Item 1B.
Unresolved Staff Comments.
None.
Our corporate headquarters is located in Watertown, Massachusetts on the Arsenal on the Charles campus, which we own. The Arsenal on the Charles is a 29-acre, multi-building, commercial property, which includes approximately 697,000 square feet of office space and approximately 71,000 square feet of retail space. We currently occupy 551,984 square feet of these facilities and lease the remainder to third parties. Additionally, we own a complex of buildings, including approximately 210,400 square feet of office space, on approximately 53 acres of land in Belfast, Maine, as well as a conference and training facility on approximately 396 acres of land in Northport, Maine.
We lease the remainder of our facilities in various locations in the United States, including: Atlanta, Georgia; Austin, Texas; Princeton, New Jersey; and San Francisco, California, which we currently sublease; as well as in Bangalore, India; Chennai, India; and Pune, India. Additionally, we operate data centers nationwide.
Item 3.
Item 3.
Legal Proceedings.
On May 21, 2015, a class action petition was filed by St. Louis Heart Center, Inc. in the State Circuit Court of St. Louis County, Missouri, against athenahealth. The petition alleges we violated the Telephone Consumer Protection Act. Following service, we removed the case to federal court in the United States District Court for the Eastern District of Missouri, Case No. 4:15-cv-01215. After filing our answer in the case on March 8, 2016, we moved for and obtained a stay of the action pending a decision by the U.S. Court of Appeals for the D.C. Circuit in Bais Yaakov of Spring Valley v. FCC, No. 14-1234, regarding the validity of a regulation promulgated by the Federal Communications Commission, or FCC, relating to the claims asserted in the petition. On March 31, 2017, the U.S. Court of Appeals for the D.C. Circuit issued its decision, invalidating the FCC regulation in question. On April 7, 2017, we notified the federal court of the U.S. Court of Appeals for the D.C. Circuit's decision in Bais Yaakov. On joint motion of the parties, the federal court on May 9, 2017 reinstated the stay, pending any further appellate
review of the D.C. Circuit's decision in Bais Yaakov. On September 5, 2017, a petition for a writ of certiorari as to the D.C. Circuit's decision in Bais Yaakov was filed with the United States Supreme Court, which remains pending.
In addition, from time to time we may be subject to other legal proceedings, claims, and litigation arising in the ordinary course of business. We do not, however, currently expect that the ultimate costs to resolve any pending matter will have a material effect on our consolidated financial position, results of operations, or cash flows.
Item 4.
Item 4.
Mine Safety Disclosures.
None.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is listed on the NASDAQ Global Select Market under the trading symbol “ATHN.” The following table sets forth, for each of the periods indicated, the high and low sales prices per share of our common stock as reported by the NASDAQ Global Select Market.
Holders
The last reported sale price of our common stock on the NASDAQ Global Select Market on January 30, 2018 was $127.59 per share. As of January 30, 2018, we had 72 holders of record of our common stock. Because many shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Dividends
We have never declared or paid any dividends on our capital stock. We currently intend to retain any future earnings and do not intend to declare or pay cash dividends on our common stock in the foreseeable future. Any future determination to pay dividends will be, subject to applicable law, at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, contractual restrictions, and capital requirements.
Performance Graph
The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
Set forth below is a graph comparing the cumulative total stockholder return on our common stock with the NASDAQ Composite-Total Returns Index and the NASDAQ Computer and Data Processing Index for each of the last five fiscal years ended December 31, 2017, assuming an investment of $100 at the beginning of such period and the reinvestment of any dividends.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
During the quarter ended December 31, 2017, there were no purchases made by us, on our behalf, or by any “affiliated purchasers” of shares of our common stock.
Item 6.
Item 6.
Selected Financial Data.
The following tables summarize our consolidated financial data for the periods presented. You should read the following financial information together with the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes to these consolidated financial statements appearing elsewhere in this Form 10-K. Historical results are not necessarily indicative of the results to be expected in future periods.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our consolidated financial statements, the accompanying notes to these financial statements, and the other financial information that appears elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains predictions, estimates, and other forward-looking statements. All statements other than statements of historical fact contained in this Annual Report on Form 10-K are forward-looking statements, including statements regarding management's expectations for future financial and operational performance and operating expenditures, expected growth, and business outlook; statements regarding the implementation, timing, and impact of the Plan (as defined below); the benefits of and demand for our service offerings; the impact of new accounting pronouncements; seasonality and changes in seasonality of our business; increased automation; changes in expenses related to operations, selling and marketing, research and development, general and administrative matters, depreciation and amortization, interest, and income taxes; statements regarding competition; statements regarding the impact of new legislation, including new tax legislation; the impact of litigation; the impact of foreign currency fluctuations; the impact of acquisitions and associated measurements of fair value; and liquidity matters. Forward-looking statements may be identified with words such as “will,” “may,” “expect,” “plan,” “anticipate,” “upcoming,” “believe,” “estimates,” or similar terminology, and the negative of these terms.
Forward-looking statements are not promises or guarantees of future performance, and are subject to a variety of risks and uncertainties, many of which are beyond our control, and which could cause actual results to differ materially from those contemplated in these forward-looking statements. These factors include, among other things, those set forth in the section entitled “Risk Factors” and elsewhere in this Annual Report on Form 10-K.
Although we believe that the expectations reflected in the forward-looking statements contained in this Annual Report on Form 10-K are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by law, we undertake no obligation to update or revise any of such forward-looking statements, whether as a result of new information, future events, or otherwise, after the date of this Annual Report on Form 10-K.
Overview
athenahealth, Inc. (which we refer to as athenahealth, the Company, we, or our) partners with hospital and ambulatory clients to drive clinical and financial results. We offer network-based medical record, revenue cycle, patient engagement, care coordination, and population health services, as well as Epocrates® and other point-of-care mobile applications. Our network provides clients better insight into their own organizations as well as the ability to learn from the experience of every other client on the network. Through our model, we infuse the knowledge clients need to thrive in a changing industry directly into their workflow, from clinical guidelines to payer rules. We take on back-office work at scale so providers can focus on patients, not paperwork.
We deliver the majority of our service offerings through a single instance of cloud-based software, which we refer to as athenaNet. By combining our commitment to opening up the network, multiplying our intelligence, and freeing people to do what matters, we help healthcare providers leverage technology to automate certain back-office tasks, assist at the point of care, and adapt to changes in government regulatory schemes or the billing requirements of payers. We believe that including our clients on the same instance of software creates a network effect that enables each client to benefit from the collective experience of other clients. As our network grows, we believe these benefits expand and we can further multiply intelligence for all clients on the network. athenaNet acts as a conduit for the exchange of information among clients, payers, trading partners, and our own experienced team. It enables us to learn continuously, innovate with agility, and deliver near-instant updates that we believe rapidly improve performance for our clients. In addition, our clients benefit from back-office administrative work that we perform on their behalf. This work ranges from receiving, scanning, and delivering faxes to tracking claims with payers and managing denials. We automate this work whenever possible; when automation is not an option, we perform the work at massive scale with our internal team. The knowledge we gain from doing work for our clients and discovering ways to improve their performance is culled, curated, and captured within athenaNet through mechanisms that include our proprietary billing rules engine and clinical quality management engine. Using this knowledge, we also proactively coach our clients on best practices to help improve their performance. As we work with clients, payers, and other industry trading partners, more knowledge is infused into each service, which we believe makes athenaNet "smarter" and more powerful for our clients. This unique combination of opening up the network, multiplying our intelligence, and freeing people to do what matters is fundamental to our service model and value proposition to clients.
For the year ended December 31, 2017, we generated revenue of $1,220.3 million, compared to $1,082.9 million for the year ended December 31, 2016 and $924.7 million for the year ended December 31, 2015. Given the scope of our market opportunity, we have also increased our spending each year on growth, innovation, and infrastructure.
Our revenue is predominately derived from core athenahealth-branded business services. In most cases, we charge clients a percentage of payments collected by us on behalf of our clients, connecting our financial results directly to those of our clients and our ability to drive revenue to medical practices. Therefore, the key drivers of our revenue include growth in the number of providers working within our client accounts, the collections of these providers, and the number of services purchased. To provide these services, we incur expenses in several categories, including cost of revenue, selling and marketing, research and development, and general and administrative expense. In general, our cost of revenue increases as our volume of work increases, whereas our selling and marketing expense correlates with current and expected market demand. Our research and development and general and administrative expense categories are less directly related to growth of revenues and relate more to our planning for the future and our overall business management activities. We manage our cash and our use of credit facilities to ensure adequate liquidity and to ensure adherence to related financial covenants.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We base our assumptions, estimates and judgments on historical experience, current trends, and other factors we believe to be relevant at the time we prepare our consolidated financial statements. The accounting estimates used in the preparation of our consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained, and as our operating environment changes. On a regular basis, we review the accounting policies and assumptions and update our assumptions, estimates, and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. Additionally, we may employ outside experts to assist in our evaluations. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 1 - Nature of Operations and Summary of Significant Accounting Policies, to our accompanying consolidated financial statements. We consider the following accounting policies to be “critical accounting policies,” as they require management to make difficult, subjective, or complex judgments, and to make estimates about the effect of matters that are inherently uncertain. We have reviewed these critical accounting policies and related disclosures with the Audit Committee of our Board of Directors.
Description
Judgment and Uncertainties
Effect if Actual Results Differ from Assumptions
Revenue Recognition
All revenue, other than certain non-refundable, upfront fees, is recognized when the service is performed. We derive the majority of our revenue from business services associated with our integrated, network-enabled services. Our integrated services consist of medical billing and practice management; electronic health record, or EHR; patient engagement; order transmission and care coordination; and population health management, which are supported by our network, athenaNet.
Our clients typically purchase one-year service contracts related to our integrated, network-enabled services that renew automatically. In most cases, our clients may terminate their agreements without cause by providing notice, generally over a time period prescribed in a client's contract. Our clients are billed monthly, in arrears, typically based upon a percentage of collections posted to our network; minimum fees; flat fees; or per-claim fees, where applicable. Invoices are generated within the first two weeks of the subsequent month. For most of our clients, amounts due are then deducted from a pre-defined bank account one week after invoice receipt via an auto-debit transaction. Unbilled amounts that have been earned are accrued and recorded as revenue, and are included in our accounts receivable balances.
Certain expenses related to the implementation of a client, such as out-of-pocket travel, are typically reimbursed by the client. This is accounted for as both revenue and expense in the period the cost is incurred.
Determining whether and when some of our revenue recognition criteria have been satisfied often involves judgments that can have a significant impact on the timing and amount of revenue we report.
We do not recognize revenue for business services associated with our integrated network-enabled services until collections received by our clients are posted to their accounts, as the fees are not fixed or determinable until such time.
The determination of the amount of revenue we can recognize each accounting period related to certain non-refundable, upfront fees associated with our integrated network-enabled services requires management to make estimates and judgments on the expected client life. We determined the expected client life considering the following key factors:
- Renewal rate considerations
- Economic life of the service
The expected client life, or expected performance period, for the years presented is 12 years.
