NATIONAL HEALTHCARE CORP - Quarter Report: 2018 March (Form 10-Q)

 

Table of Contents

 

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
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    001–13489
(Exact name of registrant as specified in its Charter)
Delaware		52–2057472
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization		Identification No.)
100 E. Vine Street
Murfreesboro, TN 37130
(Address of principal executive offices)
(Zip Code)
(615) 890–2020
Registrant's telephone number, including area code
Indicate by check mark whether the registrant: (1) Has filed all reports required to be filed by Section 13 or 15(d), of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] 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 period that the registrant was required to submit and post such files). Yes  [x]      No  [  ]   Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non–accelerated filer or a smaller reporting company. See the definitions of "large accelerated file," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b–2 of the Exchange Act.
Large Accelerated filer [X ]	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 is defined in Rule 12b–2 of the Exchange Act).
Yes [  ]   No [x]
15,219,633 shares of common stock of the registrant were outstanding as of May 2, 2018.

 

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TABLE OF CONTENTS

 

 

 

PART I. FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements	3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	38
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	38
Item 1A	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Mine Safety Disclosures	38
Item 5.	Other Information	38
Item 6.	Exhibits	39

 

 

 

		Three Months Ended March 31
		2018				2017
						(as adjusted)
Revenues:
Net patient revenues		$	231,692			$	227,254
Other revenues			11,269				11,284
Net operating revenues			242,961				238,538
Cost and expenses:
Salaries, wages and benefits			140,095				138,055
Other operating			65,172				63,178
Facility rent			10,229				10,088
Depreciation and amortization			10,342				10,295
Interest			1,240				1,058
Total costs and expenses			227,078				222,674
Income from operations			15,883				15,864
Other income (expense):
Non–operating income (expense)			(3,065	)			4,768
Unrealized losses on marketable equity securities			(15,517	)			-
Income (loss) before income taxes			(2,699	)			20,632
Income tax provision			(200	)			(7,999	)
Net income (loss)			(2,899	)			12,633
Net loss attributable to noncontrolling interest			108				95
Net income (loss) attributable to National HealthCare Corporation		$	(2,791	)		$	12,728
Earnings (loss) per share attributable to National HealthCare Corporation stockholders:
Basic		$	(0.18	)		$	0.84
Diluted		$	(0.18	)		$	0.84
Weighted average common shares outstanding:
Basic			15,216,635				15,173,491
Diluted			15,216,635				15,212,133
Dividends declared per common share		$	0.48			$	0.45

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		Three Months Ended March 31
		2018				2017
Net income (loss)		$	(2,899	)		$	12,633
Other comprehensive loss:
Unrealized losses on investments in restricted marketable securities			(2,798	)			(941	)
Reclassification adjustment for realized gains on sale of securities			(11	)			(34	)
Income tax benefit related to items of other comprehensive income			590				408
Other comprehensive loss, net of tax			(2,219	)			(567	)
Net loss attributable to noncontrolling interest			108				95
Comprehensive income (loss) attributable to National HealthCare Corporation		$	(5,010	)		$	12,161

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		March 31, 2018				December 31, 2017
		unaudited
Assets
Current Assets:
Cash and cash equivalents		$	54,962			$	59,118
Restricted cash and cash equivalents			9,864				6,397
Marketable equity securities			123,568				139,085
Restricted marketable debt securities			18,067				21,012
Accounts receivable, net			85,006				86,767
Inventories			7,266				7,153
Prepaid expenses and other assets			3,478				2,864
Notes receivable, current portion			1,422				1,450
Federal income tax receivable			1,527				5,465
Total current assets			305,160				329,311
Property and Equipment:
Property and equipment, at cost			965,774				958,748
Accumulated depreciation and amortization			(419,697	)			(409,429	)
Net property and equipment			546,077				549,319
Other Assets:
Restricted cash and cash equivalents			1,914				1,906
Restricted marketable securities			144,689				145,383
Deposits and other assets			4,884				4,867
Goodwill			17,600				17,600
Notes receivable, less current portion			11,398				11,801
Investments in limited liability companies			27,499				36,339
Total other assets			207,984				217,896
Total assets		$	1,059,221			$	1,096,526

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		March 31, 2018				December 31, 2017
		unaudited
Liabilities and Stockholders’ Equity
Current Liabilities:
Trade accounts payable		$	16,715			$	15,978
Capital lease obligations, current portion			3,751				3,696
Accrued payroll			44,483				67,102
Amounts due to third party payors			17,155				17,389
Accrued risk reserves, current portion			27,931				27,409
Other current liabilities			14,312				16,194
Dividends payable			7,305				7,297
Total current liabilities			131,652				155,065
Long–term debt			100,000				100,000
Capital lease obligations, less current portion			22,094				23,052
Accrued risk reserves, less current portion			68,315				65,866
Refundable entrance fees			8,668				8,827
Obligation to provide future services			2,887				2,887
Deferred income taxes			12,580				18,376
Other noncurrent liabilities			16,132				15,795
Deferred revenue			5,256				3,226
Total liabilities			367,584				393,094
Equity:
Common stock, $.01 par value; 45,000,000 shares authorized; 15,219,533 and 15,212,133 shares, respectively, issued and outstanding			152				152
Capital in excess of par value			216,287				215,659
Retained earnings			477,528				419,423
Accumulated other comprehensive income			(2,916	)			67,504
Total National HealthCare Corporation stockholders’ equity			691,051				702,738
Noncontrolling interest			586				694
Total equity			691,637				703,432
Total liabilities and equity		$	1,059,221			$	1,096,526

