Notes to the Consolidated Financial Statements
December 31, 2022
1. Organization and Basis of Presentation
Description of Business
ModivCare Inc. ("ModivCare" or the "Company") is a technology-enabled healthcare services company that provides a suite of integrated supportive care solutions for public and private payors and their members. Its value-based solutions address the social determinants of health, or SDoH, connect members to care, help health plans manage risks, reduce costs, and improve outcomes. ModivCare is a provider of non-emergency medical transportation, or NEMT, personal care, and remote patient monitoring, or RPM, solutions, which serve similar, highly vulnerable patient populations. The technology-enabled operating model includes NEMT core competencies in risk underwriting, contact center management, network credentialing, claims management and non-emergency medical transportation management. Additionally, its personal care services include placements of non-medical personal care assistants, home health aides and nurses primarily to Medicaid patient populations in need of care monitoring and assistance performing daily living activities in the home setting. ModivCare’s remote patient monitoring services include personal emergency response systems, vitals monitoring and data-driven patient engagement solutions. ModivCare is further expanding its offerings to include meal delivery and working with communities to provide meals to food-insecure individuals.
ModivCare also holds a 43.6% minority interest in CCHN Group Holdings, Inc. and its subsidiaries, which operates under the Matrix Medical Network brand (“Matrix”). Matrix, which is included in our Corporate and Other segment, maintains a national network of community-based clinicians who deliver in-home and on-site services, and a fleet of mobile health clinics that provide community-based care with advanced diagnostic capabilities and enhanced care options.
Basis of Presentation
The Company follows accounting standards established by the Financial Accounting Standards Board (“FASB”). The FASB establishes accounting principles generally accepted in the United States (“GAAP”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. References to GAAP issued by the FASB in these notes are to the FASB Accounting Standards Codification (“ASC”), which serves as the single source of authoritative accounting and applicable reporting standards to be applied for non-governmental entities. All amounts are presented in U.S. dollars unless otherwise noted.
The Company accounts for its investment in Matrix using the equity method, as the Company does not control the decision-making process or business management practices of Matrix. While the Company has access to certain information and performs certain procedures to review the reasonableness of information, the Company relies on the management of Matrix to provide accurate financial information prepared in accordance with GAAP. The Company receives audit reports relating to such financial information from Matrix’s independent auditors on an annual basis. The Company is not aware of any errors in or possible misstatements of the financial information provided by Matrix that would have a material effect on the Company’s consolidated financial statements. See Note 7, Equity Investment, for further information.
Reclassifications: Certain prior year amounts have been reclassified to conform to current year presentation.
Impact of the COVID-19 Pandemic
Since March 2020, the COVID-19 pandemic and the measures enacted by state and government officials to prevent, prepare for, and respond to COVID-19 or slow its spread have had an ongoing adverse impact on the Company’s business, as well as its patients, communities, and employees. With ongoing uncertainties around the duration and magnitude of the pandemic, the ultimate impact to the business remains uncertain. Accordingly, the COVID-19 pandemic could continue to have an adverse impact on the Company's financial statements with potential for (i) labor shortages or other disruptions that impact our ability to provide services, (ii) decreased member comfort leaving the house to obtain transportation for non-emergency medical purposes, and (iii) supply chain challenges that may cause an increase in the costs of providing our services; among other things. Despite ongoing uncertainties, the Company continues to actively monitor the pandemic and any future impact it may have on our business and results of operations with emphasis on protecting the health and safety of its employees, maximizing the availability of its services and products to support the SDoH, and supporting the operational and financial stability of its business.
Federal, state, and local authorities have taken several actions designed to assist healthcare providers in providing care to COVID-19 and other patients and to mitigate the adverse economic impact of the COVID-19 pandemic. Legislative actions taken by the federal government include the CARES Act and the American Rescue Plan Act of 2021 ("ARPA"). Through the CARES Act, the federal government has authorized payments to be distributed to healthcare providers through the Public Health and Social Services Emergency Fund ("Provider Relief Fund" or "PRF"). The Government further initiated ARPA which established the Coronavirus State and Local Fiscal Recovery Fund ("SLFRF") to send relief payments to state and local governments impacted by the pandemic to assist with responding to the public health emergency (“PHE”) including the economic hardships that continue to impact communities and to respond to workers performing essential work during the COVID-19 PHE, including providers. These funds are not subject to repayment, provided we are able to attest and comply with any terms and conditions of such funding, as applicable.
2. Significant Accounting Policies and Recent Accounting Pronouncements
Principles of Consolidation
The accompanying consolidated financial statements include ModivCare Inc., its wholly-owned subsidiaries, and entities it controls, or in which it has a variable interest and is the primary beneficiary of expected cash profits or losses. The Company records its investments in entities that it does not control, but over which it has the ability to exercise significant influence, using the equity method. The Company has eliminated significant intercompany transactions and accounts.
Accounting Estimates
The Company uses estimates and assumptions in the preparation of the consolidated financial statements in accordance with GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the Company’s consolidated financial statements. These estimates and assumptions also affect the reported amount of net income or loss during any period. The Company’s actual financial results could differ significantly from these estimates. The significant estimates underlying the Company’s consolidated financial statements include revenue recognition; accrued transportation costs; income taxes; recoverability of current and long-lived assets, including equity method investments; intangible assets and goodwill; loss contingencies; accounting for business combinations, including amounts assigned to definite and indefinite lived intangibles and contingent consideration; and loss reserves for reinsurance and self-funded insurance programs.
Changes in Accounting Estimate
In accordance with its policy, the Company reviews the estimated useful lives of its fixed assets and intangible assets on an ongoing basis. As a result of this review, the Company adjusted the estimated useful life of the OEP AM, Inc. (together with its subsidiaries doing business as "Simplura Health Group", or Simplura) trademarks and trade names intangible asset from 10 years to 3 years and adjusted the estimated useful life of the payor network from 15 years to 10 years effective as of January 1, 2022. This change was driven by strategic shifts in the Company's Personal Care segment operations, partially contributed to by the acquisition of Care Finders Total Care, LLC ("Care Finders"). Based on the intangible asset values as of December 31, 2021, the effect of the change in estimate during the year ended December 31, 2022 was an increase in amortization expense of $14.3 million, a decrease in net income of $10.3 million, and a decrease in earnings per share of $0.73 per diluted common share outstanding.
Fair Value Measurements
The Company follows FASB ASC Topic 820, Fair Value Measurement (“ASC 820”) which establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:
–Level 1: Quoted Prices in Active Markets for Identical Assets – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
–Level 2: Significant Other Observable Inputs – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
–Level 3: Significant Unobservable Inputs – inputs to the valuation methodology are unobservable and significant to the fair value measurement.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. As of December 31, 2022 and 2021, the carrying amount for cash and cash equivalents, accounts receivable (net of allowance for credit losses) and current liabilities was equal to or approximated fair value due to their short-term nature or proximity to current market rates. Fair values for our publicly traded debt securities are based on quoted market prices, when available. See Note 12, Debt, for the fair value of our long-term debt.
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid investments with an initial maturity of three months or less. Investments in cash equivalents are carried at cost, which approximates fair value. The Company places its temporary cash investments with high credit quality financial institutions. At times, such investments may be in excess of the federally insured limits.
Accounts Receivable and Allowance for Doubtful Accounts
The Company records accounts receivable amounts at the contractual amount, less contractual revenue adjustments based on amounts expected to be due from payors and less an allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts at an amount it estimates to be sufficient to cover the risk that an account will not be collected due to credit risk. In order to establish the amount of the allowance related to the credit risk of accounts receivable, the Company considers information related to receivables that are past due, past loss experience, current and forecasted economic conditions, and other relevant factors. In circumstances where the Company is aware of a customer’s inability to meet its financial obligation, the Company records a specific allowance for doubtful accounts to reduce its net recognized receivable to an amount the Company reasonably expects to collect. As the Company primarily contracts with Medicaid and Medicare governmental payors, the Company is not subject to significant credit risk in the collection of accounts receivable.
The Company’s bad debt expense for the years ended December 31, 2022, 2021 and 2020 was $2.7 million, $1.7 million and $0.6 million, respectively.
Business Combinations
The Company accounts for acquisitions in accordance with ASC Topic 805, Business Combinations. The acquisition method of accounting requires the Company to make significant estimates and assumptions as of the date of the acquisition related to the determination of the fair values (primarily Level 3) of the acquired tangible and intangible assets and liabilities assumed, and related to the determination of estimated lives of the depreciable assets acquired. The Company recognizes goodwill at the amount by which the purchase price exceeds the fair value of identified assets acquired and liabilities assumed. See Note 3, Acquisitions, for further discussion of the Company’s acquisitions.
Property and Equipment
Property and equipment are stated at historical cost, net of accumulated depreciation, or at fair value if the assets were initially recorded as the result of a business combination or if the asset was remeasured due to an impairment. Depreciation is calculated using the straight-line method over the estimated useful life of the asset to the Company. Maintenance and repairs are expensed as incurred. Gains and losses resulting from the disposition of an asset are reflected in results of operations.
Internal-use Software
The Company develops and implements software for internal use to enhance the performance and capabilities of the technology infrastructure. The costs incurred for the development of the internal-use software are capitalized when they meet the internal-use software capitalization criteria outlined in ASC 350-40. The capitalized costs are amortized using the straight-line method over the estimated useful life of the software, ranging from 3 to 10 years.
In addition to acquired software, the Company capitalizes costs associated with cloud computing arrangements (“CCA”) that are service contracts. The CCA includes services which are used to support certain internal corporate functions as well as technology associated with revenue-generating activities. The capitalized costs are amortized using the straight-line
method over the term of the related CCA. As of December 31, 2022 and 2021, capitalized costs associated with CCA, net of accumulated amortization of $2.2 million and $0.6 million, were $11.9 million and $4.1 million, respectively. Amortization expense during the years ended December 31, 2022 and 2021, totaled $1.7 million and $0.5 million, respectively. Amortization expense during the year ended December 31, 2020 was immaterial.
Recoverability of Goodwill
In accordance with ASC 350, Intangibles-Goodwill and Other, the Company reviews goodwill for impairment annually, and more frequently if events and circumstances indicate that an asset may be impaired. Such circumstances could include, but are not limited to: (1) the loss or modification of significant contracts, (2) a significant adverse change in legal factors or in business climate, (3) unanticipated competition, (4) an adverse action or assessment by a regulator, or (5) a significant decline in the Company’s stock price. We perform our annual goodwill impairment test as of October 1.
First, we perform qualitative assessments for each reporting unit to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment suggests that it is more likely than not that the fair value of a reporting unit is less than its carrying value amount, then we perform a quantitative assessment and compare the fair value of the reporting unit to its carrying value and to the extent the carrying value is greater than the fair value, the difference is recorded as an impairment in the consolidated statements of operations.
The fair value of the Company's reporting units is estimated using either an income approach, a market valuation approach, or a blended approach. The income approach produces an estimated fair value of a reporting unit based on the present value of the cash flows the Company expects the reporting unit to generate in the future. Estimates included in the discounted cash flow model include the discount rate, which the Company determines based on adjusting an industry-wide weighted-average cost of capital for size, geography, and company specific risk factors, long-term rates of growth and profitability of the Company’s business, working capital effects and planned capital expenditures. The market approach produces an estimated fair value of a reporting unit based on a comparison of the reporting unit to comparable publicly traded entities in similar lines of business. The Company’s significant estimates in the market approach include the selected similar companies with comparable business factors such as size, growth, profitability, risk and return on investment and the multiples the Company applies to earnings before interest, taxes, depreciation and amortization (“EBITDA”) to estimate the fair value of the reporting unit.
Recoverability of Intangible Assets Subject to Amortization and Other Long-Lived Assets
Intangible assets subject to amortization and other long-lived assets are carried at cost and are amortized or depreciated on a straight-line basis over their estimated useful lives of 2 to 15 years. In accordance with ASC 360, Property, Plant, and Equipment, the Company reviews the carrying value of long-lived assets or groups of assets to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets may be impaired. Factors that may necessitate an impairment assessment include, among others, significant adverse changes in the extent or manner in which an asset or group of assets is used, significant adverse changes in legal factors or the business climate that could affect the value of an asset or group of assets or significant declines in the observable market value of an asset or group of assets. The presence or occurrence of those events indicates that an asset or group of assets may be impaired. In those cases, the Company assesses the recoverability of an asset or group of assets by determining whether the carrying value of the asset or group of assets exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the asset or the primary asset in the group of assets. If such testing indicates the carrying value of the asset or group of assets is not recoverable, the Company estimates the fair value of the asset or group of assets using appropriate valuation methodologies, which would typically include an estimate of discounted cash flows. If the fair value of those assets or groups of assets is less than carrying value, the Company records an impairment loss equal to the excess of the carrying value over the estimated fair value.
Accrued Transportation Costs
The Company generally contracts with third-party providers to provide transportation services to customers. The cost of transportation is recorded in the month the services are rendered based upon contractual rates and mileage estimates. Once a trip is completed, the third-party transportation providers will furnish invoices for actual mileage incurred. Any trips that have not been invoiced as of the reporting period require an accrual based upon the expected cost of the trips as well as an estimated number of cancellations, as the Company is generally only obligated to pay the transportation provider for completed trips. These estimates are based upon the historical trend associated with each contract’s population and the transportation provider network servicing the program. There may be differences between actual invoiced amounts and estimated costs, and any resulting adjustments are included in expense. Accrued transportation costs were $96.9 million and $103.3 million at December 31, 2022 and 2021, respectively.
Deferred Financing Costs and Debt Discounts
The Company capitalizes costs incurred in connection with its credit facilities and other borrowings, referred to as deferred financing costs, and amortizes such costs over the life of the respective credit facility or other borrowings. Costs associated with the revolving facility are capitalized as deferred financing costs and included in "Prepaid expenses and other current assets" on the consolidated balance sheets. Costs associated with term loans are capitalized and included as a reduction to the debt balance on the consolidated balance sheets. Deferred financing costs for the revolving loan, net of amortization, totaled $3.1 million and $1.4 million as of December 31, 2022 and 2021, respectively. Debt discounts for the $500.0 million Senior Unsecured Notes due 2025 of $8.9 million and $11.6 million are netted against the carrying balance of the long-term debt on the consolidated balance sheets as of December 31, 2022 and 2021, respectively. Debt discounts for the $500.0 million Senior Unsecured Notes due 2029 of $11.7 million and $13.1 million are netted against the carrying balance of the long-term debt on the consolidated balance sheets as of December 31, 2022 and 2021, respectively.
