The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except shares and per share data)
(Unaudited)
1. Summary of Significant Accounting Policies
Principles of Consolidation.
The consolidated financial statements include the accounts of Quality Systems, Inc. and its wholly-owned subsidiaries (collectively, the “Company”). Each of the terms “we,” “us,” or “our” as used herein refers collectively to the Company, unless otherwise stated. All intercompany accounts and transactions have been eliminated.
Basis of Presentation.
The accompanying unaudited consolidated financial statements as of June 30, 2018 and for the three months ended June 30, 2018 have been prepared in accordance with the requirements of Quarterly Report on Form 10-Q and Article 10 of the Securities and Exchange Commission Regulation S-X and therefore do not include all information and notes which would be presented were such consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These consolidated financial statements should be read in conjunction with the audited consolidated financial statements presented in our Annual Report on Form 10-K for the fiscal year ended March 31, 2018. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments which are necessary for a fair statement of the results of operations and cash flows for the periods presented. The results of operations for such interim periods are not necessarily indicative of results of operations to be expected for the full year.
Effective April 1, 2018, we changed the presentation of our consolidated statements of comprehensive income to present revenue and cost of revenue under a ‘recurring’ caption and a ‘software, hardware, and other non-recurring’ caption. Recurring consists of revenue and related cost of revenue for subscription services, support and maintenance, managed services, and electronic data interchange and data services. Software, hardware, and other non-recurring consists of revenue and related cost of revenue, for software licenses, hardware, and other non-recurring services, such as implementation, training, and consulting services. Cost of revenue within recurring and software, hardware, and other non-recurring are reported exclusive of the amortization of capitalized software costs and acquired intangible assets. Amortization of capitalized software costs and acquired intangible assets are now reported in a separate cost of revenue caption. Prior period amounts have been reclassified to conform to current year presentation.
Also effective April 1, 2018, prior period amounts previously presented as deferred revenue are now presented as contract liabilities. Prior period balances have not changed.
References to amounts in the consolidated financial statement sections are in thousands, except shares and per share data, unless otherwise specified.
Significant Accounting Policies
.
We adopted Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers: Topic 606
, effective on April 1, 2018 using the modified retrospective method (see Note 2). There have been no other material changes to our significant accounting policies from those disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2018.
Share-Based Compensation.
The following table summarizes total share-based compensation expense included in the consolidated statements of comprehensive income for the three months ended June 30, 2018 and 2017:
|
Three Months Ended June 30,
|
|
|
2018
|
|
|
2017
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
Cost of revenue
|
$
|
233
|
|
|
$
|
137
|
|
Research and development costs
|
|
610
|
|
|
|
361
|
|
Selling, general and administrative
|
|
2,273
|
|
|
|
1,543
|
|
Total share-based compensation
|
|
3,116
|
|
|
|
2,041
|
|
Income tax benefit
|
|
(753
|
)
|
|
|
(716
|
)
|
Decrease in net income
|
$
|
2,363
|
|
|
$
|
1,325
|
|
Recently adopted accounting pronouncements.
Recently adopted accounting pronouncements are discussed below or in the notes, where applicable.
In March 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-05,
Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118
, to add various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No. 118 (“SAB 118”) to Accounting Standards codification 740. SAB 118 was issued by the SEC in December 2017 to provide immediate guidance for accounting implications of the United States Tax Reform under the Tax Cuts and Jobs Act (“TCJA”). We have evaluated the potential impacts of SAB 118 and have applied this guidance to our consolidated financial statements and related disclosures (see Note 10).
7
In May 2017, FASB issued ASU 2017-09,
Compensation–Stock Compensation (Topic 718): S
cope of Modification Accounting
("ASU 2017-09"). ASU 2017-09 clarifies the changes to terms or conditions of a share-based payment award that require an entity to apply modification accounting. ASU 2017-09 is effective for annual periods, and interim periods within those annual periods,
beginning after December 15, 2017. Early application is permitted and prospective application is required. ASU 2017-09 is effective for us in the first quarter of fiscal 2019. The adoption of this new standard did not have a material impact on our consoli
dated financial statements.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
(“ASU 2017-01”). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted in two scenarios as identified in the new standard. ASU 2017-01 is effective for us in the first quarter of fiscal 2019. The adoption of this new standard did not have a material impact on our consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update ("ASU") 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
(“ASU 2016-18”). ASU 2016-18 provides guidance on the classification of restricted cash and cash equivalents in the statement of cash flows. Although it does not provide a definition of restricted cash or restricted cash equivalents, it states that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. ASU 2016-18 is effective for us in the first quarter of fiscal 2019. The adoption of this new standard resulted in an increase to net cash provided by operating activities of $5,147 and $999 for the three months ended June 30, 2018 and 2017, respectively.
In August 2016, the FASB issued ASU 2016-15,
Classification of Certain Cash Receipts and Cash Payments.
ASU 2016-15 is intended to add and clarify guidance on the classification of certain cash receipts and cash payments in the statement of cash flows to eliminate diversity in practice related to how such cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. ASU 2016-15 is effective for us in the first quarter of fiscal 2019. The adoption of this new standard did not have a material impact on our consolidated financial statements.
In May 2014, the FASB, along with the International Accounting Standards Board, issued ASU 2014-09,
Revenue from Contracts with Customers: Topic 606
("ASC 606"), which supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605,
Revenue Recognition
(“ASC 605”). We adopted ASC 606 and all related amendments as of April 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption (see Note 2).
Recent Accounting Standards Not Yet Adopted.
Recent accounting pronouncements requiring implementation in current or future periods are discussed below or in the notes, where applicable.
In January 2017, the FASB issued ASU 2017-04,
Intangibles–Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”). ASU 2017-04 removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of Step two of the goodwill impairment test. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. ASU 2017-04 is effective prospectively for annual and interim periods beginning after December 15, 2019, and early adoption is permitted on goodwill impairment tests performed on testing dates after January 1, 2017. ASU 2017-04 is effective for us in the fourth quarter of fiscal 2020, and we currently do not expect the adoption of this new standard to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
(“ASU 2016-02”), which is intended to improve financial reporting about leasing transactions. The new guidance will require lessees to recognize on their balance sheets the assets and liabilities for the rights and obligations created by leases and to disclose key information about the leasing arrangements. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. ASU 2016-02 is effective for us in the first quarter of fiscal 2020. We are currently in the process of evaluating the potential impact of adoption of this updated authoritative guidance on our consolidated financial statements.
We do not believe that any other recently issued, but not yet effective accounting standards, if adopted, would have a material impact on our consolidated financial statements.
8
2.
Revenue from Contracts with Customers
Adoption of ASC 606
In May 2014, the FASB issued ASC 606, which
supersedes the revenue recognition requirements in
ASC 605
and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new guidance provides a five-step process for determining the amount and timing of revenue recognition and establishes disclosure requirements to enable users of the financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers. It also provides guidance on the accounting treatment for the incremental costs of obtaining a contract that would not have been incurred had the contract not been obtained.
We adopted ASC 606 and all related amendments as of April 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. Results for reporting periods beginning after April 1, 2018 are presented under ASC 606, while prior period comparative information has not been adjusted and continue to be reported under the accounting standards in effect for those prior periods. We have also implemented changes to our processes, policies, and internal controls over financial reporting to address the impacts of the new revenue recognition standard on our consolidated financial statements and related disclosures.
The adjustments to reflect the cumulative effect of the changes to the balances of our previously reported consolidated balance sheet as of March 31, 2018 for the adoption of ASC 606 are summarized as follows:
|
|
As Reported
|
|
|
ASC 606 Transition
|
|
|
Adjusted
|
|
|
|
March 31, 2018
|
|
|
Adjustments
|
|
|
April 1, 2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
84,962
|
|
|
$
|
2,380
|
|
|
$
|
87,342
|
|
Contract assets
|
|
|
—
|
|
|
|
13,446
|
|
|
|
13,446
|
|
Prepaid expenses and other current assets
|
|
|
17,180
|
|
|
|
(223
|
)
|
|
|
16,957
|
|
Deferred income taxes, net
|
|
|
9,219
|
|
|
|
(2,884
|
)
|
|
|
6,335
|
|
Contract assets, net of current
|
|
|
—
|
|
|
|
2,731
|
|
|
|
2,731
|
|
Other assets
|
|
|
18,795
|
|
|
|
6,679
|
|
|
|
25,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract liabilities
|
|
|
54,079
|
|
|
|
4,174
|
|
|
|
58,253
|
|
Accrued compensation and related benefits
|
|
|
27,910
|
|
|
|
745
|
|
|
|
28,655
|
|
Other current liabilities
|
|
|
48,317
|
|
|
|
9,964
|
|
|
|
58,281
|
|
Contract liabilities, net of current
|
|
|
1,173
|
|
|
|
(1,173
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
78,708
|
|
|
|
8,419
|
|
|
|
87,127
|
|
We recorded a net increase to retained earnings of $8,419 as of April 1, 2018 due to the cumulative impact of adopting ASC 606, with the impact primarily related to (i) revenue cycle management (“RCM”) and related services revenue whereby
revenue recognition may be accelerated under ASC 606 for software, subscriptions, support and maintenance, and professional services included with RCM arrangements as the timing of revenue recognition is based upon the transfer of value of the promised goods or services to our clients, which may occur prior to time that client c
ollections occur, (ii) the amortization of capitalized direct sales commissions costs over a longer period of time under ASC 606, and (iii) the income tax impact of the cumulative transition adjustment. Further, we recorded reclassifications to present certain unbilled amounts as contract assets and sales returns reserves and certain customer liabilities as other current liabilities, which were both previously recorded within accounts receivables on our consolidated balance sheets.
