Notes to the Unaudited Condensed Consolidated Financial Statements
September 30, 2020
1. Organization and Basis of Presentation
Description of Business
The Providence Service Corporation (“we”, the “Company” or “Providence”) is the largest benefits manager of non-emergency medical transportation (“NEMT” or "NET") programs for state governments and managed care organizations (“MCOs”) in the United States (“U.S.”) through the wholly-owned subsidiary, LogistiCare Solutions, LLC, a Delaware limited liability company and the brands “LogistiCare” and “Circulation”. The technology-enabled operating model includes core competencies in risk underwriting, call center management, network credentialing, vendor payment management and non-emergency medical transport management. Through this model, the Company provides a suite of integrated supportive care solutions for our payor customers and end-users, focused on addressing the social determinates of health (“SDoH”) and enabling greater access to healthcare and improved outcomes.
The Company also own a 43.6% minority investment in CCHN Group Holdings, Inc. and its subsidiaries (“Matrix”). Matrix is a nationwide provider of a broad array of assessment and care management services that improve health outcomes for individuals and financial performance for health plans. Matrix’s national network of community-based clinicians delivers in-home and on-site services while its fleet of mobile health clinics provides community-based care with advanced diagnostic capabilities. In 2020, Matrix launched its Employee Health and Wellness solution focused on improving employee health with worksite solutions that reinforce business resilience and safe return-to-work outcomes. These solutions combined with Matrix’s advanced engagement approach, help health plans manage risks, close care gaps and connect members to care.
In 2018, the Company acquired Circulation to provide additional technological improvements through their digital transportation platform. Circulation’s technology allows for real time notifications to members on their mobile devices, integration with a wide variety of ATMS and transportation network companies, real time ride tracking, network management and analytics.
During 2019, the Company consolidated all activities and functions performed at the corporate holding company level into its NET Services segment (“Organizational Consolidation”). As a result of the Organizational Consolidation, the Company incurred restructuring and related organization costs. See Note 8, Restructuring and Related Reorganization Costs, for further information.
On May 6, 2020, LogistiCare entered into an Equity Purchase Agreement (the “Purchase Agreement”) with Specialty Benefits, LLC., a Delaware corporation (the “Seller”), National MedTrans, LLC, a New York limited liability company (“NMT”) and for limited purposes therein, United Healthcare Services, Inc., a Minnesota corporation. NMT services contractual relationships to provide non-emergency medical transportation. Pursuant to the terms of the Purchase Agreement, LogistiCare acquired all of the outstanding capital stock of NMT. See Note 15, Acquisitions, for further information.
Basis of Presentation
The Company follows accounting standards set 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 authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. References to GAAP issued by the FASB in these footnotes 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.
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, 2020 are not
necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020. 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 condensed consolidated financial statements.
The condensed consolidated balance sheet at December 31, 2019 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, 2019.
The Company accounts for its investment in Matrix using the equity method, as the Company does not control the decision-making process or business management practices of Matrix. While the Company has access to certain information and performs certain procedures to review the reasonableness of information, the Company relies on the management of Matrix to provide accurate financial information prepared in accordance with GAAP. The Company receives audit reports relating to such financial information from Matrix’s independent auditors on an annual basis. The Company is not aware of any errors in or possible misstatements of the financial information provided by Matrix that would have a material effect on the Company’s condensed consolidated financial statements. See Note 5, Equity Investment, for further information.
Uncertainties due to COVID-19
In December 2019, an outbreak of a new strain of a coronavirus causing a coronavirus disease ("COVID-19"), began in Wuhan, Hubei Province, China. In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. COVID-19, as well as measures taken by governmental authorities and private actors to limit the spread of this virus, has and is likely to continue to interfere with the ability of the Company's employees, suppliers, transportation providers and other business providers to carry out their assigned tasks at ordinary levels of performance relative to the conduct of the Company’s business which may cause the Company to materially curtail certain business operations. While the Company is monitoring the impact of COVID-19 on its business and financial results, at this time the Company is unable to accurately predict the extent to which the COVID-19 pandemic impacts its business, operations and financial results.
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which includes modifications to the limitation on business interest expense and net operating loss provisions, and provides a delay in the payment of employer federal payroll taxes during 2020 after the date of enactment. Due to the favorable impact of the CARES Act on the Company’s 2018 U.S. net operating losses ("NOLs"), the effective tax rate of 17.6% was lower than the U.S. federal statutory rate of 21.0% for the nine months ended September 30, 2020. The 27.0% effective tax rate for the three months ended September 30, 2020 was not impacted by the CARES Act. See Note 12, Income Taxes, for further information.
The accompanying unaudited condensed consolidated financial statements reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and reported amounts of revenue and expenses. It is possible that the Company's assumptions and estimates may materially change due to these uncertainties.
Reclassifications
During the nine months ended September 30, 2020, the Company has separately classified the reduction of right-of-use assets in its unaudited condensed consolidated statement of cash flows and conformed the prior period.
2. Significant Accounting Policies and Recent Accounting Pronouncements
The Company adopted the following accounting pronouncements during the nine months ended September 30, 2020:
In June 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”). The amendments in ASU 2016-13 superseded much of the existing guidance for reporting credit losses for assets held at amortized cost basis and available for sale debt securities. The amendments in ASU 2016-13 affected loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The Company adopted ASU 2016-13 on January 1, 2020. As of September 30, 2020, this guidance did not have a material
impact on the unaudited condensed consolidated financial statements or disclosures nor is it expected to have a material impact in the future.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”) which removed, modified, and added additional disclosures related to fair value measurements. The Company adopted ASU 2018-13 on January 1, 2020. As of September 30, 2020, this guidance did not have an impact on the unaudited condensed consolidated financial statements or disclosures nor is it expected to have a material impact in the future.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (“ASU 2018-15”). ASU 2018-15 aligned 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. The Company elected to apply the prospective transition approach and therefore applied the transition requirements to any eligible costs incurred after adoption. The Company adopted ASU 2018-15 on January 1, 2020. As of September 30, 2020, the Company has not incurred any material implementation costs associated with new service contracts since the date of adoption.
In February 2020, the FASB issued ASU No. 2020-02, Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) ("ASU 2020-02"). ASU 2020-02 provides interpretive guidance on methodologies and supporting documentation for measuring credit losses, with a focus on the documentation the SEC would normally expect registrants engaged in lending transactions to prepare and maintain to support estimates of current expected credit losses for loan transactions. The Company adopted ASU 2020-02 on February 6, 2020, as the ASU was effective upon issuance. As of September 30, 2020, this guidance did not have an impact on the unaudited condensed consolidated financial statements or disclosures nor is it expected to have a material impact in the future.
