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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________________
FORM 10-Q
______________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 001-33989
LHC Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
71-0918189
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
901 Hugh Wallis Road South
Lafayette, LA 70508
(Address of principal executive offices including zip code)
(337233-1307
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, par value of $0.01
 
LHCG
 
NASDAQ Global Select Market

 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Table of Contents

Large accelerated filer
  
ý
 
Accelerated filer
 
Non-accelerated filer
  
 
Smaller reporting company  
 
 
 
 
 
Emerging growth company
 


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  ý
Number of shares of common stock, par value $0.01, outstanding as of August 3, 2020: 31,590,210 shares.


Table of Contents

LHC GROUP, INC.
INDEX
 
Part I. Financial Information
 
Page
Item 1.
 
 
Condensed Consolidated Balance Sheets — June 30, 2020 and December 31, 2019
 
Condensed Consolidated Statements of Income — Three and six months ended June 30, 2020 and 2019
 
Condensed Consolidated Statements of Changes in Equity — Three and six months ended June 30, 2020 and 2019
 
Condensed Consolidated Statements of Cash Flows — Six months ended June 30, 2020 and 2019
 
 
Item 2.
 
Item 3.
 
Item 4.
 
Part II. Other Information
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 6.
 
 

3

Table of Contents

PART I — FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
LHC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data) (Unaudited)
 
June 30, 
 2020
 
December 31, 
 2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash
$
172,752

 
$
31,672

Receivables:
 
 
 
Patient accounts receivable
324,587

 
284,962

Other receivables
10,674

 
10,832

Total receivables
335,261

 
295,794

Prepaid income taxes
6,330

 
9,652

Prepaid expenses
23,740

 
21,304

Other current assets
26,698

 
21,852

Total current assets
564,781

 
380,274

Property, building and equipment, net of accumulated depreciation of $74,486 and $69,441, respectively
123,408

 
97,908

Goodwill
1,234,145

 
1,219,972

Intangible assets, net of accumulated amortization of $17,070 and $16,431, respectively
310,548

 
305,556

Assets held for sale
1,900

 
2,500

Operating lease right of use asset
100,834

 
95,452

Other assets
21,483

 
38,633

Total assets
$
2,357,099

 
$
2,140,295

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and other accrued liabilities
$
70,138

 
$
83,572

Salaries, wages, and benefits payable
86,405

 
85,631

Self-insurance reserves
34,438

 
31,188

Government stimulus advance
44,273

 

Contract liabilities - deferred revenue
310,712

 

Current operating lease liabilities
34,838

 
28,701

Amounts due to governmental entities
2,186

 
1,880

Total current liabilities
582,990

 
230,972

Deferred income taxes
70,959

 
60,498

Income taxes payable
6,373

 
3,867

Revolving credit facility
30,000

 
253,000

Other long term liabilities
17,818

 

Operating lease payable
68,858

 
69,556

                                   Total liabilities
776,998

 
617,893

Noncontrolling interest — redeemable
21,998

 
15,151

Commitments and contingencies

 

Stockholders’ equity:

 
 
LHC Group, Inc. stockholders’ equity:

 
 
Preferred stock – $0.01 par value; 5,000,000 shares authorized; none issued or outstanding

 

Common stock — $0.01 par value; 60,000,000 shares authorized; 36,327,819 and 36,129,280 shares issued, and 31,121,968 and 30,992,390 shares outstanding, respectively
363

 
361

Treasury stock — 5,205,851 and 5,136,890 shares at cost, respectively
(68,654
)
 
(60,060
)
Additional paid-in capital
955,119

 
949,321

Retained earnings
590,417

 
523,701

Total LHC Group, Inc. stockholders’ equity
1,477,245

 
1,413,323

Noncontrolling interest — non-redeemable
80,858

 
93,928

Total stockholders' equity
1,558,103

 
1,507,251

Total liabilities and stockholders' equity
$
2,357,099

 
$
2,140,295

See accompanying Notes to Condensed Consolidated Financial Statements.

4

Table of Contents

LHC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended 
 June 30,
 
2020
 
2019
 
2020
 
2019
Net service revenue
$
487,320


$
517,842


$
1,000,191


$
1,020,427

Cost of service revenue (excluding depreciation and amortization)
306,712


325,860


627,914


646,852

Gross margin
180,608


191,982


372,277


373,575

General and administrative expenses
150,574


148,584


308,440


293,805

Impairment of intangibles and other
600


1,018


600


7,337

Government stimulus income
(44,435
)



(44,435
)


Operating income
73,869


42,380


107,672


72,433

Interest expense
(841
)

(2,885
)

(3,609
)

(5,937
)
Income before income taxes and noncontrolling interest
73,028


39,495


104,063


66,496

Income tax expense
15,227


9,557


18,586


13,157

Net income
57,801


29,938


85,477


53,339

Less net income attributable to noncontrolling interests
13,109


4,938


18,761


9,483

Net income attributable to LHC Group, Inc.’s common stockholders
$
44,692


$
25,000


$
66,716


$
43,856

 







Earnings per share:







Basic
$
1.44


$
0.81


$
2.15


$
1.42

Diluted
$
1.43


$
0.80


$
2.13


$
1.41

Weighted average shares outstanding:







Basic
31,104


30,960


31,060


30,899

Diluted
31,324


31,201


31,301


31,188

 




See accompanying Notes to the Condensed Consolidated Financial Statements.


5

Table of Contents

LHC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Amounts in thousands, except share data)
(Unaudited)
 
 
For the Six Months Ended June 30, 2020
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Noncontrolling
Interest Non
Redeemable
 
Total
Equity
Issued
 
Treasury
 
Amount
 
Shares
 
Amount
 
Shares
 
Balance as of December 31, 2019
$
361

 
36,129,280

 
$
(60,060
)
 
5,136,890

 
$
949,321

 
$
523,701

 
$
93,928

 
$
1,507,251

Net income (1)

 

 

 

 

 
22,024

 
2,099

 
24,123

Acquired noncontrolling interest

 

 

 

 

 

 
2,880

 
2,880

Noncontrolling interest distributions

 

 

 

 

 

 
(2,093
)
 
(2,093
)
Purchase of additional controlling interest

 

 

 

 
(2,470
)
 

 
(21,105
)
 
(23,575
)
Nonvested stock compensation

 

 

 

 
3,680

 

 

 
3,680

Issuance of vested stock
2

 
163,163

 

 

 

 

 

 
2

Treasury shares redeemed to pay income tax

 

 
(7,122
)
 
59,390

 
189

 

 

 
(6,933
)
Issuance of common stock under Employee Stock Purchase Plan

 
4,663

 

 

 
610

 

 

 
610

Balance as of March 31, 2020
$
363

 
36,297,106

 
$
(67,182
)
 
5,196,280

 
$
951,330

 
$
545,725

 
$
75,709

 
$
1,505,945

Net income (1)

 

 

 

 

 
44,692

 
7,058

 
51,750

Noncontrolling interest distributions

 

 

 

 

 

 
(1,909
)
 
(1,909
)
Nonvested stock compensation

 

 

 

 
3,263

 

 

 
3,263

Issuance of vested stock

 
19,846

 

 

 

 

 

 

Treasury shares redeemed to pay income tax

 

 
(950
)
 
6,256

 
(189
)
 

 

 
(1,139
)
Exercise of options

 
7,137

 
(522
)
 
3,315

 
218

 

 

 
(304
)
Issuance of common stock under Employee Stock Purchase Plan

 
3,730

 

 

 
497

 

 

 
497

Balance as of June 30, 2020
$
363

 
36,327,819

 
$
(68,654
)
 
5,205,851

 
$
955,119

 
$
590,417

 
$
80,858

 
$
1,558,103


(1) Net income excludes net income attributable to noncontrolling interest-redeemable of $3.5 million and $9.6 million during the three and six months ended June 30, 2020, respectively. Noncontrolling interest-redeemable is reflected outside of permanent equity on the condensed consolidated balance sheets. See Note 8 of the Notes to Condensed Consolidated Financial Statements.

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For the Six Months Ended June 30, 2019
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Noncontrolling
Interest Non
Redeemable
 
Total
Equity
Issued
 
Treasury
 
Amount
 
Shares
 
Amount
 
Shares
 
Balance as of December 31, 2018
$
358

 
35,835,348

 
$
(49,373
)
 
5,029,429

 
$
937,965

 
$
427,975

 
$
107,549

 
$
1,424,474

Net income (1)

 

 

 

 

 
18,856

 
1,686

 
20,542

Acquired noncontrolling interest

 

 

 

 

 

 
820

 
820

Noncontrolling interest distributions

 

 

 

 

 

 
(6,799
)
 
(6,799
)
Purchase of additional controlling interest

 

 

 

 

 

 
(18,000
)
 
(18,000
)
Nonvested stock compensation

 

 

 

 
1,804

 

 

 
1,804

Issuance of vested stock
2

 
174,562

 

 

 

 

 

 
2

Treasury shares redeemed to pay income tax

 

 
(6,726
)
 
61,465

 
(115
)
 

 

 
(6,841
)
Exercise of options
1

 
44,387

 
(851
)
 
24,044

 

 

 

 
(850
)
Issuance of common stock under Employee Stock Purchase Plan

 
5,357

 

 

 
478

 

 

 
478

Balance as of March 31, 2019
$
361

 
36,059,654

 
$
(56,950
)
 
5,114,938

 
$
940,132

 
$
446,831

 
$
85,256

 
$
1,415,630

Net income (1)

 

 

 

 

 
25,000

 
1,897

 
26,897

Acquired noncontrolling interest

 

 

 

 

 

 
6,170

 
6,170

Noncontrolling interest distributions

 

 

 

 

 

 
(2,026
)
 
(2,026
)
Purchase of additional controlling interest

 

 

 

 
(1,283
)
 

 
531

 
(752
)
Nonvested stock compensation

 

 

 

 
2,588

 

 

 
2,588

Issuance of vested stock

 
17,145

 

 

 

 

 

 

Treasury shares redeemed to pay income tax

 

 
(730
)
 
7,199

 
30

 

 

 
(700
)
Exercise of options

 
3,293

 
(212
)
 
1,866

 

 

 

 
(212
)
Issuance of common stock under Employee Stock Purchase Plan

 
4,301

 

 

 
453

 

 

 
453

Balance as of June 30, 2019
$
361

 
36,084,393

 
$
(57,892
)
 
5,124,003

 
$
941,920

 
$
471,831

 
$
91,828

 
$
1,448,048


 (1) Net income excludes net income attributable to noncontrolling interest-redeemable of $3.0 million and $5.9 million during the three and six months ended June 30, 2019, respectively. Noncontrolling interest-redeemable is reflected outside of permanent equity on the condensed consolidated balance sheets. See Note 8 of the Notes to Condensed Consolidated Financial Statements.

See accompanying Notes to Condensed Consolidated Financial Statements.


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Table of Contents

LHC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands) (Unaudited)
 
Six Months Ended 
 June 30,
 
2020
 
2019
Operating activities:
 
 
 
Net income
$
85,477

 
$
53,339

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


 
 
Depreciation and amortization expense
10,385

 
8,400

Amortization of operating lease right of use asset
17,090

 
15,528

Stock-based compensation expense
6,943

 
4,392

Deferred income taxes
10,461

 
4,821

Loss on disposal of assets
154

 
312

    Impairment of intangibles and other
600

 
7,337

Changes in operating assets and liabilities, net of acquisitions:


 
 
Receivables
(38,186
)
 
(22,704
)
Prepaid expenses
(2,436
)
 
(332
)
Other assets
(4,169
)
 
8

Prepaid income taxes
3,322

 
5,063

Accounts payable and accrued expenses
(16,354
)
 
(935
)
Salaries, wages, and benefits payable
3,850

 
(4,547
)
Government stimulus advance
44,273

 

Contract liabilities - deferred revenue
310,712

 

Other long term liabilities
17,818

 

Operating lease liabilities
(16,876
)
 
(13,253
)
Income taxes payable
2,506

 
374

Net amounts due to/from governmental entities
306

 
528

Net cash provided by operating activities
435,876

 
58,331

Investing activities:


 
 
Purchases of property, building and equipment
(40,944
)
 
(7,599
)
Proceeds from sale of property, building and equipment
7,142

 

Cash received (paid) for acquisitions
3,125

 
(20,431
)
Net cash used in investing activities
(30,677
)
 
(28,030
)
Financing activities:


 
 
Proceeds from line of credit
256,230

 
25,000

Payments on line of credit
(479,230
)
 
(30,000
)
Proceeds from employee stock purchase plan
1,107

 
931

Payments on debt

 
(7,650
)
Noncontrolling interest distributions
(10,267
)
 
(13,857
)
Withholding taxes paid on stock-based compensation
(8,602
)
 
(8,519
)
Purchase of additional controlling interest
(23,575
)
 
(18,748
)
Exercise of vested awards and stock options
218

 
(84
)
Net cash used in financing activities
(264,119
)
 
(52,927
)
Change in cash
141,080

 
(22,626
)
Cash at beginning of period
31,672

 
49,363

Cash at end of period
$
172,752

 
$
26,737

Supplemental disclosures of cash flow information:


 
 
Interest paid
$
4,083

 
$
4,038

Income taxes paid
$
2,375

 
$
4,042

Non-Cash Operating Activity:
 
 
 
Operating right of use assets in exchange for lease obligations
$
18,690

 
$
98,070

Non-Cash Investing Activity:
 
 
 
Accrued capital expenditures
$
2,348

 
$
953

See accompanying Notes to Condensed Consolidated Financial Statements.

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LHC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Significant Events
Organization
LHC Group, Inc. (the “Company”) is a health care provider specializing in the post-acute continuum of care. The Company provides services through five segments: home health, hospice, home and community-based services, facility-based services, the latter primarily through long-term acute care hospitals (“LTACHs”), and healthcare innovations services ("HCI").
As of June 30, 2020, the Company, through its wholly- and majority-owned subsidiaries, equity joint ventures, controlled affiliates, and management agreements operated 816 service locations in 35 states within the continental United States and the District of Columbia.
COVID-19
The effects of the worldwide pandemic caused by the outbreak of SARS-CoV-2 (“COVID-19”) have materially impacted our business. 
In response to the COVID-19 outbreak, we promptly convened a cross-functional COVID-19 task force comprised of the Company's leaders that continually communicates with our clinicians and other employees concerning best practices and changes in Company policies and procedures. We also implemented contingency planning policies, whereby most employees in our home offices located in Louisiana and Kentucky are continuing to work remotely in compliance with CDC recommendations. We continue to invest in technology and equipment that allows our remote work force to provide continued and seamless functionality to our clinicians who continue to care for patients on service.
We have undertaken numerous measures to promote the safety of our clinicians and other employees. For example, we have prepared and distributed to our clinicians across the country special kits of personal protective equipment and other supplies needed to properly treat our patients during the COVID-19 outbreak, adopted social distancing guidelines for our agencies and our home offices located in Louisiana and Kentucky and posted reminder signs and markers throughout our work spaces, adopted additional cleaning procedures at all locations, installed plexiglass shields at work spaces that require a physical protective barrier, and instituted temperature check points in our agencies and home office campuses. These and other measures have altered numerous clinical, operational and business processes and significantly increases our supplies and services costs.
In addition, we have implemented a number of programs to support our employees, including a pandemic grant program that supports employees experiencing financial hardships, retirement plan amendments, special cash-in opportunities for accumulated paid time off, expanded offerings in our employee assistance program, a wage supplement program designed to restore lost wages for front line patient care employees that qualified, and a paid time off replenishment program designed to restore certain hours of paid time off for front line patient care employees that qualified and for any employees who previously donated their paid time off hours to these front line patient care employees.
CARES Act
In response to COVID-19, the U.S. Government enacted the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") on March 27, 2020. The CARES Act was passed to provide $100 billion of Provider Relief Funds for distribution to eligible providers who provided diagnoses, testing, or care for individuals with possible or actual case of COVID-19, specifically to reimburse providers for health care related expense related to the prevention of the spread of COVID-19, preparations for treating cases of COVID-19 positive patients, and for lost revenues attributable to COVID-19. The CARES Act also provided financial hardship relief to Medicare providers impacted by the COVID-19 pandemic in order to provide necessary funds when there is a disruption in Medicare claims submission and/or Medicare claims processing by distributing funds through the Accelerated and Advanced Payments Program ("AAPP").
In addition, the CARES Act suspended the 2% sequestration payment adjustments on Medicare patient claims with dates of service from May 1 through December 31, 2020, suspended the application of site-neutral payment for LTACH admissions that were admitted during the Public Health Emergency ("PHE"), and delayed payment of the employer portion of social security tax.

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Provider Relief Fund
During the three months ended June 30, 2020, the Company received $88.7 million in payments from the Provider Relief Fund. The payments received under the Provider Relief Fund are subject to certain terms and conditions, including being subject to potential repayment if those funds are not utilized to address the lost revenue and/or increased costs associated with our efforts associated with COVID-19.
During the three months ended June 30, 2020, the Company recognized $44.4 million related to these funds, which was recorded in government stimulus income in our condensed consolidated statements of income. The unrecognized amount of $44.3 million was recorded in government stimulus advance in our condensed consolidated balance sheet. Such unrecognized amounts may be recognized as government stimulus income in future periods if conditions of recognition are met. The Company will continue to monitor compliance with the terms and conditions of the Provider Relief Fund and the impact of covered expenses and lost revenues. Any portion of the unrecognized $44.3 million that does not meet the terms and conditions of the grant will be returned to the government following the end of the PHE.
AAPP
During the three months ended June 30, 2020, the Company received $310.7 million of accelerated payments under the AAPP, which was recorded in contract liabilities - deferred revenue in our condensed consolidated balance sheet in accordance with Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers ("Topic 606"). We are required to begin repaying to the government AAPP funds that we received within 120 days after our receipt of such funds. After the 120-day period, any AAPP funds that remain unpaid will be automatically recouped from Medicare amounts otherwise payable to us by Centers for Medicare and Medicaid Services ("CMS"), until all AAPP funds have been completely repaid. Any unapplied advance payment amounts must be paid in full within 210 days from receipt of the advance payments.
Other
During the three months ended June 30, 2020, the Company recognized $5.0 million and $2.9 million of net service revenue due to the suspension of the 2% sequestration payment adjustment and the suspension of LTACH site-neutral payments, respectively. As of June 30, 2020, the Company deferred $17.8 million of employer social security taxes, which was recorded in other long term liabilities on our condensed consolidated balance sheets.
Unaudited Interim Financial Information
The accompanying unaudited condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019, and the related unaudited condensed consolidated statements of income for the three and six months ended June 30, 2020 and 2019, condensed consolidated statements of changes in equity for the three and six months ended June 30, 2020 and 2019, condensed consolidated statements of cash flows for the six months ended June 30, 2020 and 2019, and related notes (collectively, these financial statements are referred to as the "interim financial statements" and together with the related notes are referred to herein as the “interim financial information”) have been prepared by the Company. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been included. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from the interim financial information presented. This report should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019 Form 10-K"). The 2019 Form 10-K was filed with the Securities and Exchange Commission (the “SEC”) on February 27, 2020, and includes information and disclosures not included herein.    
Immaterial Correction of an Error
During the six months ended June 30, 2019, the Company increased the reported number of common shares issued by 47,680, decreased the reported number of treasury shares by 368, and reclassified the reported number of treasury shares by 25,542 for the six months ended June 30, 2019 due to the exclusion of reporting the number of common shares issued as a result of the exercise of certain outstanding stock options and the number of treasury shares redeemed to pay income tax associated with such stock option exercises. For further details of this noted item, see Note 2 of the Notes to Consolidated Financial Statements in the 2019 10K filed with the SEC on February 27, 2020.
The Company has evaluated the effects both qualitatively and quantitatively, and concluded that they did not have a material impact on previously issued financial statements for the six months ended June 30, 2019.
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of

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the financial statements, and the reported revenue and expenses during the reporting period. Actual results could differ from those estimates.
Critical Accounting Policies
The Company’s most critical accounting policies relate to revenue recognition.
Net Service Revenue
Net service revenue from contracts with customers is recognized in the period the performance obligations are satisfied under the Company's contracts by transferring the requested services to patients in amounts that reflect the consideration to which is expected to be received in exchange for providing patient care, which is the transaction price allocated to the services provided in accordance with Topic 606 and ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (collectively, "ASC 606").
Net service revenue is recognized as performance obligations are satisfied, which can vary depending on the type of services provided. The performance obligation is the delivery of patient care in accordance with the requested services outlined in physicians' orders, which are based on specific goals for each patient.
The performance obligations are associated with contracts in duration of less than one year; therefore, the optional exemption provided by ASC 606 was elected resulting in the Company not being required to disclose the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied or partially unsatisfied as of the end of the reporting period. The Company's unsatisfied or partially unsatisfied performance obligations are primarily completed when the patients are discharged and typically occur within days or weeks of the end of the period.
The Company determines the transaction price based on gross charges for services provided, reduced by estimates for explicit and implicit price concessions. Explicit price concessions include contractual adjustments provided to patients and third-party payors. Implicit price concessions include discounts provided to self-pay, uninsured patients or other payors, adjustments resulting from regulatory reviews, audits, billing reviews and other matters. Subsequent changes to the estimate of the transaction price are recorded as adjustments to net service revenue in the period of change. Subsequent changes that are determined to be the result of an adverse change in the patient's ability to pay (i.e. change in credit risk) are recorded as a provision for doubtful accounts within general and administrative expenses.
Explicit price concessions are recorded for the difference between our standard rates and the contracted rates to be realized from patients, third-party payors and others for services provided.
Implicit price concessions are recorded for self-pay, uninsured patients and other payors by major payor class based on historical collection experience and current economic conditions, representing the difference between amounts billed and amounts expected to be collected. The Company assesses the ability to collect for the healthcare services provided at the time of patient admission based on the verification of the patient's insurance coverage under Medicare, Medicaid, and other commercial or managed care insurance programs.
Amounts due from third-party payors, primarily commercial health insurers and government programs (Medicare and Medicaid), include variable consideration for retroactive revenue adjustments due to settlements of audits and reviews. The Company has determined estimates for price concessions related to regulatory reviews based on historical experience and success rates in the claim appeals and adjudication process. Revenue is recorded at amounts estimated to be realizable for services provided.
The following table sets forth the percentage of net service revenue earned by category of payor for the three and six months ended June 30, 2020 and 2019:
 

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Three Months Ended  
 June 30,
 
Six Months Ended 
 June 30,
 
2020
 
2019
 
2020
 
2019
Home health:
 
 
 
 
 
 
 
Medicare
66.4
%
 
70.8
%
 
67.3
%
 
71.1
%
Managed Care, Commercial, and Other
33.6

 
29.2

 
32.7

 
28.9

 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Hospice:
 
 
 
 
 
 
 
Medicare
92.9
%
 
92.9
%
 
92.4
%
 
92.7
%
Managed Care, Commercial, and Other
7.1

 
7.1

 
7.6

 
7.3

 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Home and Community-Based Services:
 
 
 
 
 
 
 
Medicaid
20.9
%
 
24.3
%
 
20.7
%
 
24.7
%
Managed Care, Commercial, and Other
79.1

 
75.7

 
79.3

 
75.3

 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Facility-Based Services:
 
 
 
 
 
 
 
Medicare
56.6
%
 
53.0
%
 
55.8
%
 
55.2
%
Managed Care, Commercial, and Other
43.4

 
47.0

 
44.2

 
44.8

 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
HCI:
 
 
 
 
 
 
 
Medicare
30.7
%
 
23.5
%
 
27.3
%
 
22.8
%
Managed Care, Commercial, and Other
69.3

 
76.5

 
72.7

 
77.2

 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%

Medicare
The following describes the payment models in effect during the six months ended June 30, 2020. Such payment models have been subject to temporary adjustments made by CMS in response to COVID-19 pandemic as described elsewhere by this Quarterly Report on Form 10-Q.
Home Health Services
Effective January 1, 2020, the Patient Driven Groupings Model ("PDGM") became the new payment model for services provided to Medicare patients with dates of service on or after the effective date, including certain Medicare Advantage patients. PDGM was implemented by CMS. Under PDGM, the initial certification of Medicare patient eligibility, plan of care, and comprehensive assessment is for a 60-day episode of care; however, unlike the former Medicare prospective payment system ("PPS"), where each 60-day episode of care could not be final billed until the episode was completed, PDGM provides for each 30-day period within the episode of care to be final billed upon completion.
As a result of PDGM, the Company now completes its final billing after each 30-day period instead of the former 60-day period under PPS. For each 30-day period, the patient is classified into one of 432 home health resource groups prior to receiving services. Each 30-day period is placed into a subgroup falling under the following categories: (i) timing being early or late, (ii) admission source being community or institutional, (iii) one of 12 clinical groupings based on the patient's principal diagnosis, (iv) functional impairment level of low, medium, or high, and (v) a co-morbidity adjustment of none, low, or high based on the patient's secondary diagnoses.
Each 30-day period payment from Medicare reflects base payment adjustments for case-mix and geographic wage differences. All Medicare patient claims with dates of service from January 1, 2020 through April 30, 2020 reflected a 2% sequestration reduction. The 2% sequestration reduction adjustment was suspended for patient claims with dates of service that began May 1, 2020 through December 31, 2020. In addition, payments may reflect one of three retroactive adjustments to the total reimbursement: (a) an outlier payment if the patient’s care was unusually costly; (b) a low utilization adjustment whereby the number of visits is dependent on the clinical grouping; and/or (c) a partial payment if the patient transferred to another provider or from another provider before completing the episode. The retroactive adjustments outlined above are recognized in net service revenue when the event causing the adjustment occurs and during the period in which the services are provided to the patient. The Company reviews these adjustments to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustments is subsequently

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resolved. Net service revenue and related patient accounts receivable are recorded at amounts estimated to be realized from Medicare for services rendered.
Hospice
The Company records revenue based upon the date of service at amounts equal to the estimated payment rates. The Company receives one of four predetermined daily rates based upon the level of care provided by the Company, which can be routine care, general inpatient care, continuous home care, and respite care. There are two separate payment rates for routine care: payment for the first 60 days of care and care beyond 60 days. In addition to the two routine rates, the Company may also receive a service intensity add-on ("SIA"). The SIA is based on visits made in the last seven days of life by a registered nurse or medical social worker for patients in a routine level of care.
The performance obligation is the delivery of hospice services to the patient, as determined by a physician, each day the patient is on hospice care.
Adjustments to Medicare revenue are made from regulatory reviews, audits, billing reviews and other matters. The Company estimates the impact of these adjustments based on our historical experience.
Hospice payments are subject to variable consideration through an inpatient cap and an overall Medicare payment cap. The inpatient cap relates to individual programs receiving more than 20% of their total Medicare reimbursement from inpatient care services, and the overall Medicare payment cap relates to individual programs receiving reimbursements in excess of a “cap amount,” determined by Medicare to be payment equal to 12 months of hospice care for the aggregate base of hospice patients, indexed for inflation. The determination for each cap is made annually based on the 12-month period ending on October 31 of each year. The Company monitors its limits on a provider-by-provider basis and records an estimate of its liability for reimbursements received in excess of the cap amount, if any, in the reporting period.
Facility-Based Services
Gross revenue is recorded as services are provided under the LTACH prospective payment system. Each patient is assigned a long-term care diagnosis-related group. The Company is paid a predetermined fixed amount intended to reflect the average cost of treating a Medicare LTACH patient classified in that particular long-term care diagnosis-related group. For selected LTACH patients, the amount may be further adjusted based on length-of-stay and facility-specific costs, as well as in instances where a patient is discharged and subsequently re-admitted, among other factors. The Company calculates the adjustment based on a historical average of these types of adjustments for LTACH claims paid. Similar to other Medicare prospective payment systems, the rate is also adjusted for geographic wage differences. Net service revenue adjustments resulting from reviews and audits of Medicare cost report settlements are considered implicit price concessions for LTACHs and are measured at expected value.
Non-Medicare Revenues
Other sources of net service revenue for all segments fall into Medicaid, managed care or other payors of the Company's services. Medicaid reimbursement is based on a predetermined fee schedule applied to each service provided. Therefore, revenue is recognized for Medicaid services as services are provided based on this fee schedule. The Company's managed care and other payors reimburse the Company based upon a predetermined fee schedule or an episodic basis, depending on the terms of the applicable contract. Accordingly, the Company recognizes revenue from managed care and other payors as services are provided, such costs are incurred, and estimates of expected payments are known for each different payor, thus the Company's revenue is recorded at the estimated transaction price.
Contingent Service Revenues
The HCI segment provides strategic health management services to Affordable Care Organizations ("ACOs") that have been approved to participate in the Medicare Shared Savings Program ("MSSP"). The HCI segment has service agreements with ACOs that provide for sharing of MSSP payments received by the ACO, if any. ACOs are legal entities that contract with CMS to provide services to the Medicare fee-for-service population for a specified annual period with the goal of providing better care for the individual, improving health for populations and lowering costs. ACOs share savings with CMS to the extent that the actual costs of serving assigned beneficiaries are below certain trended benchmarks of such beneficiaries and certain quality performance measures are achieved. The generation of shared savings is the performance obligation of each ACO, which only become certain upon the final issuance of unembargoed calculations by CMS, generally in the third quarter of each year.
Government Grants

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The Company accounted for these funds as government grants, in accordance with IAS 20, Accounting for Government Grants and Disclosure of Government Assistance. Under IAS 20, government grants are recognized on a systematic basis over the periods in which the Company recognizes expenses and lost revenue for the related costs for which the grants are intended to compensate. The Company will recognize the grant when there is reasonable assurance that (a) the Company will comply with any conditions attached to the grant and (b) the grant will be received.
Patient Accounts Receivable
The Company reports patient accounts receivable from services rendered at their estimated transaction price, which includes price concessions based on the amounts expected to be due from payors. The Company's patient accounts receivable is uncollateralized and primarily consist of amounts due from Medicare, Medicaid, other third-party payors, and to a lesser degree patients. The credit risk from other payors is limited due to the significance of Medicare as the primary payor. The Company believes the credit risk associated with its Medicare accounts is limited due to (i) the historical collection rate from Medicare and (ii) the fact that Medicare is a U.S. government payor. The Company does not believe that there are any other significant concentrations from any particular payor that would subject it to any significant credit risk in the collection of patient accounts receivable.
    
A portion of the estimated Medicare PDGM system reimbursement from each submitted home nursing episode is received in the form of a request for anticipated payment (“RAP”). For a standard 60-day episode of care, the Company will submit two RAPs, one for the first 30-day period and a second for the next 30-day period. The Company submits a RAP for 20% of the estimated reimbursement for each of the 30-day periods at the start of care. A final bill is submitted at the end of each 30-day period. If a final bill is not submitted within the greater of 120 days from the start of the 30-day period, or 60 days from the date the RAP was paid, any RAP received for that 30-day period will be recouped by Medicare from any other Medicare claims in process for that particular provider. The RAP and final claim must then be resubmitted.

Earnings Per Share
Basic per share information is computed by dividing the relevant amounts from the condensed consolidated statements of income by the weighted-average number of shares outstanding during the period, under the treasury stock method. Diluted per share information is also computed using the treasury stock method, by dividing the relevant amounts from the condensed consolidated statements of income by the weighted-average number of shares outstanding plus potentially dilutive shares.
The following table sets forth shares used in the computation of basic and diluted per share information and, with respect to the data provided for the three and six months ended June 30, 2020 and 2019 (amounts in thousands):  
 
Three Months Ended  
 June 30,
 
Six Months Ended 
 June 30,
 
2020
 
2019
 
2020
 
2019
Weighted average number of shares outstanding for basic per share calculation
31,104

 
30,960

 
31,060

 
30,899

Effect of dilutive potential shares:
 
 
 
 
 
 
 
Nonvested stock
220

 
241

 
241

 
289

Adjusted weighted average shares for diluted per share calculation
31,324

 
31,201

 
31,301

 
31,188

Anti-dilutive shares
5

 
13

 
122

 
153



Assets Held for Sale

As of June 30, 2020, the Company's assets held for sale consisted of property and fixed assets of one hospice facility in Knoxville, Tennessee. The Company has accepted a purchase offer from a buyer that indicated the fair market value of the property was $1.9 million. The Company performed an impairment analysis and recorded an impairment charge of $0.6 million during the three months ended June 30, 2020, which was recorded in impairment of intangibles and other on our condensed consolidated statements of income.



Recently Adopted Accounting Pronouncements

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In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment, which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. This ASU was effective for annual and interim periods in fiscal years beginning after December 15, 2019, and did not have a significant impact to the Company.
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments which amends Financial Instruments - Credit Losses ("Topic 326"). ASU 2016-13 provides guidance for measuring credit losses on financial instruments. Early adoption is permitted. The amendments in this ASU should be applied retrospectively. This ASU was effective for annual and interim periods in fiscal years beginning after December 15, 2019, and did not have a significant impact to the Company.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Simplifications to accounting for income taxes, which removes certain exceptions to the general principles of Topic 740 and adds guidance to reduce complexity in accounting for income taxes. The ASU is effective for annual and interim periods in fiscal years beginning December 15, 2020. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on the Company's condensed consolidated financial statements.
3. Acquisitions and Joint Venture Activities
Acquisitions
The Company acquired the majority-ownership of six home health agencies, three hospice agencies, and four home and community-based agencies during the six months ended June 30, 2020. The total aggregate purchase price for these transactions was $13.9 million. The purchase prices were determined based on the Company’s analysis of comparable acquisitions and the target market’s potential future cash flows.

The Company funded these acquisitions in 2019 by paying cash consideration of $16.4 million. During the six months ended June 30, 2020, the Company received $3.1 million from an equity joint venture partnership for the partner's noncontrolling interest for one of the Company's acquired home health and hospice agencies. The total cash consideration includes adjustments for assets acquired and liabilities assumed.

Goodwill generated from the acquisitions was recognized based on the expected contributions of each acquisition to the overall corporate strategy. The Company expects its portion of goodwill to be fully tax deductible. The acquisitions were accounted for under the acquisition method of accounting. Accordingly, the accompanying interim financial information includes the results of operations of the acquired entities from the date of acquisition.

The following table summarizes the amounts of the assets acquired and liabilities assumed at the acquisition dates, as well as their fair value at the acquisition dates and the noncontrolling interest acquired during the six months ended June 30, 2020:

Fair value of total consideration transferred
 
 
Recognized amounts of identifiable assets acquired and liabilities assumed:
 
 
Trade name
 
$
1,944

Certificates of need/licenses
 
3,584

Other assets and (liabilities), net
 
(410
)
Total identifiable assets
 
$
5,118

 
 
 
Noncontrolling interest
 
$
6,388

Goodwill, including noncontrolling interest of $4,661
 
$
14,617



Trade names, certificates of need and licenses are indefinite-lived assets and, therefore, not subject to amortization. Acquired trade names that are not being used actively are amortized over the estimated useful life on the straight line basis. Trade names are valued using the relief from royalty method, a form of the income approach. Certificates of need are valued using the replacement cost approach based on registration fees and opportunity costs. Licenses are valued based on the estimated direct costs associated with recreating the asset, including opportunity costs based on an income approach. In the case of states with a

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moratorium in place, the licenses are valued using the multi-period excess earnings method. Noncontrolling interest is recorded at fair value.

Joint Venture Activities

During the six months ended June 30, 2020, the Company purchased a portion of the noncontrolling membership interest in one of our equity joint venture partnerships, which prior to the purchase was classified as a nonredeemable noncontrolling interest in permanent equity. As a result of the purchase, the Company retained its controlling financial interests in the joint venture partnership and the noncontrolling interest of our partner will continue to be classified as a nonredeemable noncontrolling interest in permanent equity. Total consideration for this noncontrolling interest purchase was $23.6 million.

4. Goodwill and Intangibles
The changes in recorded goodwill and intangible assets by reporting unit for the six months ended June 30, 2020 were as follows (amounts in thousands):  
 
Home health reporting unit
 
Hospice
reporting
unit
 
Home and community-based services
reporting
 unit
 
Facility-based
reporting
 unit
 
HCI reporting unit
 
Total
Goodwill:
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2019
$
867,924

 
$
128,875

 
$
166,629

 
$
15,682

 
$
40,862

 
$
1,219,972

Acquisitions
7,278

 
2,678

 

 

 

 
9,956

Noncontrolling interests
2,882

 
1,779

 

 

 

 
4,661

Adjustments and disposals
(108
)
 
(336
)
 

 

 

 
(444
)
Balance as of June 30, 2020
$
877,976

 
$
132,996

 
$
166,629

 
$
15,682

 
$
40,862

 
$
1,234,145

Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2019
$
219,872

 
$
40,590

 
$
24,096

 
$
5,317

 
$
15,681

 
$
305,556

Acquisitions
4,700

 
930

 

 

 

 
5,630

Amortization
(288
)
 
(46
)
 
(11
)
 
(3
)
 
(290
)
 
(638
)
Balance as of June 30, 2020
$
224,284

 
$
41,474

 
$
24,085

 
$
5,314

 
$
15,391

 
$
310,548


The allocation of goodwill from acquisitions purchased during the six months ended June 30, 2020 for each reporting unit is preliminary and subject to change once the valuation analysis required by ASC 805, Business Combinations is finalized.
The following tables summarize the changes in intangible assets during the six months ended June 30, 2020 and December 31, 2019 (amounts in thousands): 

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2020
 
2019
Indefinite-lived intangible assets:
 
 
 
   Trade Names
$
165,417

 
$
163,499

   Certificates of Need/Licenses
133,273

 
129,689

   Net Total
$
298,690

 
$
293,188

 
 
 
 
Definite-lived intangible assets:
 
 
 
   Trade Names
 
 
 
      Gross carrying amount
$
10,209

 
$
10,182

      Accumulated amortization
(9,378
)
 
(9,229
)
      Net total
$
831

 
$
953

   Non-compete agreements
 
 
 
      Gross carrying amount
$
6,897

 
$
6,795

      Accumulated amortization
(6,191
)
 
(5,991
)
      Net total
$
706

 
$
804

   Customer relationships
 
 
 
      Gross carrying amount
$
11,822

 
$
11,822

      Accumulated amortization
(1,501
)
 
(1,211
)
      Net total
$
10,321

 
$
10,611

   Total definite-lived intangible assets
 
 
 
      Gross carrying amount
$
28,928

 
$
28,799

      Accumulated amortization
(17,070
)
 
(16,431
)
      Net total
$
11,858

 
$
12,368

 
 
 
 
Total intangible assets:
 
 
 
   Gross carrying amount
$
327,618

 
$
321,987

   Accumulated amortization
(17,070
)
 
(16,431
)
   Net total
$
310,548

 
$
305,556

     
Remaining useful lives for trade names, customer relationships, and non-compete agreements were 9.3, 17.7, and 2.4 years, respectively, at June 30, 2020. Similar periods at December 31, 2019 were 9.8, 18.2, and 2.8 years for trade names, customer relationships, and non-compete agreements, respectively. Amortization expense was $0.6 million and $0.7 million during the six months ended June 30, 2020 and 2019, respectively. Amortization expense was recorded in general and administrative expenses.

5. Debt
Credit Facility
On March 30, 2018, the Company entered into a Credit Agreement with JPMorgan Chase Bank, N.A., which was effective on April 2, 2018 (the "Credit Agreement"). The Credit Agreement provides a senior, secured revolving line of credit commitment with a maximum principal borrowing limit of $500.0 million, which includes an additional $200.0 million accordion expansion feature, and a letter of credit sub-limit equal to $50.0 million. The expiration date of the Credit Agreement is March 30, 2023. The Company’s obligations under the Credit Agreement are secured by substantially all of the assets of the Company and its wholly-owned subsidiaries (subject to customary exclusions), which assets include the Company’s equity ownership of its wholly-owned subsidiaries and its equity ownership in joint venture entities. The Company’s wholly-owned subsidiaries also guarantee the obligations of the Company under the Credit Agreement. 
Revolving loans under the Credit Agreement bear interest at, as selected by the Company, either a (a) Base Rate, which is defined as a fluctuating rate per annum equal to the highest of (1) the Federal Funds Rate in effect on such day plus 0.5% (2) the Prime Rate in effect on such day and (3) the Eurodollar Rate for a one month interest period on such day plus 1.5%, plus

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a margin ranging from 0.50% to 1.25% per annum or (b) Eurodollar rate plus a margin ranging from 1.50% to 2.25% per annum, with pricing varying based on the Company's quarterly consolidated Leverage Ratio. Swing line loans bear interest at the Base Rate. The Company is limited to 15 Eurodollar borrowings outstanding at any time. The Company is required to pay a commitment fee for the unused commitments at rates ranging from 0.20% to 0.35% per annum depending upon the Company’s quarterly consolidated Leverage Ratio. The Base Rate as of June 30, 2020 was 4.00% and the LIBOR rate was 2.00%. As of June 30, 2020, the effective interest rate on outstanding borrowings under the Credit Agreement was 2.00%.
As of June 30, 2020, the Company had $30.0 million drawn, letters of credit issued in the amount of $24.8 million, and $445.2 million of remaining borrowing capacity available under the Credit Agreement. At December 31, 2019, the Company had $253.0 million drawn and letters of credit issued in the amount of $28.4 million under the Credit Facility.
Under the terms of the Credit Agreement, the Company is required to maintain certain financial ratios and comply with certain financial covenants. The Credit Agreement permits the Company to make certain restricted payments, such as purchasing shares of its stock, within certain parameters, provided the Company maintains compliance with those financial ratios and covenants after giving effect to such restricted payments. The Company was in compliance with its debt covenants under the Credit Agreement at June 30, 2020.
6. Stockholder’s Equity
Equity Based Awards
The 2018 Incentive Plan is administered by the Compensation Committee of the Company’s Board of Directors. The total number of shares of the Company's common stock originally reserved were 2,210,544 shares and a total of 1,874,354 shares are currently available for issuance. A variety of discretionary awards for employees, officers, directors, and consultants are authorized under the 2018 Incentive Plan, including incentive or non-qualified stock options and restricted stock, restricted stock units and performance-based awards. All awards must be evidenced by a written award certificate which will include the provisions specified by the Compensation Committee of the Board of Directors. The Compensation Committee determines the exercise price for stock options, which cannot be less than the fair market value of the Company’s common stock as of the date of grant.
Share Based Compensation
Nonvested Stock
During the six months ended June 30, 2020, the Company granted 9,900 nonvested shares of common stock to independent directors under the Second Amended and Restated 2005 Non-Employee Directors Compensation Plan. The shares vest 100% on the one year anniversary date. During the six months ended June 30, 2020, one retired director was granted 775 nonvested shares of common stock under the Second Amended and Restated 2005 Non-Employee Directors Compensation Plan, which shares vest 100% at the grant date.
During the six months ended June 30, 2020, employees and a consultant were granted 113,525 and 10,890 shares, respectively, of nonvested shares of common stock pursuant to the 2018 Incentive Plan. The shares vest over a period of five years, conditioned on continued employment and in accordance with consulting agreement. The fair value of nonvested shares of common stock is determined based on the closing trading price of the Company’s common stock on the grant date.
The following table represents the share grants activity for the six months ended June 30, 2020: 
 
Restricted stock
 
Options
 
Number of
shares
 
Weighted
average grant
date fair value
 
Number of shares
 
Weighted
average grant
date fair value
Share grants outstanding as of December 31, 2019
534,331

 
$
71.01

 
98,756

 
$
40.71

Granted
135,090

 
123.10