| Significant Accounting Policies | 2 . Significant Accounting Policies
Basis of Presentation
Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include the accounts of our wholly owned subsidiaries . The results of operations for companies acquired are included in our consolidated financial statements from the effective date of acquisition. All intercompany accounts and transactions have been eliminated upon consolidation .
Accounting Estimates
The preparation of financial statements in conformity with GAAP requires us to make a number of estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. We base our estimates on historical experience, current business factors and various other assumptions that we believe are necessary in order to form a basis for making judgments about the carrying values of assets and liabilities, the reported amounts of revenues and expenses and disclosure of contingent assets and liabilities. We are subject to uncertainties such as the impact of future events, economic, environmental and political factors and changes in our business environment; therefore, actual results could differ from these estimates. Accordingly, the accounting estimates used in the preparation of our financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. Changes in estimates are made when circumstances warrant. Estimates and assumptions affect: the allowance for credit losses ; the fair value assigned to assets acquired and liabilities assumed in business combinations; the carrying value of long-lived assets (including goodwill and intangible assets); the amortization period of long-lived assets (excluding goodwill); the carrying value, capitalization and amortization of software development costs; operating lease right-of-use assets; the carrying value of our investments; tax receivable agreement obligations; the fair value of interest rate cap agreement obligations; components of our tangible equity units; the value s attributed to equity awards ; operating lease liabilities; contingent consideration; loss accruals; certain accrued expenses; revenue recognition; and the income tax provision or benefit and related deferred tax accounts .
Business Combinations
We recognize the consideration transferred (i.e., purchase price) in a business combination, as well as the acquired business’ identifiable assets, liabilities and noncontrolling interests at their acquisition date fair value. The excess of the consideration transferred over the fair value of the identifiable assets, liabilities and noncontrolling interest, if any, is recorded as goodwill.
The fair values of the consideration transferred, assets, liabilities and noncontrolling interests are estimated based on one or a combination of income, cost or market approaches as determined based on the nature of the asset or liability and the level of inputs available (i.e., quoted prices in an active market, other observable inputs or unobservable inputs). To the extent our initial accounting for a business combination is incomplete at the end of a reporting period, provisional amounts are reported for those items which are incomplete.
Cash and Cash Equivalents
For the purposes of reporting, cash and cash equivalents include unrestricted cash on hand and investments with an original maturity from the date of purchase of three months or less.
Our cash and cash equivalents are deposited with several financial institutions. Deposits may exceed the amounts insured by the Federal Deposit Insurance Corporation in the U.S. and similar deposit insurance programs in other jurisdictions. We mitigat e the risk of our short-term investment portfolio by depositing funds with reputable financial institutions and monitoring risk profiles.
From time to time, our cash balances include funds we manage for customers, the most significant of which relates to funds remitted to retail pharmacies. Such funds are not restricted; however, funds are generally paid out in satisfaction of the processing obligations pursuant to the management contracts. At the time of receipt, we record a corresponding liability within A ccrued expenses on the consolidated balance sheets. Such liabilities are summarized as “Pass- through payments” within Note 1 2 , Accrued Expenses .
Allowance for Credit Losses
The allowance for credit losses of $24,126 and $22,360 at March 31, 2021 and 2020, respectively, was primarily based on historical credit loss experience, current conditions, future expected credit losses, and adjustments for certain asset-specific risk characteristics. The following table summarizes activity related to the allowance for credit losses:
Year Ended March 31,
2021
2020
Balance at beginning of period
$ 22,360
$
—
Cumulative effect of accounting change-ASU 2016-13
417
—
Acquisitions and Dispositions (1)
(4,952)
22,059
Provisions
14,645
905
Write-offs
(8,344)
(604)
Balance at end of period
$ 24,126
$ 22,360
(1)
For the year ended March 31, 2021, this amount relates primarily to the sales of Connected Analytics and Capacity Management. For the year ended March 31, 2020, this amount relates to the allowance acquired in the Merger.
Capitalized Software Developed for Sale
Development costs for software developed for sale to external customers are capitalized once a project has reached the point of technological feasibility. Completed projects are amortized after reaching the point of general availability using the straight-line method based on an estimated useful life of three years . At each balance sheet date, or earlier if an indicator of an impairment exists, we evaluate the recoverability of unamortized capitalized software costs based on estimated future undiscounted revenues net of estimated related costs over the remaining amortization period.
