Notes to the Unaudited Condensed Consolidated Financial Statements
September 30, 2022
1. Organization and Basis of Presentation
Description of Business
ModivCare Inc. ("ModivCare" or the "Company") is a technology-enabled healthcare services company that provides a suite of integrated supportive care solutions for public and private payors and their patients. Its value-based solutions address the social determinants of health, or SDoH, connect members to care, help health plans manage risks, reduce costs, and improve outcomes. ModivCare is a provider of non-emergency medical transportation, or NEMT, personal care, and remote patient monitoring, or RPM, solutions, which serve similar, highly vulnerable patient populations.
The technology-enabled operating model includes NEMT core competencies in risk underwriting, contact center management, network credentialing, claims management and non-emergency medical transportation management. Additionally, its personal care services include placements of non-medical personal care assistants, home health aides and nurses primarily to Medicaid patient populations in need of care monitoring and assistance performing daily living activities in the home setting. ModivCare’s remote patient monitoring services include personal emergency response systems, vitals monitoring and data-driven patient engagement solutions. ModivCare is further expanding its offerings to include meal delivery and working with communities to provide food-insecure individuals delivery of meals.
ModivCare also holds a 43.6% minority interest in CCHN Group Holdings, Inc. and its subsidiaries, which operates under the Matrix Medical Network brand, which we refer to as “Matrix”. Matrix maintains a national network of community-based clinicians who deliver in-home and on-site services, and a fleet of mobile health clinics that provide community-based care with advanced diagnostic capabilities and enhanced care options.
Basis of Presentation
The Company follows accounting standards established by the Financial Accounting Standards Board (“FASB”). The FASB establishes accounting principles generally accepted in the United States (“GAAP”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. References to GAAP issued by the FASB in these notes are to the FASB Accounting Standards Codification (“ASC”), which serves as the single source of authoritative accounting and applicable reporting standards to be applied for non-governmental entities. All amounts are presented in U.S. dollars unless otherwise noted.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information, and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for the fair presentation of the results of the interim periods have been included.
The Company has made estimates relating to the reporting of assets and liabilities, revenues and expenses, and certain disclosures in the preparation of these unaudited condensed consolidated financial statements in conformity with GAAP. Actual results could differ from those estimates. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2022. Management has evaluated events and transactions that occurred after the balance sheet date and through the date these unaudited condensed consolidated financial statements were filed with the SEC and considered the effect of such events in the preparation of these unaudited condensed consolidated financial statements.
The unaudited condensed consolidated balance sheet at December 31, 2021 included in this Form 10-Q has been derived from audited financial statements at that date, but does not include all the information and footnotes required by GAAP for complete financial statements. The unaudited condensed consolidated financial statements contained herein should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Reclassifications: Certain prior year amounts have been reclassified to conform to current year presentation.
Impact of the COVID-19 Pandemic
Since March 2020, the COVID-19 pandemic and the measures enacted by state and government officials to prevent, prepare for, and respond to COVID-19 or slow its spread have had an ongoing adverse impact on the Company’s business, as well as its patients, communities, and employees. With ongoing uncertainties around the duration and magnitude of the pandemic, the ultimate impact to the business remains uncertain. Accordingly, the COVID-19 pandemic could continue to have an adverse impact on the Company's financial statements with potential for (i) labor shortages or other disruptions that impact our ability to provide services, and (ii) decreased member comfort leaving the house to obtain transportation for non-emergency medical purposes; among other things. Despite ongoing uncertainties, the Company’s priorities throughout the COVID-19 pandemic remain intact with emphasis on protecting the health and safety of its employees, maximizing the availability of its services and products to support the SDoH, and supporting the operational and financial stability of its business.
Federal, state, and local authorities have taken several actions designed to assist healthcare providers in providing care to COVID-19 and other patients and to mitigate the adverse economic impact of the COVID-19 pandemic. Legislative actions taken by the federal government include the CARES Act and the American Rescue Plan Act of 2021 ("ARPA"). Through the CARES Act, the federal government has authorized payments to be distributed to healthcare providers through the Public Health and Social Services Emergency Fund ("Provider Relief Fund" or "PRF"). The Government further initiated ARPA which established the Coronavirus State and Local Fiscal Recovery Fund ("SLFRF") to send relief payments to state and local governments impacted by the pandemic to assist with responding to the public health emergency (“PHE”) including the economic hardships that continue to impact communities and to respond to workers performing essential work during the COVID-19 PHE, including providers. These funds are not subject to repayment, provided we are able to attest and comply with any terms and conditions of such funding, as applicable.
2. Significant Accounting Policies and Recent Accounting Pronouncements
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including disclosure of contingencies, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Changes in Accounting Estimate
In accordance with its policy, the Company reviews the estimated useful lives of its fixed assets and intangible assets on an ongoing basis. As a result of this review, the Company adjusted the estimated useful life of the Simplura trademarks and trade names intangible asset from 10 years to 3 years and adjusted the estimated useful life of the payor network from 15 years to 10 years effective as of January 1, 2022. This change was driven by strategic shifts in the Company's personal care segment operations, partially contributed to by the acquisition of Care Finders Total Care, LLC ("Care Finders"). Based on the intangible asset values as of December 31, 2021, the effect of the change in estimate during the three and nine months ended September 30, 2022 was an increase in amortization expense of $3.6 million, a decrease in net income of $2.4 million, and a decrease in earnings per share of $0.17 per diluted common share outstanding, and an increase in amortization expense of $10.7 million, a decrease in net income of $8.4 million, and a decrease in earnings per share of $0.60 per diluted common share outstanding, respectively.
Government Grants
The Company has received government grants under the CARES Act PRF and the ARPA SLFRF to provide economic relief and stimulus to combat health and economic impacts of the COVID-19 pandemic. Under these acts, the Company received distributions of approximately $1.4 million during the three months ended September 30, 2022. No distributions were received during the three months ended September 30, 2021. The Company received distributions of approximately $10.4 million and $3.5 million during the nine months ended September 30, 2022 and September 30, 2021, respectively. Distributions received under these acts are targeted to assist with incremental health care related expenses or lost revenue attributable to the COVID-19 pandemic as well as provide stimulus to support long-term growth and recovery.
The payments from these acts are subject to certain restrictions and possible recoupment if not used for designated purposes. As a condition to receiving PRF distributions, providers must agree to certain terms and conditions, including that the funds are being used for healthcare related expenses and lost revenues attributable to COVID-19, as defined by the U.S. Department of Health and Human Services ("HHS"). All recipients of PRF payments are required to comply with the reporting requirements described in the terms and conditions and as determined by HHS. The Company has submitted the required
documents to meet reporting requirements through reporting period three, which ended September 30, 2022. The Company received an audit inquiry letter from HHS related to one of the business units that received PRF payments, to which the Company has responded and submitted all requested information and believes that the payments received are substantiated and within the terms and conditions defined by the HHS and continues to include these amounts as grant income. At this time, the Company is unaware of any other pending or upcoming audits or inquiries related to PRF received.
As a condition to receiving SLFRF, providers must agree to use the funds to respond to the PHE or its negative economic impacts, to respond to workers performing essential work by providing premium pay to eligible workers and to offset reduction in revenue due to the COVID-19 PHE as stipulated by the states in which the funds were received. All recipients of SLFRF payments are required to comply with the reporting requirements that the state in which the funds originated has requested in order for the states to meet the requirements as described in the terms and conditions as determined by the Department of the Treasury. The Company has complied with all known reporting requirements to date.