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		Three Months Ended March 31
		2018				2017
Cash Flows From Operating Activities:
Net income (loss)		$	(2,899	)		$	12,633
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			10,342				10,295
Equity in (earnings) losses of unconsolidated investments			6,586				(1,526	)
Distributions from unconsolidated investments			2,254				2,609
Unrealized losses on marketable securities			15,517				-
Gains on sale of restricted marketable securities			(11	)			(34	)
Deferred income taxes			(5,206	)			(1,657	)
Stock–based compensation			428				92
Changes in operating assets and liabilities:
Accounts receivable			1,761				(808	)
Income tax receivable			3,938				4,665
Inventories			(113	)			188
Prepaid expenses and other assets			(631	)			(1,280	)
Trade accounts payable			737				(14	)
Accrued payroll			(22,619	)			(23,936	)
Amounts due to third party payors			(234	)			668
Accrued risk reserves			2,971				3,661
Other current liabilities			(1,882	)			4,695
Other noncurrent liabilities			337				528
Deferred revenue			2,030				2,232
Net cash provided by operating activities			13,306				13,011
Cash Flows From Investing Activities:
Additions to property and equipment			(7,100	)			(8,066	)
Investments in unconsolidated companies			-				(176	)
Collections of notes receivable			431				2,918
Purchase of restricted marketable securities			(2,694	)			(2,291	)
Sale of restricted marketable securities			3,535				33,887
Net cash (used in) provided by investing activities			(5,828	)			26,272
Cash Flows From Financing Activities:
Principal payments under capital lease obligations			(903	)			(851	)
Dividends paid to common stockholders			(7,297	)			(6,818	)
Issuance of common shares			1,067				817
Repurchase of common shares			(867	)			-
Equity attributable to noncontrolling interest							970
Entrance fee refunds			(159	)			(519	)
Change in deposits			-				(662	)
Net cash used in financing activities			(8,159	)			(7,063	)
Net Increase (Decrease) in Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents			(681	)			32,220
Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents, Beginning of Period			67,421				31,589
Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents, End of Period		$	66,740			$	63,809
Balance Sheet Classifications:
Cash and cash equivalents		$	54,962			$	47,096
Restricted cash and cash equivalents			11,778				16,713
Total Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents		$	66,740			$	63,809

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		Common Stock								Capital in Excess of				Retained				Accumulated Other Comprehensive				Non-controlling				Total Stockholders’
		Shares				Amount				Par Value				Earnings				Income				Interest				Equity
Balance at January 1, 2017			15,162,938			$	152			$	211,457			$	391,934			$	66,068			$	–			$	669,611
Net income attributable to National HealthCare Corporation			–				–				–				12,728				–				–				12,728
Net loss attributable to noncontrolling interest			–				–				–				–				–				(95	)			(95	)
Equity contributed by noncontrolling interest			–				–				–				–				–				970				970
Other comprehensive loss			–				–				–				–				(567	)			–				(567	)
Stock–based compensation			–				–				92				–				–				–				92
Shares sold – options exercised			16,992				–				817				–				–				–				817
Dividends declared to common stockholders ($0.45 per share)			–				–				–				(6,831	)			–				–				(6,831	)
Balance at March 31, 2017			15,179,930			$	152			$	212,366			$	397,831			$	65,501			$	875			$	676,725
Balance at January 1, 2018			15,212,133			$	152			$	215,659			$	419,423			$	67,504			$	694			$	703,432
Reclassification due to new accounting standards			–				–				–				68,201				(68,201	)			–				–
Net loss attributable to National HealthCare Corporation			–				–				–				(2,791	)			–				–				(2,791	)
Net loss attributable to noncontrolling interest			–				–				–				–				–				(108	)			(108	)
Other comprehensive income			–				–				–				–				(2,219	)			–				(2,219	)
Stock–based compensation			–				–				428				–				–				–				428
Shares sold – options exercised			21,906				–				1,067				–				–				–				1,067
Repurchase of common shares			(14,506	)			–				(867	)			–				–				–				(867	)
Dividends declared to common stockholders ($0.48 per share)			–				–				–				(7,305	)			–				–				(7,305	)
Balance at March 31, 2018			15,219,533			$	152			$	216,287			$	477,528			$	(2,916	)		$	586				691,637

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Note 1 – Description of Business

 

National HealthCare Corporation (“NHC” or the “Company”) is a leading provider of senior health care services. As of March 31, 2018, we operate or manage, through certain affiliates, 76 skilled nursing facilities with a total of 9,623 licensed beds, 24 assisted living facilities, five independent living facilities, and 36 homecare programs. We operate specialized care units within certain of our healthcare centers such as Alzheimer's disease care units and sub-acute nursing units. We also have a noncontrolling ownership interest in a hospice care business that services NHC owned skilled nursing facilities and others. In addition, we provide insurance services, management and accounting services, and we lease properties to operators of skilled nursing facilities. We operate in 10 states and are located primarily in the southeastern United States.

 

 

 

Note 2 – Summary of Significant Accounting Policies

 

The listing below is not intended to be a comprehensive list of all our significant accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles ("GAAP"), with limited need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. See our audited December 31, 2017 consolidated financial statements and notes thereto which contain accounting policies and other disclosures required by generally accepted accounting principles. Our audited December 31, 2017 consolidated financial statements are available at our web site: www.nhccare.com.

 

Basis of Presentation

 

The unaudited interim condensed consolidated financial statements to which these notes are attached include all normal, recurring adjustments which are necessary to fairly present the financial position, results of operations and cash flows of NHC. All significant intercompany transactions and balances have been eliminated in consolidation. The consolidated financial statements include the accounts of all entities controlled by NHC. The Company presents noncontrolling interest within the equity section of its consolidated balance sheets. The Company presents the amount of consolidated net income (loss) that is attributable to NHC and the noncontrolling interest in its consolidated statements of operations.

 

We assume that users of these interim financial statements have read or have access to the audited December 31, 2017 consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations and that the adequacy of additional disclosure needed for a fair presentation, except in regard to material contingencies, may be determined in that context. Accordingly, footnotes and other disclosures which would substantially duplicate the disclosure contained in our most recent annual report to stockholders have been omitted. This interim financial information is not necessarily indicative of the results that may be expected for a full year for a variety of reasons.

