What changed in this filing

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Item 1. Financial Statements

2020-08-06 compared with 2020-02-07 · 114 added, 411 removed, 292 unchanged (64% of the section changed)

2 unchanged sentences

CONSOLIDATED BALANCE SHEETS

December 31, 2019

June 30, 2020

March 31, 2020

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Common stock, $ .0001 par value:

120,000,000 shares authorized at December 31, 2019

120,000,000 shares authorized at June 30, 2020

and March 31, 2020;

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Treasury shares) and 54,254,557 shares issued ( 17,968,966 shares outstanding, net of

Treasury shares) at December 31, 2019 and March 31, 2019, respectively

Treasury shares) at June 30, 2020 and March 31, 2020, respectively

Paid-in capital

Treasury Stock (36,052,141 shares at December 31, 2019 and 35,463,238 shares at

Treasury stock ( 36,320,229 shares at June 30, 2020 and 36,285,591 shares at

March 31, 2020)

( 534,162,000

( 531,764,000

Retained earnings

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CONSOLIDATED INCOME STATEMENTS – UNAUDITED

Three Months Ended December 31,

Cost of revenues

General and administrative expenses

Income before income tax provision

Income tax provision

Net income per common and common equivalent share

Weighted average common and common equivalent shares

See accompanying notes to unaudited consolidated financial statements.

CORVEL CORPORATION

CONSOLIDATED INCOME ST ATEMENTS – UNAUDITED

Nine Months Ended December 31,

Three Months Ended June 30,

Cost of revenues

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY – UNAUDITED

Three Months Ended December 31, 2019

Stockholders'

Balance – September 30, 2019

Stock issued under stock option plan,

net of shares repurchased

Stock-based compensation expense

Purchase of treasury stock

Balance – December 31, 2019

Three Months Ended December 31, 2018

Stockholders'

Balance – September 30, 2018

Stock issued under stock option plan,

net of shares repurchased

Stock-based compensation expense

Purchase of treasury stock

Balance – December 31, 2018

Nine Months Ended December 31, 2019

Three Months Ended June 30, 2020

Stockholders'

Balance – March 31, 2020

Stock issued under employee stock

purchase plan

( 531,764,000

Stock issued under stock option plan,

2 unchanged sentences

Purchase of treasury stock

Balance – December 31, 2019

Nine Months Ended December 31, 2018

Balance – June 30, 2020

( 534,162,000

Three Months Ended June 30, 2019

Stockholders'

Balance – March 31, 2019

Stock issued under employee stock

purchase plan

( 466,156,000

Stock issued under stock option plan,

2 unchanged sentences

Purchase of treasury stock

Balance – December 31, 2018

Balance – June 30, 2019

( 475,275,000

See accompanying notes to unaudited consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED

Nine Months Ended December 31,

Three Months Ended June 30,

Cash Flows from Operating Activities

3 unchanged sentences

Stock compensation expense

(Recovery) provision for doubtful accounts

Provision for doubtful accounts

Deferred income tax

13 unchanged sentences

Exercise of common stock options

Exercise of employee stock purchase options

Net cash used in financing activities

(Decrease)/increase in cash and cash equivalents

Increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

6 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019

June 30, 2020

Note 1 — Summary of Significant Accounting Policies

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Significant intercompany accounts and transactions have been eliminated in consolidation.

The unaudited consolidated financial statements herein have been prepared by CorVel Corporation (“the Company”) pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”).

The unaudited consolidated financial statements herein have been prepared by CorVel Corporation (“the Company”, “we”, “our”, “us”) 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, 2020.

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In the opinion of management, all adjustments considered necessary for a fair presentation have been included.

Operating results for the three and nine months ended December 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2020.

Operating results for the three months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2021.

For further information, refer to the audited consolidated financial statements and notes thereto for the fiscal year ended March 31, 2020 included in the Company's Annual Report on Form 10-K filed with the SEC on June 10, 2020.

Reclassification:

The Company has reclassified certain amounts in its consolidated statements of cash flows for the period ended June 30, 2019 to conform to the consolidated statements of cash flows presentation for the period ended June 30, 2020.

The reclassification relates to the depreciation and amortization and operating lease liabilities amounts under operating activities.

Impact of COVID-19:

The COVID-19 pandemic has impacted and could further impact our operations and the operations of our suppliers and vendors as a result of quarantines, facility closures, illnesses, reduced medical services, and travel and logistics restrictions.

The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to the duration, spread, severity, and impact of the COVID-19 pandemic, the effects of the COVID-19 pandemic on our customers, suppliers, vendors, the remedial actions and stimulus measures adopted by federal, state, and local governments, and to what extent normal economic and operating conditions can resume.

Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future.

Therefore, the Company cannot reasonably estimate the full impact at this time.

