolidated results of operations and may continue to impact our future
results.




Over the last decade, the ambulatory healthcare market has experienced
significant regulatory change, which has driven the need for improved technology
to enable practice transformation. Recognizing it was imperative to digitize the
American health system to stem the escalating cost of healthcare and improve the
quality of care being delivered, Congress enacted the Health Information
Technology for Economic and Clinical Health Act in 2009 ("HITECH Act"). The
legislation stimulated healthcare organizations to not only adopt electronic
health records, but to use them to collect discrete data that could be used to
drive quality care. This standardization supported early pay-for-reporting and
pay-for-performance programs.

In 2010, the Affordable Care Act ("ACA") established the roadmap for shifting
American healthcare from volume (fee-for-service) to a value-based care ("VBC")
system that rewards improved outcomes at lower costs (fee-for-value). This was
followed by the Medicare Access and CHIP Reauthorization Act of 2015 ("MACRA"),
bipartisan legislation that further changed the way Medicare rewards clinicians
for value vs. volume. Initially focused on government-funded care, the domain of
the Centers for Medicare & Medicaid Services ("CMS"), these programs are now
firmly established on the commercial insurance side of the industry as well.

VBC created the need for a new category of healthcare information technology
("HIT") tools that could be used to identify and treat groups of patients, or
cohorts, based on risk. Population Health Management ("PHM") tools support these
needs by identifying patient risk, engaging patients, coordinating care, and
determining when interventions are needed to improve clinical and financial
outcomes. According to estimates from Frost & Sullivan in May 2020, the United
States PHM market is expected to reach $9.4 billion in total revenue by 2022,
representing a compound annual growth rate ("CAGR") of 28% from 2017.

Importantly, the introduction of VBC programs was only an element of the broader
approach to reducing healthcare expenditure. It was also accompanied by
significant reductions in Medicare spending with a projected reduction of $253
billion
in payments by 2029, as reported by RevCycle Intelligence in October
2019
. The drive to reduce costs initially led to consolidation in the healthcare
system that was followed by a significant shift of care from the inpatient to
lower cost outpatient setting. Ambulatory surgery centers (ASCs) have become an
essential component of comprehensive, low cost distributed care. According to an
October 2019 report from ResearchandMarkets, ASCs continue to perform more than
half of all U.S. outpatient surgical procedures and are expected to see greater
volumes as the number of outpatient procedures increases by an estimated 15% by
2028. From 2015 to 2022, the proportion of outpatient cases performed in ASCs is
expected to increase across most service lines with the largest jump (10%) to
occur in spine procedures. Among other factors, consumerism is set to play a
major role in driving ASC volume increases, as procedures performed in ASCs cost
an average of 58% less than the same procedure in a hospital outpatient
department. The need to sustain revenue has made it extremely important for
practices to secure their patient market share, elevating patient loyalty to a
significant determinant of provider success. In addition to being loyal, groups
participating in value-based contracts realized that patients also needed to be
engaged in their care and interested in improving their own health. The need to
attract, retain and engage patients has made patient experience one of the most
important aspects of evolving care delivery in the United States. Capturing
patient market share and thriving in a market driven by VBC requires both an
integrated platform and a full view of the patient population's clinical and
cost data, neither of which could be accomplished without new technologies to
collect and analyze multi-sourced patient data. Effectively implemented, these
new technologies allow organizations to enhance financial viability while
exercising the freedom to join, affiliate, integrate or interoperate in ways
that maximize strategic control.

Although the HITECH Act led to the successful adoption of electronic health
records, many in the healthcare industry were dissatisfied with the level of
exchange of health information between different providers and across different
software platforms. With the passing of the MACRA law in 2015, the U.S. Congress
declared it a national objective to achieve widespread exchange of health
information through interoperable certified EHR technology. Then, in December
2016
, the 21st Century Cures Act ("Cures Act") was passed and signed into law.
Among many other policies, the law includes numerous provisions intended to
encourage nationwide interoperability.

In March 2020, the HHS Office of the National Coordinator for Health Information
Technology
("ONC") released a final regulation which implements the key
interoperability provisions included in the Cures Act. The rule calls on
developers of certified EHRs to adopt standardized application programming
interfaces ("APIs") and to meet a list of other new certification and
maintenance of certification requirements in order to maintain approved federal
government certification status.

The ONC rule also implements the information blocking provisions of the Cures
Act, including identifying reasonable and necessary activities that do not
constitute information blocking. Under the Cures Act, HHS has the regulatory
authority to investigate and assess civil monetary penalties of up to $1,000,000
against certified health IT developers found to be in violation of "information
blocking."

The new regulations will require significant compliance efforts for healthcare
providers, information networks, exchanges, and HIT companies. However, CURES
also creates opportunities for improving care delivery and outcomes through
increased data exchange between providers, and easier patient access to their
own health information. Key to unlocking these benefits is the introduction of
new Fast Healthcare Interoperability Resources ("FHIR") standards. ONC's goal is
for certified HIT companies

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to adopt FHIR-based API standards. Meanwhile, CMS is requiring hospitals to
provide electronic admission, discharge and transfer notification to other
healthcare facilities, providers and designated care team members.




Through the expansion of our NextGen® Share interoperability services platform
and API partner marketplace, we will address the increased demand for moving and
sharing patient data from the EHR easily, quickly and securely. Interoperability
improves patient experience and care coordination, enhances patient safety, and
reduces costs. We are also expanding resources such as educational webinars,
blogs and videos on interoperability to help educate and support healthcare
providers.

In recent years, there has been incremental investment to improve the delivery
of behavioral healthcare. One of the central drivers of this investment has been
the opioid epidemic which claims more than 70,000 lives a year in the United
States
. The integrated care model previously prevalent mainly in FQHCs, a model
which calls for integration of behavioral health and primary care in single care
settings, has also gained momentum. Both behavioral health and the integrated
care workflows require broad, purpose built, tailored HIT capabilities, many of
which are supported by the NextGen platform.


