crvl-10q_20170630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June 30, 2017

or

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

For the transition period from            to           

Commission file number 0-19291

 

CORVEL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

33-0282651

(State or other jurisdiction of

incorporation or organization)

 

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

 

2010 Main Street, Suite 600

 

 

Irvine, CA

 

92614

(Address of principal executive offices)

 

(Zip Code)

 

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

 

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

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

The number of shares outstanding of the registrant's Common Stock, $0.0001 par value per share, as of August 1, 2017, was 18,755,675.

 

 


CORVEL CORPORATION

FORM 10-Q

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

3

 

 

 

 

 

Consolidated Balance Sheets – March 31, 2017 and June 30, 2017 (unaudited)

 

3

 

 

 

 

 

Consolidated Income Statements (unaudited) – Three months ended June 30, 2016 and 2017

 

4

 

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) – Three months ended June 30, 2016 and 2017

 

5

 

 

 

 

 

Notes to Consolidated Financial Statements – June 30, 2017

 

6

 

 

 

 

Item 2.

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

 

14

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

22

 

 

 

 

Item 4.

Controls and Procedures

 

22

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

22

 

 

 

 

Item 1A.

Risk Factors

 

22

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

29

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

29

 

 

 

 

Item 4.

Mine Safety Disclosures

 

29

 

 

 

 

Item 5.

Other Information

 

29

 

 

 

 

Item 6.

Exhibits

 

30

 

 

 

 

 

Signatures

 

31

 

Page 2


Part I - Financial Information

Item 1 - Financial Statements

CORVEL CORPORATION

CONSOLIDATED BALANCE SHEETS

 

 

 

March 31, 2017

 

 

June 30, 2017

 

 

 

 

 

 

 

(Unaudited)

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents (Note A)

 

$

28,611,000

 

 

$

35,009,000

 

Customer deposits

 

 

32,471,000

 

 

 

31,730,000

 

Accounts receivable, net

 

 

62,841,000

 

 

 

62,768,000

 

Prepaid taxes and expenses

 

 

4,944,000

 

 

 

4,906,000

 

Total current assets

 

 

128,867,000

 

 

 

134,413,000

 

Property and equipment, net

 

 

63,042,000

 

 

 

63,152,000

 

Goodwill

 

 

36,814,000

 

 

 

36,814,000

 

Other intangibles, net (Note F)

 

 

3,851,000

 

 

 

3,728,000

 

Other assets

 

 

2,809,000

 

 

 

2,352,000

 

TOTAL ASSETS

 

$

235,383,000

 

 

$

240,459,000

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts and taxes payable

 

$

16,583,000

 

 

$

20,679,000

 

Accrued liabilities

 

 

73,468,000

 

 

 

74,761,000

 

Total current liabilities

 

 

90,051,000

 

 

 

95,440,000

 

Deferred income taxes

 

 

6,686,000

 

 

 

6,358,000

 

Total liabilities

 

 

96,737,000

 

 

 

101,798,000

 

Commitments and contingencies (Notes G and H)

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

Common stock, $.0001 par value: 120,000,000 shares authorized at March 31, 2017 and

   June 30, 2017; 53,569,067 shares issued (18,937,233 shares outstanding, net of

   Treasury shares) and 53,619,066 shares issued (18,738,011 shares outstanding, net of

   Treasury shares) at March 31, 2017 and June 30, 2017, respectively

 

 

3,000

 

 

 

3,000

 

Paid-in capital

 

 

135,683,000

 

 

 

138,110,000

 

Treasury Stock (34,631,834 shares at March 31, 2017 and 34,881,055 shares at

   June 30, 2017)

 

 

(419,802,000

)

 

 

(430,989,000

)

Retained earnings

 

 

422,762,000

 

 

 

431,537,000

 

Total stockholders' equity

 

 

138,646,000

 

 

 

138,661,000

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

235,383,000

 

 

$

240,459,000

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

Page 3


CORVEL CORPORATION

CONSOLIDATED INCOME STATEMENTS – UNAUDITED

 

 

 

Three Months Ended June 30,

 

 

 

2016

 

 

2017

 

REVENUES

 

$

128,459,000

 

 

$

137,612,000

 

Cost of revenues

 

 

102,877,000

 

 

 

108,829,000

 

Gross profit

 

 

25,582,000

 

 

 

28,783,000

 

General and administrative expenses

 

 

13,461,000

 

 

 

14,629,000

 

Income before income tax provision

 

 

12,121,000

 

 

 

14,154,000

 

Income tax provision

 

 

4,630,000

 

 

 

5,379,000

 

NET INCOME

 

$

7,491,000

 

 

$

8,775,000

 

Net income per common and common equivalent share

 

 

 

 

 

 

 

 

Basic

 

$

0.38

 

 

$

0.47

 

Diluted

 

$

0.38

 

 

$

0.46

 

Weighted average common and common equivalent shares

 

 

 

 

 

 

 

 

Basic

 

 

19,572,000

 

 

 

18,811,000

 

Diluted

 

 

19,754,000

 

 

 

19,000,000

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

Page 4


CORVEL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED

 

 

 

Three Months Ended June 30,

 

 

 

2016

 

 

2017

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

NET INCOME

 

$

7,491,000

 

 

$

8,775,000

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,051,000

 

 

 

5,303,000

 

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

 

 

7,000

 

 

 

288,000

 

Stock compensation expense

 

 

516,000

 

 

 

922,000

 

Provision for doubtful accounts

 

 

386,000

 

 

 

276,000

 

Deferred income tax

 

 

(193,000

)

 

 

(328,000

)

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,341,000

)

 

 

(203,000

)

Customer deposits

 

 

1,139,000

 

 

 

741,000

 

Prepaid taxes and expenses

 

 

(1,582,000

)

 

 

38,000

 

Other assets

 

 

71,000

 

 

 

178,000

 

Accounts and taxes payable

 

 

2,618,000

 

 

 

4,096,000

 

Accrued liabilities

 

 

(6,020,000

)

 

 

1,293,000

 

Net cash provided by operating activities

 

 

8,143,000

 

 

 

21,379,000

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(5,285,000

)

 

 

(5,299,000

)

Net cash (used in) investing activities

 

 

(5,285,000

)

 

 

(5,299,000

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Purchase of treasury stock

 

 

(1,648,000

)

 

 

(11,187,000

)

Tax effect of stock option exercises

 

 

743,000

 

 

 

768,000

 

Exercise of common stock options

 

 

1,502,000

 

 

 

737,000

 

Net cash  provided by (used in) financing activities

 

 

597,000

 

 

 

(9,682,000

)

Increase in cash and cash equivalents

 

 

3,455,000

 

 

 

6,398,000

 

Cash and cash equivalents at beginning of period

 

 

32,779,000

 

 

 

28,611,000

 

Cash and cash equivalents at end of period

 

$

36,234,000

 

 

$

35,009,000

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

 

Income taxes paid

 

$

1,818,000

 

 

$

152,000

 

Purchase of software license under finance agreement

 

$

2,166,000

 

 

$

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

Page 5


CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

Note A — Basis of Presentation and Summary of Significant Accounting Policies

The unaudited consolidated financial statements herein have been prepared by CorVel Corporation (“the Company”) pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”).  The accompanying interim unaudited financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited consolidated financial statements for the latest fiscal year ended March 31, 2017.  Accordingly, note disclosures which would substantially duplicate the disclosures contained in the March 31, 2017 audited consolidated financial statements have been omitted from these interim unaudited consolidated financial statements.

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

Certain information and note disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included.  Operating results for the three months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2018.  For further information, refer to the audited consolidated financial statements and notes for the fiscal year ended March 31, 2017 included in the Company's Annual Report on Form 10-K filed with the SEC on June 9, 2017.