In March 2020, the FASB issued ASU No. 2020-03, Codification Improvements to Financial Instruments ("ASU 2020-03") to make improvements to ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). Public business entities that meet the definition of an SEC filer, excluding eligible smaller reporting companies as defined by the SEC, should adopt ASU 2020-03 during 2020. The Company adopted ASU 2020-03 on April 1, 2020. This guidance did not have an impact on the unaudited condensed consolidated financial statements or disclosures nor is it expected to have a material impact in the future.
Recent accounting pronouncements that the Company has yet to adopt are as follows:
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). The ASU removes certain exceptions to the general principles in ASC 740, Income Taxes, and also clarifies and amends existing guidance to improve consistent application. The ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within that fiscal year, with early adoption permitted. The Company is currently evaluating the impact of this ASU, but does not expect a material impact to the financial statements upon adoption.
In January 2020, the FASB issued ASU 2020-01, Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815 ("ASU 2020-01"), to clarify the interaction among the accounting standards for equity securities, equity method investments and certain derivatives. ASU 2020-01 is effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. The Company is currently evaluating the impact ASU 2020-01 will have on its consolidated financial statements or disclosures; however, does not expect the adoption to have a material impact.
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. The Company is currently evaluating the
impact ASU 2020-04 will have on its consolidated financial statements or disclosures; however, does not expect the adoption to have a material impact.
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40) ("ASU 2020-06") which addresses the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity. The update limits the accounting models for convertible instruments resulting in fewer embedded conversion features being separately recognized from the host contract. Specifically, ASU 2020-06 removes from GAAP the separation models for convertible debt with a cash conversion feature and convertible instruments with a beneficial conversion feature. As a result, after adopting the ASU’s guidance, entities will not separately present in equity an embedded conversion feature in such debt. ASU 2020-06 is effective for public business entities for fiscal years beginning after December 15, 2021, including interim periods therein. The Company is currently evaluating the impact ASU 2020-06 will have on its consolidated financial statements or disclosures.
3. Revenue Recognition
Disaggregation of Revenue
The following table summarizes disaggregated revenue from contracts with customers by contract type (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
2020
|
|
2019
|
State Medicaid agency contracts
|
$
|
154,689
|
|
|
$
|
196,891
|
|
Managed care organization contracts
|
165,930
|
|
|
196,494
|
|
|
|
|
|
Total Service revenue, net
|
$
|
320,619
|
|
|
$
|
393,385
|
|
|
|
|
|
Capitated contracts
|
$
|
277,908
|
|
|
$
|
334,549
|
|
Non-capitated contracts
|
42,711
|
|
|
58,836
|
|
|
|
|
|
Total Service revenue, net
|
$
|
320,619
|
|
|
$
|
393,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
2020
|
|
2019
|
State Medicaid agency contracts
|
$
|
486,964
|
|
|
$
|
551,632
|
|
Managed care organization contracts
|
483,202
|
|
|
573,479
|
|
|
|
|
|
Total Service revenue, net
|
$
|
970,166
|
|
|
$
|
1,125,111
|
|
|
|
|
|
Capitated contracts
|
$
|
832,490
|
|
|
$
|
947,811
|
|
Non-capitated contracts
|
137,676
|
|
|
177,300
|
|
|
|
|
|
Total Service revenue, net
|
$
|
970,166
|
|
|
$
|
1,125,111
|
|
During the three months ended September 30, 2020 and 2019, the Company recognized $0.6 million and $15.3 million of service revenue respectively, from adjustments relating to performance obligations satisfied in previous periods to which the customer agreed. During the nine months ended September 30, 2020 and 2019, the Company recognized $0.4 million and $8.5 million, of service revenue respectively, from contractual adjustments relating to performance obligations satisfied in previous periods to which the customer agreed.
Related Balance Sheet Accounts
The following table provides information about accounts receivable, net (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Accounts receivable
|
$
|
118,101
|
|
|
$
|
124,868
|
|
Reconciliation contracts receivable
|
49,637
|
|
|
61,481
|
|
Allowance for doubtful accounts
|
(2,794)
|
|
|
(5,933)
|
|
Accounts receivable, net
|
$
|
164,944
|
|
|
$
|
180,416
|
|
The following table provides information about other accounts included on the accompanying condensed consolidated balance sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Accrued contract payables, current, included in “Accrued expenses” (1)
|
$
|
88,347
|
|
|
$
|
15,706
|
|
Long-term contract payables (2)
|
50,244
|
|
|
—
|
|
Deferred revenue, current
|
681
|
|
|
227
|
|
Deferred revenue, long-term, included in “Other long-term liabilities”
|
629
|
|
|
758
|
|
During the nine months ended September 30, 2020 and 2019, the Company recognized $0.2 million and $0.4 million of deferred revenue, respectively.
(1) Accrued contract payables, current, primarily represents overpayments and liability reserves on certain profit corridor and reconciliation contracts due to lower activity as a result of COVID-19.
(2) Long-term contract payables primarily represents liability reserves on certain profit corridor and reconciliation contracts due to lower activity as a result of COVID-19 that may be repaid in greater than 12 months.
4. Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
2020
|
|
2019
|
Cash and cash equivalents
|
$
|
183,277
|
|
|
$
|
40,637
|
|
Restricted cash, current
|
3,182
|
|
|
833
|
|
Current assets of discontinued operations
|
357
|
|
|
250
|
|
|
|
|
|
Cash, cash equivalents and restricted cash
|
$
|
186,816
|
|
|
$
|
41,720
|
|
Restricted cash as of September 30, 2020 relates to a security reserve obtained as part of the NMT acquisition. Restricted cash as of September 30, 2019 primarily relates to amounts held in trusts for reinsurance claims losses under the Company’s now dissolved captive insurance operation for historical workers’ compensation, general and professional liability and auto liability reinsurance programs, as well as amounts restricted for withdrawal under our self-insured medical and benefits plans. See Note 15, Acquisition, for further information on the security reserve. The wholly-owned captive insurance subsidiary, Social Services Providers Captive Insurance Company ("SPCIC"), was dissolved during the nine months ended September 30, 2020. Current assets of discontinued operations principally reflect the cash position of WD Services operations in Saudi Arabia, which the Company is winding down. See Note 16, Discontinued Operations, for further information on the WD Services sale.
5. Equity Investment
As of September 30, 2020 and December 31, 2019, the Company owned a 43.6% non-controlling interest in Matrix. Affiliates of Frazier Healthcare Partners hold rights necessary to control the fundamental operations of Matrix. The Company accounts for this investment in Matrix under the equity method of accounting. 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 and the investment basis is recorded as "Equity investment" in the accompanying condensed consolidated balance sheets. During the fourth quarter of the year ended December 31, 2019, Matrix recorded asset impairment charges of $55.1 million. No impairment was recorded during the nine months ended September 30, 2020 or 2019.