Based on these trends, successful clients must undertake the following
imperatives:




1. Manage patient experience and engagement


2. Align incentives and energize clinicians


3. Maximize and shape financial outcomes


4. Assume risk and drive commercial advantage


5. Optimize workflows with data exchange



Our Strategy



We empower the accelerating transformation of ambulatory care by delivering
solutions that enable groups to be successful under all models of care,
including emerging value-based care in which providers assume risk while
minimizing risk. We primarily serve groups that focus on delivering care in
ambulatory settings, and do so across diverse practice sizes, specialties, and
business constructs. In addition to traditional medical specialties, we
participate actively with groups that deliver oral (dental) and behavioral
healthcare, and with those that combine these in the emerging model for
integrated care.




Our configurability enables groups to drive commercial advantage with creative
workflows for patient access, patient-provider interactions, clinical workflows
and care coordination. At the same time, our automation helps drive variability
and cost out of the back office by accommodating exacting regulatory, billing
and reporting requirements. We embrace both the art and science of delivering
healthcare in the transforming U.S. healthcare system.

We believe that the ability to interoperate in a complex, heterogeneous
healthcare ecosystem is one of the keys to providing great care and healthy
financial outcomes. Because we interoperate with the major stakeholders across
the U.S. healthcare system and power many of the nation's Health Information
Exchanges ("HIEs"), we help keep patient data more secure, promote continuity of
care, lower the cost of care delivery and perhaps most importantly improve the
patient experience.

We recognize that patient experience drives patient engagement and that engaged
patients have better outcomes. Consequently, much of our activity over the last
few years has been informed by the emergence of the patient as an active,
involved consumer. Our solutions help our clients create a holistic,
personalized care experience that drive loyalty and satisfaction.

We surround our technical solutions with implementation and optimization
services and provide business process outsourcing with managed hosting and
revenue cycle management services. With some of our most sophisticated clients,
we have been asked to share the breadth of our experience as they shape their
strategies. We believe that this sort of engagement, acting as a virtual
extension of our clients' leadership teams, is an important step along our
journey to becoming a trusted advisor.


As one of the leading healthcare information technology players in the U.S.
ambulatory marketplace, we plan to continue investing in our current
capabilities as well as building and/or acquiring new capabilities as we guide
our clients through the market's transformation. We expect to continue to
empower the transformation of care through the following strategic priorities:




• Be a learning organization and transform ahead of the industry


• Be a trusted advisor for our customers and prospects


• Deliver breadth, depth and configurability to enable our clients to
effectively execute their strategies



• Use automation to drive variability and cost from our clients' operations



• Drive real innovation in patient experience and patient-provider interactions



• Help our clients be recognized as interoperability leaders in their regions



and areas of specialty



• Integrate new capabilities (whether organic or inorganic) more quickly and



successfully than others.


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COVID-19 Update

In late 2019, the emergence of a novel coronavirus, or COVID-19, was reported
and in January 2020, the World Health Organization ("WHO"), declared it a Public
Health Emergency of International Concern. In March 2020, the WHO escalated
COVID-19 as a pandemic. We proactively responded to the pandemic by creating an
executive task force to monitor the COVID-19 situation daily and immediately
restricted non-essential travel and migrated to a fully remote workforce while
maintaining complete operational effectiveness. Shortly thereafter, and in line
with guidance provided by government agencies and international organizations,
we restricted all travel, mandated a work-from-home policy across our global
workforce, and moved all in-person client-facing events to virtual ones.

According to Johns Hopkins University, as of May 29, 2020, more than 5.9 million
cases of COVID-19 have been reported in over 188 countries with more than
364,000 deaths. In addition to the socioeconomic disruption caused by the
pandemic, both treatment and suppression measures stressed the very fabric of
the U.S. healthcare system in some geographies, exacerbating some of the
existing challenges with capacity, balance and reimbursement. Among the measures
to slow the spread of the disease and flatten the curve in line with healthcare
system capacity was social/physical distancing. The need to access care while
still social distancing was addressed early on with the limited use of virtual
visits and was energized when the federal government reduced regulatory barriers
and addressed payment parity between virtual and in-person visits. With these
tailwinds, telemedicine quickly became regarded as a safer way for patients and
providers to engage each other while also relieving economic pressure on the
medical practice. We believe that the uptake of telemedicine will transcend
COVID-19 and that virtual visits will become a permanent and important change in
the way care is delivered. Keeping patients out of the transit system, out of
the waiting room and away from other sick patients is simply good medicine.

We also believe that ambulatory practices will emerge from the pandemic with a
clearer appreciation of the importance of business continuity and will turn to
NextGen more often for managed services. Consequently, we expect to see
increased subscription of our revenue cycle management services, managed
hosting, and our emerging capabilities for managed clinical and administrative
services.

Since the mid-March 2020 timing of government orders to shelter in place and
restrict non-essential medical services, the COVID-19 pandemic has caused
declines in patient volume. This has negatively impacted our revenue in the
fourth quarter of 2020, most notably for purchases of software and hardware. The
impact of the disruption will continue to heavily impact the first half of
fiscal 2021 primarily in managed services and EDI, which are volume driven, and
purchases of software and hardware due to client management being focused on
business continuity. Assuming the impact of the pandemic and related restrictive
measures begin to subside late in the fiscal first half, we expect that patient
volume and thus revenue will likely return to more normal levels throughout late
fiscal 2021. Based on our overall financial health and the opportunity in front
of us, we have made some important decisions on how to approach the first two
quarters of fiscal 2021, which include executing cost reductions with a primary
goal of mitigating COVID-19 based impacts to earnings. Most of these cost
reductions are temporary as we believe that preserving our employee base,
organizational momentum, and robust capabilities for the near future will be a
win for the Company and our shareholders. The net effect of the aforementioned
actions will result in earnings being down markedly and negative free cash flow
(calculated as net cash provided by operating activities, less net of cash used
for the additions of capitalized software costs and equipment and improvements)
in the first half of the fiscal year. We believe we will be well positioned to
weather the initial storm and increase earnings, revenue, and opportunity as
volume begins to return in the second half of the year.

The broader implications of the global emergence of COVID-19 on our business,
operating results, and overall financial performance remain uncertain and it
depends on certain developments, including the duration and spread of the
outbreak, impact on our clients and our sales cycles, impact on our partners or
employees, and impact on the economic environment and financial markets, all of
which are uncertain and cannot be predicted. We are conducting business as usual
with certain modifications to employee travel, employee work locations, and
marketing events, among other modifications. We have observed other companies
taking precautionary and preemptive actions to address COVID-19, and the effects
it has had and is expected to have on business and the economy. We expect that
our customers and potential customers will take actions to reduce operating
expenses and moderate cash flows, including by delaying sales and requesting
extended billing and payment terms. We will continue to actively monitor the
situation and may take further actions that we determine are in the best
interests of our employees, customers, partners, suppliers, and shareholders.