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

Use of Estimates: The preparation of financial statements in compliance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying unaudited consolidated financial statements.  Actual results could differ from those estimates.  Significant estimates include the values assigned to intangible assets, capitalized software development, allowance for doubtful accounts, accruals for income taxes, share-based payments related to performance-based awards, loss contingencies, estimated claims for claims administration revenue recognition, estimates used in stock option valuations, and accruals for self-insurance reserves. 

Cash and Cash Equivalents: Cash and cash equivalents consist of short-term, highly-liquid, investment-grade, interest-bearing securities with maturities of 90 days or less when purchased.  Customer deposits represent cash that is expected to be returned or applied towards payment within one year through our provider reimbursement services.

Fair Value of Financial Instruments: The Company applies Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements with respect to fair value measurements of (i) nonfinancial assets and liabilities that are recognized or disclosed at fair value in the Company’s consolidated financial statements on a recurring basis (at least annually) and (ii) all financial assets and liabilities.  ASC 820 prioritizes the inputs used in measuring fair value into the following hierarchy:

Level 1- Quoted market prices in active markets for identical assets or liabilities;

Level 2- Observable inputs other than those included in Level 1 (for example, quoted prices for similar assets in active markets or quoted prices for identical assets in inactive markets); and

Level 3- Unobservable inputs reflecting management’s own assumptions about the inputs used in estimating the value of the asset.

The carrying amounts of the Company’s financial instruments (i.e. cash equivalents, accounts receivable, accounts payable) are all Level 1, and the Company believes they approximate their fair values at March 31, 2017 and June 30, 2017. The Company has no Level 2 or Level 3 financial instruments.

Investment in Private Equity: The Company has made an investment of $2,250,000 into a private equity limited partnership that invests in start-up companies primarily in the data analytics industry.   The Company accounts for the investment using the cost method and will periodically review the investment for possible impairment. The Company recorded an impairment to the investment of $284,000 for the year ended March 31, 2017 and an additional $283,000 for the quarter ended June 30, 2017.  The investment is recorded in other assets on the accompanying consolidated balance sheets.  

Page 6


CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

Goodwill: The Company accounts for its business combinations in accordance with the FASB ASC 805-10 through ASC 805-50, “Business Combinations,” which (i) requires that the purchase method of accounting be applied to all business combinations and (ii) addresses the criteria for initial recognition of intangible assets and goodwill. In accordance with FASB ASC 350-10 through ASC 350-30, goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment annually, or more frequently if circumstances indicate the possibility of impairment. If the carrying value of goodwill or an intangible asset exceeds its fair value, an impairment loss shall be recognized.

Revenue Recognition: The Company recognizes revenue when (i) there is persuasive evidence of an arrangement, (ii) the services have been provided to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. For the Company’s services, the Company’s professional staff is contractually permitted to bill (i) for fees earned for time worked in fraction of an hour increments or (ii) by units of production. The Company recognizes revenue as fees are earned or as units of production are completed, which is when the revenue is earned and realized. Labor costs are recognized as the costs are incurred. The Company derives its revenue from the sale of network solutions and patient management services. Network solutions and patient management services may be sold individually or combined. When a sale combines multiple elements, the Company accounts for such multiple element arrangements in accordance with the guidance included in ASC 605-25.

The multiple element arrangements consist of bundled managed care services, which include various units of accounting such as network solutions and patient management (which includes claims administration). Such elements are considered separate units of accounting due to each element having value to the customer on a stand-alone basis. The selling price for each unit of accounting is determined using the contract price and management estimates. When the Company’s customers purchase several products, the pricing of the products sold is generally the same as if the products were sold on an individual basis. Revenue is recognized as the work is performed in accordance with the Company’s customer contracts. Based upon the nature of the Company’s products, bundled managed care elements are generally delivered in the same accounting period. The Company recognizes revenue for patient management claims administration services over the life of the customer contract. The Company estimates, based upon prior experience in managing claims, the deferral amount from when the claim is received to when the customer contract expires.

Accounts Receivable: The majority of the Company’s accounts receivable is due from companies in the property and casualty insurance industries, self-insured employers, and government entities.  Accounts receivable are generally due within 30 days and are stated as amounts due from customers net of an allowance for doubtful accounts. Those accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company and the condition of the general economy and the industry as a whole. No one customer accounted for 10% or more of accounts receivable at either March 31, 2017 or June 30, 2017. No one customer accounted for 10% or more of revenue during the three months ended June 30, 2016 and 2017.

Property and Equipment: Additions to property and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets, which range from two to seven years or the life of the lease.  The Company accounts for internally-developed software costs in accordance with FASB ASC 350-40, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” which allows for the capitalization of software developed for internal use. These costs are included within computer software in property and equipment and are amortized over a period of five years.

Long-Lived Assets: The carrying amount of all long-lived assets is evaluated periodically to determine if adjustment to the depreciation and amortization period or to the unamortized balance is warranted. Such evaluation is based principally on the expected utilization of the long-lived assets and the projected, undiscounted cash flows of the operations in which the long-lived assets are deployed.

Income Taxes: The Company provides for income taxes in accordance with provisions specified in ASC 740, “Accounting for Income Taxes”. Accordingly, deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities. These differences will result in taxable or deductible amounts in the future, based on tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which temporary differences become deductible. In making an assessment regarding the probability of realizing a benefit from these deductible differences, management considers the Company’s current and past performance, the market environment in which the Company operates, tax-planning strategies and the length of carry-forward periods for loss carry-forwards, if any. Valuation allowances are established when necessary to reduce

Page 7


CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

deferred tax assets to amounts that are more likely than not to be realized. Further, the Company provides for income tax issues not yet resolved with federal, state and local tax authorities.

Earnings per Share: Earnings per common share-basic is based on the weighted average number of common shares outstanding during the period. Earnings per common share-diluted is based on the weighted average number of common shares and common share equivalents outstanding during the period. In calculating earnings per share, earnings are the same for the basic and diluted calculations. Weighted average shares outstanding decreased in the quarter ended June 30, 2017 compared to the same quarter of the prior year primarily due to repurchases of shares under the Company’s share repurchase program.  See also Note D.

Recent Accounting Pronouncements: On May 28, 2014, the FASB issued ASU 2014-09 regarding ASC Topic 606, “Revenue from Contracts with Customers”. This standard provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB approved a one-year delay of the effective date of this new revenue recognition standard. The guidance will now be effective for our fiscal year beginning April 1, 2018. We are currently evaluating the accounting, transition and disclosure requirements of the standard.  Based on the analyses we have completed thus far, which includes analyzing CorVel standard contracts from which the Company derives the majority of its revenues, we anticipate that the ASU will not have a significant impact on our consolidated financial statements.  However, the Company is currently reviewing its existing non-standard customer contracts, and as a result, the impact of the ASU adoption on this portion of the Company’s revenues cannot yet be reasonably estimated.

In January 2016, the FASB issued ASU 2016-01 regarding Subtopic 825-10, “Financials Instruments — Overall: Recognition and Measurements of Financial Assets and Financial Liabilities”. The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. It requires that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net income. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. We are currently evaluating the accounting, transition, and disclosure requirements of the standard and cannot currently estimate the impact of adoption on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases”, which sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for using an approach that is similar to the existing guidance for operating leases.  The standard is effective April 1, 2019, with early adoption permitted. The standard is to be applied using a modified retrospective transition method. We are currently evaluating the impact of adoption on our consolidated financial position, results of operations, and cash flows.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows”, which reduces diversity in the practice of how certain transactions are classified in the statement of cash flows.  The new guidance is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted. The adoption of this guidance will not have a material impact on our consolidated financial statements.