The carrying amount of the assets included in the Company’s condensed consolidated balance sheets and the maximum loss exposure related to the Company’s interest in Matrix as of September 30, 2020 and December 31, 2019 totaled $141.3 million and $130.9 million, respectively.
Summary financial information for Matrix on a standalone basis is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Current assets
|
$
|
149,548
|
|
|
$
|
64,221
|
|
Long-term assets
|
618,905
|
|
|
631,007
|
|
Current liabilities
|
65,808
|
|
|
31,256
|
|
Long-term liabilities
|
364,061
|
|
|
351,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
2020
|
|
2019
|
Revenue
|
$
|
140,728
|
|
|
$
|
71,663
|
|
Operating income (loss)
|
35,489
|
|
|
(2,640)
|
|
Net income (loss)
|
21,382
|
|
|
(6,906)
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
2020
|
|
2019
|
Revenue
|
$
|
292,699
|
|
|
$
|
210,807
|
|
Operating income (loss)
|
49,074
|
|
|
(542)
|
|
Net income (loss)
|
23,917
|
|
|
(15,054)
|
|
6. Prepaid Expenses and Other
Prepaid expenses and other were comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Prepaid income taxes
|
$
|
8,105
|
|
|
$
|
2,942
|
|
Prepaid insurance
|
3,277
|
|
|
1,317
|
|
|
|
|
|
Prepaid rent
|
849
|
|
|
868
|
|
|
|
|
|
Other prepaid expenses
|
8,035
|
|
|
5,815
|
|
Total prepaid expenses and other
|
$
|
20,266
|
|
|
$
|
10,942
|
|
7. Accrued Expenses
Accrued expenses consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Accrued compensation and related liabilities
|
$
|
28,470
|
|
|
$
|
8,941
|
|
Accrued contract payables, current
|
88,347
|
|
|
15,706
|
|
|
|
|
|
Accrued cash settled stock-based compensation
|
10,021
|
|
|
3,282
|
|
|
|
|
|
Other accrued expenses
|
16,195
|
|
|
10,804
|
|
Total accrued expenses
|
$
|
143,033
|
|
|
$
|
38,733
|
|
8. Restructuring and Related Reorganization Costs
The Company completed an Organizational Consolidation in 2019 during which it closed the corporate offices in Stamford, Connecticut and Tucson, Arizona. A total of $0.6 million and $3.7 million in restructuring and related costs was incurred during the three and nine months ended September 30, 2019, respectively, related to the Organizational Consolidation. These costs include, respectively, $0.1 million and $2.4 million of retention and personnel costs, $0.0 million and $0.3 million of stock-based compensation expense, $0.0 million and $0.2 million of depreciation and $0.5 million and $0.8 million of other costs, primarily related to recruiting and legal costs. These costs are recorded as “General and administrative expense” and “Depreciation and amortization” in the accompanying condensed consolidated statements of operations.
A total of $13.1 million in restructuring and related costs was incurred on a cumulative basis through December 31, 2019 related to the Organizational Consolidation. These costs include $7.5 million of retention and personnel costs, $2.0 million of stock-based compensation expense, $0.7 million of depreciation and $2.8 million of other costs, primarily related to recruiting and legal costs.
The summary of the liability for restructuring and related reorganization costs is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 1, 2019
|
|
Costs
Incurred
|
|
Cash Payments
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
Retention and personnel liability
|
$
|
1,956
|
|
|
$
|
2,418
|
|
|
$
|
(4,374)
|
|
|
$
|
—
|
|
Other liability
|
398
|
|
|
1,308
|
|
|
(1,706)
|
|
|
—
|
|
Total
|
$
|
2,354
|
|
|
$
|
3,726
|
|
|
$
|
(6,080)
|
|
|
$
|
—
|
|
No restructuring or related costs were incurred related to the Organizational Consolidation during the three and nine months ended September 30, 2020. There was no restructuring liability as of September 30, 2020.
During the nine months ended September 30, 2020, the Company incurred approximately $0.7 million of restructuring expense for the closure of its Las Vegas contact center. The majority of these costs were recorded to “Service expense” and the remainder were recorded to "General and administrative expense".
9. Debt
The Company is a party to the amended and restated credit and guaranty agreement, dated as of August 2, 2013 (as amended, the “Credit Agreement”), with Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, and the other lenders party thereto. On May 6, 2020, the Company entered into the Seventh Amendment to the Amended and Restated Credit and Guaranty Agreement (the “Seventh Amendment”) which, among other things, extended the maturity date to August 1, 2021, expanded the amount available under the revolving credit facility (the “Credit Facility”) from $200.0 million to $225.0 million, and increased the sub-facility for letters of credits from $25.0 million to $40.0 million. Interest on the loans is payable quarterly in arrears. In addition, the Company is obligated to pay a quarterly commitment fee based on a percentage of the unused portion of each lender’s commitment under the 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.
As of September 30, 2020, the Company had no borrowings outstanding on the Credit Facility; however, had letters of credit outstanding in the amount of $16.9 million. The Company’s available credit under the Credit Facility was $208.1 million. Under the Credit Agreement, the Company has an option to request an increase in the amount of the revolving credit facility from time to time (on substantially the same terms as apply to the existing facilities) in an aggregate amount of up to $75.0 million with either additional commitments from lenders under the Credit Agreement at such time or new commitments from financial institutions acceptable to the administrative agent in its reasonable discretion, so long as no default or event of default exists at the time of any such increase. 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 Credit Facility.
On October 16, 2020, the Company entered into the Eighth Amendment to the Amended and Restated Credit and Guaranty Agreement (the “Eighth Amendment”), which among other things, amended the Credit Facility to permit the incurrence of additional debt to finance the acquisition (the "Simplura Acquisition") of OEP AM, Inc., a Delaware corporation, doing business as Simplura Health Group (“Simplura” and, together with its subsidiaries, the “Simplura Group”), permit borrowing under the Credit Facility to partially fund the Simplura Acquisition with limited conditions to such borrowing, increase the top interest rate margin that may apply to loans thereunder, and revise our permitted ratio of EBITDA to indebtedness. In addition, the Eighth Amendment extended the maturity date to August 2, 2023. See Note 18, Subsequent Events, for further information on the acquisition.
Effective as of the Eighth Amendment, interest on the outstanding principal amount of loans under the Credit Facility accrues, at the Company’s election, at a per annum rate equal to the greater of either LIBOR or 1.00%, plus an applicable margin, or the base rate as defined in the agreement plus an applicable margin. The applicable margin ranges from 2.25% to 3.50% in the case of LIBOR loans and 1.25% to 2.50% in the case of the base rate loans, in each case, based on the Company’s consolidated leverage ratio as defined in the credit agreement that governs our Credit Facility. The commitment fee and letter of credit fee ranges from 0.35% to 0.50% and 2.25% to 3.50%, respectively, in each case based on the Company’s consolidated leverage ratio as defined in the credit agreement that governs our Credit Facility.
10. Stock-Based Compensation and Similar Arrangements
The Company provides stock-based compensation to employees and non-employee directors 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.
The following table reflects the amount of stock-based compensation, for share settled grants or awards, recorded in each financial statement line item for the three and nine months ended September 30, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Service expense
|
$
|
55
|
|
|
$
|
162
|
|
|
$
|
174
|
|
|
$
|
488
|
|
General and administrative expense
|
1,122
|
|
|
693
|
|
|
2,775
|
|
|
3,759
|
|
Total stock-based compensation
|
$
|
1,177
|
|
|
$
|
855
|
|
|
$
|
2,949
|
|
|
$
|
4,247
|
|
At September 30, 2020, the Company had 358,953 stock options outstanding with a weighted-average exercise price of $63.02. The Company also had 55,469 unvested restricted stock awards ("RSAs") and 46,021 unvested restricted stock units ("RSUs") outstanding at September 30, 2020 with a weighted-average grant date fair value of $62.78 and $63.17, respectively.
Cash-Settled Awards
The Company also grants stock equivalent unit awards (“SEUs”) and stock option equivalent units that are cash-settled awards and are not included as part of the 2006 Plan. During the three months ended September 30, 2020 and 2019, the Company recorded expense of $2.9 million and $0.4 million for cash-settled awards, respectively. During the nine months ended September 30, 2020 and 2019, the Company recorded expense of $6.9 million and income of $0.2 million for cash-settled awards, respectively. The expense and benefit for cash-settled awards is included as “General and administrative expense” in the accompanying condensed consolidated statements of operations. As the instruments are accounted for as liability awards, the income or expense recorded for the three and nine months ended September 30, 2020 and 2019 are attributable to the Company’s change in stock price from the previous reporting period. The liability for unexercised cash-settled share-based payment awards of $10.0 million and $3.3 million at September 30, 2020 and December 31, 2019, respectively, is reflected in “Accrued expenses” in the condensed consolidated balance sheets. At September 30, 2020, the Company had 3,862 SEUs and 200,000 stock option equivalent units outstanding.
Long-Term Incentive Plans
In connection with the acquisition of Circulation during 2018, the Company established a management incentive plan (“MIP”) intended to motivate key employees of Circulation. During the three months ended March 31, 2019, the MIP was amended to remove the previously included performance requirements and to provide for a total fixed payment of $12.0 million to the group of MIP participants. During the year ended December 31, 2019, the MIP was further amended to a total fixed payment of $2.7 million. The payout date is within 30 days following the finalization of the Company’s audited financial statements for the fiscal year ending December 31, 2021 and is subject to the participant remaining employed by the Company through December 31, 2021, except for certain termination scenarios. As of September 30, 2020 and December 31, 2019, the Company has accrued $1.8 million and $1.1 million, respectively, related to the MIP, which is primarily reflected in “Other long-term liabilities” in the condensed consolidated balance sheets.
Preferred Stock Conversion
On June 8, 2020, the Company entered into a Preferred Stock Conversion Agreement (the “Conversion Agreement”) with Coliseum Capital Partners, L.P. and certain funds and accounts managed by Coliseum Capital Management, LLC (collectively, the “Holders”), pursuant to which, among other things, (a) the Company agreed to purchase 369,120 shares of Series A Convertible Preferred Stock, par value $0.001 per share, held by the Holders in the aggregate, in exchange for (i) $209.88 in cash per share of Series A Preferred Stock, plus (ii) a cash amount equal to accrued but unpaid dividends on such shares of Series A Preferred Stock through the day prior to June 11, 2020, and (b) the Holders converted 369,120 shares of Series A Preferred Stock into (i) 2.5075 shares of Common Stock of the Company for each share of Series A Preferred Stock, plus (ii) a cash payment equal to accrued but unpaid dividends on such shares of Series A Preferred Stock through the day prior to June 11, 2020, plus (iii) a cash payment of $8.82 per share of Series A Preferred Stock. The Conversion Agreement was considered to be an induced conversion in which a premium consideration was provided by the Company to Holders of the Series A Preferred Stock.
On September 3, 2020, the Company elected to effect the conversion (the “Conversion”) of all of the outstanding Series A Convertible Preferred Stock. In accordance with the Preferred Stock Conversion Agreement dated June 8, 2020, the Company repurchased 27,509 shares of Series A Preferred Stock from the Holders for (i) a cash amount equal to $209.88 per share of Series A Preferred Stock, plus (ii) a cash amount equal to accrued but unpaid dividends on such shares through the day
prior to the Conversion. In connection with the Conversion, all remaining outstanding shares of Series A Preferred Stock were converted into Common Stock at the conversion rate of 2.5075 shares of Common Stock for each share of Series A Preferred Stock and cash-in-lieu of fractional shares.
The following table summarizes the convertible preferred stock activity in 2020 (in thousands, except share count):
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Value
|
|
Share Count
|
Balance at January 1, 2020
|
$
|
77,120
|
|
|
798,788
|
|
Conversion to common stock
|
(572)
|
|
|
(5,666)
|
|
Conversion to common stock pursuant to Conversion Agreement
|
(37,256)
|
|
|
(369,120)
|
|
Preferred stock redemption pursuant to Conversion Agreement
|
(37,256)
|
|
|
(369,120)
|
|
Reduction of unamortized issuance cost
|
3,263
|
|
|
—
|
|
Balance at June 30, 2020
|
$
|
5,299
|
|
|
54,882
|
|
Conversion to common stock
|
(2,763)
|
|
|
(27,373)
|
|
Preferred stock redemption pursuant to Conversion Agreement
|
(2,777)
|
|
|
(27,509)
|
|
Reduction of unamortized issuance cost
|
241
|
|
|
—
|
|
Balance at September 30, 2020
|
$
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with ASC 260, Earnings Per Share, retained earnings was reduced by the excess of the fair value of the consideration transferred over the carrying amount of the shares surrendered. The impact to retained earnings of the excess consideration transferred, including the direct costs incurred, and write-off of any unamortized issuance costs was $52.1 million as of September 30, 2020.
As of September 30, 2020, there were no outstanding shares of convertible preferred stock.
11. Earnings Per Share
The following table details the computation of basic and diluted earnings per share (in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Numerator:
|
|
|
|
|
|
|
|
Net income
|
$
|
38,805
|
|
|
$
|
8,154
|
|
|
$
|
91,901
|
|
|
$
|
7,024
|
|
Dividends on convertible preferred stock outstanding
|
—
|
|
|
(1,109)
|
|
|
(1,171)
|
|
|
(3,295)
|
|
Dividends paid pursuant to the Conversion Agreement
|
(27)
|
|
|
—
|
|
|
(817)
|
|
|
—
|
|
Consideration paid in excess of preferred cost basis pursuant to the Conversion Agreement
|
(3,186)
|
|
|
—
|
|
|
(52,137)
|
|
|
—
|
|
Income allocated to participating securities
|
(246)
|
|
|
(941)
|
|
|
(3,213)
|
|
|
(499)
|
|
Net income available to common stockholders
|
$
|
35,346
|
|
|
$
|
6,104
|
|
|
$
|
34,563
|
|
|
$
|
3,230
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
35,461
|
|
|
$
|
6,473
|
|
|
$
|
35,181
|
|
|
$
|
2,762
|
|
Discontinued operations
|
(115)
|
|
|
(369)
|
|
|
(618)
|
|
|
468
|
|
Net income available to common stockholders
|
$
|
35,346
|
|
|
$
|
6,104
|
|
|
$
|
34,563
|
|
|
$
|
3,230
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Denominator for basic earnings per share -- weighted-average shares
|
14,026,039
|
|
|
12,993,934
|
|
|
13,367,605
|
|
|
12,956,222
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Common stock options
|
61,312
|
|
|
10,515
|
|
|
15,730
|
|
|
21,376
|
|
Restricted stock
|
46,553
|
|
|
—
|
|
|
32,009
|
|
|
—
|
|
Denominator for diluted earnings per share -- adjusted weighted-average shares assumed conversion
|
14,133,904
|
|
|
13,004,449
|
|
|
13,415,344
|
|
|
12,977,598
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
2.53
|
|
|
$
|
0.50
|
|
|
$
|
2.63
|
|
|
$
|
0.21
|
|
Discontinued operations
|
(0.01)
|
|
|
(0.03)
|
|
|
(0.05)
|
|
|
0.04
|
|
Basic earnings per share
|
$
|
2.52
|
|
|
$
|
0.47
|
|
|
$
|
2.58
|
|
|
$
|
0.25
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
2.51
|
|
|
$
|
0.50
|
|
|
$
|
2.62
|
|
|
$
|
0.21
|
|
Discontinued operations
|
(0.01)
|
|
|
(0.03)
|
|
|
(0.05)
|
|
|
0.04
|
|
Diluted earnings per share
|
$
|
2.50
|
|
|
$
|
0.47
|
|
|
$
|
2.57
|
|
|
$
|
0.25
|
|
Income allocated to participating securities is calculated by allocating a portion of net income attributable to Providence, less dividends on convertible stock, to the convertible preferred stockholders on a pro-rata, as converted basis; however, the convertible preferred stockholders are not allocated losses.
In accordance with ASC 260, Earnings Per Share, and as related to the Conversion Agreement discussed in Note 10, Stock-Based Compensation and Similar Arrangements, the numerator was adjusted by the excess of the fair value of consideration paid over the carrying amount of the shares surrendered, net of issuance costs.
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,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Stock options to purchase common stock
|
3,481
|
|
|
420,846
|
|
|
170,076
|
|
|
499,611
|
|
Convertible preferred stock
|
38,851
|
|
|
799,969
|
|
|
487,576
|
|
|
800,983
|
|
12. Income Taxes
The Company’s effective tax rate for continuing operations for the three and nine months ended September 30, 2020 was 27.0% and 17.6%, respectively. The effective tax rate for continuing operations for the three and nine months ended September 30, 2019 was 37.3% and 37.8%, respectively. For the nine months ended September 30, 2020, the effective tax rate was lower than the U.S. federal statutory rate of 21.0% primarily due to the favorable impact of the CARES Act on the Company’s 2018 U.S. net operating losses ("NOLs"). For the nine months ended September 30, 2019, the effective tax rate was higher than the U.S. federal statutory rate of 21.0% primarily due to state income taxes and certain non-deductible expenses.
During 2019, the Company received refunds from the Internal Revenue Service (“IRS”) totaling $30.8 million resulting from the loss on the 2018 workforce development segment sale. As a result of the size of the refunds received, in October 2019, the IRS commenced a mandatory review by a joint committee of Congress. The review is still ongoing.
The 2017 Tax Reform Act reduced the U.S. corporate income tax rate from 35% to 21% and provided that U.S. NOLs incurred after 2017 could only be carried forward to offset future taxable income. Pursuant to the CARES Act, which was enacted on March 27, 2020, the Company carried its 2018 NOL back five years. As a result, during the nine months ended September 30, 2020, the Company recorded a $27.3 million receivable for the 2018 U.S. NOL carryback, and a $11.0 million tax benefit from the favorable carryback tax rate of 35% compared to a carryforward tax rate of 21%. The Company also recorded an additional income tax payable of $3.5 million for 2019 as a result of the 2018 NOL being carried back instead of carried forward.
As of September 30, 2020, the Company has received $17.0 million of the $27.3 million receivable for the 2018 U.S. NOL carryback. It is anticipated that the remaining $10.3 million refund will be received by year end. This $27.3 million is also subject to the ongoing IRS mandatory review.
As discussed in Note 16, Discontinued Operations, the Company transferred its operations in Saudi Arabia to its contractual counterparties on January 1, 2019. In connection with the dissolution of its Saudi Arabia legal entity, the Company is protesting withholding tax and income tax assessments for the years 2012 through 2017. The Company does not believe the ultimate determination of the assessments will have a material adverse effect on its financial condition or results of discontinued operations.
13. Commitments and Contingencies
Legal proceedings
In the ordinary course of business, the Company is a party to various lawsuits. Management does not expect these lawsuits to have a material impact on the liquidity, results of operations, or financial condition of the Company.
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. and LogistiCare by Brandee White, Laura Cunningham, and Jeffery Wisier (the “Relators”) alleging violations of 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 seek to recover damages, fees and costs under the federal False Claims Act including treble damages, civil penalties and attorneys’ fees. In addition, the Relators seek reinstatement to their jobs with the Mobile Care entities. None of the Relators were employed by LogistiCare. Prior to January 21, 2019, LogistiCare had no knowledge of the complaint. The federal government has declined to intervene against LogistiCare. The Company filed a motion to dismiss the Complaint on April 22, 2019. Although the outcome of such matter is inherently uncertain and may be materially adverse, based on current information, the Company does not expect the case to have a material adverse effect on our business, financial condition or results of operations.
