NEXTGEN HEALTHCARE,

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

07/31/2020 | 06:13am

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS




This Quarterly Report on Form 10-Q ("Report") and certain information
incorporated herein by reference contain forward-looking statements within the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. All statements included or incorporated by reference in this Report, other
than statements that are purely historical, are forward-looking
statements. Words such as "anticipate," "expect," "intend," "plan," "believe,"
"seek," "estimate," "will," "should," "would," "could," "may," and similar
expressions also identify forward-looking statements. These forward-looking
statements include, without limitation, discussions of the impact of the
COVID-19 pandemic and measures taken in response thereto, as well as our product
development plans, business strategies, future operations, financial condition
and prospects, developments in and the impacts of government regulation and
legislation and market factors influencing our results. Our expectations,
beliefs, objectives, intentions and strategies regarding our future results are
not guarantees of future performance and are subject to risks and uncertainties,
both foreseen and unforeseen, that could cause actual results to differ
materially from results contemplated in our forward-looking statements. These
risks and uncertainties include, but are not limited to, our ability to continue
to develop new products and increase systems sales in markets characterized by
rapid technological evolution, consolidation, and competition from larger,
better-capitalized competitors. Many other economic, competitive, governmental
and technological factors could affect our ability to achieve our goals, and
interested persons are urged to review any risks that may be described in "Item
1A. Risk Factors" as set forth herein and other risk factors appearing in our
most recent Annual Report on Form 10-K for the fiscal year ended March 31, 2020
("Annual Report"), as supplemented by additional risk factors, if any, in our
interim filings on our Quarterly Reports on Form 10-Q, as well as in our other
public disclosures and filings with the Securities and Exchange Commission
("SEC"). Because of these risk factors, as well as other variables affecting our
financial condition and results of operations, past financial performance may
not be a reliable indicator of future performance and historical trends should
not be used to anticipate results or trends in future periods. We assume no
obligation to update any forward-looking statements. You are cautioned not to
place undue reliance on forward-looking statements, which speak only as of the
date of the filing of this Report. Each of the terms "NextGen Healthcare,"
"NextGen," "we," "us," "our," or the "Company" as used throughout this Report
refers collectively to NextGen Healthcare, Inc. and its wholly-owned
subsidiaries, unless otherwise indicated.

This management's discussion and analysis of financial condition and results of
operations ("MD&A") is provided as a supplement to the condensed consolidated
financial statements and notes thereto included elsewhere in this Report in
order to enhance your understanding of our results of operations and financial
condition and should be read in conjunction with, and is qualified in its
entirety by, the condensed consolidated financial statements and related notes
thereto included elsewhere in this Report. Historical results of operations,
percentage margin fluctuations and any trends that may be inferred from the
discussion below are not necessarily indicative of the operating results for any
future period.

Company Overview

NextGen Healthcare is a leading provider of 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 ("Topaz") for its
behavioral health solutions. In December 2019, we acquired Medfusion,
Inc.
("Medfusion") for its Patient Experience Platform (i.e., patient portal,
self-scheduling, and patient pay) capabilities and OTTO Health, LLC ("OTTO") 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 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.

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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.

Since the COVID-19 pandemic began, millions of cases and hundreds of thousands
of deaths have been reported globally. 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 condensed consolidated statements of net income (loss) and
comprehensive income (loss) for the three months ended June 30, 2020 and 2019
(certain percentages below may not sum due to rounding):



Three Months Ended June 30,
2020 2019
Revenues:
Recurring 91.3 % 90.6 %
Software, hardware, and other non-recurring 8.7 9.4
Total revenues 100.0 100.0
Cost of revenue:
Recurring 38.5 38.3
Software, hardware, and other non-recurring 4.6 4.8
Amortization of capitalized software costs and
acquired intangible assets 7.6 6.4
Total cost of revenue 50.7 49.5
Gross profit 49.3 50.5
Operating expenses:
Selling, general and administrative 31.1 30.4
Research and development costs, net 13.9 16.7
Amortization of acquired intangible assets 0.8 0.7
Impairment of assets 0.0 0.4
Restructuring costs 2.0 1.3
Total operating expenses 47.9 49.5
Income from operations 1.4 1.1
Interest income 0.0 0.1
Interest expense (0.8 ) (0.4 )
Other income (expense), net 0.0 (0.1 )
Income before provision for (benefit of) income
taxes 0.6 0.7
Provision for (benefit of) income taxes 1.2 (0.3 )
Net income (loss) (0.6 )% 0.9 %




Revenues



The following table presents our disaggregated revenues for the three months
ended June 30, 2020 and 2019 (in thousands):






Three Months Ended June 30,
2020 2019
Recurring revenues:
Subscription services $ 35,360 $ 30,144
Support and maintenance 38,547 39,652
Managed services 22,493 25,681
Electronic data interchange and data services 23,122 23,970
Total recurring revenues 119,522 119,


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


4,740 7,095
Other non-recurring services 6,617 5,319
Total software, hardware and other non-recurring revenues 11,357 12,414

Total revenues $ 130,879 $ 131,861

Recurring revenues as a percentage of total revenues 91.3 % 90.6 %





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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Revenue for the three months ended June 30, 2020 decreased $1.0 million compared
to the prior year, driven mostly by a $1.1 million decrease in software,
hardware and other non-recurring revenues, including a $2.4 million decrease in
software license and hardware revenue due to lower software bookings from the
impact of the COVID-19 pandemic and our transition to a recurring
subscription-based model, partially offset by a $1.3 million increase in other
non-recurring services related to the completion of professional services
projects. Recurring revenues increased $0.1 million, driven by a $5.2 million
increase in subscription services, partially offset by $3.2 million lower
managed services, $1.1 million lower support and maintenance, and $0.8 million
lower EDI and data services. The increase in subscription services was primarily
due to growth in subscriptions associated with patient experience and telehealth
platforms, including the incremental revenues from the acquisitions of Medfusion
and OTTO, our population health and analytics, core NextGen, and NextGen Office
cloud-based solutions. The decrease in managed services and EDI and data
services was primarily the result of lower patient volumes directly associated
with the COVID-19 pandemic. Support and maintenance decrease due to client
attrition and our transition to a recurring subscription-based model.

Bookings reflect the estimated annual value of our executed contracts and are
believed to 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 $25.6 million for the three months
ended June 30, 2020 compared to $32.3 million in the prior year, reflecting a
decrease in software and non-recurring services bookings, partially offset by
higher subscriptions bookings. In May 2020, we 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 cost of revenue and gross profit for the three
months ended June 30, 2020 and 2019 (in thousands):






Three Months Ended June 30,
2020 2019
Cost of revenue:
Recurring $ 50,429 $ 50,540
Software, hardware, and other non-recurring 6,041 6,278
Amortization of capitalized software costs and
acquired intangible assets 9,899 8,413
Total cost of revenue $ 66,369 $ 65,231

Gross profit $ 64,510 $ 66,630
Gross margin % 49.3 % 50.5 %




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 $0.4 million
and $0.5 million for the three months ended June 30, 2020 and 2019,
respectively.




Gross profit for the three months ended June 30, 2020 decreased $2.1 million
compared to the prior year period due to $1.0 million lower revenues, consisting
mostly of lower software, hardware and other non-recurring revenue, as discussed
above and a $1.5 million increase in amortization of acquired intangible assets
mostly related to our acquisitions of Topaz, Medfusion, and OTTO, higher
amortization of previously capitalized software costs from the general release
of development projects, and higher subscriptions services costs, offset by
lower managed services and EDI and data services costs due to lower
transactional volume. As a result, our gross margin decreased to 49.3% for the
three months ended June 30, 2020 compared to 50.5% in the prior year.