The Company recognizes distributions from government grants as grant income in line with the loss of revenues or expenses for which the grants are intended to compensate when there is reasonable assurance that it has complied with the conditions associated with the grant.
CARES Act Payroll Deferral
The CARES Act also provides for certain federal income and other tax changes, including the deferral of the employer portion of Social Security payroll taxes. The Company has deferred payment of approximately $12.3 million related to the deferral of employer payroll taxes as of September 30, 2022 and December 31, 2021 under the CARES Act which is recorded in accrued expenses on the unaudited condensed consolidated balance sheets. This balance is expected to be paid in the fourth quarter of 2022.
Recent Accounting Pronouncements
The Company adopted the following accounting pronouncements during the nine months ended September 30, 2022:
In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04") which provides optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships, and other transactions that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued due to reference rate reform. The relief granted in ASC 848, Reference Rate Reform ("ASC 848"), is applicable only to legacy contracts if the amendments made to the agreements are solely for reference rate reform activities. The provisions of ASC 848 must be applied for all transactions other than derivatives, which may be applied at a hedging relationship level. Entities may apply the provisions as of the beginning of the reporting period when the election is made (i.e. as early as the first quarter 2020). Unlike other topics, the provisions of this update are only available until December 31, 2022, when the reference rate replacement activity is expected to be completed. There was no material impact to the financial statements from the adoption of this ASU.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ("ASU 2021-08"). The new guidance requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers, as if it had originated the contracts. Under the current business combinations guidance, such assets and liabilities are recognized by the acquirer at fair value on the acquisition date. ASU 2021-08 is effective for public business entities for fiscal years beginning on or after November 1, 2023, including interim periods therein. The standard will not impact acquired contract assets or liabilities from business combinations occurring prior to the effective date of adoption, and the impact in future periods will depend on the contract assets and contract liabilities acquired in future business combinations. The Company has elected to early adopt this accounting standard and notes that there was no material impact to the financial statements from the adoption of this ASU.
3. Acquisitions
Business Combinations
Care Finders Total Care, LLC
On September 14, 2021, the Company acquired Care Finders which is a personal care provider in the Northeast, with operations in New Jersey, Pennsylvania, and Connecticut. The acquisition of Care Finders broadens access to in-home personal care solutions for patients and supports the Company's strategy to expand its personal care platform.
The equity transaction was accounted for in accordance with ASC 805, Business Combinations in which a wholly-owned subsidiary of the Company acquired 100.0% of the equity securities of Care Finders for $333.4 million (a purchase price of $344.8 million less $11.4 million of cash that was acquired).
The following table summarizes information from the allocation of the consideration transferred to acquired identifiable assets and assumed liabilities, net of cash acquired, as of the acquisition date of September 14, 2021 (in thousands):
| | | | | |
Cash | $ | 11,424 | |
Accounts receivable (1) | 14,708 | |
Prepaid expenses and other (2) | 2,625 | |
Property and equipment (3) | 2,527 | |
Inventories (4) | 231 | |
Operating right of use asset (5) | 1,939 | |
Intangibles (6) | 100,750 | |
Goodwill (7) | 232,103 | |
Other assets (8) | 226 | |
Accounts payable (9) | (2,720) | |
Accrued expenses and other accrued liabilities (9) | (14,344) | |
Operating lease liability (5) | (1,939) | |
Deferred tax liabilities (10) | (2,327) | |
Other liabilities (9) | (378) | |
Total of assets acquired less liabilities assumed | $ | 344,825 | |
(1) Management has valued accounts receivable based on the estimated future collectability of the receivables portfolio.
(2) Given the short-term nature of the balance of prepaid expenses, the carrying value represents the fair value.
(3) The acquired property and equipment consists primarily of capitalized software, computer equipment, and automobiles.
(4) Given the short-term nature of the balance of inventories, the carrying value represents the fair value.
(5) The fair value of the operating lease liability and corresponding right-of-use asset (current and long-term) was recorded at $1.9 million based on market rates available to the Company during the purchase price allocation.
(6) The allocation of consideration exchanged for intangible assets acquired is as follows (in thousands):
| | | | | | | | | | | |
| Type | Useful Life | Value |
Payor network | Amortizable | 7 years | $ | 97,200 | |
Trade name | Amortizable | 3 years | 1,950 | |
Non-compete agreement | Amortizable | 5 years | 1,600 | |
| | | $ | 100,750 | |
The Company valued the payor network utilizing the multi-period excess earnings method, trade names utilizing the relief-from-royalty method and the non-compete agreement utilizing the with/without method.
(7) The acquisition initially resulted in $232.2 million of goodwill as a result of expected synergies due to future customers driven by expansion into different markets, an increase in market share, and a growing demographic that will need home care solutions. In the third quarter of 2022, goodwill decreased by $0.1 million as a result of changes to accounts payable and deferred tax liabilities, as discussed in detail below. All of the acquired goodwill is deductible for tax purposes.
(8) Included in other assets are security deposits with a value of $0.2 million.
(9) Due to the short-term nature of the accounts, the carrying value is assumed to represent the fair value for accounts payable as well as certain other current and non-current liabilities as of the acquisition date. In the third quarter of 2022, it was determined that an additional $0.2 million of accounts payable existed as of the acquisition date, and therefore, the initial balance of $2.5 million was increased to $2.7 million.
(10) Net deferred tax liabilities represent the expected future tax consequences of temporary differences between the fair values of the assets acquired and liabilities assumed and their tax basis. In the third quarter of 2022, deferred tax liabilities of $2.6 million decreased by $0.3 million due to tax impacts of the acquisition.
VRI Intermediate Holdings, LLC
On September 22, 2021, the Company acquired VRI, a provider of remote patient monitoring solutions that manages a comprehensive suite of services including personal emergency response systems, vitals monitoring and data-driven patient engagement solutions. The acquisition of VRI accelerates the Company's strategy to build a holistic suite of supportive care solutions that address SDoH, introduces new technology-enabled in-home solutions that deepen the Company's engagement with payors and patients, and adds a new suite of services and operating team to advance the Company's broader technology and data strategy.
The stock transaction was accounted for in accordance with ASC 805, Business Combinations in which a wholly-owned subsidiary of the Company acquired 100.0% of the equity securities of VRI for $314.6 million (a purchase price of $317.5 million less $2.9 million of cash that was acquired).
The following table summarizes the allocation of the consideration transferred to acquired identifiable assets and assumed liabilities, net of cash acquired, as of the acquisition date of September 22, 2021 (in thousands):
| | | | | |
Cash | $ | 2,922 | |
Accounts receivable (1) | 6,800 | |
Inventory (2) | 1,684 | |
Prepaid expenses and other (3) | 805 | |
Property and equipment (4) | 14,908 | |
Intangible assets (5) | 75,590 | |
Goodwill (6) | 236,317 | |
Accounts payable and accrued liabilities (7) | (1,884) | |
Accrued expense (7) | (2,487) | |
Deferred revenue (7) | (67) | |
Deferred tax liabilities (8) | (17,070) | |
Total of assets acquired less liabilities assumed | $ | 317,518 | |
(1) Management has valued accounts receivable based on the estimated future collectability of the receivables portfolio.
(2) Given the short-term nature of the balance of inventories, the carrying value represents the fair value.