Guidance Adopted in 2017

In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting”, which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, as well as classification on the statement of cash flows. For public companies, the new guidance became effective for annual reporting periods, and interim periods within those periods, beginning after December 15, 2016.  We have elected to early adopt this standard as of March 31, 2017.

Note B — Stock-Based Compensation and Stock Options

Under the Company’s Restated Omnibus Incentive Plan (formerly the Restated 1988 Executive Stock Option Plan) (“the Plan”) as in effect at June 30, 2017, options exercisable for up to 19,365,000 shares of the Company’s common stock may be granted over the life of the Plan to key employees, non-employee directors, and consultants at exercise prices not less than the fair market value of the stock on the date of grant. Options granted under the Plan are non-statutory stock options and generally vest 25% one year from

Page 8


CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

the date of grant with the remaining 75% vesting ratably each month for the next 36 months. The options granted to employees and the Company’s Board of Directors expire at the end of five years and ten years from date of grant, respectively.  All options granted in the three months ended June 30, 2016 and 2017 were granted with an exercise price equal to the fair value of the Company’s common stock on the grant date and are non-statutory stock options.

The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model with the assumptions included in the table below. The Company uses historical data, among other factors, to estimate the expected volatility, the expected dividend yield, the expected forfeiture rate and the expected option life. Upon adoption of ASU No. 2016-09 as of fiscal 2017, the Company will account for forfeitures as they occur, rather than estimate expected forfeitures.  As a result, during the fourth quarter of fiscal 2017, we reclassified the excess tax benefit of $0.5 million from additional paid in capital into the income tax provision line.  The risk-free rate is based on the interest rate paid on a U.S. Treasury issue with a term similar to the estimated life of the option.  The following assumptions were used to estimate the fair value of options granted during the three months ended June 30, 2016 and 2017 using the Black-Scholes option-pricing model:

 

 

 

Three Months Ended June 30,

 

 

 

2016

 

 

2017

 

Risk-free interest rate

 

 

1.20%

 

 

 

1.88%

 

Expected volatility

 

 

43%

 

 

 

41%

 

Expected dividend yield

 

 

0.00%

 

 

 

0.00%

 

Expected weighted average life of option in years

 

4.1 years

 

 

4.5 years

 

 

For the three months ended June 30, 2016 and 2017, the Company recorded share-based compensation expense of $516,000 and $922,000, respectively. The table below shows the amounts recognized in the unaudited consolidated financial statements for stock compensation expense for time-based options and performance-based options during the three months ended June 30, 2016 and 2017, respectively.  

 

 

 

Three Months Ended

 

 

 

June 30, 2016

 

 

June 30, 2017

 

Cost of revenues

 

$

337,000

 

 

$

483,000

 

General and administrative

 

 

179,000

 

 

 

439,000

 

Total cost of stock-based compensation included in

   income before income tax provision

 

 

516,000

 

 

 

922,000

 

Amount of income tax benefit recognized

 

 

(197,000

)

 

 

(350,000

)

Amount charged against net income

 

$

319,000

 

 

$

572,000

 

Effect on basic earnings per share

 

$

(0.02

)

 

$

(0.03

)

Effect on diluted earnings per share

 

$

(0.02

)

 

$

(0.03

)

 

The following table summarizes information for all stock options for the three months ended June 30, 2016 and 2017:

 

 

 

Three Months Ended June 30, 2016

 

 

Three Months Ended June 30, 2017

 

 

 

Shares

 

 

Weighted

Average

Exercise Price

 

 

Shares

 

 

Weighted

Average

Exercise Price

 

Options outstanding, beginning

 

 

1,115,465

 

 

$

30.36

 

 

 

1,143,928

 

 

$

32.02

 

Options granted

 

 

44,900

 

 

 

45.74

 

 

 

77,400

 

 

 

45.93

 

Options exercised

 

 

(76,623

)

 

 

22.11

 

 

 

(65,921

)

 

 

26.67

 

Options cancelled/forfeited

 

 

(9,221

)

 

 

35.43

 

 

 

(3,685

)

 

 

39.99

 

Options outstanding, ending

 

 

1,074,521

 

 

$

31.56

 

 

 

1,151,722

 

 

$

33.24

 

 

Page 9


CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

The following table summarizes the status of stock options outstanding and exercisable at June 30, 2017:

 

Range of Exercise Price

 

Number of

Outstanding Options

 

 

Weighted

Average

Remaining

Contractual

Life

 

 

Outstanding

Options –

Weighted

Average

Exercise Price

 

 

Exercisable

Options –

Number of

Exercisable

Options

 

 

Exercisable

Options –

Weighted

Average

Exercise

Price

 

$12.71 to $23.10

 

 

292,576

 

 

 

1.94

 

 

$

20.33

 

 

 

292,576

 

 

$

20.33

 

$23.11 to $34.77

 

 

296,844

 

 

 

3.61

 

 

$

31.75

 

 

 

103,778

 

 

$

30.27

 

$34.78 to $43.14

 

 

316,406

 

 

 

3.21

 

 

$

37.26

 

 

 

85,645

 

 

$

38.93

 

$43.15 to $46.10

 

 

245,896

 

 

 

3.79

 

 

$

45.21

 

 

 

76,720

 

 

$

45.37

 

Total

 

 

1,151,722

 

 

 

3.11

 

 

$

33.24

 

 

 

558,719

 

 

$

28.46

 

 

The following table summarizes the status of all outstanding options at June 30, 2017, and changes during the three months then ended:

 

 

 

Number of Options

 

 

Weighted Average

Exercise Price

Per Share

 

 

Weighted Average

Remaining Contractual

Life (Years)

 

 

Aggregate

Intrinsic Value as

of June 30,

2017

 

Options outstanding at April 1, 2017

 

 

1,143,928

 

 

$

32.02

 

 

 

 

 

 

 

 

 

Granted

 

 

77,400

 

 

 

45.93

 

 

 

 

 

 

 

 

 

Exercised

 

 

(65,921

)

 

 

26.67

 

 

 

 

 

 

 

 

 

Cancelled – forfeited

 

 

(2,062

)

 

 

38.25

 

 

 

 

 

 

 

 

 

Cancelled – expired

 

 

(1,623

)

 

 

42.99

 

 

 

 

 

 

 

 

 

Ending outstanding

 

 

1,151,722

 

 

$

33.24

 

 

 

3.11

 

 

$

16,370,972

 

Ending vested and expected to vest

 

 

1,151,722

 

 

$

33.24

 

 

 

3.11

 

 

$

16,370,972

 

Ending exercisable at June 30, 2017

 

 

558,719

 

 

$

28.46

 

 

 

2.13

 

 

$

10,608,043

 

 

The weighted-average grant-date fair value of options granted during the three months ended June 30, 2016 and 2017, was $15.91 and $16.57, respectively.

Included in the above-noted stock option grants and stock compensation expense are performance-based stock options which vest only upon the Company’s achievement of certain earnings per share targets on a calendar year basis, as determined by the Company’s Board of Directors.  These options were valued in the same manner as the time-based options. However, the Company only recognizes stock compensation expense to the extent that the targets are determined to be probable of being achieved, which triggers the vesting of the performance options.  The Company recognized ($31,000) and $212,000 of stock compensation expense for the three months ended June 30, 2016 and 2017, respectively, for performance-based stock options.  