Recent Accounting Pronouncements:

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes”.

The pronouncement simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, “Income Taxes”.

The pronouncement also improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance.

This standard is effective for fiscal years beginning after December 15, 2020, with early adoption permitted.

We are still evaluating the impact this guidance will have on our consolidated financial statements.

Guidance Adopted:

In June 2016, the FASB issued ASU 2016-13 regarding ASC Topic 326, “Measurement of Credit Losses on Financial Instruments”.

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This standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

We are still evaluating the impact this guidance will have on our consolidated financial statements.

The Company has adopted this standard as of April 1, 2020.

The adoption did not have a material impact on our consolidated financial statements.

On an ongoing basis, the Company will contemplate forward-looking economic conditions in recording lifetime expected credit losses for the Company’s financial assets measured at cost.

In January 2017, the FASB issued ASU 2017-04 regarding ASC Topic 350, “Simplifying the Test for Goodwill Impairment”.

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This standard is effective for fiscal years beginning after December 15, 2019 , with early adoption permitted.

The adoption of this guidance will not have a material impact on our consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes”.

The pronouncement simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, “Income Taxes”.

The pronouncement also improves consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.

This standard is effective for fiscal years beginning after December 15, 2020, with early adoption permitted.

We are still evaluating the impact this guidance will have on our consolidated financial statements.

Guidance Adopted:

In February 2016, the FASB issued ASU No.

2016-02, “Leases”, which sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract (i.e.

lessees and lessors).

The standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases.

This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease.

A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.

Leases with a term of 12 months or less will be accounted for using an approach that is similar to the existing guidance for operating leases.

The standard is to be applied using a modified retrospective transition method.

The Company has adopted this standard as of April 1, 2020.

The adoption of this standard did not have a material impact on retained earnings on the consolidated balance sheet and did not have a material impact on the consolidated statements of income.

The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company to carry forward the historical assessments of whether contracts are or contain leases, lease classification, and initial direct costs.

The Company implemented internal controls and key system functionality to enable the preparation of financial information on adoption.

Refer to Note 10 of the accompanying consolidated financial statements for a description of the impact of this adopted guidance.

The adoption did not have a material impact on our consolidated financial statements .

Note 2 – Revenue Recognition

The Company adopted ASC 606 using the modified retrospective method for those contracts which were not substantially completed as of the transition date, which was April 1, 2018.

The reported results for the three and nine months ended December 31, 2019 and 2018 reflect the application of the guidance of ASC 606.

The reported results for the three months ended June 30, 2020 and 2019 reflect the application of the guidance of ASC 606.

There was no material impact to any of the line items within the Company’s Consolidated Statements of Income or Consolidated Balance Sheets as a result of applying ASC 606 for the three months ended June 30, 2020.

Revenue from Contracts with Customers

Revenue is recognized when control of the promised services is transferred to the Company’s customers in an amount that reflects the consideration expected to be entitled to in exchange for those services.

Revenue is recognized when control of the promised services is transferred to the Company’s customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.

As the Company completes its performance obligations, which are identified below, it has an unconditional right to consideration as outlined in the Company’s contracts.

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Revenue is recognized over time as services are provided as the performance obligations are satisfied through the effort expended to research, investigate, evaluate, document, and report the claim and control of these services is transferred to the customer.

Revenue is recognized based on historical claim closure rates and claim type applied utilizing a portfolio approach based on the time elapsed for these claims, generally between three and fifteen months.

Revenue is recognized based on historical claim closure rates and claim type applied utilizing a portfolio approach based on time elapsed for these claims, generally between three and fifteen months .

The Company believes this approach reasonably reflects the transfer of the claims management services to its customers.

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however, many of these contracts contain auto-renewal provisions and the Company’s customer relationships can span multiple years.

Under certain claims management agreements, the Company receives consideration from a customer at contract inception prior to transferring services to the customer, however, it would begin performing services immediately.

The period between a customer’s payment of consideration and the completion of the promised services is generally less than one year.

There is no difference between the amount of promised consideration and the cash selling price of the promised services.

The fee is billed upfront by the Company to provide customers with simplified and predictable ways of purchasing its services.

The patient management service line also offers case managers who provide administration services by proactively managing medical treatment for claimants while facilitating an understanding of, and participation in, their rehabilitation process.

The fee is billed upfront by the Company in order to provide customers with simplified and predictable ways of purchasing the Company’s services.

The patient management service line also offers the services of case managers who provide administration services by proactively managing medical treatment for claimants while facilitating an understanding of and participation in their rehabilitation process.

Revenue for case management services is recognized over time as the performance obligations are satisfied through the effort expended to manage the medical treatment for claimants and control of these services is transferred to the customer.

Case management services are generally billed based on time incurred, are considered variable consideration, and revenue is recognized at the amount at which the Company has the right to invoice for services performed.

Case management services are generally billed based on time incurred, are considered variable consideration, and revenue is recognized at the amount in which the Company has the right to invoice for services performed.

The Company believes this approach reasonably reflects the transfer of the case management service to the customer.

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Variable consideration is recognized when the Company concludes that it is probable that a significant revenue reversal will not occur in future periods.

Third-party services revenue includes pharmacy, directed care services and other services, and includes amounts received from customers compensating the Company for certain third-party cos ts associated with providing its integrated network solutions services.

The Company is considered the princ ipal in these transactions as it direct s the third party, control s the specified service, perfor m s program utilization review, direct s payment to the provider, accept s the financial risk of loss associated with services rendered , and combine s the services provided into an integrated s olution, as specified within the Company’s customer contracts.

The Company has the ability to influe nce contractual fees with customer s and possess es the financial risk of loss in certain contractual obliga tions.

These factors indicate the Company is the principal and, as such, it is required to recognize revenue gross and service partner vendor fees in the oper ating expense in the Company’s c onsolidated income s tatements .

The following table presents revenues disaggregated by service line for the three and nine months ended December 31, 2019 and December 31, 2018:

Third-party services revenue includes pharmacy, directed care services and other services, and includes amounts received from customers compensating the Company for certain third-party costs associated with providing its integrated network solutions services.

The Company is considered the principal in these transactions as it directs the third party, controls the specified service, performs program utilization review, directs payment to the provider, accepts the financial risk of loss associated with services rendered and combines the services provided into an integrated solution, as specified within the Company’s customer contracts.

The Company has the ability to influence contractual fees with customers and possesses the financial risk of loss in certain contractual obligations.

These factors indicate the Company is the principal and, as such, it is required to recognize revenue gross and service partner vendor fees in the operating expense in the Company’s consolidated statements of income.

The following table presents revenues disaggregated by service line for the three months ended June 30, 2020 and June 30, 2019:

Three Months Ended

December 31, 2019

December 31, 2018

Patient management services

Network solutions services

Total services

Nine Months Ended

December 31, 2019

December 31, 2018

June 30, 2020

June 30, 2019

Patient management services

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For many of the Company’s services, the Company typically has one performance obligation;

however, it also provides the customer with an option to acquire additional services.

however, the Company also provides the customer with an option to acquire additional services.

The Company offers multiple services under its patient management and network solutions service lines.

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Contract Balances

The timing of revenue recognition, billings, and cash collections results in billed accounts receivables, contract assets (reported as unbilled revenues at estimated billable amounts), and contract liabilities (reported as deferred revenues) on the Company’s consolidated balance sheets.

Unbilled revenues is a contract asset for revenue that has been recognized in advance of billing the customer, resulting from professional services delivered that the Company expects and is entitled to receive as consideration under certain contracts.

Billing requirements vary by contract but substantially all unbilled revenues are billed within one year.

December 31, 2019

The timing of revenue recognition, billings and cash collections results in billed accounts receivables, unbilled receivables, and contract liabilities (reported as deferred revenues) on the Company’s consolidated balance sheets.

Unbilled receivables are due to the Company unconditionally for services already rendered except for physical invoicing and the passage of time.

Invoicing requirements vary by customer contract but substantially all unbilled revenues are billed within one year .

June 30, 2020

March 31, 2020

1 unchanged sentence

Allowance for doubtful accounts

Contract assets

Unbilled receivables

Accounts receivable, net

1 unchanged sentence

Certain services, such as claims management, are provided under fixed-fee service agreements and require the Company to manage claims over a contract period, typically for one year with the option for auto renewal, with the fixed fee renewing on the anniversary date of such contracts.

The Company recognizes deferred revenues as revenues when it performs services, transfers control of the services to the customer, and satisfies the performance obligation which it determines utilizing a portfolio approach.

The Company recognizes deferred revenues as revenues when it performs services and transfers control of the services to the customer and satisfies the performance obligation which it determines utilizing a portfolio approach.

For all fixed fee service agreements, revenues are recognized over the expected service periods by type of claim.

The table below presents the deferred revenues balance and the significant activity affecting de ferred revenues during the nine months ended December 31 , 2019 :

December 31, 2019

The table below presents the deferred revenues balance and the significant activity affecting deferred revenues during the three months ended June 30, 2020:

Three Months Ended

June 30, 2020

Beginning balance at April 1, 2020 (Note 9)

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Revenue recognized from additions

Ending balance at December 31, 2019 (Note 9)

Ending balance at June 30, 2020 (Note 9)

Remaining Performance Obligations

As of December 31, 2019, the Company had $50.8 million of remaining performance obligations related to claims and non-claims services for which the price is fixed.

Remaining performance obligations consist of deferred revenues as well as certain unbilled receivables that are considered contract assets.

As of June 30, 2020, the Company had $ 18.7 million of remaining performance obligations related to claims and non-claims services for which the price is fixed.

Remaining performance obligations consist of deferred revenues.

The Company expects to recognize approximately 97 % of its remaining performance obligations as revenues within one year and the remaining balance thereafter.

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Costs to Obtain a Contract

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

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

Practical Expedients Elected

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It expects, at contract inception, that the period between a customer’s payment of consideration and the transfer of promised services to the customer will be one year or less .

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

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

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

Note 3 — Stock-Based Compensation and Stock Options

Under the Company’s Restated Omnibus Incentive Plan (formerly the Restated 1988 Executive Stock Option Plan) (“the Plan”) as in effect at December 31, 2019, options exercisable for up to 19,865,000 shares of the Company’s common stock may be granted over the life of the Plan to key employees, non-employee directors, and consultants at exercise prices not less than the fair market value of the stock on the date of grant.

Under the Company’s Restated Omnibus Incentive Plan (formerly the Restated 1988 Executive Stock Option Plan) (“the Plan”) as in effect at June 30, 2020, options exercisable for up to 19,865,000 shares of the Company’s common stock may be granted over the life of the Plan to key employees, non-employee directors, and consultants at exercise prices not less than the fair market value of the common stock on the date of grant.

Options granted under the Plan are non-statutory stock options and generally vest 25 % one year from the date of grant with the remaining 75 % vesting ratably each month for the next 36 months.

The options granted to employees and the Company’s Board of Directors expire at the end of five years and ten years from the date of grant, respectively.

All options granted in the nine months ended December 31, 2019 and 2018 were granted with an exercise price equal to the fair value of the Company’s common stock on the grant date and are non-statutory stock options.

The Company r ecords 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, am ong other factors, to estimate the expected volatility, the expected dividend yie ld and the expected option life.

All options granted in the three months ended June 30, 2020 and 2019 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 yie ld and the expected option life.

The Company account s for forfeitures as they occur, rather than estimating expected forfeitures.

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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 December 31, 2019 and 2018 using the Black-Scholes option-pricing model:

The following assumptions were used to estimate the fair value of options granted during the three months ended June 30, 2020 and 2019 using the Black-Scholes option-pricing model:

Three Months Ended

December 31, 2019

December 31, 2018

June 30, 2020

June 30, 2019

Risk-free interest rate

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Expected weighted average life of option in years

For the three months ended December 31, 2019 and 2018, the Company recorded share-based compensation expense of $1,143,000 and $1,023,000, respectively.

For the nine months ended December 31, 2019 and 2018, the Company recorded share-based compensation expense of $3,566,000 and $3,110,000.

The table below shows the amounts recognized in the unaudited consolidated financial statements for stock compensation expense for time-based options and performance-based options during the three and nine months ended December 31, 2019 and 2018, respectively.

For the three months ended June 30, 2020 and 2019, the Company recorded share-based compensation expense of $ 995,000 and $ 1,225,000 , respectively.

Three Months Ended

December 31, 2019

December 31, 2018

Cost of revenues

General and administrative

Total cost of stock-based compensation included in

income before income tax provision

Amount of income tax benefit recognized

Amount charged against net income

Effect on basic earnings per share

Effect on diluted earnings per share

Nine Months Ended

December 31, 2019

December 31, 2018

June 30, 2020

June 30, 2019

Cost of revenues

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Effect on diluted earnings per share

The following table summarizes information for all stock options for the three and nine months ended December 31, 2019 and 2018:

Three Months Ended December 31, 2019

Three Months Ended December 31, 2018

Exercise Price

Options outstanding, beginning

Options granted

Options exercised

Options cancelled/forfeited

Options outstanding, ending

Nine Months Ended December 31, 2019

Nine Months Ended December 31, 2018

The following table summarizes information for all stock options for the three months ended June 30, 2020 and 2019:

Three Months Ended June 30, 2020

Three Months Ended June 30, 2019

Exercise Price

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Options outstanding, ending

The following table summarizes the status of stock options outstanding and exercisable at December 31, 2019:

The following table summarizes the status of stock options outstanding and exercisable at June 30, 2020:

Range of Exercise Price

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$77.94 to $88.22

The following table summarizes the status of all outstanding options at December 31, 2019, and changes during the three months then ended:

The following table summarizes the status of all outstanding options at June 30, 2020 , and changes during the three months then ended:

Exercise Price

Aggregate Intrinsic

Value as of December 31, 2019

Options outstanding at October 1, 2019

Value as of June 30, 2020

Options outstanding at April 1, 2020

Cancelled – forfeited

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Ending vested and expected to vest

Ending exercisable at December 31, 2019

The weighted-average grant-date fair value of options granted during the three months ended December 31, 2019 and 2018, was $22.23 and $20.44, respectively.

Ending exercisable at June 30, 2020

The weighted-average grant-date fair value of options granted during the three months ended June 30, 2020 and 2019, was $ 15.19 and $ 21.30 , respectively.

Included in the above-noted stock option grants and stock compensation expense are performance-based stock options that 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.

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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 $400,000 and $360,000 of stock compensation expense for the three months ended December 31, 2019 and 2018, respectively, for performance-based stock options.

The Company recognized $1,413,000 and $1,201,000 of stock compensation expense for the nine months ended December 31, 2019 and 2018, respectively, for performance-based options.

The Company recognized $ 294,000 and $ 543,000 of stock compensation expense for the three months ended June 30, 2020 and 2019, respectively, for performance-based stock options.

Note 4 — Treasury Stock

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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 and nine months ended December 31, 2019, the Company repurchased 240,026 shares of its common stock for $19.2 million at an average price of $79.98 per share and 588,903 shares of its common stock for $47.5 million at an average price of $82.66 per share, respectively.

The Company had 18,152,615 shares of common stock outstanding as of December 31, 2019, net of the 36,052,141 shares in treasury.

During the period subsequent to the quarter ended December 31, 2019, the Company repurchased 71,102 shares of its common stock for $6,599,000 at an average price of $92.80 per share under the Company’s stock repurchase program.

Although the Company had temporarily suspended share repurchases under its stock repurchase program from March 21 through June 14, 2020, the Company repurchased 34,638 shares of its common stock for $ 2.4 million at an average price of $ 69.27 per share during the three months ended June 30, 2020 after its stock repurchase program resumed.

The Company had 17,976,583 shares of common stock outstanding as of June 30, 2020, net of the 36,320,229 shares in treasury.

During the period subsequent to the quarter ended June 30, 2020, the Company repurchased 62,903 shares of its common stock for $ 4.8 million at an average price of $ 76.11 per share under the Company’s stock repurchase program.

Note 5 — Weighted Average Shares and Net Income Per Share

Basic weighted average common shares outstanding decreased to 18,253,000 for the quarter ended December 31, 2019 from 18,758,000 for the quarter ended December 31, 2018.

Diluted weighted average common and common equivalent shares outstanding decreased to 18,526,000 for the quarter ended December 31, 2019 from 18,984,000 for the quarter ended December 31, 2018.

Basic weighted average common shares outstanding decreased to 18,410,000 for the nine months ended December 31, 2019 from 18,852,000 for the nine months ended December 31, 2018.

Diluted weighted average common and common equivalent shares outstanding decreased to 18,695,000 for the nine months ended December 31, 2019 from 19,058,000 for the nine months ended December 31, 2018.

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 period.

The following table sets forth the calculations of the basic and diluted weighted average common shares for the three and nine months ended December 31, 2019 and 2018:

Three Months Ended December 31,

Weighted average common shares outstanding

Net Income per share

Weighted average common shares outstanding

Treasury stock impact of stock options

Total common and common equivalent shares

Net Income per share

Nine Months Ended December 31,

Basic weighted average common shares outstanding decreased to 17,983,000 for the quarter ended June 30, 2020 from 18,524,000 for the quarter ended June 30, 2019.

Diluted weighted average common and common equivalent shares outstanding decreased to 18,114,000 for the quarter ended June 30, 2020 from 18,787,000 for the quarter ended June 30, 2019.

Net income per common and common equivalent share was computed by dividing net income by the weighted average number of common and common share equivalent s outstanding during the period .

The following table sets forth the calculations of the basic and diluted weighted average common shares for the three months ended June 30 , 20 20 and 201 9 :

Three Months Ended June 30,

Weighted average common shares outstanding

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Note 9 — Accounts and Taxes Payable and Accrued Liabilities

The following table sets forth accounts payable, income taxes payable, and accrued liabilities at December 31, 2019 and March 31, 2019:

December 31, 2019

The following table sets forth accounts payable, income taxes payable, and accrued liabilities at June 30, 2020 and March 31, 2020:

June 30, 2020

March 31, 2020

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Total accounts and taxes payable

December 31, 2019

June 30, 2020

March 31, 2020

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Three Months Ended

Nine Months Ended

December 31, 2019

Three Months Ended

June 30, 2020

June 30, 2019

Operating lease expense

1 unchanged sentence

Variable lease expense

Total lease expenses

The following table presents the lease related assets and liabilities recorded on the Company’s consolidated balance sheets related to its operating leases:

December 31, 2019

June 30, 2020

March 31, 2020

Right-of-use asset, net

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Weighted average discount rate

Supplemental cash flow information related to operating leases for the nine months ended December 31, 2019 were as follows:

Supplemental cash flow information related to operating leases for the three months ended June 30, 2020 and 2019 were as follows:

Three Months Ended

June 30, 2020

June 30, 2019

Cash paid for amounts included in the measurement of operating lease liabilities

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Reductions to ROU assets resulting from reductions to operating lease liabilities

As of December 31, 2019, maturities of operating lease liabilities for each of the next five years and thereafter are as follows:

As of June 30, 2020, maturities of operating lease liabilities for each of the next five years and thereafter are as follows:

Total lease payments

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Total lease liabilities

As of December 31, 2019, the Company has approximately $4.6 million of additional operating lease commitments that have not yet commenced.

As of June 30, 2020, the Company has approximately $ 13.2 million of additional operating lease commitments that have not yet commenced.

These leases commence in 2020 and have lease terms between 2 years and 10 years.

Item 2 – M anagement’s Discussion and Analysis o f 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,” “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) changes in interpretations or application of the Tax Cuts and Jobs Act through regulations and guidance that may be issued by the U.S.

Department of Treasury;

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 Company’s ability to continue to grow its sales of third party administrator, or TPA, services;

the risk of cybersecurity incidents;

and the other risks identified in Part II, Item 1A of this report.

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.

In November 2019, the Bureau of Labor Statistics reported the occupational injury and illness incidence rate for 2018 remained unchanged from the prior year.

This is the first year since 2012 that the rate did not decline.

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.

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, 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.

Organizational Structure

The Company’s management is structured geographically with regional vice presidents who are responsible for all services provided by the Company in his or her particular region and responsible 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.

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 to $148.1 million in the quarter ended December 31, 2019 from $146.1 million in the quarter ended December 31, 2018, an increase of $2.0 million, or 1.4%.

This slight increase was due to an increase in patient management services, which was offset by a decrease in network solutions services.

Cost of revenues increased to $118.8 million in the quarter ended December 31, 2019 from $116.7 million in the quarter ended December 31, 2018, an increase of $2.1 million, or 1.8%.

This increase was primarily due to the increase of 1.4% in revenue mentioned above, in connection with which there was an increase in salaries resulting from an increase in field operations’ headcount.

General and administrative expense increased to $17.0 million in the quarter ended December 31, 2019 from $15.8 million in the quarter ended December 31, 2018, an increase of $1.2 million, or 7.6%.

This increase was primarily due to an increase in legal costs.

Income tax expense decreased to $2.9 million in the quarter ended December 31, 2019 from $3.3 million in the quarter ended December 31, 2018, a decrease of $0.4 million, or 10.8%.

Income before income tax provision decreased to $12.3 million in the quarter ended December 31, 2019 from $13.6 million in the quarter ended December 31, 2018, a decrease of $1.3 million, or 9.6%.

The effective tax rate was 23.7% for the quarter ended December 31, 2019 compared to 24.0% in the quarter ended December 31, 2018.

Weighted diluted shares decreased to 18.5 million shares in the quarter ended December 31, 2019 from 19.0 million shares in the quarter ended December 31, 2018, a decrease of 458,000 shares, or 2.4%, due to the weighted impact of options exercised partially offset by the weighted impact of shares repurchased.

Diluted earnings per share decreased to $0.50 per share in the quarter ended December 31, 2019 from $0.54 per share in the quarter ended December 31, 2018, a decrease of $0.04 per share, or 7.4%.

The decrease in diluted earnings per share was primarily due to a decrease in net income, which was slightly offset by a decrease in weighted diluted shares.

Results of Operations for the three months ended December 31, 2019 and 2018

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 December 31, 2019 and 2018 are as follows:

December 31, 2019

December 31, 2018

Patient management services

Network solutions services

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 December 31, 2019 and 2018.

The Company’s past operating results are not necessarily indicative of future operating results.

Three Months Ended

December 31, 2019

December 31, 2018

Cost of revenues

Gross profit as percentage of revenue

General and administrative

General and administrative as percentage of revenue

Income before income tax provision

as percentage of revenue

Income tax provision

Weighted Shares

Earnings Per Share

Change in revenue to the quarter ended December 31, 2019 from the quarter ended December 31, 2018

Revenues increased to $148.1 million in the quarter ended December 31, 2019 from $146.1 million in the quarter ended December 31, 2018, an increase of $2.0 million, or 1.4%.

The increase in revenues was due to an increase in patient management services revenues, which increased to $98.3 million from $92.1 million, an increase of 6.7%.

Patient management services increased to 66.4% of total revenue in the quarter ended December 31, 2019, from 63.1% in the comparable prior year quarter, due to higher revenue from the Company’s TPA and related services.

This increase in patient management services revenues was offset by a decrease in network services revenues, which decreased to $50.0 million from $54.0 million, a decrease of 7.8%.

The decrease was due to an 11.1% decrease in the number of pharmacy services bills the Company reviewed during the quarter ended December 31, 2019.

Additionally, revenue increases were recognized in enhanced bill review programs services.

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, and (iv) office rent.

Approximately 39% 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 to the quarter ended December 31, 2019 f rom the quarter ended December 31, 2018

Cost of revenues increased to $118.8 million in the quarter ended December 31, 2019 from $116.7 million in the quarter ended December 31, 2018, an increase of $2.1 million, or 1.8%.

The increase in cost of revenues was primarily due to the increase in total revenues of 1.4%, in connection with which there was an increase in salaries resulting from an increase in field operations’ headcount.

General and Administrative Expense

For the quarter ended December 31, 2019, general and administrative expense consisted of approximately 52% 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 to the quarter ended December 31, 2019 from the quarter ended December 31, 2018

General and administrative expense increased to $17.0 million in the quarter ended December 31, 2019 from $15.8 million in the quarter ended December 31, 2018, an increase of $1.2 million, or 7.6%.

This increase was primarily due to an increase in legal costs.

Income Tax Provision

Change in income tax expense to the quarter ended December 31, 2019 from the quarter ended December 31, 2018

Income tax expense decreased to $2.9 million in the quarter ended December 31, 2019 from $3.3 million in the quarter ended December 31, 2018, a decrease of $0.4 million, or 10.8%.

Income before income tax provision decreased to $12.3 million in the quarter ended December 31, 2019 from $13.6 million in the quarter ended December 31, 2018, a decrease of $1.3 million, or 9.6%.

The effective tax rate was 23.7% for the quarter ended December 31, 2019 compared to 24.0% in the quarter ended December 31, 2018.

Results of Operations for the nine months ended December 31, 2019 and 2018

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 consolidated income statements for the nine months ended December 31, 2019 and 2018.

The Company’s past operating results are not necessarily indicative of future operating results.

Nine Months Ended

December 31, 2019

December 31, 2018

Cost of revenues

Gross profit as percentage of revenue

General and administrative

General and administrative as percentage of revenue

Income before income tax provision

Income before income tax provision as

percentage of revenue

Income tax provision

Weighted Shares

Earnings Per Share

Change in revenues to the nine months ended December 31, 2019 from the nine months ended December 31, 2018

Revenues increased to $445.2 million for the nine months ended December 31, 2019 from $444.7 million for the nine months ended December 31, 2018, an increase of $0.5 million, or 0.1%.

The increase in revenues was due to an increase in patient management services revenues, which increased to $293.5 million from $272.0 million, an increase of 7.9%.

This increase in patient management services revenues was offset by a decrease in network solutions services revenues, which decreased to $151.7 million from $172.7 million, a decrease of 12.2%.

The decrease was due to a 7.7% decrease in the number of pharmacy services bills the Company reviewed during the nine months ended December 31, 2019.

Additionally, revenue increases were recognized in enhanced bill review programs services.

Cost of Revenues

Change in cost of revenues to the nine months ended December 31, 2019 from the nine months ended December 31, 2018

Cost of revenues decreased to $350.0 million in the nine months ended December 31, 2019 from $352.5 million in the nine months ended December 31, 2018, a decrease of $2.4 million, or 0.7%.

The decrease in cost of revenues was primarily due to a decrease in pharmacy services costs related to a decrease in pharmacy services revenues, which was offset by an increase in salaries due to an increase in headcount.

General and Administrative Expense

Change in general and administrative expense to the nine months ended December 31, 2019 from the nine months ended December 31, 2018

General and administrative expense increased to $49.3 million in the nine months ended December 31, 2019 from $46.8 million in the nine months ended December 31, 2018, an increase of $2.5 million, or 5.2%.

The increase in general and administrative expense was primarily due to an increase in legal and corporate systems costs.

Income Tax Provision

Change in income tax expense to the nine months ended December 31, 2019 from the nine months ended December 31, 2018

Income tax expense decreased to $10.3 million for the nine months ended December 31, 2019 from $10.5 million for the nine months ended December 31, 2018, a decrease of $0.2 million, or 2.3%.

Income before income tax provision increased to $45.9 million in the nine months ended December 31, 2019 from $45.4 million in the nine ended December 31, 2018, an increase of $0.5 million, or 1.2%.

The income tax expense as a percentage of income before income taxes, also known as the effective tax rate, was 22.4% for the nine months ended December 31, 2019 and 23.1% for the nine months ended December 31, 2018.

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 decreased to $74.8 million as of December 31, 2019 from $98.6 million as of March 31, 2019, a decrease of $23.7 million primarily due to an increase in payables related to a software licenses contract for $5.7 million and an increase in accrued liabilities.

Cash and cash equivalents decreased to $89.6 million as of December 31, 2019 from $91.7 million as of March 31, 2019, a decrease of $2.1 million.

This is primarily due to an increase in cash used to repurchase shares of the Company’s common stock, partially offset by proceeds from stock options exercised and an increase in income before income tax provision.

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, with terms favorable to the Company or at all.

As of December 31, 2019, the Company had $89.6 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.

The Company’s revolving credit facility expired in September 2019, and the Company chose not to renew its line of credit agreement with a financial institution.

The Company believes that the cash balance at December 31, 2019 , along with anticipated internally generated funds, will be s ufficient to meet the Company’s expected cash requirements for at least the next twelve months.

Operating Activities

Nine months ended December 31, 2019 compared to nine months ended December 31, 2018

Net cash provided by operating activities decreased to $66.3 million in the nine months ended December 31, 2019 from $67.9 million in the nine months ended December 31, 2018, a decrease of $1.6 million.

The decrease in cash flow from operating activities was primarily due to a change in payroll processes during fiscal year 2019 where the Company changed from semi-monthly to bi-weekly payroll, causing an increase to payroll related accruals in the prior year.

This decrease was offset by an increase in net income.

Investing Activities

Nine months ended December 31, 2019 compared to nine months ended December 31, 2018

Net cash flow used in investing activities increased to $27.7 million in the nine months ended December 31, 2019 from $10.3 million in the nine months ended December 31, 2018, an increase of $17.4 million.

Capital purchases were $27.7 million for the nine months ended December 31, 2019 and $10.3 million for the nine months ended December 31, 2018.

The increase in capital purchases is primarily due to construction on the building the Company purchased in the greater Portland metropolitan area during fiscal 2018, which was put into service during the quarter ended December 31, 2019.

Financing Activities

Nine months ended December 31, 2019 compared to nine months ended December 31, 2018

Net cash flow used in financing activities increased to $40.6 million for the nine months ended December 31, 2019 from $16.9 million for the nine months ended December 31, 2018, an increase of $23.8 million.

The increase in net cash used in financing activities was primarily due to an increase in spending on share repurchases to $47.5 million from $22.6 million over the same periods, which was offset by a $1.2 million increase in stock option exercises.

Contractual Obligations

The following table summarizes the Company’s contractual obligations outstanding as of December 31, 2019:

Payments Due by Period

Between One and

Between Three and

Operating leases

Software licenses

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

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.

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.

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 Company’s significant accounting policies which have the greatest potential impact on its financial statements are more fully described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of its Annual Report on Form 10-K for the fiscal year ended March 31, 2019, filed with the SEC on June 7, 2019.

No changes in critical accounting policies have been made since the filing of that Annual Report on Form 10-K.

Additional information related to adoption of accounting standards is provided in Notes 1 and 10 to the accompanying unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q.

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.

Actual results could differ from the estimates we use in applying our critical accounting policies.

We are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.

Recent Accounting Standards Update

In June 2016, the FASB issued ASU 2016-13 regarding ASC Topic 326, “Measurement of Credit Losses on Financial Instruments”.

The pronouncement changes the impairment model for most financial assets and will require the use of an "expected loss" model for instruments measured at amortized cost.

Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset.

Subsequently, the FASB issued an amendment to clarify the implementation dates and items that fall within the scope of this pronouncement.

This standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

We are still evaluating the impact this guidance will have on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04 regarding ASC Topic 350, “Simplifying the Test for Goodwill Impairment”.

The pronouncement simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test.

Under this guidance, if the carrying amount of a reporting unit exceeds its estimated fair value, an impairment charge shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

This standard is effective for fiscal years beginning after December 15, 2019, with early adoption permitted.

The adoption of this guidance will not have a material impact on our consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes”.

The pronouncement simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, “Income Taxes”.

The pronouncement also improves consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.

This standard is effective for fiscal years beginning after December 15, 2020, with early adoption permitted.

We are still evaluating the impact this guidance will have on our consolidated financial statements.

Guidance Adopted

In February 2016, the FASB issued ASU No.

2016-02, “Leases”, which sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract (i.e.

lessees and lessors).

The standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases.

This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease.

A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.

Leases with a term of 12 months or less will be accounted for using an approach that is similar to the existing guidance for operating leases.

The standard is to be applied using a modified retrospective transition method.

The Company has adopted this standard as of April 1, 2019.

The adoption of this standard did not have a material impact on retained earnings on the consolidated balance sheet and did not have a material impact on the consolidated statements of income.

The Company implemented internal controls and key system functionality to enable the preparation of financial information on adoption.

Refer to Note 10 of the accompanying consolidated financial statements for a description of the impact of this adopted guidance.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements