10-Q 1 cotv-20160630x10q.htm 10-Q cotv_Current_Folio_10Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


Form 10-Q


(Mark One)

 

         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2016
OR

 

         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Cotiviti Holdings, Inc.

(Exact name of registrant as specified in its charter)


Delaware

(State or other jurisdiction of incorporation)

 

001-37787
(Commission
File Number)

46-0595918
(IRS Employer
Identification No.)

115 Perimeter Center Place
Suite 700
Atlanta, GA 30346
(Address of principal executive offices)

30346
(Zip Code)

 

(770) 379-2800

(Registrant’s telephone number, including area code)


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes     No  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b‑2 of the Exchange Act. (Check one):

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No  

 

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of June 30, 2016 was 90,170,462.

 

 

 

 


 

 


 

PART I - FINANCIAL INFORMATION

 

ITEM 1.      Consolidated Financial Statements

 

Cotiviti Holdings, Inc.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

2016

    

2015

 

 

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

45,703

 

$

149,365

 

Restricted cash

 

 

7,566

 

 

10,741

 

Accounts receivable, net of allowance for doubtful accounts of $761 and $1,053 at June 30, 2016 and December 31, 2015, respectively; and net of estimated allowance for refunds and appeals of $45,495 and $33,406 at June 30, 2016 and December 31, 2015, respectively

 

 

74,674

 

 

78,856

 

Prepaid expenses and other current assets

 

 

13,237

 

 

24,044

 

Deferred tax assets

 

 

38,233

 

 

32,919

 

Total current assets

 

 

179,413

 

 

295,925

 

Property and equipment, net

 

 

60,703

 

 

57,452

 

Goodwill

 

 

1,196,585

 

 

1,197,044

 

Intangible assets, net

 

 

563,863

 

 

594,410

 

Other long-term assets

 

 

2,864

 

 

2,176

 

TOTAL ASSETS

 

$

2,003,428

 

$

2,147,007

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

8,100

 

$

21,099

 

Customer deposits

 

 

7,566

 

 

10,741

 

Accounts payable and accrued other expenses

 

 

30,223

 

 

29,521

 

Accrued compensation costs

 

 

37,775

 

 

42,902

 

Estimated liability for refunds and appeals

 

 

70,574

 

 

67,775

 

Total current liabilities

 

 

154,238

 

 

172,038

 

Long-term liabilities:

 

 

 

 

 

 

 

Long-term debt

 

 

795,563

 

 

1,012,971

 

Other long-term liabilities

 

 

9,628

 

 

12,199

 

Deferred tax liabilities

 

 

157,176

 

 

162,203

 

Total long-term liabilities

 

 

962,367

 

 

1,187,373

 

Total liabilities

 

 

1,116,605

 

 

1,359,411

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock ($0.001 par value; 600,000,000 and 122,000,000 shares authorized, 90,177,862 and 77,237,711 issued, and 90,170,462 and 77,230,311 outstanding at June 30, 2016 and December 31, 2015, respectively)

 

 

90

 

 

77

 

Additional paid-in capital

 

 

888,893

 

 

807,419

 

Retained earnings (deficit)

 

 

4,042

 

 

(14,935)

 

Accumulated other comprehensive loss

 

 

(6,104)

 

 

(4,867)

 

Treasury stock, at cost (7,400 shares at June 30, 2016 and December 31, 2015)

 

 

(98)

 

 

(98)

 

Total stockholders’ equity

 

 

886,823

 

 

787,596

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

2,003,428

 

$

2,147,007

 

 

See accompanying notes to consolidated financial statements.

1


 

Cotiviti Holdings, Inc.

Consolidated Statements of Comprehensive Income

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2016

    

2015

    

2016

    

2015

    

Net revenue

 

$

158,291

 

$

133,306

 

$

301,009

 

$

252,944

 

Cost of revenue (exclusive of depreciation and amortization, stated separately below):

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

 

55,285

 

 

44,528

 

 

108,746

 

 

86,504

 

Other costs of revenue

 

 

5,275

 

 

4,621

 

 

10,673

 

 

8,983

 

Total cost of revenue

 

 

60,560

 

 

49,149

 

 

119,419

 

 

95,487

 

Selling, general and administrative expenses (exclusive of depreciation and amortization, stated separately below):

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

 

23,176

 

 

17,443

 

 

42,286

 

 

35,589

 

Other selling, general and administrative expenses

 

 

14,945

 

 

14,756

 

 

30,174

 

 

28,072

 

Total selling, general and administrative expenses

 

 

38,121

 

 

32,199

 

 

72,460

 

 

63,661

 

Depreciation and amortization of property and equipment

 

 

4,811

 

 

2,775

 

 

9,646

 

 

5,497

 

Amortization of intangible assets

 

 

15,208

 

 

15,410

 

 

30,415

 

 

30,819

 

Transaction-related expenses

 

 

653

 

 

 —

 

 

893

 

 

 —

 

Total operating expenses

 

 

119,353

 

 

99,533

 

 

232,833

 

 

195,464

 

Operating income

 

 

38,938

 

 

33,773

 

 

68,176

 

 

57,480

 

Other expense (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

14,660

 

 

16,753

 

 

30,720

 

 

33,675

 

Loss on extinguishment of debt

 

 

7,068

 

 

4,084

 

 

7,068

 

 

4,084

 

Other non-operating (income) expense

 

 

(359)

 

 

(21)

 

 

(658)

 

 

(197)

 

Total other expense (income)

 

 

