Veradigm (MDRX) - 2019 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Unaudited consolidated financial statements for Q2 2019 reveal a significant net loss due to a legal settlement and negative operating cash flow Consolidated Balance Sheets Consolidated Balance Sheets as of June 30, 2019, show total assets increased to $3.24 billion, with rising liabilities decreasing equity Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total current assets | $804,051 | $858,965 | | Total assets | $3,235,473 | $3,181,484 | | Total current liabilities | $879,771 | $797,730 | | Total liabilities | $1,919,266 | $1,601,057 | | Total stockholders' equity | $1,316,207 | $1,580,427 | - The company adopted the new lease accounting standard (ASU 2016-02) on January 1, 2019, resulting in the recognition of $96.1 million in Right-of-use assets and corresponding operating lease liabilities[9][11][28] Consolidated Statements of Operations Q2 2019 revenue slightly increased, but a $145.0 million DOJ settlement resulted in a $149.9 million net loss, reversing prior-year income Q2 2019 vs Q2 2018 Statement of Operations (in thousands, except per share amounts) | Metric | Q2 2019 | Q2 2018 | | :--- | :--- | :--- | | Total revenue | $444,460 | $441,464 | | Gross profit | $184,122 | $173,767 | | Income (loss) from operations | $4,743 | ($60,094) | | Other loss, net | ($144,994) | ($13) | | Net (loss) income | ($149,930) | $74,272 | | Diluted (loss) income per share | ($0.90) | $0.36 | - The significant swing from net income to net loss is primarily attributable to a $145.0 million charge recorded in 'Other loss, net' for an agreement in principle with the DOJ[14][108] Consolidated Statements of Cash Flows For the six months ended June 30, 2019, operating cash flow turned negative at $1.9 million used, a significant decline from the prior year Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($1,910) | $66,540 | | Net cash used in investing activities | ($77,519) | ($20,518) | | Net cash provided by (used in) financing activities | $42,630 | ($67,453) | | Net decrease in cash and cash equivalents | ($36,656) | ($21,722) | - The company used $65.1 million for the repurchase of common stock and $54.1 million for the purchase of subsidiary shares owned by a non-controlling interest (Pulse8, Inc.) in the first six months of 2019[21][54] Notes to Consolidated Financial Statements Notes detail accounting policies, segment changes, $3.9 billion contract backlog, debt facilities, and a $145.0 million DOJ settlement accrual - In Q1 2019, the company changed its reportable segments from Clinical and Financial Solutions and Population Health to Provider and Veradigm[27][115] - Total contract backlog was $3.9 billion as of June 30, 2019, with 38% expected to be recognized as revenue in the next 12 months[38] - Practice Fusion, an Allscripts subsidiary, reached an agreement in principle with the DOJ to resolve civil and criminal investigations for $145.0 million, which was accrued as a loss[108] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2019 financial results, including a 31% increase in bookings, segment performance, and the impact of the $145 million DOJ settlement - Q2 2019 bookings totaled $276 million, a 31% increase over the prior year period[148] - The company expects to fund the $145 million DOJ settlement through future cash flows and draws on its Revolving Facility[196] - Total non-GAAP R&D spending was 20.3% of total revenue in Q2 2019, down from 23.9% in Q2 2018[200] Overview of Consolidated Results Q2 2019 saw revenue growth of 0.7% and improved gross margin, but a $145.0 million DOJ settlement led to a significant pre-tax loss Q2 2019 vs Q2 2018 Key Metrics (% Change) | Metric | Q2 2019 vs Q2 2018 % Change | | :--- | :--- | | Total revenue | 0.7% | | Gross profit | 6.0% | | Selling, general and administrative expenses | (14.1%) | | Research and development | (14.9%) | | Income (loss) from operations | (107.9%) | | Other loss, net | NM (>200%) | - The decrease in recurring revenue for Q2 2019 was primarily due to known attrition within the acquired EIS business, while non-recurring revenue increased due to higher perpetual software license sales[152] Segment Operations Segment performance shows