Revenue Recognition
Under ASC 606, the Company recognizes revenue as it transfers promised services to its customers and generates all of its revenue from contracts with customers. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled in exchange for these services. The Company satisfies substantially all of its performance obligations over time and recognizes revenue over time instead of at points in time and applies the "as-invoiced" practical expedient which aligns the pattern of transfer of promised services with the value received by the customer for the performance completed to date. In the NEMT segment, the Company's performance obligation is to stand ready to perform transportation-related activities, including the management, fulfillment, and recordkeeping activities associated with such services. In the Personal Care segment, the Company's performance obligation is to deliver patient care services in accordance with the nature of services and hours worked per each contract. In the RPM segment, the Company's performance obligation is to stand ready to perform monitoring services in the form of personal emergency response system (PERS) monitoring, vitals monitoring, and medication management, as contractually agreed upon.
The Company holds different contract types under its different segments of business. In the NEMT segment, there are both capitated contracts, under which payors pay a fixed amount monthly per eligible member, and fee-for-service ("FFS") contracts, under which the Company bills and collects a specified amount for each service that is provided. Personal Care contracts are also FFS, and service revenue is reported at the estimated net realizable amount from clients, patients and third-party payors for services rendered. RPM service revenue consists of revenue from monitoring services provided to the customer. Under RPM contracts, payors pay per-enrolled-member-per-month, based on enrolled membership. For each contract type, the Company determines the transaction price based on the gross charges for services provided, reduced by estimates for contractual adjustments due to settlements of audits and payment reviews from third-party payors. The Company determines the estimated revenue adjustments at each segment based on our historical experience with various third-party payors and previous results from the claims and adjudication process. At the Personal Care segment, the Company uses the portfolio approach to determine the estimated revenue adjustments. See further information in Note 5, Revenue Recognition.
Government Grants
The Company has received government grants under the CARES Act PRF and the ARPA SLFRF to provide economic relief and stimulus to combat health and economic impacts of the COVID-19 pandemic. Under these acts, the Company received distributions of approximately $16.3 million and $5.4 million during the years ended December 31, 2022 and 2021, respectively, of which $7.4 million and $5.4 million were recognized as grant income during the years ended December 31, 2022 and 2021, respectively, with the remaining balance recorded in accrued expenses and other current liabilities. Distributions received under these acts are targeted to assist with incremental health care related expenses or lost revenue attributable to the COVID-19 pandemic as well as provide stimulus to support long-term growth and recovery.
The payments from these acts are subject to certain restrictions and possible recoupment if not used for designated purposes. As a condition to receiving PRF distributions, providers must agree to certain terms and conditions, including, among other things, that the funds are being used for healthcare related expenses and lost revenues attributable to COVID-19, as defined by the U.S. Department of Health and Human Services ("HHS"). All recipients of PRF payments are required to comply with the reporting requirements described in the terms and conditions and as determined by HHS. The Company has submitted the required documents to meet reporting requirements through reporting period three, which ended September 30, 2022. The Company received an audit inquiry letter from HHS related to one of the business units that received PRF payments, to which the Company has responded and submitted all requested information and believes that the payments received are substantiated and within the terms and conditions defined by HHS and continues to include these amounts as grant income. At this time, the Company is unaware of any other pending or upcoming audits or inquiries related to PRF received.
As a condition to receiving SLFRF, providers must agree to use the funds to respond to the PHE or its negative economic impacts, to respond to workers performing essential work by providing premium pay to eligible workers and to offset reduction in revenue due to the COVID-19 PHE as stipulated by the states in which the funds were received. All recipients of SLFRF payments are required to comply with the reporting requirements that the state in which the funds originated has requested in order for the states to meet the requirements as described in the terms and conditions as determined by the Department of the Treasury. The Company has complied with all known reporting requirements to date.
The Company recognizes distributions from government grants as grant income or accrued expenses and other current liabilities in line with the loss of revenues or expenses for which the grants are intended to compensate when there is reasonable assurance that it has complied with the conditions associated with the grant.
CARES Act Payroll Deferral
The CARES Act also provides for certain federal income and other tax changes, including the deferral of the employer portion of Social Security payroll taxes. During 2022, the Company paid all of its deferred payroll taxes under the CARES Act of $12.3 million and there were no deferred employer payroll taxes as of December 31, 2022. As of December 31, 2021, the Company had deferred payment of approximately $12.3 million related to the deferral of employer payroll taxes, which is recorded in "Accrued expenses and other current liabilities" on our consolidated balance sheets.
Stock-Based Compensation
The Company follows the fair value recognition provisions of ASC Topic 718 – Compensation – Stock Compensation (“ASC 718”), which requires companies to measure and recognize compensation expense for all share-based payments at fair value.
•The Company calculates the fair value of stock options using the Black-Scholes option-pricing formula. The fair value of restricted stock awards or units is determined based on the closing market price of the Company’s Common Stock on the date of grant. Forfeitures are recorded as they occur. The expense for stock-based compensation awards is amortized on a straight-line basis over the requisite service period, which is typically the vesting period.
•The Company records restricted stock units (“RSUs”) that may be settled by the holder in cash, rather than shares, as a liability and remeasures these liabilities at fair value at the end of each reporting period. Forfeitures are recorded as they occur. Upon settlement of these awards, the cumulative compensation expense recorded over the vesting period of the awards will equal the settlement amount, which is based on the Company’s stock price on the settlement date.
•The Company issues performance-based RSUs ("PRSUs") that vest upon achievement of pre-established company specific performance conditions and a service period. The fair value of the performance-based RSU awards is determined based on the closing market price of the Company’s Common Stock on the grant date and an assessment of the probability the performance targets will be achieved. Forfeitures are recorded as they occur. The expense for such awards is recognized over the requisite service period.
Income Taxes
Deferred income taxes are determined by the asset and liability method in accordance with ASC Topic 740 - Income Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The Company considers many factors when assessing the likelihood of future realization of deferred tax assets, including recent earnings experience by jurisdiction, expectations of future taxable income, and the carryforward periods available for tax reporting purposes, as well as other relevant factors. The Company establishes a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. The net amount of deferred tax liabilities and assets, net of the valuation allowance, is presented as non-current in the Company's consolidated balance sheets.
Due to inherent complexities arising from the nature of the Company’s businesses, future changes in income tax law or variances between the Company’s actual and anticipated operating results, the Company makes certain judgments and estimates. Therefore, actual income taxes could materially vary from these estimates.
The Company has recorded a valuation allowance which includes amounts for certain carryforwards and deferred tax assets, as more fully described in Note 18, Income Taxes, for which the Company has concluded that it is more likely than not that these carryforwards and deferred tax assets will not be realized in the ordinary course of operations.
The Company recognizes interest and penalties related to income taxes as a component of income tax expense.
The Company accounts for uncertain tax positions based on a two-step process of evaluating recognition and measurement criteria. The first step assesses whether the tax position is more likely than not to be sustained upon examination by the tax authority, including resolution of any appeals or litigation, based on the technical merits of the position. If the tax position meets the more likely than not criteria, the portion of the tax benefit greater than 50.0% likely to be realized upon settlement with the tax authority is recognized in the consolidated financial statements.
On March 27, 2020, the CARES Act was enacted and on August 16, 2022 the Inflation Reduction Act of 2022 ("IRA") was enacted. See Note 18, Income Taxes, for a discussion of the impact on the Company from these acts.
Loss Reserves for Certain Reinsurance Programs
The Company historically reinsured a substantial portion of its automobile, general and professional liability and workers’ compensation costs under certain reinsurance programs. The Company utilizes a report prepared by an independent actuary to estimate the gross expected losses related to these reinsurance policies, including the estimated losses in excess of insured limits, which would be reimbursed to the Company to the extent such losses were incurred. As of December 31, 2022 and 2021, the Company had reserves of $16.0 million and $8.3 million, respectively, for the automobile, general and professional liability and workers’ compensation reinsurance policies. The gross reserve as of December 31, 2022 and 2021 of $37.1 million and $22.3 million, respectively, is classified as current liabilities and other long-term liabilities in the consolidated balance sheets. The estimated amount to be reimbursed to the Company as of December 31, 2022 and 2021 was $21.1 million and $14.0 million, respectively, and is classified as other long-term assets in the consolidated balance sheets.
The Company regularly analyzes its reserves for incurred but not reported claims, and for reported but not paid claims related to its reinsurance and self-funded insurance programs. The Company believes its reserves are adequate. However, judgment is involved in assessing these reserves, such as in assessing historical paid claims, average lag times between the claims’ incurred date, reported dates and paid dates, and the frequency and severity of claims. There may be differences between actual settlement amounts and recorded reserves and any resulting adjustments are included in expense once a probable amount is known.
Self-Funded Insurance Programs
The Company also maintains a self-funded health insurance program with a stop-loss umbrella policy with a third-party insurer to limit the maximum potential liability for individual claims generally to $0.3 million per person, subject to an aggregating stop-loss limit of $0.4 million. In addition, the program has a total stop-loss limit for total claims, in order to limit the Company’s exposure to catastrophic claims. With respect to this program, the Company considers historical and projected medical utilization data when estimating its health insurance program liability and related expense. As of December 31, 2022 and 2021, the Company had $2.1 million and $1.9 million, respectively, in reserves for its self-funded health insurance programs. The reserves are classified as “accrued expenses and other current liabilities” in the consolidated balance sheets.
Earnings (Loss) Per Share
The Company computes basic earnings (loss) per share by taking net income (loss) attributable to the Company available to common stockholders divided by the weighted average number of common shares outstanding during the period, including restricted stock and stock held in escrow if such shares are participating securities. Diluted earnings (loss) per share includes the potential dilution that may occur from stock-based awards and other stock-based commitments using the treasury stock or the as-if converted methods, as applicable. For additional information on how the Company computes earnings (loss) per share, see Note 16, Earnings Per Share.
Recent Accounting Pronouncements
The Company adopted the following accounting pronouncements during the year ended December 31, 2022:
In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04") which provides optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships, and other transactions that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued due to reference rate reform. The relief granted in ASC 848, Reference Rate Reform ("ASC 848"), is applicable only to legacy contracts if the amendments made to the agreements are solely for reference rate reform
activities. The provisions of ASC 848 must be applied for all transactions other than derivatives, which may be applied at a hedging relationship level. Entities may apply the provisions as of the beginning of the reporting period when the election is made (i.e. as early as the first quarter 2020). The provisions of this update were extended to December 31, 2024 under ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. There was no material impact to the financial statements from the adoption of this ASU.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ("ASU 2021-08"). The new guidance requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers, as if it had originated the contracts. Under the current business combinations guidance, such assets and liabilities are recognized by the acquirer at fair value on the acquisition date. ASU 2021-08 is effective for public business entities for fiscal years beginning on or after November 1, 2023, including interim periods therein. The standard will not impact acquired contract assets or liabilities from business combinations occurring prior to the effective date of adoption, and the impact in future periods will depend on the contract assets and contract liabilities acquired in future business combinations. The Company has elected to early adopt this accounting standard and there was no material impact to the financial statements from the adoption of this ASU.
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance ("ASU 2021-10"). This update requires annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. These disclosures include information about the nature of the transactions and the related accounting policy used to account for the transactions, the line items on the balance sheet and income statement that are affected by the transactions, the amounts applicable to each financial line item, and the significant terms and conditions of the transactions, including commitments and contingencies. ASU 2021-10 is effective for public business entities for fiscal years beginning after December 15, 2021, with early adoption permitted. The Company adopted this accounting standard on January 1, 2022 and will apply it to any government assistance received thereafter.
3. Acquisitions
Business Combinations
Simplura Health Group
On November 18, 2020 the Company acquired OEP AM, Inc. (together with its subsidiaries doing business as “Simplura Health Group”). OEP AM, Inc. was a nonpublic entity that specializes in home care services offering placements of personal care assistants, home health aides, and skilled nurses for senior citizens, disabled adults and other high-needs patients. Simplura Health Group operates from its headquarters in Valley Stream, New York, with 57 agency branches across seven states, including in several of the nation’s largest home care markets. The acquisition of Simplura adds a strategic pillar in our mission to address the SDoH by introducing a business in non-medical personal care—a large, rapidly growing sector of healthcare that compliments the NEMT segment.
The stock transaction was accounted for in accordance with ASC 805, Business Combinations where a wholly-owned subsidiary of ModivCare Inc. acquired 100.0% of the voting stock of OEP AM Inc. for $548.6 million (a purchase price of $569.8 million less $21.2 million of cash that was acquired).
The following table summarizes information from the allocation of the consideration transferred to acquired identifiable assets and assumed liabilities, net of cash acquired, as of the acquisition date of November 18, 2020 (in thousands):
| | | | | |
Cash | $ | 21,182 | |
Accounts receivable (1) | 65,297 | |
Prepaid expenses and other (2) | 10,975 | |
Property and equipment (3) | 1,640 | |
Intangible assets (4) | 264,770 | |
Operating right of use asset (5) | 10,285 | |
Goodwill (6) | 320,383 | |
Other assets (7) | 628 | |
Accounts payable and accrued liabilities (7) | (46,073) | |
Accrued expense (7) | (2,564) | |
Deferred revenue (7) | (2,871) | |
Deferred acquisition payments (8) | (4,046) | |
Deferred acquisition note payable (7) | (1,050) | |
Operating lease liabilities (5) | (10,285) | |
Deferred tax liabilities (9) | (58,452) | |
Total of assets acquired less liabilities assumed | $ | 569,819 | |
(1) Management has valued accounts receivable based on the estimated future collectability of the receivables portfolio. Through this valuation, it was determined that $4.6 million of the initial accounts receivable was uncollectible, and therefore, the initial balance of $69.9 million was decreased to $65.3 million.
(2) Given the short-term nature of the balance of prepaid expenses, the carrying value represents the fair value.
(3) The acquired property and equipment consists primarily of leasehold improvements, furniture and fixtures, and vehicles. The fair value of the property and equipment was determined based upon the best and highest use of the property with final values determined using cost and comparable sales methods.
(4) The allocation of consideration exchanged to intangible assets acquired is as follows (in thousands):
| | | | | | | | | | | |
| Type | Useful Life | Value |
Payor network | Amortizable | 10 years | $ | 221,000 | |
Trademarks and trade names | Amortizable | 3 years | 43,000 | |
Licenses | Not Amortizable | Indefinite | 770 | |
| | | $ | 264,770 | |
The Company valued trademarks and trade names utilizing the relief of royalty method and payor network utilizing the multi-period excess earnings method, a form of the income approach. The useful life of the trademarks and trade names intangible was decreased from 10 years to 3 years and the useful life of the the payor network was decreased from 15 years to 10 years effective as of January 1, 2022 due to strategic shifts in the Company's Personal Care segment operations, partially contributed to by the acquisition of Care Finders, as discussed in Note 2, Significant Accounting Policies and Recent Accounting Pronouncements. This is a prospective change to amortization expense. The weighted average useful life of the acquired intangible assets is approximately 8.9 years.
