10-Q 1 crvl-10q_20190930.htm 10-Q crvl-10q_20190930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 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 September 30, 2019

or

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

For the transition period from            to           

Commission file number 0-19291

 

CORVEL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

33-0282651

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

2010 Main Street, Suite 600

 

 

Irvine, CA

 

92614

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (949) 851-1473

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, Par Value $0.0001 Per Share

 

CRVL

 

NASDAQ Global Select Market

 

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 every Interactive Data File required to be submitted 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 such files).    Yes      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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 outstanding of the registrant's Common Stock, $0.0001 par value per share, as of November 1, 2019, was 18,280,035.

 

 


CORVEL CORPORATION

FORM 10-Q

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

3

 

 

 

 

 

Consolidated Balance Sheets (unaudited) – September 30, 2019  and March 31, 2019

 

3

 

Consolidated Income Statements (unaudited) – Three months ended September 30, 2019 and 2018

 

4

 

Consolidated Income Statements (unaudited) – Six months ended September 30, 2019 and 2018

 

5

 

Consolidated Statements of Stockholders’ Equity (unaudited) – Three and six months ended September 30, 2019 and 2018

 

6

 

Consolidated Statements of Cash Flows (unaudited) – Six months ended September 30, 2019 and 2018

 

7

 

Notes to Consolidated Financial Statements (unaudited) – September 30, 2019

 

8

 

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

18

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

25

 

 

 

 

Item 4.

Controls and Procedures

 

25

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

26

 

 

 

 

Item 1A.

Risk Factors

 

26

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

34

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

34

 

 

 

 

Item 4.

Mine Safety Disclosures

 

34

 

 

 

 

Item 5.

Other Information

 

34

 

 

 

 

Item 6.

Exhibits

 

35

 

 

 

 

 

Signatures

 

36

 

Page 2


Part I FINANCIAL INFORMATION

Item 1 – Financial Statements

CORVEL CORPORATION

CONSOLIDATED BALANCE SHEETS

 

 

 

September 30, 2019

 

 

March 31, 2019

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

97,920,000

 

 

$

91,713,000

 

Customer deposits

 

 

42,122,000

 

 

 

45,268,000

 

Accounts receivable, net

 

 

71,421,000

 

 

 

71,336,000

 

Prepaid taxes and expenses

 

 

7,623,000

 

 

 

7,176,000

 

Total current assets

 

 

219,086,000

 

 

 

215,493,000

 

Property and equipment, net

 

 

72,294,000

 

 

 

61,980,000

 

Goodwill

 

 

36,814,000

 

 

 

36,814,000

 

Other intangibles, net

 

 

2,757,000

 

 

 

2,975,000

 

Right-of-use asset, net (Note 10)

 

 

94,379,000

 

 

 

 

Other assets

 

 

1,439,000

 

 

 

756,000

 

TOTAL ASSETS

 

$

426,769,000

 

 

$

318,018,000

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts and taxes payable (Note 9)

 

$

19,657,000

 

 

$

11,478,000

 

Accrued liabilities (Note 9)

 

 

113,284,000

 

 

 

105,441,000

 

Total current liabilities

 

 

132,941,000

 

 

 

116,919,000

 

Deferred income taxes

 

 

5,688,000

 

 

 

6,294,000

 

Long-term operating lease liabilities (Note 10)

 

 

87,324,000

 

 

 

 

Total liabilities

 

 

225,953,000

 

 

 

123,213,000

 

Commitments and contingencies (Notes 7 and 8)

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

Common stock, $.0001 par value: 120,000,000 shares authorized at September 30, 2019

   and March 31, 2019; 54,176,531 shares issued (18,364,416 shares outstanding, net of

   Treasury shares) and 54,021,032 shares issued (18,557,794 shares outstanding, net of

   Treasury shares) at September 30, 2019 and March 31, 2019, respectively

 

 

3,000

 

 

 

3,000

 

Paid-in capital

 

 

163,847,000

 

 

 

155,798,000

 

Treasury Stock (35,812,115 shares at September 30, 2019 and 35,463,238 shares at

   March 31, 2019)

 

 

(494,472,000

)

 

 

(466,156,000

)

Retained earnings

 

 

531,438,000

 

 

 

505,160,000

 

Total stockholders' equity

 

 

200,816,000

 

 

 

194,805,000

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

426,769,000

 

 

$

318,018,000

 

 

See accompanying notes to unaudited consolidated financial statements.