Provider revenue decreased 1.9%, while Veradigm revenue grew 15.0% with significant operating margin expansion Segment Revenue - Q2 2019 vs Q2 2018 (in thousands) | Segment | Q2 2019 | Q2 2018 | % Change | | :--- | :--- | :--- | :--- | | Provider | $405,690 | $413,467 | (1.9%) | | Veradigm | $38,521 | $33,497 | 15.0% | Segment Income from Operations - Q2 2019 vs Q2 2018 (in thousands) | Segment | Q2 2019 | Q2 2018 | % Change | | :--- | :--- | :--- | :--- | | Provider | $104,125 | $99,801 | 4.3% | | Veradigm | $12,231 | $8,281 | 47.7% | Contract Backlog Total contract backlog was $3.885 billion as of June 30, 2019, showing a slight increase from year-end 2018 but a decrease from prior-year quarter Contract Backlog by Category (in millions) | Category | June 30, 2019 | Dec 31, 2018 | June 30, 2018 | | :--- | :--- | :--- | :--- | | Software delivery, support and maintenance | $2,527 | $2,507 | $2,631 | | Client services | $1,358 | $1,350 | $1,689 | | Total contract backlog | $3,885 | $3,857 | $4,320 | Liquidity and Capital Resources As of June 30, 2019, liquidity included $148 million cash and $719 million credit facility, with operating cash flow turning negative for the first six months - Principal sources of liquidity as of June 30, 2019, include $148 million in cash and cash equivalents and $719 million available under the revolving credit facility[187] - Net cash used in operating activities for the first six months of 2019 was $1.9 million, compared to $66.5 million provided in the same period of 2018, primarily due to working capital changes and higher incentive compensation payments[188][189] - The company amended its credit agreement on August 7, 2019, to provide financial flexibility for the $145 million DOJ settlement[196][122] Quantitative and Qualitative Disclosures About Market Risk No material changes occurred in market risk disclosures during the six months ended June 30, 2019 - There were no material changes in market risk disclosures during the six months ended June 30, 2019[202] Controls and Procedures Disclosure controls and procedures were effective as of June 30, 2019, with new internal controls implemented for lease accounting - Disclosure controls and procedures were deemed effective as of June 30, 2019[203] - Internal controls were implemented and refined related to the new leasing accounting standard adopted on January 1, 2019[204] PART II. OTHER INFORMATION Legal Proceedings This section incorporates Note 13 details, primarily the $145.0 million DOJ settlement agreement for Practice Fusion and other ongoing legal matters - The company refers to Note 13 for details on legal proceedings, the most significant of which is the $145.0 million settlement agreement in principle with the DOJ regarding Practice Fusion[206][108] Risk Factors A new material risk factor addresses the DOJ's Practice Fusion investigation, warning of potential enforcement actions, substantial damages, and compliance costs - A new risk factor was disclosed regarding the finalization and compliance with the DOJ settlement for Practice Fusion[208] - Risks include failure to finalize the agreement, significant costs and burdens of compliance, potential for substantial monetary penalties, and possible exclusion of Practice Fusion from Medicare and Medicaid if terms are not met[209][210] - The company may face additional investigations and legal proceedings from other governmental entities or third parties related to the same or similar conduct[208][212] Unregistered Sales of Equity Securities and Use of Proceeds On May 29, 2019, the company issued 61,448 unregistered common shares to a commercial partner under a ten-year agreement - The company issued 61,448 shares of common stock to a commercial partner on May 29, 2019, under a commercial agreement[213] Other Information On August 6, 2019, the company amended its credit agreement to modify the definition of EBITDA, providing flexibility for the DOJ settlement - The company amended its credit agreement on August 6, 2019, to adjust the definition of EBITDA, allowing for flexibility to absorb the impact of the DOJ settlement[214] Exhibits This section lists exhibits filed with the Form 10-Q, including the Credit Agreement amendment and certifications