(3) Given the short-term nature of the balance of prepaid expenses, the carrying value represents the fair value.
(4) The acquired property and equipment consists primarily of personal emergency response system devices, with the remainder consisting of computer equipment, buildings and other equipment. The Company valued the personal emergency response system devices, computer equipment and other equipment utilizing the cost approach at $12.7 million. The carrying value of the remainder of the property, plant and equipment, consisting primarily of buildings and land, is assumed to represent the fair value.
(5) The allocation of consideration exchanged for intangible assets acquired is as follows (in thousands):
| | | | | | | | | | | |
| Type | Useful Life | Value |
Payor network | Amortizable | 7 years | $ | 72,150 | |
Trade name | Amortizable | 3 years | 890 | |
Developed technology | Amortizable | 3 years | 2,550 | |
| | | $ | 75,590 | |
The Company valued the payor network utilizing the multi-period excess earnings method, trade names utilizing the relief-from-royalty method and developed technology utilizing the cost approach.
(6) The acquisition initially resulted in $236.7 million of goodwill as a result of expected synergies due to future customers driven by expansion into different markets and an increase in market share. In the third quarter of 2022, goodwill decreased by $0.4 million due to a decrease in deferred tax liabilities, as discussed in more detail below. The related goodwill is not deductible for tax purposes.
(7) Due to the short-term nature of the accounts, the carrying value is assumed to represent the fair value for accounts payable as well as certain other current and non-current liabilities as of the acquisition date.
(8) Net deferred tax liabilities represent the expected future tax consequences of temporary differences between the fair values of the assets acquired and liabilities assumed and their tax basis. In the third quarter of 2022, deferred tax liabilities of $17.5 million decreased by $0.4 million due to tax impacts of the acquisition.
Guardian Medical Monitoring
On May 11, 2022, the Company acquired Guardian Medical Monitoring ("GMM"), a provider of remote patient monitoring solutions that manages a comprehensive suite of services including personal emergency response systems and medication management. The acquisition of GMM supports the Company's strategy to expand its RPM segment and enhances the Company's suite of supportive care solutions that address SDoH.
The stock transaction was accounted for in accordance with ASC 805, Business Combinations in which a wholly-owned subsidiary of the Company acquired 100.0% of the equity securities of GMM for $71.3 million (a purchase price of $71.6 million less $0.3 million of cash that was acquired).
The following is a preliminary estimate of the allocation of the consideration transferred to acquired identifiable assets and assumed liabilities, net of cash acquired, as of the acquisition date of May 11, 2022 (in thousands):
| | | | | |
Cash | $ | 327 | |
Accounts receivable (1) | 2,548 | |
Prepaid expenses and other (2) | 770 | |
Property and equipment (3) | 2,744 | |
Intangible assets (4) | 21,950 | |
Goodwill (5) | 44,113 | |
Accounts payable (6) | (281) | |
Accrued expenses and other current liabilities (6) | (577) | |
| |
| |
Total of assets acquired less liabilities assumed | $ | 71,594 | |
The acquisition method of accounting requires us to record the assets acquired and liabilities assumed at their fair values as of the date of acquisition, which requires management to use currently available information to make estimates and assumptions. The Company believes that the available information provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, however, if new information becomes available related to facts that existed at the acquisition date, preliminary estimates may be adjusted. Upon finalization of the preliminary items noted below, there may be related adjustments to certain of such items and to goodwill and income taxes.
(1) Management has valued accounts receivable based on the estimated future collectability of the receivables portfolio. In the third quarter of 2022, it was determined that $0.4 million of the initial accounts receivable balance was uncollectible, and therefore, the initial balance of $2.9 million was decreased to $2.5 million. This estimate is preliminary as the Company's evaluation of the collectability of receivables is ongoing.
(2) Given the short-term nature of the balance of prepaid expenses and other assets, the carrying value represents the fair value.
(3) The acquired property and equipment consists primarily of personal emergency response system devices, with the remainder consisting of computer equipment and furniture and fixtures. The Company valued the personal emergency response system devices utilizing the cost approach. The carrying value of the remainder of the property, plant and equipment, consisting primarily of computer equipment and furniture and fixtures, is assumed to represent the fair value. Management's assessment of the fair value for PP&E is ongoing.
(4) The preliminary allocation of consideration exchanged for intangible assets acquired is as follows (in thousands):
| | | | | | | | | | | |
| Type | Useful Life | Value |
Payor network | Amortizable | 7 years | $ | 21,600 | |
Trade name | Amortizable | 2 years | 350 | |
| | | $ | 21,950 | |
The Company valued the payor network utilizing the multi-period excess earnings method and trade names utilizing the relief-from-royalty method.
(5) The acquisition preliminarily resulted in $43.7 million of goodwill as a result of expected synergies due to future customers driven by expansion into different markets and an increase in market share. In the third quarter of 2022, accounts receivable was adjusted down by $0.4 million which caused a corresponding increase to goodwill for a total goodwill balance of $44.1 million. The amount of goodwill deductible for tax purposes has yet to be determined.
(6) Due to the short-term nature of the accounts, the carrying value is assumed to represent the fair value for accounts payable and accrued expenses and other current liabilities as of the acquisition date.
Pro Forma Financial Information (unaudited)
Assuming Care Finders, VRI, and GMM had been acquired as of January 1, 2021, and the results of each had been included in operations beginning on January 1, 2021, the following table provides estimated unaudited pro forma results of operations for the three and nine months ended September 30, 2022 and September 30, 2021 (in thousands, except earnings per share). The estimated pro forma net income adjusts for the effect of fair value adjustments related to each of the acquisitions, transaction costs and other non-recurring costs directly attributable to the transactions and the impact of the additional debt to finance the applicable acquisitions.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
Revenue | $ | 647,782 | | | $ | 552,342 | | | $ | 1,850,472 | | | $ | 1,616,115 | |
Income (loss) from continuing operations, net | (9,714) | | | (13,442) | | | (7,242) | | | 12,439 | |
Diluted earnings (loss) per share | $ | (0.69) | | | $ | (0.96) | | | $ | (0.52) | | | $ | 0.87 | |
Estimated unaudited pro forma information is not necessarily indicative of the results that actually would have occurred had the acquisitions been completed on the date indicated or of future operating results. The supplemental pro forma earnings were adjusted to exclude the impact of historical interest expense of Care Finders and VRI of $1.1 million and $1.0 million, respectively, for the three months ended September 30, 2021 and $3.7 million and $3.2 million, respectively, for the nine months ended September 30, 2021.
Acquisition-related costs of approximately $0.4 million and $2.0 million for the three and nine months ended September 30, 2022 for GMM were expensed as incurred, recorded in selling, general and administrative expenses and are reflected in the pro forma table above at the assumed acquisition date. Acquisition-related costs consisted of professional fees for advisory, consulting, and underwriting services as well as other incremental costs directly related to the acquisition.
Asset Acquisition
On May 30, 2022, the Company entered into an asset purchase agreement with a private entity to purchase certain customer contracts. Pursuant to the purchase agreement, the contracts were acquired for total preliminary consideration of $7.6 million in cash, subject to certain adjustments.
The transaction was accounted for as an asset acquisition in accordance with ASC 805, Business Combinations. The preliminary fair value of the net consideration is fully allocated to a payor network intangible asset recorded at the personal care segment and will be amortized over a period of 6 years.
4. Segments
The Company’s reportable segments are identified based on a number of factors related to how its chief operating decision maker ("CODM") determines the allocation of resources and assesses the performance of the Company’s operations. The Company's CODM manages the Company under four reportable segments.
The Company’s reportable segments are strategic units that offer different services under different financial and operating models to the Company’s customers. The segments are managed separately because each requires different technology and marketing strategies. Furthermore, the different segments were each generally acquired as a unit, with the management of each at the time of acquisition retained to continue to operate their respective businesses.
The Company has determined each of the separate reportable segments based on the difference in services provided by each of the segments as provided in further detail below:
•NEMT - The Company's NEMT segment is its legacy segment and operates primarily under the brands ModivCare Solutions and Circulation. The NEMT segment is the largest manager of non-emergency medical transportation programs for state governments and managed care organizations, or MCOs, in the U.S. This segment also holds the results of the Company's captive insurance program.
•Personal Care - The Company's Personal Care segment began operations in November 2020 with the acquisition of Simplura and expanded in September 2021 with the acquisition of Care Finders. The Personal Care segment operates under the brands Simplura and Care Finders and provides personal care to State and Managed Medicaid, Medicare, and Private Pay patient populations in need of care monitoring and assistance performing activities of daily living;
•RPM - The Company's RPM segment began operations in September 2021 with the acquisition of VRI and expanded in May 2022 with the acquisition of GMM. The RPM segment operates under the VRI brand and is a provider of remote patient monitoring solutions, including personal emergency response systems, vitals monitoring and data-driven patient engagement solutions;
•Corporate and Other - Effective January 1, 2022, the Company completed its segment reorganization which resulted in the addition of a Corporate and Other segment that includes the costs associated with the Company's corporate operations. The operating results of the Corporate and Other segment include activities related to executive, accounting, finance, internal audit, tax, legal and certain strategic and corporate development functions for each segment, as well as the results of the Matrix investment. Prior to the segment reorganization, we reported the investment in Matrix as a separate operating segment, however based on the relative size of the Matrix investment and all related activity to the overall financial statements, the CODM no longer views it as a separate operating segment but reviews results in conjunction with the other corporate results of the business. The Company reclassified certain costs associated with this reorganization for the three and nine months ended September 30, 2021, to conform to this presentation.
The Company evaluates performance and allocates resources based on the operating income of the reportable segments, which includes an allocation of corporate expenses directly attributable to the specific segment and includes revenues and all other costs directly attributable to the specific segment.
The following table sets forth certain financial information from continuing operations attributable to the Company’s business segments for the three and nine months ended September 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2022 |
| NEMT | | Personal Care | | RPM | | Corporate and Other | | Total |
Service revenue, net | $ | 459,796 | | | $ | 169,226 | | | $ | 18,760 | | | $ | — | | | $ | 647,782 | |
Grant income (1) | — | | | 789 | | | — | | | — | | | 789 | |
| | | | | | | | | |
Service expense | 394,981 | | | 132,746 | | | 6,836 | | | — | | | 534,563 | |
General and administrative expense | 31,815 | | | 22,057 | | | 5,816 | | | 16,201 | | | 75,889 | |
Depreciation and amortization | 7,079 | | | 12,919 | | | 5,467 | | | 207 | | | 25,672 | |
Operating income (loss) | $ | 25,921 | | | $ | 2,293 | | | $ | 641 | | | $ | (16,408) | | | $ | 12,447 | |
| | | | | | | | | |
Equity in net loss (income) of investee, net of tax | $ | (208) | | | $ | — | | | $ | — | | | $ | 26,656 | | | $ | 26,448 | |
Equity investment | $ | 208 | | | $ | — | | | $ | — | | | $ | 43,269 | | | $ | 43,477 | |
Goodwill (2) | $ | 135,186 | | | $ | 552,775 | | | $ | 280,429 | | | $ | 30 | | | $ | 968,420 | |
Total assets | $ | 517,930 | | | $ | 962,425 | | | $ | 402,929 | | | $ | 106,561 | | | $ | 1,989,845 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2022 |
| NEMT | | Personal Care | | RPM | | Corporate and Other | | Total |
Service revenue, net | $ | 1,309,449 | | | $ | 491,661 | | | $ | 49,362 | | | $ | — | | | $ | 1,850,472 | |
Grant income (1) | — | | | 4,587 | | | — | | | — | | | 4,587 | |
| | | | | | | | | |
Service expense | 1,100,801 | | | 379,423 | | | 17,884 | | | — | | | 1,498,108 | |
General and administrative expense | 102,736 | | | 68,536 | | | 17,520 | | | 43,316 | | | 232,108 | |
Depreciation and amortization | 21,576 | | | 37,976 | | | 14,201 | | | 623 | | | 74,376 | |
Operating income (loss) | $ | 84,336 | | | $ | 10,313 | | | $ | (243) | | | $ | (43,939) | | | $ | 50,467 | |
| | | | | | | | | |
Equity in net loss (income) of investee, net of tax | $ | (143) | | | $ | — | | | $ | — | | | $ | 28,163 | | | $ | 28,020 | |
Equity investment | $ | 208 | | | $ | — | | | $ | — | | | $ | 43,269 | | | $ | 43,477 | |
Goodwill (2) | $ | 135,186 | | | $ | 552,775 | | | $ | 280,429 | | | $ | 30 | | | $ | 968,420 | |
Total assets | $ | 517,930 | | | $ | 962,425 | | | $ | 402,929 | | | $ | 106,561 | | | $ | 1,989,845 | |
(1) Grant income for the Personal Care segment includes funding received on a periodic basis from the PRF in relation to relief under the CARES Act and funding received from the SLFRF under ARPA in relation to economic recovery to combat health and economic impacts of the COVID-19 pandemic. See Note 2, Significant Accounting Policies and Recent Accounting Pronouncements.