 

Note C — Treasury Stock

 

The Company’s Board of Directors approved the commencement of a share repurchase program in the fall of 1996.  In February 2017, the Company’s Board of Directors approved a 1,000,000 share expansion to the Company’s existing stock repurchase program, increasing the total number of shares of the Company’s common stock approved for repurchase over the life of the program to 36,000,000 shares.  Since the commencement of the share repurchase program, the Company has spent $431 million on the repurchase of 34,881,055 shares of its common stock, equal to 65% of the outstanding common stock had there been no repurchases.  The average price of these repurchases was $12.36 per share. These repurchases were funded primarily by the net earnings of the Company, along with proceeds from the exercise of common stock options.  During the three months ended June 30, 2017, the Company repurchased 249,245 shares of its common stock for $11.2 million at an average price of $44.88 per share of stock.  The Company had 18,738,011 shares of common stock outstanding as of June 30, 2017, net of the 34,881,055 shares in treasury.  

 

 

Page 10


CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

Note D — Weighted Average Shares and Net Income Per Share

Basic weighted average common shares outstanding decreased from 19,572,000 for the quarter ended June 30, 2016 to 18,811,000 for the quarter ended June 30, 2017.  Diluted weighted average common and common equivalent shares outstanding decreased from 19,754,000 for the quarter ended June 30, 2016 to 19,000,000 for the quarter ended June 30, 2017.  The net decrease in both of these weighted average share calculations is due to the repurchase of common stock as noted above, offset by an increase in shares outstanding due to the exercise of stock options under the Plan.

Net income per common and common equivalent share was computed by dividing net income by the weighted average number of common and common share equivalents outstanding during the quarter.  The following table sets forth the calculations of the basic and diluted weighted average shares for the three months ended June 30, 2016 and 2017:

 

 

 

Three Months Ended June 30,

 

 

 

2016

 

 

2017

 

Net Income

 

$

7,491,000

 

 

$

8,775,000

 

Basic:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

19,572,000

 

 

 

18,811,000

 

Net Income per share

 

$

0.38

 

 

$

0.47

 

Diluted:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

19,572,000

 

 

 

18,811,000

 

Treasury stock impact of stock options

 

 

182,000

 

 

 

189,000

 

Total common and common equivalent shares

 

 

19,754,000

 

 

 

19,000,000

 

Net Income per share

 

$

0.38

 

 

$

0.46

 

 

 

Note E — Shareholder Rights Plan

During fiscal year 1997, the Company’s Board of Directors approved the adoption of a shareholder rights plan (the “Shareholder Rights Plan”). The Shareholder Rights Plan provides for a dividend distribution to the Company’s shareholders of one preferred stock purchase right for each outstanding share of the Company’s common stock held by such shareholder (as used in this Note E, the “right” or the “rights”), only in the event of certain takeover-related events.  In November 2008, the Company’s Board of Directors approved an amendment to the Shareholder Rights Plan to extend the expiration date of the rights to February 10, 2022.

The rights are designed to assure that all shareholders receive fair and equal treatment in the event of a proposed takeover of the Company, and to encourage a potential acquirer to negotiate with the Company’s Board of Directors prior to attempting a takeover. The rights are not exercisable until the occurrence of certain takeover-related events, at which time they can be exercised at an exercise price of $118 per share of common stock which carries the right, subject to subsequent adjustments. The rights trade with the Company’s common stock.

 

Generally, the Shareholder Rights Plan provides that if a person or group acquires 15% or more of the Company’s common stock without the approval of the Company’s Board of Directors, subject to certain exceptions, the holders of the rights, other than the acquiring person or group, would, under certain circumstances, have the right to purchase additional shares of the Company’s common stock having a market value equal to two times the then-current exercise price of the right.

In addition, if the Company is thereafter merged into another entity, or if 50% or more of the Company’s consolidated assets or earning power are sold, then the right will entitle its holder to buy common shares of the acquiring entity having a market value equal to two times the then-current exercise price of the right. The Company’s Board of Directors may exchange or redeem the rights under certain conditions.

 

 

Page 11


CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

Note F — Other Intangible Assets

The following table summarizes other intangible assets at March 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost, Net of

 

 

 

 

 

 

 

 

 

Fiscal 2017

 

 

Accumulated

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Amortization

 

 

Amortization at

 

 

Amortization at

 

Item

 

Life

 

Cost

 

 

Expense

 

 

March 31, 2017

 

 

March 31, 2017

 

Covenants Not to Compete

 

5 Years

 

$

775,000

 

 

$

 

 

$

775,000

 

 

$

 

Customer Relationships

 

18-20 Years

 

 

7,922,000

 

 

 

423,000

 

 

 

4,144,000

 

 

 

3,778,000

 

TPA Licenses

 

15 Years

 

 

204,000

 

 

 

14,000

 

 

 

131,000

 

 

 

73,000

 

Total

 

 

 

$

8,901,000

 

 

$

437,000

 

 

$

5,050,000

 

 

$

3,851,000

 

 

The following table summarizes other intangible assets at June 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost, Net of

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Accumulated

 

 

Accumulated

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

Amortization at

 

 

Amortization at

 

Item

 

Life

 

Cost

 

 

Amortization Expense

 

 

June 30, 2017

 

 

June 30, 2017

 

Covenants Not to Compete

 

5 Years

 

$

775,000

 

 

$

 

 

$

775,000

 

 

$

 

Customer Relationships

 

18-20 Years

 

 

7,922,000

 

 

 

118,000

 

 

 

4,262,000

 

 

 

3,660,000

 

TPA Licenses

 

15 Years

 

 

204,000

 

 

 

4,000

 

 

 

136,000

 

 

 

68,000

 

Total

 

 

 

$

8,901,000

 

 

$

122,000

 

 

$

5,173,000

 

 

$

3,728,000

 

 

 

Note G — Line of Credit

In September 2016, the Company renewed its line of credit agreement with a financial institution, which provides a revolving credit facility with borrowing capacity of up to $10 million. Borrowings under the credit agreement, as amended, bear interest, at the Company’s option, at a fixed LIBOR-based rate plus 1.00% or at a fluctuating rate determined by the financial institution to be 1.00% above the daily one-month LIBOR rate. The loan covenants require the Company to (i) maintain a current assets to liabilities ratio of at least 1.25:1, (ii) maintain a current debt to tangible net worth ratio of not greater than 1.25:1 and (iii) have positive net income.  The Company is in compliance with all these covenants.  There were no outstanding revolving loans as of June 30, 2017, but letters of credit in the aggregate amount of $4.5 million have been issued separately from the line of credit, and therefore do not reduce the amount of borrowings available under the revolving credit facility. The renewed credit agreement expires in September 2017.  The Company expects to renew the line of credit for another year.

 

 

Note H — Contingencies and Legal Proceedings

The Company is involved in litigation arising in the ordinary course of business. Management believes that resolution of these matters will not result in any payment that, individually or in the aggregate, would be material to the consolidated financial position or results of operations of the Company.