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Results of Operations

The following table sets forth the percentage of revenue represented by each
item in our consolidated statements of net income and comprehensive income for
the years ended March 31, 2020 and 2019 (certain percentages below may not sum
due to rounding):



Fiscal Year Ended March 31,
2020 2019
Revenues:
Recurring 90.6 % 89.6 %
Software, hardware, and other non-recurring 9.4 10.4
Total revenues 100.0 100.0
Cost of revenue:
Recurring 38.0 36.2
Software, hardware, and other non-recurring 5.0


5.0



Amortization of capitalized software costs and
acquired intangible assets 6.6 5.4
Total cost of revenue 49.5 46.6
Gross profit 50.5 53.4
Operating expenses:
Selling, general and administrative 30.6


31.2



Research and development costs, net 15.4


15.3



Amortization of acquired intangible assets 0.8 0.8
Impairment of assets 2.3 0.0
Restructuring costs 0.5 0.1
Total operating expenses 49.5 47.4
Income from operations 0.9 6.0
Interest income 0.0 0.0
Interest expense (0.4 ) (0.5 )
Other income, net 0.2 0.1
Income before provision for (benefit of) income taxes 0.8


5.5



Provision for (benefit of) income taxes (0.6 ) 0.9
Net income 1.4 % 4.6 %


Revenues



The following table presents our consolidated revenues for the years ended March
31, 2020
and 2019 (in thousands):






Fiscal Year Ended March 31,
2020 2019
Recurring revenues:
Subscription services $ 127,602 $ 117,502
Support and maintenance 158,619 160,798
Managed services 104,549 98,203
Electronic data interchange and data services 98,543 97,418
Total recurring revenues 489,313 473,921


Software, hardware, and other non-recurring revenues:
Software license and hardware


27,270 35,122
Other non-recurring services 23,656 20,130
Total software, hardware and other non-recurring revenues 50,926 55,252

Total revenues $ 540,239 $ 529,173

Recurring revenues as a percentage of total revenues 90.6 % 89.6 %





We generate revenue from sales of licensing rights and subscriptions to our
software solutions, hardware and third-party software products, support and
maintenance, managed services, electronic data interchange ("EDI") and data
services, and other non-recurring services, including implementation, training,
and consulting services performed for clients who use our products.



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Consolidated revenue for the year ended March 31, 2020 increased $11.1 million
compared to the prior year due to a $15.4 million increase in recurring
revenues, partially offset by a $4.3 million decrease in software, hardware and
other non-recurring revenues. The increase in recurring revenues was primarily
due to $10.1 million higher subscription services driven by incremental revenue
related to our acquisitions of Topaz and Medfusion and growth in subscriptions
associated with our population health and analytics, core NextGen, and NextGen
Office cloud-based solutions, $6.3 million higher managed services revenue
related to recent growth in RCM and managed cloud services bookings and
incremental patient pay services related to the Medfusion acquisition, and $1.1
million
higher EDI and data services associated with growth in EDI transaction
volume from the addition of new clients and further penetration of our existing
client base, for which growth in revenue was partially muted by incremental
revenues recognized in the prior year from the sales of certain clinical data.
The increase in recurring revenues was partially offset by $2.2 million lower
support and maintenance revenue from client attrition. The decrease in software,
hardware, and other non-recurring revenues was primarily due to a $7.9 million
decline in software license and hardware revenue from lower software bookings,
including the impact from COVID-19 in our fiscal fourth quarter, partially
offset by a $3.5 million increase in professional services.

Bookings reflect the estimated annual value of our executed contracts, which we
believe may provide a broad indicator of the general direction and progress of
the business. Total bookings on a comparable basis, adjusted to include the
effect of pre-acquisition bookings, were $130.9 million for the year ended March
31, 2020
compared to $135.6 million in the prior year, primarily reflecting a
decline in software bookings, partially offset by higher bookings of
subscriptions and EDI services. Total bookings for the year ended March 31, 2018
were $120.5 million. In May 2020, we also announced a move to reduce our
perpetual license revenue in favor of recurring subscription revenue.


Cost of Revenue and Gross Profit



The following table presents our consolidated cost of revenue and gross profit
for the years ended March 31, 2020 and 2019 (in thousands):






Fiscal Year Ended March 31,
2020 2019
Cost of revenue:
Recurring $ 205,057 $ 191,496
Software, hardware, and other non-recurring 26,904


26,711



Amortization of capitalized software costs and
acquired intangible assets 35,478 28,490
Total cost of revenue $ 267,439 $ 246,697

Gross profit $ 272,800 $ 282,476
Gross margin % 50.5 % 53.4 %




Cost of revenue consists primarily of compensation expense, including
share-based compensation, for personnel that deliver our products and services.
Cost of revenue also includes amortization of capitalized software costs and
acquired technology, third party consultant and outsourcing costs, costs
associated with our EDI business partners and clearinghouses, hosting service
costs, third party software costs and royalties, and other costs directly
associated with delivering our products and services. Refer to Note 8,
"Intangible Assets" and Note 9, "Capitalized Software Costs" of our notes to
consolidated financial statements included elsewhere in this Report for
additional information on current period amortization of capitalized software
costs and acquired technology and an estimate of future expected amortization.
As noted above, we announced in May 2020 a move to reduce our perpetual license
revenue in favor of recurring subscription revenue, which will impact our gross
margin percentages as we will book less high-margin perpetual licenses than we
have historically, but ultimately it will produce high-margin recurring revenue.
When combined with incremental amortization of capitalized software costs and
acquired intangible assets, it will further reduce our expected gross margin
percentage.


Share-based compensation expense included in cost of revenue was $2.1 million
and $1.3 million for the years ended March 31, 2020 and 2019, respectively.




Gross profit for the year ended March 31, 2020 decreased $9.7 million compared
to the prior year and gross margin percentage decreased to 50.5% for the year
ended March 31, 2020 compared to 53.4% in the prior year period. The declines in
gross profit and gross margin were primarily attributable to a decline in higher
margin software license revenue as noted above, combined with $7.0 million
higher amortization of previously capitalized software development costs and
higher amortization of software technology intangible assets associated with the
recent acquisitions of Medfusion, OTTO, Topaz, Inforth, EagleDream, and Entrada,
partially offset by higher recurring revenues.

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Selling, General and Administrative Expense




The following table presents our consolidated selling, general and
administrative expense for the years ended March 31, 2020 and 2019 (in
thousands):



Fiscal Year Ended March 31,
2020 2019
Selling, general and administrative $ 165,174 $ 164,879
Selling, general and administrative, as a percentage
of revenue 30.6 % 31.2 %




Selling, general and administrative expense consist of compensation expense,
including share-based compensation, for management and administrative personnel,
selling and marketing expense, facilities costs, depreciation, professional
service fees, including legal and accounting services, legal settlements,
acquisition and transaction-related costs, and other general corporate and
administrative expenses.

Share-based compensation expense included in selling, general and administrative
expenses was $13.8 million and $11.9 million for the years ended March 31, 2020
and 2019, respectively. The increase in share-based compensation expense for the
year ended March 31, 2020 compared to the prior years is due to increased
utilization of share-based awards to incentivize our executives and employees.
Refer to Note 14, "Share-Based Awards" of our notes to consolidated financial
statements included elsewhere in this Report for additional information on
equity award grants.

Selling, general and administrative expenses increased $0.3 million for the year
ended March 31, 2020 compared to the prior year primarily due to lower bad debt
and depreciation expense, lower payroll costs associated with our restructuring
plans, and lower spend related to conferences, travel, marketing, and
communications, offset by the impact of a $5.7 million net benefit recorded in
the prior year from insurance recoveries related to the settlement of the
Federal Securities Class Action complaint and higher share-based compensation
expenses noted above.


Research and Development Costs, net



The following table presents our consolidated net research and development
costs, capitalized software costs, and gross expenditures prior to
capitalization, for the years ended March 31, 2020 and 2019 (in thousands):






Fiscal Year Ended March 31,
2020 2019
Gross expenditures $ 102,727 $ 101,565
Capitalized software costs (19,432 ) (20,571 )
Research and development costs, net $ 83,295


$ 80,994



Research and development costs, as a percentage of
revenue


15.4 % 15.3 %
Capitalized software costs as a percentage of gross
expenditures 18.9 % 20.3 %




Gross research and development expenditures, including costs expensed and costs
capitalized, consist of compensation expense, including share-based compensation
for research and development personnel, certain third-party consultant fees,
software maintenance costs, and other costs related to new product development
and enhancement to our existing products.

The healthcare information systems and services industry is characterized by
rapid technological change, requiring us to engage in continuing investments in
our research and development to update, enhance and improve our systems. This
includes expansion of our software and service offerings that support
pay-for-performance initiatives around accountable care organizations, bringing
greater ease of use and intuitiveness to our software products, enhancing our
managed cloud and hosting services to lower our clients' total cost of
ownership, expanding our interoperability and enterprise analytics capabilities,
and furthering development and enhancements of our portfolio of
specialty-focused templates within our electronic health records software.

The capitalization of software development costs results in a reduction to our
reported net research and development costs. Our software capitalization rate,
or capitalized software costs as a percentage of gross expenditures, has varied
historically and may continue to vary based on the nature and status of specific
projects and initiatives in progress. Although changes in software
capitalization rates have no impact on our overall cash flows, it results in
fluctuations in the amount of software development costs being expensed up front
and the amount of net research and development costs reported in our
consolidated statement of net income and comprehensive income.


Share-based compensation expense included in research and development costs was
$3.9 million and $2.9 million for the years ended March 31, 2020 and 2019,
respectively.




Net research and development costs for the year ended March 31, 2020 increased
$2.3 million compared to the prior year due to a $1.2 million increase in our
gross expenditures and $1.1 million lower capitalization of software costs. The
increase in gross expenditures is primarily the result of incremental costs
incurred for the development of the next versions of our software solutions and
enhancements to our existing solutions, including increased hosting fees, higher
utilization of our Bangalore

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development center resources, and increased share-based compensation expense,
partially offset by lower consulting and outside services costs and lower
US-based payroll costs due to reductions in our headcount.




Our software capitalization rate fluctuates due to differences in the nature and
status of our projects and initiatives during a given year, which affects the
amount of development costs that may be capitalized and ultimately also affects
the future amortization of our previously capitalized software development
costs.


Amortization of Acquired Intangible Assets



The following table presents our amortization of acquired intangible assets for
the years ended March 31, 2020 and 2019 (in thousands):






Fiscal Year Ended March 31,
2020
2019


Amortization of acquired intangible assets $ 4,143 $ 4,344







Amortization of acquired intangible assets included in operating expense consist
of the amortization related to our customer relationships and trade names
intangible assets acquired as part of our business combinations. Refer to Note
8, "Intangible Assets" of our notes to consolidated financial statements
included elsewhere in this Report for an estimate of future expected
amortization.

Amortization of acquired intangible assets for the year ended March 31, 2020
decreased $0.2 million, compared to the prior year period due to certain
acquired intangible assets becoming fully amortized, partially offset by
additional amortization of the customer relationships and trade names intangible
assets acquired from Medfusion.


Impairment of Assets




During the year ended March 31, 2020, we recorded impairments of $9.4 million to
our operating right-of-use assets and certain related fixed assets associated
with the vacated locations, or portions thereof, in North Canton, San Diego,
Horsham, St. Louis, Irvine, Atlanta, Brentwood, and Phoenix, in connection with
our restructuring plans, based on projected sublease rental income and estimated
sublease commencement dates. We are actively marketing each of these vacated
locations for sublease. The impairment analysis was performed at the asset group
level and the impairment charge was estimated by comparing the fair value of
each asset group based on the expected cash flows to its respective book value.
We determined the discount rate for each asset group based on the approximate
interest rate on a collateralized basis with similar remaining terms and
payments as of the impairment date. Significant judgment was required to
estimate the fair value of each asset group and actual results could vary from
the estimates, resulting in potential future adjustments to amounts previously
recorded.


During the year ended March 31, 2020, we also recorded $3.2 million of
impairments related to the write down of previously capitalized software
development costs for certain technology that will no longer be utilized in any
future software solutions.




Restructuring Costs

In June 2019, we implemented a business restructuring plan as part of our
continued efforts to preserve and grow the value of the Company through
client-focused innovations while reducing our cost structure. As part of the
restructuring, we reduced our total workforce by approximately 4% primarily
within the research and development function and intend to expand on our
research and development resources in India. We recorded $2.5 million of
restructuring costs in the year ended March 31, 2020 within operating expenses
in our consolidated statements of comprehensive income. The restructuring costs
consisted primarily of payroll-related costs, such as severance, outplacement
costs, and continuing healthcare coverage, associated with the involuntary
separation of employees pursuant to a one-time benefit arrangement.

During the year ended March 31, 2019, we recorded $0.6 million of restructuring
costs related to adjustments to the estimated fair value of remaining lease
obligations for vacated properties associated with our prior restructuring plan.
The restructuring costs were comprised of facilities-related costs associated
with accruals for the remaining lease obligations at certain locations,
including Solana Beach, Costa Mesa, and a portion of Horsham with contractual
lease terms ending between January 2018 and September 2023. We estimated the
remaining lease obligations at fair value as of the cease-use date for each
location based on the future contractual lease obligations, reduced by projected
sublease rentals that could be reasonably obtained for the locations after a
period of marketing, and adjusted for the effect deferred rents that have been
recognized under the lease. The effect of discounting future cash flows using a
credit-adjusted risk free rate was not significant. Sublease income and
commencement dates were estimated based on data available from rental activity
in the local markets. As of March 31, 2019, the remaining lease obligation, net
of estimated projected sublease rentals, was $1.8 million.

Refer to Note 5, "Leases," of our notes to consolidated financial statements
included elsewhere in this Report for estimated timing of payments related to
remaining lease obligations.

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Interest Expense



The following table presents our interest expense for the years ended March 31,
2020
and 2019 (in thousands):






Fiscal Year Ended March 31,
2020 2019
Interest income $ 256 $ 216
Interest expense (1,955 ) (2,814 )
Other income, net 846 267




Interest expense relates to our revolving credit agreement and the related
amortization of deferred debt issuance costs. Refer to Note 10, "Line of Credit"
of our notes to consolidated financial statements included elsewhere in this
Report for additional information.

Interest expense for the year ended March 31, 2020 decreased $0.9 million
compared to the prior year. The changes in interest expense is primarily caused
by fluctuations in outstanding balances under our revolving credit agreement and
the related amortization of debt issuance costs. As of March 31, 2020, we had
$129.0 million in outstanding loans under the revolving credit agreement.

Other income for the year ended March 31, 2020 increased $0.6 million compared
to the prior year, which was primarily associated with fluctuations in the India
foreign exchange rates.


Provision for (Benefit of) Income Taxes



The following table presents our provision for (benefit of) income taxes for the
years ended March 31, 2020 and 2019 (in thousands):






Fiscal Year Ended March 31,
2020
2019


Provision for (benefit of) income taxes $ (3,239 ) $ 4,794
Effective tax rate


-76.1 % 16.4 %




The change in the effective tax rate for the year ended March 31, 2020 compared
to the prior year period was driven primarily by a decrease in pretax income for
the current year. The effective tax rate for the year ended March 31, 2020 also
benefitted from a release of uncertain tax position reserves on prior year tax
settlements, certain return to provision adjustments, and state income taxes,
which was partially offset by nondeductible expenses for the year ended March
31, 2020
.

The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), signed
into law on March 27, 2020, has resulted in significant changes to the U.S.
federal corporate tax law. Additionally, several state and foreign jurisdictions
have enacted additional legislation and or comply with federal changes. As the
enactment dates of this law was prior to the end of our reporting period, we
have considered the applicable tax law changes in our current and deferred
income tax expense as of March 31, 2020. We will continue analyzing the
applications of the CARES Act and include the material impact to future income
tax provisions, if applicable.


Net Income



The following table presents our net income (in thousands) and net income per
share and for the years ended March 31, 2020 and 2019:






Fiscal Year Ended March 31,
2020 2019
Net income $ 7,498 $ 24,494
Net income per share:
Basic $ 0.11 $ 0.38
Diluted $ 0.11 $ 0.38




As a result of the foregoing changes in revenue and expense, net income for the
fiscal year ended March 31, 2020 decreased $17.0 million compared to the prior
year period.

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Liquidity and Capital Resources



The following table presents selected financial statistics and information for
the years ended March 31, 2020 and 2019 (in thousands):






Fiscal Year Ended March 31,
2020 2019
Cash and cash equivalents $ 138,012 $ 33,079
Unused portion of revolving credit agreement (1) 171,000 289,000
Total liquidity $ 309,012 $ 322,079

Net income $ 7,498 $ 24,494
Net cash provided by operating activities $ 85,601 $ 50,475





(1) As of March 31, 2020, we had outstanding borrowings of $129.0 million under



our $300.0 million revolving credit agreement.



Our outstanding borrowings under our revolving credit agreement was $129.0
million
as of March 31, 2020 compared to $11.0 million as of March 31, 2019.



Our principal sources of liquidity are our cash generated from operations,
driven mostly by our net income and working capital management, our cash and
cash equivalents, and our revolving credit agreement.




We believe that our cash and cash equivalents on hand at March 31, 2020,
together with our cash flows from operating activities and liquidity provided by
our revolving credit agreement, will be sufficient to meet our working capital
and capital expenditure requirements for the next twelve months. Due to the
ongoing uncertainties of the impact of the COVID-19 pandemic on the industry in
which we operate, we proactively implemented certain precautionary measures,
including cost containment and strengthening our cash position by increasing the
outstanding borrowings under our revolving credit agreement during the year
ended March 31, 2020 and borrowing an additional $50.0 million in April 2020.
The impact of COVID-19 is rapidly evolving and widespread, and therefore, it is
not possible to fully identify, measure, and predict the various impacts that
COVID-19 may have on our financial condition, results of operations, cash flows,
and liquidity requirements. We will continue to assess the potential effects of
the COVID-19 pandemic on our business and actively manage our response
accordingly.


Cash and Cash Equivalents



As of March 31, 2020, our cash and cash equivalents balance of $138.0 million
compares to $33.1 million as of March 31, 2019.