Although we believe that our approach to estimates and judgments is reasonable, actual results could differ, and we may be exposed to increases or decreases in revenue that could be material.
Our estimate of the expected performance period may prove to be inaccurate, in which case we may have understated or overstated the revenue recognized in an accounting period. The amount of deferred revenue related to certain non-refundable, upfront fees is $55.1 million and $57.0 million as of December 31, 2017 and 2016, respectively. However, upon adoption of the new revenue recognition standard on January 1, 2018, we expect that this will no longer be a critical judgment, as the accounting for these fees will change.
Description
Judgment and Uncertainties
Effect if Actual Results Differ from Assumptions
Purchased Intangible Assets and Goodwill
Business Combinations, including purchased intangible assets, are accounted for at fair value. Acquisition costs are expensed as incurred and recorded in general and administrative expenses. Measurement period adjustments relate to adjustments to the fair value of assets acquired and liabilities assumed based on information that we should have known at the time of acquisition. All changes to purchase accounting that do not qualify as measurement period adjustments are included in current period earnings. The fair value amount assigned to intangible assets is based on an exit price from a market participant’s viewpoint, and utilizes data such as discounted cash flow analysis and replacement cost models. We review acquired intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Indefinite-lived intangible assets are reviewed for recoverability at least annually, or more frequently if indicators of impairment are present or changes in circumstances suggest that impairment may exist.
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the identifiable net tangible and intangible assets acquired. Goodwill is not amortized but is evaluated for impairment annually on November 30th or more frequently if indicators of impairment are present or changes in circumstances suggest that impairment may exist. The first step of the goodwill impairment test compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered to be impaired. If the carrying amount of the reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill.
Critical estimates in valuing certain intangible assets and the fair value of the reporting units during goodwill impairment tests include, but are not limited to, identifying reporting units, historical and projected client retention rates, anticipated growth in revenue from the acquired clients, expected future cash outflows, the allocation of those cash flows to identifiable intangible assets, estimated useful lives of these intangible assets, and a probability-weighted income approach based on scenarios in estimating achievement of operating results.
Testing finite-lived intangible assets for impairment includes significant judgment in the determination of the separate asset groups as well as the recoverability of those asset groups. Management uses various assumptions when determining recoverability including, but not limited to, future cash flows, cash outflows necessary to obtain the cash inflows, and disposition of the asset group.
Testing goodwill for impairment includes significant judgment in the assessment of the number of reporting units, assigning assets and liabilities to the reporting units, and determining the fair value of each reporting unit based on management’s best estimates and assumptions, as well as other information compiled by management which sometimes include third-party valuations that utilize customary valuation procedures and techniques.
Management’s best estimates and assumptions are employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period.
Future business and economic conditions, as well as differences actually related to any of the assumptions, could materially impact the financial statements through impairment of goodwill or intangible assets and acceleration of the amortization period of the purchased intangible assets, which are finite-lived assets.
As of December 31, 2017, the carrying amounts of goodwill and purchased intangible assets were $274.4 million and $108.6 million, respectively. As of December 31, 2016, the carrying amounts of goodwill and purchased intangible assets were $240.7 million and $112.1 million, respectively.
Description
Judgment and Uncertainties
Effect if Actual Results Differ from Assumptions
Capitalized Software Costs for Internal Use
All of our software is considered internal use for accounting purposes, as we do not market or sell our software. As a result, we capitalize certain costs associated with the creation of internally-developed software for internal use (i.e., athenaNet). These costs are recorded in the Capitalized Software Costs, net line on our Consolidated Balance Sheets.
We capitalize costs incurred during the application development stage related to the development of athenaNet services and other internally-developed software for internal use. Costs incurred during the application development phase are capitalized only when we believe it is probable that the development will result in new or additional functionality. The types of costs capitalized during the application development phase include employee compensation (including stock-based compensation), as well as external consultant fees for individuals working on these projects. Costs related to the preliminary project stage and post-implementation activities are expensed as incurred. Capitalized internal-use software is amortized on a straight-line basis over its estimated useful life when the asset has been placed in service.
We account for costs associated with internal-use software on a project-by-project basis during initial capitalization as well as subsequent measurement.
Significant judgments related to the capitalization of internal use software costs include determining whether it is probable that projects will result in new or additional functionality; concluding on when the application development phase starts and ends; and estimating which costs, especially employee compensation costs, should be capitalized. Additionally, there is judgment applied to the useful lives of these capitalized costs; we have concluded that the useful life for capitalized internally-developed software ranges from two to five years. When internal-use software that was previously capitalized is abandoned, the cost less the accumulated amortization, if any, is recorded as amortization expense. Fully amortized capitalized internal-use software costs are removed from their respective accounts.
While we believe that our approach to estimates and judgments is reasonable, actual results could differ, and such differences could lead to an increase or decrease in expenses in the current period.
As of December 31, 2017 and December 31, 2016, the carrying amounts of internally-developed capitalized software were $115.7 million and $95.6 million, respectively. Note that these totals exclude acquired third-party software licenses for internal use.
Financial Operations Overview
Revenue
We partner with hospital and ambulatory clients to drive clinical and financial results. We derive our revenue from two sources: business services, and implementation and other services. Business services primarily consists of revenue from our athenaNet providers who use our network-enabled medical record, revenue cycle, patient engagement, care coordination, and population health services. Business services also includes revenue from Epocrates® and other point-of-care mobile applications. No single client accounted for a significant amount of revenues for the years ended December 31, 2017, December 31, 2016, and December 31, 2015.
Business Services Revenue. Business services revenue accounted for 97%, 97%, and 96% of our total revenues the years ended December 31, 2017, December 31, 2016, and December 31, 2015, respectively. Business services revenue for athenahealth-branded services is typically 2% to 8% of a practice’s or health system’s total collections depending upon the services purchased and the size, complexity, and other characteristics of the practice or health system. Accordingly, business services revenue is largely driven by: the number of clients we serve, the number of physicians and other healthcare providers working in those practices, the volume of activity and related collections of those providers, the mix of our services used by those medical practices and healthcare providers, and our contracted rates. There is moderate seasonality in the activity level and service mix of healthcare providers. Typically, discretionary use of healthcare provider services declines during the holiday season, which leads to a decline in collections by our healthcare provider clients in mid-January. Based on the new revenue recognition guidance that we will adopt on January 1, 2018, we believe that the seasonality associated with the timing of when claims are submitted by our clients and when our clients receive payment on these claims will be reflected in our financial results with differing patterns than under today's recognition method.
Implementation and Other Revenue. Implementation and other revenue consists of all non-core revenue streams and includes the amortization of deferred revenue on non-refundable, upfront fees. We expect the amortization of deferred implementation fees to cease upon the adoption of the new revenue recognition guidance on January 1, 2018. Refer to Note 1 - Nature of Operations and Summary of Significant Accounting Policies for further information.
Operating Expenses
During 2017, we commenced a comprehensive plan, which we refer to as the Plan, designed to increase strategic focus and improve operational efficiency. The Plan is expected to generate $100 million to $115 million in gross pre-tax expense savings by the end of 2018. In connection with the Plan, we took steps to reduce our workforce by approximately 9%. Implementation of the Plan is expected to result in cumulative pre-tax charges of approximately $15 million to $25 million by the end of 2018, primarily related to workforce reductions, most of which occurred during the three months ended December 31, 2017.
Cost of Revenue. Cost of revenue primarily consists of compensation expense related to personnel who provide services, including implementation of new clients and client support, costs associated with our business partner outsourcing arrangements and clearing house, software subscriptions, claim processing costs, certain overhead costs, depreciation of certain fixed assets, and amortization of capitalized software development costs and certain purchased intangible assets. We currently expense implementation costs as incurred. However, we expect that upon adoption of the new revenue recognition standard on January 1, 2018, certain costs associated with implementation activities prior to go-live will be capitalized and amortized ratably on a straight-line basis over the average expected customer life. We expect to increase our overall level of automation as we become a larger operation with higher volumes of work in particular functions, lower cost geographies, and medical specialties, as well as streamlining and simplifying client support. However, we will continue to perform work on our clients’ behalf, which will require investments in the near future. We expect that cost of revenue will still increase in absolute terms; however, we expect that costs will remain relatively consistent as a percentage of revenue compared to prior periods. Due to the new revenue recognition guidance that we will adopt January 1, 2018, in initial years post-adoption, we will capitalize more implementation activities than we will amortize, resulting in a net benefit to cost of revenue; however, at the point at which the amortization of capitalized implementation activities equals the amount capitalized in the corresponding period, cost of revenue will no longer receive a benefit from the new revenue recognition guidance.
Selling and Marketing Expense. Selling and marketing expense primarily consists of compensation expense for selling and marketing employees, marketing programs (including trade shows, brand messaging, and online initiatives), certain overhead costs, depreciation of certain fixed assets, and amortization of certain purchased intangible assets. Although we recognize substantially all revenue when services have been delivered, we recognize a portion of our sales commission expense at the time of contract signature and a portion at other milestone achievements. Accordingly, we incur a portion of our selling and marketing expense prior to the recognition of the corresponding revenue. We expect that, upon adoption of the new revenue recognition standard on January 1, 2018, certain commissions will be capitalized and amortized ratably on a straight-line basis over the average expected customer life. In connection with the Plan, we are taking and plan to continue to take measures to
adjust our selling and marketing expenses to reflect today's market conditions, while reallocating resources to address the best opportunities to grow our market share. As a result, we expect that, in the near-term, selling and marketing expense will decline in absolute terms and as a percentage of revenue.
Research and Development Expense. Research and development expense primarily consists of compensation expense for research and development employees, consulting fees for third-party developers, certain overhead costs, and depreciation of certain fixed assets. We expect that, in the near-term, research and development expenditures will increase in absolute terms and will likely remain constant or slightly decrease as a percentage of revenue as we develop and enhance new and existing services; however, the amount of expenditures that will be capitalized as software costs versus expensed as research and development costs could vary based on the specific projects we undertake.
General and Administrative Expense. General and administrative expense primarily consists of compensation expense for administrative employees, professional fees for third-party accountants, lawyers, and consultants, certain overhead expenses, and depreciation of certain fixed assets. We expect that general and administrative expense will decrease with the implementation of the Plan, but increase modestly in absolute terms over time as we make investments to support our growth. Though expenses are expected to continue to rise in absolute terms, we expect general and administrative expense to decline as a percentage of revenue over time.
Other
Interest Expense. Interest expense primarily consists of interest costs related to our term and revolving loans under our current credit facility and the amortization of deferred financing fees.
Other (Expense) Income. Other (expense) income consists of various expense and income items that are not part of our core business activities. For the year ended December 31, 2015, other (expense) income primarily consists of gains realized from the sale of marketable securities in Castlight Health, Inc. Upon adoption of the new investment accounting standard as of January 1, 2018, we will be required to recognize gains and losses on our cost method investments in our statement of income. Such gains and losses could be volatile and significant depending upon the market activity of each investment.