Page 3


CORVEL CORPORATION

CONSOLIDATED INCOME STATEMENTS – UNAUDITED

 

 

 

Three Months Ended September 30,

 

 

 

2019

 

 

2018

 

REVENUES

 

$

146,970,000

 

 

$

148,176,000

 

Cost of revenues

 

 

114,127,000

 

 

 

116,686,000

 

Gross profit

 

 

32,843,000

 

 

 

31,490,000

 

General and administrative expenses

 

 

16,593,000

 

 

 

15,094,000

 

Income before income tax provision

 

 

16,250,000

 

 

 

16,396,000

 

Income tax provision

 

 

3,379,000

 

 

 

3,607,000

 

NET INCOME

 

$

12,871,000

 

 

$

12,789,000

 

Net income per common and common equivalent share

 

 

 

 

 

 

 

 

Basic

 

$

0.70

 

 

$

0.68

 

Diluted

 

$

0.69

 

 

$

0.67

 

Weighted average common and common equivalent shares

 

 

 

 

 

 

 

 

Basic

 

 

18,452,000

 

 

 

18,877,000

 

Diluted

 

 

18,771,000

 

 

 

19,089,000

 

 

See accompanying notes to unaudited consolidated financial statements.

Page 4


CORVEL CORPORATION

CONSOLIDATED INCOME STATEMENTS – UNAUDITED

 

 

 

Six Months Ended September 30,

 

 

 

2019

 

 

2018

 

REVENUES

 

$

297,109,000

 

 

$

298,574,000

 

Cost of revenues

 

 

231,132,000

 

 

 

235,731,000

 

Gross profit

 

 

65,977,000

 

 

 

62,843,000

 

General and administrative expenses

 

 

32,345,000

 

 

 

31,031,000

 

Income before income tax provision

 

 

33,632,000

 

 

 

31,812,000

 

Income tax provision

 

 

7,354,000

 

 

 

7,245,000

 

NET INCOME

 

$

26,278,000

 

 

$

24,567,000

 

Net income per common and common equivalent share

 

 

 

 

 

 

 

 

Basic

 

$

1.42

 

 

$

1.30

 

Diluted

 

$

1.40

 

 

$

1.29

 

Weighted average common and common equivalent shares

 

 

 

 

 

 

 

 

Basic

 

 

18,488,000

 

 

 

18,899,000

 

Diluted

 

 

18,779,000

 

 

 

19,095,000

 

 

See accompanying notes to unaudited consolidated financial statements.

Page 5


CORVEL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY – UNAUDITED

 

 

 

Three Months Ended September 30, 2019

 

 

 

Common

Shares

 

 

Stock

Amount

 

 

Paid-in-

Capital

 

 

Treasury

Shares

 

 

Treasury

Stock

 

 

Retained

Earnings

 

 

Total

Stockholders'

Equity

 

Balance – June 30, 2019

 

 

54,117,215

 

 

$

3,000

 

 

$

160,522,000

 

 

 

(35,587,649

)

 

$

(475,275,000

)

 

$

518,567,000

 

 

$

203,817,000

 

Stock issued under employee stock

   purchase plan

 

 

3,323

 

 

 

 

 

 

239,000

 

 

 

 

 

 

 

 

 

 

 

 

239,000

 

Stock issued under stock option plan,

   net of shares repurchased

 

 

55,993

 

 

 

 

 

 

1,888,000

 

 

 

 

 

 

 

 

 

 

 

 

1,888,000

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,198,000

 

 

 

 

 

 

 

 

 

 

 

 

1,198,000

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

(224,466

)

 

 

(19,197,000

)

 

 

 

 

 

(19,197,000

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,871,000

 

 

 

12,871,000

 

Balance – September 30, 2019

 

 

54,176,531

 

 

$

3,000

 

 

$

163,847,000

 

 

 

(35,812,115

)

 

$

(494,472,000

)

 

$

531,438,000

 

 

$

200,816,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

 

 

Common

Shares

 

 

Stock

Amount

 

 

Paid-in-

Capital

 

 

Treasury

Shares

 

 

Treasury

Stock

 

 

Retained

Earnings

 

 

Total

Stockholders'

Equity

 

Balance – June 30, 2018

 

 

53,839,539

 

 

$

3,000

 

 