We may continue to use a portion of our funds as well as available financing
from our revolving credit agreement for future acquisitions or other similar
business activities, although the specific timing and amount of funds to be used
is not currently determinable. We intend to expend some of our available funds
for the development of products complementary to our existing product line as
well as new versions of certain of our products. These developments are intended
to take advantage of more powerful technologies and to increase the integration
of our products.

Our investment policy is determined by our Board of Directors. Excess cash, if
any, may be invested in very liquid short term assets including tax exempt and
taxable money market funds, certificates of deposit and short term municipal
bonds with average maturities of 365 days or less at the time of purchase. Our
Board of Directors continues to review alternate uses for our cash including an
expansion of our investment policy and other items. Any or all of these programs
could significantly impact our investment income in future periods.


Cash Flows from Operating Activities



The following table summarizes our consolidated statements of cash flows for the
years ended March 31, 2020 and 2019 (in thousands):






Fiscal Year Ended March 31,
2020 2019
Net income $ 7,498 $ 24,494
Non-cash expenses 85,902 66,662
Cash from net income, as adjusted $ 93,400 $


91,156



Change in contract assets and liabilities, net 1,325 (4,943 )
Change in accounts receivable 4,937 (6,178 )
Change in other assets and liabilities (14,061 ) (29,560 )
Net cash provided by operating activities $ 85,601 $ 50,475




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For the year ended March 31, 2020, cash provided by operating activities
increased $35.1 million compared to the prior year, consisting of $15.5 million
increase from net changes in other assets and liabilities, $17.4 million
increase from net changes in accounts receivable and contract balances, and $2.2
million
increase from higher net income, as adjusted for non-cash expenses. Cash
from operating activities benefited from changes in other assets and liabilities
due to payments in the prior year related to the $19.0 million settlement of the
Federal Securities Class Action complaint, which was partially offset by the
impact of operating lease liabilities from the adoption of ASC 842 (refer to
Note 5, "Leases" of our notes to consolidated financial statements included
elsewhere in this Report for additional information) and net decreases in cash
from changes in income taxes receivable and payable. Net changes to accounts
receivable and contract balances resulted in a benefit to cash from operating
activities as we continue to focus our efforts on collections and resolution of
aged balances. Non-cash expenses increased primarily due to higher amortization
of operating lease assets, higher amortization of previously capitalized
software costs, impairment charges related to our vacated lease locations and
capitalized software costs, as described above, higher share-based compensation
expenses, and changes in deferred taxes, while net income for the year ended
March 31, 2020 decreased $17.0 million compared to the prior year, as described
above.


Cash Flows from Investing Activities




Net cash used in investing activities for the years ended March 31, 2020 and
2019 was $96.1 million and $25.5 million, respectively. The $70.6 million net
increase in cash used in investing activities compared to the prior year is
primarily due to cash payments for our acquisitions of Topaz, Medfusion and
OTTO, net of cash acquired, of $71.7 million and $2.5 million higher additions
to equipment and improvements, offset by $2.5 million of proceeds from
over-funded corporate-owned life insurance policies and $1.1 million lower
capitalization of software development costs.


Cash Flows from Financing Activities




Net cash provided by financing activities for the year ended March 31, 2020 was
$116.3 million compared to net cash used in financing activities of $21.6
million
in the prior year. The increase in cash from financing activities is due
to $118.0 million of net borrowings against our revolving credit facility,
comprised of $137.0 million of additional borrowings and $19.0 million of
principal repayments and $2.4 million of net proceeds from the issuance of
shares under employee plans, partially offset by $4.1 million of payments for
taxes related to net share settlement of equity awards. In comparison, during
the prior year, net payments on our revolving credit facility were $26.0
million
, consisting of $52.0 million of principal repayments and $26.0 million
of additional borrowings and $3.2 million of payments for taxes related to net
share settlement of equity awards, partially offset by $7.5 million of net
proceeds from the issuance of shares under employee plans.


Contractual Obligations



As of March 31, 2020, we had minimum purchase commitments of $17.3 million
related to payments due under certain non-cancelable agreements to purchase
goods and services.




The following table summarizes our other significant contractual obligations at
March 31, 2020 and the effect that such obligations are expected to have on our
liquidity and cash in future periods (in thousands):



For the year ended March 31,
2026 and
Contractual Obligations Total 2021 2022 2023 2024 2025 beyond
Operating lease
obligations $ 43,017 $ 9,408 $ 9,186 $ 9,248 $ 7,955 $ 5,948 $ 1,272
Remaining lease
obligations for vacated
properties (1) 11,898 3,182 2,935 2,255 1,677 1,337 512
Line of credit
obligations (Note 10) 129,000 - - 129,000 - - -
Total $ 183,915 $ 12,590 $ 12,121 $ 140,503 $ 9,632 $ 7,285 $ 1,784





(1) Remaining lease obligations for vacated properties relates to remaining lease



obligations at certain locations, including Brentwood, Solana Beach, North



Canton, Phoenix and portions of Atlanta, Irvine, Horsham, San Diego and St.



Louis, that we have vacated and are actively marketing the locations for



sublease as part of our reorganization efforts. Refer to Note 16,



"Restructuring Plan" of our notes to consolidated financial statements



included elsewhere in this Report for additional information. Total



obligations have not been reduced by projected sublease rentals or by minimum



sublease rentals of $0.9 million due in future periods under non-cancelable



subleases.





The deferred compensation liability as of March 31, 2020 was $5.3 million, which
is not included in the table above as the timing of future benefit payments to
employees is not determinable.


The uncertain tax position liability as of March 31, 2020 was $4.2 million,
which is not included in the table above as the timing of expected payments is
not determinable.




New Accounting Pronouncements


Refer to Note 2, "Summary of Significant Accounting Policies" of our notes to
consolidated financial statements included elsewhere in this Report for a
discussion of new accounting standards.



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Critical Accounting Policies and Estimates




The discussion and analysis of our consolidated financial statements and results
of operations is based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America
("GAAP"). The preparation of these consolidated
financial statements requires us to make estimates and judgments that affect our
reported amounts of assets, liabilities, revenue and expenses, and related
disclosures. We base our assumptions, estimates and judgments on historical
experience, current trends, and other factors we believe to be reasonable under
the circumstances, and we evaluate these estimates on an ongoing basis. On a
regular basis, we review the accounting policies and update our assumptions,
estimates, and judgments, as needed, to ensure that our consolidated financial
statements are presented fairly and in accordance with GAAP. Actual results
could differ materially from our estimates under different assumptions or
conditions. To the extent that there are material differences between our
estimates and actual results, our financial condition or results of operations
will be affected.

Our significant accounting policies, as described in Note 2, "Summary of
Significant Accounting Policies" of our notes to consolidated financial
statements included elsewhere in this Report, should be read in conjunction with
management's discussion and analysis of financial condition and results of
operations. We believe that the following accounting policies are the most
critical to aid in fully understanding and evaluating our reported financial
results because application of such policies require significant judgment
regarding the effects of matters that are inherently uncertain and that affect
our consolidated financial statements.


Revenue Recognition




Application of the revenue recognition guidance requires a significant amount of
judgments and estimates, which may impact the amount and timing of revenue
recognition and related disclosures. Refer to Note 3, "Revenue from Contracts
with Customers" of our notes to consolidated financial statements included
elsewhere in this Report for additional information regarding our revenue
recognition policies, significant judgements, and estimates.


Software Development Costs




Software development costs, consisting primarily of employee salaries and
benefits and certain third party costs, incurred in the development of new
software solutions and enhancements to existing software solutions for external
sale are expensed as incurred, and reported as net research and development
costs in the consolidated statements of net income and comprehensive income,
until technological feasibility has been established. After technological
feasibility is established, any additional software development costs are
capitalized. Amortization of capitalized software is recorded on straight-line
basis over the estimated economic life of the related product, which is
typically three years. The total of capitalized software costs incurred in the
development of products for external sale are reported as capitalized software
costs within our consolidated balance sheets.

We also incur costs related to the development of software applications for our
internal-use and for the development of software-as-a-service ("SaaS") based
solutions sold to our clients. The development costs of our SaaS-based solutions
are considered internal-use for accounting purposes. Our internal-use
capitalized development costs are stated at cost and amortized on a
straight-line basis over the estimated useful lives of the assets, which is
typically three years. Application development stage costs generally include
costs associated with internal-use software configuration, coding, installation
and testing. Costs related to the preliminary project stage and
post-implementation activities are expensed as incurred. Costs of significant
upgrades and enhancements that result in additional functionality are also
capitalized, whereas costs incurred for maintenance and minor upgrades and
enhancements are expensed as incurred. Capitalized software costs for the
development of SaaS-based solutions are reported as capitalized software costs
within our consolidated balance sheets and capitalized software costs for the
development of our internal-use software applications are reported as equipment
and improvements within our consolidated balance sheets.

We periodically reassess the estimated economic life and the recoverability of
our capitalized software costs. If we determine that capitalized amounts are not
recoverable based on the expected net cash flows to be generated from sales of
the applicable software solutions, the amount by which the unamortized
capitalized costs exceed the net realizable value is written off as a charge to
earnings. The net realizable value is the estimated as the expected future gross
revenues from that product reduced by the estimated future costs of completing
and disposing of that product, including the costs of performing maintenance and
client support required to satisfy our responsibility at the time of sale. In
addition to the assessment of net realizable value, we review and adjust the
remaining estimated lives of our capitalized software costs, if necessary. We
also perform a periodic review of our software solutions and dispose of fully
amortized capitalized software costs after such products are determined to be no
longer used by our clients.


Although we currently believe that our approach to estimates and judgments as
described herein is reasonable, actual results could differ and we may be
exposed to increases or decreases in revenue that could be material.



Business Combinations




During the year ended March 31, 2020, we completed the acquisitions of Topaz,
Medfusion, and OTTO, and during the year ended March 31, 2018, we completed the
acquisitions of Entrada, EagleDream and Inforth. We accounted for the
acquisitions as purchase business combinations using the acquisition method of
accounting.

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In accordance with the acquisition method of accounting for business
combinations, we allocated the purchase price of acquired businesses to the
tangible and intangible assets acquired and liabilities assumed based on
estimated fair values. Our purchase price allocation methodology contains
uncertainties because it requires us to make assumptions and to apply judgment
to estimate the fair value of acquired assets and liabilities, including, but
not limited to, intangible assets, goodwill, and contingent consideration
liabilities. We estimate the fair value of assets and liabilities based upon the
carrying value of the acquired assets and widely accepted valuation techniques,
including discounted cash flows and market multiple analyses depending on the
nature of the assets being sold. We estimate the fair value of the contingent
consideration liabilities, as needed, based on our projection of expected
results and the estimated probability of achievement. The process to develop the
estimate of fair values in many cases requires the use of significant estimates,
assumptions and judgments, including determining the timing and estimates of
future cash flows and developing appropriate discount rates. Unanticipated
events or circumstances may occur which could affect the accuracy of our fair
value estimates, including assumptions regarding industry economic factors and
business strategies. We finalize the purchase price allocation as soon as
practicable within the measurement period, but not later than one year following
the acquisition date. Any adjustments to fair value subsequent to the
measurement period are reflected in the consolidated statements of net income
and comprehensive income.

Goodwill

Goodwill acquired in a business combination is measured as the excess of the
purchase price, or consideration transferred, over the net acquisition date fair
values of the assets acquired and the liabilities assumed. Goodwill is not
amortized as it has been determined to have an indefinite useful life.

As part of our annual goodwill impairment test, we first assess qualitative
factors to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. If we conclude that it is more
likely than not that the fair value of a reporting unit is less than its
carrying amount, we conduct a two-step quantitative goodwill impairment test.
The first step of the impairment test involves comparing the fair values of the
applicable reporting units with their carrying values. If the carrying amount of
the reporting unit exceeds the reporting unit's fair value, we perform the
second step of the goodwill impairment test. The second step of the goodwill
impairment test involves comparing the implied fair value of the affected
reporting unit's goodwill with the carrying value of that goodwill. The amount
by which the carrying value of the goodwill exceeds its implied fair value, if
any, is recognized as an impairment loss.