 

Estimates and Assumptions

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and could cause our reported net income to vary significantly from period to period.

 

 

Recently Adopted Accounting Guidance

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No. 2014–09 “Revenue from Contracts with Customers”, also known as the “New Revenue Standard”. This update is the result of a collaborative effort by the FASB and the International Accounting Standards Board to simplify revenue recognition guidance, remove inconsistencies in the application of revenue recognition, and to improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to receive for those goods or services. The New Revenue Standard is applied through the following five-step process:

 

1. Identify the contract(s) with a customer.

2. Identify the performance obligation in the contract.

3. Determine the transaction price.

4. Allocate the transaction price to the performance obligations in the contract.

5. Recognize revenue when (or as) the entity satisfies a performance obligation.

 

For a public entity, this update is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period by applying either the full retrospective method or the cumulative catch-up transition method.

 

On January 1, 2018, the Company adopted the provisions of ASU No. 2014-09 using the full retrospective method, which requires us to restate each prior reporting period presented. The most significant impact to NHC relates to the recording of revenue for patients that have individual copayment responsibilities and are eligible for both Medicare and Medicaid benefits (also known as dual eligible patients). As such with these patients, net patient revenues will only include the amounts expected to be collected from the patients in accordance with ASU No. 2014-09. Under the prior accounting guidance, we recorded the price stated in the contract as net patient revenue, and the amounts not collected from our patients were recorded as bad debts in other operating expenses. The adoption of ASU No. 2014-09 has no impact on the Company’s accounts receivable as it was historically recorded net of allowance for doubtful accounts and contractual adjustments. The following table presents the effect on the interim condensed consolidated statement of operations for the three months ending March 31, 2017 for the accounting change that was retrospectively adopted on January 1, 2018:

 

Consolidated Statement of Operations

(in thousands)

 

 

 

In January 2016, the FASB issued ASU No. 2016–01, “Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825)”. ASU No. 2016–01 revises the classification and measurement of investments in certain equity investments and the presentation of certain fair value changes for certain financial liabilities measured at fair value. ASU No. 2016–01 requires the change in fair value of many equity investments to be recognized in net income.  On January 1, 2018, the Company adopted the provisions of ASU No. 2016-01 using the modified retrospective method as required by the standard. The adoption of ASU No. 2016-01 resulted in a $68,073,000 reclassification of net unrealized gains from accumulated other comprehensive income (“AOCI”) to the opening balance of retained earnings. For the three months ended March 31, 2018, the Company recognized a loss of $15,517,000 in our interim condensed consolidated statement of operations related to the change in fair value of our equity securities.  The adoption of ASU No. 2016-01 increases the volatility of non-operating income due to the market fluctuation of our marketable equity securities.

 

In August 2016, the FASB issued ASU No. 2016-15, “Clarification on Classification of Certain Cash Receipts and Cash Payments on the Statements of Cash Flows”. ASU No. 2016-15 was issued to create consistency in the classification of eight specific cash flow items and provides an accounting policy election for classifying distributions received from equity method investments. Such equity method investment distributions are now classified using a 1) cumulative earnings approach, or 2) nature of distribution approach. On January 1, 2018, the Company adopted the provisions of ASU No. 2016-15 and this standard did not have a material impact on our consolidated financial statements.

 

In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting”. ASU No. 2017-09 amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under Accounting Standards Cofification ("ASC") 718. On January 1, 2018, the Company adopted the provisions of ASU No. 2017-09 and this standard did not have a material impact on our consolidated financial statements.

 

In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. ASU No. 2018-02 permits a company to reclassify disproportionate tax effects in accumulated other comprehensive income caused by the Tax Cuts and Jobs Act of 2017 to retained earnings. The FASB refers to these amounts as “stranded tax effects.” On January 1, 2018, the Company early adopted the provisions of ASU No. 2018-02. The adoption of this standard resulted in an adjustment of accumulated other comprehensive income, with a corresponding adjustment to the opening balance of retained earnings in the amount of $128,000, related to the stranded tax effects of the unrealized losses in our restricted marketable debt securities.

 

Recent Accounting Guidance Not Yet Adopted      

 

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." The objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods and is to be applied utilizing a modified retrospective approach. We anticipate this standard will have a material impact on our consolidated financial statements and results in an increase to total assets and total liabilities. Additionally, we are currently evaluating the impact this standard will have on our policies and procedures and internal control framework.

 

 

Segment Reporting

 

In accordance with the provisions of ASC 280, “Segment Reporting”, the Company is required to report financial and descriptive information about its reportable operating segments. The Company has two reportable operating segments: (1) inpatient services, which includes the operation of skilled nursing facilities and assisted and independent living facilities, and (2) homecare services. The Company also reports an “all other” category that includes revenues from rental income, management and accounting services fees, insurance services, and costs of the corporate office. See Note 6 - Business Segments for further disclosure of the Company’s operating segments.

 

Other Operating Expenses

 

Other operating expenses include the costs of care and services that we provide to the residents of our facilities and the costs of maintaining our facilities. Our primary patient care costs include drugs, medical supplies, purchased professional services, food, and professional liability insurance and licensing fees. The primary facility costs include utilities and property insurance.

 

General and Administrative Costs

 

With the Company being a healthcare provider, the majority of our expenses are "cost of revenue" items. Costs that could be classified as "general and administrative" by the Company would include its corporate office costs, which were $7,106,000 and $8,965,000 for the three months ended March 31, 2018 and 2017, respectively.

 

Property and Equipment

 

Property and equipment are recorded at cost. Depreciation is provided by the straight-line method over the expected useful lives of the assets estimated as follows: buildings and improvements, 20-40 years and equipment and furniture, 3-15 years. Leasehold improvements are amortized over periods that do not exceed the non-cancelable respective lease terms using the straight-line method.