We applied the practical expedient permitting the recognition of revenue in the amount to which the entity has a right to invoice based on the actual usage by the customers for our
electronic data interchange
(“EDI”) services and other transaction-based services. We have reflected the aggregate effect of all contract modifications occurring prior to the ASC 606 adoption date when (i) identifying the satisfied and unsatisfied performance obligations, (ii) determining the transaction price, and (iii) allocating the transaction price to the satisfied and unsatisfied performance obligations.
The adoption of ASC 606 had no transition impact on cash provided by or used in operating, financing or investing activities reported in our consolidated statement of cash flows.
9
The impact of t
he adoption of ASC 606 on our consolidated balance sheet and
consolidated statements of net income and comprehensive income
as of and for the three months ended June 30, 2018, assuming that the previous revenue recognition guidance in ASC 605 had been in e
ffect, is summarized as follows:
|
|
June 30, 2018
|
|
|
|
As reported under
|
|
|
Adjustments due to
|
|
|
As disclosed under
|
|
|
|
ASC 606
|
|
|
adoption of ASC 606
|
|
|
ASC 605
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
86,064
|
|
|
$
|
6,685
|
|
|
$
|
92,749
|
|
Contract assets
|
|
|
10,448
|
|
|
|
(10,448
|
)
|
|
|
—
|
|
Income taxes receivable
|
|
|
7,677
|
|
|
|
246
|
|
|
|
7,923
|
|
Prepaid expenses and other current assets
|
|
|
17,397
|
|
|
|
344
|
|
|
|
17,741
|
|
Deferred income taxes, net
|
|
|
6,249
|
|
|
|
2,884
|
|
|
|
9,133
|
|
Contract assets, net of current
|
|
|
2,768
|
|
|
|
(2,768
|
)
|
|
|
—
|
|
Other assets
|
|
|
27,383
|
|
|
|
(7,703
|
)
|
|
|
19,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract liabilities
|
|
|
52,196
|
|
|
|
6,241
|
|
|
|
58,437
|
|
Accrued compensation and related benefits
|
|
|
17,567
|
|
|
|
(158
|
)
|
|
|
17,409
|
|
Other current liabilities
|
|
|
62,067
|
|
|
|
(8,658
|
)
|
|
|
53,409
|
|
Contract liabilities, net of current
|
|
|
—
|
|
|
|
1,179
|
|
|
|
1,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
89,775
|
|
|
|
(9,364
|
)
|
|
|
80,411
|
|
|
|
Three Months Ended June 30, 2018
|
|
|
|
As reported under
|
|
|
Adjustments due to
|
|
|
As disclosed under
|
|
|
|
ASC 606
|
|
|
adoption of ASC 606
|
|
|
ASC 605
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
$
|
120,007
|
|
|
$
|
687
|
|
|
$
|
120,694
|
|
Software, hardware, and other non-recurring
|
|
|
13,193
|
|
|
|
(641
|
)
|
|
|
12,552
|
|
Total revenue
|
|
|
133,200
|
|
|
|
46
|
|
|
|
133,246
|
|
Total cost of revenue
|
|
|
61,851
|
|
|
|
40
|
|
|
|
61,891
|
|
Gross profit
|
|
|
71,349
|
|
|
|
6
|
|
|
|
71,355
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
44,636
|
|
|
|
1,197
|
|
|
|
45,833
|
|
Research and development costs, net
|
|
|
22,128
|
|
|
|
—
|
|
|
|
22,128
|
|
Amortization of acquired intangibles
|
|
|
1,168
|
|
|
|
—
|
|
|
|
1,168
|
|
Total operating expenses
|
|
|
67,932
|
|
|
|
1,197
|
|
|
|
69,129
|
|
Income from operations
|
|
|
3,417
|
|
|
|
(1,191
|
)
|
|
|
2,226
|
|
Interest and other income, net
|
|
|
(327
|
)
|
|
|
—
|
|
|
|
(327
|
)
|
Income before provision for income taxes
|
|
|
3,090
|
|
|
|
(1,191
|
)
|
|
|
1,899
|
|
Provision for income taxes
|
|
|
442
|
|
|
|
(246
|
)
|
|
|
196
|
|
Net income
|
|
$
|
2,648
|
|
|
$
|
(945
|
)
|
|
$
|
1,703
|
|
As of June 30, 2018, the reported balances include the cumulative effect adjustments of adopting ASC 606.
Revenue Recognition and Performance Obligations
We generate revenue from sales of licensing rights and subscriptions to our software solutions, hardware and third-party software products, support and maintenance, managed services (formerly referred to as revenue cycle management and related services), EDI, and other non-recurring services, including implementation, training, and consulting services. Our contracts with customers may include multiple performance obligations that consist of various combinations of our software solutions and related services, which are generally capable of being distinct and accounted for as separate performance obligations.
10
The total transaction price is allocated to each performance obligation within an arrangement based on estimated standalone selling prices.
We generally determine standalone selling prices based on the prices charged to
customers, except for certain software licenses that are based on the residual approach and certain maintenance customers that are based on substantive renewal rates. In instances where standalone selling price is not observable, such as software licenses
included in our RCM arrangements, we estimate standalone selling price utilizing an expected cost plus a margin approach. When standalone selling prices are not observable, significant judgment is required in estimating the standalone selling price for eac
h performance obligation.
Revenue is recognized when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration that we expect to be entitled to in exchange for those goods or services. We expect that the new revenue guidance in ASC 606 will result in additional complexity to our revenue recognition, including the use of an increased amount of significant judgments and estimates, particularly as it relates to our RCM services revenue.
We exclude sales tax
from the measurement of the transaction price and
record revenue net of taxes collected from customers and subsequently remitted to governmental authorities.
The following table presents our revenues disaggregated by our major revenue categories and by occurrence:
|
|
Three Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Recurring revenues:
|
|
|
|
|
|
|
|
|
Subscription services
|
|
$
|
28,328
|
|
|
$
|
25,575
|
|
Support and maintenance
|
|
|
41,248
|
|
|
|
41,116
|
|
Managed services
|
|
|
26,270
|
|
|
|
29,175
|
|
Electronic data interchange and data services
|
|
|
24,161
|
|
|
|
23,312
|
|
Total recurring revenues
|
|
|
120,007
|
|
|
|
119,178
|
|
|
|
|
|
|
|
|
|
|
Software, hardware, and other non-recurring revenues:
|
|
|
|
|
|
|
|
|
Software license and hardware
|
|
|
7,443
|
|
|
|
7,420
|
|
Other non-recurring services
|
|
|
5,750
|
|
|
|
4,324
|
|
Total software, hardware and other non-recurring revenues
|
|
|
13,193
|
|
|
|
11,744
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
133,200
|
|
|
$
|
130,922
|
|
Recurring revenues consists of subscription services, support and maintenance, managed services, and EDI and data services. Software, hardware, and other non-recurring consists of revenue from sales of software license and hardware and certain non-recurring services, such as implementation, training, and consulting performed for clients who use our products.
Generally, we recognize revenue under Topic 606 for our most significant performance obligations as follows:
Subscription services.
Performance obligations involving subscription services, which include annual licenses, are satisfied over time as the customer simultaneously receives and consumes the benefits of the services throughout the contract period. We recognize revenue related to these services ratably over the respective noncancelable contract term.
Support and maintenance.