(2) In May 2022, the Company completed the acquisition of GMM which is included within the RPM segment. The Company recorded goodwill of $43.7 million related to the acquisition during the second quarter of 2022. During the third quarter of 2022, the Company recorded an increase in GMM goodwill of $0.4 million and a decrease in VRI goodwill of $0.4 million related to measurement period adjustments as discussed in Note 3, Acquisitions, for a total GMM goodwill balance of $44.1 million and a total VRI goodwill balance of $236.3 million. Additionally, during the third quarter of 2022, the Company recorded a net decrease in goodwill of $0.1 million in the Personal Care segment related to measurement period adjustments at the Care Finders subsidiary as discussed in Note 3, Acquisitions.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2021 |
| NEMT | | Personal Care | | RPM | | Corporate and Other | | Total |
Service revenue, net | $ | 372,992 | | | $ | 118,503 | | | $ | 1,564 | | | $ | — | | | $ | 493,059 | |
Grant income (1) | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | |
Service expense | 304,398 | | | 94,107 | | | 767 | | | — | | | 399,272 | |
General and administrative expense | 29,875 | | | 15,802 | | | 216 | | | 22,312 | | | 68,205 | |
Depreciation and amortization | 7,496 | | | 4,912 | | | 200 | | | — | | | 12,608 | |
Operating income (loss) | $ | 31,223 | | | $ | 3,682 | | | $ | 381 | | | $ | (22,312) | | | $ | 12,974 | |
| | | | | | | | | |
Equity in net loss of investee, net of tax | $ | — | | | $ | — | | | $ | — | | | $ | 4,845 | | | $ | 4,845 | |
Equity investment | $ | — | | | $ | — | | | $ | — | | | $ | 134,353 | | | $ | 134,353 | |
Goodwill | $ | 135,186 | | | $ | 565,886 | | | $ | 228,884 | | | $ | 30 | | | $ | 929,986 | |
Total assets | $ | 552,912 | | | $ | 1,037,886 | | | $ | 343,277 | | | $ | 201,078 | | | $ | 2,135,153 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2021 |
| NEMT | | Personal Care | | RPM | | Corporate and Other | | Total |
Service revenue, net | $ | 1,081,168 | | | $ | 338,385 | | | $ | 1,564 | | | $ | — | | | $ | 1,421,117 | |
Grant income (1) | — | | | 3,500 | | | — | | | — | | | 3,500 | |
| | | | | | | | | |
Service expense | 869,470 | | | 268,933 | | | 767 | | | — | | | 1,139,170 | |
General and administrative expense | 85,961 | | | 45,606 | | | 216 | | | 47,812 | | | 179,595 | |
Depreciation and amortization | 21,744 | | | 14,723 | | | 200 | | | — | | | 36,667 | |
Operating income (loss) | $ | 103,993 | | | $ | 12,623 | | | $ | 381 | | | $ | (47,812) | | | $ | 69,185 | |
| | | | | | | | | |
Equity in net loss of investee, net of tax | $ | — | | | $ | — | | | $ | — | | | $ | 1,424 | | | $ | 1,424 | |
Equity investment | $ | — | | | $ | — | | | $ | — | | | $ | 134,353 | | | $ | 134,353 | |
Goodwill | $ | 135,186 | | | $ | 565,886 | | | $ | 228,884 | | | $ | 30 | | | $ | 929,986 | |
Total assets | $ | 552,912 | | | $ | 1,037,886 | | | $ | 343,277 | | | $ | 201,078 | | | $ | 2,135,153 | |
5. Revenue Recognition
Under ASC 606, the Company recognizes revenue as it transfers promised services to its customers and generates all of its revenue from contracts with customers. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled in exchange for these services. The Company satisfies substantially all of its performance obligations and recognizes revenue over time instead of at points in time.
Revenue Contract Structure
NEMT Capitated Contracts (per-member-per-month)
Under capitated contracts, payors pay a fixed amount per eligible member per month. Capitation rates are generally based on expected costs and volume of services. We assume the responsibility of meeting the covered healthcare related transportation requirements based on per-member per-month fees for the number of eligible members in the payor’s program. Revenue is recognized based on the population served during the period. Certain capitated contracts have provisions for reconciliations, risk corridors or profit rebates. For contracts with reconciliation provisions, capitation payment is received as a prepayment during the month service is provided. These prepayments are periodically reconciled based on actual cost and/or trip volume and may result in refunds to the payor, or additional payments due from the payor. Contracts with risk corridor or profit rebate provisions allow for profit within a certain corridor and once we reach profit level thresholds or maximums, we discontinue recognizing revenue and instead record a liability within the accrued contract payable account. This liability may be
reduced through future increases in trip volume or periodic settlements with the payor. While a profit rebate provision could only result in a liability from this profit threshold, a risk corridor provision could potentially result in receivables if the Company does not reach certain profit minimums, which would be recorded in the reconciliation contract receivables account.
NEMT Fee-for-service Contracts
Fee-for-service ("FFS") revenue represents revenue earned under non-capitated contracts in which we bill and collect a specified amount for each service that we provide. FFS revenue is recognized in the period in which the services are rendered and is reduced by the estimated impact of contractual allowances.
Personal Care Fee-for-service Contracts
Personal Care FFS revenue is reported at the estimated net realizable amount from clients, patients and third-party payors for services rendered based on actual personal care hours provided. Payment for services received from third-party payors includes, but is not limited to, insurance companies, hospitals, governmental agencies and other home health care providers who subcontract work to the Company. Certain contracts are subject to retroactive audit and possible adjustment by those payors based on the nature of the contract or costs incurred. The Company makes estimates of retroactive adjustments and considers these in the recognition of revenue in the period in which the related services are rendered. The difference between estimated settlement and actual settlement is reported in net service revenues as adjustments become known or as years are no longer subject to such audits, reviews, or investigations.
RPM per-member-per-month Contracts
RPM per-member-per-month ("PMPM") revenue consists of revenue from monitoring services provided to the customer. Under RPM contracts, payors pay per-enrolled-member-per-month based on enrolled membership. Consideration is generally fixed for each type of monitoring service and the contracts do not typically contain variable components of consideration. As such, the RPM segment recognizes revenue based on the monthly fee paid by customers.
Disaggregation of Revenue by Contract Type
The following table summarizes disaggregated revenue from contracts with customers by contract type for the three and nine months ended September 30, 2022 and September 30, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
NEMT capitated contracts | $ | 399,859 | | | $ | 311,913 | | | $ | 1,145,694 | | | $ | 916,976 | |
NEMT FFS contracts | 59,937 | | | 61,079 | | | 163,755 | | | 164,192 | |
Total NEMT revenue | 459,796 | | | 372,992 | | | 1,309,449 | | | 1,081,168 | |
| | | | | | | |
Personal Care FFS contracts | 169,226 | | | 118,503 | | | 491,661 | | | 338,385 | |
RPM PMPM contracts | 18,760 | | | 1,564 | | | 49,362 | | | 1,564 | |
Total service revenue, net | $ | 647,782 | | | $ | 493,059 | | | $ | 1,850,472 | | | $ | 1,421,117 | |
Payor Information
Service revenue, net, is derived from state and managed Medicaid contracts, managed Medicare contracts, as well as a small amount from private pay and other contracts. Of the NEMT segment’s revenue, 10.4% and 10.8% were derived from one payor for the three months ended September 30, 2022 and 2021, respectively, and 11.0% and 9.7% were derived from one payor for the nine months ended September 30, 2022 and 2021, respectively. Of the Personal Care segment's revenue, 12.1% and 12.0% were derived from one payor for the three months ended September 30, 2022 and 2021, respectively, and 12.0% and 13.0% were derived from one payor for the nine months ended September 30, 2022 and 2021, respectively. Of the RPM segment's revenue, 18.4% was derived from one payor for the three months ended September 30, 2022, and 20.4% was derived from one payor for the nine months ended September 30, 2022. As the RPM segment was established on September 22, 2021, the concentration of revenue is not meaningful for the three and nine months ended September 30, 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
State and Managed Medicaid contracts | $ | 547,423 | | | $ | 441,802 | | | $ | 1,565,738 | | | $ | 1,274,660 | |
Managed Medicare contracts | 92,228 | | | 44,074 | | | 254,835 | | | 125,571 | |
Private pay and other contracts | 8,131 | | | 7,183 | | | 29,899 | | | 20,886 | |
Total service revenue, net | $ | 647,782 | | | $ | 493,059 | | | $ | 1,850,472 | | | $ | 1,421,117 | |
Revenue Adjustments
During the three months ended September 30, 2022 and 2021, the Company recognized an increase of $1.7 million and a reduction of $0.1 million in service revenue, respectively, from contractual adjustments relating to performance obligations satisfied in previous periods to which the payor agreed. During the nine months ended September 30, 2022 and 2021, the Company recognized an increase of $6.5 million and $0.2 million in service revenue, respectively, from contractual adjustments relating to performance obligations satisfied in previous periods to which the payor agreed.