Application of the goodwill impairment test requires judgment, including the
identification of reporting units, assignment of assets and liabilities to
reporting units, assignment of goodwill to reporting units, and determination of
the fair value of each reporting unit. The fair value of each reporting unit is
estimated primarily through the use of a discounted cash flow methodology. This
analysis requires significant judgments, including estimation of future cash
flows, which is dependent on internal forecasts, estimation of the long-term
rate of growth for our business, estimation of the useful life over which cash
flows will occur, and determination of our weighted average cost of capital.

The estimates used to calculate the fair value of a reporting unit change from
year to year based on operating results, market conditions, and other factors.
Changes in these estimates and assumptions could materially affect the
determination of fair value and goodwill impairment for each reporting unit.

We test goodwill for impairment annually during our first fiscal quarter,
referred to as the annual test date. Based on our qualitative assessment for the
current fiscal year, we have determined that there was no impairment to our
goodwill as of June 30, 2019. We will also test for impairment between annual
test dates if an event occurs or circumstances change that would indicate the
carrying amount may be impaired.

During the years ended March 31, 2020 and March 31, 2019, we did not identify
any events or circumstances that would require an interim goodwill impairment
test. We currently also do not believe there is a reasonable likelihood that
there will be a material change in the future estimates or assumptions we use to
test for impairment losses on goodwill. However, if actual results are not
consistent with our estimates or assumptions, we may be exposed to future
impairment charges that could be material.


Intangible Assets



Intangible assets consist of trade names, customer relationships, and software
technology, all of which are associated with our acquisitions.




The intangible assets are recorded at fair value and are reported net of
accumulated amortization. We currently amortize the intangible assets over
periods ranging from 5 to 10 years using a method that reflects the pattern in
which the economic benefits of the intangible asset are consumed. We assess the
recoverability of intangible assets at least annually or whenever adverse events
or changes in circumstances indicate that impairment may have occurred. If the
future undiscounted cash flows expected to result from the use of the related
assets are less than the carrying value of such assets, impairment is deemed to
have occurred and a loss is recognized to reduce the carrying value of the
intangible assets to fair value, which is determined by discounting estimated
future cash flows. In addition to the impairment assessment, we routinely review
the remaining estimated lives of our intangible assets and record adjustments,
if deemed necessary.

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Although currently we believe that our approach to estimates and judgments as
described herein is reasonable, actual results could differ and we may be
exposed to decreases in the fair value of our intangible assets, resulting in
impairment charges that could be material. We test intangible assets for
impairment if we believe indicators of impairment exist.


Share-Based Compensation




We record share-based compensation related to share-based awards granted under
our employee stock options and incentive plans. See Note 14, "Share-Based
Awards," of our notes to consolidated financial statements included elsewhere in
this Report for a complete discussion of our stock-based compensation plans.

Share-based compensation expense associated with stock options granted under our
equity incentive plans is based on the number of options that ultimately vest
and adjusted, if needed, as forfeitures occur. We estimate the fair value of
stock options on the date of grant using the Black Scholes option-pricing model
based on required inputs, including expected term, volatility, risk-free rate,
and expected dividend yield. Expected term is estimated based upon the
historical exercise behavior and represents the period of time that options
granted are expected to be outstanding and therefore the proportion of awards
that is expected to vest. Volatility is estimated by using the weighted-average
historical volatility of our common stock, which approximates expected
volatility. The risk-free rate is the implied yield available on the U.S.
Treasury zero-coupon issues with remaining terms equal to the expected term. The
expected dividend yield is the average dividend rate during a period equal to
the expected term of the option. The fair value vest is recognized ratably as
expense over the requisite service period in our consolidated statements of net
income and comprehensive income.

Share-based compensation expense associated with restricted stock awards is
estimated using the market price of the common stock on the date of grant.
Share-based compensation expense associated with restricted performance stock
awards and units are based on the grant date fair value measured at the
underlying closing share price on the date of grant using a Monte Carlo-based
valuation model.

We currently do not believe there is a reasonable likelihood there will be a
material change in the future estimates or assumptions we use to determine
share-based compensation expense. However, if actual results are not consistent
with our estimates or assumptions, we may be exposed to changes in share-based
compensation expense that could be material.


Reserves on Accounts Receivable



We maintain reserves for potential sales returns and uncollectible accounts
receivable. Accounts receivable are reported net of uncollectible accounts
receivable our consolidated balance sheets.




Our standard contracts generally do not contain provisions for clients to return
products or services. However, we historically have accepted sales returns under
limited circumstances. We estimate expected sales returns and other forms of
variable consideration considering our customary business practice and
contract-specific facts and circumstances, and we consider such estimated
potential returns as variable consideration when allocating the transaction
price to the extent it is probable that there will not be a significant reversal
of cumulative revenue recognized.

Allowances for doubtful accounts and other uncollectible accounts receivable
related to estimated losses resulting from our clients' inability to make
required payments are established based on our assessment of the collectability
of client accounts, including review of our historical experience of bad debt
expense and the aging of our accounts receivable balances, net of specifically
reserved accounts and amounts billed prior to revenue recognition. Specific
reserves are based on our estimate of the probability of collection for certain
accounts. We regularly review the adequacy of these allowances by considering
internal factors such as historical experience, credit quality and age of the
client receivable balances as well as external factors such as economic
conditions that may affect a client's ability to pay and review of major
third-party credit-rating agencies, as needed. Accounts are written off as
uncollectible only after we have expended extensive collection efforts. If a
major client's creditworthiness or financial condition were to deteriorate, if
actual defaults are higher than our historical experience, or if other
circumstances arise, our estimates of the recoverability of amounts due to us
could be overstated, and additional allowances could be required, which could
have an adverse impact on our operating results.


Although we currently believe that our approach to estimates and judgments as
described herein is reasonable, actual results could differ and we may be
exposed to increases or decreases in required reserves that could be material.



Leases




We adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) and its
subsequent amendments (together "ASC 842") during the quarter ended June 30,
2019
using the transition approach provided for under ASU No. 2018-11, Leases
(Topic 842): Targeted Improvements, which allowed us to apply the new lease
standard as of April 1, 2019, rather than the beginning of the earliest period
presented. ASC 842 supersedes ASC 840 and requires the recognition of leased
arrangements on the balance sheet as right-of-use assets and liabilities
pertaining to the rights and obligations created by the leased assets. Refer to
Note 5, "Leases" of our notes to consolidated financial statements included
elsewhere in this Report for additional information regarding our adoption of
ASC 842.

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