Performance obligations involving support and maintenance are satisfied over time as the customer simultaneously receives and consumes the benefits of the maintenance services provided. Our support and maintenance services may consist of separate performance obligations, such as unspecified upgrades or enhancements and technical support, which are considered stand-ready in nature and can be offered at various points during the service period. Since the efforts associated with the combined support and maintenance services are rendered concurrently and provided evenly throughout the service period, we consider the series of support and maintenance services to be a single performance obligation. Therefore, we recognize revenue related to these services ratably over the respective noncancelable contract term.
Managed services.
Managed services consist primarily of RCM and related services, but also includes transcription services and certain other recurring services. Performance obligations associated with RCM services are satisfied over time as the customer simultaneously receives and consumes the benefits of the services executed throughout the contract period. The majority of service fees under our RCM arrangements are variable consideration contingent upon collections by our clients. We estimate the variable consideration which we expect to be entitled to over the noncancelable contract term associated with our RCM service arrangements. The estimate of variable consideration included in the transaction price typically involves estimating the amounts we will ultimately collect on behalf of our clients and the relative fee we charge that is generally calculated as a percentage of those collections. Inputs to these estimates include, but are not limited to, historical service fees and collections amounts, timing of historical collections relative to the timing of when claims are submitted by our clients to their respective payers, macroeconomic
11
trends, and anticipated changes in the number of providers. Significant judgement is required when estimating the total transaction price
based on the variable consideration. We may apply certain constraints, when appropriate and permitted under ASC 606, to our estimates around our variable consideration in order to ensure that our estimates do not pose a risk of significantly misstating our
revenue in any reporting period. RCM and related services may not be rendered evenly over the contract period as the timing of services are based on customer collections, which may vary throughout the service period. We recognize revenue for RCM based on
the amount of collections received throughout the contract term as it most closely depicts our efforts to transfer our service obligations to the customer. Performance obligations related to the transcription services and other recurring services are gener
ally satisfied as the corresponding services are provided and revenue is recognized as such services are rendered.
Electronic data interchange and data services.
Performance obligations related to EDI and other transaction processing services are satisfied at the point in time the services are rendered. The transfer of control occurs when the transaction processing services are delivered and the customer receives the benefits from the services provided.
Software license and hardware.
Software license and hardware are considered point-in-time performance obligations as control is transferred to customers upon the delivery of the software license and hardware. Our software licenses are considered functional licenses, and revenue recognition generally occurs on the date of contract execution as the customer is provided with immediate access to the license. We generally determine the amount of consideration allocated to the software license performance obligation using the residual approach, except for certain RCM arrangements where the amount allocated to the software license performance obligation is determined based on estimated relative standalone selling prices. For hardware, we recognize revenue upon transfer of such hardware or devices to the customer.
Other non-recurring services.
Performance obligations related to other non-recurring services, including implementation, training, and consulting services, are generally satisfied as the corresponding services are provided. Once the services have been provided to the customer, the transfer of control has occurred. Therefore, we recognize revenue as such services are rendered.
Transaction Price Allocated to Remaining Performance Obligations
As of June 30, 2018, the aggregate amount of transaction price related to remaining unsatisfied or partially unsatisfied performance obligations over the respective noncancelable contract term was approximately $422,000, of which we expect to recognize approximately 9% as services are rendered or goods are delivered
,
47% over the next 12 months, and the remainder thereafter.
Contract Balances
Contract balances result from the timing differences between our revenue recognition, invoicing, and cash collections. Such contract balances include accounts receivables, contract assets and liabilities, and other customer deposits and liabilities balances. Accounts receivable includes invoiced amounts where the right to receive payment is unconditional and only subject to the passage of time. Contract assets include amounts where revenue recognized exceeds the amount invoiced to the customer and the right to payment is not solely subject to the passage of time. Contract assets are generally associated with our sales of software licenses, but may also be associated other performance obligations such as subscription services, support and maintenance, annual licenses, and professional services, where control has been transferred to our customers but the associated payments are based on future customer collections (in the case of our RCM service arrangements) or based on future milestone payment due dates. In such instances, the revenue recognized may exceed the amount invoiced to the customer and such balances are included in contract assets since our right to receive payment is not unconditional, but rather is conditional upon customer collections or the continued functionality of the software and our ongoing support and maintenance obligations. Contract liabilities consist mainly of fees invoiced or paid by our clients for which the associated services have not been performed and revenues have not been recognized. Contract assets and contract liabilities are reported in a net position on an individual contract basis at the end of each reporting period. Contract assets are classified as current or long-term on our consolidated balance sheets based on the timing of when we expect to complete the related performance obligations and invoice the customer. Contract liabilities are classified as current on our consolidated balance sheets since the revenue recognition associated to the related customer payments and invoicing is expected to occur within the next 12 months.
Our contracts with customers do not include any major financing components.
Costs to Obtain or Fulfill a Contract
ASC 606 requires the capitalization of all incremental costs of obtaining a contract with a customer to the extent that such costs are directly related to a contract and expected to be recoverable. Our sales commissions and related sales incentives are considered incremental costs requiring capitalization. Capitalized contract costs are amortized to expense utilizing a method that is consistent with the transfer of the related goods or services to the customer. The amortization period ranges from less than one year up to eight years, based on the period over which the related goods and services are transferred, including consideration of the expected customer renewals and the related useful lives of the products.
12
Capitalized commissions costs were $12,492 as of June 30, 2018,
of which $2,952 is current and included as other current assets and $9,540 is long-term and included within other assets on our consolidated balance sheets, based on the expected timing of expense recognition. During the three months ended June 30, 2018,
we recognized $1,589 of commissions expense primarily related to the amortization of capitalized commissions costs, which is included as a selling, general and administrative expense in the
consolidated statement of comprehensive income.
3. Fair Value Measurements
The following tables set forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis at June 30, 2018 and March 31, 2018:
|
|
Balance At
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
|
|
|
Significant Other
Observable Inputs
|
|
|
Unobservable
Inputs
|
|
|
|
June 30, 2018
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
(1)
|
|
$
|
26,544
|
|
|
$
|
26,544
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restricted cash and cash equivalents
|
|
|
7,520
|
|
|
|
7,520
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
34,064
|
|
|
$
|
34,064
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Balance At
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
|
|
|
Significant Other
Observable Inputs
|
|
|
Unobservable
Inputs
|
|
|
|
March 31, 2018
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
(1)
|
|
$
|
28,845
|
|
|
$
|
28,845
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restricted cash and cash equivalents
|
|
|
2,373
|
|
|
|
2,373
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
31,218
|
|
|
$
|
31,218
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(1)
|
Cash equivalents consist primarily of money market funds.
|
We believe that the fair value of other financial assets and liabilities, including accounts receivable, accounts payable, and line of credit, approximate their respective carrying values due to their nominal credit risk.
Non-Recurring Fair Value Measurements
We have certain assets, including goodwill and other intangible assets, which are measured at fair value on a non-recurring basis and are adjusted to fair value only if an impairment charge is recognized. The categorization of the framework used to measure fair value of the assets is considered to be within the Level 3 valuation hierarchy due to the subjective nature of the unobservable inputs used. During the three months ended June 30, 2018, no adjustments were recorded.
4. Business Combinations
On January 31, 2018, we completed the acquisition of Inforth Technologies, LLC ("Inforth") pursuant to the Membership Interest Purchase Agreement, dated January 31, 2018. Headquartered in Traverse City, MI. Inforth was one of our premier clinical content and technical services partners specializing in comprehensive solutions for physician practices. The preliminary purchase price of Inforth totaled $4,337 and was funded by cash flows from operations.
On August 16, 2017, we completed the acquisition of EagleDream Health, Inc. ("EagleDream") pursuant to the Agreement and Plan of Merger (the “Merger Agreement"), dated July 31, 2017. Headquartered in Rochester, NY, EagleDream is a cloud-based analytics company that drives meaningful insight across clinical, financial and administrative data to optimize practice performance. The preliminary purchase price totaled $25,609, which included preliminary working capital and other customary adjustments. The acquisition was partially funded by a draw against our revolving credit agreement (see Note 8).
13
On April 14, 2017, we completed our acquisition of Entrada, Inc. ("Entrada") pursuant to the terms of the Agreement and Plan of Merger, dated April 11, 2017 (the "Agreement"). Based in Nashville, TN, Entrada is a leading provider of cloud-base
d solutions that are reshaping the way care is delivered by leveraging the power of mobile whenever and wherever care happens. Entrada’s best-in-class mobile application integrates with multiple clinical platforms and all major electronic health record sys
tems. Entrada enables organizations to maximize their existing technology investments while simultaneously enhancing physician and staff productivity. The acquisition of Entrada and its cloud-based, mobile application is part of our commitment to deliver s
ystematic solutions that meet its clients' transforming work requirements to become increasingly nimble and mobile. The purchase price totaled $33,958, which included working capital and other customary adjustments. The acquisition was primarily funded by
a draw against our revolving credit agreement (see Note 8). The purchase price allocation of the Entrada acquisition was considered final as of June 30, 2018.
