CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q ("Report") and certain informationincorporated herein by reference contain forward-looking statements within the"safe harbor" provisions of the Private Securities Litigation Reform Act of1995. All statements included or incorporated by reference in this Report, otherthan statements that are purely historical, are forward-lookingstatements. Words such as "anticipate," "expect," "intend," "plan," "believe,""seek," "estimate," "will," "should," "would," "could," "may," and similarexpressions also identify forward-looking statements. These forward-lookingstatements include, without limitation, discussions of the impact of theCOVID-19 pandemic and measures taken in response thereto, as well as our productdevelopment plans, business strategies, future operations, financial conditionand prospects, share repurchases, developments in and the impacts of governmentregulation and legislation and market factors influencing our results. Ourexpectations, beliefs, objectives, intentions and strategies regarding ourfuture results are not guarantees of future performance and are subject to risksand uncertainties, both foreseen and unforeseen, that could cause actual resultsto differ materially from results contemplated in our forward-lookingstatements. These risks and uncertainties include, but are not limited to, ourability to continue to develop new products and increase systems sales inmarkets characterized by rapid technological evolution, consolidation, andcompetition from larger, better-capitalized competitors. Many other economic,competitive, governmental and technological factors could affect our ability toachieve our goals, and interested persons are urged to review any risks that maybe described in "Item 1A. Risk Factors" as set forth herein and other riskfactors appearing in our most recent Annual Report on Form 10-K for the fiscalyear endedMarch 31, 2022 ("Annual Report"), as supplemented by additional riskfactors, 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 theSecurities andExchange Commission ("SEC"). Because of these risk factors, as well as othervariables affecting our financial condition and results of operations, pastfinancial performance may not be a reliable indicator of future performance andhistorical trends should not be used to anticipate results or trends in futureperiods. We assume no obligation to update any forward-looking statements. Youare cautioned not to place undue reliance on forward-looking statements, whichspeak 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 usedthroughout this Report refers collectively toNextGen Healthcare, Inc. and itswholly-owned subsidiaries, unless otherwise indicated.This management's discussion and analysis of financial condition and results ofoperations ("MD&A") is provided as a supplement to the condensed consolidatedfinancial statements and notes thereto included elsewhere in this Report inorder to enhance your understanding of our results of operations and financialcondition and should be read in conjunction with, and is qualified in itsentirety by, the condensed consolidated financial statements and related notesthereto included elsewhere in this Report. Historical results of operations,percentage margin fluctuations and any trends that may be inferred from thediscussion below are not necessarily indicative of the operating results for anyfuture period.Company OverviewNextGen Healthcare is a leading provider of innovative, cloud-based, healthcaretechnology solutions that empower healthcare practices to manage the risk andcomplexity of delivering care inthe United States healthcare system. Ourcombination of technological breadth, depth, and domain expertise makes us apreferred solution provider and trusted advisor for our clients. In addition tohighly configurable core clinical and financial capabilities, our portfolioincludes tightly integrated solutions that deliver on ambulatory healthcareimperatives, including consumerism, digitization, risk allocation, regulatoryinfluence, and integrated care and health equity.We serve clients across all 50 states. Over 100,000 providers useNextGenHealthcare solutions to deliver care in nearly every medical specialty in a widevariety of practice models including accountable care organizations ("ACOs"),independent physician associations ("IPAs"), managed service organizations("MSOs"), Veterans service organizations ("VSOs"), and dental serviceorganizations ("DSOs"). Our clients range from some of the largest and mostprogressive multi-specialty groups in the country to sole practitioners with awide variety of business models. With the addition of behavioral health to ourmedical and oral health capabilities, we continue to extend our share not onlyin federally qualified health centers ("FQHCs") but also in the growingintegrated care market.Our company was incorporated inCalifornia in 1974. Previously namedQualitySystems, Inc. , we changed our corporate name toNextGen Healthcare, Inc. inSeptember 2018 , and in 2021, we changed our state of incorporation toDelaware .As a remote-first company, we no longer maintain a principal executive office.Our principal website is www.nextgen.com. We operate on a fiscal year ending onMarch 31 .
Our Vision, Mission and Strategy
NextGen Healthcare's vision is better healthcare outcomes for all. We strive toachieve this vision by delivering innovative solutions and insights aimed atcreating healthier communities. We focus on improving care delivered inambulatory settings but do so recognizing that the entire healthcare ecosystemneeds to work in concert to achieve the quadruple aim… "to improved patientexperience, improved provider experience, improve the health of a population,and reduce per capita health care costs."Our long-term strategy is to positionNextGen Healthcare as both the essential,integrated, delivery platform and the most trusted advisor for the ambulatorypractices of the future. To that end, we primarily serve organizations thatprovide or orchestrate care in 25--------------------------------------------------------------------------------ambulatory settings and do so across diverse practice sizes, specialties, caremodalities, and business models. These customers include conventional practicesas well as new market entrants.We plan to continue investing in our current capabilities as well as buildingand/or acquiring new capabilities. InOctober 2019 , we acquiredTopazInformation Systems, LLC for its behavioral health solutions. InDecember 2019 ,we acquiredMedfusion, Inc. for its Patient Experience Platform capabilities(i.e., patient portal, self-scheduling, and patient pay) andOTTO Health, LLC for its virtual care solutions, notably telemedicine. The integration of theseacquired technologies has madeNextGen Healthcare's solutions among the mostcomprehensive in the market. Further, we are also actively innovating ourbusiness models and exploring new high-growth market domains as we extend ourposition as the essential, integrated, delivery platform and trusted impactpartner for the ambulatory practices of the future.