(5) The fair value of the operating lease liability and corresponding right-of-use asset (current and long-term) were recorded at $11.7 million based on market rates available to the Company during our preliminary purchase price allocation. This assessment has since been updated through the implementation of ASC 842 as of September 30, 2021, and the related balances have been updated to $10.3 million.
(6) The acquisition preliminarily resulted in $309.7 million of goodwill as a result of expected synergies due to value-based care and solutions being provided to similar patient populations that partner with many of the same payor groups. In the second quarter of 2021, a closing cash adjustment of $3.5 million was paid to OEP AM, in the third quarter of 2021, other assets acquired were adjusted down by $3.9 million and in the fourth quarter of 2021, accounts receivable was adjusted down by $4.6 million due to certain receivables deemed uncollectible which caused a corresponding increase to goodwill of $3.3 million, net of tax impacts. These changes increased the goodwill related to this transaction to $320.4 million. None of the acquired goodwill is deductible for tax purposes.
(7) Accounts payable and certain other current and non-current assets and liabilities are stated at fair value as of the acquisition date.
(8) Deferred acquisition payments are associated with historical acquisitions by Simplura.
(9) Net deferred tax liabilities represent the expected future tax consequences of temporary differences between the fair values of the assets acquired and liabilities assumed and their tax basis.
Care Finders Total Care, LLC
On September 14, 2021, the Company acquired Care Finders which is a personal care provider in the Northeast, with operations in New Jersey, Pennsylvania, and Connecticut. The acquisition of Care Finders broadens access to in-home personal care solutions for patients and supports the Company's strategy to expand its personal care platform.
The equity transaction was accounted for in accordance with ASC 805, Business Combinations in which a wholly-owned subsidiary of ModivCare Inc. acquired 100.0% of the equity securities of Care Finders for $333.4 million (a purchase price of $344.8 million less $11.4 million of cash that was acquired).
The following table summarizes information from the allocation of the consideration transferred to acquired identifiable assets and assumed liabilities, net of cash acquired, as of the acquisition date of September 14, 2021 (in thousands):
| | | | | |
Cash | $ | 11,424 | |
Accounts receivable (1) | 14,708 | |
Prepaid expenses and other (2) | 2,625 | |
Property and equipment (3) | 2,527 | |
Inventories (4) | 231 | |
Operating right of use asset (5) | 1,939 | |
Intangibles (6) | 100,750 | |
Goodwill (7) | 232,103 | |
Other assets (8) | 226 | |
Accounts payable (9) | (2,720) | |
Accrued expenses and other accrued liabilities (9) | (14,344) | |
Operating lease liability (5) | (1,939) | |
Deferred tax liabilities (10) | (2,327) | |
Other liabilities (9) | (378) | |
Total of assets acquired less liabilities assumed | $ | 344,825 | |
(1) Management has valued accounts receivable based on the estimated future collectability of the receivables portfolio.
(2) Given the short-term nature of the balance of prepaid expenses, the carrying value represents the fair value.
(3) The acquired property and equipment consists primarily of capitalized software, computer equipment, and automobiles. The fair value of the property and equipment was determined based upon the best and highest use of the property with final values determined using cost and comparable sales methods.
(4) Given the short-term nature of the balance of inventories, the carrying value represents the fair value.
(5) The fair value of the operating lease liability and corresponding right-of-use asset (current and long-term) was recorded at $1.9 million based on market rates available to the Company.
(6) The allocation of consideration exchanged to intangible assets acquired is as follows (in thousands):
| | | | | | | | | | | |
| Type | Useful Life | Value |
Payor network | Amortizable | 7 years | $ | 97,200 | |
Trade name | Amortizable | 3 years | 1,950 | |
Non-compete agreement | Amortizable | 5 years | 1,600 | |
| | | $ | 100,750 | |
The Company valued the payor network utilizing the multi-period excess earnings method, trade names utilizing the relief-from-royalty method and non-compete agreements utilizing the with/without method. The weighted average useful life of the acquired intangible assets is approximately 6.9 years.
(7) The acquisition initially resulted in $232.2 million of goodwill as a result of expected synergies due to future customers driven by expansion into different markets, an increase in market share, and a growing demographic that will need home care solutions. In the third quarter of 2022, goodwill decreased by $0.1 million as a result of changes to accounts payable and deferred tax liabilities, as discussed in detail below. All of the acquired goodwill is deductible for tax purposes.
(8) Included in other assets are security deposits with a value of $0.2 million.
(9) Due to the short-term nature of the accounts, the carrying value is assumed to represent the fair value for accounts payable as well as certain other current liabilities as of the acquisition date. The carrying value for non-current liabilities is also assumed to represent the fair value as of the acquisition date. In the third quarter of 2022, it was determined that an additional $0.2 million of accounts payable existed as of the acquisition date, and therefore, the initial balance of $2.5 million was increased to $2.7 million.
(10) Net deferred tax liabilities represent the expected future tax consequences of temporary differences between the fair values of the assets acquired and liabilities assumed and their tax basis. In the third quarter of 2022, deferred tax liabilities of $2.6 million decreased by $0.3 million due to tax impacts of the acquisition.
VRI Intermediate Holdings, LLC
On September 22, 2021, the Company acquired VRI, a provider of remote patient monitoring solutions that manages a comprehensive suite of services including personal emergency response systems, vitals monitoring and data-driven patient engagement solutions. The acquisition of VRI accelerates the Company's strategy to build a holistic suite of supportive care solutions that address SDoH, introduces new technology-enabled in-home solutions that deepen the Company's engagement with payors and patients, and adds a new suite of services and operating team to advance the Company's broader technology and data strategy.
The stock transaction was accounted for in accordance with ASC 805, Business Combinations in which a wholly-owned subsidiary of ModivCare Inc. acquired 100.0% of the equity securities of VRI for $314.6 million (a purchase price of $317.5 million less $2.9 million of cash that was acquired).
The following table summarizes the allocation of the consideration transferred to acquired identifiable assets and assumed liabilities, net of cash acquired, as of the acquisition date of September 22, 2021 (in thousands):
| | | | | |
Cash | $ | 2,922 | |
Accounts receivable (1) | 6,800 | |
Inventory (2) | 1,684 | |
Prepaid expenses and other (3) | 805 | |
Property and equipment (4) | 14,908 | |
Intangible assets (5) | 75,590 | |
Goodwill (6) | 236,317 | |
Accounts payable and accrued liabilities (7) | (1,884) | |
Accrued expense (7) | (2,487) | |
Deferred revenue (7) | (67) | |
Deferred tax liabilities (8) | (17,070) | |
Total of assets acquired less liabilities assumed | $ | 317,518 | |
(1) Management has valued accounts receivable based on the estimated future collectability of the receivables portfolio.
(2) Given the short-term nature of the balance of inventories, the carrying value represents the fair value.
(3) Given the short-term nature of the balance of prepaid expenses, the carrying value represents the fair value.
(4) The acquired property and equipment consists primarily of personal emergency response system devices, with the remainder consisting of computer equipment, buildings and other equipment. The Company valued the personal emergency response system devices, computer equipment and other equipment utilizing the cost approach at $12.7 million. The carrying value of the remainder of the property, plant and equipment, consisting primarily of buildings and land, is assumed to represent the fair value.
(5) The allocation of consideration exchanged to intangible assets acquired is as follows (in thousands):
| | | | | | | | | | | |
| Type | Useful Life | Value |
Payor network | Amortizable | 7 years | $ | 72,150 | |
Trade name | Amortizable | 3 years | 890 | |
Developed technology | Amortizable | 3 years | 2,550 | |
| | | $ | 75,590 | |
The Company valued payor network utilizing the multi-period excess earnings method, trade names utilizing the relief-from-royalty method and developed technology utilizing the cost approach. The weighted average useful life of the acquired intangible assets is approximately 6.8 years.
(6) The acquisition initially resulted in $236.7 million of goodwill as a result of expected synergies due to future customers driven by expansion into different markets and an increase in market share. In the third quarter of 2022, goodwill decreased by $0.4 million due to a decrease in deferred tax liabilities, as discussed in more detail below. The related goodwill is not deductible for tax purposes.
(7) Due to the short-term nature of the accounts, the carrying value is assumed to represent the fair value for accounts payable as well as certain other current liabilities as of the acquisition date. The carrying value for non-current liabilities is also assumed to represent the fair value as of the acquisition date.
(8) Net deferred tax liabilities represent the expected future tax consequences of temporary differences between the fair values of the assets acquired and liabilities assumed and their tax basis. In the third quarter of 2022, deferred tax liabilities of $17.5 million decreased by $0.4 million due to tax impacts of the acquisition.
Guardian Medical Monitoring
On May 11, 2022, the Company acquired Guardian Medical Monitoring ("GMM"), a provider of remote patient monitoring solutions that manages a comprehensive suite of services including personal emergency response systems and medication management. The acquisition of GMM supports the Company's strategy to expand its RPM segment and enhances the Company's suite of supportive care solutions that address SDoH.
The stock transaction was accounted for in accordance with ASC 805, Business Combinations in which a wholly-owned subsidiary of the Company acquired 100.0% of the equity securities of GMM for $71.2 million (a purchase price of $71.6 million less $0.4 million of cash that was acquired).
The following table summarizes the allocation of the consideration transferred to acquired identifiable assets and assumed liabilities, net of cash acquired, as of the acquisition date of May 11, 2022 (in thousands):
| | | | | |
Cash (1) | $ | 391 | |
Accounts receivable (2) | 2,355 | |
Prepaid expenses and other (3) | 771 | |
Property and equipment (4) | 2,639 | |
Intangible assets (5) | 21,950 | |
Goodwill (6) | 44,346 | |
Accounts payable (7) | (281) | |
Accrued expenses and other current liabilities (7) | (577) | |
| |
| |
Total of assets acquired less liabilities assumed | $ | 71,594 | |
(1) During 2022, the Company received an additional $0.1 million of cash related to net working capital adjustments, and therefore, the initial balance of $0.3 million was increased to $0.4 million.
(2) Management has valued accounts receivable based on the estimated future collectability of the receivables portfolio. During 2022, it was determined that $0.6 million of the initial accounts receivable balance was uncollectible, and therefore, the initial balance of $3.0 million was decreased to $2.4 million.
(3) Given the short-term nature of the balance of prepaid expenses and other assets, the carrying value represents the fair value.
(4) The acquired property and equipment consists primarily of personal emergency response system devices, with the remainder consisting of computer equipment and furniture and fixtures. The Company valued the personal emergency response system devices utilizing the cost approach. Through this valuation, it was determined that $0.1 million of acquired property and equipment did not exist, and therefore, the initial balance of $2.7 million was decreased to $2.6 million. The carrying value of the remainder of the property, plant and equipment, consisting primarily of computer equipment and furniture and fixtures, is assumed to represent the fair value.
(5) The allocation of consideration exchanged to intangible assets acquired is as follows (in thousands):
| | | | | | | | | | | |
| Type | Useful Life | Value |
Payor network | Amortizable | 7 years | $ | 21,600 | |
Trade name | Amortizable | 2 years | 350 | |
| | | $ | 21,950 | |
The Company valued the payor network utilizing the multi-period excess earnings method and trade names utilizing the relief-from-royalty method. The weighted average useful life of the acquired intangible assets is approximately 6.9 years.
(6) The acquisition initially resulted in $43.7 million of goodwill as a result of expected synergies due to future customers driven by expansion into different markets and an increase in market share. During the measurement period, accounts receivable was adjusted down by $0.6 million which caused a corresponding increase to goodwill. Also during the measurement period, cash increased by $0.1 million related to working capital adjustments, which caused a corresponding decrease to goodwill, and acquired property and equipment decreased by $0.1 million, which caused a
corresponding increase to goodwill. The result of these adjustments was a total goodwill balance of $44.3 million. All of the acquired goodwill is deductible for tax purposes.
(7) Due to the short-term nature of the accounts, the carrying value is assumed to represent the fair value for accounts payable and accrued expenses and other current liabilities as of the acquisition date.
Since the date of the acquisition, GMM revenue of $11.9 million and net income of $1.8 million are included in the Company's consolidated results of operations.
Pro Forma Financial Information (unaudited)
Assuming Simplura had been acquired as of January 1, 2019, Care Finders and VRI had been acquired as of January 1, 2020, and GMM had been acquired as of January 1, 2021, and the results of each had been included in operations beginning on the assumed acquisition date, the following table provides estimated unaudited pro forma results of operations for the years ended December 31, 2022, 2021, and 2020 (in thousands, except earnings per share). The estimated pro forma net income adjusts for the effect of fair value adjustments related to each of the acquisitions, transaction costs and other non-recurring costs directly attributable to the transactions and the impact of the additional debt to finance the applicable acquisitions.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Pro forma: | | | | | |
Revenue | $ | 2,510,875 | | | $ | 2,200,339 | | | $ | 1,989,519 | |
Net loss | (32,770) | | | (21,547) | | | (21,255) | |
Diluted earnings (loss) per share | $ | (2.33) | | | $ | (1.53) | | | $ | (1.57) | |
Estimated unaudited pro forma information is not necessarily indicative of the results that actually would have occurred had the acquisitions been completed on the date indicated or of future operating results. The supplemental pro forma earnings were adjusted to exclude the impact of historical interest expense for Care Finders and VRI of $3.7 million and $3.2 million, respectively, for 2021, and Simplura, Care Finders and VRI of $23.5 million, $4.8 million and $4.9 million, respectively, for 2020. No adjustment related to interest expense was required for the year ended December 31, 2022.
Acquisition-related costs of approximately $2.0 million for GMM, were expensed as incurred, recorded in selling, general and administrative expenses during the year ended December 31, 2022, and are reflected in the pro forma table above at the assumed acquisition date. Acquisition-related costs of approximately $6.6 million and $4.7 million for Care Finders and VRI, respectively, were expensed as incurred, recorded in selling, general and administrative expenses during the year ended December 31, 2021, and acquisition-related costs of approximately $10.5 million for Simplura were expensed as incurred, recorded in selling, general and administrative expenses during the year ended December 31, 2020, and are reflected in the pro forma table above at the assumed acquisition date. Acquisition-related costs consisted of professional fees for advisory, consulting and underwriting services as well as other incremental costs directly related to the acquisitions.
Asset Acquisitions
WellRyde
On May 6, 2021, the Company entered into an asset purchase agreement with nuVizz to purchase the software, WellRyde. Pursuant to the purchase agreement, the WellRyde software was acquired for total consideration of $12.0 million in cash, subject to certain adjustments.
The transaction was accounted for as an asset acquisition in accordance with ASC 805, Business Combinations. The Company incurred transaction costs for the acquisition of $0.5 million during the period ended December 31, 2021. These costs were capitalized as a component of the purchase price.