We accounted for the acquisitions noted above as purchase business combinations using the acquisition method of accounting. The purchase allocation of Inforth and EagleDream are deemed to be preliminary. The purchase price allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The preliminary fair values of acquired assets and liabilities assumed represent management’s estimate of fair value and are subject to change if additional information, such as changes to deferred taxes and/or working capital, becomes available. We expect to finalize the purchase price allocations as soon as practicable within the measurement period, but not later than one year following the acquisition dates.
Goodwill represents the excess of the purchase price over the net identifiable
assets acquired and liabilities assumed. Goodwill primarily represents, among other factors, the value of synergies expected to be realized and the assemblage of all assets that enable us to create new client relationships, neither of which qualify as separate amortizable intangible assets. Goodwill arising from the acquisition of Inforth is considered deductible for tax purposes, and goodwill arising from the acquisitions of EagleDream and Entrada are not deductible for tax purposes.
The total preliminary purchase price for the acquisitions of Inforth and EagleDream, and final purchase price for the acquisition of Entrada are summarized as follows:
|
Preliminary
|
|
|
Preliminary
|
|
|
|
|
|
|
|
Inforth
|
|
|
EagleDream
|
|
|
Entrada
|
|
|
|
Purchase Price
|
|
|
Purchase Price
|
|
|
Purchase Price
|
|
|
Initial purchase price
|
$
|
4,000
|
|
|
$
|
26,000
|
|
|
$
|
34,000
|
|
|
Settlement of pre-existing net liabilities
|
|
337
|
|
|
|
—
|
|
|
|
—
|
|
|
Working capital and other adjustments
|
|
—
|
|
|
|
(391
|
)
|
|
|
(42
|
)
|
|
Total purchase price
|
$
|
4,337
|
|
|
$
|
25,609
|
|
|
$
|
33,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of the net tangible assets acquired and liabilities assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired cash and cash equivalents
|
$
|
25
|
|
|
$
|
573
|
|
|
$
|
102
|
|
|
Accounts receivable
|
|
6
|
|
|
|
217
|
|
|
|
1,836
|
|
|
Prepaid expense and other current assets
|
|
—
|
|
|
|
20
|
|
|
|
145
|
|
|
Equipment and improvements
|
|
—
|
|
|
|
—
|
|
|
|
163
|
|
|
Capitalized software costs
|
|
—
|
|
|
|
—
|
|
|
|
364
|
|
|
Deferred income tax asset
|
|
—
|
|
|
|
—
|
|
|
|
117
|
|
|
Accounts payable
|
|
—
|
|
|
|
(115
|
)
|
|
|
(639
|
)
|
|
Accrued compensation and related benefits
|
|
(49
|
)
|
|
|
(691
|
)
|
|
|
(120
|
)
|
|
Deferred revenues
|
|
—
|
|
|
|
(394
|
)
|
|
|
(234
|
)
|
|
Deferred income tax liability
|
|
—
|
|
|
|
(1,811
|
)
|
|
|
—
|
|
|
Other liabilities
|
|
(22
|
)
|
|
|
(122
|
)
|
|
|
(444
|
)
|
|
Total net tangible assets acquired and liabilities assumed
|
|
(40
|
)
|
|
|
(2,323
|
)
|
|
|
1,290
|
|
|
Fair value of identifiable intangible assets acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
1,177
|
|
|
|
14,532
|
|
|
|
17,268
|
|
|
Software technology
|
|
3,200
|
|
|
|
12,800
|
|
|
|
10,500
|
|
|
Customer relationships
|
|
—
|
|
|
|
600
|
|
|
|
3,300
|
|
|
Trade name
|
|
—
|
|
|
|
—
|
|
|
|
1,600
|
|
|
Total identifiable intangible assets acquired
|
|
4,377
|
|
|
|
27,932
|
|
|
|
32,668
|
|
|
Total purchase price
|
$
|
4,337
|
|
|
$
|
25,609
|
|
|
$
|
33,958
|
|
|
14
We recorded $3,200 of Inforth intangible assets related to software technology, which is being amortized over 5 years. We recorded $13,400 of EagleDream intangible assets related to customer relationships and software technolog
y, which are being amortized over 8 years and 5 years, respectively. The weighted average amortization period for the acquired EagleDream intangible assets is 5.1 years. We recorded $15,400 of Entrada intangible assets related to customer relationships, tr
ade names, and software technology, which are being amortized over 10 years, 5 years, and 5 years, respectively. The weighted average amortization period for the acquired Entrada intangible assets is 6.1 years.
The revenues, earnings, and pro forma effects of the Inforth, EagleDream, and Entrada acquisitions would not have been material to our results of operations, individually and in aggregate, and are therefore not presented.
5. Goodwill
We test goodwill for impairment annually during our first fiscal quarter, referred to as the annual test date. We will also test for impairment between annual test dates if an event occurs or circumstances change that would indicate the carrying amount may be impaired.
As part of our annual goodwill impairment test, we first assess qualitative factors to determine whether it is more likely than not that the fair value of goodwill is less than its carrying amount. The qualitative assessment includes consideration of factors such as margin of fair values of the reporting units as of the most recent quantitative impairment assessment compared to the relative carrying value of net assets for each reporting unit and the potential adverse changes in fair value since the most recent quantitative impairment assessment by considering changes in macroeconomic variables, changes in the industry in which we operate, and relevant company-specific factors. If we conclude that it is more likely than not that the fair value is less than its carrying amount, we conduct a two-step quantitative goodwill impairment test. The first step of the impairment test involves comparing the fair values of goodwill with its carrying value. If the carrying amount of goodwill exceeds its fair value, we perform the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of goodwill with its carrying value. The amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss. As of June 30, 2018, our qualitative assessment indicated that it was more likely than not that the fair value of goodwill exceeded its net carrying value and, therefore, additional impairment testing was not deemed necessary.
We do not amortize goodwill as it has been determined to have an indefinite useful life. The carrying amount of goodwill as of June 30, 2018 was $218,875, which reflects the acquisitions of Entrada, EagleDream and Inforth (see Note 4). The carrying amount of goodwill as of March 31, 2018 was $218,875.
6. Intangible Assets
Our definite-lived intangible assets, other than capitalized software development costs, are summarized as follows, and reflects the acquisitions of Entrada, EagleDream and Inforth (see Note 4):
|
|
June 30, 2018
|
|
|
|
Customer
|
|
|
Software
|
|
|
|
|
|
|
|
Relationships
|
|
|
Technology
|
|
|
Total
|
|
Gross carrying amount
|
|
$
|
54,450
|
|
|
$
|
94,310
|
|
|
$
|
148,760
|
|
Accumulated amortization
|
|
|
(36,698
|
)
|
|
|
(43,426
|
)
|
|
|
(80,124
|
)
|
Net intangible assets
|
|
$
|
17,752
|
|
|
$
|
50,884
|
|
|
$
|
68,636
|
|
|
|
March 31, 2018
|
|
|
|
Customer
|
|
|
Software
|
|
|
|
|
|
|
|
Relationships
|
|
|
Technology
|
|
|
Total
|
|
Gross carrying amount
|
|
$
|
54,450
|
|
|
$
|
94,310
|
|
|
$
|
148,760
|
|
Accumulated amortization
|
|
|
(35,531
|
)
|
|
|
(39,138
|
)
|
|
|
(74,669
|
)
|
Net intangible assets
|
|
$
|
18,919
|
|
|
$
|
55,172
|
|
|
$
|
74,091
|
|
Amortization expense related to customer relationships and trade name and contracts recorded as operating expenses in the consolidated statements of comprehensive income was $1,168 and $2,047 for the three months ended June 30, 2018 and 2017, respectively. Amortization expense related to software technology recorded as cost of revenue was $4,287 and $3,401 for the three months ended June 30, 2018 and 2017, respectively.