 

Capital leases are recorded at the lower of fair market value or the present value of future minimum lease payments. Capital leases are amortized in accordance with the provision codified within ASC Subtopic 840-30, Leases – Capital Leases. Amortization of capital lease assets is included in depreciation and amortization expense.

 

Accrued Risk Reserves  

 

We are self–insured for risks related to health insurance and have wholly–owned limited purpose insurance companies that insure risks related to workers’ compensation and general and professional liability insurance claims. The accrued risk reserves include a liability for reported claims and estimates for incurred but unreported claims. Our policy is to engage an external, independent actuary to assist in estimating our exposure for claims obligations (for both asserted and unasserted claims). We reassess our accrued risk reserves on a quarterly basis.

 

Professional liability remains an area of particular concern to us. The long-term care industry has seen an increase in personal injury/wrongful death claims based on alleged negligence by skilled nursing facilities and their employees in providing care to residents. As of March 31, 2018, we and/or our managed centers are defendants in 63 such claims. It remains possible that those pending matters plus potential unasserted claims could exceed our reserves, which could have a material adverse effect on our consolidated financial position, results of operations and cash flows. It is also possible that future events could cause us to make significant adjustments or revisions to these reserve estimates and cause our reported net income to vary significantly from period to period.

 

We are principally self-insured for incidents occurring in all centers owned or leased by us. The coverages include both primary policies and excess policies. In all years, settlements, if any, in excess of available insurance policy limits and our own reserves would be expensed by us.

 

 

Continuing Care Contracts and Refundable Entrance Fee

 

We have one Continuing Care Retirement Community ("CCRC") within our operations. Residents at this retirement center may enter into continuing care contracts with us. The contracts provide that 10% of the resident entry fee becomes non-refundable upon occupancy, and the remaining refundable portion of the entry fee is calculated using the lessor of the price at which the apartment is re-assigned or 90% of the original entry fee, plus 40% of any appreciation if the apartment exceeds the original resident’s entry fee.

 

Non-refundable fees are included as a component of the transaction price and are amortized into revenue over the actuarially determined remaining life of the resident, which is the expected period of occupancy by the resident. We pay the refundable portion of our entry fees to residents when they relocate from our community and the apartment is re-occupied. Refundable entrance fees are not included as part of the transaction price and are classified as non-current liabilities in the Company's consolidated balance sheets. The balances of refundable entrance fees as of March 31, 2018 and December 31, 2017 were $8,668,000 and $8,827,000, respectively.

 

Obligation to Provide Future Services

 

We annually estimate the present value of the cost of future services and the use of facilities to be provided to the current CCRC residents and compare that amount with the balance of non-refundable deferred revenue from entrance fees received. If the present value of the cost of future services exceeds the related anticipated revenues, a liability is recorded (obligation to provide future services) with a corresponding charge to income. As of March 31, 2018, and December 31, 2017, we have recorded a future service obligation in the amount of $2,887,000.

 

Other Noncurrent Liabilities

 

Other noncurrent liabilities include reserves primarily related to various uncertain income tax positions.

 

Deferred Revenue

 

Deferred revenue includes the deferred gain on the sale of assets to National Health Corporation (“National”), the non-refundable portion (10%) of CCRC entrance fees being amortized over the remaining life expectancies of the residents, and premiums received within our workers’ compensation and professional liability companies that are not yet earned.

 

Noncontrolling Interest

 

The noncontrolling interest in a subsidiary is presented within total equity in the Company's interim condensed consolidated balance sheets. The Company presents the noncontrolling interest and the amount of consolidated net income attributable to NHC in its interim condensed consolidated statements of operations. The Company’s earnings per share is calculated based on net income attributable to NHC’s stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based on ownership interest.

 

Variable Interest Entities

 

We have equity interests in unconsolidated limited liability companies that operate various post-acute and senior healthcare businesses. We analyze our investments in these limited liability companies to determine if the company is considered a VIE and would require consolidation. To the extent that we own interests in a VIE and we (i) are the sole entity that has the power to direct the activities of the VIE and (ii) have the obligation or rights to absorb the VIE's losses or receive its benefits, then we would be determined to be the primary beneficiary and would consolidate the VIE. To the extent we own interests in a VIE, then at each reporting period, we re-assess our conclusions as to which, if any, party within the VIE is considered the primary beneficiary.

 

The Company's maximum exposure to losses in its investments in unconsolidated VIEs cannot be quantified and may or may not be limited to its investment in the unconsolidated VIE. The investments in unconsolidated VIEs are classified as “investments in limited liability companies” in the consolidated balance sheets.

 

 

Prior Period Classifications

 

Certain amounts in prior periods have been reclassified to conform with current period presentation.

 

 

 

Note 3 – Net Patient Revenues

 

Net patient revenues are derived from services rendered to patients for skilled and intermediate nursing, rehabilitation therapy, assisted living and independent living, and home health care services. Net patient revenue is reported at the amount that reflects the consideration to which the Company expects to be entitled in exchange for providing patient services. These amounts are due from patients, governmental programs, and other third-party payors, and include variable consideration for retroactive revenue adjustments due to settlement of audits, reviews, and investigations.

 

The Company disaggregates revenue from contracts with customers by service type and by payor.

 

Revenue by Service Type

 

The Company’s net patient services can generally be classified into the following two categories: (1) inpatient services, which includes the operation of skilled nursing facilities and assisted and independent living facilities, and (2) homecare services.

 

 

The Company recognizes revenue as its performance obligations are completed. The performance obligations are satisfied over time as the patient simultaneously receives and consumes the benefits of the healthcare services provided. For inpatient services, revenue is recognized on a daily basis as each day represents a separate contract and performance obligation. For homecare, revenue is recognized when services are provided based on the number of days of service rendered in the episode. Typically, patients and third-party payors are billed monthly after services are performed or the patient is discharged and payments are due based on contract terms.

 

As our performance obligations relate to contracts with a duration of one year or less, the Company has elected to apply the optional exemption provided in FASB ASC 606-10-50-14(a) and, therefore, is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The Company has minimal unsatisfied performance obligations at the end of the reporting period as our patients are typically under no obligation to remain admitted in our facilities or under our care.

 

As the period between the time of service and time of payment is typically one year or less, the Company elected as a practical expedient under ASC 606-10-32-18 to not adjust for the effects of a significant financing component.

 

 

Revenue by Payor

 

Certain groups of patients receive funds to pay the cost of their care from a common source. The following table sets forth sources of net patient revenues for the periods indicated:

 

 

The Company determines the transaction price based on established billing rates reduced by contractual adjustments provided to third party payors.  Contractual adjustments are based on contractual agreements and historical experience.  The Company considers the patient's ability and intent to pay the amount of consideration upon admission.  Subsequent changes resulting from a patient’s ability to pay are recorded as bad debt expense, which is included as a component of other operating expenses in the interim condensed consolidated statements of operations. The provision for doubtful accounts was $959,000 and $1,178,000 for the three months ended March 31, 2018 and 2017, respectively.

 

Medicare covers skilled nursing services for beneficiaries who require nursing care and/or rehabilitation services following a hospitalization of at least three consecutive days. For each eligible day a Medicare beneficiary is in a skilled nursing facility, Medicare pays the facility a daily payment, subject to adjustment for certain factors such as a wage index in the geographic area. The payment covers all services provided by the skilled nursing facility for the beneficiary that day, including room and board, nursing, therapy and drugs, as well as an estimate of capital–related costs to deliver those services.

 

For homecare services, Medicare pays based on the acuity level of the patient and based on episodes of care. An episode of care is defined as a length of care up to 60 days with multiple continuous episodes allowed. The services covered by the episode payment include all disciplines of care, in addition to medical supplies, within the scope of the home health benefit. We are allowed to make a request for anticipated payment at the start of care equal to 60% of the expected payment for the initial episode. The remaining balance due is paid following the submission of the final claim at the end of the episode. Deferred revenue is recorded for payments received for which the related services have not yet been provided

 

Medicaid is operated by individual states with the financial participation of the federal government. The states in which we operate currently use prospective cost–based reimbursement systems. Under cost–based reimbursement systems, the skilled nursing facility is reimbursed for the reasonable direct and indirect allowable costs it incurred in a base year in providing routine resident care services as defined by the program.

 

Private pay, managed care, and other payment sources include commercial insurance, individual patient funds, managed care plans and the Veterans Administration. Private paying patients, private insurance carriers and the Veterans Administration generally pay based on the center's charges or specifically negotiated contracts. For private pay patients in skilled nursing, assisted living and independent living facilities, the Company bills for room and board charges, with the remittance being due on receipt of the statement and generally by the 10th day of the month the services are performed.

 

Certain managed care payors for homecare services pay on a per-visit basis. This non-episodic based revenue is recorded on an accrual basis based upon the date of services at amounts equal to its established or estimated per-visit rates.     

 

Third Party Payors

 

Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Noncompliance with such laws and regulations can be subject to regulatory actions including fines, penalties, and exclusion from the Medicare and Medicaid programs. We believe that we are in compliance with all applicable laws and regulations.

 

 

Medicare and Medicaid program revenues, as well as certain Managed Care program revenues, are subject to audit and retroactive adjustment by government representatives or their agents. The Medicare PPS methodology requires that patients be assigned to Resource Utilization Groups ("RUGs") based on the acuity level of the patient to determine the amount paid to us for patient services. The assignment of patients to the various RUG categories is subject to post–payment review by Medicare intermediaries or their agents. Settlements with third-party payors for retroactive adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing patient care. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and the Company’s historical settlement activity, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustment is subsequently resolved. Estimated settlements are adjusted in future periods as adjustments become known, or as years are settled or are no longer subject to such audits, reviews, and investigations. We believe currently that any differences between the net revenues recorded and final determination will not materially affect the consolidated financial statements. We have made provisions of approximately $17,155,000 and $17,389,000 as of March 31, 2018 and December 31, 2017, respectively, for various Medicare, Medicaid, and Managed Care claims reviews and current and prior year cost reports.

 

 

Note 4 – Other Revenues

 

Revenues from rental income include health care real estate properties owned by us and leased to third party operators. Revenues from management and accounting services fees are generated by providing management and accounting services to third-party post-acute healthcare facilities. Revenues from insurance services include premiums for workers’ compensation and professional liability insurance policies that our wholly–owned insurance subsidiaries have written for third-party post-acute health care facilities to which we provide management or accounting services. "Other" revenues include miscellaneous health care related earnings.

 

Other revenues include the following:

 

 

Management Fees from National

 

We manage five skilled nursing facilities owned by National. For the three months ended March 31, 2018 and 2017, we recognized management fees and interest on management fees of $1,014,000 and $936,000 from these centers, respectively.

 

Insurance Services

 

For workers’ compensation insurance services, the premium revenues reflected in the interim condensed consolidated statements of operations for the three months ended March 31, 2018 and 2017 were $1,019,000 and $1,280,000, respectively. Associated losses and expenses are reflected in the interim condensed consolidated statements of operations as "Salaries, wages and benefits."

 

 

For professional liability insurance services, the premium revenues reflected in the interim condensed consolidated statements of operations for the three months ended March 31, 2018 and 2017 were $673,000 and $279,000, respectively. Associated losses and expenses including those for self–insurance are included in the interim condensed consolidated statements of operations as "Other operating costs and expenses".

 

 

 

Note 5 – Non–Operating Income

 

Non–operating income includes equity in earnings (losses) of unconsolidated investments, dividends and other realized gains and losses on marketable securities, interest income, and unrealized losses on our equity marketable securities.