On April 1, 2019, a purported class action was filed against LogistiCare in Texas alleging that the Company’s policy with respect to timekeeping for hourly employees constituted violations of the federal Fair Labor Standards Act (“FLSA”), as well as wage and hour laws in South Carolina and Texas. Plaintiffs filed a motion for conditional certification on a nationwide basis, which LogistiCare contested. The court granted the conditional certification motion on January 22, 2020 and the Company filed an appeal of the conditional certification order. If this case goes forward as either a class action or individual claims, the Company plans to vigorously contest the allegations on the merits as the plaintiffs have mischaracterized the method by which employees clock into work. At this stage of the litigation, it is impossible to predict with any certainty whether plaintiffs will prevail on their claims, or what they might recover.
On June 10, 2020, Gateway Insurance Company (“Gateway”), doing business in California as Alano Insurance Company, a subsidiary of Atlas Financial Holdings, Inc., entered liquidation. On August 11, 2020, American Service Insurance Company and American Country Insurance Company, subsidiaries of Atlas Financial, also entered liquidation. Gateway, American Service and American Country previously insured many of LogistiCare’s subcontracted transportation providers. LogistiCare is listed as an additional insured on these policies. LogistiCare currently has 26 active lawsuits involving Gateway, American Country Insurance Company and American Service Insurance Company. As a result of the liquidation, these suits will now be taken over by the state guaranty fund in which the suit is pending. LogistiCare will likely lose its additional insured status and be required to defend itself under its own insurance policies, which involve a self-insured retention. All of the lawsuits are currently stayed for a time period varying by state in order for the guaranty fund to take over the case. The Company has accrued reserves related to these lawsuits in accordance with ASC 450, Contingencies.
Indemnifications
The Company provided certain standard indemnifications in connection with the sale of the Human Services segment to Molina Healthcare Inc. (“Molina”) effective November 1, 2015. Certain representations made by the Company in the related Membership Interest Purchase Agreement (the “Molina Purchase Agreement”) including tax representations, survive until the expiration of applicable statutes of limitation. Molina and the Company entered into a settlement agreement regarding indemnification claims by Molina with respect to Rodriguez v. Providence Community Corrections (the “Rodriguez Litigation”), a complaint filed in the District Court for the Middle District of Tennessee, Nashville Division, against Providence Community Corrections, Inc. (“PCC”), an entity sold under the Molina Purchase Agreement. In 2019, the Company recovered a portion of the settlement through insurance coverage.
The Company has provided certain standard indemnifications in connection with its Matrix stock subscription transaction whereby Mercury Fortuna Buyer, LLC (“Subscriber”), Providence and Matrix entered into a stock subscription agreement (the “Subscription Agreement”), dated August 28, 2016. The representations and warranties made by the Company in the Subscription Agreement ended January 19, 2018; however, certain fundamental representations survived through October 19, 2019. The covenants and agreements of the parties to be performed prior to the closing ended January 19, 2018, and all other covenants and agreements survived until the expiration of the applicable statute of limitations in the event of a breach, or for such lesser periods specified therein. The Company is not aware of any indemnification liabilities with respect to Matrix that require accrual at September 30, 2020.
The Company has provided certain standard indemnifications in connection with the sale of substantially all of its WD Services segment to Advanced Personnel Management Global Pty Ltd of Australia (“APM”), which closed on December 21, 2018. The non-title warranties made by the Company in the related Share Purchase Agreement survive for 18 months following the closing date, and the title-related warranties and tax warranties survive five years from the closing date (i.e., December 21, 2023). The Company is not aware of any indemnification liabilities with respect to the former WD Services segment that require accrual at September 30, 2020.
On May 9, 2018, the Company entered into a registration indemnification agreement with Coliseum Capital Partners, L.P., Coliseum Capital Partners II, L.P., Blackwell Partners, LLC - Series A and Coliseum Capital Co-Invest, L.P. (collectively, the “Coliseum Stockholders”), who as of September 30, 2020 collectively held approximately 12.7% of the Company’s outstanding common stock, pursuant to which the Company has agreed to indemnify the Coliseum Stockholders, and the Coliseum Stockholders have agreed to indemnify the Company, against certain matters relating to the registration of the selling stockholders’ securities for resale under the Securities Act of 1933, as amended (the “Securities Act”).
Significant Lease Not Yet Commenced
In August 2020, the Company entered into an 11-1/2 year operating lease agreement for new corporate office space in Denver, Colorado. The lease is expected to commence when construction of the asset is completed in the second quarter of 2021. Total estimated base rent payments over the life of the lease are approximately $29.7 million
14. Transactions with Related Parties
As discussed in Note 10, Stock-Based Compensation and Similar Arrangements, on June 8, 2020, the Company entered into a Preferred Stock Conversion Agreement with Coliseum Capital Partners, L.P. and certain funds and accounts managed by Coliseum Capital Management, LLC. Pursuant to the Conversion Agreement, the Company purchased 369,120 shares of Series A Convertible Preferred Stock, par value $0.001 per share, in exchange for $209.88 in cash per share of Series A Preferred Stock, plus a cash amount equal to accrued but unpaid dividends on such shares of Series A Preferred Stock through the day prior to June 11, 2020. Further, the Holders converted 369,120 shares of Series A Preferred Stock into 925,567 shares of common stock, a cash payment equal to accrued but unpaid dividends on such shares of Series A Preferred Stock through June 11, 2020, and a cash payment of $8.82 per share of Series A Preferred Stock. The amount of accrued dividends paid pursuant to the Conversion Agreement was equal to $0.8 million.
Further, on September 3, 2020, the Company elected to effect the conversion (the “Conversion”) of all of the outstanding Series A Convertible Preferred Stock. In accordance with the Preferred Stock Conversion Agreement dated June 8, 2020 (as amended), immediately prior to the Conversion, the Company repurchased 27,509 shares of Series A Preferred Stock from the Holders for a cash amount equal to $209.88 per share of Series A Preferred Stock and a cash amount equal to accrued but unpaid dividends on such shares through the day prior to the Conversion.
Convertible preferred stock dividends earned by the Coliseum Stockholders during the three months ended September 30, 2020 and 2019 totaled $0.03 million and $1.1 million, respectively, including accrued dividends paid pursuant to the Conversion Agreement. Convertible preferred stock dividends earned by the Coliseum Stockholders during the nine months ended September 30, 2020 and 2019 totaled $1.9 million and $3.2 million, respectively, including accrued dividends paid pursuant to the Conversion Agreement.
15. Acquisitions
On May 6, 2020, LogistiCare entered into an equity purchase agreement with the Seller and NMT, acquiring all of the outstanding capital stock. NMT’s contractual relationships, which are approximately 85% capitated, provide more than five million trips annually to approximately two million members on behalf of state Medicaid agencies and MCOs across twelve states. NMT was acquired for approximately $80.0 million in an all cash transaction.
The transaction was accounted for as an asset acquisition in accordance with ASC 805, Business Combinations. The Company obtained an analysis from an independent third-party valuation specialist to assist in determining the purchase price allocation. The Company incurred transaction costs for the acquisition of $0.8 million during the nine months ended September 30, 2020. These costs were capitalized as a component of the purchase price.
The consideration paid for the acquisition is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Value
|
Consideration paid
|
|
$
|
80,000
|
|
Transaction costs
|
|
774
|
|
Restricted cash received
|
|
(3,109)
|
|
Net consideration
|
|
$
|
77,665
|
|
Restricted cash acquired was related to a security reserve for a contract. No liabilities were assumed.
The fair value allocation of the net consideration is as follows (in thousands, except useful lives):
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
Useful Life (yrs)
|
Value
|
Customer relationships
|
Amortizable
|
6
|
$
|
75,514
|
|
Trade names and trademarks
|
Amortizable
|
3
|
2,151
|
|
|
|
|
$
|
77,665
|
|
16. Discontinued Operations
On December 21, 2018, the Company completed the sale of substantially all of the operating subsidiaries of its WD Services segment to APM and APM UK Holdings Limited, an affiliate of APM, except for the segment’s employment services operations in Saudi Arabia. The Company’s contractual counterparties in Saudi Arabia, including an entity owned by the Saudi Arabian government, assumed these operations beginning January 1, 2019. The Company is winding down its Saudi Arabian entity.
On June 11, 2018, the Company entered into a Share Purchase Agreement to sell the shares of Ingeus France, its WD Services operation in France, for a de minimis amount. The sale was effective on July 17, 2018.
On November 1, 2015, the Company completed the sale of its Human Services segment. During the three and nine months ended September 30, 2020 and 2019, the Company recorded additional expenses related to the Human Services segment, principally related to previously disclosed legal proceedings and professional fees.
Results of Operations
The following tables summarize the results of operations classified as discontinued operations for the three and nine months ended September 30, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2020
|
|
Human Services
Segment
|
|
WD Services
Segment
|
|
Total Discontinued
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
General and administrative (income) expense
|
$
|
(7)
|
|
|
$
|
160
|
|
|
$
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating (income) expense
|
(7)
|
|
|
160
|
|
|
153
|
|
Operating income (loss)
|
7
|
|
|
(160)
|
|
|
(153)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations before income taxes
|
7
|
|
|
(160)
|
|
|
(153)
|
|
|
|
|
|
|
|
(Provision) benefit for income taxes
|
(2)
|
|
|
40
|
|
|
38
|
|
Income (loss) from discontinued operations, net of tax
|
$
|
5
|
|
|
$
|
(120)
|
|
|
$
|
(115)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2020
|
|
Human Services Segment
|
|
WD Services Segment
|
|
Total Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
General and administrative expense
|
$
|
327
|
|
|
$
|
470
|
|
|
$
|
797
|
|
Total operating expense
|
327
|
|
|
470
|
|
|
797
|
|
Operating loss
|
(327)
|
|
|
(470)
|
|
|
(797)
|
|
|
|
|
|
|
|
Loss from discontinued operations before income taxes
|
(327)
|
|
|
(470)
|
|
|
(797)
|
|
Benefit for income taxes
|
62
|
|
|
117
|
|
|
179
|
|
Loss from discontinued operations, net of tax
|
$
|
(265)
|
|
|
$
|
(353)
|
|
|
$
|
(618)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2019
|
|
Human Services
Segment
|
|
WD Services
Segment
|
|
Total Discontinued
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
General and administrative (income) expense
|
$
|
(12)
|
|
|
$
|
480
|
|
|
$
|
468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating (income) loss
|
(12)
|
|
|
480
|
|
|
468
|
|
Operating income (loss)
|
12
|
|
|
(480)
|
|
|
(468)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations before income taxes
|
12
|
|
|
(480)
|
|
|
(468)
|
|
|
|
|
|
|
|
(Provision) benefit for income taxes
|
(3)
|
|
|
45
|
|
|
42
|
|
Income (loss) from discontinued operations, net of tax
|
$
|
9
|
|
|
$
|
(435)
|
|
|
$
|
(426)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2019
|
|
Human Services Segment
|
|
WD Services Segment
|
|
Total Discontinued Operations
|
Operating expenses:
|
|
General and administrative expense (income)
|
$
|
205
|
|
|
$
|
(1,617)
|
|
|
$
|
(1,412)
|
|
Total operating loss (income)
|
205
|
|
|
(1,617)
|
|
|
(1,412)
|
|
Operating (loss) income
|
(205)
|
|
|
1,617
|
|
|
1,412
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations before income taxes
|
(205)
|
|
|
1,617
|
|
|
1,412
|
|
Benefit (provision) for income taxes
|
50
|
|
|
(922)
|
|
|
(872)
|
|
(Loss) income from discontinued operations, net of tax
|
$
|
(155)
|
|
|
$
|
695
|
|
|
$
|
540
|
|
Assets and liabilities
The following table summarizes the carrying amounts of the major classes of assets and liabilities of discontinued operations in the condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019. Amounts represent the accounts of WD Services operations in Saudi Arabia, which were not sold as part of the WD Services sale (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Cash and cash equivalents
|
$
|
357
|
|
|
$
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets of discontinued operations
|
$
|
357
|
|
|
$
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
41
|
|
|
$
|
16
|
|
Accrued expenses
|
1,693
|
|
|
1,414
|
|
|
|
|
|
Current liabilities of discontinued operations
|
$
|
1,734
|
|
|
$
|
1,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Information
There were $0.8 million in cash flow payments related to operating expenses for WD Services and Human Services Segment for the nine months ended September 30, 2020. There were $0.6 million in payments related to income taxes for WD Services Segment for the nine months ended September 30, 2019.
17. Segments
The Company’s chief operating decision maker reviews financial performance and allocates resources based on two segments as follows:
•NET Services - which operates primarily under the brands LogistiCare and Circulation, is the largest manager of NEMT programs for state governments and MCOs in the U.S and includes the Company’s activities for executive, accounting, finance, internal audit, tax, legal, certain strategic and development functions and the Company's now dissolved captive insurance company.
•Matrix Investment ("Matrix") - which consists of a minority investment in Matrix, provides a broad array of assessment and care management services that improve health outcomes for individuals and financial performance for health plans. Matrix’s national network of community-based clinicians delivers in-home and on-site services while its fleet of mobile health clinics provides community-based care with advance diagnostic capabilities.
The following tables set forth certain financial information from continuing operations attributable to the Company’s business segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2020
|
|
NET Services
|
|
|
|
Matrix
|
|
|
|
Total
|
Service revenue, net
|
$
|
320,619
|
|
|
|
|
$
|
—
|
|
|
|
|
$
|
320,619
|
|
Service expense
|
235,543
|
|
|
|
|
—
|
|
|
|
|
235,543
|
|
General and administrative expense
|
34,441
|
|
|
|
|
—
|
|
|
|
|
34,441
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
7,301
|
|
|
|
|
—
|
|
|
|
|
7,301
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
$
|
43,334
|
|
|
|
|
$
|
—
|
|
|
|
|
$
|
43,334
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net income of investee
|
$
|
—
|
|
|
|
|
$
|
10,325
|
|
|
|
|
$
|
10,325
|
|
Investment in equity method investee
|
$
|
—
|
|
|
|
|
$
|
141,292
|
|
|
|
|
$
|
141,292
|
|
Total assets (continuing operations)
|
$
|
649,986
|
|
|
|
|
$
|
141,292
|
|
|
|
|
$
|
791,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2020
|
|
NET Services
|
|
|
|
Matrix
|
|
|
|
Total
|
Service revenue, net
|
$
|
970,166
|
|
|
|
|
$
|
—
|
|
|
|
|
$
|
970,166
|
|
Service expense
|
764,310
|
|
|
|
|
—
|
|
|
|
|
764,310
|
|
General and administrative expense
|
86,435
|
|
|
|
|
—
|
|
|
|
|
86,435
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
17,199
|
|
|
|
|
—
|
|
|
|
|
17,199
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
$
|
102,222
|
|
|
|
|
$
|
—
|
|
|
|
|
$
|
102,222
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net income of investee
|
$
|
—
|
|
|
|
|
$
|
12,200
|
|
|
|
|
$
|
12,200
|
|
Investment in equity method investee
|
$
|
—
|
|
|
|
|
$
|
141,292
|
|
|
|
|
$
|
141,292
|
|
Total assets (continuing operations)
|
$
|
649,986
|
|
|
|
|
$
|
141,292
|
|
|
|
|
$
|
791,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2019
|
|
NET Services
|
|
|
|
Matrix
|
|
|
|
Total
|
Service revenue, net
|
$
|
393,385
|
|
|
|
|
$
|
—
|
|
|
|
|
$
|
393,385
|
|
Service expense
|
356,271
|
|
|
|
|
—
|
|
|
|
|
356,271
|
|
General and administrative expense
|
15,979
|
|
|
|
|
—
|
|
|
|
|
15,979
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
4,148
|
|
|
|
|
—
|
|
|
|
|
4,148
|
|
Operating income
|
$
|
16,987
|
|
|
|
|
$
|
—
|
|
|
|
|
$
|
16,987
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net loss of investee
|
$
|
—
|
|
|
|
|
$
|
(3,188)
|
|
|
|
|
$
|
(3,188)
|
|
Investment in equity method investee
|
$
|
—
|
|
|
|
|
$
|
154,532
|
|
|
|
|
$
|
154,532
|
|
Total assets (continuing operations)
|
$
|
465,688
|
|
|
|
|
$
|
154,532
|
|
|
|
|
$
|
620,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2019
|
|
NET Services
|
|
|
|
Matrix
|
|
|
|
Total
|
Service revenue, net
|
$
|
1,125,111
|
|
|
|
|
$
|
—
|
|
|
|
|
$
|
1,125,111
|
|
Service expense
|
1,042,717
|
|
|
|
|
—
|
|
|
|
|
1,042,717
|
|
General and administrative expense
|
52,241
|
|
|
|
|
—
|
|
|
|
|
52,241
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
12,976
|
|
|
|
|
—
|
|
|
|
|
12,976
|
|
Operating income
|
$
|
17,177
|
|
|
|
|
$
|
—
|
|
|
|
|
$
|
17,177
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net loss of investee
|
$
|
—
|
|
|
|
|
$
|
(6,159)
|
|
|
|
|
$
|
(6,159)
|
|
Investment in equity method investee
|
$
|
—
|
|
|
|
|
$
|
154,532
|
|
|
|
|
$
|
154,532
|
|
Total assets (continuing operations)
|
$
|
465,688
|
|
|
|
|
$
|
154,532
|
|
|
|
|
$
|
620,220
|
|
18. Subsequent Events
On September 28, 2020, the Company entered into a stock purchase agreement (the “Simplura Purchase Agreement”) with OEP AM, Inc., a Delaware corporation, doing business as Simplura Health Group.
Pursuant to the Simplura Purchase Agreement, the Company plans to acquire all of the issued and outstanding capital stock of Simplura for $575.0 million in cash, subject to certain adjustments, including adjustments based on a determination of net working capital, cash, transaction expenses and indebtedness, as provided in the Simplura Purchase Agreement. The Company intends to close the transaction in the fourth quarter of 2020.
Founded in 1955, Simplura is a home care services provider offering placements of personal care assistants, home health aides, and skilled nurses for senior citizens, disabled adults and other high-needs patients. Simplura operates from its headquarters in Valley Stream, New York, with approximately 57 branches across seven states, including in several of the nation’s largest home care markets. As of June 30, 2020, Simplura had approximately 14,000 trained caregivers throughout all locations serving, on average, approximately 12,500 patients and providing approximately 21 million hours of patient care annually. Simplura’s services are reimbursed by Medicaid, other governmental payors, and major insurance carriers.
On October 22, 2020, the Company agreed to issue and sell $500.0 million in aggregate principal amount of senior notes due on November 15, 2025, which will bear interest at a rate of 5.875% per annum (the “notes”). Completion of the notes offering occurred on November 4, 2020, and the gross proceeds of the sale of the notes were deposited into an escrow account for the benefit of the holders of the notes pending consummation of the Simplura Acquisition.
The Company intends to use the proceeds from the notes, together with borrowings under its credit facility and cash on hand, to (i) pay the consideration in connection with the Simplura Acquisition, (ii) repay in full substantially all debt for borrowed money of the Simplura Group (together with the termination of all commitments and the release and discharge of all security interests and guarantees related thereto), and (iii) pay fees and expenses incurred in connection with the transactions.