Income Tax Provision. Income tax provision includes the federal and state jurisdictions in the United States and India. The difference between our effective tax rate and our statutory tax rate has historically been driven by the amount of research and development credits we generate each year through the development of new and enhanced services offset by the amount of non-deductible (or permanent) differences and the amount of our pre-tax net income. On December 22, 2017, President Trump enacted “H.R.1,” formerly known as the “Tax Cuts and Jobs Act” which, beginning in 2018, will reduce our corporate statutory rate but will increase certain permanent differences in the near term. As of the date of enactment, we have reduced our net deferred tax assets for our new statutory rate which has resulted in a decrease to our income tax provision for the year ended December 31, 2017. In the future, we expect the difference from our effective tax rate and our newly reduced statutory rate will be less than in the past as the amount of research and development credits that we will generate each year will be offset by higher non-deductible items related to highly compensated employees. In addition, as we expect a higher pre-tax net income as a result of the Plan described above.
Results of Operations
Consolidated Results of Operations
The following table sets forth our consolidated results of operations as a percentage of total revenue for the years ended December 31, 2017, 2016, and 2015:
Percentages for each line item may not sum to the totals or subtotals for each fiscal year due to rounding.
Comparison of the Years Ended December 31, 2017 and 2016
Total revenue for the year ended December 31, 2017 increased due to an increase in collections-based revenue. The increase in collections-based revenue was primarily due to an increase in the number of clients we serve. The amount of collections processed was as follows:
Cost of Revenue. Cost of revenue increased primarily due to compensation costs and costs associated with our business partner outsourcing and clearing house activities. Compensation costs increased $23.3 million in the year ended December 31, 2017, largely due to a $16.9 million increase in salaries expense as a result of a 14% average headcount increase compared to December 31, 2016. Compensation costs also includes a $6.3 million charge related to severance associated with the Plan, as we decreased headcount by 7% from the three months ended September 30, 2017 to the three months ended December 31, 2017. In addition, costs associated with our business partner outsourcing and clearing house activities increased $14.0 million, or 17%, as the number of claims that we processed on behalf of our clients increased during those same periods. The total claims submitted on behalf of clients were as follows:
Selling and Marketing Expense. Selling and marketing expense remained relatively flat for the year ended December 31, 2017. Compensation costs increased $6.7 million for the year ended December 31, 2017, which included $3.3 million in severance due to an 18% average decrease in headcount associated with the Plan during the three months ended December 31, 2017. That increase was offset by a $16.3 million decrease in marketing program spend for the year ended December 31, 2017, as we pursued cost-saving opportunities.
Research and Development Expense. Research and development expense increased for the year ended December 31, 2017 primarily due to compensation costs. Compensation costs increased $25.5 million for the year ended December 31, 2017, largely due to a 9% increase in headcount, as well as an increase in expensed versus capitalized projects from the year ended December 31, 2016. In addition, key employee retention costs associated with our acquisitions of Filament Labs, Inc., or Patient IO, and Praxify Technologies, Inc., or Praxify, contributed $7.1 million to research and development expense in the year ended December 31, 2017.
General and Administrative Expense. General and administrative expense increased for the year ended December 31, 2017 primarily due to the use of consultants. Consulting expense increased $12.1 million for the year ended December 31, 2017. We used consultants in numerous capacities, including assistance in identifying significant cost-savings opportunities related to the Plan, temporarily staffing open positions, and assisting in our analysis and implementation of the new revenue recognition standard.
Income Tax Provision. The difference in our effective tax rate for the year ended December 31, 2017, compared to the year ended December 31, 2016, is due to the H.R.1, formerly known as the Tax Cuts and Jobs Act, enactment, the adoption of the new stock-based compensation accounting standard, the release of a portion of our valuation allowance, and the increase in the amount of pre-tax net income. Upon adoption of the new stock-based compensation guidance on January 1, 2017, we began recognizing excess tax benefits and tax deficiencies through the income tax provision in the consolidated statement of income. Prior to adoption, the excess tax benefits and tax deficiencies were recorded to additional paid-in capital on the consolidated balance sheet and excess tax benefits were not recorded until they were able to be utilized. Refer to Note 1 - Nature of Operations and Summary of Significant Accounting Policies for further information on the impact on the adoption of this new accounting guidance. Refer to Note 11 - Income Taxes for a further description of the H.R.1 enactment impact and our reconciliations of the federal statutory income tax rate to our effective income tax rate.
Comparison of the Years Ended December 31, 2016 and 2015
Total revenue for the year ended December 31, 2016 increased due to an increase in business services revenue. The increase in business services revenue was primarily driven by the growth in the number of providers using our services. Also contributing to this increase was the growth in related collections on behalf of these providers. The amount of collections processed was as follows:
Cost of Revenue. Cost of revenue increased primarily due to compensation costs, which increased $33.4 million in the year ended December 31, 2016, as a result of a 22% increase in headcount from December 31, 2015. We increased headcount due to the increase in the number of providers added to the network and the expansion of our emerging services. In addition, amortization expense increased $13.3 million due to an increase in new software functionality that we placed in service, such as certain projects associated with our athenaOne for Hospitals and Health Systems service, in the year ended December 31, 2016. Finally, cost of revenue increased $6.7 million in the year ended December 31, 2016 due to our investment in various software subscriptions necessary to support our clients and our operations.
Selling and Marketing Expense. Selling and marketing expense increased for the year ended December 31, 2016, primarily due to increases in compensation costs and consulting fees. The increase in compensation for the year ended December 31, 2016 was $9.9 million, and was largely due to a 15% increase in headcount that was partially offset by a lower increase in variable compensation from December 31, 2015. The increase in consulting fees for the year ended December 31, 2016 was $4.3 million. We hired additional sales personnel and utilized consultants to focus on adding new clients and increasing penetration within new and existing markets.
Research and Development Expense. Research and development expense increased for the year ended December 31, 2016 primarily due to compensation costs and allocated amortization expense. Compensation costs increased $10.2 million for the year ended December 31, 2016, primarily due to restructuring costs incurred for strategic re-alignment purposes during the three months ended December 31, 2016. In addition, research and development expense for the year ended December 31, 2016 was impacted by a $6.2 million increase in amortization expense related to capitalized software projects that were ultimately decided not to be placed in service.
General and Administrative Expense. General and administrative expense increased in the year ended December 31, 2016, primarily due to professional services fees and compensation costs. General and administrative expense was impacted by an
increase of $5.8 million in professional service fees, which include legal and consulting fees. General and administrative expense was also impacted by a $3.7 million increase in facilities-related expenses for the year ended December 31, 2016, largely due to our growth.
Other (Expense) Income. Other (expense) income primarily relates to interest expense for the year ended December 31, 2016 and gains realized from the sale of marketable securities during the year ended December 31, 2015.
Income Tax Provision. The difference in our effective tax rate for the year ended December 31, 2016, compared to the year ended December 31, 2015, is primarily due to the increase in our research and development tax credits.
Liquidity and Capital Resources
Sources of Liquidity
As of December 31, 2017, our principal source of liquidity consisted of cash and cash equivalents of $165.1 million compared to cash and cash equivalents of $147.4 million as of December 31, 2016. In addition, we have a credit agreement, which we refer to as the 2015 Senior Credit Facility, that provides for a $500.0 million senior credit facility comprised of a $300.0 million unsecured term loan facility and a $200.0 million unsecured revolving credit facility, which we refer to as the 2015 Senior Credit Facility. As of December 31, 2017 and December 31, 2016, we had $273.8 million and $292.5 million outstanding on the unsecured term loan facility, respectively. As of both December 31, 2017 and December 31, 2016, we had $200.0 million available on the unsecured revolving credit facility.
The 2015 Senior Credit Facility may be used to refinance existing indebtedness and for working capital and other general corporate purposes. We may increase the revolving credit facility up to an additional $100.0 million and may increase the term loan facility to the extent that such amount will not cause us to be in breach of our financial covenants (such as compliance with a consolidated fixed charge coverage, consolidated leverage, and consolidated senior leverage ratios), subject to certain conditions, including obtaining lender commitments. The 2015 Senior Credit Facility matures on May 5, 2020, although we may prepay the 2015 Senior Credit Facility in whole or in part at any time without premium or penalty. As of December 31, 2017, we were in compliance with our covenants under the 2015 Credit Agreement.
Our cash balance increased in the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily due to our cost savings program associated with implementation of the Plan. We believe our current sources of liquidity will be sufficient to sustain operations, to make payments on our contractual obligations, and to purchase property and equipment in the foreseeable future. Our 2015 Senior Credit Facility, including our currently underutilized $200.0 million line of credit, provides additional flexibility to pursue strategic initiatives in the future, if needed. Our analysis is supported by the growth in our new client base and a high rate of renewal with our existing clients, as well as the corresponding increase in billings and collections. However, there can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under these credit facilities or obtain additional financing.
Commitments
We enter into various purchase commitments with vendors in the normal course of business. We believe that our existing sources of liquidity will be adequate to fund these purchases during the 2018 fiscal year. In the normal course of business, we make representations and warranties that guarantee the performance of services under service arrangements with clients. Historically, there have been no material losses related to such guarantees.
Comparison of the Years Ended December 31, 2017 and 2016
Operating Cash Flow Activities
Net cash provided by operating activities increased $58.5 million for the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily due to an increase in net income excluding the effect of non-cash items. There was a slight decrease in cash used from changes in our operating assets and liabilities, as our $16.5 million spend on prepaid retention payments associated with our acquisition of Praxify was largely offset by favorable timing in our accounts receivable, deferred revenue, and accounts payable accounts compared to the year ended December 31, 2016. We expect that, in the near-term, due to higher expected pre-tax net income as a result of the Plan, we will substantially utilize our remaining Federal and State net operating losses and our existing R&D tax credits, and therefore, we will begin paying substantially more in income taxes.
Investing Cash Flow Activities
Net cash used in investing activities increased $29.1 million for the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily due to a $24.2 million increase in payments on acquisitions, net of cash acquired, as a result of our purchase of Praxify. We expect to continue to invest in capitalized software costs as we continue to develop new and enhance existing services and in property and equipment as we continue to grow.
Financing Cash Flow Activities
The increase in net cash used in financing activities was $18.1 million for the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily due to an additional $11.3 million in principal payments on our 2015 Senior Credit Facility in the year ended December 31, 2017. In addition, net cash used in financing activities increased $9.0 million, as we no longer present excess tax benefits within cash flows from financing activities but instead present these cash flows in cash flows from operating activities in the consolidated statements of cash flows, per a change in accounting guidance we adopted January 1, 2017. For the foreseeable future, we anticipate that income taxes paid for the net settlement of restricted stock unit awards will be greater than the cash received for stock option exercises due to our stock price and the increase in the issuance of restricted stock units compared to stock options.
Comparison of the Years Ended December 31, 2016 and 2015
Operating Cash Flow Activities
Net income after non-cash and reclassification adjustments contributed an additional $64.9 million to cash provided by operating activities during the year ended December 31, 2016 compared to the year ended December 31, 2015. The increase in non-cash and reclassification adjustments was the result of a $24.7 million increase in depreciation and amortization during the year ended December 31, 2016 and a $28.7 million gain on the sale of marketable securities during the year ended December 31, 2015. The increase in net income after non-cash and reclassification adjustments was partially offset by a decrease in cash provided by working capital of $46.1 million in the year ended December 31, 2016 compared to the year ended December 31, 2015. This decrease was primarily due to decreases in deferred revenue associated with implementations and in accrued compensation due to the timing of payments. In 2014, we began including implementation fees in our ongoing monthly rate as part of our go to market strategy, which resulted in a decrease in deferred revenue.
Investing Cash Flow Activities
Net cash used in investing activities decreased $24.2 million for the year ended December 31, 2016 compared to the year ended December 31, 2015, as 2016 required less cash for acquired third-party licenses and business acquisitions. During the year ended December 31, 2016, we acquired Filament Labs, Inc. (doing business as Patient IO) for $15.2 million (included in the payments on acquisitions, net of cash acquired line on the consolidated statements of cash flows). This activity contrasts with our acquisition of Razor Insights, LLC (included in the payments on acquisitions, net of cash acquired line on the
consolidated statements of cash flows) and our purchase of WebOMR (a third-party license included in the capitalized software costs line on the consolidated statements of cash flows) in the year ended December 31, 2015 for $39.9 million and $22.0 million, respectively. Net cash used in investing activities also decreased due to $29.8 million of cash provided from the sales of Castlight Health, Inc. stock in the year ended December 31, 2015. In addition, net cash used for property and equipment additions decreased $18.2 million in the year ended December 31, 2016 compared to the year ended December 31, 2015 primarily due to higher spend, particularly in building improvements, in the year ended December 31, 2015.
Financing Cash Flow Activities
The variance in net cash (used in) provided by financing activities was $105.8 million for the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily due to net proceeds received from the 2015 Senior Credit Facility in the year ended December 31, 2015.
Contractual Obligations
The following table summarizes our long-term contractual obligations and commitments as of December 31, 2017:
(1) We have cash interest requirements due on the 2015 Senior Credit Facility payable at variable rates which are not included in the above table.
(2) We are party to agreements for non-cancelable operating leases for office space and data centers which expire between 2018 and 2030.
(3) We have entered into sublease agreements related to facilities included in operating lease obligations, and therefore, we expect that we will receive payments from such agreements which are not included in the above table. Expected payments from these agreements are as follows:
(4) “Other” consists of uncertain tax benefits. We have not recognized these uncertain tax benefits, nor do we have an expectation of when these uncertain tax benefits would be challenged. As of December 31, 2017, we cannot reasonably estimate when any future cash outlays would occur related to these uncertain tax positions.
Off-Balance Sheet Arrangements
As of December 31, 2017 and 2016, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as “special purpose” entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Other than our operating leases, which are primarily for office space and data centers, we do not engage in off-balance sheet financing arrangements. Upon adoption of the new lease accounting guidance on January 1, 2019, we anticipate that the requirement to capitalize all long-term leases will result in a material impact to our consolidated balance sheet.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Exchange Risk. Our results of operations and cash flows are subject to fluctuations due to changes in the Indian rupee. An insignificant amount of our consolidated revenues is generated outside of the United States. Some of our contracts with our offshore vendors are denominated in currencies other than the U.S. dollar, namely Indian rupees. For the years ended December 31, 2017, 2016, and 2015, approximately 1-2% of our expenses occurred in our operations in India. We
therefore do not believe that the risk of a significant impact on our operating income from foreign currency fluctuations is likely.
Interest Rate Risk. We had $273.8 million and $292.5 million of outstanding borrowings under our 2015 Senior Credit Facility at December 31, 2017 and December 31, 2016, respectively. The 2015 Senior Credit Facility bears interest at the British Bankers Association London Interbank Offered Rate, or LIBOR, plus an interest margin based on (i) our consolidated leverage ratio, or (ii) the base rate (which is the highest of (a) the Bank of America prime rate, (b) the Federal Funds rate plus 0.50%, and (c) one month LIBOR plus 1.00%) plus an interest margin based on our consolidated leverage ratio. Accordingly, we are exposed to fluctuations in interest rates on borrowings under the 2015 Senior Credit Facility. A one hundred basis point change in the interest rate on our borrowings outstanding as of December 31, 2017 and December 31, 2016 would result in an annual change in interest expense of $2.7 million and $2.9 million, respectively.
Item 8.
Item 8.
Financial Statements and Supplementary Data.
The financial statements required by this Item are located beginning on page of this report.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A.
Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities and Exchange Act of 1934 is (1) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. As of December 31, 2017 (the “Evaluation Date”), our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934). Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our Chief Executive Officer and Chief Financial Officer have concluded based upon the evaluation described above that, as of the Evaluation Date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our company. Internal control over financial reporting is defined in Rules 13a-15(f) and 15(d)-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, our Chief Executive and Chief Financial Officers and effected by our board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and disposition of our assets;
•
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles;
•
provide reasonable assurance that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Because of inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Our management, including our Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017. In conducting this evaluation, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013).
Based upon this evaluation and those criteria, management believes that, as of December 31, 2017, our internal controls over financial reporting were effective.
Deloitte & Touche LLP, our independent registered public accounting firm, has audited our consolidated financial statements and the effectiveness of our internal control over financial reporting as of December 31, 2017, as stated in their report which appears herein.
Changes in Internal Control
There have been no changes in our internal control over financial reporting for the three months ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of athenahealth, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of athenahealth, Inc. and subsidiaries (the "Company") as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2017, of the Company and our report dated February 1, 2018, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 1, 2018
Item 9B.
Item 9B.
Other Information.
None.
PART III
Certain information required by Part III of Form 10-K is omitted from this report because we expect to file a definitive proxy statement for our 2018 Annual Meeting of Stockholders, which we refer to as the 2018 Proxy Statement, within 120 days after the end of our fiscal year pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, and the information included in our 2018 Proxy Statement is incorporated herein by reference to the extent provided below.
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance.
The information required by this Item is set forth in our 2018 Proxy Statement to be filed with the SEC within 120 days of December 31, 2017, and is incorporated by reference into this Annual Report on Form 10-K.
The information required by this Item is set forth in our 2018 Proxy Statement to be filed with the SEC within 120 days of December 31, 2017, and is incorporated by reference into this Annual Report on Form 10-K.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is set forth in our 2018 Proxy Statement to be filed with the SEC within 120 days of December 31, 2017, and is incorporated by reference into this Annual Report on Form 10-K.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is set forth in our 2018 Proxy Statement to be filed with the SEC within 120 days of December 31, 2017, and is incorporated by reference into this Annual Report on Form 10-K.
Item 14.
Item 14.
Principal Accountant Fees and Services.
The information required by this Item is set forth in our 2018 Proxy Statement to be filed with the SEC within 120 days of December 31, 2017, and is incorporated by reference into this Annual Report on Form 10-K.
PART IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules.
(a) Documents filed as part of this report.
(1) The following consolidated financial statements are filed herewith in Item 8 of Part II above.
(i) Report of Independent Registered Public Accounting Firm
(ii) Consolidated Balance Sheets
(iii) Consolidated Statements of Income
(iv) Consolidated Statements of Comprehensive Income
(v) Consolidated Statements of Stockholders’ Equity
(v) Consolidated Statements of Cash Flows
(vi) Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
All other supplemental schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto.
(3) Exhibits
See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ATHENAHEALTH, INC.
By:
/s/ Jonathan Bush
Jonathan Bush
Chief Executive Officer, President, and Chairman
By:
/s/ Marc Levine
Marc Levine
Chief Financial Officer
Date: February 1, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Exhibit
No.
Exhibit Description
XBRL (eXtensible Business Reporting Language). The following materials from athenahealth, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2017, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) notes to consolidated financial statements.
†
Indicates a management contract or any compensatory plan, contract, or arrangement.
*
Furnished or filed herewith.
Financial Statements and Supplementary Data
athenahealth, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Contents
Report of Independent Registered Public Accounting Firm
FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of athenahealth, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of athenahealth, Inc. and subsidiaries (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 1, 2018, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 1, 2018
We have served as the Company's auditor since 2003.
athenahealth, Inc.
CONSOLIDATED BALANCE SHEETS
(Amounts in millions, except per share amounts)
(1) Refer to Footnote 1 - Nature of Operations and Summary of Significant Accounting Policies for disclosure of related party amounts.
The accompanying notes are an integral part of these consolidated financial statements.
athenahealth, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in millions, except per share amounts)
(1) Refer to Footnote 1 - Nature of Operations and Summary of Significant Accounting Policies for disclosure of related party amounts.
The accompanying notes are an integral part of these consolidated financial statements.
athenahealth, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in millions)
The accompanying notes are an integral part of these consolidated financial statements.
athenahealth, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Amounts in millions)
The accompanying notes are an integral part of these consolidated financial statements.
athenahealth, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
The accompanying notes are an integral part of these consolidated financial statements.
athenahealth, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions, except per share amounts)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General - athenahealth, Inc. (which we refer to as athenahealth, the Company, we, or our) partners with hospital and ambulatory clients to drive clinical and financial results. We offer network-based medical record, revenue cycle, patient engagement, care coordination, and population health services, as well as Epocrates® and other point-of-care mobile applications. Our network provides clients better insight into their own organizations as well as the ability to learn from the experience of every other client on the network. Through our model, we infuse the knowledge clients need to thrive in a changing industry directly into their workflow, from clinical guidelines to payer rules. We take on back-office work at scale so providers can focus on patients, not paperwork.
Principles of Consolidation - The accompanying consolidated financial statements include the results of operations of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are used for, but are not limited to: (1) revenue recognition, including the expected client life; (2) asset impairments; (3) depreciable lives of assets; (4) fair value of stock-based compensation; (5) fair value of identifiable purchased tangible and intangible assets in a business combination; (6) determination of the reporting unit(s) for goodwill impairment testing; (7) litigation reserves; and (8) capitalized software costs. Actual results could significantly differ from those estimates.
Segment Reporting - Operating segments are identified as components of an enterprise about which separate discrete financial information is evaluated by the chief operating decision maker, which we refer to as the CODM, or decision-making group in assessing performance and making decisions regarding resource allocation. We use consolidated financial information in determining how to allocate resources and assess performance, and have determined that we operate in one segment. The CODM, our Chief Executive Officer, uses non-GAAP adjusted operating income (defined as the sum of GAAP net income before (provision for) benefit from income taxes; total other (expense) income; stock-based compensation expense; amortization of capitalized stock-based compensation related to software development; amortization of purchased intangible assets; integration and transaction costs; exit costs, including restructuring costs; and gain or loss on investments) as the measure of our profit on a regular basis.
Revenue Recognition - We recognize revenue when there is evidence of an arrangement, the service has been provided to the client, the collection of the fees is reasonably assured, and the amount of fees to be paid by the client is fixed or determinable.
We derive our revenue from two sources: business services, and implementation and other services. Business services primarily consists of revenue from our athenaNet providers who use our network-enabled medical record, revenue cycle, patient engagement, care coordination, and population health services. Business services also includes revenue from Epocrates and other point-of-care mobile applications.
Our clients typically purchase one-year service contracts for our integrated, network-enabled services that renew automatically. In most cases, our clients may terminate their agreements without cause by providing notice, generally over a time period prescribed in a client's contract. We bill our clients monthly, in arrears, based either upon a percentage of collections posted to athenaNet, minimum fees, flat fees, or per-claim fees. We do not recognize revenue for athenahealth-branded business services fees until client collections are posted, as the services fees are not fixed or determinable until such time. Unbilled amounts that have been earned are accrued and recorded as revenue and are included in our accounts receivable balances.
Implementation and other services revenue primarily consists of the amortization of deferred revenue on implementation fees. Prior to 2014, these fees were billed upfront and recorded as deferred revenue until the implementation was complete, and then, as the service did not have stand-alone value, it was recognized ratably over the longer of the life of the agreement or the expected client life, which is currently estimated to be 12 years. We evaluate the length of the amortization period of the implementation fees based on our experience with client contract renewals and consideration of the period over which those clients will receive benefits from our current portfolio of services.
athenahealth, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions, except per share amounts)
During 2014, we began to sell go-live and training support services separate from the required implementation services. The client can purchase go-live and training support services from us or third-party vendors, and therefore, those services have stand-alone value and are recognized as those services are delivered. When we began selling these services separately from the required implementation services, we began to include the fees associated with the required implementation services in our ongoing monthly rate; therefore, the required implementation services are being recognized ratably over the expected client life. Previously deferred revenue balances related to implementation services that were billed upfront and did not have stand-alone value continue to be amortized over those remaining client lives.
Certain expenses related to the implementation, go-live, and training of a client, such as out-of-pocket travel, are typically reimbursed by the client. These costs are recorded as both revenues and expenses in the period the costs are incurred.
Research and Development Expense - Research and development expense primarily consists of compensation expense for research and development employees and consulting fees for third-party developers. All such costs are expensed as incurred, except for certain internal use software costs, which may be capitalized (refer to Note 6 - Capitalized Software Costs). Research and development expense also includes allocated amounts for overhead, depreciation, and amortization.
Stock-Based Compensation - We account for share-based awards, including shares issued under employee stock purchase plans; stock options; and restricted stock units with compensation cost measured using the fair value of the awards issued (refer to Note 10 - Stock-Based Compensation). The assumptions used in calculating the fair value of share-based awards represent management’s best estimates. We generally issue previously unissued shares for the exercise of stock options.
Certain employees have received awards for which the ultimate number of shares that will be subject to vesting is dependent upon the achievement of certain financial targets for the year. Such determination is not made until the award’s vesting determination date, which is the date our fiscal year financial statements are available for issuance. The value of such awards are initially recorded based on the attainable number of shares that are most likely to be subject to vesting based on available financial forecasts as of the date of grant. This amount is adjusted on a quarterly basis as new financial forecasts become available. Stock-based compensation expense for these awards is recorded over the requisite service period, which is generally three or four years. Such awards generally vest ratably over three or four years from the vesting determination date.
Advertising Expenses - Advertising expenses are expensed as incurred and are included in selling and marketing expense in the Consolidated Statements of Income. Advertising expense totaled $27.3 million, $30.6 million, and $28.1 million for the years ended December 31, 2017, 2016, and 2015, respectively.
Cash and Cash Equivalents - We consider all highly liquid investments with an original or remaining maturity from the Company’s date of purchase of 90 days or less to be cash equivalents.
Investments - Management determines the classification of investments at the time of purchase based upon management’s intent with regard to such investments. Our convertible notes receivable from privately-held companies are accounted for as available-for-sale investments which are carried at cost, which we believe approximates fair value. Upon conversion, if any, we assess whether the resulting holdings in equity interests should be accounted for on a cost or equity method basis, depending on whether we believe we have significant influence over the investee, the type of equity interest held, and the level of equity interest held in the investee. Marketable securities, if any, are also accounted for as available-for-sale investments and recorded at fair value. Unrealized holding gains and losses on available-for-sale investments are recorded as a component of accumulated other comprehensive (loss) income. The Company determines realized gains and losses based on the specific identification method. Management monitors and assesses individual investments for other-than-temporary impairment on a quarterly basis.
Concentrations of Credit Risk - Financial instruments that potentially subject us to concentrations of credit risk are cash equivalents, investments, derivatives, notes receivable, and accounts receivable. We attempt to limit our credit risk associated with cash equivalents and investments by investing or making deposits in highly-rated corporate and financial institutions, and engaging with highly-rated financial institutions as counterparties to our derivative transactions. With respect to client accounts receivable, we manage our credit risk by performing ongoing credit evaluations of our clients. No single client accounted for a significant amount of revenues for the years ended December 31, 2017, 2016, and 2015. No single client accounted for a significant portion of accounts receivable as of December 31, 2017 and 2016.
Accounts Receivable - Accounts receivable represents unbilled amounts and amounts due from clients for business services. Accounts receivable are stated net of an allowance for uncollectible accounts, which is determined by establishing reserves for specific accounts and consideration of historical and estimated probable losses.
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(Amounts in millions, except per share amounts)
Activity in the allowance for doubtful accounts is as follows:
Prepaid Expenses and Other Current Assets - Prepaid expenses and other current assets consist of the following:
Property and Equipment - Property and equipment are stated at cost less accumulated depreciation. The cost of an asset consists of its purchase price and any necessary costs incurred to bring the asset to its working condition and location for its intended use. We capitalize certain costs incurred during the construction of an asset and record such costs in construction in progress until construction is completed. Once the related asset is placed into service, we transfer its carrying value into the appropriate asset category and begin depreciating the value over its estimated useful life.
Depreciation is calculated on a straight-line basis over the following estimated useful lives:
Leasehold improvements are depreciated using the straight-line method over the lesser of the useful life of the improvements or the applicable lease terms, excluding renewal periods. Costs associated with maintenance and repairs are expensed as incurred. When any assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from their respective accounts.
Capitalized Interest Cost - Interest costs related to major capital projects, specifically capital costs related to the build-out of our corporate headquarters and capitalized internal-use software costs, are capitalized until each underlying asset is placed into service. Capitalized interest is calculated by multiplying the capitalization rate by the qualifying costs. Once the qualifying asset is placed into service, the cost of the qualifying asset and the related capitalized interest are amortized over the estimated useful life of the asset.
Capitalized Software Costs - We capitalize certain costs related to the development of athenaNet services and other internal-use software. Costs incurred during the application development phase are capitalized only when we believe it is probable the development will result in new or additional functionality. The types of costs capitalized during the application development phase include employee compensation, as well as consulting fees for third-party developers working on these projects. Costs related to the preliminary project stage and post-implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over the estimated useful life of the asset, which ranges from two to five years. When internal-use software that was previously capitalized is abandoned, the cost less the accumulated amortization, if any, is recorded as amortization expense. Fully amortized capitalized internal-use software costs are removed from their respective accounts.
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(Amounts in millions, except per share amounts)
Long-Lived Assets - We review long-lived assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability of long-lived assets is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition, as compared with the carrying value of the asset. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the fair value of the asset.
Long-lived assets classified as held for sale are reported at the lower of carrying amount or fair value, less costs to sell. Long-lived assets are considered held for sale when certain criteria are met, including when management has committed to a plan to sell the asset, the asset is available for sale in its immediate condition, and the sale is probable within one year of the reporting date. Subsequent to classification of an asset as held for sale, no further depreciation is recorded.
Goodwill - Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the identifiable net tangible and intangible assets acquired. Goodwill is not amortized but is evaluated for impairment annually or more frequently if indicators of impairment are present or changes in circumstances suggest that impairment may exist. We evaluate the carrying value of our goodwill annually on November 30. The first step of the goodwill impairment test compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered impaired. If the carrying amount of the reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. No impairments have been recognized.
Purchased Intangible Assets - Most of our purchased intangible assets were acquired in connection with business acquisitions, and are amortized over their estimated useful lives based on the pattern of economic benefit expected from each asset. We concluded for certain purchased intangible assets that the pattern of economic benefit approximated the straight-line method, and therefore, the use of the straight-line method was appropriate, as the majority of the cash flows will be recognized ratably over the estimated useful lives and there is no degradation of the cash flows over time.
Accrued compensation and accrued expenses - Accrued expenses consist of the following:
Commitments and Contingencies - We are engaged from time to time in certain legal disputes arising in the ordinary course of business, including employment discrimination claims and challenges to our intellectual property. We believe that we have adequate legal defenses and that the likelihood of a loss contingency relating to the ultimate disposition of any of these disputes is remote. When the likelihood of a loss contingency becomes at least reasonably possible with respect to any of these disputes, or, as applicable in the future, if there is at least a reasonable possibility that a loss exceeding amounts already recognized may have been incurred, we will revise our disclosures in accordance with the relevant authoritative guidance.
Additionally, we will accrue a liability for loss contingencies when we believe that it is both probable that a liability has been incurred and that we can reasonably estimate the amount of the loss. We will review these accruals and adjust them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel, and other relevant information. To the extent new information is obtained, and our views on the probable outcomes of claims, suits, assessments, investigations, or legal proceedings change, changes in our accrued liabilities would be recorded in the period in which such determination is made. We expense legal costs, including those incurred in connection with loss contingencies, as incurred.
Exit Costs, Including Restructuring Costs - Exit costs, including restructuring costs, represent costs related to workforce reductions and other charges related to strategic re-alignment. On October 13, 2017, the Board of Directors approved a
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(Amounts in millions, except per share amounts)
comprehensive plan, which we refer to as the Plan, designed to increase strategic focus and improve operational efficiency. Implementation of the Plan is expected to result in cumulative pre-tax charges of approximately $15 million to $25 million, primarily related to workforce reductions.
During the year ended December 31, 2017, we recorded a charge of $18.7 million associated with the Plan, of which $6.6 million, $3.4 million, $3.2 million, and $0.6 million of costs related to workforce reductions are included in cost of revenue, selling and marketing expense, research and development expense, and general and administrative expense, respectively, and $4.9 million of non-cash charges related to other activities are included in general and administrative expense.
In the 2015 and 2016 fiscal years, management performed various activities that resulted in the Company incurring exit costs associated with workforce reductions and termination of leases and other agreements. During the years ended December 31, 2016 and 2015, the costs related to workforce reductions are primarily included in research and development expenses and the costs related to termination of leases and other agreements are primarily included in general and administrative expenses.
The activity related to the exit cost accrual during the years ended December 31, 2017 and 2016 consist of the following:
Deferred Revenue - Deferred revenue primarily consists of billings or payments received in advance of the revenue recognition criteria being met. Deferred revenue largely includes amounts associated with sponsored clinical information and decision support services which are recognized as services are performed and pre-2014 implementation services fees which continue to be recognized as revenue ratably over the longer of the life of the agreement or the expected client life, which is currently estimated to be 12 years. Deferred revenue that will be recognized during the succeeding 12-month period is recorded as current deferred revenue and the remaining portion is recorded as non-current. The treatment of these fees has not been adjusted for expected changes as a result of new accounting pronouncements that will be adopted as of January 1, 2018, as described below.
Deferred Rent - Deferred rent consists of rent escalation, tenant improvement allowances, and other incentives received from landlords related to the operating leases for our facilities. Rent escalation represents the difference between actual operating lease payments due and straight-line rent expense, which we record over the term of the lease. The excess is recorded as a deferred credit in the early periods of the lease, when cash payments are generally lower than straight-line rent expense, and is reduced in the later periods of the lease when payments begin to exceed the straight-line expense. Tenant allowances from landlords for tenant improvements are generally comprised of cash received from the landlord or paid on our behalf as part of the negotiated terms of the lease. These tenant improvement allowances and other incentives are recorded when realizable as deferred rent and are amortized as a reduction of periodic rent expense over the term of the applicable lease.
Preferred Stock - Our Board of Directors has the authority, without further action by stockholders, to issue up to 5 million shares of preferred stock in one or more series. Our Board of Directors may designate the rights, preferences, privileges, and restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preference, and number of shares constituting any series or the designation of any series. The issuance of preferred stock could have the effect of restricting dividends on our common stock, diluting the voting power of our common stock, impairing the liquidation rights of our common stock, or delaying or preventing a change in control. The ability to issue preferred stock could delay or impede a change in control. As of December 31, 2017 and 2016, no shares of preferred stock were outstanding.
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(Amounts in millions, except per share amounts)
Common Stock - Common stockholders are entitled to one vote per share and dividends, when declared by the Board of Directors, subject to any preferential rights of preferred stockholders.
Business Combinations - Business combinations are accounted for at fair value. The associated acquisition costs are expensed as incurred and recorded in general and administrative expenses; non-controlling interests, if any, are reflected at fair value at the acquisition date; in-process research and development, if any, is recorded at fair value as an intangible asset at the acquisition date; restructuring costs associated with a business combination are expensed; contingent consideration is measured at fair value at the acquisition date, with changes in the fair value after the acquisition date affecting earnings; changes in deferred tax asset valuation allowances and income tax uncertainties after the measurement period affect income tax expense; and goodwill is determined as the excess of the fair value of the consideration conveyed in the acquisition over the fair value of the net assets acquired. The accounting for business combinations requires estimates and judgments as to expectations for future cash flows of the acquired business and the allocation of those cash flows to identifiable intangible assets in determining the estimated fair value for assets and liabilities acquired. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, including valuations that utilize customary valuation procedures and techniques. If the actual results differ from our estimates and judgments, the amounts recorded in the financial statements could result in a possible impairment of the intangible assets and goodwill, or require acceleration of the amortization expense of finite-lived intangible assets. The results of the acquired businesses’ operations are included in the Consolidated Statements of Income of the combined entity beginning on the date of acquisition.
Related Party Transactions - We have a long-term investment in Access Healthcare Services Private Limited, or Access, a vendor that provides business partner outsourcing services for us. The total expense related to this vendor for the years ended December 31, 2017, 2016, and 2015 was $62.4 million, $41.1 million, and $23.6 million, respectively. Expense for the year ended December 31, 2017 reflects $61.9 million in cost of revenue and $0.5 million in research and development expense. The total amount payable related to this vendor at December 31, 2017 was $5.6 million. The total amount accrued for this vendor at December 31, 2017 and 2016 was $5.7 million and $4.6 million, respectively. Our contractual obligations with Access include a purchase obligation that limits our ability to decrease our purchased services more than 33% from the previous calendar year's volume.
A member of our Board of Directors also serves as a director of one of our clients. The total revenue recognized for this client for the years ended December 31, 2017, 2016, and 2015 was $19.3 million, $14.4 million, and $9.9 million, respectively. The total receivables related to this client were $3.5 million and $1.6 million for the years ended December 31, 2017 and 2016, respectively.
Income Taxes - Deferred tax assets and liabilities relate to temporary differences between the financial reporting and income tax bases of assets and liabilities and are measured using enacted tax rates and laws expected to be in effect at the time of their reversal. Any change in an enacted tax rate would result in a charge or credit to the income tax provision. A valuation allowance is established to reduce net deferred tax assets if, based on the available positive and negative evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In making such determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and recent financial results.
We recognize a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Our income tax positions must meet a more-likely-than-not recognition threshold at the balance sheet date to be recognized in the related period. We record interest and penalties related to unrecognized tax benefits in income tax expense.
Sales and Use Taxes - Our services are subject to sales and use taxes in certain jurisdictions. Our contractual agreements with clients provide that payment of any sales or use tax assessments is the responsibility of the client. In certain jurisdictions, sales taxes are collected from the client and remitted to the respective agencies. These taxes are recorded on a net basis and excluded from revenue and expense in our financial statements as presented.
Incentives Received from Governmental Bodies - From time to time, we receive incentives from various government agencies and programs. We account for the portion of the credits that are expected to be used as grants by reducing general and administrative expense. Credits which are expected to be used to reduce general and administrative expense are recognized when the requirements to earn the credits have been met. We recognized $3.3 million, $3.8 million, and $4.1 million from our participation in incentive programs during the years ended December 31, 2017, 2016, and 2015, respectively.
Foreign Currency Translation - The financial position and results of operations of our foreign subsidiaries are measured using local currency as the functional currency. Assets and liabilities are translated at the rate of exchange in effect at the end of
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(Amounts in millions, except per share amounts)
each reporting period. Revenues and expenses are translated at the average exchange rate for the period. Foreign currency translation gains and losses are recorded within other comprehensive income (loss).
Employee Benefit Plan - We sponsor a 401(k) retirement savings plan, which we refer to as the 401(k) Plan, under which eligible employees may contribute specified percentages of their compensation, subject to maximum aggregate annual contributions imposed by the Internal Revenue Code of 1986. All employee contributions are allocated to the employee’s individual account and are invested in various investment options as directed by the employee. Employees’ cash contributions are fully vested and non-forfeitable. We may make a discretionary contribution in any year, subject to authorization by our Board of Directors. During the years ended December 31, 2017, 2016, and 2015, our contributions to the 401(k) Plan were $11.8 million, $11.3 million, and $5.3 million, respectively.
Recently Adopted Pronouncement - In March 2016, the Financial Accounting Standards Board, or FASB, issued new guidance which changes the accounting for stock-based compensation. The guidance simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. We adopted this standard on January 1, 2017, using a modified retrospective approach, which requires the cumulative effect of initially applying the standard to be recorded as an adjustment to the opening balance of retained earnings of the annual reporting period that includes the date of initial application, and which resulted in a cumulative-effect increase of $49.2 million to retained earnings and deferred tax assets. Upon adoption, we now recognize all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement. We no longer present excess tax benefits within cash flows from financing activities but instead present these cash flows in cash flows from operating activities in the consolidated statements of cash flows. Prior to adoption, the excess tax benefits and tax deficiencies were recorded to additional paid-in capital and excess tax benefits were not recorded until they were able to be utilized. In addition, we elected to no longer calculate an estimate of expected forfeitures and began recognizing forfeitures as they occurred, including a cumulative-effect decrease of $1.0 million to retained earnings at January 1, 2017 with the offset as an increase to additional paid-in capital.
New Accounting Pronouncements Not Yet Adopted
Revenue from Contracts with Customers
New revenue recognition guidance, which was issued in March 2014 and amended thereafter, is effective for public companies for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. The new revenue standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In addition, the new standard provides guidance on accounting for certain revenue-related costs including costs associated with obtaining and fulfilling a contract.
While the impact of this standard will vary across our industry peers, our unique go-to-market strategy centered around charging a percentage of our clients’ collections for our services within athenaOne deals, combined with our offering that essentially provides a series of integrated services and our clients’ ability to terminate our services at a fixed number of days’ notice without a significant penalty, will result in additional complexity in our pattern of revenue recognition compared to the current revenue recognition pattern. We have reached conclusions on key accounting assessments and are substantially complete with the implementation of new processes for the accounting under the new standard. These new processes include implementing a new information technology system and creating additional internal controls over financial reporting.
Under today’s accounting standards, the criterion impacting the timing of our revenue recognition is the requirement of fees to be either fixed or determinable; therefore, we do not recognize revenue for many athenaOne-based business services deals until these collections are posted, as the fees are not fixed or determinable until such time. The new guidance does not limit the recognition of revenue to only fees that are fixed or determinable. Instead, the standard focuses on recognizing revenue as value is transferred to customers. The impact on our athenaOne services offering is a revenue recognition and reporting model that reflects revenue recognized over time rather than delaying the recognition of revenue until the point in time in which the fees to be charged become determinable. For athenaOne arrangements, we will estimate the value of the consideration we will earn over the remaining contractual period as our services are provided and recognize the fees over the term; this estimation will typically involve predicting the amounts our clients will ultimately collect associated with the services they provide with the assistance of athenaNet. Because most of our contracts require our clients to provide a fixed number of days’ notice prior to terminating our services, our contractual term resets daily, requiring us to estimate the amount of consideration to be paid to us over the continuously changing period during which our contracts are legally enforceable and we are providing services. As such, we believe certain estimates required to measure athenaOne-based revenue under the new standard will be significant estimates.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions, except per share amounts)
Under the new standard, certain costs to obtain a contract and our contract fulfillment costs, which we currently expense, will be deferred and amortized over the period of contract performance or a longer period, generally the expected client life, if renewals are expected. Costs to obtain a contract primarily relate to commissions paid to employees and third parties and contract fulfillment costs primarily relate to the implementation of a client.
The new standard provides companies with two implementation methods. Companies can choose to adopt the standard retrospectively and apply the guidance to each prior reporting period presented. Alternatively, a modified retrospective adoption methodology is permitted, whereby the cumulative impact of all prior periods would be recorded in retained earnings or other impacted balance sheet line items as of January 1, 2018, the date of adoption. Under this method, previously presented years’ financial positions and results would not be adjusted; however, certain disclosures are required to be presented for comparability to prior years’ results. We plan to adopt this standard using the modified retrospective method.
Under the modified retrospective adoption method, we have elected to retroactively adjust only those contracts that do not meet the definition of a completed contract at the date of initial application. As a result, our initial adjustments to costs to obtain and costs to fulfill a contract may not be indicative of future capitalization amounts once the new revenue standard is effective. In addition, upon adoption the deferred implementation revenue balance associated with past implementation costs will no longer be recognized over the client life and such balance, net of tax, will be adjusted and recorded to retained earnings.