Capitalized Software Developed for Internal Use
We provide services to many of our customers using software developed for internal use. The costs that are incurred to develop such software are expensed as incurred during the preliminary project stage and classified within Research and development in the consolidated statements of operations. Training and maintenance costs are also expensed as incurred. Once certain criteria have been met, direct costs incurred in developing or obtaining computer software are capitalized. Capitalized software costs are included in Other noncurrent assets, net on the consolidated balance sheets and are generally amortized over the estimated useful life of three years .
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation expense is computed using the straight-line method over the estimated useful lives of the related assets. Expenditures for maintenance, repair and renewals of minor items are expensed as incurred. Expenditures for repair and renewals that extend the useful life of an asset are capitalized.
Long-Lived Assets
Long-lived assets used in operations , which include capitalized software developed for internal use and property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. For long-lived assets to be held and used, we recognize an impairment loss only if the carrying amount is not recoverable when compared to our undiscounted cash flows and the impairment loss is measured based on the difference between the carrying amount and fair value. Long-lived assets held for sale are reported at the lower of cost or fair value less costs to sell.
Goodwill and Intangible Assets
Goodwill and intangible assets resulting from acquisitions are accounted for using the acquisition method of accounting. In business combinations, we generally recognize goodwill attributable to the assembled workforce and expected synergies among the operations of the acquired entities and our existing operations. Goodwill is generally deductible for federal income tax purposes when a business combination is treated as an asset purchase and is generally not deductible for federal income tax purposes when a business combination is treated as a stock purchase. We assess goodwill for impairment annually (as of January 1 of each year) or whenever significant indicators of impairment are present. Using a qualitative analysis, we first assess whether it is more likely than not that goodwill is impaired . To the extent we cannot reach a conclusion using only a qualitative analysis , we compare the fair value of each reporting unit to its associated carrying value. We will recognize an impairment charge for the amount, if any, by which the carrying amount of the reporting unit exceeds its fair value.
Intangible assets with definite lives are amortized over their useful lives either on a straight-line basis or using an accelerated method, depending on the pattern we expect the economic benefits of the assets to be consumed. Useful lives are generally as follows:
Customer relationships
12 - 18 years
Tradenames
18 years
Technology-based intangible assets
6 - 12 years
Derivatives
Derivative financial instruments are used to manage our interest rate exposure and we do not enter into financial instruments for speculative purposes. Derivative financial instruments are accounted for and measured at fair value. For derivative instruments that are designated and qualify as a cash flow hedge, the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings ( e.g. , in “ I nterest expense , net ” when the hedged transactions are interest cash flows associated with floating-rate debt).
Tangible Equity Units
In connection with our initial public offering, we completed an offering of TEUs. Each TEU includes an amortizing note and a purchase contract, both of which are freestanding instruments and separate units of account. The amortizing notes were issued at par and are classified as debt on the consolidated balance sheet s . The purchase contracts are accounted for as prepaid forward contracts and are classified as equity. The TEU proceeds and issuance costs were allocated to the amortizing notes and purchase contracts on a relative fair value basis.
Equity Compensation
We measure stock-based compensation cost based on the estimated fair value of the award on the grant date and recognize the expense over the requisite service period, typically on a straight-line basis. We recognize stock-based compensation cost for awards with performance conditions if and when we conclude that it is probable that the performance conditions will be achieved. The fair value of equity awards is recognized as expense in the same period and in the same manner as if we had paid cash for the goods or services. F orfeitures are recognized as they occur. We issue new shares of common stock upon vesting of equity awards and upon exercise of vested options. We do not intend to repurchase any issued shares of common stock.
Prior to the Merger, these equity awards, as well as awards granted under our previous equity incentive plan, were granted to employees of the Joint Venture , and therefore were subject to the accounting framework for awards granted to non-employees. Under this framework, we measured compensation expense for equity awards based on the estimated fair value of such awards at the grant date, in a manner consistent with the recognition of expense for awards to employees. The recognized pre-Merger equity-based compensation is classified within L oss from E quity M ethod I nvestment in the Joint Venture on the consolidated statement of operations.
Leases
We determine whether an arrangement contains a lease based on the conveyed rights and obligations at the inception date. If an agreement contains an operating or finance lease, at the commencement date, we record a right-of-use asset and a corresponding lease liability based on the present value of the minimum lease payments.
As most of our leases do not provide an implicit borrowing rate, to determine the present value of lease payments, we use the portfolio approach and determine our hypothetical secured borrowing rate based on information available at lease commencement. Further, we make certain estimates and judgements regarding the lease term and lease payments, noted below.