$

146,102,000

 

 

 

(34,947,632

)

 

$

(434,475,000

)

 

$

470,235,000

 

 

$

181,865,000

 

Stock issued under employee stock

   purchase plan

 

 

4,228

 

 

 

 

 

$

252,000

 

 

 

 

 

 

 

 

 

 

 

 

252,000

 

Stock issued under stock option plan,

   net of shares repurchased

 

 

63,665

 

 

 

 

 

 

2,066,000

 

 

 

 

 

 

 

 

 

 

 

 

2,066,000

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

908,000

 

 

 

 

 

 

 

 

 

 

 

 

908,000

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

(133,425

)

 

 

(7,816,000

)

 

 

 

 

 

(7,816,000

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,789,000

 

 

 

12,789,000

 

Balance – September 30, 2018

 

 

53,907,432

 

 

$

3,000

 

 

$

149,328,000

 

 

 

(35,081,057

)

 

$

(442,291,000

)

 

$

483,024,000

 

 

$

190,064,000

 

 

 

 

Six Months Ended September 30, 2019

 

 

 

Common

Shares

 

 

Stock

Amount

 

 

Paid-in-

Capital

 

 

Treasury

Shares

 

 

Treasury

Stock

 

 

Retained

Earnings

 

 

Total

Stockholders'

Equity

 

Balance – March 31, 2019

 

 

54,021,032

 

 

$

3,000

 

 

$

155,798,000

 

 

 

(35,463,238

)

 

$

(466,156,000

)

 

$

505,160,000

 

 

$

194,805,000

 

Stock issued under employee stock

   purchase plan

 

 

3,323

 

 

 

 

 

 

239,000

 

 

 

 

 

 

 

 

 

 

 

 

239,000

 

Stock issued under stock option plan,

   net of shares repurchased

 

 

152,176

 

 

 

 

 

 

5,387,000

 

 

 

 

 

 

 

 

 

 

 

 

5,387,000

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,423,000

 

 

 

 

 

 

 

 

 

 

 

 

2,423,000

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

(348,877

)

 

 

(28,316,000

)

 

 

 

 

 

(28,316,000

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26,278,000

 

 

 

26,278,000

 

Balance – September 30, 2019

 

 

54,176,531

 

 

$

3,000

 

 

$

163,847,000

 

 

 

(35,812,115

)

 

$

(494,472,000

)

 

$

531,438,000

 

 

$

200,816,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended September 30, 2018

 

 

 

Common

Shares

 

 

Stock

Amount

 

 

Paid-in-

Capital

 

 

Treasury

Shares

 

 

Treasury

Stock

 

 

Retained

Earnings

 

 

Total

Stockholders'

Equity

 

Balance – March 31, 2018

 

 

53,793,986

 

 

$

3,000

 

 

$

143,705,000

 

 

 

(34,881,079

)

 

$

(430,989,000

)

 

$

458,457,000

 

 

$

171,176,000

 

Stock issued under employee stock

   purchase plan

 

 

4,228

 

 

$

 

 

$

252,000

 

 

 

 

 

$

 

 

$

 

 

$

252,000

 

Stock issued under stock option plan,

   net of shares repurchased

 

 

109,218

 

 

 

 

 

 

3,284,000

 

 

 

 

 

 

 

 

 

 

 

 

3,284,000

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

2,087,000

 

 

 

 

 

 

 

 

 

 

 

 

2,087,000

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

(199,978

)

 

 

(11,302,000

)

 

 

 

 

 

(11,302,000

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24,567,000

 

 

 

24,567,000

 

Balance – September 30, 2018

 

 

53,907,432

 

 

$

3,000

 

 

$

149,328,000

 

 

 

(35,081,057

)

 

$

(442,291,000

)

 

$

483,024,000

 

 

$

190,064,000

 

 

See accompanying notes to unaudited consolidated financial statements.

Page 6


CORVEL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED

 

 

 

Six Months Ended September 30,

 

 

 

2019

 

 

2018

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

NET INCOME

 

$

26,278,000

 

 

$

24,567,000

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

17,750,000

 

 

 

11,275,000

 

Loss (gain) on write down or disposal of property, capitalized software or investment

 

 

26,000

 

 

 

(37,000

)

Stock compensation expense

 

 

2,423,000

 

 

 

2,087,000

 

Provision for doubtful accounts

 

 

841,000

 

 

 

1,503,000

 

Deferred income tax

 

 

(606,000

)

 

 

(521,000

)

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(926,000

)

 

 

(1,628,000

)

Customer deposits

 

 

3,146,000

 

 

 

(5,837,000

)

Prepaid taxes and expenses

 

 

(447,000

)

 

 

(502,000

)

Other assets

 

 

(682,000

)

 

 

125,000

 

Accounts and taxes payable

 

 

4,389,000

 

 

 

248,000

 

Accrued liabilities

 

 

7,843,000

 

 

 

17,320,000

 

Operating lease liabilities

 

 

(13,596,000

)

 

 

 

Net cash provided by operating activities

 

 

46,439,000

 

 

 

48,600,000

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(17,542,000

)

 

 

(6,473,000

)

Net cash (used in) investing activities

 

 

(17,542,000

)

 

 

(6,473,000

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Purchase of treasury stock

 

 

(28,316,000

)

 

 

(11,302,000

)

Exercise of common stock options

 

 

5,387,000

 

 

 

3,285,000

 

Exercise of employee stock purchase options

 

 

239,000

 

 

 

252,000

 

Net cash (used in) financing activities

 

 

(22,690,000

)

 

 

(7,765,000

)

Increase in cash and cash equivalents

 

 

6,207,000

 

 

 

34,362,000

 

Cash and cash equivalents at beginning of period

 

 

91,713,000

 

 

 

55,771,000

 

Cash and cash equivalents at end of period

 

$

97,920,000

 

 

$

90,133,000

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

 

Income taxes paid

 

$

8,157,000

 

 

$

5,585,000

 

Purchase of software license under finance agreement

 

$

3,790,000

 

 

$

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

Page 7


CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

 

Note 1 — Summary of Significant Accounting Policies

Basis of Presentation: The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.

The unaudited consolidated financial statements herein have been prepared by CorVel Corporation (“the Company”) pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”).  The accompanying interim unaudited financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited consolidated financial statements for the latest fiscal year ended March 31, 2019.  Accordingly, note disclosures which would substantially duplicate the disclosures contained in the March 31, 2019 audited consolidated financial statements have been omitted from these interim unaudited consolidated financial statements.

The Company evaluated all subsequent events and transactions through the date of filing this report.

Certain information and note disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included.  Operating results for the three and six months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2020.  For further information, refer to the audited consolidated financial statements and notes thereto for the fiscal year ended March 31, 2019 included in the Company's Annual Report on Form 10-K filed with the SEC on June 7, 2019.

Recent Accounting Pronouncements: In June 2016, the FASB issued ASU 2016-13 regarding ASC Topic 326, “Measurement of Credit Losses on Financial Instruments”. The pronouncement changes the impairment model for most financial assets and will require the use of an "expected loss" model for instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. Subsequently, the FASB issued an amendment to clarify the implementation dates and items that fall within the scope of this pronouncement. This standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  We are still evaluating the timing and impact this guidance will have on our consolidated financial statements.  

In January 2017, the FASB issued ASU 2017-04 regarding ASC Topic 350, “Simplifying the Test for Goodwill Impairment”.  The pronouncement simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test. Under this guidance, if the carrying amount of a reporting unit exceeds its estimated fair value, an impairment charge shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. This standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. We are still evaluating the impact of this guidance on future annual or interim goodwill impairment tests performed.

Guidance Adopted: In February 2016, the FASB issued ASU No. 2016-02, “Leases”, which sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for using an approach that is similar to the existing guidance for operating leases.  The standard is to be applied using a modified retrospective transition method. The Company has adopted this standard as of April 1, 2019.  The adoption of this standard did not have an impact on retained earnings on the consolidated balance sheet and did not have a material impact on the consolidated statements of income. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company to carry forward the historical assessments of whether contracts are or contain leases, lease classification, and initial direct costs. The Company implemented internal controls and key system functionality to enable the preparation of financial information on adoption.  Refer to Note 10 of the accompanying consolidated financial statements for a description of the impact of this adopted guidance.

Page 8


 

Note 2 – Revenue Recognition

The Company adopted ASC 606 using the modified retrospective method for those contracts which were not substantially completed as of the transition date.  The reported results for the three and six months ended September 30, 2019 and 2018 reflect the application of the guidance of ASC 606.

Revenue from Contracts with Customers

Revenue is recognized when control of the promised services is transferred to the Company’s customers in an amount that reflects the consideration expected to be entitled to in exchange for those services. As the Company completes its performance obligations, which are identified below, it has an unconditional right to consideration as outlined in the Company’s contracts. Generally, the Company’s accounts receivable are expected to be collected in 30 days in accordance with the underlying payment terms.

The Company generates revenue through its patient management and network solutions service lines. The Company operates in one reportable operating segment, managed care.

Patient Management Service Line

The patient management service line provides services primarily related to workers’ compensation claims management and case management. This service line also includes additional services such as accident and health claims programs. Each claim referred by the customer is considered an additional optional purchase of claims management services under the agreement with the customer. The transaction price is readily available from the contract and is fixed for each service. Revenue is recognized over time as services are provided as the performance obligations are satisfied through the effort expended to research, investigate, evaluate, document, and report the claim and control of these services is transferred to the customer. Revenue is recognized based on historical claim closure rates and claim type applied utilizing a portfolio approach based on the time elapsed for these claims, generally between three and fifteen months. The Company believes this approach reasonably reflects the transfer of the claims management services to its customers.

The Company’s obligation to manage claims and cases under the patient management service line can range from less than one year to multi-year contracts. They are generally one year under the terms of the contract; however, many of these contracts contain auto-renewal provisions and the Company’s customer relationships can span multiple years. Under certain claims management agreements, the Company receives consideration from a customer at contract inception prior to transferring services to the customer, however, it would begin performing services immediately. The period between a customer’s payment of consideration and the completion of the promised services is generally less than one year. There is no difference between the amount of promised consideration and the cash selling price of the promised services. The fee is billed upfront by the Company to provide customers with simplified and predictable ways of purchasing its services.

The patient management service line also offers case managers who provide administration services by proactively managing medical treatment for claimants while facilitating an understanding of, and participation in, their rehabilitation process. Revenue for case management services is recognized over time as the performance obligations are satisfied through the effort expended to manage the medical treatment for claimants and control of these services is transferred to the customer. Case management services are generally billed based on time incurred, are considered variable consideration, and revenue is recognized at the amount at which the Company has the right to invoice for services performed. The Company believes this approach reasonably reflects the transfer of the case management service to the customer.

 

 

Network Solutions Service Line

The network solutions service line consists primarily of medical bill review and third-party services. Medical bill review services provide an analysis of medical charges for customers’ claims to identify opportunities for savings. Medical bill review services revenues are recognized at a point in time when control of the service is transferred to the customer. Revenue is recognized based upon the transfer of the results of the medical bill review service to the customer as this is the most accurate depiction of the transfer of the service to the customer. Medical bill review revenues are variable, generally based on performance metrics set forth in the underlying contracts. Each period, the Company bases its estimates on a contract-by-contract basis. The Company makes its best estimate of amounts the Company has earned and expects to be collected using historical averages and other factors to project such revenues. Variable consideration is recognized when the Company concludes that it is probable that a significant revenue reversal will not occur in future periods.

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Third-party services revenue includes pharmacy, directed care services and other services, and includes amounts received from customers compensating the Company for certain third-party costs associated with providing its integrated network solutions services. The Company is considered the principal in these transactions as it directs the third party, controls the specified service, performs program utilization review, directs payment to the provider, accepts the financial risk of loss associated with services rendered, and combines the services provided into an integrated solution, as specified within the Company’s customer contracts. The Company has the ability to influence contractual fees with customers and possesses the financial risk of loss in certain contractual obligations. These factors indicate the Company is the principal and, as such, it is required to recognize revenue gross and service partner vendor fees in the operating expense in the Company’s consolidated income statements.

The following table presents revenues disaggregated by service line for the three and six months ended September 30, 2019 and September 30, 2018:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

September 30, 2019

 

 

September 30, 2019

 

Patient management services

 

$

95,715,000

 

 

$

195,202,000

 

Network solutions services

 

 

51,255,000

 

 

 

101,907,000

 

Total services

 

$

146,970,000

 

 

$

297,109,000

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

September 30, 2018

 

 

September 30, 2018

 

Patient management services

 

$

91,945,000

 

 

$

179,836,000

 

Network solutions services

 

 

56,231,000

 

 

 

118,738,000

 

Total services

 

$

148,176,000

 

 

$

298,574,000

 

 

Arrangements with Multiple Performance Obligations

 

For many of the Company’s services, the Company typically has one performance obligation; however, it also provides the customer with an option to acquire additional services. The Company offers multiple services under its patient management and network solutions service lines.  The Company typically provides a menu of offerings from which the customer may choose to purchase. The price of each service is separate and distinct and provides a separate and distinct value to the customer. Pricing is generally consistent for each service irrespective of the other services or quantities requested by the customer.

 

Contract Balances

 

The timing of revenue recognition, billings, and cash collections results in billed accounts receivables, contract assets (reported as unbilled revenues at estimated billable amounts), and contract liabilities (reported as deferred revenues) on the Company’s consolidated balance sheets. Unbilled revenues is a contract asset for revenue that has been recognized in advance of billing the customer, resulting from professional services delivered that the Company expects and is entitled to receive as consideration under certain contracts. Billing requirements vary by contract but substantially all unbilled revenues are billed within one year.

 

 

 

September 30, 2019

 

 

March 31, 2019

 

Billed receivables

 

$

61,065,000

 

 

$

58,410,000

 

Allowance for doubtful accounts

 

 

(5,608,000

)

 

 

(5,508,000

)

Contract assets

 

 

15,964,000

 

 

 

18,434,000

 

Accounts receivable, net

 

$

71,421,000

 

 

$

71,336,000

 

 

When the Company receives consideration from a customer prior to transferring services to the customer under the terms of certain claims management agreements, it records deferred revenues on the Company’s consolidated balance sheets, which represents a contract liability.

 

Certain services, such as claims management, are provided under fixed-fee service agreements and require the Company to manage claims over a contract period, typically for one year with the option for auto renewal, with the fixed fee renewing on the anniversary date of such contracts.  The Company recognizes deferred revenues as revenues when it performs services, transfers control of the services to the customer, and satisfies the performance obligation which it determines utilizing a portfolio approach. For all fixed fee service agreements, revenues are recognized over the expected service periods by type of claim.

 

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The table below presents the deferred revenues balance and the significant activity affecting deferred revenues during the six months ended September 30, 2019:

 

 

 

September 30, 2019

 

Beginning balance at April 1, 2019 (Note 9)

 

$

16,900,000

 

Additions

 

 

14,772,000

 

Revenue recognized from beginning of period

 

 

(8,723,000

)

Revenue recognized from additions

 

 

(5,411,000

)

Ending balance at September 30, 2019 (Note 9)

 

$

17,538,000

 

 

Remaining Performance Obligations

 

As of September 30, 2019, the Company had $54.4 million of remaining performance obligations related to claims and non-claims services for which the price is fixed. Remaining performance obligations consist of deferred revenues as well as certain unbilled receivables that are considered contract assets. The Company expects to recognize approximately 61% of its remaining performance obligations as revenues within one year and the remaining balance thereafter. See the discussion below regarding the practical expedients elected for the disclosure of remaining performance obligations.

 

Costs to Obtain a Contract

 

The Company has an internal sales force compensation program where remuneration is based solely on the revenues recognized in the period and does not represent an incremental cost to the Company which provides a future benefit expected to be longer than one year and would meet the criteria to be capitalized and presented as a contract asset on the Company’s consolidated balance sheets.

 

Practical Expedients Elected

 

As a practical expedient, the Company does not adjust the consideration in a contract for the effects of a significant financing component. It expects, at contract inception, that the period between a customer’s payment of consideration and the transfer of promised services to the customer will be one year or less.

 

For patient management services that are billed on a time-and-expense incurred or per unit basis and revenue is recognized over time, the Company recognizes revenue at the amount to which it has the right to invoice for services performed.

 

The Company does not disclose the value of remaining performance obligations for (i) contracts for which it recognizes revenue at the amount to which it has the right to invoice for services performed, and (ii) contracts with variable consideration allocated entirely to a single performance obligation.

Note 3 — Stock-Based Compensation and Stock Options

Under the Company’s Restated Omnibus Incentive Plan (formerly the Restated 1988 Executive Stock Option Plan) (“the Plan”) as in effect at September 30, 2019, options exercisable for up to 19,865,000 shares of the Company’s common stock may be granted over the life of the Plan to key employees, non-employee directors, and consultants at exercise prices not less than the fair market value of the stock on the date of grant. Options granted under the Plan are non-statutory stock options and generally vest 25% one year from the date of grant with the remaining 75% vesting ratably each month for the next 36 months. The options granted to employees and the Company’s Board of Directors expire at the end of five years and ten years from the date of grant, respectively.  All options granted in the six months ended September 30, 2019 and 2018 were granted with an exercise price equal to the fair value of the Company’s common stock on the grant date and are non-statutory stock options.

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The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model with the assumptions included in the table below. The Company uses historical data, among other factors, to estimate the expected volatility, the expected dividend yield and the expected option life. The Company accounts for forfeitures as they occur, rather than estimating expected forfeitures.  The risk-free rate is based on the interest rate paid on a U.S. Treasury issue with a term similar to the estimated life of the option.  The following assumptions were used to estimate the fair value of options granted during the three months ended September 30, 2019 and 2018 using the Black-Scholes option-pricing model:

 

 

 

Three Months Ended

 

 

 

September 30, 2019

 

 

September 30, 2018

 

Risk-free interest rate

 

1.54%

 

 

2.85%

 

Expected volatility

 

31%

 

 

39%

 

Expected dividend yield

 

 

0.00%

 

 

 

0.00%

 

Expected weighted average life of option in years

 

4.4 years

 

 

4.4 years

 

 

For the three months ended September 30, 2019 and 2018, the Company recorded share-based compensation expense of $1,198,000 and $908,000, respectively. For the six months ended September 30, 2019 and 2018, the Company recorded share-based compensation expense of $2,423,000 and $2,087,000. The table below shows the amounts recognized in the unaudited consolidated financial statements for stock compensation expense for time-based options and performance-based options during the three and six months ended September 30, 2019 and 2018, respectively.  

 

 

 

Three Months Ended

 

 

 

September 30, 2019

 

 

September 30, 2018

 

Cost of revenues

 

$

518,000

 

 

$

446,000

 

General and administrative

 

 

680,000

 

 

 

462,000

 

Total cost of stock-based compensation included in

   income before income tax provision

 

 

1,198,000

 

 

 

908,000

 

Amount of income tax benefit recognized

 

 

(249,000

)

 

 

(207,000

)

Amount charged against net income

 

$

949,000

 

 

$

701,000

 

Effect on basic earnings per share

 

$

(0.05

)

 

$

(0.04

)

Effect on diluted earnings per share

 

$

(0.05

)

 

$

(0.04

)

 

 

 

Six Months Ended

 

 

 

September 30, 2019

 

 

September 30, 2018

 

Cost of revenues

 

$

1,002,000

 

 

$

877,000

 

General and administrative

 

 

1,421,000

 

 

 

1,210,000

 

Total cost of stock-based compensation included in

   income before income tax provision

 

 

2,423,000

 

 

 

2,087,000

 

Amount of income tax benefit recognized

 

 

(528,000

)

 

 

(475,000

)

Amount charged against net income

 

$

1,895,000

 

 

$

1,612,000

 

Effect on basic earnings per share

 

$

(0.10

)

 

$

(0.09

)

Effect on diluted earnings per share

 

$

(0.10

)

 

$

(0.08

)

 

Page 12


 

The following table summarizes information for all stock options for the three and six months ended September 30, 2019 and 2018:

 

 

 

Three Months Ended September 30, 2019

 

 

Three Months Ended September 30, 2018

 

 

 

Shares

 

 

Weighted

Average

Exercise Price

 

 

Shares

 

 

Weighted

Average

Exercise Price

 

Options outstanding, beginning

 

 

1,000,830

 

 

$

47.05

 

 

 

1,063,254

 

 

$

40.43

 

Options granted

 

 

50,450

 

 

 

87.49

 

 

 

59,800

 

 

 

57.35

 

Options exercised

 

 

(55,993

)

 

 

33.72

 

 

 

(66,870

)

 

 

33.50

 

Options cancelled/forfeited

 

 

(5,223

)

 

 

51.52

 

 

 

(2,877

)

 

 

40.45

 

Options outstanding, ending

 

 

990,064

 

 

$

49.84

 

 

 

1,053,307

 

 

$

41.81

 

 

 

 

Six Months Ended September 30, 2019

 

 

Six Months Ended September 30, 2018

 

 

 

Shares

 

 

Weighted

Average

Exercise Price

 

 

Shares

 

 

Weighted

Average

Exercise Price