 

Note I — Accounts and Taxes Payable and Accrued Liabilities

The following table sets forth accounts payable, income taxes payable, and accrued liabilities at March 31, 2017 and June 30, 2017:

 

 

 

March 31, 2017

 

 

June 30, 2017

 

Accounts payable

 

$

13,869,000

 

 

$

12,588,000

 

Income taxes payable and uncertain tax positions

 

 

2,714,000

 

 

 

8,091,000

 

Total accounts and taxes payable

 

$

16,583,000

 

 

$

20,679,000

 

Page 12


CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

 

 

 

 

March 31, 2017

 

 

June 30, 2017

 

Payroll, payroll taxes and employee benefits

 

$

14,465,000

 

 

$

15,999,000

 

Customer deposits

 

 

32,471,000

 

 

 

31,730,000

 

Accrued professional service fees

 

 

4,551,000

 

 

 

4,408,000

 

Self-insurance accruals

 

 

2,835,000

 

 

 

2,896,000

 

Deferred revenue

 

 

10,096,000

 

 

 

10,904,000

 

Accrued rent

 

 

5,774,000

 

 

 

5,607,000

 

Other

 

 

3,276,000

 

 

 

3,217,000

 

Total accrued liabilities

 

$

73,468,000

 

 

$

74,761,000

 

 

 

 

Page 13


Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report may include certain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including (without limitation) statements with respect to anticipated future operating and financial performance, growth and acquisition opportunities and other similar forecasts and statements of expectation. Words such as “expects,” “anticipates,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “potential,” “continue,” “strive,” “ongoing,” “may,” “will,” “would,” “could,” and “should” and variations of these words and similar expressions, are intended to identify these forward-looking statements. Forward-looking statements made by the Company and its management are based on estimates, projections, beliefs and assumptions of management at the time of such statements and are not guarantees of future performance.

The Company disclaims any obligations to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information or otherwise. Actual future performance, outcomes, and results may differ materially from those expressed in forward-looking statements made by the Company and its management as a result of a number of risks, uncertainties and assumptions. Representative examples of these factors include (without limitation) general industry and economic conditions, including a decreasing number of national claims due to a decreasing number of injured workers; cost of capital and capital requirements; existing and  possible litigation and legal liability in the course of operations and the Company’s ability to resolve such litigation; competition from other managed care companies; the ability to expand certain areas of the Company’s business; shifts in customer demands; the ability of the Company to produce market-competitive software; changes in operating expenses including employee wages, benefits, and medical inflation; governmental and public policy changes, including but not limited to legislative and administrative law and rule implementation or change; dependence on key personnel; the impact of recently issued accounting standards on the Company’s consolidated financial statements; the continued growth in the Company’s sale of TPA services and the other risks identified in Part II, Item 1A of this report.

Overview

CorVel Corporation is an independent nationwide provider of medical cost containment and managed care services designed to address the escalating medical costs of workers’ compensation benefits, mobile insurance claims, and group health insurance benefits. The Company’s services are provided to insurance companies, third party administrators, or TPA’s, governmental entities, and self-administered employers to assist them in managing the medical costs and monitoring the quality of care associated with healthcare claims.  There is a decrease in the occupational injury and illness incidence rates as released from the United States Department of Labor in October 2016.  This is a continuance of a long term trend of a decrease in the injury rates in the United States, therefore, fewer claims could lead to fewer medical dollars to be reviewed.

Network Solutions Services

The Company’s network solutions services are designed to reduce the price paid by its customers for medical services rendered in workers’ compensation cases, automobile insurance policies, and group health insurance policies. The network solutions services offered by the Company include automated medical fee auditing, preferred provider management and reimbursement services, retrospective utilization review, facility claim review, professional review, pharmacy services, directed care services, Medicare solutions, clearinghouse services, independent medical examinations, and inpatient medical bill review. Network solutions services also includes revenue from the Company’s directed care network (known as CareIQ), which includes imaging, physical therapy and durable medical equipment.

Patient Management Services

In addition to its network solutions services, the Company offers a range of patient management services, which involve working one-on-one with injured employees and their various healthcare professionals, employers and insurance company adjusters. Patient management services include claims management and all services sold to claims management customers, case management, 24/7 nurse triage, utilization management, vocational rehabilitation, and life care planning.  The services are designed to monitor the medical necessity and appropriateness of healthcare services provided to workers’ compensation and other healthcare claimants and to expedite return to work. The Company offers these services on a stand-alone basis, or as an integrated component of its medical cost containment services.  Patient management services include the processing of claims for self-insured payors with respect to property and casualty insurance.

Organizational Structure

The Company’s management is structured geographically with regional vice-presidents who report to the Executive Vice President of the Company.  Each of these regional vice-presidents is responsible for all services provided by the Company in his or her

Page 14


 

particular region and for the operating results of the Company in multiple states. These regional vice-presidents have area and district managers who are also responsible for all services provided by the Company in their given area and district.

Business Enterprise Segments

The Company operates in one reportable operating segment, managed care. The Company’s services are delivered to its customers through its local offices in each region and financial information for the Company’s operations follows this service delivery model. All regions provide the Company’s patient management and network solutions services to customers.  Financial Accounting Standards Board, or FASB, Accounting Standard Codification, or ASC, 280- 10, “Segment Reporting”, establishes standards for the way that public business enterprises report information about operating segments in annual and interim consolidated financial statements. The Company’s internal financial reporting is segmented geographically, as discussed above, and managed on a geographic rather than service line basis, with virtually all of the Company’s operating revenue generated within the United States.

Under FASB ASC 280-10, two or more operating segments may be aggregated into a single operating segment for financial reporting purposes if aggregation is consistent with the objective and basic principles, if the segments have similar economic characteristics, and if the segments are similar in each of the following areas: (i) the nature of products and services; (ii) the nature of the production processes; (iii) the type or class of customer for their products and services; and (iv) the methods used to distribute their products or provide their services. The Company believes each of its regions meet these criteria as each provides similar services and products to similar customers using similar methods of productions and similar methods to distribute the services and products.

Seasonality

While we are not directly impacted by seasonal shifts, we are affected by the change in working days in a given quarter. There are generally fewer working days for our employees to generate revenue in the third fiscal quarter due to employee vacations, inclement weather, and holidays.

Summary of Quarterly Results

The Company’s revenues increased by $9.2 million, or 7.1%, from $128.5 million in the quarter ended June 30, 2016 to $137.6 million in the quarter ended June 30, 2017. This increase was due to an increase in patient management services, which was due to an increase in TPA services partially offset by a decrease in case management services.

Cost of revenues increased by $6.0 million, or 5.8%, from $102.9 million in the quarter ended June 30, 2016 to $108.8 million in the quarter ended June 30, 2017.   This increase was primarily due to an increase of 7% in revenue mentioned above.  Additionally, there was an increase in salaries, due to an increase in headcount in field operations.

General and administrative expense increased by $1.2 million, or 8.7%, from $13.5 million in the quarter ended June 30, 2016 to $14.6 million in the quarter ended June 30, 2017.  This increase was primarily due to an increase in legal, marketing and stock compensation expenses and the impairment in our investment in private equity.

Income tax expense increased by $0.7 million, or 16.2%, from $4.6 million in the quarter ended June 30, 2016 to $5.4 million in the quarter ended June 30, 2017.  This increase was primarily due to an increase in pretax income.

Weighted diluted shares decreased by 754,000 shares, or 3.8%, from 19.8 million shares in the quarter ended June 30, 2016 to 19 million shares in the quarter ended June 30, 2017.  This decrease was primarily due to the repurchase of 956,636 shares of common stock in the twelve months ended June 30, 2017 under our stock repurchase program.

Diluted earnings per share increased $0.08 per share, or 21.1%, from $0.38 per share in the quarter ended June 30, 2016 to $0.46 per share in the quarter ended June 30, 2017. The increase in diluted earnings per share was primarily due to an increase in net income and a decrease in weighted diluted shares.

Page 15


 

Results of Operations for the three months ended June 30, 2016 and 2017

The Company derives its revenues from providing patient management and network solutions services to payors of workers’ compensation benefits, automobile insurance claims, and group health insurance benefits.  The percentages of total revenues attributable to patient management and network solutions services for the quarters ended June 30, 2016 and June 30, 2017 are as follows:

 

 

 

June 30, 2016

 

 

June 30, 2017

 

Patient management services

 

 

55.5

%

 

 

55.5

%

Network solutions services

 

 

44.5

%

 

 

44.5

%

 

The following table sets forth, for the periods indicated, the dollar amounts, dollar and percent changes, share changes, and the percentage of revenues represented by certain items reflected in the Company’s unaudited consolidated income statements for the three months ended June 30, 2016 and June 30, 2017. The Company’s past operating results are not necessarily indicative of future operating results.