We anticipate that the new revenue standard will have a material impact on our consolidated balance sheet upon adoption, resulting from the requirement to capitalize certain commissions and contract fulfillment costs, which we currently expense as incurred, and from the removal of substantially all of the deferred revenue balances associated with past implementation fees for which $55.1 million is recorded at December 31, 2017. Compared to our current accounting, we believe that the seasonality associated with the timing of when claims are submitted by our clients and when our clients receive payment on these claims will be reflected in our financial results with differing patterns. In addition, there may be a significant impact on pre-tax operating income until the amortization expense associated with capitalized commissions and costs to fulfill begins to approximate amounts capitalized.
Financial Instruments
In January 2016, the FASB issued guidance to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The most significant impact to our consolidated financial statements relates to the recognition and measurement of equity instruments, which are currently carried at cost, but will be measured at fair value with any unrecognized gains or losses being recorded in our consolidated statements of income. We are evaluating the impact to our consolidated financial statements but expect that it could have a significant impact, including additional volatility in other income (expense) within our statement of income in future periods as a result of the measurement of equity securities upon observable price changes and impairments. We expect to elect the measurement alternative for all equity investments without readily determinable fair values, which is defined as cost, less impairments, adjusted by observable price changes on a prospective basis. This guidance is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We will adopt this guidance on January 1, 2018 and the initial impact will be recognized in other income (expense) on the consolidated statement of income for the three months ending March 31, 2018.
Leases
In February 2016, the FASB issued new accounting guidance for leases. The new guidance most significantly impacts lessee accounting and disclosures, but also requires enhanced disclosures for lessors. First, this guidance requires lessees to identify arrangements that should be accounted for as leases. Under this guidance, for lease arrangements exceeding a 12-month term, a right-of-use asset and lease obligation is recorded by the lessee for all leases, whether operating or financing, while the income statement reflects lease expense for operating leases and amortization and interest expense for financing leases. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. In addition, the new lease guidance requires the use of the modified retrospective method. This guidance is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted; however, we will adopt this guidance on January 1, 2019. We anticipate that this standard will have a material impact on our consolidated financial statements, as all long-term leases will be capitalized on the consolidated balance sheet.
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(Amounts in millions, except per share amounts)
2. BUSINESS COMBINATIONS
Praxify
On June 23, 2017, we acquired Praxify Technologies, Inc., or Praxify, a Palo Alto-based company focused on reinventing how doctors work with health data to drive productivity, portability, and improved decision support. We acquired Praxify to advance our platform strategy and mobile capabilities to drive streamlined workflows and intelligence at and around the moments of care. We anticipate that this acquisition will accelerate our research and development initiatives by adding significant expertise in mobile and user experience design. Additionally, the underlying technology on which Praxify is built will be integrated into our platform, and we anticipate it will create new opportunities for both internal and third-party developers to rapidly build and launch applications.
The purchase price of Praxify was $41.1 million, net of cash acquired. The purchase price excludes $16.5 million expected to be earned by key employees of Praxify based upon continued employment, which is accounted for as compensation expense and is being recognized in the consolidated statements of income over the requisite service period. As of December 31, 2017, there was $5.5 million of prepaid compensation expense related to retention bonuses made at the time of acquisition included in the prepaid expenses and other current assets line and $8.0 million in the investments and other assets line on our consolidated balance sheet. The fair value of net assets acquired primarily consisted of purchased intangible assets of $15.7 million related to technology. The $33.8 million excess of purchase consideration over the fair value of the net assets acquired was allocated to goodwill, which is not deductible for U.S. income tax purposes. We incurred transaction costs of $1.4 million associated with this acquisition.
Patient IO
On August 25, 2016, we acquired Filament Labs, Inc. (doing business as Patient IO), an Austin-based care coordination platform used by providers to engage patients and caregivers outside of the clinic. We acquired Patient IO to strengthen our ability to partner with providers as they deliver value-based care. We anticipate this acquisition will accelerate our movement toward becoming a trusted resource and partner to the patient.
The purchase price of Patient IO was $15.2 million, net of cash acquired. The purchase price excludes $9.6 million to be earned by key employees of Patient IO based upon continued employment, which is accounted for as compensation expense and will be recognized in the consolidated statements of income over the requisite service period. The fair value of net assets acquired included purchased intangible assets of $5.3 million related to technology acquired and $0.6 million related to customer relationships. The $10.7 million excess of purchase consideration over the fair value of the net assets acquired was allocated to goodwill, which is not deductible for U.S. income tax purposes.
Arsenal Health
On April 11, 2016, we acquired Arsenal Health, formerly known as Smart Scheduling, Inc., for $1.7 million. We purchased Arsenal Health to add its schedule optimization functionality to our athenaCoordinator offering. We expect this acquisition to accelerate our capabilities in machine learning and predictive analytics. The fair value of the purchased intangible assets related to technology acquired was $0.9 million. The $0.8 million excess of purchase consideration over the fair value of the purchased intangible assets acquired was allocated to goodwill, which is deductible for U.S. income tax purposes. In conjunction with this acquisition, Smart Scheduling, Inc. settled the convertible note receivable and related interest from our More Disruption Please, or MDP, Accelerator Program, which represented a total fair value of $0.3 million.
3. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding and potentially dilutive securities outstanding during the period under the treasury stock method. Potentially dilutive securities include stock options, restricted stock units, and shares to be purchased under the employee stock purchase plan. Under the treasury stock method, dilutive securities are assumed to be exercised at the beginning of the periods and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Securities are excluded from the computation of diluted net income (loss) per share if their effect would be anti-dilutive to earnings per share; therefore, in periods of net loss, shares used to calculate basic and dilutive net loss per share are equivalent.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions, except per share amounts)
The following table reconciles the weighted average shares outstanding for basic and diluted net income per share for the periods indicated:
The computation of diluted net income per share does not include 0.4 million, 0.4 million, and 0.7 million shares for the years ended December 31, 2017, December 31, 2016, and December 31, 2015, respectively, because their inclusion would have an anti-dilutive effect on net income per share.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 2017 and 2016, the carrying amounts of cash and cash equivalents, receivables, accounts payable, and accrued expenses approximated their estimated fair values because of the short-term nature of these financial instruments. Money market funds are valued using a market approach based upon the quoted market prices of identical instruments when available or other observable inputs such as trading prices of identical instruments in inactive markets or similar securities.
Our MDP Accelerator program is designed to cultivate heath care information technology start-ups and expand services offered to our provider network. MDP Accelerator portfolio investments as of December 31, 2017 and 2016 are typically made in the form of convertible notes receivable or cost method investments, which are included in investments and other assets on our consolidated balance sheets. At December 31, 2017, as there is no indication of performance risk, we estimate that the fair value of the notes receivable approximates cost based on inputs that include the original transaction prices, our own recent transactions in the same or similar instruments, completed or pending third-party transactions in the underlying investments, subsequent rounds of financing, and changes in financial ratios or cash flows.
As of December 31, 2017 and 2016, we had $273.8 million and $292.5 million, respectively, outstanding on our term loan facility and we had not drawn on the revolving credit facility under our senior credit facility. The credit facility carries a variable interest rate set at current market rates, and as such, the carrying value approximates fair value.
The following table presents information about our financial assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2017 and December 31, 2016, and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities, and fair values determined by Level 2 inputs utilize quoted prices in inactive markets for identical assets or liabilities obtained from readily available pricing sources for similar instruments. The fair values determined by Level 3 inputs are unobservable values which are supported by little or no market activity. It is our policy to recognize transfers between levels of the fair value hierarchy, if any, at the end of the reporting period; however, there have been no such transfers during any of the periods presented.
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(Amounts in millions, except per share amounts)
The following table presents our financial instruments measured at fair value using unobservable inputs (Level 3) as of the years ended December 31, 2017 and 2016:
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(Amounts in millions, except per share amounts)
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Depreciation expense on property and equipment was $56.4 million, $47.9 million, and $40.1 million for the years ended December 31, 2017, 2016, and 2015, respectively. During the year ended December 31, 2017, we reclassified one of our aircraft to assets held for sale and reported it in the other assets line on our consolidated balance sheets.
6. CAPITALIZED SOFTWARE COSTS
Capitalized software consisted of the following:
Capitalized software amortization expense totaled $71.3 million, $73.5 million, and $53.4 million for the years ended December 31, 2017, 2016, and 2015, respectively. Future amortization expense for all capitalized software placed in service as of December 31, 2017 is estimated to be:
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(Amounts in millions, except per share amounts)
7. GOODWILL AND PURCHASED INTANGIBLE ASSETS
Goodwill
The following table summarizes the activity related to the carrying value of our goodwill during the years ended December 31, 2017 and 2016:
Numbers for each line item in the preceding table may not sum to the totals or subtotals for each fiscal year due to rounding.
Purchased Intangible Assets
Finite-lived intangible assets acquired as of December 31, 2017 and 2016 are as follows:
Amortization expense on purchased intangible assets for the years ended December 31, 2017, 2016, and 2015 was $19.3 million, $20.8 million, and $24.0 million, respectively, and is included in cost of revenue and selling and marketing expense. Estimated amortization expense on purchased intangible assets, based upon our intangible assets at December 31, 2017, is as follows:
athenahealth, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions, except per share amounts)
athenahealth, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions, except per share amounts)
8. OPERATING LEASES
We maintain operating leases for facilities and certain office equipment. The facility leases contain renewal options and require payments of certain utilities, taxes, and shared operating costs of each leased facility. The rental agreements expire at various dates from 2018 to 2030.
Rent expense totaled $15.0 million, $13.7 million, and $9.8 million for the years ended December 31, 2017, 2016, and 2015, respectively. During the year ended December 31, 2017, we entered into sublease agreements for our office space in San Francisco and portions of our office space in Austin.
Future minimum lease payments under non-cancelable operating leases as of December 31, 2017 are as follows:
9. DEBT
We have a credit agreement which consists of a $500.0 million senior credit facility comprised of a $300.0 million unsecured term loan facility and a $200.0 million unsecured revolving credit facility, which we refer to as the 2015 Senior Credit Facility. As of December 31, 2017 and 2016, we had $273.8 million and $292.5 million outstanding on the unsecured term loan facility, respectively. As of both December 31, 2017 and 2016, we had $200.0 million available on the unsecured revolving credit facility.
Our credit agreement may be used to refinance existing indebtedness and for working capital and other general corporate purposes. We may increase the revolving credit facility up to an additional $100.0 million and may increase the term loan facility to the extent that such amount will not cause us to be in breach of our financial covenants (such as compliance with a consolidated fixed charge coverage, consolidated leverage, and consolidated senior leverage ratios), subject to certain conditions, including obtaining lender commitments. The 2015 Senior Credit Facility matures on May 5, 2020, although we may prepay the 2015 Senior Credit Facility in whole or in part at any time without premium or penalty.