15
The following table summarizes the remaining estimated amortization of definite-lived intangible assets as of June 30, 2018:
|
|
Estimated Remaining Amortization Expense
|
|
|
|
Operating
Expense
|
|
|
Cost of
Revenue
|
|
|
Total
|
|
For the year ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 (remaining nine months)
|
|
$
|
3,177
|
|
|
$
|
12,864
|
|
|
$
|
16,041
|
|
2020
|
|
|
3,460
|
|
|
|
17,151
|
|
|
|
20,611
|
|
2021
|
|
|
2,803
|
|
|
|
13,268
|
|
|
|
16,071
|
|
2022
|
|
|
2,273
|
|
|
|
5,480
|
|
|
|
7,753
|
|
2023
|
|
|
1,866
|
|
|
|
1,761
|
|
|
|
3,627
|
|
2024 and beyond
|
|
|
4,173
|
|
|
|
360
|
|
|
|
4,533
|
|
Total
|
|
$
|
17,752
|
|
|
$
|
50,884
|
|
|
$
|
68,636
|
|
7. Capitalized Software Costs
Our capitalized software costs are summarized as follows:
|
|
June 30, 2018
|
|
|
March 31, 2018
|
|
Gross carrying amount
|
|
$
|
55,146
|
|
|
$
|
50,361
|
|
Accumulated amortization
|
|
|
(26,300
|
)
|
|
|
(24,043
|
)
|
Net capitalized software costs
|
|
$
|
28,846
|
|
|
$
|
26,318
|
|
Amortization expense related to capitalized software costs was $2,257 and $1,271 for the three months ended June 30, 2018 and 2017, respectively, and is recorded as cost of revenue in the consolidated statements of comprehensive income.
The following table presents the remaining estimated amortization of capitalized software costs as of June 30, 2018. The estimated amortization is comprised of (i) amortization of released products and (ii) the expected amortization for products that are not yet available for sale based on their estimated economic lives and projected general release dates.
For the year ended March 31,
|
|
|
|
|
2019 (remaining nine months)
|
|
$
|
11,300
|
|
2020
|
|
|
10,200
|
|
2021
|
|
|
5,900
|
|
2022
|
|
|
1,446
|
|
Total
|
|
$
|
28,846
|
|
8. Line of Credit
On March 29, 2018, we entered into a $300,000 amended and restated revolving credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, U.S. Bank National Association, as syndication agent, and certain other agents and lenders. The Credit Agreement replaces our prior
$250,000 revolving credit agreement originally entered into on January 4, 2016 (“Original Credit Agreement”)
.
The Credit Agreement provides a subfacility of up to $10,000 for letters of credit and a subfacility of up to $10,000 for swing-line loans and
also includes a $100,000 accordion feature that provides us with the ability to obtain up to $400,000 in the aggregate of revolving credit commitments and/or term loans upon satisfaction of certain conditions.
The Credit Agreement matures on March 29, 2023 and the full balance of the revolving loans and all other obligations under the agreement must be paid at that time. In addition, we are required to prepay the revolving loan balance if at any time the aggregate principal amount outstanding under the Credit Agreement exceeds the aggregate commitments thereunder. The Credit Agreement is secured by substantially all of our existing and future property. The revolving loans under the Credit Agreement will be available for letters of credit, permitted acquisitions, working capital and general corporate purposes.
We were in compliance with all financial and non-financial covenants under the Credit Agreement as of June 30, 2018.
As of June 30, 2018, we had $44,000 in outstanding loans and $256,000 of unused credit under the Credit Agreement. As of March 31, 2018, we had $37,000 in outstanding loans under the Credit Agreement.
Interest expense related to the Credit Agreement was $550 and $407 for the three months ended June 30, 2018 and 2017, respectively. Amortization of deferred debt issuance costs was $177 and $269 for the three months ended June 30, 2018 and 2017, respectively.
16
9. Composition of Certain Financial Statement Captions
Subsequent to the adoption of ASC 606 as of April 1, 2018, accounts receivable include billed amounts where the right to receive payment is unconditional and only subject to the passage of time, and sales return reserves are now classified as other current liabilities on our consolidated balance sheets. As of March 31, 2018, accounts receivable may include amounts invoiced for undelivered products and services at each period end. Undelivered products and services are included as a component of the contract liabilities balance on the accompanying consolidated balance sheets.
|
|
June 30, 2018
|
|
|
March 31, 2018
|
|
Accounts receivable, gross
|
|
$
|
90,514
|
|
|
$
|
94,358
|
|
Sales return reserve
|
|
|
—
|
|
|
|
(5,520
|
)
|
Allowance for doubtful accounts
|
|
|
(4,450
|
)
|
|
|
(3,876
|
)
|
Accounts receivable, net
|
|
$
|
86,064
|
|
|
$
|
84,962
|
|
Inventory is comprised of computer systems and components.
Prepaid expenses and other current assets are summarized as follows:
|
|
June 30, 2018
|
|
|
March 31, 2018
|
|
Prepaid expenses
|
|
$
|
17,218
|
|
|
$
|
16,693
|
|
Other current assets
|
|
|
179
|
|
|
|
487
|
|
Prepaid expenses and other current assets
|
|
$
|
17,397
|
|
|
$
|
17,180
|
|
Equipment and improvements are summarized as follows:
|
|
June 30, 2018
|
|
|
March 31, 2018
|
|
Computer equipment
|
|
$
|
27,700
|
|
|
$
|
27,347
|
|
Internal-use software
|
|
|
16,914
|
|
|
|
15,804
|
|
Furniture and fixtures
|
|
|
11,543
|
|
|
|
11,432
|
|
Leasehold improvements
|
|
|
15,904
|
|
|
|
16,016
|
|
Equipment and improvements, gross
|
|
|
72,061
|
|
|
|
70,599
|
|
Accumulated depreciation and amortization
|
|
|
(45,494
|
)
|
|
|
(43,804
|
)
|
Equipment and improvements, net
|
|
$
|
26,567
|
|
|
$
|
26,795
|
|
Accrued compensation and related benefits are summarized as follows:
|
|
June 30, 2018
|
|
|
March 31, 2018
|
|
Payroll, bonus and commission
|
|
$
|
7,829
|
|
|
$
|
18,120
|
|
Vacation
|
|
|
9,738
|
|
|
|
9,790
|
|
Accrued compensation and related benefits
|
|
$
|
17,567
|
|
|
$
|
27,910
|
|
17
Other current and noncurrent liabilities are summarized as follows:
|
|
June 30, 2018
|
|
|
March 31, 2018
|
|
Accrued securities litigation settlement
|
|
$
|
19,000
|
|
|
$
|
19,000
|
|
Sales return reserves and other customer liabilities
(1)
|
|
|
8,658
|
|
|
|
—
|
|
Care services liabilities
|
|
|
7,520
|
|
|
|
2,373
|
|
Customer credit balances and deposits
|
|
|
3,272
|
|
|
|
4,287
|
|
Accrued consulting and outside services
|
|
|
2,536
|
|
|
|
4,428
|
|
Accrued employee benefits and withholdings
|
|
|
2,446
|
|
|
|
1,636
|
|
Accrued self insurance expense
|
|
|
2,354
|
|
|
|
2,145
|
|
Accrued EDI expense
|
|
|
2,274
|
|
|
|
2,310
|
|
Accrued outsourcing costs
|
|
|
1,964
|
|
|
|
2,898
|
|
Deferred rent
|
|
|
1,445
|
|
|
|
1,594
|
|
Accrued legal expense
|
|
|
1,390
|
|
|
|
1,793
|
|
Accrued hosting costs
|
|
|
1,307
|
|
|
|
1,600
|
|
Accrued royalties
|
|
|
779
|
|
|
|
1,400
|
|
Remaining lease obligations
|
|
|
633
|
|
|
|
672
|
|
Sales tax payable
|
|
|
569
|
|
|
|
499
|
|
Other accrued expenses
|
|
|
5,920
|
|
|
|
1,682
|
|
Other current liabilities
|
|
$
|
62,067
|
|
|
$
|
48,317
|
|
|
|
|
|
|
|
|
|
|
Deferred rent
|
|
$
|
9,663
|
|
|
$
|
9,902
|
|
Uncertain tax positions
|
|
|
2,527
|
|
|
|
2,419
|
|
Remaining lease obligations
|
|
|
827
|
|
|
|
962
|
|
Other liabilities
|
|
|
215
|
|
|
|
211
|
|
Other noncurrent liabilities
|
|
$
|
13,232
|
|
|
$
|
13,494
|
|
(1)
|
Subsequent to the adoption of ASC 606 as of April 1, 2018, sales return reserves and certain customer liabilities, which were previously recorded within accounts receivables, are now classified as other current liabilities on our consolidated balance sheets.
|
10. Income Taxes
The provision for income taxes in the three months ended June 30, 2018 and 2017 was $442 and $2,154, respectively. The effective tax rates were 14.3% and 35.6% for the three months ended June 30, 2018 and 2017, respectively. The decrease in the effective tax rate for the three months ended June 30, 2018 compared to the prior year periods was primarily due to reduction of the federal corporate tax rate from 35% to 21% effective January 1, 2018, enacted by new tax reform legislation, as described further below. The decrease in the effective tax rate was also due to a discrete item for stock compensation excess tax expense in prior year partially offset by the elimination of the qualified domestic manufacturer deduction, effective
April 1, 2018.