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

 

 

 

Percentage

 

 

 

June 30, 2016

 

 

June 30, 2017

 

 

Change

 

 

Change

 

Revenue

 

$

128,459,000

 

 

$

137,612,000

 

 

$

9,153,000

 

 

 

7.1

%

Cost of revenues

 

 

102,877,000

 

 

 

108,829,000

 

 

 

5,952,000

 

 

 

5.8

%

Gross profit

 

 

25,582,000

 

 

 

28,783,000

 

 

 

3,201,000

 

 

 

12.5

%

Gross profit as percentage of revenue

 

 

19.9

%

 

 

20.9

%

 

 

 

 

 

 

 

 

General and administrative

 

 

13,461,000

 

 

 

14,629,000

 

 

 

1,168,000

 

 

 

8.7

%

General and administrative as percentage of

   revenue

 

 

10.5

%

 

 

10.6

%

 

 

 

 

 

 

 

 

Income before income tax provision

 

 

12,121,000

 

 

 

14,154,000

 

 

 

2,033,000

 

 

 

16.8

%

Income before income tax provision as

   percentage of revenue

 

 

9.4

%

 

 

10.3

%

 

 

 

 

 

 

 

 

Income tax provision

 

 

4,630,000

 

 

 

5,379,000

 

 

 

749,000

 

 

 

16.2

%

Net income

 

$

7,491,000

 

 

$

8,775,000

 

 

$

1,284,000

 

 

 

17.1

%

Weighted Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

19,572,000

 

 

 

18,811,000

 

 

 

(761,000

)

 

 

(3.9

%)

Diluted

 

 

19,754,000

 

 

 

19,000,000

 

 

 

(754,000

)

 

 

(3.8

%)

Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.38

 

 

$

0.47

 

 

$

0.09

 

 

 

23.7

%

Diluted

 

$

0.38

 

 

$

0.46

 

 

$

0.08

 

 

 

21.1

%

 

Revenues

Change in revenue from the quarter ended June 30, 2016 to the quarter ended June 30, 2017

Revenues increased by $9.2 million, or 7.1%, from $128.5 million in the quarter ended June 30, 2016 to $137.6 million in the quarter ended June 30, 2017.  The increase in revenues was due to an increase in patient management services, which increased by 7.1%, from $71.3 million to $76.4 million.  The increase in patient management services was due to an increase in TPA services partially offset by a decrease in case management services to non-TPA customers.  Network solutions services increased by 7.1%, from $57.2 million to $61.2 million.  The increase was due to a 1% increase in the number of bills, and the revenue per bill increased 3.2%, from $23.71 to $24.47.

Cost of Revenues

The Company’s cost of revenues consists of direct expenses, costs directly attributable to the generation of revenue, and indirect costs which are incurred to support the operations in the field offices which generate the revenue. Direct expenses primarily include (i) case manager and bill review analyst salaries, along with related payroll taxes and fringe benefits, and (ii) costs associated with independent medical examinations (known as IME), prescription drugs, and MRI providers. Most of the Company’s revenues are generated in offices which provide both patient management services and network solutions services. The largest of the field indirect costs are (i) manager salaries and bonuses, (ii) account executive base pay and commissions, (iii) salaries of administrative and clerical support, field systems personnel and PPO network developers, along with related payroll taxes and fringe benefits, (iv) office

Page 16


 

rent, and (v) telephone expenses. Approximately 34% of the costs incurred in the field are considered field indirect costs, which support both the patient management services and network solutions operations of the Company’s field operations.

Change in cost of revenues from the quarter ended June 30, 2016 to the quarter ended June 30, 2017

Cost of revenues increased by $6.0 million, or 5.8%, from $102.9 million in the quarter ended June 30, 2016 to $108.8 million in the quarter ended June 30, 2017.   The increase in cost of revenues was primarily due to an increase in both network solutions and patient management revenues of 7%. Additionally, there was an increase in salaries, due to an increase in headcount in field operations of 135 employees.

General and Administrative Expense

For the quarter ended June 30, 2017, general and administrative expense consisted of approximately 54% of corporate systems costs, which include corporate systems support, implementation and training, rules engine development, national information technology (“IT”) strategy and planning, depreciation of hardware costs in the Company’s corporate offices and backup data center, the Company’s nationwide area network, and other systems related costs. The Company includes all IT-related costs managed by the corporate office in general and administrative expense whereas the field IT-related costs are included in the cost of revenues.  The remaining general and administrative costs consist of national marketing, national sales support, corporate legal, corporate insurance, human resources, accounting, product management, new business development, and other general corporate expenses.

Change in general and administrative expense from the quarter ended June 30, 2016 to the quarter ended June 30, 2017

General and administrative expense increased by $1.2 million, or 8.7%, from $13.5 million in the quarter ended June 30, 2016 to $14.6 million in the quarter ended June 30, 2017.  The increase in general and administrative expense was primarily due to an increase in legal expenses, marketing expenses, and stock compensation expenses related to performance options due to the improvement in the Company’s performance.  Additionally, the increase was due to the impairment in our investment in private equity.  

Income Tax Provision

Change in income tax expense from the quarter ended June 30, 2016 to the quarter ended June 30, 2017

Income tax expense increased by $0.7 million, or 16.2%, from $4.6 million in the quarter ended June 30, 2016 to $5.4 million in the quarter ended June 30, 2017.  The increase in income tax expense was primarily due to an increase in pretax income for the quarter ended June 30, 2017.  The income tax expense as a percentage of income before income taxes, also known as the effective tax rate, was 38.2% for the quarter ended June 30, 2016 and 38% for the quarter ended June 30, 2017.

Liquidity and Capital Resources

The Company has historically funded its operations and capital expenditures primarily from cash flow from operations, and to a lesser extent, proceeds from stock option exercises. Working capital increased $0.2 million, from $38.8 million as of March 31, 2017 to $39.0 million as of June 30, 2017. Cash increased from $28.6 million as of March 31, 2017 to $35.0 million as of June 30, 2017, an increase of $6.4 million. This is primarily due to the Company’s decision to pay calendar year 2016 bonuses in March 2017 when historically they have been paid in April and an increase in options exercised for the quarter.

The Company believes that cash from operations and funds from exercises of stock options granted to employees are adequate to fund existing obligations, repurchase shares of the Company’s common stock under its current stock repurchase program, introduce new services, and continue to develop the Company’s healthcare related services for at least the next twelve months. The Company regularly evaluates cash requirements for current operations, commitments, capital acquisitions, and other strategic transactions. The Company may elect to raise additional funds for these purposes, through debt or equity financings or otherwise, as appropriate. However, additional equity or debt financing may not be available when needed, on terms favorable to the Company or at all.

As of June 30, 2017, the Company had $35.0 million in cash and cash equivalents, invested primarily in short-term, interest-bearing, highly liquid investment-grade securities with maturities of 90 days or less.

In September 2016, the Company renewed its line of credit agreement with a financial institution, which provides a revolving credit facility with borrowing capacity of up to $10 million. Borrowings under this credit agreement, as amended, bear interest, at the Company’s option, at a fixed LIBOR-based rate plus 1.00% or at a fluctuating rate determined by the financial institution to be 1.00% above the daily one-month LIBOR rate. The loan covenants require the Company to maintain a current assets to liabilities ratio of at least 1.25:1, debt to tangible net worth ratio not greater than 1.25:1 and have positive net income.  The Company is in compliance with

Page 17


 

all these covenants. There were no outstanding revolving loans as of June 30, 2017, but letters of credit in the aggregate amount of $4.5 million have been issued separate from the line of credit and therefore do not reduce the amount of borrowings available under the revolving credit facility. The renewed credit agreement expires in September 2017.  The Company expects to renew the line of credit for another year.