 

Our most significant equity method investment is a 75.1% non–controlling ownership interest in Caris HealthCare L.P. (“Caris”), a business that specializes in hospice care services. As of and for the three months ended March 31, 2018, Caris recorded an expense and estimated liability of $8,500,000 for the potential settlement of their Qui Tam legal matter. Please see Note 15 – Contingencies and Commitments for further detail describing the status of Caris’ legal investigation.

 

 

 

 

Note 6 – Business Segments

 

The Company has two reportable operating segments: (1) inpatient services, which includes the operation of skilled nursing facilities and assisted and independent living facilities, and (2) homecare services. These reportable operating segments are consistent with information used by the Company’s Chief Executive Officer, as CODM, to assess performance and allocate resources.

 

The Company also reports an “all other” category that includes revenues from rental income, management and accounting services fees, insurance services, and costs of the corporate office. For additional information on these reportable segments see Note 2 - Summary of Significant Accounting Policies.

 

The Company’s CODM evaluates performance and allocates capital resources to each segment based on an operating model that is designed to improve the quality of patient care and profitability of the Company while enhancing long-term shareholder value. The CODM does not review assets by segment in his resource allocation and therefore, assets by segment are not disclosed below.

 

 

The following table sets forth the Company’s unaudited interim condensed consolidated statements of operations by business segment (in thousands):

 

 

 

 

 

 

Note 7 – Long-Term Leases

 

Capital Leases

 

Fixed assets recorded under the capital leases, which are included in property and equipment in the interim condensed consolidated balance sheets, are as follows (in thousands):

 

 

Operating Leases

 

The Company leases from National Health Investors, Inc. (“NHI”) the real property of 35 skilled nursing facilities, seven assisted living facilities and three independent living facilities under two separate lease agreements. Base rent expense under both lease agreements totals $34,200,000 annually with rent thereafter escalating by 4% of the increase in facility revenue over the base year. Total facility rent expense to NHI was $9,478,000 and $9,314,000 for the three months ended March 31, 2018 and 2017, respectively.

 

Minimum Lease Payments

 

The approximate future minimum lease payments required under all leases that have remaining non-cancelable lease terms at March 31, 2018 are as follows (in thousands):

 

 

 

 

Note 8 – Earnings per Share

 

Basic net income (loss) per share is computed based on the weighted average number of common shares outstanding for each period presented. Diluted net income (loss) per share reflects the potential dilution that would have occurred if securities to issue common stock were exercised, converted, or resulted in the issuance of common stock that would have then shared in our earnings.

 

 

The following table summarizes the earnings (losses) and the weighted average number of common shares used in the calculation of basic and diluted earnings (loss) per share (in thousands, except for share and per share amounts):

 

 

The impact of potentially dilutive securities (1,238,855) for the three months ended March 31, 2018 were not considered because the effect would be anti-dilutive in that period.  Options to purchase 1,072,425 shares of our common stock have been excluded for the quarter ended March 31, 2017 due to their anti–dilutive impact.

 

 

 

Note 9 – Investments in Marketable Securities

 

Our investments in marketable equity securities are carried at fair value with the changes in unrealized gains and losses recognized in our results of operations at each measurement date. Our investments in marketable debt securities are classified as available for sale securities and carried at fair value with the unrealized gains and losses recognized through accumulated other comprehensive income at each measurement date. Realized gains and losses from securities sales are recognized in results of operations upon disposition of the securities using the specific identification method on a trade date basis. Refer to Note 10 - Fair Value Measurements for a description of the Company's methodology for determining the fair value of marketable securities.

 

Marketable securities and restricted marketable securities consist of the following (in thousands):

 

 

Included in the marketable equity securities are the following (in thousands, except share amounts):

 

 

 

The amortized cost and estimated fair value of debt securities classified as available for sale, by contractual maturity, are as follows (in thousands):

 

 

Gross unrealized gains related to marketable equity securities are $93,421,000 and $108,934,000 as of March 31, 2018 and December 31, 2017, respectively. Gross unrealized losses related to marketable equity securities are $29,000 and $24,000 as of March 31, 2018 and December 31, 2017, respectively. For the three months ended March 31, 2018, the Company recognized net unrealized losses for the decreased market value of the marketable equity securities in the amount of $15,517,000 in the interim condensed consolidated statements of operations.

 

Gross unrealized gains related to available for sale debt securities are $179,000 and $885,000 as of March 31, 2018 and December 31, 2017, respectively. Gross unrealized losses related to available for sale debt securities are $3,870,000 and $3,149,000 as of March 31, 2018 and December 31, 2017, respectively.

 

For the marketable securities in gross unrealized loss positions, (a) it is more likely than not that the Company will not be required to sell the investment securities before recovery of the unrealized losses, and (b) the Company expects that the contractual principal and interest will be received on the investment securities. As a result, the Company recognized no other-than-temporary impairment during the three months ended March 31, 2018 or for the year ended December 31, 2017.

 

Proceeds from the sale of available for sale debt securities during the three months ended March 31, 2018 and 2017 were $3,535,000 and $33,887,000, respectively. Investment gains of $11,000 and $34,000 were realized on these sales during the three months ended March 31, 2018 and 2017, respectively. No sales were reported for marketable equity securities for the three months ended March 31, 2018 and 2017, respectively.

 

 

 

Note 10 – Fair Value Measurements

 

The accounting standard for fair value measurements provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. This accounting standard establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs that may be used to measure fair value:

 

Level 1 – The valuation is based on quoted prices in active markets for identical instruments.

Level 2 – The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model–based valuation techniques for which all significant assumptions are observable in the market.

Level 3 – The valuation is based on unobservable inputs that are supported by minimal or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar techniques that incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument, or valuations that require significant management judgment or estimation.

 

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

 

The following table summarizes fair value measurements by level at March 31, 2018 and December 31, 2017 for assets and liabilities measured at fair value on a recurring basis (in thousands):

 

 

 

 

 

 

Note 11 – Long–Term Debt

 

Long–term debt consists of the following:

 

 

 

$175,000,000 Credit Facility

 

The $175 million credit facility has a five-year maturity date ( October 2020). Loans bear interest at either (i) LIBOR plus 1.40% or (ii) the base rate plus 0.40%.

 

 

 

Note 12 - Stock Repurchase Program

 

In August 2017, the Board of Directors authorized a common stock purchase program. The program will allow for repurchases of up to $25 million of its common stock. During the quarter ended March 31, 2018, the Company repurchased 14,506 shares of its common stock for a total cost of $867,000. The shares were funded from cash on hand and were cancelled and returned to the status of authorized but unissued.

 

 

 

Note 13 – Stock–Based Compensation

 

NHC recognizes stock–based compensation expense for all stock options granted over the requisite service period using the fair value at the date of grant using the Black–Scholes pricing model. Stock–based compensation totaled $428,000 and $92,000 for the three months ended March 31, 2018 and 2017, respectively. Stock–based compensation is included in “Salaries, wages and benefits” in the interim condensed consolidated statements of operations.

 

At March 31, 2018, the Company had $6,917,000 of unrecognized compensation cost related to unvested stock–based compensation awards. This unrecognized compensation cost will be amortized over an approximate four-year period.

 

Stock Options

 

The following table summarizes the significant assumptions used to value the options granted for the three months ended March 31, 2018 and for the year ended December 31, 2017.

 

 

The following table summarizes our outstanding stock options for the three months ended March 31, 2018 and for the year ended December 31, 2017.

 

 

 

 

 

 

Note 14 – Income Taxes

 

The income tax provision for the three months ended March 31, 2018 is $200,000 (an effective income tax rate of -7.42%). The income tax provision and effective tax rate for the three months ended March 31, 2018 were unfavorably impacted by nondeductible expenses of $855,000 (primarily the non-deductible portion of the estimated potential settlement of the Caris HealthCare, L.P. Qui Tam legal matter) or -31.68% of income before taxes for the quarter. The income tax provision for the three months ended March 31, 2018 was also unfavorably impacted by the lower pre-tax book income resulting from the unrealized loss of $15,517,000 for the market value decrease in our marketable equity securities portfolio.  Prior to 2018, such market value changes ran through the balance sheet and did not impact our income statement.  The income tax provision for the three months ended March 31, 2017 was $7,999,000 (an effective income tax rate of 38.8%). The income tax provision and effective tax rate for the three months ended March 31, 2017 were unfavorably impacted by adjustments to unrecognized tax benefits of $175,000 and nondeductible expenses of $49,000 but was favorably impacted by a tax benefit of $124,000 relating to the exercise of stock options, resulting in a net increase in the provision.

 

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 ("2017 Tax Act") was signed into law making significant changes to the Internal Revenue Code.  The SEC issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the 2017 Tax Act.  As of December 31, 2017, we made a reasonable estimate that the revaluation of our net deferred tax liability using the new federal corporate tax rates resulted in a provisional net tax benefit of $8,488,000, which reduced our net deferred tax liability balance.  This amount continues to be a provisional adjustment as of March 31, 2018.  We will recognize any changes to provisional amounts as we continue to analyze the existing statute or as additional guidance becomes available.  We expect to complete our analysis of the provisional amounts by the end of 2018.  

 

Interest and penalties expense related to U.S. federal and state income tax returns are included within income tax expense.

 

The Company is no longer subject to U.S. federal and state examinations by tax authorities for years before 2014 (with certain state exceptions).

 

 

 

Note 15 – Contingencies and Commitments

 

Accrued Risk Reserves

 

We are self–insured for risks related to health insurance and have wholly–owned limited purpose insurance companies that insure risks related to workers’ compensation and general and professional liability insurance claims both for our owned or leased entities and certain of the entities to which we provide management or accounting services. The liability we have recognized for reported claims and estimates for incurred but unreported claims totals $96,246,000 and $93,275,000 at March 31, 2018 and December 31, 2017, respectively. The liability is included in accrued risk reserves in the interim condensed consolidated balance sheets and is subject to adjustment for actual claims incurred. It is possible that these claims plus unasserted claims could exceed our insurance coverages and our reserves, which could have a material adverse effect on our consolidated financial position, results of operations and cash flows.

 

As a result of the terms of our insurance policies and our use of wholly–owned limited purpose insurance companies, we have retained significant insurance risk with respect to workers’ compensation and general and professional liability. We consider the professional services of independent actuaries to assist us in estimating our exposures for claims obligations (for both asserted and unasserted claims) related to deductibles and exposures in excess of coverage limits, and we maintain reserves for these obligations. Such estimates are based on many variables including historical and statistical information and other factors.

 

Workers’ Compensation

 

For workers’ compensation, we utilize a wholly–owned Tennessee domiciled property/casualty insurance company to write coverage for NHC affiliates and for third–party customers. Policies are written for a duration of twelve months and cover only risks related to workers’ compensation losses. All customers are companies which operate in the senior care industry. Business is written on a direct basis. Direct business coverage is written for statutory limits and the insurance company’s losses in excess of $1,000,000 per claim are covered by reinsurance.

 

 

General and Professional Liability Lawsuits and Insurance

 

The senior care industry has experienced increases in both the number of personal injury/wrongful death claims and in the severity of awards based upon alleged negligence by nursing facilities and their employees in providing care to residents. As of March 31, 2018, we and/or our managed centers are currently defendants in 63 such claims.