Leases with an initial term of 12 months or less are not recorded on the balance sheet and we recognize lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one month to one year or more. Additionally, some of our leases include an option for early termination. We include renewal periods and exclude termination periods from our lease term if, at commencement, we are reasonably certain to exercise the option. For our real estate lease arrangements, we do not consider a lease to be abandoned and do not adjust the corresponding right-of-use asset in instances where we may potentially sublease the space.
Certain of our lease agreements include rental payments that are adjusted periodically for inflation or passage of time. These step payments are included within our present value calculation as they are known adjustments at commencement. Some of our lease agreements include variable payments that are excluded from our present value calculation. For example, some of our equipment leases include a component which varies based on the asset’s use.
Additionally, we have lease agreements that include lease and non-lease components, such as equipment leases, which are generally accounted for as a single lease component. For these leases, lease payments include all fixed payments stated within the contract. For other leases, such as office space, lease and non-lease components are accounted for separately. Our lease agreements do not contain any material residual value guarantees that would impact our lease payments.
Tax Receivable Agreements
Upon the consummation of the Merger, we assumed obligations related to certain tax receivable agreements entered into by the Joint Venture with its current and former owners. The tax receivable agreements were measured at their fair value as part of the Merger and are recognized at their initial fair value plus recognized accretion to date on the consolidated balance sheets. Accretion expense recorded during the period pertaining to related party payments is recorded within Accretion and changes in estimate with related parties, net, whereas non-related party accretion is recorded within Sales, marketing, general and administrative in the consolidated statement of operations.
In connection with the closing of the Merger, we, along with the Joint Venture, the subsidiaries of McKesson that served as members of the Joint Venture and McKesson entered into a tax receivable agreement (the “McKesson Tax Receivable Agreement”). Following the Merger and based on anticipated amortization allocations, we recorded an obligation for the McKesson Tax Receivable Agreement estimated payments, which represents a loss contingency under ASC 450. Future changes in this value will be reflected within Sales, marketing, general and administrative in the consolidated statement of operations.
The current and non-current portions of the non-related party obligations for our tax receivable agreements, including the McKesson Tax Receivable agreement, are recorded within Accrued expenses and Tax receivable agreement obligations, respectively, within the consolidated balance sheets. The current and non-current portions of the related party obligations for our tax receivable agreements are recorded within Due to related parties, net and Tax receivable agreement obligations due to related parties, respectively, within the consolidated balance sheets.
Revenue
We recognize revenue at an amount that reflects the consideration we expect to be entitled to in exchange for transferring goods or services to a customer, in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”), which we adopted on April 1, 2019. We had no revenue-generating operations prior to the Merger, therefore the impact of the adoption of ASC 606 was limited to recognition of an adjustment to Accumulated Deficit as a result of our equity method investment at the time of the Joint Venture’s adoption. See Note 3, Revenue Recognition, for additional information.
Foreign Currency Translation
Our reporting currency is the U.S. dollar and our foreign subsidiaries generally consider their local currency to be their functional currency. Foreign currency-denominated assets and liabilities of foreign subsidiaries are translated into U.S. dollars at year-end exchange rates , equity accounts are primarily translated at historical exchange rates and revenues and expenses are translated at average exchange rates during the corresponding period. Foreign currency translation adjustments are included in the consolidated statements of comprehensive income (loss) and the cumulative effect is included within Accumulated deficit o n the consolidated balance sheets. Realized gains and losses from currency exchange transactions are included in S ales, marketing, general and administrative expenses in the consolidated statements of operations. We release the cumulative translation adjustment from equity into net income as a gain or loss only upon complete or substantially complete liquidation of a controlling interest in a subsidiary or a group of assets within a foreign entity.
Income Taxes
We record deferred income taxes for the tax effect of differences between book and tax bases of our assets and liabilities, as well as differences relating to the timing of recognition of income and expenses. Deferred income taxes reflect the available net operating losses and the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of the future tax benefits related to deferred tax assets is dependent on many factors, including our past earnings history, expected future earnings, the character and jurisdiction of such earnings, reversing taxable temporary differences, unsettled circumstances that, if unfavorably resolved, would adversely affect utilization of its deferred tax assets, carryback and carryforward periods and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset.