Related Balance Sheet Accounts
The following table provides information about accounts receivable, net (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Accounts receivable | $ | 208,787 | | | $ | 210,937 | |
Reconciliation contracts receivable (1) | 60,060 | | | 24,480 | |
Allowance for doubtful accounts | (2,670) | | | (2,296) | |
Accounts receivable, net | $ | 266,177 | | | $ | 233,121 | |
(1) Reconciliation contracts receivable primarily represent underpayments and receivables on certain contracts with reconciliation and risk corridor provisions. See the contract payables and receivables activity below.
The following table provides information about other revenue related accounts included on the accompanying unaudited condensed consolidated balance sheets (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Accrued contract payables (1) | $ | 243,800 | | | $ | 281,586 | |
| | | |
Deferred revenue, current | $ | 2,213 | | | $ | 2,714 | |
(1) Accrued contract payables primarily represent overpayments and liability reserves on certain risk corridor, profit rebate and reconciliation contracts.
The following table provides the summary activity of total contract payables and receivables as reported within the unaudited condensed consolidated balance sheets (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | Additional Amounts Recorded | | Amounts Paid or Settled | | September 30, 2022 |
Reconciliation contract payables | | $ | 22,035 | | | $ | 15,675 | | | $ | (13,011) | | | $ | 24,699 | |
Profit rebate/corridor contract payables | | 246,424 | | | 59,129 | | | (99,123) | | | 206,430 | |
Overpayments and other cash items | | 13,127 | | | 7,529 | | | (7,985) | | | 12,671 | |
Total contract payables | | $ | 281,586 | | | $ | 82,333 | | | $ | (120,119) | | | $ | 243,800 | |
| | | | | | | | |
Reconciliation contract receivables | | $ | 24,403 | | | $ | 37,838 | | | $ | (15,848) | | | $ | 46,393 | |
Corridor contract receivables | | 77 | | | 13,590 | | | — | | | 13,667 | |
Total reconciliation contract receivables | | $ | 24,480 | | | $ | 51,428 | | | $ | (15,848) | | | $ | 60,060 | |
6. Equity Investment
As of September 30, 2022 and December 31, 2021, the Company owned a 43.6% non-controlling interest in Matrix. Pursuant to a Shareholder’s Agreement, affiliates of Frazier Healthcare Partners hold rights necessary to control the fundamental operations of Matrix. The Company accounts for its investment in Matrix under the equity method of accounting and the Company’s share of Matrix’s income or losses are recorded as “Equity in net (income) loss of investee” in the accompanying unaudited condensed consolidated statements of operations. During the three and nine months ended September 30, 2022, Matrix recorded asset impairment charges of $82.2 million and during the year ended December 31, 2021, Matrix recorded asset impairment charges of $111.4 million. No asset impairment charges were recorded for the three and nine months ended September 30, 2021.
The Company's gross share of its Matrix's operations for the three months ended September 30, 2022 and September 30, 2021 was a loss of $36.1 million and a loss of $6.7 million, respectively, which is presented net of tax on the unaudited condensed consolidated statements of operations for a loss of $26.7 million and a loss of $4.8 million, respectively. For the nine months ended September 30, 2022 and September 30, 2021, the Company's gross share of its investment in Matrix was a loss of $39.0 million and a loss of $2.0 million, respectively, which is presented net of tax on the unaudited condensed consolidated statements of operations for a loss of $28.2 million and a loss of $1.4 million, respectively.
The carrying amount of the assets included in the Company’s unaudited condensed consolidated balance sheets and the maximum loss exposure related to the Company’s interest in Matrix as of September 30, 2022 and December 31, 2021 totaled $43.5 million and $83.1 million, respectively.
Summary financial information for Matrix on a standalone basis is as follows (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Current assets | $ | 110,892 | | | $ | 124,081 | |
Long-term assets | $ | 381,096 | | | $ | 482,063 | |
Current liabilities | $ | 44,557 | | | $ | 57,048 | |
Long-term liabilities | $ | 330,794 | | | $ | 340,448 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenue | $ | 76,461 | | | $ | 78,458 | | | $ | 235,582 | | | $ | 316,830 | |
Operating income (loss) | $ | (79,992) | | | $ | (16,833) | | | $ | (81,604) | | | $ | 3,324 | |
Net loss | $ | (85,081) | | | $ | (15,627) | | | $ | (93,211) | | | $ | (7,143) | |
7. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets were comprised of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Prepaid insurance | $ | 8,331 | | | $ | 9,487 | |
Deferred ERP implementation costs | 6,390 | | | 3,003 | |
Deferred financing costs on credit facility | 3,249 | | | 1,480 | |
Prepaid income taxes | 2,709 | | | 13,848 | |
Inventory | 1,864 | | | 1,458 | |
Other prepaid expenses | 14,138 | | | 9,275 | |
Total prepaid expenses and other current assets | $ | 36,681 | | | $ | 38,551 | |
8. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities were comprised of the following (in thousands):
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Accrued compensation and related liabilities (1) | $ | 52,107 | | | $ | 54,564 | |
Accrued interest | 24,239 | | | 12,826 | |
Accrued operating expenses | 16,378 | | | 14,457 | |
Insurance reserves | 15,972 | | | 10,152 | |
Accrued legal fees | 11,016 | | | 5,081 | |
Accrued government grants (2) | 5,439 | | | 1,514 | |
Union pension obligation | 4,952 | | | 6,629 | |
Deferred revenue | 2,213 | | | 2,714 | |
Deferred acquisition payments | 50 | | | 3,578 | |
Other | 12,851 | | | 12,276 | |
Total accrued expenses and other current liabilities | $ | 145,217 | | | $ | 123,791 | |
(1) Accrued compensation and related liabilities include deferred payroll taxes, which are deferred as a result of the CARES Act. The CARES Act provides for certain federal income and other tax changes, including the deferral of the employer portion of Social Security payroll taxes. See Note 2, Significant Accounting Policies and Recent Accounting Pronouncements.
(2) Accrued government grants include payments received from government entities in relation to the PRF and SLFRF to offset lost revenue or increased expenditures for which the related expenditure has not yet been incurred and thus the related payments are deferred as of as of September 30, 2022 and December 31, 2021.
9. Debt
Senior Unsecured Notes
Senior unsecured notes as of September 30, 2022 and December 31, 2021 consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | |
Senior Unsecured Note | | Date of Issuance | | September 30, 2022 | | December 31, 2021 |
$500.0 million 5.875% due November 15, 2025 | | 11/4/2020 | | $ | 490,399 | | | $ | 488,368 | |
$500.0 million 5.000% due October 1, 2029 | | 8/24/2021 | | $ | 487,902 | | | $ | 486,857 | |
The Company pays interest on the Senior Unsecured Notes semi-annually in arrears. Principal payments are not required until the maturity date. Debt issuance costs of $14.5 million in relation to the issuance of the Senior Notes due 2025 were incurred and these costs were deferred and are amortized to interest cost over the term of the Notes. Debt issuance costs of $13.5 million were incurred in relation to the issuance of the Senior Notes due 2029 and these costs were deferred and are amortized to interest cost over the term of the Notes. As of September 30, 2022, $21.7 million of unamortized deferred issuance costs was netted against the long-term debt balance on the unaudited condensed consolidated balance sheets. The Company was in compliance with all covenants as of September 30, 2022.
Credit Facility
On February 3, 2022, the Company entered into a new credit agreement (the “New Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, swing line lender and an issuing bank, Wells Fargo Bank, National Association, as an issuing bank, Truist Bank and Wells Fargo Bank, National Association, as co-syndication agents, Deutsche Bank AG New York Branch, Bank of America, N.A., Regions Bank, Bank of Montreal and Capital One, National Association, as co-documentation agents, and JPMorgan Chase Bank, N.A., Truist Securities, Inc. and Wells Fargo Securities, LLC, as joint bookrunners and joint lead arrangers, and the other lenders party thereto. The New Credit Agreement provides the Company with a senior secured revolving credit facility (the “New Credit Facility”) in an aggregate principal amount of $325.0 million. The New Credit Facility includes sublimits for swingline loans, letters of credit and alternative currency loans in amounts of up to $25.0 million, $60.0 million and $75.0 million, respectively. The Company did not draw any amount of the New Credit Facility at closing of the New Credit Agreement. As of September 30, 2022, the Company had $38.0 million of outstanding
letters of credit under the New Credit Facility. The proceeds of the New Credit Facility may be used (i) to finance working capital needs of the Company and its subsidiaries and (ii) for general corporate purposes of the Company and its subsidiaries (including to finance capital expenditures, permitted acquisitions and investments). The New Credit Facility replaces the Credit Facility under the Credit Agreement, which was terminated concurrently with the Company's entry into the New Credit Agreement.
Under the New Credit Facility, the Company has an option to request an increase in the amount of the New Credit Facility or obtain incremental term loans from time to time (on substantially the same terms as apply to the existing facilities) by an aggregate amount of up to $175.0 million, plus an unlimited amount so long as the pro forma secured net leverage ratio does not exceed 3.50:1.00, with either additional commitments from lenders under the New Credit Agreement at such time or new commitments from financial institutions approved by the Company and the administrative agent (which approval is not to be unreasonably withheld), so long as, at the time of any such increase, no default or event of default exists, the representations and warranties of the Company set forth in the New Credit Agreement are true and correct in all material respects and the Company is in pro forma compliance with the financial covenants in the New Credit Agreement. The Company may not be able to access additional funds under this increase option as no lender is obligated to participate in any such increase under the New Credit Facility.
The New Credit Facility matures on February 3, 2027. The Company may prepay the New Credit Facility in whole or in part, at any time without premium or penalty, subject to reimbursement of the lenders’ breakage and redeployment costs in connection with prepayments of Term Benchmark loans or RFR loans, each as defined in the New Credit Agreement. The unutilized portion of the commitments under the New Credit Facility may be irrevocably reduced or terminated by the Company at any time without penalty.
Interest on the outstanding principal amount of the loans accrues at a per annum rate equal to the Alternate Base Rate, the Adjusted Term SOFR Rate, the Adjusted Daily Simple SOFR Rate, the Adjusted EURIBOR Rate or the Adjusted Daily Simple SONIA Rate, as applicable and each as defined in the New Credit Agreement, in each case, plus an applicable margin. The applicable margin ranges from 1.75% to 3.50% in the case of Term Benchmark loans or RFR loans, and 0.75% to 2.50% in the case of the Alternate Base Rate loans, in each case, based on the Company’s total net leverage ratio as defined in the New Credit Agreement. Interest on the loans is payable quarterly in arrears in the case of Alternate Base Rate loans, on the last day of the relevant interest period in the case of Term Benchmark loans, and monthly in arrears in the case of RFR loans. In addition, the Company is obligated to pay a quarterly commitment fee based on a percentage of the unused portion of the revolving credit facility and quarterly letter of credit fees based on a percentage of the maximum amount available to be drawn under each outstanding letter of credit. The commitment fee and letter of credit fee range from 0.30% to 0.50% and 1.75% to 3.50%, respectively, in each case, based on the Company’s total net leverage ratio.
The New Credit Agreement contains customary representations and warranties, affirmative and negative covenants and events of default. The negative covenants include restrictions on the Company’s ability to, among other things, incur additional indebtedness, create liens, make investments, give guarantees, pay dividends, sell assets and merge and consolidate. The Company is subject to financial covenants, including total net leverage and interest coverage covenants.
The Company’s obligations under the New Credit Facility are guaranteed by all of the Company’s present and future material domestic subsidiaries, excluding certain material domestic subsidiaries that are excluded from being guarantors pursuant to the terms of the New Credit Agreement. The Company’s obligations under, and each guarantor’s obligations under its guaranty of, the New Credit Facility are secured by a first priority lien on substantially all of the Company’s or such guarantor’s respective assets. If an event of default occurs, the required lenders may cause the administrative agent to declare all unpaid principal and any accrued and unpaid interest and all fees and expenses under the New Credit Facility to be immediately due and payable. All amounts outstanding under the New Credit Facility will automatically become due and payable upon the commencement of any bankruptcy, insolvency or similar proceedings. The New Credit Agreement also contains a cross default to any of the Company’s indebtedness having a principal amount in excess of $40.0 million. The Company was in compliance with all covenants under the Credit Agreement as of September 30, 2022.
10. Stock-Based Compensation and Similar Arrangements
The Company provides stock-based compensation to employees, non-employee directors, consultants and advisors under the Company’s 2006 Long-Term Incentive Plan (“2006 Plan”). The 2006 Plan allows the flexibility to grant or award stock options, stock appreciation rights, restricted stock, unrestricted stock, stock units including restricted stock units and performance awards to eligible persons.
Stock options. The Company recognized a reversal of previously recognized stock-based compensation expense for non-qualified stock options (“NQs”) of $0.3 million during the three months ended September 30, 2022 due to forfeitures that occurred during the period and the Company recognized stock-based compensation expense for NQs of $0.5 million for the three months ended September 30, 2021 in general and administrative expense. For the nine months ended September 30, 2022 and 2021, the Company recognized stock-based compensation expense for NQs of $1.0 million and $1.5 million, respectively, in general and administrative expense. At September 30, 2022, the Company had 209,075 stock options outstanding with a weighted-average exercise price of $97.30.
Restricted stock and restricted stock units. The Company recognized stock-based compensation expense for restricted stock awards ("RSAs") and restricted stock units ("RSUs") of $0.7 million and $1.0 million for the three months ended September 30, 2022 and 2021, respectively, and $3.5 million and $2.5 million for the nine months ended September 30, 2022 and 2021, respectively, in general and administrative expense. The Company had 13,137 unvested RSAs and 85,369 unvested RSUs outstanding at September 30, 2022 with a weighted-average grant date fair value of $94.44 and $113.19, respectively.
Performance-based share awards. These awards include RSUs and were initially issued in the first quarter of 2022. The purpose of these awards is to align management’s compensation with the Company's financial performance and other operational objectives and to retain key employees. Awards granted under this category are based on the achievement of various targeted metrics as defined by the Plan. Stock-based compensation expense related to these performance-based share awards ("PRSUs") is recognized over the 3-year vesting period under the straight-line attribution method. Related to the PRSUs, the Company recorded a reversal of $0.2 million of previously recognized stock-based compensation expense for the three months ended September 30, 2022 due to forfeitures that occurred during the period and recorded $0.6 million of stock-based compensation expense for the nine months ended September 30, 2022, with the remaining portion expected to be recognized over the remainder of the 3-year requisite service period. The Company had 18,663 unvested PRSUs outstanding at September 30, 2022 with a weighted-average grant date fair value of $153.17.