The deferred tax assets and liabilities are presented net in the accompanying consolidated balance sheets as noncurrent. We expect to receive the full benefit of the deferred tax assets recorded, with the exception of certain state credits, state net operating loss carryforwards, and foreign accumulated minimum tax credits, for which we have recorded a valuation allowance.
Uncertain tax positions
We had liabilities of $2,527 and $2,419 for unrecognized tax benefits related to various federal, state and local income tax matters as of June 30, 2018 and March 31, 2018, respectively. If recognized, this amount would reduce our effective tax rate.
We are no longer subject to United States federal income tax examinations for tax years before fiscal year ended 2014. With a few exceptions, we are no longer subject to state or local income tax examinations for tax years before fiscal year ended 2013. We do not anticipate the total unrecognized tax benefits to significantly change due to the settlement of audits or the expiration of statute of limitations within the next twelve months.
18
United States Tax Reform
On December 22, 2017, the President of the United States signed and enacted into law H.R. 1 (the “Tax Reform”). This new tax legislation, effective for tax years beginning on or after January 1, 2018, except for certain provisions, resulted in significant changes to existing United States tax law, including various provisions, such as
|
•
|
Establishes a flat corporate income tax rate of 21% on United States earnings
|
|
•
|
Imposes a one-time tax on unremitted cumulative non- United States earnings of foreign subsidiaries (Transition Tax)
|
|
•
|
Imposes a new minimum tax on certain non- United States earnings, irrespective of the territorial system of taxation, and generally allows for the repatriation of future earnings of foreign subsidiaries without incurring additional United States taxes by transitioning to a territorial system of taxation (Global Intangible Low-Taxed Income or “GILTI Tax”)
|
|
•
|
Subjects certain payments made by a United States company to a related foreign company to certain minimum taxes (Base Erosion Anti-Abuse Tax)
|
|
•
|
Eliminates certain prior tax incentives for manufacturing in the United States and creates an incentive for United States companies to sell, lease or license goods and services abroad by allowing for a reduction in taxes owed on earnings related to such sales
|
|
•
|
Allows the cost of investments in certain depreciable assets acquired and placed in service after September 27, 2017 to be immediately expensed
|
|
•
|
Reduces deductions with respect to certain compensation paid to specified executive officers
|
We are subject to the provisions of FASB Accounting Standards Codification 740-10,
Income Taxes
(“ASC 740”), which requires that the effect on deferred tax assets and liabilities of a change in tax rates be recognized in the period the tax rate change was enacted. The Tax Reform reduces the federal corporate tax rate from 35% to 21% effective January 1, 2018, and thus we have revised our estimated annual effective tax rate to reflect the change in the federal statutory rate of 21%.
The Tax Reform also required a one-time transition tax based on total post-1986 foreign cumulative earnings and profits previously deferred from United States federal taxation, which was reasonably estimated and recorded as a one-time income tax expense of $1,381 at March 31, 2018. We will continue to analyze the calculation of cumulative foreign earnings and finalize the amounts held in cash or other specified assets.
Due to the complexities involved in accounting for the enactment of the Tax Reform, Staff Accounting Bulletin No. 118 (”SAB 118”) allowed us to record provisional amounts in earnings for the year ended March 31, 2018 and quarter ended June 30, 2018. SAB 118 provides that where reasonable estimates can be made, the provisional accounting should be based on such estimates and when no reasonable estimate can be made, the provisional accounting may be based on the tax law in effect before the Tax Reform. We will continue to analyze the effects of the Tax Reform on our consolidated financial statements. Additional impacts from the enactment of the Tax Reform will be recorded as they are identified during the measurement period of up to one year from the enactment date as provided for in SAB 118. The final impact of the Tax Reform may differ from the provisional amounts that have been recognized, possibly materially, due to, among other things, changes in our interpretation of the Tax Reform, legislative or administrative actions to clarify the intent of the statutory language provided that differ from our current interpretation, any changes in accounting standards for income taxes or related interpretations in response to the Tax Reform, or any updates or changes to estimates utilized to calculate the impacts, including changes to current year earnings estimates and applicable foreign exchange rates. Additionally, our United States tax returns for March 31, 2018 will be filed during the fourth quarter of 2019 and any changes to the tax positions for temporary differences compared to the estimates used will result in an adjustment of the estimated tax expense recorded as of March 31, 2018.
The Tax Reform also includes a GILTI Tax, requiring inclusion of certain non US earnings effective April 1, 2018. The GILTI inclusion has been estimated and included in the effective tax rate used for the tax provision recorded at June 30, 2018. Currently, the estimate of the non-US income inclusion for current fiscal year is $3,028. We will continue to evaluate the impact of the GILTI provisions under the Tax Reform which are complex and subject to continuing regulatory interpretation by the United States Internal Revenue Service. We are required to make an accounting policy election of either (1) treating taxes due on future United States inclusions in taxable income related to GILTI as a current period expense when incurred or (2) factoring such amounts into our measurement of deferred taxes. The final election made with respects to the new GILTI Tax rules will depend, in part, on further analyzing our global income.
The Tax Reform legislation includes various other provisions with effective dates beginning April 1, 2018 and beyond. For other changes that impact business related income, exclusions, deductions and credits with effective dates for our fiscal year beginning April 1, 2018, we will continue to account for those items based on our existing accounting under ASC 740 and the provisions of the tax laws that were in effect immediately prior to the enactment of the Tax Reform.
19
11. Earnings per Share
The dual presentation of “basic” and “diluted” earnings per share is provided below. Share amounts below are in thousands.
|
|
Three Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Earnings per share — Basic:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,648
|
|
|
$
|
3,896
|
|
Weighted-average shares outstanding — Basic
|
|
|
64,019
|
|
|
|
62,636
|
|
Net income per common share — Basic
|
|
$
|
0.04
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
Earnings per share — Diluted:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,648
|
|
|
$
|
3,896
|
|
Weighted-average shares outstanding
|
|
|
64,019
|
|
|
|
62,636
|
|
Effect of potentially dilutive securities
|
|
|
35
|
|
|
|
7
|
|
Weighted-average shares outstanding — Diluted
|
|
|
64,054
|
|
|
|
62,643
|
|
Net income per common share — Diluted
|
|
$
|
0.04
|
|
|
$
|
0.06
|
|
The computation of diluted net income per share does not include 2,853 and 2,568 options to acquire shares of common stock for the three months ended June 30, 2018 and June 30, 2017, respectively, because their inclusion would have an anti-dilutive effect on net income per share.
12. Share-Based Awards
Employee Stock Option and Incentive Plans
In October 2005, our shareholders approved a stock option and incentive plan (the “2005 Plan”) under which 4,800,000 shares of common stock were reserved for the issuance of awards, including incentive stock options and non-qualified stock options, stock appreciation rights, restricted stock, unrestricted stock, restricted stock units, performance shares, performance units (including performance options) and other share-based awards. The 2005 Plan provides that our employees and directors may, at the discretion of the Board of Directors ("Board") or a duly designated compensation committee, be granted certain share-based awards. In the case of option awards granted under the 2005 Plan, the exercise price of each option is determined based on the date of grant and expire no later than 10 years from the date of grant. Awards granted pursuant to the 2005 Plan are subject to the vesting schedule or performance metrics set forth in the agreements pursuant to which they are granted. Upon a change of control of our Company, as such term is defined in the 2005 Plan, awards under the 2005 Plan will fully vest under certain circumstances. The 2005 Plan expired on May 25, 2015. As of June 30, 2018, there were 490,220 outstanding options under the 2005 Plan.
In August 2015, our shareholders approved a stock option and incentive plan (the “2015 Plan”) under which 11,500,000 shares of common stock were reserved for the issuance of awards, including incentive stock options and non-qualified stock options, stock appreciation rights, restricted stock awards and restricted stock unit awards, performance stock awards and other share-based awards. In August 2017, our shareholders approved an amendment to our 2015 Equity Incentive Plan, (the “Amended 2015 Plan”), to, among other items, increase the number of shares of common stock reserved for issuance thereunder by 6,000,000. The Amended 2015 Plan provides that our employees and directors may, at the discretion of the Board of Directors or a duly designated compensation committee, be granted certain share-based awards. In the case of option awards granted under the Amended 2015 Plan, the exercise price of each option is determined based on the date of grant and expire no later than 10 years from the date of grant. Awards granted pursuant to the Amended 2015 Plan are subject to the vesting schedule or performance metrics set forth in the agreements pursuant to which they are granted. Upon a change of control of our Company, as such term is defined in the Amended 2015 Plan, awards under the Amended 2015 Plan will fully vest under certain circumstances. As of June 30, 2018, there were 3,256,255 outstanding options, 1,779,786 outstanding shares of restricted stock awards, 83,125 outstanding shares of performance stock awards, and 7,712,313 shares available for future grant under the Amended 2015 Plan.
20
The following table summarizes the stock option transactions during the three months ended June 30, 2018:
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
Employee Stock Options Summary
|
|
Number of
|
|
|
Price
|
|
|
Contractual
|
|
|
Value
|
|
|
|
Shares
|
|
|
per Share
|
|
|
Life (years)
|
|
|
(in thousands)
|
|
Outstanding, April 1, 2018
|
|
|
3,670,170
|
|
|
$
|
15.51
|
|
|
|
6.2
|
|
|
$
|
766
|
|
Granted
|
|
|
241,130
|
|
|
$
|
16.83
|
|
|
|
7.9
|
|
|
|
|
|
Exercised
|
|
|
(54,945
|
)
|
|
$
|
14.97
|
|
|
|
4.9
|
|
|
$
|
115
|
|
Forfeited/Canceled
|
|
|
(107,480
|
)
|
|
$
|
23.82
|
|
|
|
4.1
|
|
|
|
|
|
Expired
|
|
|
(2,400
|
)
|
|
$
|
28.15
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2018
|
|
|
3,746,475
|
|
|
$
|
15.36
|
|
|
|
6.2
|
|
|
$
|
17,480
|
|
Vested and expected to vest, June 30, 2018
|
|
|
3,338,148
|
|
|
$
|
15.46
|
|
|
|
6.1
|
|
|
$
|
15,442
|
|
Exercisable, June 30, 2018
|
|
|
1,175,270
|
|
|
$
|
17.21
|
|
|
|
4.8
|
|
|
$
|
4,648
|
|
We utilize the Black-Scholes valuation model for estimating the fair value of share-based compensation with the following assumptions:
|
|
Three Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Expected term
|
|
6.3 years
|
|
|
5.6 - 5.7 years
|
|
Expected volatility
|
|
36.8%
|
|
|
37.6% - 37.7%
|
|
Expected dividends
|
|
0.0%
|
|
|
0.0%
|
|
Risk-free rate
|
|
2.8%
|
|
|
1.9%
|
|
The weighted-average grant date fair value of stock options granted during the three months ended June 30, 2018 and 2017 was $6.92 and $6.12 per share, respectively.
During the three months ended June 30, 2018, a total of 241,130 options to purchase shares of common stock were granted under the Amended 2015 Plan at an exercise price equal to the market price of our common stock on the date of grant, as summarized below:
Option Grant Date
|
|
Number of
Shares
|
|
|
Exercise
Price
|
|
|
Vesting
Terms
(1)
|
|
Expiration
|
May 30, 2018
|
|
|
241,130
|
|
|
$
|
16.83
|
|
|
Four Years
|
|
June 1, 2026
|
(1)
|
Options vest in equal annual installments on each grant anniversary date commencing one year following the date of grant.
|
Non-vested stock option award activity during the three months ended June 30, 2018 is summarized as follows:
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant-Date
|
|
Non-Vested Stock Option Award Summary
|
|
Number of
|
|
|
Fair Value
|
|
|
|
Shares
|
|
|
per Share
|
|
Outstanding, April 1, 2018
|
|
|
2,657,005
|
|
|
$
|
5.18
|
|
Granted
|
|
|
241,130
|
|
|
|
6.92
|
|
Vested
|
|
|
(265,150
|
)
|
|
|
5.02
|
|
Forfeited/Canceled
|
|
|
(61,780
|
)
|
|
|
5.38
|
|
Outstanding, June 30, 2018
|
|
|
2,571,205
|
|
|
$
|
5.35
|
|
As of June 30, 2018, $11,932 of total unrecognized compensation costs related to stock options is expected to be recognized over a weighted-average period of 3.0 years. This amount does not include the cost of new options that may be granted in future periods or any changes in our forfeiture percentage. The total fair value of options vested during the three months ended June 30, 2018 and 2017 was $1,330 and $1,776, respectively.
21
Restricted stock awards activity during the three months ended June 30, 2018 is summarized as follows:
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant-Date
|
|
Restricted Stock
|
|
Number of
|
|
|
Fair Value
|
|
|
|
Shares
|
|
|
per Share
|
|
Outstanding, April 1, 2018
|
|
|
1,820,910
|
|
|
$
|
14.52
|
|
Granted
|
|
|
396,400
|
|
|
|
16.83
|
|
Vested
|
|
|
(258,943
|
)
|
|
|
14.69
|
|
Canceled
|
|
|
(178,581
|
)
|
|
|
14.32
|
|
Outstanding, June 30, 2018
|
|
|
1,779,786
|
|
|
$
|
15.02
|
|
Share-based compensation expense related to restricted stock awards was $1,920 and $1,539 for the three months ended June 30, 2018 and 2017, respectively.
The weighted-average grant date fair value for the restricted stock awards was estimated using the market price of the common stock on the date of grant. The fair value of the restricted stock awards is amortized on a straight-line basis over the vesting period, which is generally between one to three years.
As of June 30, 2018, $22,113 of total unrecognized compensation costs related to restricted stock awards is expected to be recognized over a weighted-average period of 2.0 years. This amount does not include the cost of new restricted stock awards that may be granted in future periods.
On December 29, 2016, the Compensation Committee of the Board granted 123,082 performance stock awards to certain executive officers, of which 83,125 shares are currently outstanding. The performance stock awards vest in four equal increments on each of the first four anniversaries of the grant date, subject in each case to the executive officer’s continued service and achievement of certain Company performance goals, including strong Company stock price performance. Share-based compensation expense related to the performance stock awards was $73 for the three months ended June 30, 2018.
Employee Share Purchase Plan
On August 11, 2014, our shareholders approved an Employee Share Purchase Plan (the “Purchase Plan”) under which 4,000,000 shares of common stock were reserved for future grant. The Purchase Plan allows eligible employees to purchase shares through payroll deductions of up to 15% of total base salary at a price equal to 90% of the lower of the fair market values of the shares as of the beginning or the end of the corresponding offering period. Any shares purchased under the Purchase Plan are subject to a six-month holding period. Employees are limited to purchasing no more than 1,500 shares on any single purchase date and no more than $25,000 in total fair market value of shares during any one calendar year. As of June 30, 2018, we have issued 3,611,402 shares under the Purchase Plan and 388,598 shares are available for future issuance.
Share-based compensation expense recorded for the employee share purchase plan was $132 and $97 for the three months ended June 30, 2018 and 2017, respectively.
13. Concentration of Credit Risk
We had cash deposits at United States banks and financial institutions which exceeded federally insured limits at June 30, 2018. We are exposed to credit loss for amounts in excess of insured limits in the event of non-performance by the institutions; however, we do not anticipate non-performance by these institutions.
22
14. Commitments, Guarantees and Contingencies
Commitments and Guarantees
Our software license agreements include a performance guarantee that our software products will substantially operate as described in the applicable program documentation for a period of 365 days after delivery. To date, we have not incurred any significant costs associated with our performance guarantee or other related warranties and do not expect to incur significant warranty costs in the future. Therefore, no accrual has been made for potential costs associated with these warranties. Certain arrangements also include performance guarantees related to response time, availability for operational use, and other performance-related guarantees. Certain arrangements also include penalties in the form of maintenance credits should the performance of the software fail to meet the performance guarantees. To date, we have not incurred any significant costs associated with these warranties and do not expect to incur significant warranty costs in the future. Therefore, no accrual has been made for potential costs associated with these warranties.
We have historically offered short-term rights of return in certain sales arrangements. If we are able to estimate returns for these types of arrangements and all other criteria for revenue recognition have been met, revenue is recognized and these arrangements are recorded in the consolidated financial statements. If we are unable to estimate returns for these types of arrangements, revenue is not recognized in the consolidated financial statements until the rights of return expire, provided also, that all other criteria of revenue recognition have been met.
Our standard sales agreements contain an indemnification provision pursuant to which we shall indemnify, hold harmless, and reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with any United States patent, any copyright or other intellectual property infringement claim by any third-party with respect to our software. As we have not incurred any significant costs to defend lawsuits or settle claims related to these indemnification agreements, we believe that our estimated exposure on these agreements is currently minimal. Accordingly, we have no liabilities recorded for these indemnification obligations.