At our option, any loans under the 2015 Senior Credit Facility (other than swing line loans) will bear interest at a rate equal to (i) the British Bankers Association London Interbank Offered Rate, or LIBOR, plus an interest margin based on our consolidated leverage ratio, or (ii) the base rate (which is the highest of (a) the Bank of America prime rate, (b) the Federal Funds rate plus 0.50%, and (c) one month LIBOR plus 1.00%) plus an interest margin based on our consolidated leverage ratio. The interest rate for the 2015 Senior Credit Facility as of December 31, 2017 and 2016 was 2.35% and 1.61%, respectively. We will pay a commitment fee during the term of the 2015 Senior Credit Facility, which varies between 0.20% and 0.40% based on our consolidated leverage ratio.
We incurred financing fees of $1.0 million for the 2015 Senior Credit Facility, which are being amortized as interest expense in the consolidated statements of income over the five-year term of the agreement.
athenahealth, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions, except per share amounts)
Future principal payments of the unsecured term loan facility at December 31, 2017 were as follows:
athenahealth, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions, except per share amounts)
10. STOCK-BASED COMPENSATION
Total stock-based compensation expense for the years ended December 31, 2017, 2016, and 2015 by line item on our consolidated statements of income was as follows:
In addition, for the years ended December 31, 2017, 2016, and 2015, $2.5 million, $2.2 million, and $7.3 million, respectively, of stock-based compensation was capitalized as a component of Capitalized software costs, net line item in the consolidated balance sheets. For the years ended December 31, 2017, 2016, and 2015, amortization of stock-based compensation associated with capitalized software by line item on our consolidated statements of income was as follows:
Stock Plans
2007 Stock Option and Incentive Plan. In 2007, the Board of Directors adopted, and our stockholders approved, our 2007 Stock Option and Incentive Plan, which we refer to as the 2007 Plan. In 2011 and most recently in 2013, the Board of Directors and our stockholders approved amendments and restatements of the 2007 Plan. The 2007 Plan provides for the grant of stock options, stock appreciation rights, restricted stock awards, deferred stock awards, unrestricted stock awards, cash-based awards, performance share awards, and dividend equivalent rights. The 2007 Plan is administered by the Compensation Committee of our Board of Directors. As administrator, the Compensation Committee has full power and authority to select the participants to whom awards will be granted, to make any combination of awards to participants, to accelerate the exercisability or vesting of any award, and to determine the specific terms and conditions of each award, subject to the provisions of the 2007 Plan. As of December 31, 2017, 1,923,582 shares were available for grant under the 2007 Plan.
Epocrates, Inc. 2010 Equity Incentive Plan. Pursuant to an Agreement and Plan of Merger, dated as of January 7, 2013, among athenahealth, Inc.; Epocrates, Inc., a Delaware corporation; and Echo Merger Sub, Inc., a Delaware corporation; we assumed Epocrates, Inc.'s existing equity incentive plans, including its 2010 Equity Incentive Plan, which we refer to as the 2010 Plan. The 2010 Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, and other stock awards. In addition, the 2010 Plan provides for the grant of performance cash awards. The 2010 Plan is administered by the Compensation Committee of our Board of Directors. As administrator, the Compensation Committee has full power and authority to select the participants to whom awards will be granted, to make any combination of awards to participants, to accelerate the exercisability or vesting of any award, and to determine the specific terms and conditions of each award, subject to the provisions of the 2010 Plan. As of December 31, 2017, 342,530 shares of our common stock were available for grant under the 2010 Plan.
Stock Options
Options granted under the 2007 Plan and 2010 Plan may be incentive stock options or non-qualified stock options under the applicable provisions of the Internal Revenue Code. Pursuant to the terms of the 2007 Plan, the exercise price for stock options granted under the 2007 Plan is determined by our Board of Directors but cannot be less than 100% of the fair market value of our common stock on the date of grant. All options granted vest over a range of one to four years and have a maximum contractual term of ten years. Options granted typically vest 25% per year over a total of four years at each anniversary of the date of grant. No stock options are currently outstanding under the 2010 Plan.
athenahealth, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions, except per share amounts)
The following table presents the stock option activity for the year ended December 31, 2017:
We recorded compensation expense in relation to these stock options of $2.7 million, $6.6 million, and $11.6 million, for the years ended December 31, 2017, 2016, and 2015, respectively.
We use the Black-Scholes option pricing model to value share-based awards and determine the related compensation expense. The following table illustrates the range of assumptions used to compute stock-based compensation expense for awards granted for the year ended December 31, 2015. No stock options were granted in the years ended December 31, 2017 and 2016.
The risk-free interest rate estimate was based on the U.S. Treasury rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected terms of the awards being valued. The expected dividend yield was based on our expectation of not paying dividends in the foreseeable future. We calculated the expected option term primarily based upon the contractual option term, the contractual vesting dates, and historical employee activity. We used company-specific historical and implied volatility information to generate the volatility assumptions.
As of December 31, 2017, there was $1.0 million of unrecognized stock-based compensation expense related to unvested stock option share-based compensation arrangements granted under our stock award plans. This expense is expected to be recognized over a weighted-average period of approximately 1.0 year. The weighted average fair value of stock options granted during the year ended December 31, 2015 was $49.29. The intrinsic value of options exercised during the years ended December 31, 2017, 2016, and 2015 was $17.3 million, $17.4 million, and $44.3 million, respectively. The intrinsic value is calculated as the difference between the market value of the stock on the date of purchase and the exercise price of the options.
Restricted Stock Units
The majority of restricted stock units granted pursuant to the 2007 Plan and the 2010 Plan vest in either three or four equal annual installments on the anniversaries of the vesting start date. We estimate the fair value of the restricted stock unit awards contingent upon achieving performance conditions and the restricted stock units contingent upon only service conditions based on the fair market value on the grant date, which is equal to the market price of our common stock on the grant date. For awards where the vesting condition is contingent only on service, the fair value is amortized on a straight-line basis over the vesting period. For awards where vesting is subject to a performance condition, expense is estimated and adjusted on a quarterly basis based on the assessment of the probability that the performance will be met and is amortized over the vesting period.
athenahealth, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions, except per share amounts)
The following table presents the restricted stock unit activity for the year ended December 31, 2017:
The following table presents the restricted stock unit activity for the year ended December 31, 2016:
As of December 31, 2017, $89.7 million of total unrecognized compensation costs related to restricted stock units is expected to be recognized over a weighted average period of 2.6 years. Stock-based compensation expense of $49.8 million, $58.1 million, and $51.0 million was recorded for restricted stock units during the years ended December 31, 2017, 2016, and 2015, respectively. The weighted average fair value of restricted stock units granted during the years ended December 31, 2017, 2016, and 2015 was $119.90, $130.71, and $132.31, respectively. The intrinsic value of vested restricted stock units during the years ended December 31, 2017, 2016, and 2015 was $52.9 million, $57.6 million, and $61.6 million, respectively.
Employee Stock Purchase Plan
Our 2007 Employee Stock Purchase Plan allows employees of athenahealth and its subsidiaries as designated by our Board of Directors to purchase shares of our common stock. The purchase price is equal to 85% of the lower of the closing price of our common stock on (1) the first day of the purchase period or (2) the last day of the purchase period. The expense for the years ended December 31, 2017, 2016, and 2015 was $1.8 million, $1.8 million, and $1.5 million, respectively.
athenahealth, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions, except per share amounts)
11. INCOME TAXES
The components of income before income tax provision for the years ended December 31, 2017, 2016, and 2015 were as follows:
The components of our income tax provision for the years ended December 31, 2017, 2016, and 2015 were as follows:
The components of our deferred income taxes as of December 31, 2017 and 2016 were as follows:
The federal NOL carryforwards expire at various times through 2036, and the state NOL carryforwards begin to expire in 2019. Our research and development, or R&D, tax credits carryforward is available to offset future federal and state taxes, and the credits expire at various times through 2036.
athenahealth, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions, except per share amounts)
On December 22, 2017, President Trump enacted “H.R.1,” formerly known as the “Tax Cuts and Jobs Act” which, starting in 2018, reduces our corporate statutory income tax rate but eliminates or increases certain permanent differences. As of the date of enactment, we have adjusted our deferred tax assets and liabilities for our new statutory rate which resulted in a $3.0 million credit to our income tax provision for the year ended December 31, 2017. In addition, we have estimated and recorded a $0.4 million repatriation transition tax related to our foreign operations that increased our income tax provision, and made a significant judgment related to the fact that our current equity arrangements with our covered employees meet the requirements of the transition rule which resulted in minimal adjustments to our deduction estimates for highly compensated employees in the current year.
As discussed in Note 1 - Nature of Operations and Summary of Significant Accounting Policies, we adopted new accounting guidance related to accounting for stock-based compensation on January 1, 2017. During the years ended December 31, 2016, and 2015, we utilized tax attributes to reduce the current tax provision by $9.0 million, and $12.9 million, respectively. As of December 31, 2016, we had federal and state NOL carryforwards of approximately $72.2 million (which was comprised entirely of NOL carryforwards from deductions related to stock-based compensation) and $50.5 million (which included $19.2 million of NOL carryforwards from stock-based compensation), respectively, to offset future federal and state taxable income. During the years ended December 31, 2016 and 2015, we recorded excess tax benefits from federal and state tax deductions of $7.5 million and $10.3 million, respectively, as a component of additional paid-in capital.
A reconciliation of the federal statutory income tax rate to our effective income tax rate for the years ended December 31, 2017, 2016, and 2015 is as follows:
A reconciliation of the beginning and ending amount of uncertain tax benefits is as follows:
Included in the balance of unrecognized tax benefits at December 31, 2017 are $11.5 million of tax benefits that, if recognized, would affect the effective tax rate. We anticipate that no material amounts of unrecognized tax benefits will either expire or be settled within 12 months of the reporting date.
There were no interest and penalties included in the tax provision for the years ended December 31, 2017 and December 31, 2015. Interest and penalties included in the tax provision amounted to a credit of $0.3 million for the year ended December 31, 2016. Accrued interest and penalties amounted to $1.1 million as of both December 31, 2017 and 2016, respectively.
We are subject to taxation in Federal, various state, and Indian jurisdictions. All carryforward attributes generated in prior years may still be adjusted upon examination by the Internal Revenue Service or other tax authorities if they have been used or will be used in a future period. As of December 31, 2017, federal tax years after 2014, state tax years after 2013, and foreign tax years after 2009 remain open per the statute of limitations by the major taxing jurisdictions to which we are subject.
athenahealth, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions, except per share amounts)
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected quarterly financial information follows for the year ended December 31, 2017:
Net income (loss) per share for the four quarters of the fiscal year may not sum to the total for the fiscal year due to the different number of shares outstanding during each period.
athenahealth, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions, except per share amounts)
Selected quarterly financial information follows for the year ended December 31, 2016:
Net (loss) income per share for the four quarters of the fiscal year may not sum to the total for the fiscal year due to the different number of shares outstanding during each period.