The consideration paid for the acquisition is as follows (in thousands):
| | | | | | | | |
| | Value |
Consideration paid | | $ | 12,000 | |
Transaction costs | | 463 | |
Net consideration | | $ | 12,463 | |
The fair value allocation of the net consideration is as follows (in thousands, except useful lives):
| | | | | | | | | | | |
| Type | Useful Life | Value |
Transportation management software | Amortizable | 10 years | $ | 12,328 | |
Assembled workforce | Amortizable | 10 years | 135 | |
| | | $ | 12,463 | |
Other Asset Acquisition
On May 30, 2022, the Company entered into an asset purchase agreement with a private entity to purchase certain customer contracts within our Personal Care segment. Pursuant to the purchase agreement, the contracts were acquired for total consideration of $7.6 million in cash, subject to certain adjustments.
The transaction was accounted for as an asset acquisition in accordance with ASC 805, Business Combinations. The fair value of the net consideration is as follows (in thousands, except useful lives):
| | | | | | | | | | | |
| Type | Useful Life | Value |
Payor network | Amortizable | 6 years | $ | 7,297 | |
Assembled workforce | Amortizable | 6 years | 309 | |
| | | $ | 7,606 | |
4. Segments
The Company’s reportable segments are identified based on a number of factors related to how its chief operating decision maker ("CODM") determines the allocation of resources and assesses the performance of the Company’s operations. The CODM uses service revenue, net and operating income as the measures of profit or loss to assess segment performance and allocate resources, and uses total assets as the measure of assets attributable to each segment. The Company's CODM manages the Company under four reportable segments.
The Company’s reportable segments are strategic units that offer different services under different financial and operating models to the Company’s customers. The segments are managed separately because each requires different technology and marketing strategies. Furthermore, the different segments were each generally acquired as a unit, with the management of each at the time of acquisition retained to continue to operate their respective businesses.
The Company has determined each of the separate reportable segments based on the difference in services provided by each of the segments as provided in further detail below:
•NEMT - The Company's NEMT segment is its legacy segment and operates primarily under the brands ModivCare Solutions and Circulation. The NEMT segment is the largest manager of non-emergency medical transportation programs for state governments and managed care organizations, or MCOs, in the U.S. This segment also holds the results of the Company's captive insurance program;
•Personal Care - The Company's Personal Care segment began operations in November 2020 with the acquisition of Simplura and expanded in September 2021 with the acquisition of Care Finders. The Personal Care segment operates under the brands Simplura and Care Finders and provides personal care to State and Managed Medicaid, Medicare, and Private Pay patient populations in need of care monitoring and assistance performing activities of daily living;
•RPM - The Company's RPM segment began operations in September 2021 with the acquisition of VRI and expanded in May 2022 with the acquisition of GMM. The RPM segment operates under the VRI brand and is a provider of remote patient monitoring solutions, including personal emergency response systems, vitals monitoring and data-driven patient engagement solutions;
•Corporate and Other - Effective January 1, 2022, the Company completed its segment reorganization which resulted in the addition of a Corporate and Other segment that includes the costs associated with the Company's corporate operations. The operating results of the Corporate and Other segment include activities related to executive, accounting, finance, internal audit, tax, legal and certain strategic and corporate development functions for each segment, as well as the results of the Matrix investment. Prior to the segment reorganization, we reported the investment in Matrix as a separate operating segment. Based on the relative size of the Matrix investment and all related activity to the overall financial statements, however, the CODM no longer views it as a separate operating
segment but reviews results in conjunction with the other corporate results of the business. The Company reclassified certain costs associated with this reorganization for the years ended December 31, 2021 and 2020, respectively, to conform to this presentation.
The Company evaluates performance and allocates resources based on the operating income of the reportable segments, which includes an allocation of corporate expenses directly attributable to the specific segment and includes revenues and all other costs directly attributable to the specific segment.
The following table sets forth certain financial information attributable to the Company’s business segments for the years ended December 31, 2022, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| NEMT | | Personal Care | | RPM | | Corporate and Other | | Total |
Service revenue, net | $ | 1,768,442 | | | $ | 667,674 | | | $ | 68,277 | | | $ | — | | | $ | 2,504,393 | |
Grant income (1) | — | | | 7,351 | | | — | | | — | | | 7,351 | |
| | | | | | | | | |
Service expense | 1,487,447 | | | 520,065 | | | 24,562 | | | — | | | 2,032,074 | |
General and administrative expense | 146,935 | | | 91,365 | | | 23,156 | | | 60,715 | | | 322,171 | |
Depreciation and amortization | 28,709 | | | 51,025 | | | 19,854 | | | 827 | | | 100,415 | |
Operating income (loss) | $ | 105,351 | | | $ | 12,570 | | | $ | 705 | | | $ | (61,542) | | | $ | 57,084 | |
| | | | | | | | | |
Equity in net (income) loss of investee, net of tax | $ | (71) | | | $ | — | | | $ | — | | | $ | 30,035 | | | $ | 29,964 | |
Equity investment | $ | 186 | | | $ | — | | | $ | — | | | $ | 41,117 | | | $ | 41,303 | |
Goodwill | $ | 135,186 | | | $ | 552,775 | | | $ | 280,663 | | | $ | 30 | | | $ | 968,654 | |
Total assets | $ | 496,605 | | | $ | 950,181 | | | $ | 396,944 | | | $ | 100,542 | | | $ | 1,944,272 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| NEMT | | Personal Care | | RPM | | Corporate and Other | | Total |
Service revenue, net | $ | 1,483,696 | | | $ | 495,579 | | | $ | 17,617 | | | $ | — | | | $ | 1,996,892 | |
Grant income (1) | — | | | 5,441 | | | — | | | — | | | 5,441 | |
| | | | | | | | | |
Service expense | 1,186,185 | | | 392,508 | | | 5,605 | | | — | | | 1,584,298 | |
General and administrative expense | 132,493 | | | 70,704 | | | 5,791 | | | 62,686 | | | 271,674 | |
Depreciation and amortization | 29,058 | | | 23,759 | | | 4,181 | | | — | | | 56,998 | |
Operating income (loss) | $ | 135,960 | | | $ | 14,049 | | | $ | 2,040 | | | $ | (62,686) | | | $ | 89,363 | |
| | | | | | | | | |
Equity in net loss of investee, net of tax | $ | — | | | $ | — | | | $ | — | | | $ | 38,250 | | | $ | 38,250 | |
Equity investment | $ | — | | | $ | — | | | $ | — | | | $ | 83,069 | | | $ | 83,069 | |
Goodwill | $ | 135,186 | | | $ | 552,833 | | | $ | 236,738 | | | $ | 30 | | | $ | 924,787 | |
Total assets | $ | 546,923 | | | $ | 1,020,014 | | | $ | 340,913 | | | $ | 119,575 | | | $ | 2,027,425 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| NEMT | | Personal Care | | Corporate and Other | | Total |
Service revenue, net | $ | 1,314,705 | | | $ | 53,970 | | | $ | — | | | $ | 1,368,675 | |
| | | | | | | |
Service expense | 1,036,288 | | | 42,507 | | | — | | | 1,078,795 | |
General and administrative expense | 78,078 | | | 7,328 | | | 56,249 | | | 141,655 | |
Depreciation and amortization | 24,516 | | | 1,667 | | | — | | | 26,183 | |
Operating income (loss) | $ | 175,823 | | | $ | 2,468 | | | $ | (56,249) | | | $ | 122,042 | |
| | | | | | | |
Equity in net income of investee, net of tax | $ | — | | | $ | — | | | $ | (6,411) | | | $ | (6,411) | |
Equity investment | $ | — | | | $ | — | | | $ | 137,466 | | | $ | 137,466 | |
Goodwill | $ | 135,186 | | | $ | 309,711 | | | $ | 30 | | | $ | 444,927 | |
Total assets | $ | 466,872 | | | $ | 693,495 | | | $ | 265,546 | | | $ | 1,425,913 | |
(1) Grant income for the Personal Care segment includes funding received on a periodic basis from the PRF in relation to relief under the CARES Act and funding received from the SLFRF under ARPA in relation to economic recovery to combat health and economic impacts of the COVID-19 pandemic. See Note 2, Significant Accounting Policies and Recent Accounting Pronouncements.
5. Revenue Recognition
Under ASC 606, the Company recognizes revenue as it transfers promised services to its customers and generates all of its revenue from contracts with customers. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled in exchange for these services. The Company satisfies substantially all of its performance obligations over time and recognizes revenue over time instead of at points in time.
Revenue Contract Structure
NEMT Capitated Contracts (per-member-per-month)
Under capitated contracts, payors pay a fixed amount per eligible member per month. Capitation rates are generally based on expected costs and volume of services. We assume the responsibility of meeting the covered healthcare related transportation requirements based on per-member per-month fees for the number of eligible members in the payor’s program. Revenue is recognized based on the population served during the period. Certain capitated contracts have provisions for reconciliations, risk corridors or profit rebates. For contracts with reconciliation provisions, capitation payment is received as a prepayment during the month service is provided. These prepayments are reconciled based on actual cost and/or trip volume and may result in refunds to the payor, or additional payments due from the payor. Contracts with risk corridor or profit rebate provisions allow for profit within a certain corridor and once we reach profit level thresholds or maximums, we discontinue recognizing revenue and instead record a liability within the accrued contract payable account. This liability may be reduced through future increases in trip volume or periodic settlements with the payor. While a profit rebate provision could only result in a liability from this profit threshold, a risk corridor provision could potentially result in receivables if the Company does not reach certain profit minimums, which would be recorded in the reconciliation contract receivables account.
NEMT Fee-for-service Contracts
Fee-for-service ("FFS") revenue represents revenue earned under non-capitated contracts in which we bill and collect a specified amount for each service that we provide. FFS revenue is recognized in the period in which the services are rendered and is reduced by the estimated impact of contractual allowances.
Personal Care Fee-for-service Contracts
Personal Care FFS revenue is reported at the estimated net realizable amount from clients, patients and third-party payors for services rendered based on actual personal care hours provided. Payment for services received from third-party payors includes, but is not limited to, insurance companies, hospitals, governmental agencies and other home health care providers who subcontract work to the Company. Certain contracts are subject to retroactive audit and possible adjustment by
those payors based on the nature of the contract or costs incurred. The Company makes estimates of retroactive adjustments and considers these in the recognition of revenue in the period in which the related services are rendered. The difference between estimated settlement and actual settlement is reported in net service revenues as adjustments become known or as years are no longer subject to such audits, reviews, or investigations.
RPM per-member-per-month Contracts
RPM per-member-per-month ("PMPM") revenue consists of revenue from monitoring services provided to the customer. Under RPM contracts, payors pay per-enrolled-member-per-month based on enrolled membership. Consideration is generally fixed for each type of monitoring service and the contracts do not typically contain variable components of consideration. As such, the RPM segment recognizes revenue based on the monthly fee paid by customers.
Disaggregation of Revenue by Contract Type
The following table summarizes disaggregated revenue from contracts with customers by contract type for the years ended December 31, 2022, 2021, and 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
NEMT capitated contracts | $ | 1,553,407 | | | $ | 1,257,390 | | | $ | 1,132,929 | |
NEMT FFS contracts | 215,035 | | | 226,306 | | | 181,776 | |
Total NEMT service revenue, net | 1,768,442 | | | 1,483,696 | | | 1,314,705 | |
| | | | | |
Personal Care FFS contracts | 667,674 | | | 495,579 | | | 53,970 | |
RPM PMPM contracts | 68,277 | | | 17,617 | | | — | |
Total service revenue, net | $ | 2,504,393 | | | $ | 1,996,892 | | | $ | 1,368,675 | |
Payor Information
Service revenue, net, is derived from state and managed Medicaid contracts, managed Medicare contracts, as well as a small amount from private pay and other contracts. Of the NEMT segment’s revenue, 10.9%, 9.7% and 9.5% were derived from one payor for the years ended December 31, 2022, 2021 and 2020, respectively. Of the Personal Care segment's revenue, 12.0%, 11.7% and 13.4% were derived from one payor for the years ended December 31, 2022, 2021 and 2020, respectively. Of the RPM segment's revenue, 19.9% and 27.0% were derived from one payor for the years ended December 31, 2022 and 2021, respectively.
Revenue Adjustments
During the years ended December 31, 2022, 2021, and 2020 the Company recognized a reduction of $0.9 million, an increase of $11.4 million, and a reduction of $2.1 million in service revenue, respectively, from contractual adjustments relating to performance obligations satisfied in previous periods to which the payor agreed.
Related Balance Sheet Accounts
The following table provides information about accounts receivable, net as of December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Accounts receivable | $ | 225,288 | | | $ | 210,937 | |
Reconciliation contract receivables (1) | 71,131 | | | 24,480 | |
Allowance for doubtful accounts | (2,078) | | | (2,296) | |
Accounts receivable, net | $ | 294,341 | | | $ | 233,121 | |
(1) Reconciliation contract receivables primarily represent underpayments and receivables on certain contracts with reconciliation and risk corridor provisions. See the contract payables and receivables activity below.
The following table provides information about other revenue related accounts included on the accompanying consolidated balance sheets (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Accrued contract payables (1) | $ | 194,287 | | | $ | 281,586 | |
| | | |
Long-term contract receivables (2) | $ | 427 | | | $ | — | |
Deferred revenue, current | $ | 2,202 | | | $ | 2,714 | |
(1) Accrued contract payables primarily represent overpayments and liability reserves on certain risk corridor, profit rebate and reconciliation contracts.
(2) Long-term contract receivables primarily represent future receivable balances on certain risk corridor, profit rebate and reconciliation contracts that may be received in greater than 12 months.
The following table provides the summary activity of total contract payables and receivables as reported within the consolidated balance sheets (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | Additional Amounts Recorded | | Amounts Paid or Settled | | December 31, 2022 |
Reconciliation contract payables | | $ | 22,035 | | | $ | 18,836 | | | $ | (15,018) | | | $ | 25,853 | |
Profit rebate/corridor contract payables | | 246,424 | | | 78,064 | | | (169,327) | | | 155,161 | |
Overpayments and other cash items | | 13,127 | | | 9,469 | | | (9,323) | | | 13,273 | |
Total contract payables | | $ | 281,586 | | | $ | 106,369 | | | $ | (193,668) | | | $ | 194,287 | |
| | | | | | | | |
Reconciliation contract receivables | | $ | 24,403 | | | $ | 50,989 | | | $ | (27,239) | | | $ | 48,153 | |
Corridor contract receivables | | 77 | | | 23,328 | | | — | | | 23,405 | |
Total contract receivables | | $ | 24,480 | | | $ | 74,317 | | | $ | (27,239) | | | $ | 71,558 | |
6. Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets to the amounts shown in the consolidated statements of cash flows (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Cash and cash equivalents | $ | 14,451 | | | $ | 133,139 | |
Restricted cash, current | 524 | | | 283 | |
| | | |
| | | |
Cash, cash equivalents and restricted cash | $ | 14,975 | | | $ | 133,422 | |
Restricted cash primarily relates to amounts held in trusts for reinsurance claims losses under the Company’s insurance operation for historical workers’ compensation, general and professional liability and auto liability reinsurance programs, as well as amounts restricted for withdrawal under our self-insured medical and benefits plans.
7. Equity Investment
As of December 31, 2022 and 2021, the Company owned a 43.6% non-controlling interest in Matrix. Pursuant to a Shareholder’s Agreement, affiliates of Frazier Healthcare Partners hold rights necessary to control the fundamental operations of Matrix. The Company accounts for this investment in Matrix under the equity method of accounting and the Company’s share of Matrix’s income or losses are recorded as “Equity in net (income) loss of investee” in the accompanying consolidated statements of operations. During the years ended December 31, 2022 and 2021, Matrix recorded asset impairment charges of $82.2 million and $111.4 million, respectively. Matrix recorded no asset impairment charges for the year ended December 31, 2020.
The Company's gross share of its Matrix's operations for the years ended December 31, 2022, 2021 and 2020 was a loss of $41.0 million, a loss of $53.1 million and income of $8.9 million, respectively, which is presented net of tax on the
consolidated statements of operations for a loss of $30.0 million, a loss of $38.3 million and income of $6.4 million, respectively.
The carrying amount of the assets included in the Company’s consolidated balance sheets and the maximum loss exposure related to the Company’s interest in Matrix as of December 31, 2022 and 2021 totaled $41.3 million and $83.1 million, respectively.
Summary financial information for Matrix on a standalone basis is as follows (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Current assets | $ | 97,750 | | | $ | 124,081 | |
Long-term assets | $ | 373,297 | | | $ | 482,063 | |
Current liabilities | $ | 36,913 | | | $ | 57,048 | |
Long-term liabilities | $ | 325,613 | | | $ | 340,448 | |
| | | | | | | | | | | | | | | | | |
| Year ended December 31, 2022 | | Year ended December 31, 2021 | | Year ended December 31, 2020 |
Revenue | $ | 300,306 | | | $ | 398,260 | | | $ | 414,622 | |
Operating income (loss) | $ | (83,110) | | | $ | 1,316 | | | $ | 39,412 | |
Net income (loss) | $ | (98,187) | | | $ | (122,898) | | | $ | 15,137 | |
8. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets were comprised of the following (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Prepaid income taxes | $ | 7,186 | | | $ | 13,848 | |
Prepaid insurance | 6,334 | | | 9,487 | |
Deferred ERP implementation costs | 5,817 | | | 3,003 | |
Deferred financing costs on credit facility | 3,061 | | | 1,480 | |
Inventory | 2,041 | | | 1,458 | |
Other prepaid expenses | 9,893 | | | 9,275 | |
Total prepaid expenses and other current assets | $ | 34,332 | | | $ | 38,551 | |
9. Property and Equipment
Property and equipment consisted of the following (in thousands, except useful lives):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Estimated Useful | | December 31, |
| Life (years) | | 2022 | | 2021 |
Software | 3 | | — | | 10 | | $ | 51,409 | | | $ | 35,323 | |
Computer and telecommunications equipment | 2 | | — | | 7 | | 30,129 | | | 31,417 | |
Monitoring equipment | | | 3 | | | | 22,132 | | | 12,950 | |
Leasehold improvements | Shorter of useful life or lease term | | 10,136 | | | 7,524 | |
Construction and development in progress | | | N/A | | | | 3,309 | | | 6,598 | |
Furniture and fixtures | 3 | | — | | 10 | | 4,391 | | | 3,906 | |
Automobiles | | | 5 | | | | 4,245 | | | 3,998 | |
Buildings | 30 | | — | | 40 | | 1,886 | | | 1,886 | |
Land | | | N/A | | | | 292 | | | 292 | |
Total property and equipment | | | | | | | 127,929 | | | 103,894 | |
Less accumulated depreciation | | | | | | | (58,791) | | | (50,345) | |
Total property and equipment, net | | | | | | | $ | 69,138 | | | $ | 53,549 | |
Depreciation expense was $20.1 million, $12.7 million and $9.5 million for the years ended December 31, 2022, 2021 and 2020, respectively.
10. Goodwill and Intangibles
Goodwill
Changes in the carrying amount of goodwill by reportable segment are presented in the following table (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | NEMT | | Personal Care | | RPM | | Corporate and Other | | Total |
Balances at December 31, 2020 | | | | | | | | | | |
Goodwill | | $ | 231,186 | | | $ | 309,711 | | | $ | — | | | $ | 30 | | | $ | 540,927 | |
Accumulated impairment losses | | (96,000) | | | — | | | — | | | — | | | (96,000) | |
| | $ | 135,186 | | | $ | 309,711 | | | $ | — | | | $ | 30 | | | $ | 444,927 | |
| | | | | | | | | | |
Balances at December 31, 2021 | | | | | | | | | | |
Purchase accounting adjustments for Simplura | | — | | | 10,961 | | | — | | | — | | | 10,961 | |
Goodwill acquired in Care Finders acquisition | | — | | | 232,161 | | | — | | | — | | | 232,161 | |
Goodwill acquired in VRI acquisition | | — | | | — | | | 236,738 | | | — | | | 236,738 | |
| | 135,186 | | | 552,833 | | | 236,738 | | | 30 | | | 924,787 | |
| | | | | | | | | | |
Balances at December 31, 2022 | | | | | | | | | | |
Goodwill acquired in GMM acquisition | | — | | | — | | | 43,689 | | | — | | | 43,689 | |
Purchase accounting adjustments for Care Finders, VRI, and GMM | | — | | | (58) | | | 236 | | | — | | | 178 | |
| | $ | 135,186 | | | $ | 552,775 | | | $ | 280,663 | | | $ | 30 | | | $ | 968,654 | |
The total amount of goodwill that was deductible for income tax purposes related to acquisitions as of December 31, 2022 and 2021 was $312.6 million and $255.5 million, respectively.
Intangible Assets
Intangible assets are comprised of acquired payor networks, trademarks and trade names, developed technology, non-compete agreements, licenses, and an assembled workforce. Intangible assets consisted of the following (in thousands, except estimated useful lives):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2022 | | 2021 |
| Estimated Useful Life (Yrs) | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| | | | | | | | | |
Payor networks | 3 - 15 | | $ | 539,960 | | | $ | (147,980) | | | $ | 511,064 | | | $ | (85,548) | |
Trademarks and trade names | 2 - 10 | | 48,541 | | | (20,836) | | | 48,191 | | | (6,290) | |
Developed technology | 3 - 10 | | 28,978 | | | (11,618) | | | 28,978 | | | (8,605) | |
Non-compete agreement | 2 - 5 | | 1,610 | | | (408) | | | 1,610 | | | (83) | |
New York LHCSA Permit | Indefinite | | 770 | | | — | | | 770 | | | — | |
Assembled workforce | 6 - 10 | | 444 | | | (52) | | | 135 | | | (9) | |
Total | | | $ | 620,303 | | | $ | (180,894) | | | $ | 590,748 | | | $ | (100,535) | |
The weighted-average amortization period at December 31, 2022 for intangibles was 7.7 years. No significant residual value is estimated for these intangible assets. Amortization expense was $80.4 million, $44.3 million and $16.7 million for the years ended December 31, 2022, 2021 and 2020, respectively.
The total amortization expense is estimated to be as follows for the next five years as of December 31, 2022 (in thousands):
| | | | | | | | |
Year | | Amount |
2023 | | $ | 74,597 | |
2024 | | 73,907 | |
2025 | | 59,779 | |
2026 | | 51,308 | |
2027 | | 46,873 | |
Total | | $ | 306,464 | |
Impairment
The Company did not record any goodwill or intangible asset impairment charges for the years ended December 31, 2022, 2021 and 2020. As of December 31, 2022, accumulated goodwill impairment losses totaled $96.0 million
11. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities were comprised of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Accrued compensation and related liabilities | $ | 47,947 | | | $ | 54,564 | |
Accrued operating expenses | 18,432 | | | 14,457 | |
Insurance reserves | 17,836 | | | 10,152 | |
Accrued legal fees | 15,574 | | | 5,081 | |
Accrued interest | 10,643 | | | 12,826 | |
Accrued government grants (1) | 7,367 | | | 1,514 | |
Union pension obligation | 3,665 | | | 6,629 | |
Deferred revenue | 2,202 | | | 2,714 | |
Deferred acquisition payments | 50 | | | 3,578 | |
Other | 12,144 | | | 12,276 | |
Total accrued expenses and other current liabilities | $ | 135,860 | | | $ | 123,791 | |
| | | |
(1) Accrued government grants include payments received from government entities in relation to the PRF and SLFRF to offset lost revenue or increased expenditures for which the related expenditure has not yet been incurred and thus the related payments are deferred as of December 31, 2022 and 2021.
12. Debt
Senior Unsecured Notes
Senior unsecured notes as of December 31, 2022 and 2021 consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | December 31, |
Senior Unsecured Note | | Date of Issuance | | 2022 | | 2021 |
$500.0 million 5.875% due November 15, 2025 (effective interest rate 6.538%) | | 11/4/2020 | | $ | 491,098 | | | $ | 488,368 | |
$500.0 million 5.000% due October 1, 2029 (effective interest rate 5.407%) | | 8/24/2021 | | 488,263 | | | 486,857 | |
Total | | | | $ | 979,361 | | | $ | 975,225 | |
The Senior Notes due 2025 and the Senior Notes due 2029 (collectively, the "Notes") were issued pursuant to two indentures, dated November 4, 2020 and August 24, 2021, respectively, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. The Senior Notes due 2025 relate to the Company’s acquisition of Simplura and the Senior Notes due 2029 relate to the Company’s acquisition of VRI. The fair value of the Notes as of December 31, 2022 and 2021 was $896.6 million and $1,038.6 million, respectively, which was determined based on quoted prices in active markets, and therefore designated as Level 1 within the valuation hierarchy.
The Notes are senior unsecured obligations and rank senior in right of payment to all of the Company's future subordinated indebtedness, rank equally in right of payment with all of the Company's existing and future senior indebtedness, are effectively subordinated to any of the Company's existing and future secured indebtedness, including indebtedness under the New Credit Facility, to the extent of the value of the assets securing such indebtedness, and are structurally subordinated to all of the existing and future liabilities (including trade payables) of each of the Company’s non-guarantor subsidiaries.
The indentures for the Notes contain covenants that, among other things, restrict the Company’s ability and the ability of its restricted subsidiaries to, among other things: incur additional indebtedness or issue disqualified capital stock; make certain investments; create or incur certain liens; enter into certain transactions with affiliates; merge, consolidate, amalgamate or transfer substantially all of its assets; agree to dividend or other payment restrictions affecting its restricted subsidiaries; and transfer or sell assets, including capital stock of its restricted subsidiaries. These covenants, however, are subject to a number of important exceptions and qualifications, and certain covenants may be suspended in the event the Notes are assigned an investment grade rating from two of three rating agencies. The indentures for both the Senior Notes due 2025 and the Senior Notes due 2029 provide that the notes may become subject to redemption under certain circumstances.
The Company may redeem all or a part of the Senior Notes due 2025 upon not less than ten days’ nor more than 60 days’ notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest, if any, on the Notes redeemed, to, but excluding, the applicable redemption date, if redeemed during the 12-month period beginning on November 15 of the years indicated below:
| | | | | |
Year | Percentage |
| |
2023 | 101.469% |
2024 and thereafter | 100.000% |
The Company may also redeem the Senior Notes due 2029, in whole or in part, at any time prior to October 1, 2024, at a price equal to 100% of the principal amount of the notes redeemed, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption plus a “make-whole” premium set forth in the Indenture. In addition, the Company may redeem up to 40.0% of the Senior Notes due 2029 prior to October 1, 2024, at a redemption price of 105.000% of the principal amount, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption, with the proceeds of certain equity offerings, subject to certain conditions as specified in the Indenture Agreement.
On or after October 1, 2024, the Company may redeem all or a part of the Senior Notes due 2029 upon not less than ten nor more than 60 days’ notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest, if any, on the Notes redeemed, to, but excluding, the applicable redemption date, if redeemed during the 12-month period beginning on October 1 of the years indicated below:
| | | | | |
Year | Percentage |
2024 | 102.500% |
2025 | 101.250% |
2026 and thereafter | 100.000% |
The Company will pay interest on the Senior Notes due 2025 at 5.875% per annum until maturity. Interest is payable semi-annually in arrears on May 15 and November 15 of each year, with the first interest payment date being May 15, 2021. Principal payments are not required until the maturity date on November 15, 2025 when 100.0% of the outstanding principal will be required to be repaid.
Pursuant to the Senior Notes due 2029, the Company will pay interest on the notes at 5.000% per annum until maturity. Interest is payable semi-annually in arrears on April 1 and October 1 of each year, with the first interest payment date being April 1, 2022. Principal payments are not required until the maturity date on October 1, 2029 when 100% of the outstanding principal will be required to be repaid. As a part of the bond issuance process, we incurred a $6.6 million bridge commitment fee that provided a potential funding backstop in the event that the Notes did not meet the desired subscription level to be used to acquire VRI. That commitment expired unused upon closing of the Notes and the fee was expensed in the third quarter of 2021.
In relation to the issuance of the Senior Notes due 2025, debt issuance costs of $14.5 million were incurred at the date of issuance and these costs were deferred and are amortized to interest cost over the term of the Notes. Additionally, in relation to the issuance of the Senior Notes due 2029, debt issuance costs of $13.5 million were incurred at the date of issuance and these costs were deferred and are amortized to interest cost over the term of the Notes. As of December 31, 2022, $20.6 million of unamortized deferred issuance costs was netted against the long-term debt balance on the consolidated balance sheet. The Company was in compliance with all covenants as of December 31, 2022.
Annual maturities on all long-term debt outstanding at December 31, 2022, are as follows:
| | | | | | | | |
| | Maturities |
2023 | | $ | — | |
2024 | | — | |
2025 | | 500,000 | |
2026 | | — | |
2027 | | — | |
Thereafter | | 500,000 | |
Total maturities | | 1,000,000 | |
Unamortized deferred issuance costs | | 20,639 | |
Total long-term debt | | $ | 979,361 | |
Credit Facility
The Company was a party to an amended and restated credit and guaranty agreement, dated as of August 2, 2013 (as amended, the “Old Credit Agreement”), with Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, and the other lenders party thereto. On September 13, 2021, the Company entered into the Ninth Amendment to the Amended and Restated Credit and Guaranty Agreement (the “Ninth Amendment”), which among other things, amended the Old Credit Facility to permit the incurrence of additional debt to finance the acquisition of VRI and revise financial covenants therein to permit the consummation of the VRI acquisition. The amount available under the revolving credit facility (the “Old Credit Facility”) included an aggregate principal amount of $225.0 million, with a sub-facility for letters of credit of $40.0 million.