21,369

 

 

20,816

 

 

37,130

 

 

37,562

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

 

17,569

 

 

12,957

 

 

31,046

 

 

19,918

 

Income tax expense

 

 

6,676

 

 

5,177

 

 

12,069

 

 

8,503

 

Income from continuing operations

 

 

10,893

 

 

7,780

 

 

18,977

 

 

11,415

 

Gain on discontinued operations, net of tax

 

 

 —

 

 

 —

 

 

 

 

559

 

Net income

 

$

10,893

 

$

7,780

 

$

18,977

 

$

11,974

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(645)

 

 

905

 

 

(671)

 

 

(239)

 

Change in fair value of derivative instruments (net of related taxes of $160 and $208 for the three months ended June 30, 2016 and 2015, respectively and $453 and $519 for the six months ended June 30, 2016 and 2015, respectively)

 

 

(84)

 

 

(494)

 

 

(566)

 

 

(1,568)

 

Total other comprehensive (loss) income

 

 

(729)

 

 

411

 

 

(1,237)

 

 

(1,807)

 

Comprehensive income

 

$

10,164

 

$

8,191

 

$

17,740

 

$

10,167

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.13

 

$

0.10

 

$

0.24

 

$

0.15

 

Diluted

 

 

0.13

 

 

0.10

 

 

0.24

 

 

0.14

 

Earnings per share from discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

 

$

 —

 

$

 

$

0.01

 

Diluted

 

 

 

 

 —

 

 

 

 

0.01

 

Total earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.13

 

$

0.10

 

$

0.24

 

$

0.16

 

Diluted

 

 

0.13

 

 

0.10

 

 

0.24

 

 

0.15

 

 

See accompanying notes to consolidated financial statements.

2


 

Cotiviti Holdings, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

    

2016

    

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

18,977

 

$

11,974

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Deferred income taxes

 

 

(9,797)

 

 

(2,171)

 

Depreciation and amortization

 

 

40,061

 

 

36,316

 

Stock-based compensation expense

 

 

4,502

 

 

1,219

 

Amortization of debt issuance costs

 

 

2,675

 

 

2,878

 

Accretion of asset retirement obligations

 

 

92

 

 

76

 

Loss on extinguishment of debt

 

 

7,068

 

 

4,084

 

Gain on discontinued operations

 

 

 —

 

 

(900)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Restricted cash

 

 

3,176

 

 

10,298

 

Accounts receivable

 

 

4,182

 

 

(7,358)

 

Other current assets

 

 

9,625

 

 

(249)

 

Other long-term assets

 

 

(688)

 

 

894

 

Customer deposits

 

 

(3,176)

 

 

(10,298)

 

Accrued compensation

 

 

(5,127)

 

 

(10,594)

 

Accounts payable and accrued other expenses

 

 

(1,295)

 

 

(18,897)

 

Estimated liability for refunds and appeals

 

 

2,799

 

 

(4,296)

 

Other long-term liabilities

 

 

98

 

 

(156)

 

Other

 

 

(598)

 

 

24

 

Net cash provided by operating activities

 

 

72,574

 

 

12,844

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Expenditures for property and equipment

 

 

(14,019)

 

 

(6,324)

 

Other investing activities

 

 

1,181

 

 

406

 

Net cash used in investing activities

 

 

(12,838)

 

 

(5,918)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net proceeds from issuance of common stock

 

 

226,929

 

 

 —

 

Proceeds from exercise of stock options

 

 

56

 

 

 —

 

Dividends paid

 

 

(150,000)

 

 

 —

 

Payment of debt issuance costs

 

 

 —

 

 

(1,086)

 

Repayment of debt

 

 

(240,150)

 

 

(4,050)

 

Net cash used in financing activities

 

 

(163,165)

 

 

(5,136)

 

Effect of foreign exchanges on cash and cash equivalents

 

 

(233)

 

 

(124)

 

Net (decrease) increase in cash and cash equivalents

 

 

(103,662)

 

 

1,666

 

Cash and cash equivalents at beginning of period

 

 

149,365

 

 

118,612

 

Cash and cash equivalents at end of the period

 

$

45,703

 

$

120,278

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

11,268

 

$

29,435

 

Cash paid for interest

 

 

27,795

 

 

30,733

 

Noncash investing activities (accrued property and equipment purchases)

 

 

11,779

 

 

1,398

 

 

See accompanying notes to consolidated financial statements

 

 

3


 

Table of Contents

Cotiviti Holdings, Inc.

Notes to the Financial Statements

(In thousands, except shares and per share amounts)

(Unaudited)

 

Note 1. Description of Business

 

Cotiviti Holdings, Inc. (collectively with its subsidiaries, “we,” “our,” “Cotiviti” or the “Company”) is a leading provider of analytics‑driven payment accuracy solutions, focused primarily on the healthcare sector. Our integrated solutions help clients enhance payment accuracy in an increasingly complex healthcare environment. We leverage our robust technology platform, configurable analytics, proprietary information assets and expertise in healthcare reimbursement to help our clients enhance their claims payment accuracy. We help our healthcare clients identify and correct payment inaccuracies. We work with approximately 40 healthcare organizations, including eight of the ten largest U.S. commercial, Medicaid and Medicare managed health plans, as well as the Centers for Medicare and Medicaid Services (“CMS”). We are also a leading provider of payment accuracy solutions to approximately 40 retail clients, including eight of the ten largest retailers in the United States.

 

Note 2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

Our accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). All significant intercompany balances and transactions have been eliminated in consolidation. These consolidated financial statements are unaudited and have been prepared by us following the rules and regulations of the U.S. Securities and Exchange Commission. In our opinion they reflect all adjustments, including normal recurring items, that are necessary to present fairly the results of interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted as permitted by such rules and regulations; however, we believe that the disclosures are adequate to make the information presented not misleading. Operating results for the periods presented herein are not necessarily indicative of the results that may be expected for other interim periods or the entire fiscal year. Certain prior year amounts have been reclassified to conform to the current year presentation.

 

Revenue Recognition, Unbilled Receivables and Estimated Liability for Refunds and Appeals

 

We provide services under contracts that contain various fee structures, including performance fee‑based contracts and fixed fee arrangements. Revenue is recognized when a contract exists, services have been provided to the client, the fee is fixed and determinable and collectability is reasonably assured.

 

We recognize revenue on performance fee based contracts based upon the specific terms of the underlying contract. The contract terms generally specify: (a) time periods covered by the work to be performed; (b) nature and extent of services we are to provide; (c) the client’s duties in assisting and cooperating with us; and (d) fees payable to us. Our fees are most often expressed as a percentage of our findings. Generally, our services are rendered when our clients realize the economic benefits from our services. Our clients realize economic benefits when they take credits against their existing accounts payable based on when we identify cost savings, when they receive refund checks based on overpayments, or when they acknowledge payment reductions based on cost savings.

 

We derive a relatively small portion of revenue on contracts with fixed‑fee arrangements. We recognize revenue on these contracts ratably over the contract term and once all of the above criteria have been satisfied.

 

Historically, there has been a certain amount of revenue with respect to which, even though we had met the requirements of our revenue recognition policy, the claim is ultimately rejected. In such cases, our clients may request a refund or offset if their providers or vendors ultimately reject the payment inaccuracies we find or if our clients determine not to pursue reimbursement from their providers or vendors even though we may have collected fees. We record any such refund as a reduction of revenue. We record an estimate for refund liabilities at any given time based on actual historical refund data by client type. We satisfy such refund liabilities either by offsets to accounts receivable or by cash payments to clients.

 

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Table of Contents

Cotiviti Holdings, Inc.

Notes to the Financial Statements (continued)

(In thousands, except shares and per share amounts)

(Unaudited)

 

In addition to the refund liabilities, we calculate client specific reserves when we determine an additional reserve may be necessary.

 

The estimated liability for refunds and appeals representing our estimate of claims that may be overturned related to revenue which had already been received was $70,574 and $67,775 at June 30, 2016 and December 31, 2015, respectively. The estimated allowance for refunds and appeals representing our estimate of claims that may be overturned related to amounts in accounts receivable was $45,495 and $33,406 at June 30, 2016 and December 31, 2015, respectively.

 

Under the Medicare Recovery Audit Program, in which we are one of the four Recovery Audit Contractors (“Medicare RAC”) for CMS, healthcare providers have the right to appeal a claim and may pursue additional appeals if the initial appeal is found in favor of CMS. We accrue an estimated liability for appeals based on the amount of fees that are subject to appeals, closures or other adjustments and those which we estimate are probable of being returned to CMS following a successful appeal by the providers. Our estimates are based on our historical experience with the Medicare RAC appeal process.

 

This estimated liability for Medicare RAC appeals is an offset to revenue in our Consolidated Statements of Comprehensive Income. The liability is included in the estimated liability for refunds and appeals on our Consolidated Balance Sheets. See Note 6 for further information regarding the estimated liability for appeals related to the Medicare RAC program.

 

Unbilled receivables represent revenue recognized related to claims for which clients have received economic value that were not invoiced at the balance sheet date. Unbilled receivables were approximately $50,083 and $51,799 as of June 30, 2016 and December 31, 2015, respectively and are included in accounts receivable on our Consolidated Balance Sheets.

 

Certain unbilled receivables arise when a portion of our earned fee is deferred at the time of the initial invoice. At a later date (which can be up to a year after original invoice, and at other times during the year after completion of the audit period based on contractual terms or as agreed with our client), we invoice the unbilled receivable amount. Notwithstanding the deferred due date, our clients acknowledge we have earned this unbilled receivable at the time of the original invoice, but we have agreed to defer billing the client for the related services. Unbilled receivables of this nature were approximately $5,800 and $6,431 as of June 30, 2016 and December 31, 2015, respectively, and are included in accounts receivable on our Consolidated Balance Sheets.

 

We record periodic changes in unbilled receivables and refund liabilities as adjustments to revenue.

 

Recently Issued Accounting Standards

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) which simplifies several aspects of the accounting for share based compensation. ASU 2016-09 changes several aspects of the accounting for share based payment award transactions, including 1) accounting for income taxes, 2) classification of excess tax benefits on the statement of cash flows, 3) forfeitures, 4) minimum statutory tax withholding requirements and 5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The guidance is effective for public companies with annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. We are evaluating this new guidance and its impact on our consolidated financial statements and related disclosures.

 

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”) which changes the accounting recognition, measurement and disclosure for leases in order to increase transparency. ASU 2016-02 requires lease assets and liabilities to be recognized on the balance sheet and key information about leasing arrangements to be disclosed.  The guidance is effective for public companies with annual reporting periods beginning after December 15, 2018,

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Table of Contents

Cotiviti Holdings, Inc.

Notes to the Financial Statements (continued)

(In thousands, except shares and per share amounts)

(Unaudited)

 

including interim periods within that reporting period. Early adoption is permitted. We are evaluating this new guidance and its impact on our consolidated financial statements and related disclosures.

 

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”) which changes the current financial instruments model primarily impacting the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The guidance is effective for public companies with annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. We are evaluating this new guidance and do not believe it will have a material impact on our consolidated financial statements and related disclosures.

 

In November 2015, the FASB issued ASU 2015‑17, Balance Sheet Classification of Deferred Taxes, (“ASU 2015‑17”) which requires entities with a classified balance sheet to present all deferred tax assets and liabilities as noncurrent. The guidance is effective for public companies with annual and interim periods beginning after December 15, 2016. Early adoption is permitted. We are evaluating this new guidance and its impact on our consolidated balance sheets and related disclosures and expect the adoption of this ASU will reduce our total current assets and net working capital.

 

In April 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-05”) which established guidance regarding the accounting for software licenses. ASU 2015-05 is effective for annual reporting periods, including interim periods, beginning after December 15, 2015.  We prospectively adopted the provisions of ASU 2015-05 as of January 1, 2016 and have not yet had any material contracts that were impacted by this new guidance.

 

In April 2015, the FASB issued ASU 2015‑03, Simplifying the Presentation of Debt and Issuance Costs (“ASU 2015‑03”) which establishes guidance to simplify the presentation of debt issuance costs by requiring debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that liability, consistent with debt discounts. Prior to the issuance of ASU 2015-03, debt issuance costs were required to be presented as an asset in the balance sheet. The guidance is effective for annual reporting periods beginning after December 15, 2015, and interim periods within that reporting period. We adopted the provisions of ASU 2015-03 as of January 1, 2016 and prior period amounts have been reclassified to conform to the current period presentation. As of June 30, 2016 and December 31, 2015, $13,658 and $20,975 of debt issuance costs, respectively, were reclassified in the consolidated balance sheet from debt issuance costs, net to long-term debt. The adoption of ASU 2015-03 did not materially impact our consolidated financial position, results of operations or cash flows.

 

In May 2014, the FASB issued ASU No. 2014‑09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014‑09”) which supersedes existing revenue recognition guidance and provides clarification of principles for recognizing revenue from contracts with customers. The guidance is effective for public companies with annual periods beginning after December 15, 2017 and interim periods within that reporting period. We are evaluating this new guidance, the method of adoption we will take and the impact, if any, on our consolidated financial statements and related disclosures.

 

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Table of Contents

Cotiviti Holdings, Inc.

Notes to the Financial Statements (continued)

(In thousands, except shares and per share amounts)

(Unaudited)

 

Note 3. Property and Equipment

 

Property and equipment by major asset class for the periods presented consisted of the following:

 

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

 

2016

 

2015

 

Computer equipment

 

$

37,259

 

$

31,496

 

Software

 

 

33,058

 

 

26,412

 

Furniture and fixtures

 

 

8,248

 

 

7,916

 

Leasehold improvements

 

 

4,179

 

 

3,488

 

Projects in progress

 

 

9,484

 

 

10,434

 

Property and equipment, gross

 

$

92,228

 

$

79,746

 

Less: Accumulated depreciation and amortization

 

 

31,525

 

 

22,294

 

Property and equipment, net

 

$

60,703

 

$

57,452

 

 

In December 2015, we purchased a perpetual software license, which is included in the software total above. We will pay for this software over the next two years. As such there is approximately $3,286 included in accounts payable and accrued other expenses and $3,161 included in other long-term liabilities on our Consolidated Balance Sheets as of June 30, 2016.  The amount included in other long-term liabilities represents the present value of payments that will ultimately be made.

 

Total depreciation and amortization expense related to property and equipment, including capitalized software costs, was $4,811 and $2,775 for the three months ended June 30, 2016 and 2015, respectively and $9,646 and $5,497 for the six months ended June 30, 2016 and 2015, respectively.

 

Note 4. Intangible Assets

 

Intangible asset balances by major asset class for the periods presented were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Weighted

 

 

 

Gross

 

 

 

 

 

 

 

Net

 

Average

 

 

 

Carrying

 

Accumulated

 

 

 

 

Carrying

 

Amortization

 

 

    

Amount

    

Amortization

    

Impairment

    

Amount

    

Period

 

June 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

640,302

 

$

121,331

 

$

 —

 

$

518,971

 

13.7

years

 

Acquired software

 

 

82,400

 

 

41,708

 

 

 —

 

 

40,692

 

6.2

years

 

Connolly trademark

 

 

4,200

 

 

 —

 

 

 —

 

 

4,200

 

   indefinite-lived

 

Total

 

$

726,902

 

$

163,039

 

$

 —

 

$

563,863

 

12.8

years

 

December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

640,503

 

$

97,857

 

$

 —

 

$

542,646

 

13.7

years

 

Acquired software

 

 

82,400

 

 

34,836

 

 

 —

 

 

47,564

 

6.2

years

 

Connolly trademark

 

 

24,500

 

 

 —

 

 

20,300

 

 

4,200

 

   indefinite-lived

 

iHealth trademark

 

 

8,600

 

 

1,074

 

 

7,526

 

 

 —

 

11.0

years

 

Total

 

$

756,003

 

$

133,767

 

$

27,826

 

$

594,410

 

12.8

years

 

 

Amortization expense was $15,208 and $15,410 for the three months ended June 30, 2016 and 2015, respectively and $30,415 and $30,819 for the six months ended June 30, 2016 and 2015, respectively.

 

7


 

Table of Contents

Cotiviti Holdings, Inc.

Notes to the Financial Statements (continued)

(In thousands, except shares and per share amounts)

(Unaudited)

 

As of June 30, 2016 amortization expense for the next 5 years is expected to be:

 

 

 

 

 

 

Remainder of 2016

    

$

30,409

 

2017

 

 

57,846

 

2018

 

 

53,917

 

2019

 

 

53,917

 

2020

 

 

53,917

 

 

 

Note 5. Goodwill

 

Total goodwill in our Consolidated Balance Sheets was $1,196,585 and $1,197,044 as of June 30, 2016 and December 31, 2015, respectively.

 

Changes in the carrying amount of goodwill by our Healthcare and Global Retail and Other segments for the six months ended June 30, 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Global Retail

 

 

 

Healthcare

 

and Other

 

December 31, 2015

 

$

1,147,771

 

$

49,273

 

Foreign currency translation and other

 

 

 —

 

 

(459)

 

June 30, 2016

 

$

1,147,771

 

$

48,814

 

 

There was no impairment related to goodwill for any period presented.

 

Note 6. Commitments and Contingencies

 

Legal and Other Matters

 

We may be involved in various legal proceedings and litigation arising in the ordinary course of business. While any legal proceeding or litigation has an element of uncertainty, management believes the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations, or liquidity.

 

Medicare RAC Contract Contingency

 

In August 2014, CMS announced it would allow providers to remove all eligible claims currently pending in the appeals process by offering to pay hospitals 68% of the original claim amount. This settlement was offered to the providers and it was unknown what, if any, impact there would be for the Medicare RACs. On July 1, 2015, CMS issued a Technical Direction Letter to the Medicare RACs, including ourselves, indicating that Medicare RACs will only be entitled to the contract contingency fee on the settled amounts of the claims, or 32% of the original inpatient claim amounts. Based on the initial lists of finalized settlements provided by CMS, we would be required to refund CMS approximately $22,308 due to the related adjustments in Medicare RAC contingency fees. CMS further advised that as the hospital settlement project continues, additional settlement lists will be matched to Medicare RAC claims which may result in updated refund amounts to those initially provided. While there are uncertainties in any dispute resolution and results are uncertain, we have disputed CMS’s findings based on our interpretation of the terms of the Medicare RAC contract and our belief that the backup data provided by CMS is inaccurate and/or incomplete. Our liability for estimated refunds and appeals includes amounts for these settled claims based on our best estimates of the amount we believe will be ultimately payable to CMS based on our interpretation of the terms of the Medicare RAC contract. We believe that it is possible that we could be required to pay an additional amount up to approximately $12,500 in excess of the amount we accrued as of June 30, 2016 based on the claims data we have received from CMS to date. As CMS completes its settlement process with the providers and updated files are provided to us, the potential amount owed by us may change.

 

8


 

Table of Contents

Cotiviti Holdings, Inc.

Notes to the Financial Statements (continued)

(In thousands, except shares and per share amounts)

(Unaudited)

 

Note 7. Long‑term Debt

 

In June 2016, we repaid $223,000 in outstanding principal under our Second Lien Credit Facility using proceeds from our Initial Public Offering (“IPO”). We also made a voluntary prepayment of $13,100 of outstanding principal under the Second Lien Credit Facility. As a result of these repayments, we recognized a loss on extinguishment of debt totaling $7,068 during the three and six months ended June 30, 2016, which is included on our Consolidated Statements of Comprehensive Income.

 

In May 2015, in order to benefit from favorable market conditions, we entered into and executed the First and Second Amendments to the May 2014 First Lien, which, among other things, provide for lower applicable interest rates associated with the May 2014 First Lien by 50 basis points. As a result, we recorded a loss on extinguishment of debt of $4,084 during the three months ended June 30, 2015, which is included on our Consolidated Statements of Comprehensive Income.

 

Long‑term debt for the periods presented was as follows:

 

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

 

2016

 

2015

 

May 2014 First Lien

 

$

788,634

 

$

792,167

 

May 2014 Second Lien

 

 

28,687

 

 

262,878

 

May 2014 Revolver

 

 

 

 

 

Total debt

 

 

817,321

 

 

1,055,045

 

Less: debt issuance costs

 

 

13,658

 

 

20,975

 

Less: current portion

 

 

8,100

 

 

21,099

 

Total long-term debt

 

$

795,563

 

$

1,012,971

 

 

The May 2014 Credit Agreements include certain binding affirmative and negative covenants, including delivery of financial statements and other reports, maintenance of existence and transactions with affiliates. The negative covenants limit our ability, among other things, to incur debt, incur liens, make investments, sell assets or declare or pay dividends. The financial covenant setting forth a maximum leverage ratio which is included in the May 2014 Credit Agreements is only applicable if we exceed certain borrowing thresholds. These borrowing thresholds are based upon 35% of our total revolving credit commitments with certain exceptions, which were not exceeded as of June 30, 2016 and December 31, 2015. In addition, the May 2014 Credit Agreements include certain events of default including payment defaults, failure to perform affirmative covenants, failure to refrain from actions or omissions prohibited by negative covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency related defaults and a change of control default. We were in compliance with all such covenants as of June 30, 2016 and December 31, 2015.

 

The May 2014 Credit Agreements require mandatory prepayments based upon annual excess cash flows commencing with the year ended December 31, 2015. The mandatory prepayment is contingently payable based on an annual excess cash flow calculation as defined within the Credit Agreements. We did not meet the annual excess cash flow calculation requirement as of December 31, 2015.

 

As of June 30, 2016, the aggregate maturities of long‑term debt for each of the next five years are expected to be $4,050 for the remainder of 2016 and $8,100 in each of 2017 through 2020.

 

Note 8. Derivative Instruments

 

We are exposed to fluctuations in interest rates on our long‑term debt. We manage our exposure to fluctuations in the 3‑month LIBOR through the use of interest rate cap agreements designated as cash flow hedges. We are meeting our objective by hedging the risk of changes in cash flows related to changes in LIBOR by capping the interest on our floating rate debt linked to LIBOR to approximately 3%. We do not utilize derivatives for speculative or trading purposes.

 

9


 

Table of Contents

Cotiviti Holdings, Inc.

Notes to the Financial Statements (continued)

(In thousands, except shares and per share amounts)

(Unaudited)

 

As of June 30, 2016 and December 31, 2015, we had $630,000 in notional debt outstanding related to these interest rate caps, which cover quarterly interest payments through September 2019. The notional amount decreases over time.

 

All of our outstanding interest rate cap contracts qualify for cash flow hedge accounting treatment in accordance with ASC 815, Derivatives and Hedging. Cash flow hedge accounting treatment allows for gains and losses on the effective portion of qualifying hedges to be deferred in accumulated other comprehensive (loss) income until the underlying transaction occurs, rather than recognizing the gains and losses on these instruments in earnings during each period they are outstanding. When the actual interest payments are made on our variable rate debt and the related derivate contract settles, any effective portion of realized interest rate hedging derivative gains and losses previously recorded in accumulated other comprehensive (loss) income is recognized in interest expense. We recognized interest expense of $62 and $16 related to interest rate caps during the three months ended June 30, 2016 and 2015, respectively and $144 and $32 during the six months ended June 30, 2016 and 2015, respectively.

 

Ineffectiveness results, in certain circumstances, when the change in total fair value of the derivative instrument differs from the change in the fair value of our expected future cash outlays for the related interest payment and is recognized immediately in interest expense. There was no ineffectiveness recorded during the six months ended June 30, 2016 and 2015, respectively. Likewise, if the hedge does not qualify for hedge accounting, the periodic changes in its fair value are recognized in the period of the change in interest expense. All cash flows related to our interest rate cap agreements are classified as operating cash flows.

 

Any outstanding derivative instruments expose us to credit loss in the event of nonperformance by the counterparties to the agreements, but we do not expect that the counterparty will fail to meet their obligations. The amount of such credit exposure is generally the positive fair value of our outstanding contracts. To manage credit risks, we select counterparties based on credit assessments, limit our overall exposure to any single counterparty and monitor the market position of any counterparty.

 

The table below reflects quantitative information related to the fair value of our derivative instruments and where these amounts are recorded in our consolidated financial statements as of the period presented:

 

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

 

2016

 

2015

 

Liability fair value recorded in other long-term liabilities

 

$

2,750

 

$

2,310

 

Liability fair value recorded in accounts payable and accrued other expenses

 

 

1,078

 

 

1,086

 

Estimated amount of existing losses expected to be reclassified into earnings in the next 12 months

 

 

(739)

 

 

(283)

 

 

We record deferred hedge premiums which are being paid over the life of the hedge in accumulated other comprehensive (loss) income until the related hedge ultimately settles and interest payments are made on the underlying debt. As of June 30, 2016, we have made payments of $1,838 related to these deferred premiums. We expect to pay an additional $4,556 in deferred premiums through 2019 related to our outstanding interest rate cap agreements which is reflected in the fair value of these derivatives in the table above.

 

10


 

Table of Contents

Cotiviti Holdings, Inc.

Notes to the Financial Statements (continued)

(In thousands, except shares and per share amounts)

(Unaudited)

 

Comprehensive income includes changes in the fair value of our interest rate cap agreements which qualify for hedge accounting. Changes in other comprehensive income for the periods presented related to derivative instruments classified as cash flow hedges were as follows:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

 

    

2016

    

2015

 

 

 

 

 

 

 

 

 

Balance at beginning of period, April 1

 

$

(3,450)

 

$

(1,697)

 

Reclassifications in earnings, net of tax of $24 and $6, respectively

 

 

38

 

 

10

 

Change in fair value of derivative instrument, net of tax of $184 and $202, respectively

 

 

(122)

 

 

(504)

 

Balance at end of period, June 30

 

$

(3,534)

 

$

(2,191)

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

 

    

2016

    

2015

 

 

 

 

 

 

 

 

 

Balance at beginning of period, January 1

 

$

(2,968)

 

$

(623)

 

Reclassifications in earnings, net of tax of $56 and $14, respectively

 

 

88

 

 

18

 

Change in fair value of derivative instrument, net of tax of $509 and $533, respectively

 

 

(654)

 

 

(1,586)

 

Balance at end of period, June 30

 

$

(3,534)

 

$

(2,191)

 

 

 

Note 9. Fair Value Measurements

 

We measure assets and liabilities at fair value based on assumptions market participants would use in pricing an asset or liability in the principal or most advantageous market. Authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value whereby inputs are assigned a hierarchical level. The hierarchical levels are:

 

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

 

Level 2: Observable prices, other than quoted prices included in Level 1 inputs for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

 

Level 3: Unobservable inputs for the asset or liability used to measure fair value to the extent observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

 

The following table summarizes our financial instruments measured at fair value within the Consolidated Balance Sheets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

December 31, 2015

 

 

    

Level 1

    

Level 2

    

Level 3

    

Level 1

    

Level 2

    

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

$

 —

 

$

 —

 

$

 —

 

$

1,181

 

$

 —

 

$

 —

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

 —

 

 

 

 

817,231

 

 

 

 

 

 

1,055,045

 

Interest rate cap agreements

 

 

 

 

3,828

 

 

 

 

 

 

3,396

 

 

 

Total

 

$

 —

 

$

3,828

 

$

817,231

 

$

1,181

 

$

3,396

 

$

1,055,045

 

 

11


 

Table of Contents

Cotiviti Holdings, Inc.

Notes to the Financial Statements (continued)

(In thousands, except shares and per share amounts)

(Unaudited)

 

Investments are classified as available‑for‑sale and carried at fair value in the accompanying Consolidated Balance Sheets. Our investments consist of money market securities valued using quoted market prices for identical assets in active markets. As of June 30, 2016, we no longer hold any money market securities.

 

The fair value of our private debt is determined based on fluctuations in current interest rates, the trends in market yields of debt instruments with similar credit ratings, general economic conditions and other quantitative and qualitative factors. The carrying value of our debt approximates its fair value.

 

The fair value of the interest rate cap agreements is determined using the market standard methodology of discounting the future expected variable cash receipts that would occur if interest rates rose above the strike rate of the caps. The analysis reflects the contractual terms of the derivatives, including period to maturity and remaining deferred premium payments, and uses observable market‑based inputs, including interest rates and implied volatilities. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rates. As such, the estimated fair values of these liabilities are classified as Level 2 in the fair value hierarchy.

 

Note 10. Income Taxes

 

The following table presents our income tax provision and effective income tax rate: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 

 

 

June 30, 

 

 

    

2016

    

2015

 

    

2016

    

2015

 

Income tax provision

 

$

6,676

 

$

5,177

 

 

$

12,069

 

$

8,503

 

Effective income tax rate

 

 

38.0

%  

 

39.9

%  

 

 

38.9

%  

 

42.7

%

 

Our effective income tax rate was 38.0% and 39.9% for the three months ended June 30, 2016 and 2015, respectively and 38.9% and 42.7% for the six months ended June 30, 2016 and 2015, respectively. The change in the effective tax rate is primarily due to uncertain tax positions recorded during the prior year period.

 

We are currently under audit with the Internal Revenue Service for the tax year ended December 31, 2014.  In addition we are currently under audit for iHealth Technologies, Inc. for the tax years ended December 31, 2012, December 31, 2013 and May 13, 2014. As a result, it is reasonably possible that the audit will conclude or reach the stage where a change in unrecognized income tax benefits may occur within the next twelve months. At that time, we will record any adjustment to income tax expense as required.

 

Note 11. Stockholders’ Equity

 

Issuance of Common Stock

 

On May 13, 2016 our Certificate of Incorporation was amended and the number of shares of common stock authorized to be issued by the Company was increased from 122,000,000 to 600,000,000.

 

On May 25, 2016 we consummated our IPO in which we issued and sold a total of 12,936,038 shares of common stock, including a portion of the underwriter overallotment, at a public offering price of $19.00 per share. We received net proceeds of approximately $226,929 after deducting underwriting discounts and commissions and other offering expenses of approximately $18,856.

 

12


 

Table of Contents

Cotiviti Holdings, Inc.

Notes to the Financial Statements (continued)

(In thousands, except shares and per share amounts)

(Unaudited)

 

A summary of the current rights and preferences of holders of our common stock are as follows:

 

Voting

 

Common stockholders are entitled to one vote per share of common stock held on all matters on which such common stockholder is entitled to vote.

 

Dividends

 

Common stockholders are eligible to receive dividends on common stock held when funds are available and as approved by the Board of Directors. The May 2014 Credit Agreements contain negative covenants that limit our ability to pay dividends.

 

Liquidation Rights

 

In the event of liquidation or dissolution, common stockholders are entitled to receive all assets available for distribution to stockholders.

 

Registration Rights

 

The Second Amended and Restated Stockholders Agreement contains (i) demand registration rights for Advent, subject to a cap of two requests in any 12 month period; (ii) piggy-back registration rights for any stockholder holding at least $500,000 worth of shares (each, a “Holder”), subject to a pro rata reduction if the total amount of shares requested to be included exceeds the amount of securities which in the opinion of the underwriters can be sold; and (iii) shelf registration rights for Holders, subject to a required anticipated aggregate offering price, net of selling expenses, of $5.0 million, subject to a cap of two requests for shelf registrations, for all Holders in the aggregate, in any 12 month period. Holders that are capable of selling all of their registrable securities pursuant to Rule 144 under the Securities Act in a single transaction without timing or volume limitations will not have piggy-back registration rights. We will be responsible for fees and expenses in connection with the registration rights, other than underwriters’ discounts and brokers’ commissions, if any, relating to any such registration and offering.

 

Common Stock Split

 

On May 13, 2016 we effected a 6.1-for-1 stock split of all outstanding shares of our common stock. All share, option and per share information presented in the accompanying consolidated financial statements and notes thereto have been adjusted to reflect the stock split on a retroactive basis for all periods presented and all share information is rounded up to the nearest whole share after reflecting the stock split.

 

Common Stock Dividends

 

On May 25, 2016 we paid a special cash dividend of $150,000, or $1.94 per share of common stock outstanding prior to the IPO, to holders of record of our common stock on the dividend record date. In connection with the special cash dividend we lowered the exercise price of then outstanding stock options by $1.94 per share in order to preserve the intrinsic value of the options giving effect to the special cash dividend.

 

Note 12. Earnings per Share

 

Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period. For all periods presented, potentially dilutive outstanding shares consisted solely of our common stock options. Our potential common shares consist of the incremental common shares issuable upon the exercise of the options. The dilutive effect of

13


 

Table of Contents

Cotiviti Holdings, Inc.

Notes to the Financial Statements (continued)

(In thousands, except shares and per share amounts)

(Unaudited)

 

outstanding stock options is reflected in diluted earnings per share by application of the treasury stock method. For all periods presented, all outstanding common stock consisted of a single‑class.

 

Basic and diluted earnings per share are computed as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Net income available to common stockholders

 

$

10,893

 

$

7,780

 

$

18,977

 

$

11,974

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average outstanding shares of common stock

 

 

82,348,189

 

 

77,204,691

 

 

79,789,693

 

 

77,204,691

 

Dilutive effect of stock-based awards

 

 

764,846

 

 

421,745

 

 

729,249

 

 

427,884

 

Adjusted weighted average outstanding and assumed conversions for diluted EPS

 

 

83,113,035

 

 

77,626,436

 

 

80,518,942

 

 

77,632,575

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.13

 

$

0.10

 

$

0.24

 

$

0.15

 

Diluted

 

 

0.13

 

 

0.10

 

 

0.24

 

 

0.14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share from discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

 

$

 —

 

$

 

$

0.01

 

Diluted

 

 

 

 

 —

 

 

 

 

0.01

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.13

 

$

0.10

 

$

0.24

 

$

0.16

 

Diluted

 

 

0.13

 

 

0.10

 

 

0.24

 

 

0.15

 

 

Employee stock options and restricted stock units (“RSUs”) that were excluded from the calculation of diluted earnings per share because their effect is anti‑dilutive for the periods presented were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

 

 

 

 

 

 

 

 

 

 

Employee stock-based awards

 

1,598,231

 

846,467

 

1,598,231

 

846,467

 

 

In addition, performance‑based stock options of 2,788,817 and 2,408,067 as of June 30, 2016 and 2015, respectively, have not been included as the vesting conditions have not been satisfied as of the respective period end.

 

Note 13. Stock‑Based Compensation

 

Equity Incentive Plans

 

In 2012, we adopted an equity incentive plan (“2012 Plan”) pursuant to which our Board of Directors (or committee as designated by the Board of Directors) may grant options to purchase shares of our stock, restricted stock and certain other equity awards to directors, officers and key employees. We only granted stock options that can be settled in shares of our common stock under the 2012 Plan. The 2012 Plan had a total of 7,243,330 shares authorized for issuance. Upon completion of the IPO in May 2016, issuances under the 2012 Plan were suspended. At that time we adopted the 2016 Equity Incentive Plan (“2016 Plan” and collectively with the 2012 Plan, the “Plans”), pursuant to which our Board of Directors (or a committee or sub-committee designated by the Board of Directors) may grant options to purchase shares of our stock, restricted stock and certain other equity awards to directors, officers and key employees. The 2016 Plan was established with the authorization for grants of up to 5,490,000 shares of authorized but unissued shares of common stock.

14


 

Table of Contents

Cotiviti Holdings, Inc.

Notes to the Financial Statements (continued)

(In thousands, except shares and per share amounts)

(Unaudited)

 

 

No stock options were granted under the 2012 Plan after December 31, 2015. Awards granted under the 2012 Plan will remain outstanding until the earlier of exercise, forfeiture, cancellation or expiration. To the extent outstanding options under the 2012 Plan are forfeited, cancelled or terminated, the common stock subject to such options will be available for future issuance under the 2016 Plan. As of June 30, 2016, there are no shares available for future issuance under the 2012 Plan as the 776,839 shares that were available were discontinued upon adoption of the 2016 Plan. As of June 30, 2016 the total number of shares available for future issuance under the Plans is 5,248,147.

 

Stock Options

 

Under the terms of the 2016 Plan, we may issue options to purchase shares of our common stock at a price equal to 100% of the market price on the date of grant. Issuances under the 2012 Plan, prior to its suspension, were under terms similar to issuances under the 2016 Plan. Stock options granted are subject to either time of service (service-based awards) or performance (performance-based awards) criteria. Service-based awards typically vest ratably over a five year service period from the date of grant under the 2012 Plan and typically vest ratably over a four year service period from the date of grant under the 2016 Plan. In the event of a change in control, any outstanding, unvested service-based awards will vest immediately. Performance-based awards vest in accordance with the specific performance criteria espoused in the executed award agreements. The term of any stock option shall not exceed ten years from the date of grant. However, an incentive stock option granted to an employee who, at the time of grant, owns stock possessing more than 10% of the total combined voting power of all classes of our stock may not have a term exceeding five years from the date of grant.

 

The following is a summary of stock option activity under the Plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

 

 

2016

 

2015

 

 

    

 

    

Weighted

    

 

    

Weighted

 

 

 

 

 

average

 

 

 

average

 

 

 

 

 

exercise

 

 

 

exercise

 

 

 

Shares

 

price

 

Shares

 

price

 

Outstanding at beginning of period

 

6,441,573

 

$

9.59

 

5,012,034

 

$