We recognize tax benefits for uncertain tax positions when we conclude that the tax position, based solely on its technical merits, is more likely than not to be sustained upon examination. The benefit, if any, is measured as the largest amount of benefit, determined on a cumulative probability basis that is more likely than not to be realized upon ultimate settlement. Tax positions failing to qualify for initial recognition are subsequently recognized when they meet the more likely than not standard, upon resolution through negotiation or litigation with the taxing authority or on expiration of the statute of limitations.
Equity Method Investment in the Joint Venture
Prior to the Merger, we accounted for our investment in the Joint Venture using the equity method of accounting . During that period , we evaluated our equity method investment for impairment whenever an event or change in circumstances occurred that had a potentially significant adverse impact on the carrying value of our investment. During the period from the inception of the Joint Venture through the date of the Merger, we did not identify any loss in the value of our investment that was deemed other than temporary, and therefore , did no t recognize any impairment loss.
Recently Adopted Accounting Pronouncements
Financial Instruments: Credit Losses
In April 2020, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016-13, as amended by ASU No. 2018-19, which requires that a financial asset (or group of financial assets) measured at amortized cost be presented at the net amount expected to be collected based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. The guidance also requires us to pool assets with similar risk characteristics and consider current economic conditions when estimating losses. We adopted this standard using the modified retrospective approach and recorded a cumulative effect to retained earnings of $417 as of April 1, 2020.
Fair Value Measurements
In April 2020, we adopted FASB ASU No. 2018-13, which modifies the disclosure requirements for fair value measurements . Entities are no longer required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies are required to disclose the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements. See Note 15, Fair Value Measurements .
Hosting Arrangement Implementation Costs
In April 2020, we adopted FASB ASU No. 2018-15, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This update also requires that the effects of such capitalized costs be classified in the same respective caption in the statement of operations, balance sheet and cash flows as the underlying hosting arrangement. We adopted this standard prospectively beginning April 1, 2020. This adoption did not have a material impact on our financial statements for the year ended March 31, 2021.
Leases
In April 2020, we adopted FASB ASU No. 2016-02, which created Topic 842 – Leases (“ASC 842”). The standard generally requires that all lease obligations be recognized on the balance sheet at the present value of the remaining lease payments with a corresponding right-of-use asset. In July 2018, the FASB issued ASU No. 2018-11 which provides companies with the option to apply this cumulative effect adjustment to the opening balance of retained earnings in the period of adoption.
Upon adoption, we elected the transition “practical expedients” permitting us not to reassess our prior conclusions about lease identification, lease classification and initial direct costs. Additionally, we elected the practical expedient to not separate lease and non-lease components for equipment lease agreements.
We adopted ASC 842 using the modified retrospective approach and recorded right-of-use assets of $111,815 and lease liabilities of $125,331 , primarily related to operating leases. The recognition of the right-of-use assets in combination with our previously recorded prepaid rent balances resulted in no requirement to adjust the opening balance of retained earnings. Our accounting for finance leases remains substantially unchanged. Adoption of ASC 842 did not materially impact our consolidated statement of operations and had no impact on our consolidated statement of cash flows. See Note 7, Leases .
London Interbank Offered Rate (LIBOR) Reform
In March 2020, the FASB issued ASU No. 2020-04, as amended by ASU No. 2021-01, which created Topic 848 – Reference Rate Reform. ASU No. 2020-04 contains optional practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts which may be elected over time as activities occur. Among other things, the ASU intends to ease the transition from LIBOR to an alternative reference rate. During the first quarter of fiscal year 2021, we elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. We continue to evaluate the impacts of ASU No. 2020-04 and may apply other elections as reference rate reform activities progress.
Income Taxes
In March 2021, we adopted FASB ASU No. 2019-12, which modifies ASC 740 to simplify the accounting for income taxes. The standard removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The update also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for goodwill and allocating taxes to members of a consolidated group. In addition, the update amends the accounting for hybrid tax regimes. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020; early adoption is permitted. This adoption did not have a material impact on our financial statements for the year ended March 31, 2021.
Accounting Pronouncements Not Yet Adopted
Derivatives and Convertible Instruments
In August 2020, the FASB issued ASU No. 2020-06 which simplifies the accounting for convertible instruments and amends the guidance addressing the derivatives scope exception for contracts in an e ntity’s ow n e quity. The standard is scheduled to be effective for us beginning April 1, 2022. Given the forward purchase contracts of our Tangible Equity Units qualify for the derivatives scope exception and are currently accounted for under that guidance , we do not expect a material impact upon adoption . We will continue to evaluate the impact of this pronouncement prior to adoption.
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