On February 3, 2022, the Company terminated its Old Credit Facility and entered into a new credit agreement (the “New Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, swing line lender and an issuing bank, Wells Fargo Bank, National Association, as an issuing bank, Truist Bank and Wells Fargo Bank, National Association, as co-syndication agents, Deutsche Bank AG New York Branch, Bank of America, N.A., Regions Bank, Bank of Montreal and Capital One, National Association, as co-documentation agents, and JPMorgan Chase Bank, N.A., Truist Securities, Inc. and Wells Fargo Securities, LLC, as joint bookrunners and joint lead arrangers, and the other lenders party thereto. The New Credit Agreement provides the Company with a senior secured revolving credit facility (the “New Credit Facility”) in an aggregate principal amount of $325.0 million. The New Credit Facility includes sublimits for swingline loans, letters of credit and alternative currency loans in amounts of up to $25.0 million, $60.0 million and $75.0 million, respectively. The Company did not draw any amount of the New Credit Facility at closing of the New Credit Agreement. As of December 31, 2022, the Company had $38.1 million of outstanding letters of credit under the New Credit Facility. The proceeds of the New Credit Facility may be used (i) to finance working capital needs of the Company and its subsidiaries and (ii) for general corporate purposes of the Company and its subsidiaries (including to finance capital expenditures, permitted acquisitions and investments).
Under the New Credit Facility, the Company has an option to request an increase in the amount of the New Credit Facility or obtain incremental term loans from time to time (on substantially the same terms as apply to the existing facilities) by an aggregate amount of up to $175.0 million, plus an unlimited amount so long as the pro forma secured net leverage ratio does not exceed 3.50:1.00, with either additional commitments from lenders under the New Credit Agreement at such time or new commitments from financial institutions approved by the Company and the administrative agent (which approval is not to be unreasonably withheld), so long as, at the time of any such increase, no default or event of default exists, the representations and warranties of the Company set forth in the New Credit Agreement are true and correct in all material respects and the Company is in pro forma compliance with the financial covenants in the New Credit Agreement. The Company may not be able to access additional funds under this increase option as no lender is obligated to participate in any such increase under the New Credit Facility.
The New Credit Facility matures on February 3, 2027. The Company may prepay the New Credit Facility in whole or in part, at any time without premium or penalty, subject to reimbursement of the lenders’ breakage and redeployment costs in connection with prepayments of Term Benchmark loans or RFR loans, each as defined in the New Credit Agreement. The unutilized portion of the commitments under the New Credit Facility may be irrevocably reduced or terminated by the Company at any time without penalty.
Interest on the outstanding principal amount of the loans accrues at a per annum rate equal to the Alternate Base Rate, the Adjusted Term SOFR Rate, the Adjusted Daily Simple SOFR Rate, the Adjusted EURIBOR Rate or the Adjusted Daily Simple SONIA Rate, as applicable and each as defined in the New Credit Agreement, in each case, plus an applicable margin. The applicable margin ranges from 1.75% to 3.50% in the case of Term Benchmark loans or RFR loans, and 0.75% to 2.50% in the case of the Alternate Base Rate loans, in each case, based on the Company’s total net leverage ratio as defined in the New Credit Agreement. Interest on the loans is payable quarterly in arrears in the case of Alternate Base Rate loans, on the last day of the relevant interest period in the case of Term Benchmark loans, and monthly in arrears in the case of RFR loans. In addition, the Company is obligated to pay a quarterly commitment fee based on a percentage of the unused portion of the revolving credit facility and quarterly letter of credit fees based on a percentage of the maximum amount available to be drawn under each outstanding letter of credit. The commitment fee and letter of credit fee range from 0.30% to 0.50% and 1.75% to 3.50%, respectively, in each case, based on the Company’s total net leverage ratio.
The New Credit Agreement contains customary representations and warranties, affirmative and negative covenants and events of default. The negative covenants include restrictions on the Company’s ability to, among other things, incur additional indebtedness, create liens, make investments, give guarantees, pay dividends, sell assets and merge and consolidate. The Company is subject to financial covenants, including total net leverage and interest coverage covenants.
The Company’s obligations under the New Credit Facility are guaranteed by all of the Company’s present and future material domestic subsidiaries, excluding certain material domestic subsidiaries that are excluded from being guarantors pursuant to the terms of the New Credit Agreement. The Company’s obligations under, and each guarantor’s obligations under its guaranty of, the New Credit Facility are secured by a first priority lien on substantially all of the Company’s or such guarantor’s respective assets. If an event of default occurs, the required lenders may cause the administrative agent to declare all unpaid principal and any accrued and unpaid interest and all fees and expenses under the New Credit Facility to be immediately due and payable. All amounts outstanding under the New Credit Facility will automatically become due and payable upon the commencement of any bankruptcy, insolvency or similar proceedings. The New Credit Agreement also contains a cross default to any of the Company’s indebtedness having a principal amount in excess of $40.0 million. The Company was in compliance with all covenants under the Credit Agreement as of December 31, 2022.
13. Convertible Preferred Stock
Following (i) the completion of a rights offering in February 2015, under which certain holders of our Common Stock exercised subscription rights to purchase Preferred Stock, and (ii) the purchase of Preferred Stock by Coliseum Capital Partners, L.P., Coliseum Capital Partners II, L.P., Blackwell Partners, LLC - Series A and Coliseum Capital Co-Invest, L.P. (collectively, the “Coliseum Stockholders”), pursuant to the Standby Purchase Agreement between the Coliseum Stockholders and us, we issued 805,000 shares of Preferred Stock, which were eligible for a cash dividend on each share of Preferred Stock, when, as and if declared by a committee of our of Directors (the "Board"), at the rate of 5.5% per annum on the liquidation preference then in effect.
Cash dividends were payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, and, if declared, began to accrue on the first day of the applicable dividend period. Cash dividends on redeemable convertible preferred stock totaling $2.0 million were distributed to convertible preferred stockholders for the year ended December 31, 2020. No cash dividends were distributed to convertible preferred stockholders for the years ended December 31, 2022 and 2021.
Preferred Stock Conversion
On June 8, 2020, the Company entered into a Preferred Stock Conversion Agreement (the “Conversion Agreement”) with Coliseum Capital Partners, L.P. and certain funds and accounts managed by Coliseum Capital Management, LLC (collectively, the “Holders”), pursuant to which, among other things, (a) the Company agreed to purchase 369,120 shares of Series A Convertible Preferred Stock, par value $0.001 per share, held by the Holders in the aggregate, in exchange for (i) $209.88 in cash per share of Series A Preferred Stock, plus (ii) a cash amount equal to accrued but unpaid dividends on such shares of Series A Preferred Stock through the day prior to June 11, 2020, and (b) the Holders converted 369,120 shares of Series A Preferred Stock into (i) 2.5075 shares of Common Stock of the Company for each share of Series A Preferred Stock, plus (ii) a cash payment equal to accrued but unpaid dividends on such shares of Series A Preferred Stock through the day prior to June 11, 2020, plus (iii) a cash payment of $8.82 per share of Series A Preferred Stock. The Conversion Agreement was considered to be an induced conversion in which a premium consideration was provided by the Company to Holders of the Series A Preferred Stock.
On September 3, 2020, the Company elected to effect the conversion (the “Conversion”) of all of the outstanding Series A Convertible Preferred Stock. In accordance with the Preferred Stock Conversion Agreement dated June 8, 2020, the Company repurchased 27,509 shares of Series A Preferred Stock from the Holders for (i) a cash amount equal to $209.88 per share of Series A Preferred Stock, plus (ii) a cash amount equal to accrued but unpaid dividends on such shares through the day prior to the Conversion. In connection with the Conversion, all remaining outstanding shares of Series A Preferred Stock were converted into Common Stock at the conversion rate of 2.5075 shares of Common Stock for each share of Series A Preferred Stock and cash-in-lieu of fractional shares.
In accordance with ASC 260, Earnings Per Share, retained earnings was reduced by the excess of the fair value of the consideration transferred over the carrying amount of the shares surrendered. The impact to retained earnings of the excess consideration transferred, including the direct costs incurred, and write-off of any unamortized issuance costs was $52.1 million as of December 31, 2020.
The Preferred Stock was accounted for outside of stockholders’ equity as it could be redeemed upon certain change in control events that were not solely in the control of the Company. Dividends were recorded in stockholders’ equity and consist of the 5.5% dividend.
As of December 31, 2022, 2021, and 2020 there were no shares of convertible preferred stock outstanding.
14. Stockholders’ Equity
At December 31, 2022 and 2021 there were 19,729,923 and 19,589,422 shares of the Company’s Common Stock issued, respectively, including 5,573,529 and 5,568,983 treasury shares at December 31, 2022 and 2021, respectively.
Subject to the rights specifically granted to holders of any then outstanding shares of the Company’s Preferred Stock, the Company’s common stockholders are entitled to vote together as a class on all matters submitted to a vote of the Company’s common stockholders, and are entitled to any dividends that may be declared by the Board. The Company’s common stockholders do not have cumulative voting rights. Upon the Company’s dissolution, liquidation or winding up, holders of the Company’s Common Stock are entitled to share ratably in the Company’s net assets after payment or provision for all liabilities and any preferential liquidation rights of the Company’s Preferred Stock then outstanding. The Company’s common stockholders do not have preemptive rights to purchase shares of the Company’s stock. The issued and outstanding shares of the Company’s Common Stock are not subject to any redemption provisions and are not convertible into any other shares of the Company’s capital stock. The rights, preferences and privileges of holders of the Company’s Common Stock will be subject to those of the holders of any shares of the Company’s Preferred Stock the Company may issue in the future.
As of December 31, 2022, 250,077 shares of the Company’s common stock were reserved for future issuances related to the exercise of stock options that were outstanding and restricted stock units and awards that were unvested as of December 31, 2022.
Purchases of Equity Securities
On March 11, 2020, the Board authorized a stock repurchase program under which the Company could repurchase up to $75.0 million in aggregate value of the Company’s Common Stock, subject to the consent of the holders of a majority of the Company’s then outstanding Series A convertible preferred stock, through December 31, 2020. A total of 195,677 shares were repurchased under this program for approximately $10.2 million during the year ended December 31, 2020.
On March 8, 2021, the Board authorized a new stock repurchase program under which the Company could repurchase up to $75.0 million in aggregate value of the Company’s Common Stock through December 31, 2021, unless terminated earlier. A total of 276,268 shares were repurchased under the program for $40.0 million during the year ended December 31, 2021.
No repurchase program was authorized during the year ended December 31, 2022.
Equity Award Withholding
During the years ended December 31, 2022, 2021 and 2020, the Company withheld 7,486, 5,432 and 2,824 shares, respectively, from employees to cover the settlement of income tax and related benefit withholding obligations arising from vesting of restricted stock awards and units.
15. Stock-Based Compensation and Similar Arrangements
The Company provides stock-based compensation to employees, non-employee directors, consultants and advisors under the Company’s 2006 Long-Term Incentive Plan (“2006 Plan”). The 2006 Plan allows the flexibility to grant or award stock options, stock appreciation rights, restricted stock, unrestricted stock, stock units including restricted stock units and performance awards to eligible persons.
The following table summarizes the activity under the 2006 Plan as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of shares of the Company’s Common Stock authorized for | | Number of shares of the Company’s Common Stock remaining for | | Number of shares of the Company’s Common Stock subject to |
| issuance | | future grants | | Stock Options | | Stock Grants |
2006 Plan | 5,400,000 | | | 1,177,991 | | | 125,179 | | | 124,898 | |
The following table reflects the amount of stock-based compensation for share settled awards recorded in each financial statement line item for the years ended December 31, 2022, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Service expense | $ | — | | | $ | — | | | $ | 222 | |
General and administrative expense | 6,872 | | | 5,904 | | | 3,708 | |
| | | | | |
| | | | | |
Total stock-based compensation | $ | 6,872 | | | $ | 5,904 | | | $ | 3,930 | |
Stock-based compensation included in general and administrative expense is related to the employees across all of our segments, except for a select group of employees that were included within service expense in 2020, which have since been phased out.
The amounts above exclude tax benefits of $1.9 million, $1.6 million and $1.1 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Stock Options
The fair value of each stock option awarded to employees is estimated on the date of grant using the Black-Scholes option-pricing formula based on the following assumptions for the years ended December 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Expected dividend yield | 0.0% | | 0.0% | | 0.0% |
Expected stock price volatility | 39.6% | - | 46.5% | | 36.6% | - | 41.6% | | 28.3% | - | 38.1% |
Risk-free interest rate | 1.6% | - | 4.4% | | 0.3% | - | 0.9% | | 0.2% | - | 1.4% |
Expected life of options (years) | 3.5 | - | 4.5 | | 3.5 | - | 4.4 | | 3.5 | - | 4.4 |
| | | | | | | | | | | |
The risk-free interest rate was based on the U.S. Treasury security rate in effect as of the date of grant which corresponds to the expected life of the award. The expected stock price volatility and expected lives of the stock options were based on the Company’s historical data. Stock options granted under the 2006 Plan vest ratably in equal annual installments over 3 to 4 years, or, for certain grants, over periods designated in the respective employee’s agreements, and expire after 5 to 7 years.
During the year ended December 31, 2022, the Company issued 109,731 shares of its Common Stock in connection with the exercise of employee stock options under the Company’s 2006 Plan.
The following table summarizes the stock option activity for the year ended December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2022 |
| Number of Shares Under Option | | Weighted- average Exercise Price | | Weighted- average Remaining Contractual Term | | Aggregate Intrinsic Value (in thousands) |
Balance at beginning of year, January 1 | 270,239 | | | $ | 88.72 | | | | | |
Granted | 103,013 | | | 106.90 | | | | | |
Exercised | (109,731) | | | 61.87 | | | | | |
Forfeited/Canceled | (131,284) | | | 95.23 | | | | | |
Expired | (7,058) | | | 174.57 | | | | | |
Outstanding at end of year, December 31 | 125,179 | | | $ | 115.54 | | | 3.53 | | $ | 539 | |
Vested or expected to vest at end of year, December 31 | 125,179 | | | $ | 115.54 | | | 3.53 | | $ | 539 | |
Exercisable at end of year, December 31 | 26,332 | | | $ | 116.89 | | | 2.66 | | $ | 275 | |
As of December 31, 2022, there was approximately $3.9 million of unrecognized compensation cost related to share settled stock options that is expected to be recognized over a weighted-average remaining contractual term of 3.53 years, using the simplified method as allowed for plain vanilla options.