The Company believes that the cash balance at June 30, 2017, along with anticipated internally generated funds and the credit facility, will be sufficient to meet the Company’s expected cash requirements for at least the next twelve months.

Operating Activities

Three months ended June 30, 2016 compared to three months ended June 30, 2017

Net cash provided by operating activities increased from $8.1 million in the three months ended June 30, 2016 to $21.4 million in the three months ended June 30, 2017, an increase of $13.2 million. The increase in cash flow from operating activities was primarily due to an increase in net income, accrued liabilities and taxes payables.  The increase in accrued liabilities was due to the timing of annual bonus payments in the prior year compared to the current year.  Additionally, the increase in taxes payables was due to the timing of the estimated tax payments in the prior year compared to the current year.

Investing Activities

Three months ended June 30, 2016 compared to three months ended June 30, 2017

Net cash flow used in investing activities was $5.3 million in the three months ended June 30, 2016 and $5.3 million in the three months ended June 30, 2017. Capital purchases were $5.3 million for the three months ended June 30, 2016 and 2017.

Financing Activities

Three months ended June 30, 2016 compared to three months ended June 30, 2017

Net cash flow provided by financing activities was $0.6 million for the three months ended June 30, 2016 and net cash flow used by financing activities was $9.7 million for the three months ended June 30, 2017, a change of $9.1 million. The change is primarily due to the Company’s decision to increase its stock repurchase program activity.

Contractual Obligations

The following table summarizes the Company’s contractual obligations outstanding as of June 30, 2017:

 

 

 

Payments Due by Period

 

 

 

 

 

 

 

Within One

 

 

Between One and

 

 

Between Three and

 

 

More than

 

 

 

Total

 

 

Year

 

 

Three Years

 

 

Five Years

 

 

Five Years

 

Operating leases

 

$

57,705,000

 

 

$

13,674,000

 

 

$

20,500,000

 

 

$

14,032,000

 

 

$

9,499,000

 

Uncertain tax positions

 

 

2,200,000

 

 

 

2,200,000

 

 

 

 

 

 

 

 

 

 

Software licenses

 

 

1,746,000

 

 

 

1,746,000

 

 

 

 

 

 

 

 

 

 

Total

 

$

61,651,000

 

 

$

17,620,000

 

 

$

20,500,000

 

 

$

14,032,000

 

 

$

9,499,000

 

 

Operating leases are rents paid for the Company’s physical locations.

Litigation

The Company is involved in litigation arising in the ordinary course of business. Management believes that resolution of these matters will not result in any payment that, individually or in the aggregate, would be material to the financial position or results of operations of the Company.

Inflation

The Company experiences pricing pressures in the form of competitive prices. The Company is also impacted by rising costs for certain inflation-sensitive operating expenses such as labor, employee benefits, and facility leases.  However, the Company generally does not believe these impacts are material to its revenues or net income.

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Off-Balance Sheet Arrangements

The Company is not a party to off-balance sheet arrangements as defined by the rules of the SEC. However, from time to time the Company enters into certain types of contracts that contingently require the Company to indemnify parties against third-party claims. The contracts primarily relate to: (i) certain contracts to perform services, under which the Company may provide customary indemnification for the purchases of such services, (ii) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises, and (iii) certain agreements with the Company’s officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of certain actions taken by such persons, acting in their respective capacities within the Company.

The terms of such customary obligations vary by contract and in most instances a specific or maximum dollar amount is not explicitly stated therein. Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted. Consequently, no material liabilities have been recorded for these obligations on the Company’s balance sheets for any of the periods presented.

Critical Accounting Policies

The SEC defines critical accounting policies as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

The following is not intended to be a comprehensive list of our accounting policies. The Company’s significant accounting policies are more fully described in Note A, “Basis of Presentation and Summary of Significant Accounting Policies” in the notes to our consolidated financial statements. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States of America (“GAAP”), with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting an available alternative would not produce a materially different result.

We have identified the following accounting policies as critical to us: (i) revenue recognition, (ii) allowance for uncollectible accounts, (iii) goodwill and long-lived assets, (iv) accrual for self-insured costs, (v) accounting for income taxes, (vi) legal and other contingencies, (vii) share-based compensation, and (viii) software development costs.

Revenue Recognition:    The Company recognizes revenue when (i) there is persuasive evidence of an arrangement, (ii) the services have been provided to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. For the Company’s services, the Company’s professional staff is contractually permitted to bill (i) for fees earned for time worked in fraction of an hour increments or (ii) by units of production. The Company recognizes revenue as fees are earned or as units of production are completed, which is when the revenue is earned and realized. Labor costs are recognized as the costs are incurred. The Company derives the majority of its revenue from the sale of network solutions and patient management services. Network solutions and patient management services may be sold individually or combined with any of the services the Company provides. When a sale combines multiple elements, the Company accounts for such multiple element arrangements in accordance with the guidance included in ASC 605-25.

The multiple elements arrangements consist of bundled managed care which included various units of accounting such as network solutions, and patient management (which includes claims administration). Such elements are considered separate units of accounting as each element has value to the customer on a stand-alone basis. The selling price for each unit of accounting is determined using the contract price and management estimates. When the Company’s customers purchase several products, the pricing of the products sold is generally the same as if the products were sold on an individual basis. Revenue is recognized as the work is performed in accordance with the Company’s customer contracts. Based upon the nature of the Company’s products, bundled managed care elements are generally delivered in the same accounting period. The Company recognizes revenue for patient management claims administration services over the life of the customer contract. The Company estimates, based upon prior experience in managing claims, the deferral amount from when the claim is received to when the customer contract expires.

Allowance for Uncollectible Accounts:    The Company determines its allowance for uncollectible accounts by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customers’ current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible.

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The Company must make significant judgments and estimates in determining contractual and bad debt allowances in any accounting period. One significant uncertainty inherent in the Company’s analysis is whether its past experience will be indicative of future periods. Although the Company considers future projections when estimating contractual and bad debt allowances, the Company ultimately makes its decisions based on the best information available to it at the time the decision is made. Adverse changes in general economic conditions or trends in reimbursement amounts for the Company’s services could affect the Company’s contractual and bad debt allowance estimates, collection of accounts receivable, cash flows, and results of operations. No one customer accounted for 10% or more of accounts receivable at March 31, 2017 or June 30, 2017.

Goodwill and Long-Lived Assets:    Goodwill arising from business combinations represents the excess of the purchase price over the estimated fair value of the net assets of the acquired business. Pursuant to ASC 350-10 through ASC 350-30, “Goodwill and Other Intangible Assets,” goodwill is tested annually for impairment or more frequently if circumstances indicate the potential for impairment. Also, management tests for impairment of the Company’s amortizable intangible assets and long-lived assets annually and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The impairment test is conducted at the company level.  The measurement of fair value is based on an evaluation of market capitalization and is further tested using a multiple of earnings approach. In projecting the Company’s cash flows, management considers industry growth rates and trends and cost structure changes. Based on the Company’s tests and reviews, no indicators of impairment of its goodwill, intangible assets, or other long-lived assets existed at June 30, 2017. However, future events or changes in current circumstances could affect the recoverability of the carrying value of goodwill and long-lived assets. Should an asset be deemed impaired, an impairment loss would be recognized to the extent the carrying value of the asset exceeded its estimated fair market value.

Accrual for Self-insurance Costs:    The Company accrues for the group medical costs and workers’ compensation costs of its employees based on claims filed and an estimate of claims incurred but not reported as of each balance sheet date. The Company purchases stop loss insurance for large claims.  The Company determines its estimated self-insurance reserves based upon historical trends along with outstanding claims information provided by its claims paying agents.  However, it is possible that recorded accruals may not be adequate to cover the future payment of claims. Adjustments, if any, to estimated accruals resulting from ultimate claim payments will be reflected in earnings during the periods in which such adjustments are determined. The Company’s self-insured liabilities contain uncertainties because management is required to make assumptions and judgments to estimate the ultimate cost to settle reported claims and claims incurred but not reported at the balance sheet date.

The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to calculate its self-insured liabilities. However, if actual results are not consistent with these estimates or assumptions, the Company may be exposed to losses or gains that could be material.

Accounting for Income Taxes:    The Company records a tax provision for the anticipated tax consequences of its reported results of operations. The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently-enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The Company records a valuation allowance, if necessary, to reduce deferred tax assets to the amount that is believed more likely than not to be realized.

The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with future reversals of existing taxable temporary differences, will be sufficient to fully recover the deferred tax assets. In the event that the Company determines all or part of the net deferred tax assets are not realizable in the future, the Company will make an adjustment to the valuation allowance that would be charged to earnings in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on the Company’s financial condition and operating results. The significant assumptions and estimates described above are important contributors to our ultimate effective tax rate in each year.

Legal and Other Contingencies:    As discussed in Part II, Item 1 of this report under the heading “Legal Proceedings” and in Note H, “Contingencies and Legal Proceedings” in the notes to consolidated financial statements, the Company is subject to various legal proceedings and claims that arise in the ordinary course of business. The Company records a liability when it is probable that a

Page 20


 

loss has been incurred and the amount is reasonably estimable. There is significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated. In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies. However, the outcome of legal proceedings and claims brought against the Company are subject to significant uncertainty.

Share-Based Compensation:    The Company accounts for share-based compensation in accordance with the provisions of ASC Topic 718 “Compensation – Stock Compensation”. Under ASC 718, share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant).  Included in the stock option grants and stock compensation expense are performance-based stock options which vest only upon the Company’s achievement of certain earnings per share targets on a calendar year basis, as determined by the Company’s Board of Directors.  These options were valued in the same manner as the time-based options. However, the Company only recognizes stock compensation expense to the extent that the targets are determined to be probable of being achieved, which triggers the vesting of the performance options.  The Company has elected to early adopt ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting” as of March 31, 2017.  

The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s term, and the Company’s expected annual dividend yield. The Company’s management believes that this valuation technique and approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s granted stock options. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

The Company does not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to determine stock-based compensation expense. However, if actual results are not consistent with these estimates or assumptions, the Company may be exposed to changes in stock-based compensation expense that could be material.

Software Development Costs:    Development costs incurred in the research and development of new software products and enhancements to existing software products for internal use are expensed as incurred until technological feasibility has been established. After technological feasibility is established, any additional external and internal software development costs are capitalized and amortized on a straight-line basis over the estimated economic life of the related product, which is typically five years. The Company performs an annual review of the estimated economic life and the recoverability of such capitalized software costs. If a determination is made that capitalized amounts are not recoverable based on the estimated cash flows to be generated from the applicable software, any remaining capitalized amounts are written off.

Recent Accounting Standards Update

On May 28, 2014, the FASB issued ASU 2014-09 regarding ASC Topic 606, “Revenue from Contracts with Customers”. This standard provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB approved a one-year delay of the effective date of this new revenue recognition standard. The guidance will now be effective for our fiscal year beginning April 1, 2018. We are currently evaluating the accounting, transition and disclosure requirements of the standard.  Based on the analyses we have completed thus far, which includes analyzing CorVel standard contracts from which the Company derives the majority of its revenues, we anticipate that the ASU will not have a significant impact on our consolidated financial statements.  However, the Company is currently reviewing its existing non-standard customer contracts, and as a result, the impact of the ASU adoption on this portion of the Company’s revenues cannot yet be reasonably estimated.

In January 2016, the FASB issued ASU 2016-01 regarding Subtopic 825-10, “Financials Instruments — Overall: Recognition and Measurements of Financial Assets and Financial Liabilities”. The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. It requires that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net income. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. We are currently evaluating the accounting, transition, and disclosure requirements of the standard and cannot currently estimate the impact of adoption on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases”, which sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.

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Leases with a term of 12 months or less will be accounted for using an approach that is similar to the existing guidance for operating leases. The standard is effective April 1, 2019, with early adoption permitted. The standard is to be applied using a modified retrospective transition method. We are currently evaluating the impact of adoption on our consolidated financial position, results of operations, and cash flows.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows”, which reduces diversity in the practice of how certain transactions are classified in the statement of cash flows.  The new guidance is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted. The adoption of this guidance will not have a material impact on our consolidated financial statements.

Guidance Adopted in 2017

In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting”, which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification on the statement of cash flows. For public companies, the new guidance became effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016. We have elected to early adopt this standard as of March 31, 2017.  

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

As of June 30, 2017, the Company held no market risk sensitive instruments for trading purposes, and the Company did not employ any derivative financial instruments, other financial instruments, or derivative commodity instruments to hedge any market risk. The Company had no debt outstanding as of June 30, 2017, and therefore, had no market risk related to debt.

Item 4 – Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of June 30, 2017, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is (i) recorded, processed, summarized, and reported, within the time periods specified in the rules and forms of the SEC and (ii) accumulated and communicated to our management, including our principal executive and principal accounting officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the three months ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

Item 1 – Legal Proceedings

The Company is involved in litigation arising in the ordinary course of business. Management believes that resolution of these matters will not result in any payment that, individually or in the aggregate, would be material to the consolidated financial position or results of operations of the Company.

Item 1A – Risk Factors

A restated description of the risk factors associated with our business is set forth below.  This description includes any and all changes (whether or not material) to, and supersedes, the description of the risk factors associated with our business previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2017, filed with the SEC on June 9, 2017.

Page 22


 

Past financial performance is not necessarily a reliable indicator of future performance.  Investors in our common stock should not use historical performance to anticipate results or future period trends. Investing in our common stock involves a high degree of risk. Investors should consider carefully the following risk factors, as well as the other information in this report and our other filings with the SEC, including our audited and unaudited consolidated financial statements and the related notes, before deciding whether to invest or maintain an investment in shares of our common stock. If any of the following risks actually occurs, our business, financial condition, and results of operations would suffer. In this case, the trading price of our common stock would likely decline. The risks described below are not the only ones we face. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business operations.

If we fail to grow our business internally or through strategic acquisitions we may be unable to execute our business plan, maintain high levels of service, or adequately address competitive challenges.

Our strategy is to continue internal growth and, as strategic opportunities arise in the workers’ compensation managed care industry, to consider acquisitions of, or relationships with, other companies in related lines of business. As a result, we are subject to certain growth-related risks, including the risk that we will be unable to retain personnel or acquire other resources necessary to service such growth adequately. Expenses arising from our efforts to increase our market penetration may have a negative impact on operating results. In addition, there can be no assurance that any suitable opportunities for strategic acquisitions or relationships will arise or, if they do arise, that the transactions contemplated could be completed. If such a transaction does occur, there can be no assurance that we will be able to integrate effectively any acquired business. In addition, any such transaction would be subject to various risks associated with the acquisition of businesses, including, but not limited to, the following: