NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Nature of Business
The accompanying condensed consolidated financial statements include the accounts of Cross Country Healthcare, Inc. and its direct and indirect wholly-owned subsidiaries (collectively, the Company). The condensed consolidated financial statements include all assets, liabilities, revenue, and expenses of Cross Country Talent Acquisition Group, LLC, which is controlled by the Company but not wholly-owned. The Company records the ownership interest of the noncontrolling shareholder as noncontrolling interest in subsidiary. All intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, all adjustments necessary for a fair presentation of such unaudited condensed consolidated financial statements have been included. These adjustments consisted of all normal recurring items.
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by United States generally accepted accounting principles (U.S. GAAP) for complete financial statements. These operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.
These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K as filed with the SEC. The December 31, 2019 condensed consolidated balance sheet included herein was derived from the December 31, 2019 audited consolidated balance sheet included in the Company’s Annual Report on Form 10-K.
Certain prior year amounts have been reclassified to conform to the current year presentation on the condensed consolidated statements of operations and statements of cash flows, and as presented in Note 11 - Segment Data.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Management has assessed various accounting estimates and other matters, including those that require consideration of forecasted financial information, in context of the unknown future impacts of the current global outbreak of COVID-19 using information that is reasonably available to the Company at the time. Significant estimates and assumptions are used for, but not limited to: (1) the valuation of accounts receivable; (2) goodwill, trade names, and other intangible assets; (3) other long-lived assets; (4) share-based compensation; (5) accruals for health, workers’ compensation, and professional liability claims; (6) valuation of deferred tax assets; (7) legal contingencies; (8) income taxes; and (9) sales and other non-income tax liabilities. Accrued insurance claims and reserves include estimated settlements from known claims and actuarial estimates for claims incurred but not reported. As additional information becomes available to the Company, its future assessment of these estimates, including management's expectations at the time regarding the duration, scope and severity of the pandemic, as well as other factors, could materially and adversely impact the Company's consolidated financial statements in future reporting periods. Actual results could differ from those estimates.
Restructuring Costs
The Company considers restructuring activities to be programs whereby it fundamentally changes its operations, such as closing and consolidating facilities, reducing headcount, and realigning operations in response to changing market conditions. As a result, restructuring costs on the consolidated statements of operations primarily include employee termination costs and lease-related exit costs.
Reconciliation of the employee termination costs and lease-related exit costs beginning and ending liability balance is presented below:
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|
|
|
|
|
|
|
|
|
|
|
|
Employee Termination Costs
|
|
Lease-Related Exit Costs
|
|
(amounts in thousands)
|
Balance at January 1, 2020
|
$
|
386
|
|
|
$
|
1,223
|
|
Charged to restructuring costs (a)
|
212
|
|
|
20
|
|
Payments
|
(292)
|
|
|
(76)
|
|
Balance at March 31, 2020
|
306
|
|
|
1,167
|
|
Charged to restructuring costs (a)
|
1,565
|
|
|
535
|
|
|
|
|
|
Payments
|
(1,096)
|
|
|
(170)
|
|
Balance at June 30, 2020
|
775
|
|
|
1,532
|
|
Charged to restructuring costs (a)
|
353
|
|
|
1,571
|
|
Payments
|
(668)
|
|
|
(256)
|
|
Balance at September 30, 2020
|
$
|
460
|
|
|
$
|
2,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________________
(a) Aside from what is presented in the table above, restructuring costs in the condensed consolidated statements of operations for the nine months ended September 30, 2020 include: (i) $0.7 million of ongoing lease costs related to the Company's strategic reduction in its real estate footprint which are included as operating lease liabilities - current and non-current in our condensed consolidated balance sheets, (ii) $0.2 million of legal entity reorganization costs, and (iii) $0.1 million of other costs.
The three months ended September 30, 2020 include $0.4 million of ongoing lease costs related to the Company's strategic reduction in its real estate footprint.
Recently Adopted Accounting Pronouncements
Effective January 1, 2020, the Company adopted ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The Company has adopted this guidance prospectively with no material impact on its condensed consolidated financial statements.
Effective January 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivable, loans, and other financial instruments. The guidance requires a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which it is effective. The Company has adopted this guidance using the modified retrospective approach related to its accounts receivable, resulting in no cumulative adjustment to retained earnings and no material impact on its condensed consolidated financial statements. See Note 3 - Customer Contracts.
3. CUSTOMER CONTRACTS
The Company's revenues from customer contracts are generated from temporary staffing services and other services. Revenue is disaggregated by segment in the following table. Sales and usage-based taxes are excluded from revenue.
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|
|
|
|
|
|
Three Months ended September 30, 2020
|
|
Nurse
And Allied
Staffing
|
|
Physician
Staffing
|
|
Search
|
|
Total Segments
|
|
(amounts in thousands)
|
Temporary Staffing Services
|
$
|
169,264
|
|
|
$
|
15,753
|
|
|
$
|
—
|
|
|
$
|
185,017
|
|
Other Services
|
5,980
|
|
|
699
|
|
|
2,272
|
|
|
8,951
|
|
Total
|
$
|
175,244
|
|
|
$
|
16,452
|
|
|
$
|
2,272
|
|
|
$
|
193,968
|
|
|
|
|
|
|
|
|
|
|
Three Months ended September 30, 2019
|
|
Nurse
And Allied
Staffing
|
|
Physician
Staffing
|
|
Search
|
|
Total Segments
|
|
(amounts in thousands)
|
Temporary Staffing Services
|
$
|
181,640
|
|
|
$
|
19,236
|
|
|
$
|
—
|
|
|
$
|
200,876
|
|
Other Services
|
3,334
|
|
|
1,171
|
|
|
3,819
|
|
|
8,324
|
|
Total
|
$
|
184,974
|
|
|
$
|
20,407
|
|
|
$
|
3,819
|
|
|
$
|
209,200
|
|
|
|
|
|
|
|
|
|
|
Nine Months ended September 30, 2020
|
|
Nurse
And Allied
Staffing
|
|
Physician
Staffing
|
|
Search
|
|
Total Segments
|
|
(amounts in thousands)
|
Temporary Staffing Services
|
$
|
547,543
|
|
|
$
|
48,994
|
|
|
$
|
—
|
|
|
$
|
596,537
|
|
Other Services
|
14,032
|
|
|
2,511
|
|
|
7,731
|
|
|
24,274
|
|
Total
|
$
|
561,575
|
|
|
$
|
51,505
|
|
|
$
|
7,731
|
|
|
$
|
620,811
|
|
|
|
|
|
|
|
|
|
|
Nine Months ended September 30, 2019
|
|
Nurse
And Allied
Staffing
|
|
Physician
Staffing
|
|
Search
|
|
Total Segments
|
|
(amounts in thousands)
|
Temporary Staffing Services
|
$
|
532,036
|
|
|
$
|
51,217
|
|
|
$
|
—
|
|
|
$
|
583,253
|
|
Other Services
|
9,362
|
|
|
3,377
|
|
|
11,136
|
|
|
23,875
|
|
Total
|
$
|
541,398
|
|
|
$
|
54,594
|
|
|
$
|
11,136
|
|
|
$
|
607,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable, net
The timing of revenue recognition, billings, and collections results in billed and unbilled accounts receivable from our customers which are classified as accounts receivable on the condensed consolidated balance sheets and are presented net of allowances for doubtful accounts and sales allowances. Estimated revenue for the Company's employees', subcontracted employees', and independent contractors’ time worked but not yet billed at September 30, 2020 and December 31, 2019 totaled $57.3 million and $46.1 million, respectively.
The allowance for doubtful accounts is established for losses expected to be incurred on accounts receivable balances. Accounts receivable are written off against the allowance for doubtful accounts when the Company determines amounts are no longer collectible. Judgment is required in the estimation of the allowance and the Company evaluates the collectability of its accounts
receivable and contract assets based on a combination of factors. The Company bases its allowance for doubtful account estimates on its historical write-off experience, current conditions, an analysis of the aging of outstanding receivable and customer payment patterns, and specific reserves for customers in adverse condition adjusted for current expectations for the customers or industry. Based on the information currently available, the Company also considered current expectations of future economic conditions, including the impact of COVID-19, when estimating its allowance for doubtful accounts.
The opening balance of the allowance for doubtful accounts is reconciled to the closing balance for expected credit losses as follows:
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|
|
|
|
|
Allowance for Doubtful Accounts
|
(amounts in thousands)
|
Balance at January 1, 2020
|
$
|
2,406
|
|
Bad Debt Expense
|
539
|
|
Write-Offs, net of Recoveries
|
(349)
|
|
Balance at March 31, 2020
|
2,596
|
|
Bad Debt Expense
|
898
|
|
Write-Offs, net of Recoveries
|
(532)
|
|
Balance at June 30, 2020
|
2,962
|
|
Bad Debt Expense
|
946
|
|
Write-Offs, net of Recoveries
|
(800)
|
|
Balance at September 30, 2020
|
$
|
3,108
|
|
In addition to the allowance for doubtful accounts, the Company maintains a sales allowance for billing-related adjustments which may arise in the ordinary course and adjustments to the reserve are recorded as contra-revenue. The balance of this allowance as of September 30, 2020 and December 31, 2019 was $0.6 million and $0.8 million, respectively.
4. COMPREHENSIVE LOSS
Total comprehensive loss includes net income or loss, foreign currency translation adjustments, and net change in derivative transactions, net of any related deferred taxes and valuation allowance. Certain of the Company’s foreign subsidiaries use their respective local currency as their functional currency. In accordance with the Foreign Currency Matters Topic of the FASB ASC, assets and liabilities of these operations are translated at the exchange rates in effect on the balance sheet date. Income statement items are translated at the average exchange rates for the period. The cumulative impact of currency fluctuations related to the balance sheet translation is included in accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets and was an unrealized loss of $1.3 million at September 30, 2020 and December 31, 2019.
The income tax impact related to components of other comprehensive loss for the three and nine months ended September 30, 2020 and 2019 is reflected on the condensed consolidated statements of comprehensive loss.
5. EARNINGS PER SHARE
The following table sets forth the components of the numerator and denominator for the computation of the basic and diluted earnings per share:
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
September 30,
|
|
September 30,
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
(amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders - Basic and Diluted
|
$
|
(1,334)
|
|
|
$
|
(3,128)
|
|
|
$
|
(17,574)
|
|
|
$
|
(56,569)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average common shares - Basic
|
36,176
|
|
|
35,865
|
|
|
36,058
|
|
|
35,797
|
|
Effect of diluted shares:
|
|
|
|
|
|
|
|
Share-based awards (a)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Weighted average common shares - Diluted
|
36,176
|
|
|
35,865
|
|
|
36,058
|
|
|
35,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common shareholders - Basic and Diluted
|
$
|
(0.04)
|
|
|
$
|
(0.09)
|
|
|
$
|
(0.49)
|
|
|
$
|
(1.58)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________________
(a) Due to the net loss for the three and nine months ended September 30, 2020 and 2019, 227,821, 252,810, 317,905, and 177,449 shares, respectively, were excluded from diluted weighted average shares. For the three and nine months ended September 30, 2020 and 2019, no tax benefits were assumed for the potentially dilutive shares due to the Company's net operating loss position.
6. GOODWILL, TRADE NAMES, AND OTHER INTANGIBLE ASSETS
The Company had the following acquired intangible assets:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
(amounts in thousands)
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
Databases
|
$
|
30,530
|
|
|
$
|
14,559
|
|
|
$
|
15,971
|
|
|
$
|
30,530
|
|
|
$
|
12,269
|
|
|
$
|
18,261
|
|
Customer relationships
|
33,538
|
|
|
13,295
|
|
|
20,243
|
|
|
49,758
|
|
|
26,596
|
|
|
23,162
|
|
Non-compete agreements
|
304
|
|
|
196
|
|
|
108
|
|
|
320
|
|
|
161
|
|
|
159
|
|
Trade names
|
—
|
|
|
—
|
|
|
—
|
|
|
4,500
|
|
|
1,125
|
|
|
3,375
|
|
Other intangible assets, net
|
$
|
64,372
|
|
|
$
|
28,050
|
|
|
$
|
36,322
|
|
|
$
|
85,108
|
|
|
$
|
40,151
|
|
|
$
|
44,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
Trade names, indefinite-lived
|
|
|
|
|
$
|
5,900
|
|
|
|
|
|
|
$
|
5,900
|
|
In the third quarter of 2020, fully amortized intangible assets of $15.0 million related to customer relationships and $4.5 million related to trade names, along with the related accumulated amortization, were removed from the table above. As of September 30, 2020, estimated annual amortization expense is as follows:
|
|
|
|
|
|
Years Ending December 31:
|
(amounts in thousands)
|
2020
|
$
|
1,491
|
|
2021
|
5,963
|
|
2022
|
5,933
|
|
2023
|
5,875
|
|
2024
|
5,238
|
|
Thereafter
|
11,822
|
|
|
$
|
36,322
|
|
The changes in the carrying amount of goodwill by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nurse
And Allied
Staffing
|
|
Physician
Staffing
|
|
Search
|
|
Total
|
|
(amounts in thousands)
|
Balances as of December 31, 2019
|
|
|
|
|
|
|
|
Aggregate goodwill acquired
|
$
|
346,130
|
|
|
$
|
43,405
|
|
|
$
|
21,750
|
|
|
$
|
411,285
|
|
Sale of business
|
—
|
|
|
—
|
|
|
(9,889)
|
|
|
(9,889)
|
|
Accumulated impairment loss
|
(259,732)
|
|
|
(40,598)
|
|
|
—
|
|
|
(300,330)
|
|
Goodwill, net of impairment loss
|
86,398
|
|
|
2,807
|
|
|
11,861
|
|
|
101,066
|
|
|
|
|
|
|
|
|
|
Changes to aggregate goodwill in 2020
|
|
|
|
|
|
|
|
Impairment charges
|
—
|
|
|
—
|
|
|
(10,142)
|
|
|
(10,142)
|
|
Reclassification of API goodwill
|
24
|
|
|
—
|
|
|
(24)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Balances as of September 30, 2020
|
|
|
|
|
|
|
|
Aggregate goodwill acquired
|
346,130
|
|
|
43,405
|
|
|
21,750
|
|
|
411,285
|
|
|
|
|
|
|
|
|
|
Sale of business
|
—
|
|
|
—
|
|
|
(9,889)
|
|
|
(9,889)
|
|
Accumulated impairment loss
|
(259,732)
|
|
|
(40,598)
|
|
|
(10,142)
|
|
|
(310,472)
|
|
Reclassification of API goodwill
|
24
|
|
|
—
|
|
|
(24)
|
|
|
—
|
|
Goodwill, net of impairment loss
|
$
|
86,422
|
|
|
$
|
2,807
|
|
|
$
|
1,695
|
|
|
$
|
90,924
|
|
Goodwill, Trade Names, and Other Intangible Assets Impairment
The Company tests reporting units’ goodwill and intangible assets with indefinite lives for impairment annually during the fourth quarter and more frequently if impairment indicators exist. The Company performs quarterly qualitative assessments of significant events and circumstances such as reporting units’ historical and current results, assumptions regarding future performance, strategic initiatives and overall economic factors, including COVID-19, and macro-economic developments, to determine the existence of potential indicators of impairment and assess if it is more likely than not that the fair value of reporting units or intangible assets is less than their carrying value. If indicators of impairments are identified a quantitative impairment test is performed.
As of September 30, 2020, the Company performed a qualitative assessment of each of its reporting units and determined it was not more likely than not that the fair value of its reporting units dropped below their carrying value.
During the second quarter of 2020, due to the increased negative impact and continuing uncertainty of the COVID-19 pandemic on the business, all reporting units were quantitatively tested. For the Nurse and Allied Staffing and Physician Staffing reporting units, no impairment was identified as the fair value was substantially in excess of the carrying amount of goodwill.
The Search reporting unit under-performed relative to management’s expectations in the second quarter of 2020. The lower than expected revenue was driven by: (i) the cancellation or postponement of a significant number of working searches, (ii) the decision to delay the hiring of new revenue producers, and (iii) the loss of customers, which were mostly related to the negative impacts of COVID-19. As a result, the quantitative testing of the Search reporting unit resulted in impairment charges of $10.2 million for its goodwill and $0.3 million for its customer relationships.
In order to determine the fair value of the Search reporting unit, the Company used a combination of an income and market approach. The weighting was based on the specific characteristics, risks, and uncertainties of the Search reporting unit. The discounted cash flow that served as the primary basis for the income approach was based on the Company’s discrete financial forecast of revenue, gross profit margins, operating costs, and cash flows. It also considered estimated future results, economic and market conditions including the timing and duration of COVID-19, as well as the impact of planned business and operational strategies. Assumptions used in the market approach were derived including an analysis of a range of valuation multiples of comparable public companies.
Impairment charges on the condensed consolidated statements of operations include impairment of $10.7 million related to goodwill and other intangible assets and $5.4 million related to right-of-use assets and related property and equipment, and totaled $16.1 million for the nine months ended September 30, 2020.
Although management believes that the Company's current estimates and assumptions utilized in its quantitative testing are reasonable and supportable, including its assumptions on the impact and timing related to COVID-19, there can be no assurance that the estimates and assumptions management used for purposes of its qualitative assessment as of September 30, 2020 will prove to be accurate predictions of future performance.
As part of evolving its go-to-market strategy, in the second quarter of 2019, the Company began eliminating certain brands across all of its segments. The Company’s rebranding efforts resulted in a $14.5 million write-off of indefinite-lived trade names related to its Nurse and Allied Staffing business segment, which is presented within impairment charges on the condensed consolidated statements of operations for the nine months ended September 30, 2019.
Intangible Asset Amortization
In connection with its rebranding efforts, the Company made a decision at the end of 2019 to phase out a trade name by the end of 2020, which as of December 31, 2019 would have been recognized over a weighted average life of 7.5 years. In connection with this decision, the Company expected accelerated amortization related to the trade name of $2.9 million throughout 2020. In the second quarter of 2020, the Company further accelerated its rebranding plan and shortened the estimated remaining life of the trade name. Total accelerated amortization resulting from the changes in the estimated remaining life of the trade name were $0.9 million, or $0.03 per share, and $3.1 million, or $0.09 per share, for the three and nine months ended September 30, 2020, respectively.
7. DEBT
2019 ABL Credit Agreement
Effective October 25, 2019, the Company terminated its commitments under its prior senior credit facility entered into in August 2017 (described below) and entered into an ABL Credit Agreement (Loan Agreement). The Loan Agreement provided for a five-year revolving senior secured asset-based credit facility (ABL) in the aggregate principal amount of up to $120.0 million (as described below), including a sublimit for swing loans up to $15.0 million and a $35.0 million sublimit for standby letters of credit.
On June 30, 2020, the Company amended its Loan Agreement, which increased the current aggregate committed size of the ABL from $120.0 million to $130.0 million. All other terms, conditions, covenants, and pricing of the Loan Agreement remain the same. The amendment was treated as a modification of debt and, as a result, the associated fees and costs of $0.1 million were included in debt issuance costs and will be amortized ratably over the remaining term of the agreement.
Availability of the ABL commitments is subject to a borrowing base of up to 85% of secured eligible accounts receivable, subject to adjustment at certain quality levels, plus an amount of supplemental availability, and reducing over time in accordance with the terms of the Loan Agreement, minus customary reserves, and subject to customary adjustments. Revolving loans and letters of credit issued under the Loan Agreement reduce availability under the ABL on a dollar-for-dollar basis. Availability under the ABL will be used for general corporate purposes. Additionally, the facility contains a provision to increase the aggregate committed size of the facility to $150.0 million. At September 30, 2020, availability under the ABL was $110.2 million and the Company had $56.0 million of borrowings drawn, as well as $19.5 million of letters of credit outstanding related to workers' compensation and professional liability policies, leaving $34.7 million available for borrowing. The balances drawn are presented as revolving credit facility on the condensed consolidated balance sheets and as of September 30, 2020 and December 31, 2019 had a weighted average interest rate of 2.70% and 4.23%, respectively.
As of September 30, 2020, the interest rate spreads and fees under the Loan Agreement were based on LIBOR plus 2.00% for the revolving portion of the borrowing base and LIBOR plus 4.00% on the Supplemental Availability. The Base Rate (as defined by the Loan Agreement) margins would have been 1.00% and 3.00%, respectively, for the revolving portion and Supplemental Availability, respectively. The LIBOR and Base Rate margins are subject to monthly pricing adjustments, pursuant to a pricing matrix based on the Company’s excess availability under the revolving credit facility. In addition, the facility is subject to an unused line fee, letter of credit fees, and an administrative fee. The unused line fee is 0.375% of the average daily unused portion of the revolving credit facility.
The Loan Agreement contains various restrictions and covenants applicable to the Company and its subsidiaries, including a covenant to maintain a minimum fixed charge coverage ratio. The Company was in compliance with this covenant as of September 30, 2020. Obligations under the ABL are secured by substantially all the assets of the borrowers and guarantors, subject to customary exceptions.
Prior Senior Credit Facility
The Company had a prior senior credit facility that included a revolver and term loan. The term loan was payable in quarterly installments and the Company had the right at any time to prepay borrowings in whole or in part, without premium or penalty. During the nine months ended September 30, 2019, the Company made optional prepayments on the term loan of $12.5 million.
Also, in both the first and third quarter of 2019, the Company amended its prior senior credit facility to reduce the commitment under the revolving credit facility, among other changes. Each of the amendments were treated as modifications and the fees of $0.7 million paid to its lenders were classified as debt issuance costs.
As a result of the reduction in borrowing capacity under the revolving credit facility, as well as the reduction in the term loan due to the prepayments in the nine months ended September 30, 2019, $0.5 million of debt issuance costs were written off. The amount of the write-off is reflected as loss on early extinguishment of debt on the condensed consolidated statements of operations.
In the third quarter of 2019, in contemplation of entering into the Loan Agreement, the Company terminated its interest rate swap agreement associated with its prior senior credit facility by making a cash payment of $1.3 million. As the interest payments related to the swap were no longer expected to occur, the unrealized amount of loss that had accumulated in other comprehensive loss was recognized, resulting in a $1.3 million loss on derivative in the third quarter of 2019.
Note Payable
On October 30, 2015, the Company completed the acquisition of all of the membership interests of New Mediscan II, LLC, Mediscan Diagnostic Services, LLC, and Mediscan Nursing Staffing, LLC (collectively, Mediscan). In connection with the Mediscan acquisition, the Company assumed contingent purchase price liabilities for a previously acquired business that were payable annually based on certain performance criteria for the years 2016 through 2019, and a second performance criteria related to 2019 payable in three equal installments. Pursuant to the asset purchase agreement, once the earnout amount related to the second performance criteria for 2019 was determined, a note payable documenting the remaining principal and interest was specified as part of the settlement. In the first quarter of 2020, the total earnout amount related to both 2019 performance criterion of $7.4 million was determined, and $0.1 million was paid by the Company. Pursuant to the note payable, the first installment of $2.4 million was paid in the second quarter of 2020, the second installment of $2.4 million is payable on January 31, 2021, and the third installment of $2.5 million is to be paid, together with interest at a rate of 2% per annum, accruing from April 1, 2020, on January 31, 2022. As of September 30, 2020, the current portion of the note payable in the amount of $2.4 million is included in other current liabilities and the long-term portion of $2.5 million is included in other long-term liabilities on the condensed consolidated balance sheets.
8. LEASES
The Company's lease population of its right-of-use asset and lease liabilities under the Leases Topic of the FASB ASC is substantially related to the rental of office space. The Company enters into lease agreements as lessee for the rental of office space for both its corporate and branch locations that may include options to extend or terminate early. Many of these real estate leases require variable payments of property taxes, insurance, and common area maintenance, in addition to base rent. Certain of the leases have provisions for free rent months during the lease term and/or escalating rent payments and, particularly for the Company’s longer-term leases for its corporate offices, it has received incentives to enter into the leases such as receiving up to a specified dollar amount to construct tenant improvements. These leases do not include residual value guarantees, covenants, or other restrictions.
During the nine months ended September 30, 2020, in connection with the continuing developments from COVID-19, the Company expedited restructuring plans and either reduced or fully vacated leased office space. The Company is in the process of seeking to sublet some of the space where possible. The decision and change in the use of space resulted in a right-of-use asset impairment charge of $4.4 million. This loss was determined by comparing the fair value of the impacted right-of-use assets to the carrying value of the assets as of the impairment measurement date, in accordance with the Property, Plant and Equipment Topic of the FASB ASC. The fair value of the right-of-use assets was based on the estimated sublease income for the space taking into consideration the time period it will take to obtain a subtenant, the applicable discount rate, and the sublease rate. The Company wrote off a total of $1.0 million of leasehold improvements and other property and equipment related to these locations. The measurement of the right-of-use asset impairments, using the assumptions described, is a Level 3 measurement.
The table below presents the lease-related assets and liabilities included on the condensed consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
Classification on Condensed Consolidated Balance Sheets:
|
September 30, 2020
|
|
December 31, 2019
|
|
(amounts in thousands)
|
Operating lease right-of-use assets
|
$
|
10,526
|
|
|
$
|
16,964
|
|
Operating lease liabilities - current
|
$
|
4,732
|
|
|
$
|
4,878
|
|
Operating lease liabilities - non-current
|
$
|
15,762
|
|
|
$
|
19,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Weighted-average remaining lease term
|
4.2 years
|
|
4.7 years
|
Weighted average discount rate
|
6.28
|
%
|
|
6.26
|
%
|
The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities (which do not include short-term leases) recorded on the condensed consolidated balance sheets as of September 30, 2020:
|
|
|
|
|
|
Years Ending December 31:
|
(amounts in thousands)
|
2020
|
$
|
992
|
|
2021
|
6,246
|
|
2022
|
5,334
|
|
2023
|
4,858
|
|
2024
|
3,487
|
|
Thereafter
|
2,553
|
|
Total minimum lease payments
|
23,470
|
|
Less: amount of lease payments representing interest
|
(2,976)
|
|
Present value of future minimum lease payments
|
20,494
|
|
Less: current lease obligations
|
(4,732)
|
|
Non-current lease obligations
|
$
|
15,762
|
|
Other Information
The table below provides information regarding supplemental cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 30,
|
|
2020
|
|
2019
|
|
(amounts in thousands)
|
Supplemental Cash Flow Information:
|
|
|
|
Cash paid for amounts included in the measurement of operating lease liabilities
|
$
|
5,404
|
|
|
$
|
5,619
|
|
Right-of-use assets acquired under operating lease
|
$
|
915
|
|
|
$
|
872
|
|
The components of lease expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
2019
|
|
|
|
(amounts in thousands)
|
Amounts Included in Condensed Consolidated Statements of Operations:
|
|
|
|
|
|
Operating lease expense
|
$
|
1,006
|
|
|
$
|
1,646
|
|
|
|
Short-term lease expense
|
$
|
1,077
|
|
|
$
|
2,124
|
|
|
|
Variable and other lease costs
|
$
|
444
|
|
|
$
|
598
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
|
2019
|
|
|
|
(amounts in thousands)
|
Amounts Included in Condensed Consolidated Statements of Operations:
|
|
|
|
|
|
Operating lease expense
|
$
|
3,946
|
|
|
$
|
5,038
|
|
|
|
Short-term lease expense
|
$
|
4,373
|
|
|
$
|
6,232
|
|
|
|
Variable and other lease costs
|
$
|
1,490
|
|
|
$
|
1,975
|
|
|
|
Operating lease expense, short-term lease expense, and variable and other lease costs are included in selling, general and administrative expenses, direct operating expenses, and restructuring costs in the condensed consolidated statements of operations, depending on the nature of the leased asset. Operating lease expense is reported net of sublease income, which is not material.
As of September 30, 2020, the Company does not have any material operating leases which have not yet commenced. The Company has an immaterial amount of finance lease contracts related to other equipment rentals which are not included in the above disclosures.
9. FAIR VALUE MEASUREMENTS
The Fair Value Measurements and Disclosures Topic of the FASB ASC defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Items Measured at Fair Value on a Recurring Basis:
The Company’s financial assets/liabilities required to be measured on a recurring basis were its: (1) deferred compensation asset included in other non-current assets; (2) deferred compensation liability included in other long-term liabilities; and (3) contingent consideration liabilities included as other current liabilities and contingent consideration on its condensed consolidated balance sheets.
Deferred compensation—The Company utilizes Level 1 inputs to value its deferred compensation assets and liabilities. The Company’s deferred compensation assets and liabilities are measured using publicly available indices, as per the plan documents.
Contingent consideration liabilities—Potential earnout payments related to the acquisition of Mediscan were contingent upon meeting certain performance requirements through 2019. As of December 31, 2019, the long-term portion of these liabilities has been included in contingent consideration, and the short-term portion is included in other current liabilities on the condensed consolidated balance sheets. The Company utilized Level 3 inputs to value these contingent consideration liabilities as significant unobservable inputs were used in the calculation of their fair value. As of December 31, 2019, due to the end of the earnout period, the Company measured the fair value of the liability based on the expected payout related to its Mediscan acquisition.
In the first quarter of 2020, the total earnout amounts related to 2019 of $7.4 million was determined, and $0.1 million was paid by the Company. The remaining $7.3 million was documented as a subordinated promissory note payable and is included in other current and other long-term liabilities on the condensed consolidated balance sheets which is not measured at fair value on a recurring basis. See Note 7 - Debt.
The estimated fair value of the Company’s financial assets and liabilities measured on a recurring basis is as follows:
Fair Value Measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
Financial Assets:
|
|
|
|
(Level 1)
|
|
|
|
Deferred compensation asset
|
$
|
990
|
|
|
$
|
830
|
|
Financial Liabilities:
|
|
(Level 1)
|
|
|
|
Deferred compensation liability
|
$
|
2,249
|
|
|
$
|
2,216
|
|
|
|
|
|
|
|
|
|
(Level 3)
|
|
|
|
Contingent consideration liabilities
|
$
|
—
|
|
|
$
|
7,300
|
|
The opening balances of contingent consideration liabilities are reconciled to the closing balances for fair value measurements of these liabilities categorized within Level 3 of the fair value hierarchy are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent Consideration
|
|
|
|
Liabilities
|
|
|
|
2020
|
|
2019
|
|
|
|
(amounts in thousands)
|
Balance at beginning of period
|
$
|
7,300
|
|
|
$
|
7,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
|
(100)
|
|
|
(100)
|
|
|
|
Accretion expense
|
—
|
|
|
247
|
|
|
|
Valuation adjustment
|
77
|
|
|
—
|
|
|
|
Reclassification to other current and long-term liabilities
|
(7,277)
|
|
|
—
|
|
|
|
Balance at March 31
|
—
|
|
|
7,836
|
|
|
|
Accretion expense
|
—
|
|
|
253
|
|
|
|
Balance at June 30
|
—
|
|
|
8,089
|
|
|
|
Payments
|
—
|
|
|
(179)
|
|
|
|
Valuation adjustment
|
—
|
|
|
(426)
|
|
|
|
Balance at September 30
|
$
|
—
|
|
|
$
|
7,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items Measured at Fair Value on a Non-Recurring Basis:
The Company's non-financial assets, such as goodwill, trade names, other intangible assets, right-of-use assets, and property and equipment, are measured at fair value when there is an indicator of impairment and are recorded at fair value only when an impairment charge is recognized.
During 2020, the Company recorded a customer list impairment charge related to the Nurse and Allied Staffing reporting unit. The nine months ended September 30, 2020 included impairment charges to goodwill and other intangible assets related to the Search reporting unit and impairment to right-of-use assets along with related property and equipment in connection with leases that were vacated during the year. Accordingly, as of September 30, 2020, these assets were recorded at fair value using Level 3 inputs. See Note 6 - Goodwill, Trade Names, and Other Intangible Assets and Note 8 - Leases for more information about these fair value measurements.
Other Fair Value Disclosures:
Financial instruments not measured or recorded at fair value in the condensed consolidated balance sheets consist of cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses. The estimated fair value of accounts receivable and accounts payable and accrued expenses approximate their carrying amount due to the short-term nature of these instruments. The Company’s note payable is included in other current and long-term liabilities on the condensed consolidated balance sheets. Due to its relatively short-term nature, the carrying value of the note payable approximates its fair value. The carrying amount of the Company's ABL approximates fair value because the interest rates are variable and reflective of market rates.
The carrying amounts and estimated fair value of the Company’s significant financial instruments that were not measured at fair value are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Financial Liabilities:
|
|
|
(amounts in thousands)
|
|
|
(Level 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note Payable
|
$
|
4,851
|
|
|
$
|
4,851
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Senior Secured Asset-Based Loan
|
$
|
56,038
|
|
|
$
|
56,038
|
|
|
$
|
70,974
|
|
|
$
|
70,974
|
|
|
|
|
|
|
|
|
|
Concentration of Credit Risk:
See discussion of credit losses and allowance for doubtful accounts in Note 3 - Customer Contracts. Overall, based on the large number of customers in differing geographic areas, primarily throughout the United States and its territories, the Company believes the concentration of credit risk is limited.
10. STOCKHOLDERS’ EQUITY
Stock Repurchase Program
During the nine months ended September 30, 2020 and 2019, the Company did not repurchase any shares of its Common Stock. As of September 30, 2020, the Company had 510,004 shares of Common Stock under the current share repurchase program available to repurchase, subject to certain conditions in the Company's Loan Agreement.
Share-Based Payments
On May 19, 2020, the Company's shareholders approved the Cross Country Healthcare, Inc. 2020 Omnibus Incentive Plan (2020 Plan), which replaced the 2017 Omnibus Incentive Plan (2017 Plan), and applies to awards granted after May 19, 2020. The remaining shares under the 2017 Plan were cancelled and no further awards will be granted under that plan. The 2020 Plan generally mirrors the terms of the 2017 Plan, and includes the following provisions: (i) an aggregate share reserve of 3,000,000 shares; (2) annual dollar and share limits of awards granted to employees and consultants, as well as non-employee directors,
based on type of award; (3) awards granted generally will be subject to a minimum one-year vesting schedule; and (4) awards may be granted under the 2020 Plan until March 24, 2030.
The following table summarizes restricted stock awards and performance stock awards activity issued under the 2017 Plan and the 2020 Plan for the nine months ended September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Awards
|
|
Performance Stock Awards
|
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Number of Target
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Unvested restricted stock awards, January 1, 2020
|
996,794
|
|
|
$
|
8.54
|
|
|
364,557
|
|
|
$
|
9.66
|
|
Granted
|
829,023
|
|
|
$
|
6.65
|
|
|
286,415
|
|
|
$
|
6.74
|
|
Vested
|
(404,478)
|
|
|
$
|
8.81
|
|
|
—
|
|
|
$
|
—
|
|
Forfeited
|
(35,234)
|
|
|
$
|
7.81
|
|
|
(70,113)
|
|
|
$
|
13.67
|
|
Unvested restricted stock awards, September 30, 2020
|
1,386,105
|
|
|
$
|
7.05
|
|
|
580,859
|
|
|
$
|
7.74
|
|
Restricted stock awards granted under the Company’s 2020 Plan entitle the holder to receive, at the end of a vesting period, a specified number of shares of the Company’s common stock. Share-based compensation expense is measured by the market value of the Company’s stock on the date of grant.
Awards granted to non-employee directors under the 2017 Plan prior to the June 2020 grant vest in three equal installments on the first, second and third anniversaries of the grant date, while restricted shares granted under the 2020 Plan in June 2020 will vest on the first anniversary of such grant date, or earlier subject to retirement eligibility. In addition, effective in the three months ended June 30, 2020, the Company implemented modified guidelines that provide for accelerated vesting of restricted stock grants on the last date of service when a retirement-eligible director retires.
Pursuant to the 2017 Plan, the number of target shares that are issued for performance-based stock awards are determined based on the level of attainment of the targets. In the first quarter of 2020, it was determined that the performance stock awards that were granted in 2017 were not earned and, accordingly, those shares were forfeited.
During the three and nine months ended September 30, 2020, $1.1 million and $4.1 million, respectively, was included in selling, general and administrative expenses related to share-based payments, and a net of 2,576 and 306,550 shares, respectively, of Common Stock were issued upon the vesting of restricted stock.
During the three and nine months ended September 30, 2019, $1.0 million and $2.5 million, respectively, was included in selling, general and administrative expenses related to share-based payments, and a net of 5,233 and 230,986 shares, respectively, of Common Stock were issued upon the vesting of restricted stock.
11. SEGMENT DATA
In accordance with the Segment Reporting Topic of the FASB ASC, the Company reports three business segments – Nurse and Allied Staffing, Physician Staffing, and Search. The Company manages and segments its business based on the services it offers to its customers as described below:
● Nurse and Allied Staffing – Nurse and Allied Staffing provides traditional staffing, recruiting, and value-added total talent solutions including: temporary and permanent placement of travel and local branch-based nurse and allied professionals, managed services programs (MSP) services, education healthcare services, and outsourcing services. Its clients include: public and private acute-care and non-acute care hospitals, government facilities, public schools and charter schools, outpatient clinics, ambulatory care facilities, physician practice groups, retailers, and many other healthcare providers throughout the United States.
● Physician Staffing – Physician Staffing provides physicians in many specialties, as well as certified registered nurse anesthetists, nurse practitioners, and physician assistants as independent contractors on temporary assignments throughout the United States at various healthcare facilities, such as acute and non-acute care facilities, medical group practices, government facilities, and managed care organizations.
● Search – Search includes retained and contingent search services for physicians, healthcare executives, and other healthcare professionals, as well as recruitment process outsourcing.
The Company evaluates performance of each segment primarily based on revenue and contribution income. The Company defines contribution income as income or loss from operations before depreciation and amortization, acquisition and integration-related costs, restructuring costs, legal settlement charges, impairment charges, and corporate overhead. Contribution income is a financial measure used by the Company when assessing segment performance and is provided in accordance with the Segment Reporting Topic of the FASB ASC. The Company does not evaluate, manage, or measure performance of segments using asset information; accordingly, total asset information by segment is not prepared or disclosed. The information in the following table is derived from the segments’ internal financial information as used for corporate management purposes. Certain corporate expenses are not allocated to and/or among the operating segments.
Information on operating segments and a reconciliation to loss from operations for the periods indicated are as follows:
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2020
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2019
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2020
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2019
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(amounts in thousands)
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Revenue from services:
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Nurse and Allied Staffing
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$
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175,244
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$
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184,974
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$
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561,575
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$
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541,398
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Physician Staffing
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16,452
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20,407
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51,505
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54,594
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Search
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2,272
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3,819
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7,731
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11,136
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$
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193,968
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$
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209,200
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$
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620,811
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$
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607,128
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Contribution income (loss):
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Nurse and Allied Staffing
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$
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18,233
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$
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16,097
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$
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53,028
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$
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46,504
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Physician Staffing
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827
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811
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2,677
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1,724
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Search
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(308)
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78
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(1,694)
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(526)
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18,752
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16,986
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54,011
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47,702
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Corporate overhead (a)
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12,499
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10,975
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36,993
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34,744
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Depreciation and amortization
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3,247
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2,907
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10,472
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9,448
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Acquisition and integration-related costs
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—
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(426)
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77
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385
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Restructuring costs
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2,316
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1,607
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5,210
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2,884
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Legal settlement charges
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—
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—
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—
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1,600
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Impairment charges
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1,071
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1,804
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16,082
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16,306
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(Loss) income from operations
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$
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(381)
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$
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119
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$
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(14,823)
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$
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(17,665)
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_______________
(a) Corporate overhead includes unallocated executive leadership and other centralized corporate functional support costs such as finance, IT, legal, human resources, and marketing, as well as public company expenses and corporate-wide projects (initiatives).
12. CONTINGENCIES
Legal Proceedings and Other Reserves
From time to time, the Company is involved in various litigation, claims, investigations, and other proceedings that arise in the ordinary course of its business. These matters primarily relate to employee-related matters that include individual and collective claims, professional liability, tax, and payroll practices. The Company establishes reserves when available information indicates that a loss is probable and an amount or range of loss can be reasonably estimated. For these matters, the Company has established a liability of $1.2 million as of September 30, 2020. These assessments are performed at least quarterly and are based on the information available to management at the time and involve a significant management judgment to determine the probability and estimated amount of potential losses, if any. Based on the available information considered in its reviews, the Company adjusts its loss contingency accruals and its disclosures as may be required. Actual outcomes or losses may differ materially from those estimated by the Company's current assessments, including available insurance recoveries, which would impact the Company's profitability. Adverse developments in existing litigation claims or legal proceedings involving the Company or new claims could require management to establish or increase litigation reserves or enter into unfavorable settlements or satisfy judgments for monetary damages for amounts in excess of current reserves, which could adversely affect the Company's financial results. In October 2019, the Company received a grand jury subpoena directed to Advantage On Call whose assets were purchased by Cross Country Healthcare, Inc. in 2017. The subpoena relates to an investigation of healthcare staffing services. The Company has communicated with authorities, provided requested documents, and continues to cooperate with the investigation. The Company believes the outcome of any outstanding loss contingencies as of September 30, 2020 will not have a material adverse effect on its business, financial condition, results of operations, or cash flows.
Sales and Other State Non-Income Tax Liabilities
The Company's sales and other state non-income tax filings are subject to routine audits by authorities in the jurisdictions where it conducts business in the United States which may result in assessments of additional taxes. The Company accrues sales and other non-income tax liabilities based on the Company's best estimate of its probable liability utilizing currently available information and interpretation of relevant tax regulations. Given the nature of the Company's business, significant subjectivity exists as to both whether sales and other state non-income taxes can be assessed on its activity and how the sales tax will ultimately be measured by the relevant jurisdictions. The Company makes a determination for each reporting period whether the estimates for sales and other non-income taxes in certain states should be revised. The expense is included in selling, general and administrative expenses in the Company's condensed consolidated statements of operations and the liability is reflected in sales tax payable within other current liabilities as of September 30, 2020 and December 31, 2019, in its condensed consolidated balance sheets.
13. INCOME TAXES
For the three and nine months ended September 30, 2020 and 2019, the Company calculated its effective tax rate based on year-to-date results, pursuant to the Income Taxes Topic of the FASB ASC. The Company’s effective tax rate for the three and nine months ended September 30, 2020 was negative 17.2% and 0.2%, respectively, including the impact of discrete items. Excluding discrete items, the Company's effective tax rate for the three and nine months ended September 30, 2020 was negative 18.6% and negative 3.2%, respectively. The Company’s effective tax rate for the three and nine months ended September 30, 2019 was negative 3.6% and negative 135.5%, respectively, including the impact of discrete items. Excluding discrete items, the Company’s effective tax rate for the three and nine months ended September 30, 2019 was negative 7.0% and 2.6%, respectively.
As a result of the Company's valuation allowance on substantially all of its domestic deferred tax assets, income tax expense for the three months ended September 30, 2020 and 2019 was primarily impacted by international and state taxes. Income tax expense for the nine months ended September 30, 2020 and 2019 was further impacted by the impairment of indefinite-lived intangibles. Lastly, income tax expense for the nine months ended September 30, 2019 was impacted by the additional valuation allowance recorded in the second quarter of 2019.
In the second quarter of 2019, management assessed the available positive and negative evidence to estimate whether sufficient future taxable income would be generated to permit use of the Company's existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended June 30, 2019. On the basis of this evaluation, an additional valuation allowance of $36.0 million was recorded, of which $35.8 million was recorded as income tax expense and $0.2 million as a reduction of other comprehensive income, to reduce the portion of the deferred tax asset that was not more likely than not to be realized.
The Coronavirus Aid, Relief and Economic Security Act, also known as the CARES Act, was signed into law on March 27, 2020. Among other things, the CARES Act provided for an immediate refund of Alternative Minimum Tax credits as compared to the 2017 Tax Act’s scheduled refunds through 2021. Accordingly, an additional $0.3 million is presented as a current income tax receivable within other current assets in the condensed consolidated balance sheets as of September 30, 2020.
The Company intends to maintain a valuation allowance until sufficient positive evidence exists to support its reversal. As of September 30, 2020 and December 31, 2019, the Company had a valuation allowance of $39.5 million and $37.3 million, respectively. The valuation allowance applied to all domestic deferred tax assets other than certain deferred tax assets expected to be realized.
As of September 30, 2020, the Company had approximately $0.9 million of unrecognized tax benefits included in other long-term liabilities, $6.8 million, net of deferred taxes, which would affect the effective tax rate if recognized. During the three months ended September 30, 2020, the Company increased its unrecognized tax benefits by $0.2 million. For the nine months ended September 30, 2020, the Company had a gross increase of $0.9 million to its current year unrecognized tax benefits related to federal and state tax provisions.
The tax years 2012 through 2019 remain open to examination by certain taxing jurisdictions to which the Company is subject to tax.
14. RELATED PARTY TRANSACTIONS
The Company has a 68% ownership interest in Cross Country Talent Acquisition Group, LLC, a joint venture between the Company and a hospital system. The Company generated revenue providing staffing services to the hospital system of $3.6 million and $11.3 million for the three and nine months ended September 30, 2020, respectively, and $6.3 million and $18.2 million for the three and nine months ended September 30, 2019, respectively. At September 30, 2020 and December 31, 2019, the Company had a receivable balance of $1.6 million and $1.7 million, respectively, and a payable balance of $0.2 million and $0.5 million, respectively. In October 2020, the Company was informed that the sole professional staffing services agreement held by its joint venture Cross Country Talent Acquisition Group, LLC will be terminated as of December 31, 2020. Accordingly, the Company currently anticipates that Cross Country Talent Acquisition Group, LLC will be dissolved, and that the Company will enter into a direct staffing agreement with the hospital system. See Note 16 - Subsequent Events.
The Company has entered into an arrangement for digital marketing services provided by a firm that is related to Mr. Clark, the Company's Co-Founder and Chief Executive Officer. Mr. Clark is a minority shareholder in the firm's parent company and is a member of the parent company's Board of Directors. The terms of the arrangement are equivalent to those prevailing in an arm's-length transaction and have been approved by the Company through its related party process. The digital marketing firm manages a limited number of digital publishers covering various Company brands for a monthly management fee. During the three and nine months ended September 30, 2020, the Company incurred less than $0.1 million and $0.1 million, respectively, and incurred less than $0.1 million for both the three and nine months ended September 30, 2019, in expenses related to these fees. At September 30, 2020, the Company had a payable balance of less than $0.1 million.
In the first quarter of 2020, the Company entered into a note payable related to contingent consideration assumed as part of a prior period acquisition. The payees of the note are controlled by an employee of the sellers who remained with the Company. The note payable has a balance of $4.9 million at September 30, 2020. See Note 7 - Debt.
15. RECENT ACCOUNTING PRONOUNCEMENTS
On March 12, 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. When elected, the optional expedients for contract modifications must be applied consistently for all eligible contracts or transactions. The amendments in this update are effective as of March 12, 2020 through December 31, 2022. As of September 30, 2020, the Company is not impacted by this guidance; however, it will continue to assess the potential impact on its debt contracts and future hedging relationships, if applicable, through the effective period.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public business entities, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, and should be applied either on a
prospective, retrospective, or modified retrospective basis depending on the amendment. Early adoption of the amendments is permitted. The Company expects to adopt this standard in its first quarter of 2021 with no material impact on its consolidated financial statements.
16. SUBSEQUENT EVENTS
See Note 14 - Related Party Transactions for further discussion of the termination of the sole professional staffing services agreement between Cross Country Talent Acquisition Group, LLC and a hospital system.