The weighted-average grant date fair value for options granted, total intrinsic value and cash received by the Company related to options exercised during the years ended December 31, 2022, 2021 and 2020 were as follows (in thousands, except for fair value per share):
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
Weighted-average grant date fair value per share | $ | 106.90 | | | $ | 170.26 | | | $ | 71.56 | |
Options exercised: | | | | | |
Total intrinsic value | $ | 3,057 | | | $ | 4,454 | | | $ | 26,228 | |
Restricted Stock Awards and Restricted Stock Units
The Board grants restricted stock awards (RSAs) and restricted stock units (RSUs) under the 2006 Plan. RSAs and RSUs vest ratably in equal annual installments over 1 to 4 years, or, for certain grants, over periods designated in the respective employee’s agreements or as determined by the Compensation Committee.
During the year ended December 31, 2022, the Company issued 36,521 shares of its Common Stock to non-employee directors, executive officers and key employees upon the vesting of certain RSAs and RSUs granted under the Company’s 2006 Plan.
The following table summarizes the activity of the shares and weighted-average grant date fair value of the Company’s unvested RSAs and RSUs during the year ended December 31, 2022:
| | | | | | | | | | | |
| Shares | | Weighted-average grant date fair value |
| | | |
Non-vested at beginning of year, January 1 | 73,879 | | | $ | 112.61 | |
Granted | 113,414 | | | $ | 103.60 | |
Vested | (36,521) | | | $ | 98.63 | |
Forfeited or cancelled | (45,684) | | | $ | 103.49 | |
Non-vested at end of year, December 31 | 105,088 | | | $ | 108.49 | |
At December 31, 2022, there was approximately $12.1 million of unrecognized compensation costs related to non-vested RSAs and RSUs that is expected to be recognized over a weighted average remaining contractual term of 1.23 years.
Performance-Based Restricted Stock Units
The Board grants performance-based restricted stock units (PRSUs) to certain executive officers and key employees. PRSUs primarily have a three year performance period, after which the number of underlying RSUs earned is determined based on the achievement of pre-established performance targets.
The following table summarizes the activity of the shares and weighted-average grant date fair value of the Company's unvested PRSUs during the year ended December 31, 2022:
| | | | | | | | | | | |
| Shares | | Weighted-average grant date fair value |
| | | |
Non-vested at beginning of year, January 1 | — | | | $ | — | |
Granted | 42,228 | | | $ | 149.94 | |
Vested | — | | | $ | — | |
Forfeited or cancelled | (22,418) | | | $ | 149.60 | |
Non-vested at end of year, December 31 | 19,810 | | | $ | 150.33 | |
As of December 31, 2022, there was approximately $3.0 million of unrecognized compensation cost related to non-vested PRSUs that is expected to be recognized over a weighted-average remaining contractual term of 2.21 years.
The total fair value of vested stock options, RSUs and RSAs, and PRSUs was $2.6 million, $3.3 million and $5.2 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Employee Stock Purchase Plan
During the fourth quarter of 2022, the Company began offering an Employee Stock Purchase Plan ("ESPP") available to eligible employees. Under terms of the plan, eligible employees may designate a dollar value or percentage of their compensation to be withheld through payroll deductions, up to a maximum of $25,000 in each plan year, for the purchase of common stock at 85% of the lower of the market price on the first or last day of the offering period. Purchases under this plan were for a total of 2,940 shares as of December 31, 2022. As of December 31, 2022, 997,060 shares remain available for future issuance under this plan.
16. Earnings (Loss) Per Share
The following table details the computation of basic and diluted earnings (loss) per share (in thousands, except share and per share data):
| | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
Numerator: | | | | | |
Net income (loss) attributable to ModivCare | $ | (31,806) | | | $ | (6,585) | | | $ | 88,836 | |
Dividends on convertible preferred stock outstanding | — | | | — | | | (1,171) | |
Dividends paid pursuant to the Conversion Agreement | — | | | — | | | (816) | |
Consideration paid in excess of preferred cost basis pursuant to the Conversion Agreement | — | | | — | | | (52,139) | |
Income allocated to participating securities | — | | | — | | | (2,239) | |
Net income (loss) available to common stockholders | $ | (31,806) | | | $ | (6,585) | | | $ | 32,471 | |
| | | | | |
Denominator: | | | | | |
Denominator for basic earnings per share -- weighted-average shares | 14,061,839 | | | 14,054,060 | | | 13,567,323 | |
Effect of dilutive securities: | | | | | |
Common stock options | — | | | — | | | 71,651 | |
Restricted stock units | — | | | — | | | 44,334 | |
Denominator for diluted earnings per share -- adjusted weighted-average shares assumed conversion | 14,061,839 | | | 14,054,060 | | | 13,683,308 | |
| | | | | |
Earnings (loss) per share: | | | | | |
Basic earnings (loss) per share | $ | (2.26) | | | $ | (0.47) | | | $ | 2.39 | |
Diluted earnings (loss) per share | $ | (2.26) | | | $ | (0.47) | | | $ | 2.37 | |
Income allocated to participating securities is calculated by allocating a portion of the Company's net income, less dividends on convertible stock, to the convertible preferred stockholders on a pro-rata as converted basis; however, the convertible preferred stockholders are not allocated losses.
The following weighted-average shares were not included in the computation of diluted earnings per share as the effect of their inclusion would have been anti-dilutive: | | | | | | | | | | | | | | | | | |
| Year ended December 31, |
| 2022 | | 2021 | | 2020 |
Stock options to purchase common stock | 118,260 | | | 56,291 | | | 43,061 | |
Restricted stock unit equivalents to purchase common stock | 58,831 | | | 1,178 | | | 618 | |
17. Leases
The Company has non-cancelable operating leases primarily associated with office space and other facilities. The leases expire in various years and generally provide for renewal options. In the normal course of business, management expects that these leases will be renewed or replaced by leases on other properties.
Certain operating leases provide for increases in future minimum annual rental payments based on defined increases in the Consumer Price Index, subject to certain minimum increases. Several of these lease agreements contain provisions for periods in which rent payments are reduced. The total amount of rental payments due over the lease term is recorded as rent expense on a straight-line basis over the term of the lease.
To determine whether a contract contains a lease, the Company evaluates its contracts and verifies that there is an identified asset and that the Company, or the tenant, has the right to obtain substantially all the economic benefits from the use of the asset throughout the contract term and has the right to direct the use of the identified asset. If a contract is determined to contain a lease and the Company is a lessee, the lease is evaluated to determine whether it is an operating or financing lease.
The discount rate used for each lease is determined by estimating an appropriate incremental borrowing rate. In estimating an incremental borrowing rate, the Company considers the debt information, credit rating, and interest rate on the revolving credit facility, which is collateralized by the Company's assets. Accordingly, the Company continues discounting its remaining operating lease payments for calculating its lease liability using a weighted-average discount rate of 5.31%. The Company applies this rate to its entire portfolio of leases on the basis that any adjustments to the rate for lease term or asset classification would not affect the interest rate charged under the debt or have a material effect on the discounted lease liability.
A summary of all lease classifications in our consolidated balance sheets is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
Leases | Classification | | December 31, 2022 | | December 31, 2021 |
Assets | | | | | |
Operating lease assets | Operating lease ROU assets | | $ | 39,405 | | | $ | 43,750 | |
Finance lease assets | Property and equipment, net | | — | | | — | |
Total leased assets | | | $ | 39,405 | | | $ | 43,750 | |
| | | | | |
Liabilities | | | | | |
Current: | | | | | |
Operating | Current portion of operating lease liabilities | | $ | 9,640 | | | $ | 9,873 | |
Finance | Current portion of long-term obligations | | — | | | — | |
Long-term: | | | | | |
Operating | Operating lease liabilities, less current portion | | 32,088 | | | 34,524 | |
Finance | Finance lease liabilities, less current portion | | — | | | — | |
Total lease liabilities | | | $ | 41,728 | | | $ | 44,397 | |
As of December 31, 2022, future maturities of lease liabilities were as follows (in thousands):
| | | | | | | | | |
| Operating Leases | | | | |
2023 | $ | 11,347 | | | | | |
2024 | 8,509 | | | | | |
2025 | 6,009 | | | | | |
2026 | 4,714 | | | | | |
2027 | 3,599 | | | | | |
Thereafter | 15,657 | | | | | |
Total lease payments | 49,835 | | | | | |
Less: interest and accretion | (8,107) | | | | | |
Present value of minimum lease payments | 41,728 | | | | | |
Less: current portion | (9,640) | | | | | |
Long-term portion | $ | 32,088 | | | | | |
As of December 31, 2021, future maturities of lease liabilities were as follows (in thousands):
| | | | | | | | | |
| Operating Leases | | | | |
2022 | $ | 11,256 | | | | | |
2023 | 9,777 | | | | | |
2024 | 7,137 | | | | | |
2025 | 4,937 | | | | | |
2026 | 3,742 | | | | | |
Thereafter | 16,527 | | | | | |
Total lease payments | 53,376 | | | | | |
Less: interest and accretion | (8,979) | | | | | |
Present value of minimum lease payments | 44,397 | | | | | |
Less: current portion | (9,873) | | | | | |
Long-term portion | $ | 34,524 | | | | | |
The weighted-average remaining lease terms and weighted-average discount rates are as follows:
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Weighted-average remaining lease term (years): | | | |
Operating lease costs | 4.84 | | 6.61 |
Finance lease cost | N/A | | N/A |
Weighted-average discount rate: | | | |
Operating lease costs | 5.31 | % | | 5.25 | % |
Finance lease cost | N/A | | N/A |
For the years ended December 31, 2022 and December 31, 2021, our operating lease cost was $13.8 million and $13.6 million, respectively, and is primarily included in "Service expense” on our accompanying consolidated statements of operations.
A summary of other lease information is as follows (in thousands):
| | | | | | | | | | | |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 |
| | | |
Financing cash flows from finance leases | $ | — | | | $ | — | |
Operating cash flows from operating leases | $ | (12,492) | | | $ | (5,701) | |
Amortization of operating lease ROU assets | $ | 11,640 | | | $ | 11,330 | |
| | | |
ROU assets obtained through operating lease liabilities | $ | 7,295 | | | $ | 24,152 | |
18. Income Taxes
The federal and state tax provision is summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Federal income tax (benefit) expense: | | | | | |
Current | $ | 22,651 | | | $ | 6,642 | | | $ | 1,952 | |
Deferred | (25,291) | | | (820) | | | 8,223 | |
Total federal income tax (benefit) expense | (2,640) | | | 5,822 | | | 10,175 | |
| | | | | |
State income tax (benefit) expense: | | | | | |
Current | 11,500 | | | 5,048 | | | 9,937 | |
Deferred | (11,895) | | | (2,253) | | | 1,906 | |
Total state income tax (benefit) expense | (395) | | | 2,795 | | | 11,843 | |
Total provision (benefit) for income taxes | $ | (3,035) | | | $ | 8,617 | | | $ | 22,018 | |
A reconciliation of the provision (benefit) for income taxes with amounts determined by applying the statutory U.S. federal income tax rate to income before income taxes is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Federal statutory rates | 21.0 | % | | 21.0 | % | | 21.0 | % |
Federal income tax (benefit) at statutory rates | $ | (1,024) | | | $ | 8,459 | | | $ | 21,933 | |
| | | | | |
| | | | | |
Change in valuation allowance | (648) | | | 385 | | | (452) | |
Change in uncertain tax positions | 390 | | | (929) | | | 116 | |
State income taxes, net of federal benefit | 521 | | | 1,717 | | | 10,445 | |
Non-taxable income | — | | | (74) | | | (124) | |
Compensation expense | 251 | | | 1,204 | | | 1,036 | |
Stock-based compensation | (1,282) | | | (1,004) | | | (650) | |
Meals and entertainment | 48 | | | 30 | | | 51 | |
Transaction costs | — | | | 89 | | | 1,289 | |
Tax credits | (1,864) | | | (1,095) | | | (650) | |
CARES Act benefit | — | | | — | | | (10,984) | |
Subsidiary deconsolidation gain | 148 | | | — | | | — | |
Life insurance expense | 183 | | | — | | | — | |
Political activities | 197 | | | — | | | — | |
Other | 45 | | | (165) | | | 8 | |
Provision (benefit) for income taxes | $ | (3,035) | | | $ | 8,617 | | | $ | 22,018 | |
Effective income tax rate | 62.2 | % | | 21.4 | % | | 21.1 | % |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 2,769 | | | $ | 3,570 | |
Capital loss carryforward | 1,003 | | | 946 | |
Tax credit carryforwards | 205 | | | 516 | |
Interest expense carryforward | 12,616 | | | 5,100 | |
Accounts receivable allowance | 4,182 | | | 4,456 | |
Accrued items and reserves | 10,406 | | | 10,730 | |
Stock-based compensation | 2,066 | | | 812 | |
Deferred rent | 1,400 | | | 1,029 | |
Deferred revenue | 2,093 | | | 595 | |
Project costs | 65 | | | 952 | |
| | | |
Total deferred tax assets | 36,805 | | | 28,706 | |
Deferred tax liabilities: | | | |
Prepaid expenses | 1,493 | | | 3,181 | |
Property and equipment | 9,793 | | | 11,174 | |
Goodwill and intangible assets | 68,163 | | | 82,290 | |
Equity investment | 11,488 | | | 23,209 | |
Deferred financing costs | 155 | | | — | |
Other | 71 | | | 99 | |
Total deferred tax liabilities | 91,163 | | | 119,953 | |
Deferred tax liabilities, net of deferred tax assets | (54,358) | | | (91,247) | |
Less valuation allowance | (2,878) | | | (3,364) | |
Net deferred tax liabilities | $ | (57,236) | | | $ | (94,611) | |
| | | |
| | | |
| | | |
At December 31, 2022, the Company had $1.5 million of federal net operating loss (“NOL”) carryforwards. The Company also had approximately $39.6 million of state NOL carryforwards which expire as follows (in thousands):
| | | | | |
2023 | $ | 58 | |
2024 | 2,738 | |
2025 | — | |
2026 | 387 | |
2027 | — | |
2028 | 9 | |
2029 and thereafter | 36,391 | |
Total state net operating loss carryforwards | $ | 39,583 | |
The federal NOL carryforwards and approximately $21.5 million of the state NOL carryforwards relate to pre-acquisition tax periods and are subject to change of ownership limitations on their use. These limitations are not expected to restrict the ultimate use of these loss carryforwards.
Realization of the Company’s net operating loss carryforwards is dependent on reversing taxable temporary differences and on generating sufficient taxable income. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized to the extent they are not covered by a valuation allowance. The
amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
The net change in the total valuation allowance for the year ended December 31, 2022 was a decrease of $0.5 million, of which $0.6 million related to current operations offset by $0.1 million related to the balance from the Care Finders acquisition. The valuation allowance of $2.9 million includes amounts for state NOLs, capital loss and tax credit carryforwards for which the Company has concluded that it is more likely than not that these carryforwards will not be realized in the ordinary course of operations. The Company will continue to assess the valuation allowance, and to the extent it is determined that the valuation allowance should be changed, an appropriate adjustment will be recorded.
CARES ACT and Inflation Reduction Act
On March 27, 2020, the CARES Act was enacted into law. The CARES Act includes several significant business tax provisions that, among other things, allow businesses to carry back NOLs arising in 2018, 2019 and 2020 to the five prior years, accelerate refunds of previously generated corporate alternative minimum tax credits, deferral of employer's share of certain payroll taxes, and generally loosen the business interest limitation imposed by the Tax Reform Act.
Pursuant to the CARES Act, the Company carried its 2018 NOL back five years. As a result, in the year ended December 31, 2020, the Company recorded a $27.3 million receivable for the 2018 U.S. NOL carryback, and a $11.0 million tax benefit from the favorable carryback tax rate of 35% compared to a carryforward tax rate of 21%. The Company also recorded an additional income tax payable of $3.5 million for 2019 as a result of the 2018 NOL being carried back instead of carried forward.
As of December 31, 2021, the Company received all of the $27.3 million receivable for the 2018 U.S. NOL carryback. This $27.3 million was also subject to the IRS Joint Committee Review, which was completed in the third quarter of 2021 with no material adjustments being made.
On August 16, 2022, the IRA was enacted into law. This Act includes a 15.0 percent book minimum tax on the adjusted financial statement income of applicable corporations, a number of clean-energy tax credits, and a 1.0 percent excise tax on certain corporate stock buybacks. We do not expect these changes to have a material impact on our provision for income taxes or consolidated financial statements.
Unrecognized Tax Benefits
The Internal Revenue Service completed its audit of our consolidated U.S. income tax returns for 2015-2018 and no material adjustments were made to the large refunds (total of $47.6 million from capital loss and NOL carrybacks) received from the loss on the WD Services sale. In addition, we are being examined by various states and by the Saudi Arabian tax authorities. All known adjustments have been fully reserved.
The Company recognizes interest and penalties as a component of income tax expense. During the year ended December 31, 2022, the Company did not recognize a tax benefit or expense from interest or penalties. During the years ended December 31, 2021 and 2020, the Company recognized a benefit of approximately $0.2 million and an expense of $0.1 million, respectively, in interest and penalties. The Company had approximately $0.1 million and $0.1 million for the payment of penalties and interest accrued as of December 31, 2022 and 2021, respectively.
A reconciliation of the liability for unrecognized income tax benefits is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 | | 2020 |
Unrecognized tax benefits, beginning of year | $ | 1,290 | | | $ | 2,219 | | | $ | 1,403 | |
Transfer from discontinued operations | — | | | — | | | 700 | |
Increase related to prior year tax positions | 108 | | | (1,027) | | | — | |
Increase related to current year tax positions | 415 | | | 148 | | | 116 | |
Statute of limitations expiration | (133) | | | (50) | | | — | |
Unrecognized tax benefits, end of year | $ | 1,680 | | | $ | 1,290 | | | $ | 2,219 | |
The entire ending balance in unrecognized tax benefits of $1.7 million as of December 31, 2022 would reduce tax expense and our effective tax rate. The Company expects no material amount of the unrecognized tax benefits to be recognized during the next twelve months.
The Company is subject to taxation in the U.S. and various state jurisdictions. The statute of limitations is generally three years for the U.S. and between three and four years for the various states in which the Company operates. The tax years that remain open for examination by the U.S. and states principally include the years 2018 to 2021.
19. Commitments and Contingencies
Surveys, audits and governmental investigations
In the ordinary course of business, the Company may from time to time be or become subject to surveys, audits and governmental investigations under or with respect to various governmental programs and state and federal laws. Agencies associated with the programs and other third-party commercial payors periodically conduct extensive pre-payment or post-payment medical reviews or other audits of claims data to identify possible payments made or authorized other than in compliance with the requirements of Medicare or Medicaid. In order to conduct these reviews, documentation is requested from us and then that documentation is reviewed to determine compliance with applicable rules and regulations, including the eligibility of clients to receive benefits, the appropriateness of the care provided to those clients, and the documentation of that care. Similarly, other state and federal governmental agencies conduct reviews and investigation to confirm our compliance with applicable laws where we operate, including regarding employment and wage related regulations and matters. We cannot predict the ultimate outcome of any regulatory reviews or other governmental surveys, audits or investigations, but management does not expect any ongoing surveys or audits involving the Company to have a material adverse effect on the business, liquidity, financial condition, or results of operations of the Company. Regardless of our expectations, however, surveys and audits are subject to inherent uncertainties and can have a material adverse impact on our company due to, among other reasons, potential regulatory orders that inhibit our ability to operate our business, amounts paid as reimbursement or in settlement of any such matter, diversion of management resources and investigative costs.
Legal proceedings
In the ordinary course of business, the Company may from time to time be or become involved in various lawsuits, some of which may seek monetary damages, including claims for punitive damages. Unless otherwise expressly stated, management does not expect any ongoing lawsuits involving the Company to have a material impact on the business, liquidity, financial condition, or results of operations of the Company. Legal proceedings are subject to inherent uncertainties, however, and unfavorable rulings or other events could occur. Unfavorable resolutions could involve substantial monetary damages. In addition, in matters for which conduct remedies are sought, unfavorable resolutions could include an injunction or other order precluding particular business practices or requiring other remedies. An unfavorable outcome might result in a material adverse impact on our business, liquidity, financial position, or results of operations.
The Company records accruals for loss contingencies related to legal matters when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated. If the Company determines that a range of reasonably possible losses can be estimated, the Company records an accrual for the most probable amount in the range. Due to the inherent difficulty in predicting the outcome of any legal proceeding, it may not be reasonably possible to estimate a range of potential liability until the matter is closer to resolution. Legal fees related to all legal matters are expensed as incurred.
On September 27, 2022, Daniel Greenleaf, the Company’s former Chief Executive Officer, asserted claims in an arbitration against the Company. His claims allege that the Company breached Mr. Greenleaf’s employment agreement and include a tort claim against the Company. As disclosed to the Company on December 2, 2022, Mr. Greenleaf’s arbitration complaint seeks contractual, extra-contractual, and statutory damages totaling approximately $35 million, plus additional damages that were not quantified. The Company disputes Mr. Greenleaf’s claims in their entirety and intends to vigorously contest these claims. Based on the status of the proceeding and the uncertainty of the outcome, the Company is unable to estimate a range of possible loss for this matter. The Company does not believe, based on currently available information, that the outcome of the arbitration will have a material adverse effect on the Company's business, liquidity, financial condition, or results of operations. However, an unfavorable outcome could be material to the Company's operating results or cash flows for the period in which it occurs.
On August 6, 2020, the Company’s subsidiary, ModivCare Solutions, LLC (“ModivCare Solutions”), was served with a putative class action lawsuit filed against it by Mohamed Farah, the owner of transportation provider Dalmar Transportation, in the Western District of Missouri, seeking to represent all non-employee transportation providers contracted with ModivCare Solutions. The lawsuit alleges claims under the Fair Labor Standards Act of 1938, as amended (the “FLSA”), and the Missouri Minimum Wage Act, and asserts that all transportation providers to ModivCare Solutions in the putative class should be considered ModivCare Solutions’ employees rather than independent contractors. On June 6, 2021, the Court conditionally certified as the putative class all current and former In Network Transportation Providers who, individually or through their
companies, were issued 1099 payments from ModivCare Solutions for providing non-emergency medical transportation services for ModivCare Solutions for the previous three years. Notice of the proposed collective class was issued on October 5, 2021, and potential members of the class had until January 3, 2022 to opt-in. Plaintiff moved for class certification on August 15, 2022, and ModivCare Solutions filed an opposition to class certification on September 6, 2022. On January 13, 2023, the matter was transferred with the consent of the parties and the court to binding arbitration. ModivCare Solutions believes that it is and has been in compliance in all material respects with the laws and regulations regarding the characterization of the transportation providers as independent contractors, and does not believe that the ultimate outcome of this arbitration will have a material adverse effect on the Company’s business, liquidity, financial condition or results of operations.
On January 21, 2019, the United States District Court for the Southern District of Ohio unsealed a qui tam complaint, filed in December 2015, against Mobile Care Group, Inc., Mobile Care Group of Ohio, LLC, Mobile Care EMS & Transport, Inc. (collectively, the “Mobile Care Entities”) and ModivCare Solutions by Brandee White, Laura Cunningham, and Jeffery Wisier (the “Relators”) alleging that the Mobile Care Entities and indirectly ModivCare Solutions violated the federal False Claims Act by presenting claims for payment to government healthcare programs knowing that the prerequisites for such claims to be paid had not been met. The Relators sought to recover damages, fees and costs under the federal False Claims Act, including treble damages, civil penalties and attorneys’ fees. None of the Relators were employed by ModivCare Solutions. The federal government declined to intervene against ModivCare Solutions. ModivCare Solutions filed a motion to dismiss the Complaint on April 22, 2019, but such motion was denied on October 26, 2021. ModivCare Solutions filed an interlocutory appeal of this ruling with the Sixth Circuit Court of Appeals which was subsequently denied. The Relators and Modivcare tentatively agreed to settle the Relators' substantive claims in September 2022 and continue discussions concerning the Relators' counsel’s attorney fees. The settlement is not expected to have a material adverse effect on the Company’s business, liquidity, financial condition or results of operations.
In 2017, one of our Personal Care segment subsidiaries, All Metro Home Care Services of New York, Inc. d/b/a All Metro Health Care (“All Metro”), received a class action lawsuit in state court claiming that, among other things, it failed to properly pay live-in caregivers who stay in patients’ homes for 24 hours per day (“live-ins”). The Company currently pays live-ins for 13 hours per day as supported through a written opinion letter from the New York State Department of Labor (“NYSDOL”). A similar case involving this issue has been heard by the New York Court of Appeals (New York’s highest court), which on March 26, 2019, issued a ruling reversing earlier lower courts’ decisions that an employer must pay live-ins for 24 hours. The Court of Appeals agreed with the NYSDOL’s interpretation to pay live-ins 13 hours instead of 24 hours if certain conditions were being met. If the class action lawsuit on this matter is allowed to proceed, and is successful, All Metro may be liable for back wages and litigated damages going back to November 2011. All Metro filed its motion to oppose class certification of this matter and the matter was heard on June 23, 2022. The state court issued an order certifying the class on December 12, 2022. All Metro intends to defend itself vigorously with respect to this matter, believes that it is and has been in compliance in all material respects with the laws and regulations covering pay for live-in caregivers, and does not believe in any event that the ultimate outcome of this matter will have a material adverse effect on the Company’s business, liquidity, financial condition or results of operations.
Purchased service commitments
The Company entered into a contract related to transportation services that includes a minimum volume requirement. If the Company does not utilize the minimum level of services specified in the agreement, a penalty provision applies. Future minimum payments under the service commitments consisted of the following at December 31, 2022 (in thousands):
| | | | | |
| Service |
| Commitment |
2023 | $ | 36,000 | |
2024 | 49,500 | |
Total future minimum payments | $ | 85,500 | |
Deferred Compensation Plan
The Company has one deferred compensation plan for management and highly compensated employees of NEMT Services as of December 31, 2022. The deferred compensation plan is unfunded, and benefits are paid from the general assets of the Company. The total of participant deferrals, which is reflected in “Other long-term liabilities” in the consolidated balance sheets, was $2.0 million and $2.7 million at December 31, 2022 and 2021, respectively.
20. Transactions with Related Parties
Cash Settled Awards
On September 11, 2014, the Company granted 200,000 stock option equivalent units (“SOEUs”) to Coliseum Capital Management, LLC (“Coliseum”) as compensation for the Board service of Christopher Shackelton, Chairman of the Board, for his service on the Board in lieu of the restricted share awards that are given to our other non-employee directors.as compensation. These shares were granted at an exercise price of $43.81 per share that were fully vested. The SOEUs were accounted for as liability awards, with the recorded expense adjustment attributable to the Company’s change in stock price from the previous reporting period. On August 12, 2021, Coliseum exercised all of the SOEUs at a stock price of $182.73 per share for a total cash settlement of $27.8 million. The Company recorded an expense of $8.8 million and $15.8 million for SOEUs during the years ended December 31, 2021 and 2020, respectively, which was included in “General and administrative expense” in the consolidated statements of operations. At December 31, 2022 and 2021, respectively, there were no SOEU's outstanding and no remaining liability associated with the awards.
The cash settled share-based compensation expense in total excluded a tax benefit of $2.6 million and $4.5 million for the years ended December 31, 2021, and 2020, respectively. The Company had no outstanding SOEUs at December 31, 2022, and therefore, no tax impact was recorded at December 31, 2022.
As discussed in Note 13, Convertible Preferred Stock, Net, on June 8, 2020, the Company entered into a Preferred Stock Conversion Agreement with Coliseum Capital Partners, L.P. and certain funds and accounts managed by Coliseum Capital Management, LLC. Pursuant to the Conversion Agreement, the Company purchased 369,120 shares of Series A Convertible Preferred Stock, par value $0.001 per share, in exchange for $209.88 in cash per share of Series A Preferred Stock, plus a cash amount equal to accrued but unpaid dividends on such shares of Series A Preferred Stock through the day prior to June 11, 2020. Further, the Holders converted 369,120 shares of Series A Preferred Stock into 925,567 shares of common stock, a cash payment equal to accrued but unpaid dividends on such shares of Series A Preferred Stock through the day prior to June 11, 2020, and a cash payment of $8.82 per share of Series A Preferred Stock. The amount of accrued dividends paid pursuant to the Conversion Agreement was equal to $0.8 million.
Further, on September 3, 2020, the Company elected to affect the conversion (the “Conversion”) of all of the outstanding Series A Convertible Preferred Stock. In accordance with the Preferred Stock Conversion Agreement dated June 8, 2020 (as amended), immediately prior to the Conversion, the Company repurchased 27,509 shares of Series A Preferred Stock from the Holders for a cash amount equal to $209.88 per share of Series A Preferred Stock and a cash amount equal to accrued but unpaid dividends on such shares through the day prior to the Conversion.
There were no convertible preferred stock dividends earned by Coliseum Stockholders during the year ended December 31, 2022 or 2021. Convertible preferred stock dividends earned by the Coliseum Stockholders during the year ended December 31, 2020 totaled $2.0 million, including accrued dividends paid pursuant to the Conversion Agreement.