Market Opportunity, and Trends
The scale and scope of the healthcare industry continues to expand. AnnualUnited States healthcare spend today represents nearly$4.1 trillion and ~20% ofGDP. A significant portion of this spend is directed towards the treatment ofchronic conditions and administering an increasingly complex system with diversestakeholders. While there are several convergent market forces reshaping thehealthcare industry landscape, we are focused on six trends we believe willmaterially impact the markets we participate in and our customer valueproposition:
1. Regulatory Influence - Medicare and Medicaid continue to expand and
represent approximately a third of covered lives. Further, the 21st Century
Cures Act ("Cures Act") certification requirements and impending changes by
and shared savings programs parameters (i.e., MIPS, MSSP and telehealth
programs) represent continued and escalating regulatory requirements in the
healthcare industry broadly and the shape of primary healthcare. Considering
these regulatory and market-based changes, many ambulatory practices have
come to place a very high value on partnering with vendors that stay ahead
of these regulatory and industry changes
2. Risk Reallocation - As healthcare shifts away from defined benefit models
towards defined contribution, employers, payors, providers and consumers are
increasingly evaluating models to share and reallocate risk. In 2020, nearly
40% of all healthcare payments representing over 75% of all covered lives
flowed through an alternative payment model. While Medicare Advantage
related payments led the charge with over 55% of payments tied to
alternative models, a plurality of commercial payors are also leveraging
value-based provider arrangements to incent care quality standards and
reduce health disparities. For providers, effective participation in these
models requires a full view of the patient population's clinical and cost
data and robust financial management solutions and services to navigate
multiple contract types.
3. Consumerism - Consumers are increasingly directing their own healthcare and
are expecting greater levels of access, convenience, and experience
personalization. Beyond tailoring healthcare interactions to their needs and
preferences, they also expect much greater transparency about the costs for
visits, medications, and procedures. Accompanied by a significant shift of
care from inpatient to lower cost outpatient settings and virtual modes,
healthcare is poised to becomes increasingly 'retail-like' and will place
unique demands on practices and care providers who need comprehensive
engagement platforms to attract, retain and engage patients through their
complete health journey
4. New Modalities and Coordinated Team Based Care - Untethered from physical
clinics and desktops, care is now being delivered in "boundless" venues by
multiple, coordinated care providers. 5. Meaningful Interoperability & Digitization - Greater levels of data exchange, automation, Artificial Intelligence (AI) and speech enabled workflows. 6. Integrated Care and Health Equity - Integrated, whole-person health
continues to trend strongly as evidenced by FQHCs/CHCs receiving Health
medical, behavioral, and oral health. Public sector and private investment
in understanding and addressing social determinants of health and improving
community health are growing.
NextGen Healthcare is well positioned to play a key role in guiding our clientsthrough short-term and long-term changes that impact healthcare inthe UnitedStates and is committed to helping them deliver better outcomes.
Our Value Proposition
• Integration - Delivering a broad and highly integrated set of solutions and
end-user experiences.
solution provider, is driving greater levels of efficiency and experience
for practices. Our clients value the full breadth of our solution offering
and seamless integration into their clinical workflows. This integration is
an important determinant of our success.
• Interoperability - Building seamlessly connected data and human networks
across ambulatory healthcare.
solutions help create a frictionless environment where those that need
important healthcare data can rapidly find and utilize it. For example,
Information Exchanges ("HIE's"), with over 170 million patient records
passing over our network of almost 2.8 million directory addresses.
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• Insights - Providing intelligence at the point of care to enable better
health and financial decision-making. We are helping our clients move from being data rich to insight rich. By providing intelligence, through innovative solutions that take data out of electronic health records
("EHR"), normalize, cleanse, and present it back as usable data pipelines,
reviews, billing quality, practice variance, etc. and insert it directly
into clinician's workflows in order to facilitate sound clinical and financial decisions when serving patients.
• Impact - Delivering and shaping outcomes in all aspects of our solutions and
service.
partner for our clients and is evidenced by proactively helping manage
performance and outcomes for our clients.
NextGen Healthcare delivers value to our clients in several ways. Our solutionsenable our clients to address current needs while preparing for the needs of thefuture including expanding access to health services, enhancing the coordinationand management of care, and optimizing patient outcomes while also ensuring thesustainability of their practices. Specifically, we offer a range of solutionsto allow clinicians to practice anywhere and in new and innovative collaborationmodels.
We optimize the core with an automation and workflow layer that gives ourclients control over how platform capabilities are implemented to drive theirdesired outcomes. The workflow layer includes mobile and voice-enabledcapabilities proven to reduce physician burden. Recognizing that engagedpatients are key to positive outcomes, our patient experience platform enablesour clients to create personalized care experiences that enhance trust and drivepatient loyalty. Further, we support the advances in integrated care thatfocuses on the whole person with solutions supporting behavioral and oralhealth. Our cloud-based population health and analytics engine allows ourclients to improve results in both fee-for-service and fee-for-valueenvironments.In support of extensibility, we surround the core with open, web-basedapplication programming interfaces ("APIs") to drive the secure exchange ofhealth and patient data with connected health solutions. Our commitment tointeroperability, defragmenting care and our experience powering many of thenation's HIE's places us in a unique position to enable our clients to leveragethis technology to lower the cost of care and improve the patient and providerexperience by providing an integrated community patient record.Finally, to ensure our clients get maximum value from our solutions, we haveaugmented our technology with key services aligned with their needs, helping toensure they reach their organizational goals. We partner with our clients tooptimize their information technology ("IT") operations, enhance revenue cycleprocesses across fee-for-service and fee-for-value models, service lineexpansion and operations, as well as advise on long-term strategy.PositioningNextGen Healthcare for Growth. AsNextGen Healthcare applies thisvalue proposition framework across the ambulatory care market, we incorporatesome or all our current solution offerings within three broad domainsillustrated in Figure 1 below:
• Enterprise - The Enterprise domain is both the largest and incorporates our
broadest portfolio of solutions (e.g., clinical, financial, and patient
engagement solution portfolios) provided to ambulatory care practices that incorporate 10 or more healthcare providers. One of these solutions, our
practice management offering, NextGen® Enterprise PM, was recognized as the
#1 Practice Management Solution (11-75 Physicians) for four consecutive
years - 2019, 2020, 2021 and 2022 Best in KLAS Report.
• Office - The Office domain reflects almost all solutions (software solutions
and adjacent services) provided to an ambulatory care practice that incorporates fewer than 10 healthcare providers. Our main offering in this group is a cloud-based, multi-tenant SaaS EHR and PM solution, called
NextGen® Office, which was recognized as the #1 Small Practice Ambulatory
EMR/PM (<10 Physicians) in the 2022 Best in KLAS Report. • Insights - The Insights domain incorporates solutions that address
interoperability, data and analytics, and value-based care. Previously
described as population health and connected health, the Insights solutions
portfolio is offered to clients across both our Enterprise and Office
domains as well as additional ambulatory healthcare stakeholders addressing
connectivity or value-based care needs. NextGen is highlighting this domain
as a reflection of its overall importance and high future growth potential. 27
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Figure 1: NextGen Healthcare Solutions Domains
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Results of Operations
The following table sets forth the percentage of revenue represented by eachitem in our condensed consolidated statements of net income (loss) for the threeand six months endedSeptember 30, 2022 and 2021 (certain percentages below maynot sum due to rounding): Three Months Ended September 30, Six Months Ended September 30, 2022 2021 2022 2021Revenues:Recurring 90.0 % 90.8 % 90.6 % 90.7 %Software, hardware, and othernon-recurring 10.0 9.2 9.4 9.3Total revenues 100.0 100.0 100.0 100.0Cost of revenue:Recurring 40.8 38.3 40.7 38.7Software, hardware, and othernon-recurring 6.8 5.1 6.9 5.1Amortization of capitalized softwarecosts and acquired intangible assets 4.2 5.3 4.4 5.4Total cost of revenue 51.8 48.7 52.0 49.2Gross profit 48.2 51.3 48.0 50.8Operating expenses:Selling, general and administrative 28.2 42.8 30.0 38.0Research and development costs, net 13.1 12.4 13.6 12.8Amortization of acquired intangibleassets 0.4 0.6 0.5 0.6Impairment of assets 0.5 0.8 0.4 0.5Restructuring costs 0.2 0.0 0.1 0.2Total operating expenses 42.4 56.6 44.6 52.2Income (loss) from operations 5.8 (5.3 ) 3.4 (1.4 )Interest income 0.0 0.0 0.0 0.0Interest expense (0.2 ) (0.2 ) (0.2 ) (0.2 )Other income (expense), net 6.5 0.0 3.3 0.0Income (loss) before provision for(benefit of) income taxes 12.1 (5.5 ) 6.5 (1.6 )Provision for (benefit of) incometaxes 3.6 (1.0 ) 1.7 (0.3 )Net income (loss) 8.5 % (4.5 )% 4.7 % (1.3 )% 28
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Revenues
The following table presents our disaggregated revenues for the three and sixmonths ended
Three Months Ended September 30, Six Months Ended September 30, 2022 2021 2022 2021Recurring revenues:Subscription services$ 43,416 $ 41,139 $ 86,175 $ 79,423 Support and maintenance 38,150 39,004 77,288 77,490Managed services 31,055 28,207 61,700 56,115Transactional and data services 30,882 27,259 58,099 54,962Total recurring revenues 143,503 135,609 283,262 267,990Software, hardware, and othernon-recurring revenues:Software license and hardware 7,916 8,068 14,115 15,282Other non-recurring services 8,024 5,609 15,368 12,098Total software, hardware and othernon-recurring revenues 15,940 13,677 29,483 27,380Total revenues$ 159,443 $ 149,286 $ 312,745 $ 295,370 Recurring revenues as a percentage oftotal revenues 90.0 % 90.8 % 90.6 % 90.7 %
We generate revenue from sales of licensing rights and subscriptions to oursoftware solutions, hardware and third-party software products, support andmaintenance, managed services, transactional and data services, and othernon-recurring services, including implementation, training, and consultingservices performed for clients who use our products.
Beginning in fiscal year 2023, in order to align the presentation ofdisaggregated revenue with the manner in which management reviews suchinformation, we revised our presentation of disaggregated revenues by majorrevenue categories to reclassify revenues related to patient pay services andcertain other services from the managed services category into the transactionaland data services category, which replaced the prior Electronic Data Interchange("EDI") and data services category. The prior period presentation of revenuesdisaggregated by our major revenue categories and by occurrence above have beenreclassified to conform to current year presentation.Consolidated revenue for the three months endedSeptember 30, 2022 increased$10.2 million compared to the prior year period due to a$7.9 million increasein recurring revenues and a$2.3 million increase in software, hardware andother non-recurring revenues. The increase in recurring revenues was driven by a$3.6 million increase in transactional and data services,$2.8 million increasein managed services, and a$2.3 million increase in subscription services,partially offset by a$0.8 million decrease in support and maintenance. Theincrease in transactional and data services revenue was primarily driven byhigher revenues from our patient pay services. The increase in managed servicesrevenue was primarily due to an increase in hosting services and revenue cyclemanagement ("RCM") services revenues associated with higher recent bookings. Theincrease in subscription services was primarily due to higher revenuesassociated with NextGen Office, NextGen Enterprise surround solutions such asvirtual visits and interoperability, which is part of the NextGen Insightsportfolio, due to higher recent bookings. Support and maintenance decreasedprimarily due to net client attrition and our continued shift tosubscription-based solutions. The increase in software, hardware, and othernon-recurring revenues was primarily due to higher professional services revenuefrom more hours incurred and projects completed in the current year period.Consolidated revenue for the six months endedSeptember 30, 2022 increased$17.4million compared to the prior year period due to a$15.3 million increase inrecurring revenues and a$2.1 million increase in software, hardware and othernon-recurring revenues. The increase in recurring revenues was driven by a$6.8million increase in subscription services,$5.6 million increase in managedservices,$3.1 million in transactional and data services, offset by a$0.2million decrease in support and maintenance. The increase in subscriptionservices was primarily due to higher subscriptions of our NextGen Office andInsights solutions, including interoperability, virtual visits, mobile,financial analytics, and NextGen Enterprise solutions, due to higher recentbookings. The increase in managed services revenue was primarily due to anincrease in hosting services and RCM services revenues associated with higherrecent bookings. The increase in transactional and data services revenue wasprimarily driven by higher revenues from our patient pay services. Support andmaintenance decreased primarily due to net client attrition and our continuedshift to subscription-based solutions. The increase in software, hardware, andother non-recurring revenues was primarily due to higher professional servicesrevenue from more hours incurred and projects completed in the current yearperiod.Bookings reflect the estimated annual value of our executed contracts, adjustedto include the effect of pre-acquisition bookings if applicable, and arebelieved to provide a broad indicator of the general direction and progress ofthe business. Total bookings were$37.4 million and$39.1 million for the threemonths endedSeptember 30, 2022 and 2021, respectively. The decrease isprimarily 29--------------------------------------------------------------------------------
due to lower bookings of professional services and subscriptions of NextGenOffice and mobile, partially offset by higher bookings of patient pay servicesand RCM services.
Total bookings were$76.6 million and$73.4 million for the six months endedSeptember 30, 2022 and 2021, respectively. The increase is due to higherbookings of patient pay services and RCM services, partially offset by lowerbookings of professional services and subscriptions of mobile, virtual visits,NextGen Office, and population health.We continue to see overall practice volumes at healthy, pre-pandemic levels.This reflects in our volume- and transaction-based solutions, as noted above,and reflects an ongoing industry trend of procedure volumes migrating out ofhigher cost settings, like hospitals, favoring lower cost care settings andindependent healthcare providers. We also continue to see healthy activitylevels in our current pipeline. Sales development activities, such as leadgeneration and demos, indicate a positive demand environment. We have not beensignificantly impacted by the current economic concerns and general marketconditions, and we continue to constructively engage prospects and our clientsto find ways to achieve better outcomes for all.
Cost of Revenue and Gross Profit
The following table presents our consolidated cost of revenue and gross profitfor the three months ended
Three Months Ended September 30, Six Months Ended September 30, 2022 2021 2022 2021Cost of revenue:Recurring$ 65,039 $ 57,119 $ 127,283 $ 114,279 Software, hardware, and othernon-recurring 10,797 7,610 21,473 15,107Amortization of capitalized softwarecosts and acquired intangible assets 6,744 7,969 13,878 16,053Total cost of revenue$ 82,580 $ 72,698 $ 162,634 $ 145,439 Gross profit$ 76,863 $ 76,588 $ 150,111 $ 149,931 Gross margin % 48.2 % 51.3 % 48.0 % 50.8 %Cost of revenue consists primarily of compensation expense, includingshare-based compensation, for personnel that deliver our products and services.Cost of revenue also includes amortization of capitalized software costs andacquired technology, third party consultant and outsourcing costs, costsassociated with our EDI business partners and clearinghouses, hosting servicecosts, third party software costs and royalties, and other costs directlyassociated with delivering our products and services. Refer to Note 8,"Intangible Assets" and Note 9, "Capitalized Software Costs" of our notes tocondensed consolidated financial statements included elsewhere in this Reportfor additional information on current period amortization of capitalizedsoftware costs and acquired technology and an estimate of future expectedamortization.Share-based compensation expense included in cost of revenue was$1.0 million and$0.6 million for the three months endedSeptember 30, 2022 and 2021,respectively. Share-based compensation expense included in cost of revenue was$1.5 million and$1.1 million for the six months endedSeptember 30, 2022 and2021, respectively.Gross profit for the three months endedSeptember 30, 2022 was$76.9 million compared$76.6 million in the prior year due to an$10.2 million increase inrevenues as discussed above, offset by a$9.9 million increase in cost ofrevenue primarily associated with the higher revenues. Our gross margindecreased to 48.2% for the three months endedSeptember 30, 2022 compared 51.3%in the prior year period.Gross profit for the six months endedSeptember 30, 2022 was$150.1 million compared to$149.9 million in the prior year period due to a$17.4 million increase in revenues as discussed above, offset by a$17.2 million increase incost of revenue associated with the higher revenues. Our gross margin decreasedto 48.0% for the six months endedSeptember 30, 2022 compared to 50.8% in theprior year period.The increase in cost of revenue for the three and six months endedSeptember 30,2022 compared to the prior year period was primarily due to higher costs ofpatient pay services directly associated with higher recent revenues andbookings. Other recurring cost of revenue, including subscription services andmanaged services costs, also increased driven by higher revenues and bookings,resulting in higher hosting costs, higher third-party costs, and higher salariesand benefits from increased employee headcount associated with delivering oursoftware solutions and services. EDI and data services costs also increased asrevenues increased over the prior year period. Software, hardware, and othernon-recurring services revenue costs increased compared to the prior periodsprimarily due to higher salaries and benefits from increased employee headcountand an increase in consulting costs associated with the delivery of ourprofessional services as we accelerate Spring'21 migration. These increases incost of revenue were partially offset by lower amortization of capitalizedsoftware costs and acquired intangible assets, as noted above. 30--------------------------------------------------------------------------------Our gross margin for the three and six months endedSeptember 30, 2022 comparedto the prior year period decreased primarily due to increased investments inprofessional services as we accelerate Spring'21 migration and a shift inproduct mix to higher transactional and data services, including patient payservices, and higher managed services, as noted above.
Selling, General and Administrative Expense
The following table presents our selling, general and administrative expense forthe three and six months ended
Three Months Ended September
30, Six Months Ended
2022 2021 2022 2021Selling, general and administrative$ 44,886 $ 63,891 $ 93,920 $ 112,377 Selling, general and administrative, asa percentage of revenue 28.2 % 42.8 % 30.0 % 38.0 %Selling, general and administrative expense consists of compensation expense,including share-based compensation, for management and administrative personnel,selling and marketing expense, facilities costs, depreciation, professionalservice fees, including legal and accounting services, legal settlements,acquisition and transaction-related costs, and other general corporate andadministrative expenses.Share-based compensation expense included in selling, general and administrativeexpenses was$6.1 million and$3.6 million for the three months endedSeptember30, 2022 and 2021, respectively. Share-based compensation expense included inselling, general and administrative expenses was$12.7 million and$8.4 million for the six months endedSeptember 30, 2022 and 2021, respectively. Refer toNote 14, "Stockholders' Equity" of our notes to condensed consolidated financialstatements included elsewhere in this Report for additional information of ourshare-based awards and related incentive plans.Selling, general and administrative expenses decreased$19.0 million and$18.5million in the three and six months endedSeptember 30, 2022 compared to theprior year. The decrease in expense from the prior year periods were primarilydriven by higher legal and related costs for our shareholder litigation matterincurred in the prior year period, including a$11.4 million payment related tothe indemnification of certain expenses related to the Hussein matter. Selling,general and administrative expense in the prior year periods also includedapproximately$7.4 million of incremental proxy contest expenses associated withour prior year annual shareholders' meeting. Partially offsetting the decreasein expense were higher personnel costs from our annual merit increases, highershare-based compensation expense noted above, higher commissions expense, andincreased travel, conferences, and conventions costs as these activities resume.
Research and Development Costs, net
The following table presents our consolidated net research and developmentcosts, capitalized software costs, and gross expenditures prior tocapitalization, for the three and six months ended
Three Months Ended September 30, Six Months Ended September 30, 2022 2021 2022 2021Gross expenditures$ 30,275 $ 24,693 $ 61,068 $ 49,552 Capitalized software costs (9,418 ) (6,175 ) (18,416 ) (11,713 )
Research and development costs, net
Research and development costs, as apercentage of revenue 13.1 % 12.4 % 13.6 % 12.8 %Capitalized software costs as apercentage of gross expenditures 31.1 % 25.0 % 30.2 % 23.6 %Gross research and development expenditures, including costs expensed and costscapitalized, consist of compensation expense, including share-based compensationfor research and development personnel, certain third-party consultant fees,software maintenance costs, and other costs related to new product developmentand enhancement to our existing products.The healthcare information systems and services industry is characterized byrapid technological change, requiring us to engage in continuing investments inour research and development to update, enhance and improve our systems. Thisincludes expansion of our software and service offerings that supportpay-for-performance initiatives around accountable care organizations, bringinggreater ease of use and intuitiveness to our software products, enhancing ourmanaged cloud and hosting services to lower our clients' total cost ofownership, expanding our interoperability and enterprise analytics capabilities,and furthering development and enhancements of our portfolio ofspecialty-focused templates within our electronic health records software. 31--------------------------------------------------------------------------------The capitalization of software development costs results in a reduction to ourreported net research and development costs. Our software capitalization rate,or capitalized software costs as a percentage of gross expenditures, has variedhistorically and may continue to vary based on the nature and status of specificprojects and initiatives in progress. Although changes in softwarecapitalization rates have no impact on our overall cash flows, it results influctuations in the amount of software development costs that may be capitalizedor expensed up front and the amount of net research and development costsreported in our condensed consolidated statements of net income (loss) andcomprehensive income (loss), and ultimately also affects the future amortizationof our previously capitalized software development costs. Refer to Note 9,"Capitalized Software Costs" of our notes to condensed consolidated financialstatements included elsewhere in this Report for additional information oncurrent period amortization of capitalized software costs and an estimate offuture expected amortization.Share-based compensation expense included in research and development costs was$1.7 million and$1.1 million for the three months endedSeptember 30, 2022 and2021, respectively. Share-based compensation expense included in research anddevelopment costs was$3.2 million and$2.2 million for the six months endedSeptember 30, 2020 and 2021, respectively.Net research and development costs for the three months endedSeptember 30, 2022 increased$2.3 million compared to the prior year period due to$5.6 million higher gross expenditures, offset by$3.3 million higher capitalization ofsoftware costs.Net research and development costs for the six months endedSeptember 30, 2022 increased$4.8 million compared to the prior year period due to$11.5 million higher gross expenditures, offset by$6.7 million higher capitalization ofsoftware costs.The increase in gross expenditures in the three and six months endedSeptember30, 2022 compared to the prior year was primarily driven by an increase inconsulting costs, as well as higher personnel costs due to our annual meritincreases and increased headcount. Our software capitalization rate fluctuatesdue to differences in the nature and status of our projects and initiativesduring a given year, which affects the amount of development costs that may becapitalized.
Amortization of Acquired Intangible Assets
The following table presents our amortization of acquired intangible assets forthe three and six months ended
Three Months Ended September 30, Six Months Ended September 30, 2022 2021 2022 2021Amortization of acquired intangible assets $ 705 $ 881 $ 1,410 $ 1,762Amortization of acquired intangible assets included in operating expenseconsists of the amortization related to our customer relationships and tradenames intangible assets acquired as part of our business combinations. Refer toNote 8, "Intangible Assets" of our notes to condensed consolidated financialstatements included elsewhere in this Report for an estimate of future expectedamortization.Amortization of acquired intangible assets for the three and six months endedSeptember 30, 2022 decreased$0.2 million and$0.4 million , respectivelycompared to the prior year period due to lower amortization of the customerrelationships intangible assets associated withMedfusion and HealthFusion asthese assets are amortized under the accelerated method of amortization.
Restructuring Costs and Impairment of Assets
During the three and six months endedSeptember 30, 2022 , we recordedrestructuring costs of$0.3 million , consisting of payroll-related costs, suchas severance, outplacement costs, and continuing healthcare coverage, associatedwith the involuntary separation of employees pursuant to a one-time benefitarrangement, within operating expenses in our consolidated statements of netincome (loss) and comprehensive income (loss). The payroll-related costs weresubstantially paid as ofSeptember 30, 2022 .
During the six months ended
In the three and six months endedSeptember 30, 2022 we vacated portions ofcertain leased locations and recorded impairments of$0.8 million and$1.3million , respectively, to our right-of-use assets and certain related fixedassets associated with the vacated locations, or portions thereof, inSt. Louis ,Atlanta , Horsham, andBangalore based on projected sublease rental income andestimated sublease commencement dates and the remeasurement of our operatinglease liability associated with the modification of ourSt. Louis lease.
In the three and six months ended
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locations, or portions thereof, in
The impairment analyses were performed at the asset group level and theimpairment charges were estimated by comparing the fair value of each assetgroup based on the expected cash flows to its respective book value. Wedetermined the discount rate for each asset group based on the approximateinterest rate on a collateralized basis with similar remaining terms andpayments as of the impairment date. Significant judgment was required toestimate the fair value of each asset group and actual results could vary fromthe estimates, resulting in potential future adjustments to amounts previouslyrecorded.
Interest and Other Income and Expense
The following table presents our interest expense for the three and six monthsended
Three Months Ended September
30, Six Months Ended
2022 2021 2022 2021Interest income$ 74 $ 17$ 120 $ 29Interest expense (325 ) (320 ) (655 ) (637 )Other income (expense), net 10,292 (12 ) 10,287 (34 )Interest expense relates to our revolving credit agreement and the relatedamortization of deferred debt issuance costs. Refer to Note 10, "Line of Credit"of our notes to condensed consolidated financial statements included elsewherein this Report for additional information.The changes in interest expense are primarily caused by fluctuations inoutstanding balances under our revolving credit agreement and the relatedamortization of debt issuance costs. As ofSeptember 30, 2022 andSeptember 30,2021 , we had no outstanding balances under the revolving credit agreement.Interest income is earned from funds in our money market accounts. Thefluctuation of other income and expense compared to the prior year period areprimarily due to changes to theIndia foreign exchange rates.
The change in other income (expense), net is due to the
Provision for (Benefit of) Income Taxes
The following table presents our provision for (benefit of) income taxes for thethree and six months ended
Three Months Ended September 30, Six Months Ended September 30, 2022 2021 2022 2021
Provision for (benefit of) income taxes $ 5,707 $
(1,441 ) $ 5,460 $ (882 )Effective tax (benefit) rate
29.5 % 17.5 % 27.0 % 18.4 %The increase in the effective tax rate for the three and six months endedSeptember 30, 2022 compared to the prior periods was primarily due to the netbenefit of discrete items related to stock based compensation in the currentperiod compared to prior year.
Liquidity and Capital Resources
The following table presents selected financial statistics and information forthe six months ended
Six Months Ended September 30, 2022 2021Cash and cash equivalents$ 70,728 $ 75,303 Unused portion of revolving credit agreement (1) 300,000 300,000Total liquidity$ 370,728 $ 375,303 Net income (loss)$ 14,771 $ (3,923 ) Net cash provided by operating activities$ 33,796 $ 20,479 33
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(1) As of
million revolving credit agreement.
We had no outstanding borrowings under our revolving credit agreement as ofSeptember 30, 2022 ,March 31, 2022 , andSeptember 30, 2021 . Our principalsources of liquidity are our cash generated from operations, driven mostly byour net income and working capital management, our cash and cash equivalents,and our revolving credit agreement.We believe that our cash and cash equivalents balance as ofSeptember 30, 2022 ,together with our cash flows from operating activities and liquidity provided byour revolving credit agreement, will be sufficient to meet our working capitaland capital expenditure requirements for the next twelve months.The extent to which COVID-19 and other macroeconomic factors may impact ourbusiness, financial results, cash flows, and liquidity requirements depend onnumerous evolving factors including, but not limited to, the magnitude andduration of COVID-19; the impact on our employees; worldwide macroeconomicconditions, including interest rates, employment rates, and health insurancecoverage; and governmental and business reactions to the pandemic and othermacroeconomic factors. We continue to monitor the broader implications of theglobal COVID-19 pandemic and other macroeconomic factors and may take furtheractions that we determine are in the best interests of our employees, customers,partners, suppliers, and shareholders.
Cash and Cash Equivalents
As ofSeptember 30, 2022 , our cash and cash equivalents balance of$70.7 million compares to$59.8 million as ofMarch 31, 2022 and$75.3 million as ofSeptember30, 2021 .We may continue to use a portion of our funds as well as available financingfrom our revolving credit agreement, to the extent permissible, for sharerepurchases, future acquisitions, or other similar business activities, althoughthe specific timing and amount of funds to be used is not currentlydeterminable. We intend to expend some of our available funds for thedevelopment of products complementary to our existing product line as well asnew versions of certain of our products. These developments are intended to takeadvantage of more powerful technologies and to increase the integration of ourproducts.Our investment policy is determined by our Board of Directors. Excess cash, ifany, may be invested in very liquid short term assets including tax exempt andtaxable money market funds, certificates of deposit and short term municipalbonds with average maturities of 365 days or less at the time of purchase. OurBoard of Directors continues to review alternate uses for our cash including anexpansion of our investment policy and other items. Any or all of these programscould significantly impact our investment income in future periods.
Cash Flows from Operating Activities
The following table summarizes our condensed consolidated statements of cashflows for the six months ended
Six Months Ended September 30, 2022 2021Net income (loss)$ 14,771 $ (3,923 )Non-cash expenses 28,604 39,574Cash from net income, as adjusted$ 43,375 $ 35,651Change in contract assets and liabilities, net 1,737 (412 )Change in accounts receivable (1,527 ) 4,874Change in all other assets and liabilities (9,789 ) (19,634 )Net cash provided by operating activities$ 33,796
$ 20,479
For the six months endedSeptember 30, 2022 , cash provided by operatingactivities increased$13.3 million compared to the prior year period, primarilydue to$7.7 million higher cash from net income, as adjusted for a$11.0 million decrease in non-cash expenses,$9.8 million increase in cash from changes inother assets and liabilities, and an increase in cash of$2.1 million from netchanges in contract assets and liabilities, partially offset by a$6.4 million decrease in cash from changes in accounts receivable. Net income increased$18.7million compared to the prior year period, as described in the sections above.Non-cash expenses decreased primarily due to a$10.3 million gain from thedisposition of our Commercial Dental assets reflected in the current yearperiod. The increase in cash from changes in other assets and liabilities isprimarily due to changes in our income tax assets and liabilities, including ourFIN 48 tax liability, and changes in accounts payable due to timing of invoicepayments, partially offset by a decrease in cash from higher payments of cashincentive bonuses compared to the prior year due to a higher rate of bonusachievement for the prior fiscal year. The increase in cash from changes in netcontract assets and liabilities was primarily due to higher invoicing associatedwith higher bookings and sales volume and our annual CPI fee increases. Thedecrease in cash from changes in accounts receivable is primarily due tosignificant efforts in the prior year period to resolve aged balances andimprove collections resulting in a larger decrease in our account receivablebalances during the prior year period. 34--------------------------------------------------------------------------------
Cash Flows from Investing Activities
Net cash used in investing activities for the six months endedSeptember 30,2022 was$8.6 million compared with$13.4 million in the prior year period. Thedecrease in net cash used in investing activities is primarily due to$11.3million in cash proceeds from the disposition of our Commercial Dental assets,partially offset by higher additions to capitalized software in the currentperiod.
Cash Flows from Financing Activities
Net cash used in financing activities for the six months endedSeptember 30,2022 was$13.4 million compared with$4.1 million cash used in financingactivities in the prior year period. The increase in cash used in financingactivities is primarily due to$9.9 million in share repurchases in the currentperiod and higher payments for taxes related to net share settlement of equityawards, partially offset by higher proceeds from the issuance of shares underour employee equity plans in the six months endedSeptember 30, 2022 .
Contractual Obligations
Debt
OnMarch 12, 2021 , we entered into a$300 million second amended and restatedrevolving credit agreement (the "Credit Agreement"). The Credit Agreementmatures onMarch 12, 2026 and the full balance of the revolving loans and allother obligations under the Credit Agreement must be paid at that time. Inaddition, we are required to prepay the revolving loan balance if at any timethe aggregate principal amount outstanding under the Credit Agreement exceedsthe aggregate commitments thereunder. OnMay 17, 2022 , we entered into anamendment to the Credit Agreement, which, among other changes, provides morefavorable terms and flexibility with regards to our ability to obtain additionalrevolving credit commitments and/or term loans thereunder, including amendmentsto the net leverage ratio and definition of restricted payments.
As of
Non-cancelable Operating Leases
As ofSeptember 30, 2022 , the total amount of future lease payments underoperating leases was$12.7 million , of which$7.4 million is short-term. Ouroperating leases have a weighted average remaining lease term of 2.0 years.Included in our total future lease payments are$9.3 million of remaining leaseobligations for vacated properties, of which$6.1 million is short-term.Remaining lease obligations for vacated properties relates to certain locations,including Cary,Brentwood , North Canton, Fairport and portions ofAtlanta ,Horsham,St. Louis ,Hunt Valley , andBangalore that we have vacated as part ofour reorganization efforts and are actively marketing for sublease. Refer toNote 5, "Leases" of our notes to consolidated financial statements includedelsewhere in this Report for additional information. The remaining obligationshave not been reduced by projected sublease rentals or by minimum subleaserentals of$2.1 million due in future periods under non-cancelable subleases.
Purchase Obligations
As of
Share Repurchase Program
InOctober 2021 , the Board authorized a share repurchase program under which wemay repurchase up to$60.0 million of our outstanding shares of common stockthroughMarch 2023 . The timing and amount of any share repurchases under theshare repurchase program will be determined by our management at its discretionbased on ongoing assessments of the capital needs of the business, the marketprice of our common stock and general market conditions. The program does notobligate the Company to acquire any particular amount of our common stock, andthe share repurchase program may be suspended or discontinued at any time at ourdiscretion.During the three months endedSeptember 30, 2022 , we repurchased 428,297 sharesof common stock for a total of$7.4 million at a weighted-average sharerepurchase price of approximately$17.21 . As ofSeptember 30, 2022 ,$14.3million remained available for share repurchases pursuant to the Company's sharerepurchase program. 35--------------------------------------------------------------------------------
Deferred Compensation
Deferred compensation liability was$7.0 million , for which timing of futurebenefit payments to employees is not determinable. To offset this liability, wehave purchased life insurance policies on some of the participants. The Companyis the owner and beneficiary of the policies and the cash values are intended toproduce cash needed to help make the benefit payments to employees when theyretire or otherwise leave the Company. The cash surrender value of the lifeinsurance policies for deferred compensation was$7.0 million .
Income Taxes
We have an uncertain tax position liability of
Off-Balance Sheet Arrangements
During the six months ended, we did not have any relationships withunconsolidated organizations, financial partnerships, or special purposeentities that would have been established for the purpose of facilitatingoff-balance sheet arrangements or other limited purposes.
New Accounting Pronouncements
Refer to Note 1, "Summary of Significant Accounting Policies" of our notes tocondensed consolidated financial statements included elsewhere in this Reportfor a discussion of new accounting standards.
Critical Accounting Policies and Estimates
The discussion and analysis of our condensed consolidated financial statementsand results of operations is based upon our condensed consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted inthe United States of America ("GAAP"). The preparation ofthese condensed consolidated financial statements requires us to make estimatesand judgments that affect our reported amounts of assets, liabilities, revenueand expenses, and related disclosures. We base our assumptions, estimates andjudgments on historical experience, current trends, and other factors we believeto be reasonable under the circumstances, and we evaluate these estimates on anongoing basis. On a regular basis, we review the accounting policies and updateour assumptions, estimates, and judgments, as needed, to ensure that ourcondensed consolidated financial statements are presented fairly and inaccordance with GAAP. Actual results could differ materially from our estimatesunder different assumptions or conditions. To the extent that there are materialdifferences between our estimates and actual results, our financial condition orresults of operations will be affected.We describe our significant accounting policies in Note 1, "Summary ofSignificant Accounting Policies," of our notes to consolidated financialstatements included in our Annual Report. We discuss our critical accountingpolicies and estimates in Part II, Item 7, "Management's Discussion and Analysisof Financial Condition and Results of Operations," of our Annual Report.There have been no other material changes in our significant accounting policiesor critical accounting policies and estimates since the fiscal year endedMarch31, 2022 . 36
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