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Selling, General and Administrative Expense



The following table presents our selling, general and administrative expense for
the three months ended June 30, 2020 and 2019 (in thousands):






Three Months Ended June 30,
2020 2019
Selling, general and administrative $ 40,737 $ 40,128
Selling, general and administrative, as a percentage
of revenue 31.1 % 30.4 %




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 $4.1 million and $3.4 million for the three months ended June 30,
2020
and 2019, respectively. The increase in share-based compensation for the
three months ended June 30, 2020 compared to the same prior year periods 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 condensed
consolidated financial statements included elsewhere in this Report for
additional information of our share-based awards and related incentive plans.

Selling, general and administrative expenses increased $0.6 million for the
three months ended June 30, 2020 compared to the prior year period, driven by
higher legal fees, higher share-based compensation expenses noted above, and
incremental personnel costs from our acquisitions, partially offset by decreases
in travel and conferences and infrastructure expenses.


Research and Development Costs, net




The following table presents our net research and development costs, capitalized
software costs, and gross expenditures prior to capitalization, for the three
months ended June 30, 2020 and 2019 (in thousands):



Three Months Ended June 30,
2020 2019
Gross expenditures $ 23,834 $ 26,786
Capitalized software costs (5,612 ) (4,735 )
Research and development costs, net $ 18,222


$ 22,051



Research and development costs, as a percentage of
revenue


13.9 % 16.7 %
Capitalized software costs as a percentage of gross
expenditures 23.5 % 17.7 %




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 that may be capitalized
or expensed up front and the amount of net research and development costs
reported in our consolidated statements of net income (loss) and comprehensive
income (loss), and ultimately also affects the future amortization of our
previously capitalized software development costs. Refer to Note 9, "Capitalized
Software Costs" of our notes to consolidated financial statements included
elsewhere in this Report for additional information on current period
amortization of capitalized software costs and an estimate of future expected
amortization.

Share-based compensation expense included in research and development costs was
$0.9 million and $1.0 million for the three months ended June 30, 2020 and 2019,
respectively.

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Net research and development costs for the three months ended June 30, 2020
decreased $3.8 million compared to the prior year period due to $2.9 million
lower gross expenditures and $0.9 million higher capitalization of software
costs. The decrease in gross expenditures was driven primarily by lower
personnel costs associated with our business restructuring plan and lower travel
costs. Our software capitalization rate fluctuates due to differences in the
nature and status of our projects and initiatives during a given year, which
affects the amount of development costs that may be capitalized.


Amortization of Acquired Intangible Assets



The following table presents our amortization of acquired intangible assets for
the three months ended June 30, 2020 and 2019 (in thousands):






Three Months Ended June 30,
2020
2019


Amortization of acquired intangible assets $ 1,112 $ 865







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 three months ended June 30,
2020
increased $0.2 million compared to the prior year due to additional
amortization of the customer relationships and trade names intangible assets
acquired from Medfusion.




Restructuring Costs and Impairment of Assets




In May 2020, we announced a decision to execute a reduction in our workforce of
less than 3% as well as other temporary cost reductions in response to the
COVID-19 pandemic. We recorded $2.6 million of restructuring costs, consisting
of payroll-related costs, such as severance, outplacement costs, and continuing
healthcare coverage, associated with the involuntary separation of employees
pursuant to a one-time benefit arrangement, in the three months ended June 30,
2020
within operating expenses in our condensed consolidated statements of net
income (loss) and comprehensive income (loss). These amounts were accrued when
it was probable that the benefits would be paid, and the amounts were reasonably
estimable. The payroll-related costs have been substantially paid as of June 30,
2020
.

In the three months ended June 30, 2019, we recorded $1.7 million of
restructuring costs, consisting 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, as part of a business restructuring plan implemented in June 2019.
In connection with the June 2019 restructuring plan, we also vacated portions of
certain leased locations and recorded impairments of $0.5 million in the three
months ended June 30, 2019 to our operating right-of-use assets and certain
related fixed assets associated with the vacated locations, or portions thereof,
in Horsham, St. Louis, and Irvine based on projected sublease rental income and
estimated sublease commencement dates. 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.




Interest and Other Income and Expense



The following table presents our interest expense for the three months ended
June 30, 2020 and 2019 (in thousands):






Three Months Ended June 30,
2020 2019
Interest income $ 6 $ 79
Interest expense (1,107 ) (472 )
Other income (expense), net 16 (133 )




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 condensed consolidated financial statements included elsewhere
in this Report for additional information.

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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 June 30, 2020, we had $179.0 million
of outstanding balances under the revolving credit agreement, compared to an
outstanding balance of $129.0 million as of March 31, 2020 and $6.0 million as
of June 30, 2019, resulting in higher interest expense for the three months
ended June 30, 2020 compared to the prior year. The fluctuations of other income
and expense compared to the prior year period is primarily due to changes to the
India foreign exchange rates.


Provision for (Benefit of) Income Taxes



The following table presents our provision for (benefit of) income taxes for the
three months ended June 30, 2020 and 2019 (in thousands):






Three Months Ended June 30,
2020
2019


Provision for (benefit of) income taxes $ 1,616 $ (380 )
Effective tax rate


204.0 % 44.0 %




The increase in the effective tax rate for the three months ended June 30, 2020
compared to the prior year was primarily due to the decrease in pre-tax book
income and increase tax benefit in research and development credits offset with
additional tax expense related to higher nondeductible officer's compensation
and an increase in stock option discrete items.

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. We have
considered the applicable tax law changes in our current and deferred income tax
expense and recognized the impact in our income tax provision, as applicable.


Net Income (Loss)




The following table presents our net income and loss (in thousands) and net
income (loss) per share and for the three months ended June 30, 2020 and 2019:



Three Months Ended June 30,
2020 2019
Net income (loss) $ (824 ) $ 1,244
Net income (loss) per share:
Basic $ (0.01 ) $ 0.02
Diluted $ (0.01 ) $ 0.02




As a result of the foregoing changes in revenue and expense, net income (loss)
for the three months ended June 30, 2020 decreased $2.1 million compared to the
prior year period.


Liquidity and Capital Resources



The following table presents selected financial statistics and information for
the three months ended June 30, 2020 and 2019 (in thousands):






Three Months Ended June 30,
2020 2019
Cash and cash equivalents $ 192,323 $ 28,607
Unused portion of revolving credit agreement (1) 121,000 294,000
Total liquidity $ 313,323 $ 322,607

Net income (loss) $ (824 ) $ 1,244
Net cash provided by operating activities $ 17,672 $ 16,997





(1) As of June 30, 2020, we had $179.0 million of outstanding loans under our



$300.0 million revolving credit agreement.



Our outstanding borrowings under our revolving credit agreement was $179.0
million
as of June 30, 2020 compared to $129.0 million as of March 31, 2020 and
$6.0 million as of June 30, 2019.



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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 June 30, 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 had proactively implemented certain precautionary measures,
including cost containment and strengthening our cash position by increasing the
outstanding borrowings under our revolving credit agreement. We borrowed an
additional $50.0 million under our revolving credit agreement in April 2020 and
subsequently paid down $50.0 million in July 2020 based on the reassessment of
our short-term cash flow and working capital requirements. 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 June 30, 2020, our cash and cash equivalents balance of $192.3 million
compares to $138.0 million as of March 31, 2020.




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 condensed consolidated statements of cash
flows for the three months ended June 30, 2020 and 2019 (in thousands):






Three Months Ended June 30,
2020 2019
Net income (loss) $ (824 ) $ 1,244
Non-cash expenses 22,037 20,894



Cash from net income (loss), as adjusted $ 21,213 $



22,138



Change in contract assets and liabilities, net (6,708 ) (650 )
Change in accounts receivable 2,286


5,105



Change in other assets and liabilities 881 (9,596 )
Net cash provided by operating activities $ 17,672 $ 16,997




For the three months ended June 30, 2020, cash provided by operating activities
increased $0.7 million compared to the prior year, driven by a $10.5 million
increase in cash from changes in other assets and liabilities, partially offset
by decreases of $6.1 million from net changes in contract assets and
liabilities, $2.8 million from changes in accounts receivable, and $0.9 million
from changes in net income (loss) as adjusted for non-cash expenses. The
increase in cash from net changes in other assets and liabilities is primarily
due to an increase in the deferral of payroll taxes in the three months ended
June 30, 2020 and higher payments of cash incentive bonuses and commissions in
the prior year. The decrease in cash associated with net changes in contract
assets and liabilities is primarily due to a lower level of maintenance
invoicing as a result of client attrition. The change in accounts receivable
decreased as collections in the three months ended June 30, 2020 was negatively
impacted by the COVID-19 pandemic in comparison to stronger collections in the
prior year. Net income (loss) for the three months ended June 30, 2020 decreased
$2.1 million compared to the prior year, as described above under the heading
"Net Income (Loss)".


Cash Flows from Investing Activities




Net cash used in investing activities for the three months ended June 30, 2020
was $6.2 million compared with $8.4 million in the prior year. The $2.2 million
decrease in net cash used in investing activities is due to a $3.1 million
decrease in additions to equipment and improvements, offset by a $0.9 million
increase in additions to capitalized software costs.

34

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Cash Flows from Financing Activities




Net cash provided by financing activities for the three months ended June 30,
2020
was $48.6 million cash provided compared with $6.3 million cash used in the
prior year. The $54.9 million increase in cash provided by financing activities
is due to additional borrowings of $50.0 million on our line of credit in the
three months ended June 30, 2020, compared to $5.0 million in principal
repayments in the prior year and $0.6 million lower payments of taxes related to
net share settlement of equity awards, partially offset by $0.7 million lower
proceeds from the issuance of shares under employee plans.


Contractual Obligations



We have minimum purchase commitments of $27.8 million related to payments due
under certain non-cancelable agreements to purchase goods and services.



The following table summarizes our significant contractual obligations at June
30, 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,
2021 (remaining 2026 and
Contractual Obligations Total nine months) 2022 2023 2024 2025 beyond
Operating lease
obligations $ 40,676 $ 7,066 $ 9,186 $ 9,249 $ 7,955 $ 5,948 $ 1,272
Remaining lease
obligations for vacated
properties (1) 11,108 2,391 2,935 2,255 1,677 1,338 512
Line of credit
obligations (Note 10) 179,000 - - 179,000 - - -
Total $ 230,784 $ 9,457 $ 12,121 $ 190,504 $ 9,632 $ 7,286 $ 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 17,



"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 June 30, 2020 was $6.0 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 June 30, 2020 was $4.7 million, which
is not included in the table above as the timing of expected payments is not
determinable.

New Accounting Pronouncements

Refer to Note 1, "Summary of Significant Accounting Policies" of our notes to
condensed consolidated financial statements included elsewhere in this Report
for a discussion of new accounting standards.


Critical Accounting Policies and Estimates




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

We describe our significant accounting policies in Note 1, "Summary of
Significant Accounting Policies," of our notes to consolidated financial
statements included in our Annual Report. We discuss our critical accounting
policies and estimates in Part II, Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," of our Annual Report.

35



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We adopted Accounting Standards Update No. 2016-13, Financial Instruments-Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, using
the modified retrospective transition approach, which required the recognition
of expected credit losses for our accounts receivable and our contract assets.
Refer to Note 3, "Accounts Receivable" of our notes to condensed consolidated
financial statements included elsewhere in this Report for additional
information.

There have been no other material changes in our significant accounting policies
or critical accounting policies and estimates since the fiscal year ended March
31, 2020
.

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