In the second quarter of 2022, an Employee Stock Purchase Program ("ESPP") was approved by the Board of Directors and the Company's shareholders, which will allow employees to purchase Company stock at a discounted rate. The first offering period will begin in the fourth quarter of 2022.
11. Earnings (Loss) Per Share
The following table details the computation of basic and diluted earnings (loss) per share (in thousands, except share and per share data):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Numerator: | | | | | | | |
Net income (loss) | $ | (28,505) | | | $ | (7,572) | | | $ | (24,859) | | | $ | 24,940 | |
| | | | | | | |
Denominator: | | | | | | | |
Denominator for basic earnings per share -- weighted-average shares | 14,051,794 | | | 13,993,438 | | | 14,041,224 | | | 14,102,371 | |
Effect of dilutive securities: | | | | | | | |
Common stock options | — | | | — | | | — | | | 130,221 | |
Restricted stock | — | | | — | | | — | | | 45,739 | |
Denominator for diluted earnings per share -- adjusted weighted-average shares assumed conversion | 14,051,794 | | | 13,993,438 | | | 14,041,224 | | | 14,278,331 | |
| | | | | | | |
Earnings (loss) per share: | | | | | | | |
Basic earnings (loss) per share | $ | (2.03) | | | $ | (0.54) | | | $ | (1.77) | | | $ | 1.77 | |
Diluted earnings (loss) per share | $ | (2.03) | | | $ | (0.54) | | | $ | (1.77) | | | $ | 1.75 | |
The following weighted-average shares were not included in the computation of diluted earnings per share as the effect of their inclusion would have been anti-dilutive:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Stock options to purchase common stock | 115,686 | | | 49,158 | | | 123,534 | | | 53,550 | |
Purchases of Equity Securities
On March 8, 2021, the Board of Directors authorized a stock repurchase program under which the Company could repurchase up to $75.0 million in aggregate value of the Company’s Common Stock through December 31, 2021, unless terminated earlier. Through September 30, 2021, 269,407 shares were repurchased under the program for $39.0 million. The program ended December 31, 2021. No repurchase program was authorized as of September 30, 2022.
12. Income Taxes
The Company’s effective tax rate for the three months ended September 30, 2022 and 2021 was a tax benefit of 33.9% and 42.3%, respectively. The effective tax rate for the nine months ended September 30, 2022 and 2021 was a tax provision of 21.7% and 24.2%, respectively. For the three and nine months ended September 30, 2022 and 2021, the effective tax rates were higher than the U.S. federal statutory rate of 21.0% primarily due to state income taxes and nondeductible expenses.
13. Commitments and Contingencies
Legal proceedings
In the ordinary course of business, the Company may from time to time be or become involved in various lawsuits. Unless otherwise expressly stated, management does not expect any ongoing lawsuits involving the Company to have a material impact on the business, liquidity, financial condition, or results of operations of the Company.
On August 6, 2020, LogistiCare Solutions, LLC, the Company’s subsidiary now known as ModivCare Solutions, LLC (“ModivCare Solutions”), was served with a putative class action lawsuit filed against it by Mohamed Farah, the owner of transportation provider Dalmar Transportation, in the Western District of Missouri, seeking to represent all non-employee transportation providers contracted with ModivCare Solutions. The lawsuit alleges claims under the Fair Labor Standards Act of 1938, as amended (the “FLSA”), and the Missouri Minimum Wage Act, and asserts that all transportation providers to ModivCare Solutions in the putative class should be considered ModivCare Solutions’ employees rather than independent contractors. On June 6, 2021, the Court conditionally certified as the putative class all current and former In Network Transportation Providers who, individually or through their companies, were issued 1099 payments from ModivCare Solutions for providing non-emergency medical transportation services for ModivCare Solutions for the previous three years. Notice of the proposed collective class was issued on October 5, 2021, and potential members of the class had until January 3, 2022 to opt-in. Plaintiff moved for class certification on August 15, 2022, and ModivCare Solutions filed an opposition to class certification on September 6, 2022. ModivCare Solutions believes it will be able to successfully oppose class certification of this action after discovery and in any event intends to defend itself vigorously with respect to this matter, believes that it is and has been in compliance in all material respects with the laws and regulations regarding the characterization of the transportation providers as independent contractors, and does not believe that the ultimate outcome of this matter will have a material adverse effect on the Company’s business, liquidity, financial condition or results of operations.
On January 21, 2019, the United States District Court for the Southern District of Ohio unsealed a qui tam complaint, filed in December 2015, against Mobile Care Group, Inc., Mobile Care Group of Ohio, LLC, Mobile Care EMS & Transport, Inc. (collectively, the “Mobile Care Entities”) and ModivCare Solutions by Brandee White, Laura Cunningham, and Jeffery Wisier (the “Relators”) alleging that the Mobile Care Entities and indirectly ModivCare Solutions violated the federal False Claims Act by presenting claims for payment to government healthcare programs knowing that the prerequisites for such claims to be paid had not been met. The Relators sought to recover damages, fees and costs under the federal False Claims Act, including treble damages, civil penalties and attorneys’ fees. None of the Relators were employed by ModivCare Solutions. The federal government declined to intervene against ModivCare Solutions. ModivCare Solutions filed a motion to dismiss the Complaint on April 22, 2019, but such motion was denied on October 26, 2021. ModivCare Solutions filed an interlocutory appeal of this ruling with the Sixth Circuit Court of Appeals which was subsequently denied. The Relators and Modivcare tentatively agreed to settle the Relators' substantive claims in September 2022 and continue discussions concerning the Relators' counsel’s attorney fees. The settlement will not have a material adverse effect on the Company’s business, liquidity, financial condition or results of operations.
In 2017, one of our Personal Care segment subsidiaries, All Metro Home Care Services of New York, Inc. d/b/a All Metro Health Care (“All Metro”), received a class action lawsuit in state court claiming that, among other things, it failed to properly pay live-in caregivers who stay in patients’ homes for 24 hours per day (“live-ins”). The Company currently pays live-ins for 13 hours per day as supported through a written opinion letter from the New York State Department of Labor (“NYSDOL”). A similar case involving this issue has been heard by the New York Court of Appeals (New York’s highest court), which on March 26, 2019, issued a ruling reversing earlier lower courts’ decisions that an employer must pay live-ins for 24 hours. The Court of Appeals agreed with the NYSDOL’s interpretation to pay live-ins 13 hours instead of 24 hours if certain conditions were being met. If the class action lawsuit on this matter is allowed to proceed, and is successful, All Metro may be liable for back wages and litigated damages going back to November 2011. All Metro filed its motion to oppose class certification of this matter and the matter was heard on June 23, 2022. A ruling should be issued by end-of-year. All Metro intends to defend itself vigorously with respect to this matter, believes that it is and has been in compliance in all material respects with the laws and regulations covering pay for live-in caregivers, and does not believe in any event that the ultimate outcome of this matter will have a material adverse effect on the Company’s business, liquidity, financial condition or results of operations.
14. Subsequent Events
The Company has evaluated events and transactions subsequent to the Company's unaudited condensed consolidated balance sheet date and prior to the date of issuance. Based on this evaluation, the Company is not aware of any events or transactions that occurred subsequent to the unaudited condensed consolidated balance sheet date and prior to the date of issuance that would require recognition or disclosure in these financial statements.