Hussein Litigation
On October 7, 2013, a complaint was filed against our Company and certain of our officers and directors in the Superior Court of the State of California for the County of Orange, captioned Ahmed D. Hussein v. Sheldon Razin, Steven Plochocki, Quality Systems, Inc. and Does 1-10, inclusive, No. 30-2013-00679600-CU-NP-CJC, by Ahmed Hussein, a former director and significant shareholder of our Company. We filed a demurrer to the complaint, which the Court granted on April 10, 2014. An amended complaint was filed on April 25, 2014. The amended complaint generally alleges fraud and deceit, constructive fraud, negligent misrepresentation and breach of fiduciary duty in connection with statements made to our shareholders regarding our financial condition and projected future performance. The amended complaint seeks actual damages, exemplary and punitive damages and costs. We filed a demurrer to the amended complaint. On July 29, 2014, the Court sustained the demurrer with respect to the breach of fiduciary duty claim, and overruled the demurrer with respect to the fraud and deceit claims. On August 28, 2014, we filed an answer and also filed a cross-complaint against Hussein, alleging that he breached fiduciary duties owed to the Company, Mr. Razin and Mr. Plochocki. Mr. Razin and Mr. Plochocki have dismissed their claims against Hussein, leaving QSI as the sole plaintiff in the cross-complaint. On June 26, 2015, we filed a motion for summary judgment with respect to Hussein’s claims, which the Court granted on September 16, 2015, dismissing all of Hussein’s claims against us. On September 23, 2015, Hussein filed an application for reconsideration of the Court's summary judgment order, which the Court denied. Hussein filed a renewed application for reconsideration of the Court’s summary judgment order on August 3, 2017. The Court again denied Hussein’s application. On October 28, 2015, May 9, 2016, and August 5, 2016, Hussein filed a motion for summary judgment, motion for summary adjudication, and motion for judgment on the pleadings, respectively, seeking to dismiss our cross-complaint. The Court denied each motion. Trial on our cross-complaint began June 12, 2017. On July 26, 2017, the Court issued a statement of decision granting Hussein’s motion for judgment on our cross-complaint. Final judgment over Hussein’s claims and our cross-claims was entered on January 9, 2018. Hussein has noticed his appeal of the order granting summary judgment over his claims, and we noticed a cross-appeal on the court’s statement of decision granting Hussein’s motion for judgment on our cross-complaint. Briefing on the cross-appeals will be completed in fall 2018. At this time, we are unable to estimate the probability or the amount of liability, if any, related to this claim.
Federal Securities Class Action
On November 19, 2013, a putative class action complaint was filed on behalf of the shareholders of our Company other than the defendants against us and certain of our officers and directors in the United States District Court for the Central District of California by one of our shareholders. After the Court appointed lead plaintiffs and lead counsel for this action, and recaptioned the action In re Quality Systems, Inc. Securities Litigation, No. 8:13-cv-01818-CJC-JPR, lead plaintiffs filed an amended complaint on April 7, 2014. The amended complaint, which is substantially similar to the litigation described above under the caption “Hussein Litigation,” generally alleges that statements made to our shareholders regarding our financial condition and projected future performance were false and misleading in violation of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and that the individual defendants are liable for such statements because they are controlling persons under Section 20(a) of the
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Exchange Act. The complaint seeks compensatory damages, court costs and attorneys' fees. We filed a motion to dismiss the amended complaint on June 20, 2014, which the Court granted on October 20, 2014, dismissing the complaint with
prejudice. Plaintiffs filed a motion for reconsideration of the Court's order, which the Court denied on January 5, 2015. On January 30, 2015, Plaintiffs filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit, captioned In re
Quality Systems, Inc. Securities Litigation, No. 15-55173. On July 28, 2017, the Ninth Circuit issued a decision reversing and remanding the District Court's order on our motion to dismiss. On September 5, 2017, we filed a petition for rehearing en banc,
which was denied on September 29, 2017. On January 26, 2018, we filed a petition for a writ of certiorari with the Supreme Court of the United States. The Supreme Court ordered the plaintiffs to file a response to the petition, which they filed on March 22
, 2018.
On May 10, 2018, the parties reached an agreement-in-principle to resolve the action for $19,000, and on May 11, 2018, the parties requested that the Supreme Court stay any decision regarding whether to hear the Company’s petition for a writ of certiorari, pending the parties’ ongoing settlement negotiations. On July 16, 2018, the parties signed a definitive settlement agreement resolving this matter and submitted it to the Court for approval. On July 30, 2018, the Court granted preliminary approval of the settlement and scheduled a final approval hearing for November 19, 2018. Under the terms of this agreement, the settlement will be partially funded by certain of the Company’s insurance carriers, and defendants will continue to deny any liability or wrongdoing.
The settlement does not resolve the Hussein Litigation or the Shareholder Derivative Litigation.
We have recorded an accrual of $19,000 for preliminary settlement this
Federal Securities Class Action complaint.
Shareholder Derivative Litigation
On January 24, 2014, a complaint was filed against our Company and certain of our officers and current and former directors in the United States District Court for the Central District of California, captioned Timothy J. Foss, derivatively on behalf of himself and all others similarly situated, vs. Craig A. Barbarosh, George H. Bristol, James C. Malone, Peter M. Neupert, Morris Panner, D. Russell Pflueger, Steven T. Plochocki, Sheldon Razin, Lance E. Rosenzweig and Quality Systems, Inc., No. SACV14-00110-DOC-JPPx, by Timothy J. Foss, a purported shareholder of ours. The complaint arises from the same allegations described above under the captions “Hussein Litigation” and “Federal Securities Class Action” and generally alleges breach of fiduciary duties, abuse of control and gross mismanagement by our directors, in addition to unjust enrichment and insider selling by individual directors. The complaint seeks compensatory damages, restitution and disgorgement of all profits, court costs, attorneys’ fees and implementation of enhanced corporate governance procedures. The matter was stayed pending the Ninth Circuit’s decision in the appeal described above under the caption, “Federal Securities Class Action.” This stay now has been lifted and, Defendants filed a motion to dismiss on February 2, 2018. On July 25, 2018, the Court dismissed the complaint with prejudice. On September 28, 2017, a complaint was filed against our Company and certain of our current and former officers and directors in the United States District Court for the Central District of California, captioned Kusumam Koshy, derivatively on behalf of Quality Systems Inc. vs. Craig Barbarosh, George H. Bristol, James C. Malone, Peter M. Neupert, Morris Panner, D. Russell Pflueger, Steven T. Plochocki, Sheldon Razin, Lance E. Rosenzweig, Paul A. Holt, and Quality Systems, Inc., No. 8:17-cv-01694, by Kusumam Koshy, a purported shareholder of ours. The complaint alleges breach of fiduciary duties and abuse of control, as well as unjust enrichment and insider selling by individual directors arising out of the allegations described above under the captions “Hussein Litigation” and “Federal Securities Class Action,” QSI’s adoption of revised indemnification agreements, and the resignation of certain officers of the Company. The complaint seeks restitution and disgorgement, court costs and attorneys’ fees, and enhanced corporate governance reforms and internal control procedures. On January 12, 2018, Defendants filed a motion to dismiss the derivative complaint. On July 25, 2018, the Court dismissed the complaint with prejudice.
Other Regulatory Matters
In April 2017, we received a request for documents and information from the United States Attorney's Office for the District of Vermont pursuant to a Civil Investigative Demand (“CID”). The CID relates to an investigation concerning the certification we obtained for our software under the United States Department of Health and Human Services' Electronic Health Record Incentive Program. We have provided documents and information in response to that CID. On December 11, 2017, we received a subpoena from the United States Department of Justice in connection with the same matter seeking among other things records relating to (a) data used to determine objectives and measures under the Meaningful Use (MU) and the Physician Quality Reporting System (PQRS) programs, (b) EHR software code used in certifying the 2014 EHR software and information, and (c) payments provided for the referral of EHR business. We continue to respond to this CID and subpoena and intend to cooperate fully with the government, including responding to any future requests. Requests and investigations of this nature may lead to future requests for information and ultimately the assertion of claims or the commencement of legal proceedings against us, as well as other material liabilities. In addition, our responses to these and any future requests require time and effort, which can result in additional cost to us. At this time, we are unable to estimate the probability or the amount of liability, if any, related to this matter. Given the highly-regulated nature of our industry, we may, from time to time, be subject to subpoenas, requests for information, or investigations from various government agencies. It is our practice to respond to such matters in a cooperative, thorough and timely manner.
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