 

Insurance coverage for both periods includes both primary policies and excess policies. The primary coverage is in the amount of $1.0 million per incident, $3.0 million per location with an annual primary policy aggregate limit that is adjusted on an annual basis. For 2017 and 2018, the excess coverage is $9.0 million per occurrence. Additional insurance is purchased through third party providers that serve to supplement the coverage provided through our wholly–owned captive insurance company.

 

Civil Investigative Demand

 

On December 19, 2013, the Company was served with a civil investigative demand (“CID”) from the U.S. Department of Justice and the Office of the U.S. Attorney for the Eastern District of Tennessee (“DOJ Investigation”) requesting the production of documents and interrogatory responses regarding the billing for and medical necessity of certain rehabilitative therapy services.

 

                On October 7, 2014, the Company received a subpoena from the Office of Inspector General of the United Department of Health and Human Services (“OIG Subpoena”) related to the current DOJ Investigation.  The OIG Subpoena requests certain financial and organizational documents from the Company and certain of its subsidiaries and SNFs and medical records from certain of the Company’s Tennessee–based SNFs. 

 

The DOJ Investigation and the OIG Subpoena resulted from the filing of two qui tam lawsuits under seal in the United States District Court for the Eastern District of Tennessee captioned U.S. ex rel. Forsythe v. National Healthcare Corp., No. 3:12-cv-00102 (E.D. Tenn.), and U.S. ex rel. Byrd v. National Healthcare Corp., No. 3:12-cv-00500 (E.D. Tenn.) (the “Lawsuits”), which asserted claims under the False Claims Act (“FCA”) against the Company based on allegations that the Company provided medically unnecessary skilled services to patients. The Lawsuits also alleged that the plaintiffs in the Lawsuits were terminated in violation of the FCA’s anti-retaliation provisions (the “Retaliation Claims”).  Following the DOJ Investigation, on July 31, 2017, the United States filed a Notice of Election to Decline Intervention with respect to the Lawsuits.  On March 22, 2018, the district court entered a Memorandum and Order in the Lawsuits, which, among other things, unsealed the Lawsuits, dismissed the qui tam actions without prejudice, and provided the plaintiffs in the Lawsuits leave to file amended complaints with respect to the plaintiffs’ employment-related claims.  On April 5, 2018, the plaintiffs filed Amended Complaints in cases captioned Byrd v. National Health Corp., No. 3:18-cv-00123 (E.D. Tenn.), and Forsythe v. National Health Corp., No. 3:18-cv-00122 (E.D. Tenn.), which assert employment-related claims.  The Company intends to defend itself vigorously against the allegations asserted in the Amended Complaints when and if the Amended Complaints are served. 

 

Caris HealthCare, L.P. Investigation

 

                On December 9, 2014, Caris Healthcare, L.P., a business that specializes in hospice care services in Company–owned health care centers and in other settings, received notice from the U.S. Attorney’s Office for the Eastern District of Tennessee and the Attorney Generals’ Offices for the State of Tennessee and State of Virginia that those government entities were conducting an investigation regarding patient eligibility for hospice services provided by Caris precipitated by a qui tam lawsuit.  We have a 75.1% non–controlling ownership interest in Caris.

 

                A qui tam lawsuit was filed on May 22, 2014, in the U.S. District Court for the Eastern District of Tennessee by a former Caris employee, Barbara Hinkle, and is captioned United States of America, State of Tennessee, and State of Virginia ex rel. Barbara Hinkle v. Caris Healthcare, L.P., No. 3:14–cv–212 (E.D. Tenn.).

 

                On June 16, 2016, the State of Tennessee and the State of Virginia declined to intervene in the qui tam lawsuit.  On June 20, 2016, the Court ordered that the complaint be unsealed.  On October 11, 2016, the United States filed a Complaint in Intervention against Caris Healthcare, L.P. and Caris Healthcare, LLC, a wholly owned subsidiary of Caris Healthcare, L.P.  The United States' complaint alleges that Caris billed the government for ineligible hospice patients between June 2013 and December 2013 and retained overpayments regarding ineligible hospice patients from April 2010 through June 2013.  It seeks treble damages and civil penalties under the Federal False Claims Act and asserts claims for payment under mistake of fact, unjust enrichment, and conversion.  The relator has filed a notice of voluntary dismissal without prejudice of the non–intervened claims asserted in her qui tam complaint.  On May 30, 2017, the district court denied Caris’ motion to dismiss, and the parties have engaged in discovery.  This matter is set for trial in March 2019. 

 

 

                On March 9, 2018, Caris and the United States jointly moved for a partial 90-day stay of the case to allow the parties to finalize a settlement in principle of the action.  On March 12, 2018, the district court entered an order granting a partial stay of 90 days from the date of the order.  On March 22, 2018, Caris and the relator jointly moved for a full stay of the case.  On March 23, 2018, the district court entered an order staying all proceedings in the matter for the same time period set forth in the court’s March 12, 2018 order.  The parties are ordered to file a joint status report regarding the outcome of their settlement negotiations and any other pertinent matters at the conclusion of that time period. 

 

As of and for the three months ended March 31, 2018, Caris has recorded an expense and an estimated liability in the amount of $8,500,000 regarding this legal matter, of which 75.1% is included in the Company's interim condensed consolidated statements of operations. Although the parties have reached an agreement in principle to settle the case, until the action is fully resolved, it is possible that this claim could continue to have material adverse effect on our consolidated financial position, results of operations and cash flows.

 

Financing Commitments

 

In conjunction with our management contract with National, we have entered into a line of credit arrangement whereby we may have amounts due from National from time to time. The maximum loan commitment under the line of credit is $2,000,000. At March 31, 2018, National did not have an outstanding balance on the line of credit.

 

Governmental Regulations

 

Laws and regulations governing the Medicare, Medicaid and other federal healthcare programs are complex and subject to interpretation. Management believes that it is in compliance with all applicable laws and regulations in all material respects. However, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusions from the Medicare, Medicaid and other federal healthcare programs.

 

 

 

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