Exhibit 99.1
SOLARA MEDICAL SUPPLIES, LLC
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2019 AND 2018 (SUCCESSOR),
AND FOR THE YEAR ENDED DECEMBER 31, 2019 (SUCCESSOR)
AND THE PERIOD FROM JUNE 1, 2018 TO
DECEMBER 31, 2018
(SUCCESSOR),
AND FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 2018 TO MAY 31, 2018
(PREDECESSOR)
F-1
SOLARA MEDICAL SUPPLIES, LLC
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
| Independent Auditor’s Report | F-3 | |
| Consolidated Balance Sheets as of December 31, 2019 and 2018 (Successor) | F-4 | |
| Consolidated Statements of Operations for the Year Ended December 31, 2019 (Successor) and the Period from June 1, 2018 to December 31, 2018 (Successor), and Statement of Operations for the Period from January 1, 2018 to May 31, 2018 (Predecessor) | F-5 | |
| Consolidated Statements of Members’ Equity for the Year Ended December 31, 2019 (Successor) and the Period from June 1, 2018 to December 31, 2018 (Successor) | F-6 | |
| Statement of Stockholder’s Equity for the Period from January 1, 2018 to May 31, 2018 (Predecessor) | F-7 | |
| Consolidated Statements of Cash Flows for the Year Ended December 31, 2019 (Successor) and the Period from June 1, 2018 to December 31, 2018 (Successor), and Statement of Cash Flows for the Period from January 1, 2018 to May 31, 2018 (Predecessor) | F-8 | |
| Notes to Consolidated Financial Statements | F-9 – F-22 |
F-2
Independent Auditor’s Report
To the Board of Directors of
Solara Medical Supplies, LLC
Chula Vista, CA
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of Solara Medical Supplies, LLC (Successor), which comprise the consolidated balance sheets as of December 31, 2019 and 2018, the related consolidated statements of operations, members’ equity and cash flows for the year ended December 31, 2019, and for the period from June 1, 2018, through December 31, 2018, and the related notes to the consolidated financial statements. We have also audited the accompanying financial statements of Solara Medical Supplies, Inc. (Predecessor), which comprise the statements of operations, stockholder’s equity and cash flows for the period from January 1, 2018, through May 31, 2018, and the related notes to the financial statements. The financial statements of the Predecessor and the Successor, and the related notes to the consolidated financial statements, are collectively referred to herein as the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP); this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Solara Medical Supplies, LLC as of December 31, 2019 and 2018, and the results of their operations and their cash flows for the year ended December 31, 2019, and for the period from June 1, 2018, through December 31, 2018, and the results of the operations and cash flows of Solara Medical Supplies, Inc. for the period from January 1, 2018, through May 31, 2018, in accordance with accounting principles generally accepted in the United States of America.
San Diego, California
June 16, 2020
F-3
SOLARA MEDICAL SUPPLIES, LLC
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2019 AND 2018 (SUCCESSOR)
| Successor | Successor | |||||||
| December 31, 2019 | December 31, 2018 | |||||||
| ASSETS | | | ||||||
| Current Assets | | | ||||||
| Cash | $ | 9,768,000 | $ | 10,643,000 | ||||
| Accounts Receivable, Net | 26,970,000 | 21,889,000 | ||||||
| Inventory | 18,213,000 | 8,528,000 | ||||||
| Prepaid Expenses and Other Current Assets | 3,155,000 | 811,000 | ||||||
| Total Current Assets | $ | 58,106,000 | $ | 41,871,000 | ||||
| Property and Equipment, Net | 2,181,000 | 2,088,000 | ||||||
| Rental Pumps, Net | 2,323,000 | 1,922,000 | ||||||
| Goodwill | 110,355,000 | 110,924,000 | ||||||
| Intangible Assets, Net | 54,801,000 | 61,296,000 | ||||||
| Other Assets | 70,000 | 36,000 | ||||||
| TOTAL ASSETS | $ | 227,836,000 | $ | 218,137,000 | ||||
| LIABILITIES AND MEMBERS’ EQUITY | | | ||||||
| Current Liabilities | | | ||||||
| Accounts Payable | $ | 26,498,000 | $ | 17,717,000 | ||||
| Accrued Expenses | 19,527,000 | 18,049,000 | ||||||
| Debt, Current Portion | 1,660,000 | 4,000,000 | ||||||
| Contingent Consideration, Current Portion | 5,156,000 | 15,750,000 | ||||||
| Total Current Liabilities | $ | 52,841,000 | $ | 55,516,000 | ||||
| Debt, Net of Debt Acquisition Costs | 159,708,000 | 72,770,000 | ||||||
| Contingent Consideration, Long-Term | — | 4,516,000 | ||||||
| Other Long-Term Liabilities | 149,000 | 334,000 | ||||||
| TOTAL LIABILITIES | $ | 212,698,000 | $ | 133,136,000 | ||||
| Commitments and Contingencies (Notes 5 and 6) | | | ||||||
| Members’ Equity | | | ||||||
| Common Units | 944,000 | 896,000 | ||||||
| Preferred Units (Class A) | 63,240,000 | 62,938,000 | ||||||
| Preferred Units (Class B) | 25,740,000 | 25,740,000 | ||||||
| Accumulated Deficit | (74,786,000 | ) | (4,573,000 | ) | ||||
| TOTAL MEMBERS’ EQUITY | $ | 15,138,000 | $ | 85,001,000 | ||||
| TOTAL LIABILITIES AND MEMBERS’ EQUITY | $ | 227,836,000 | $ | 218,137,000 | ||||
See accompanying notes to the consolidated financial statements.
F-4
SOLARA MEDICAL SUPPLIES, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2019 (SUCCESSOR)
AND THE PERIOD FROM JUNE 1, 2018 TO DECEMBER 31, 2018 (SUCCESSOR),
AND STATEMENT OF OPERATIONS FOR THE PERIOD FROM JANUARY 1, 2018
TO MAY 31, 2018 (PREDECESSOR)
| Successor | Predecessor | |||||||||||
|
Year End
December 31, 2019 |
Period from
June 1, 2018 to December 31, 2018 |
Period
from
January 1, 2018 to May 31, 2018 |
||||||||||
| Revenue, Net | $ | 183,352,000 | $ | 99,928,000 | $ | 44,186,000 | ||||||
| Cost of Goods Sold | 113,335,000 | 63,184,000 | 29,660,000 | |||||||||
| Gross Profit | $ | 70,017,000 | $ | 36,744,000 | $ | 14,526,000 | ||||||
| Operating Expenses | | | | |||||||||
| Selling, General and Administrative Expenses | 44,360,000 | 22,400,000 | 6,039,000 | |||||||||
| Operating Income | $ | 25,657,000 | $ | 14,344,000 | $ | 8,487,000 | ||||||
| Interest Expense | (13,261,000 | ) | (5,201,000 | ) | — | |||||||
| Other Income | 135,000 | 107,000 | 80,000 | |||||||||
| Income Before Income Taxes | $ | 12,531,000 | $ | 9,250,000 | $ | 8,567,000 | ||||||
| Income Tax Expense | (294,000 | ) | (7,000 | ) | (120,000 | ) | ||||||
| Net Income | $ | 12,237,000 | $ | 9,243,000 | $ | 8,447,000 | ||||||
See accompanying notes to the consolidated financial statements.
F-5
SOLARA MEDICAL SUPPLIES, LLC
CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2019 (SUCCESSOR)
AND THE PERIOD FROM JUNE 1, 2018 TO DECEMBER 31, 2018 (SUCCESSOR)
| Common Units | Preferred Units (Class A) | Preferred Units (Class B) | Total | |||||||||||||||||||||||||||
| Amount |
Number
of
Units |
Amount |
Number
of
Units |
Amount |
Number
of
Units |
Accumulated
Deficit |
Members’
Equity |
|||||||||||||||||||||||
| Balance at June 1, 2018 | $ | 896,000 | 895,740 | $ | 62,938,000 | 62,938 | $ | 25,740,000 | 25,740 | $ | (7,528,000 | ) | $ | 82,046,000 | ||||||||||||||||
| Distributions to Members | — | — | — | — | — | — | (6,288,000 | ) | (6,288,000 | ) | ||||||||||||||||||||
| Net Income | — | — | — | — | — | — | 9,243,000 | 9,243,000 | ||||||||||||||||||||||
| Balance at December 31, 2018 | $ | 896,000 | 895,740 | $ | 62,938,000 | 62,938 | $ | 25,740,000 | 25,740 | $ | (4,573,000 | ) | $ | 85,001,000 | ||||||||||||||||
| Members Contributions | 48,000 | 3,000 | 302,000 | 302 | — | — | — | 350,000 | ||||||||||||||||||||||
| Distributions to Members | — | — | — | — | — | — | (82,450,000 | ) | (82,450,000 | ) | ||||||||||||||||||||
| Net Income | — | — | — | — | — | — | 12,237,000 | 12,237,000 | ||||||||||||||||||||||
| Balance at December 31, 2019 | $ | 944,000 | 898,740 | $ | 63,240,000 | 63,240 | $ | 25,740,000 | 25,740 | $ | (74,786,000 | ) | $ | 15,138,000 | ||||||||||||||||
See accompanying notes to the consolidated financial statements.
F-6
SOLARA MEDICAL SUPPLIES, LLC
STATEMENT OF STOCKHOLDER’S EQUITY
FOR THE PERIOD FROM JANUARY 1, 2018 TO MAY 31, 2018 (PREDECESSOR)
| Common Stock | Retained | Total | |||||||||||
| Amount | Number of Shares | Earnings | Stockholder’s Equity | ||||||||||
| Balance at December 31, 2017 | $ | 20,000 | 20,000 | $ | 18,855,000 | $ | 18,875,000 | ||||||
| Net Income | — | — | 8,447,000 | 8,447,000 | |||||||||
| Dividends | — | — | (12,668,000 | ) | (12,668,000 | ) | |||||||
| Balance at May 31, 2018 | $ | 20,000 | 20,000 | $ | 14,634,000 | $ | 14,654,000 | ||||||
See accompanying notes to the consolidated financial statements.
F-7
SOLARA MEDICAL SUPPLIES, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2019 (SUCCESSOR)
AND THE PERIOD FROM JUNE 1, 2018 TO DECEMBER 31, 2018
(SUCCESSOR),
AND STATEMENT OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 2018
TO
MAY 31, 2018 (PREDECESSOR)
| Successor | Predecessor | |||||||||||
|
Year
Ended
December 31, 2019 |
Period
from
June 1, 2018 to December 31, 2018 |
Period
from
January 1, 2018 to May 31, 2018 |
||||||||||
| Cash Flows from Operating Activities | ||||||||||||
| Net Income | $ | 12,237,000 | $ | 9,243,000 | $ | 8,447,000 | ||||||
| Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities | | | | |||||||||
| Depreciation and Amortization | 7,110,000 | 4,232,000 | 135,000 | |||||||||
| Rental Pump Amortization | 4,173,000 | 1,671,000 | 912,000 | |||||||||
| Loss on Disposition of Assets | — | — | 166,000 | |||||||||
| Deferred Rent | 62,000 | 190,000 | — | |||||||||
| Change in Fair Value of Contingent Liability | 640,000 | 576,000 | — | |||||||||
| Bad Debt Expense and Contractual Allowance | 6,730,000 | 3,649,000 | 394,000 | |||||||||
| Amortization of Debt Acquisition Costs | 640,000 | 1,088,000 | — | |||||||||
| Changes in Operating Assets and Liabilities | | | | |||||||||
| Accounts Receivable, Net | (11,811,000 | ) | (13,511,000 | ) | 7,433,000 | |||||||
| Inventory | (14,259,000 | ) | (8,616,000 | ) | 2,329,000 | |||||||
| Prepaid Expenses and Other Current Assets | (2,378,000 | ) | 150,000 | (114,000 | ) | |||||||
| Accounts Payable | 8,781,000 | 14,090,000 | (5,425,000 | ) | ||||||||
| Accrued Expenses | 1,479,000 | 8,565,000 | 2,368,000 | |||||||||
| Net Cash Provided by Operating Activities | $ | 13,404,000 | $ | 21,327,000 | $ | 16,645,000 | ||||||
| Cash Flows from Investing Activities | | | | |||||||||
| Purchases of Property and Equipment | (930,000 | ) | (1,351,000 | ) | (248,000 | ) | ||||||
| Purchase of Intangible Asset | (25,000 | ) | — | — | ||||||||
| Purchase Price Adjustment | 569,000 | — | — | |||||||||
| Net Investment in Acquired Business | — | (1,506,000 | ) | — | ||||||||
| Net Cash Used in Investing Activities | $ | (386,000 | ) | $ | (2,857,000 | ) | $ | (248,000 | ) | |||
| Cash Flows from Financing Activities | | | | |||||||||
| Proceeds from Term Loan | 87,700,000 | — | — | |||||||||
| Payments of Debt Acquisition Costs | (2,173,000 | ) | — | — | ||||||||
| Term Loan Repayments | (1,570,000 | ) | (2,000,000 | ) | (25,000 | ) | ||||||
| Dividends | — | — | (12,668,000 | ) | ||||||||
| Distributions | (82,450,000 | ) | (13,816,000 | ) | — | |||||||
| Contributions | 350,000 | — | — | |||||||||
| Payments of Contingent Consideration | (15,750,000 | ) | — | — | ||||||||
| Net Cash Used in Financing Activities | $ | (13,893,000 | ) | $ | (15,816,000 | ) | $ | (12,693,000 | ) | |||
| (Decrease) Increase in Cash | $ | (875,000 | ) | $ | 2,654,000 | $ | 3,704,000 | |||||
| Cash, Beginning of the Year | 10,643,000 | 7,989,000 | 6,522,000 | |||||||||
| Cash, End of the Year | $ | 9,768,000 | $ | 10,643,000 | $ | 10,226,000 | ||||||
| Supplemental Disclosures of Cash Flow Information | | | | |||||||||
| Cash Paid During the Period for Interest | $ | 12,621,000 | $ | 4,113,000 | $ | — | ||||||
| Cash Paid During the Period for Income Taxes | 294,000 | 7,000 | 120,000 | |||||||||
| Contingent Liability Recognized at Purchase Date | — | 19,690,000 | — | |||||||||
See accompanying notes to the consolidated financial statements.
F-8
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Company and Basis of Presentation
Description of Company
Solara Medical Supplies, LLC, a Delaware limited liability company (“LLC”), and its subsidiaries (collectively, the “Company”) were formed upon the completion of the purchase of Solara Medical Supplies, Inc. on May 31, 2018. Solara Medical Supplies, LLC is a subsidiary of Solara Intermediate, LLC, and Solara Intermediate, LLC is a subsidiary of Solara Holdings, LLC (“Holdings”), which operates under an LLC agreement (“LLC Agreement”) (Note 8). The Company is a direct-to-customer supplier of advanced diabetic devices, including continuous glucose monitors, insulin pumps and other supplies for the intensely managed diabetic. The Company is headquartered in Chula Vista, California, and operates additional offices in Michigan, Texas, Alabama, Ohio and South Carolina.
Basis of Presentation
Successor: The consolidated financial statements for the year ended December 31, 2019 and the period from June 1, 2018 to December 31, 2018 include the accounts of Solara Medical Supplies, LLC and its wholly owned subsidiaries. All intercompany accounts and transactions were eliminated at consolidation.
Predecessor: The financial statements for the period from January 1, 2018 to May 31, 2018 include the accounts of Solara Medical Supplies, Inc.
Predecessor and Successor Periods: The purchase agreement was a stock purchase. As a result, Solara Intermediate, LLC is the acquirer and elected push-down accounting to Solara Medical Supplies, LLC, the accounting successor, and Solara Medical Supplies, Inc. is the acquiree and the accounting predecessor. The purchase was accounted for as a business combination using the acquisition method of accounting and the successor financial statements reflect a new basis of accounting that is based on the fair value of the net assets acquired.
As a result of the application of the acquisition method of accounting as of the effective time of the purchase transaction, the accompanying financial statements include a black line division that indicates the predecessor and successor reporting entities shown are presented on a different basis and are therefore not directly comparable.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of the financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions. Such estimates affect the reported amount of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors. Significant estimates made by management include, but are not limited to, contractual allowances, doubtful accounts, inventories, goodwill, fair value measurements and contingent liabilities.
Concentrations of Risk
The Company primarily sells its products directly to customers whereby the customer prepays an amount and the remaining amount is paid by the third-party payor. During the year ended December 31, 2019 (Successor), the Company had three third-party payors representing 11.3%, 18.5% and 7.9% of gross accounts receivable, and 18.5%, 16.1% and 13.0% of net revenue, respectively. During the period from June 1, 2018 to December 31, 2018 (Successor), the Company had three third-party payors representing 28.8%, 19.8% and 16.4% of gross accounts receivable, and 22.6%, 16.5% and 12.5% of net revenue, respectively.
F-9
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2019 (Successor), the Company purchased 67% and 12% of its inventory from two suppliers. During the period from June 1, 2018 to December 31, 2018 (Successor), the Company purchased 70% and 12% of its inventory from two suppliers. During the period from January 1, 2018 to May 31, 2018 (Predecessor), the Company purchased 63% and 15% of its inventory from two suppliers.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of 90 days or less from the date of purchase to be cash equivalents. The Company did not hold any cash equivalents during the successor or predecessor periods. The cash maintained in the Company’s bank account may, at times, exceed the federally insured limit of $250,000. The Company has not experienced any losses as a result of any excesses over the federally insured limit.
Accounts Receivable and Allowance for Doubtful Accounts and Allowances
Accounts receivable are customer and third-party payor obligations due under normal sales terms. Management estimates the allowance for doubtful accounts based on several factors, including historical cash collections, bad debt experience, economic conditions, and the age and composition of the outstanding amounts. Changes in these conditions may result in additional allowances. Contractual allowances are estimated using the expected value method, which estimates the amount that is expected to be earned. Revisions in allowance for doubtful accounts estimates are recorded as an adjustment to bad debt expense within selling, general and administrative expenses. Revisions to contractual allowances are recorded as decreases to the transaction price, which reduces revenue. At December 31, 2019 and 2018 (Successor), the allowance for doubtful accounts balance was $3,877,000 and $806,000, respectively, and the contractual allowance was $5,069,000 and $1,409,000, respectively.
Inventories
Inventories include finished goods and are stated at the lower of cost or estimated net realizable value, with cost being determined using average cost. The Company reviews inventory for potentially excess, obsolete, slow-moving or impaired items on an ongoing basis. There have been no adjustments resulting from the review of these items.
Property and Equipment
Property and equipment are valued at cost. Depreciation is calculated using the straight-line method over the assets’ estimated useful lives. Expenditures for maintenance and repairs are expensed as incurred, while expenditures that increase asset lives are capitalized.
The Company capitalizes system development costs related to its internal-use software during the application development stage. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life, which is generally three years.
Rental Pumps
Certain inventory, primarily insulin pumps, are reclassified to an equipment classification upon shipment. The cost of the shipped pump is recorded to depreciation expense in cost of goods sold on a straight-line basis over the reimbursement term, which is typically 13 to 15 months. The cost basis and accumulated depreciation related to rental pumps was $4,869,000 and $2,546,000, respectively, at December 31, 2019 (Successor) and $3,886,000 and $1,964,000, respectively, at December 31, 2018 (Successor). Total depreciation expense for the rental pumps was $4,173,000, $1,671,000 and $912,000 for the year ended December 31, 2019 (Successor), the period from June 1, 2018 to December 31, 2018 (Successor) and the period from January 1, 2018 to May 31, 2018 (Predecessor), respectively.
F-10
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-Lived Asset Impairment Testing
Long-lived assets, which include property and equipment and intangible assets, are periodically reviewed for impairment indicators. The Company assesses and evaluates potential impairment to its long-lived assets held for use when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. This evaluation is performed at the asset group level, which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities, using the estimated projected future undiscounted cash flows associated with the asset group over its remaining useful life compared to the asset group’s carrying amount to determine if a write-down is required. When impairment is indicated for long-lived assets, the amount of the impairment loss is the excess of net book value over fair value as approximated using discounted cash flows. The Company has not recognized any impairment losses on long-lived assets for the successor or predecessor periods.
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU and all subsequently issued clarifying ASUs replaced most existing revenue recognition guidance in U.S. GAAP. The ASU also required expanded disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted the new standard effective January 1, 2019, the first day of the Company’s fiscal year using the modified retrospective approach.
As part of the adoption of ASU 2014-09, the Company elected the following transition practical expedients: (i) to reflect the aggregate of all contract modifications that occurred prior to the date of initial application when identifying satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price, (ii) to apply the standard only to contracts that are not completed at the initial date of application, (iii) to apply Accounting Standards Codification (“ASC”) 606 to a portfolio of similar contracts, and (iv) shipping and handling activities are treated as fulfillment activities and not promised services that would have to be further evaluated under ASC 606. There was no significant impact as a result of electing these practical expedients.
The Company derives its revenues primarily from the sale of advanced diabetic devices, including continuous glucose monitors, insulin pumps, and supporting supplies and products. Revenues are recognized when control of these products is transferred to its customers, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those products. Shipping and handling fees charged to customers are reported within revenue. Incidental items that are immaterial in the context of the contract are recognized as expenses. The Company does not have any significant financing components as payment is received at or shortly after the point of sale. There are also no significant costs incurred to obtain contracts.
Revenues from product sales are the result of performance obligations satisfied at a point in time. The Company’s principal terms of sale are free on board (“FOB”) shipping point and the Company transfers control and records revenue for product sales upon shipment to the customer. The Company accounts for revenues from pump equipment rentals under ASC 840, Leases. ASC 840 is included in the scope exceptions for ASC 606-10-15-2 and is therefore outside the scope of ASC 606. Revenue from pump equipment rentals is recognized over the reimbursement term of the contract with the customer, which is typically 13 to 15 months.
F-11
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following are the Company’s revenues from performance obligations and their timing of transfer of goods and services:
| Revenues, Net | ||||||||||||||
| Successor | Predecessor | |||||||||||||
| Performance Obligations |
Year Ended
December 31, 2019 |
Period from
June 1, 2018 to December 31, 2018 |
Period from
January 1, 2018 to May 31, 2018 |
Timing
of Transfer |
||||||||||
| Product Sales | $ | 178,205,000 | $ | 97,764,000 | $ | 42,979,000 | Point in Time | |||||||
| Pump Equipment Rentals | 5,147,000 | 2,164,000 | 1,207,000 | Over Time | ||||||||||
| $ | 183,352,000 | $ | 99,928,000 | $ | 44,186,000 | |||||||||
Overall, the adoption of this standard did not result in any changes to beginning accumulated deficit as of January 1, 2019. The nature of the Company’s business gives rise to variable consideration, including contractual allowances and third-party payor overpayments that generally decrease the transaction price, which reduces revenue. Variable consideration is estimated using the expected value method, which estimates the amount that is expected to be earned. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Estimates of variable consideration are estimated based upon historical experience and known trends.
Goodwill and Intangible Assets
Goodwill represents the excess purchase price over the fair value of assets acquired and liabilities assumed in a business combination. Identifiable intangible assets consist of payor contracts, trademarks, leasehold interests and a domain name. Identifiable intangible assets are amortized using the straight-line method over their estimated useful lives, which reflects the pattern in which the economic benefits of the assets are expected to be consumed. The following table summarizes the lives of the intangible assets acquired:
| Payor Contracts | 10 years | |||
| Trademarks | 10 years | |||
| Leasehold Interest | 5 years | |||
| Domain Name | 10 years |
The Company has a significant amount of goodwill on its balance sheet that resulted from the business acquisitions the Company has made in recent years. Goodwill is not amortized and is tested for impairment annually or when a change in circumstances indicate a possible impairment. Such changes in circumstance can include, among others, changes in the legal environment, reimbursement environment, operating performance, and/or future prospects. The Company performs its annual impairment review of goodwill during the fourth quarter of each year.
The impairment testing can be performed on either a quantitative or qualitative basis. Upon evaluating the qualitative analysis, it was more likely than not that the fair value exceeded the carrying value of the reporting unit. As a result, the Company did not record any goodwill impairment charges.
F-12
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements
Fair value is defined 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. Valuation techniques used to measure fair value under authoritative guidance must maximize the use of observable inputs and minimize the use of unobservable inputs. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs. The three levels of inputs that may be used to measure fair value are:
| · | Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. | |
| · | Level 2: Other quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. | |
| · | Level 3: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. |
The Company applies fair value accounting to its financial instruments. The carrying amounts of financial instruments such as accounts receivable, prepaid and other current assets, accounts payable and accrued liabilities, accrued payroll and related benefits approximate the related fair values due to the short-term maturities of these instruments. The carrying amounts of long-term debt as of December 31, 2019 and 2018 (Successor) approximate fair value due to the timing of the debt draw-down in relation to the balance sheet date. Liabilities measured at fair value on a recurring basis as of December 31, 2019 and 2018 (Successor) are as follows:
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| Balance |
Quoted Prices in
Active Market for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
|||||||||||||
| Liabilities: | ||||||||||||||||
| Contingent Consideration, 2019 | $ | 5,156,000 | $ | — | $ | — | $ | 5,156,000 | ||||||||
| Contingent Consideration, 2018 | $ | 20,266,000 | $ | — | $ | — | $ | 20,266,000 | ||||||||
The contingent consideration is the result of the purchase of Solara Medical Supplies, Inc. (Note 6) and is calculated based on the present value of the expected future cash flows discounted at an interest rate consistent with that the Company could obtain from a third-party lender.
The following table provides the activity for liabilities measured at fair value using significant unobservable inputs (Level 3) for the year ended December 31, 2019 (Successor) and the period from June 1, 2018 to December 31, 2018 (Successor):
|
Fair Value Measurements
at Reporting Date Using Significant Unobservable Inputs (Level 3) |
||||
| Balance at May 31, 2018 | $ | — | ||
| Establishment of Contingent Consideration | 19,690,000 | |||
| Adjustment in Fair Value of Contingent Consideration | 576,000 | |||
| Balance at December 31, 2018 | $ | 20,266,000 | ||
| Payments of Contingent Consideration | (15,750,000 | ) | ||
| Adjustment in Fair Value of Contingent Consideration | 640,000 | |||
| Balance at December 31, 2019 | $ | 5,156,000 | ||
F-13
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s non-financial assets measured on a non-recurring basis were as follows:
| As of December 31, | ||||||||
| 2019 | 2018 | |||||||
| Significant unobservable inputs (Level 3): | | | ||||||
| Goodwill (annual impairment assessment) | $ | 110,355,000 | $ | 110,924,000 | ||||
Income Taxes
For the year ended December 31, 2019 (Successor) and the period from June 1, 2018 to December 31, 2018 (Successor), as an LLC, the Company’s taxable income or loss is allocated to its members in accordance with the LLC Agreement. Therefore, no provision or liability for income taxes has been included in the financial statements related to the business activities of Solara Medical Supplies, LLC. The $294,000 of income taxes paid in the year ended December 31, 2019 (Successor) mainly relates to a taxable gain recognized upon liquidation of a wholly owned C corporation subsidiary of the Company.
The Company complies with ASC 740-10, which prescribes a recognition threshold and measurement process for accounting for uncertain tax positions and also provides guidance on various related matters such as derecognition, interest, penalties and disclosures required. As of December 31, 2019 and 2018 (Successor), the Company does not have any entity-level uncertain tax positions.
For the period from January 1, 2018 to May 31, 2018 (Predecessor), the Company had elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under these provisions, the Company did not pay federal corporate income taxes on its taxable income. Instead, the sole stockholder was liable for individual federal income taxes based on the Company’s taxable income. Distributions were made periodically to the sole stockholder to the extent needed to cover his income tax liability based on the Company’s taxable income.
Equity-based Compensation
The Company accounts for its equity-based compensation in accordance with FASB ASC Topic 718, Compensation-Stock Compensation, which establishes accounting for share-based awards exchanged for employee services and requires companies to expense the estimated fair value of these awards over the requisite employee service period. The Company measures and recognizes equity-based compensation expense for such awards granted to employees based on their estimated fair values on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period in the Company’s consolidated financial statements. Equity-based compensation expense is recognized on a straight-line basis over the requisite service period.
New Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02), which amended authoritative guidance on accounting for leases. The new provisions require that a lessee of operating leases recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The lease liability will be equal to the present value of lease payments, with the right-of-use asset equal to the lease liability. The classification criteria for distinguishing between finance (or capital) leases and operating leases are substantially similar to the previous lease guidance, but with no explicit bright lines. As such, operating leases will result in straight-line rent expense similar to current practice. For short term leases (term of 12 months or less), a lessee is permitted to make an accounting election not to recognize lease assets and lease liabilities, which would generally result in lease expense being recognized on a straight-line basis over the lease term. The Company is required to adopt the new standard for the annual reporting period beginning January 1, 2021, and interim reporting periods beginning January 1, 2022. The standard requires a transition adoption election using either 1) a modified retrospective approach with periods prior to the adoption date being recast or 2) a prospective adoption approach with a cumulative-effect adjustment recognized to the opening balance of retained earnings on the adoption date with prior periods not recast. The Company anticipates adopting this standard using the prospective adoption approach and electing the practical expedients allowed under the standard. The adoption of this standard is expected to have a material impact on the Company’s financial position. The Company is still evaluating the impact on its results of operations and does not expect the adoption of this standard to have an impact on liquidity.
F-14
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January 2017, the FASB issued ASU 2017-04, Intangibles — Goodwill and Other (ASC Topic 350): Simplifying the Test for Goodwill Impairment, which will eliminate the requirement to calculate the implied fair value of goodwill, commonly referred to as “Step 2” in the current goodwill impairment test. An entity will still have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The Company adopted this standard on January 1, 2019, which did not have a material impact on the Company’s consolidated financial statements.
3. Balance Sheet Details
Property and equipment consist of the following:
| Successor | ||||||||||
| Useful Life |
As of
December 31, 2019 |
As of
December 31, 2018 |
||||||||
| Leasehold Improvements | 5 Years (or remaining lease term) | $ | 848,000 | $ | 1,072,000 | |||||
| Furniture and Fixtures | 7 Years | 476,000 | 574,000 | |||||||
| Software | 3 Years | 361,000 | 173,000 | |||||||
| Computer Equipment | 5 Years | 206,000 | 401,000 | |||||||
| Office Equipment | 4 Years | — | 15,000 | |||||||
| Telephone System | 4 Years | — | 39,000 | |||||||
| Vehicles | 6 Years | 13,000 | 13,000 | |||||||
| Construction in Process | | 567,000 | — | |||||||
| | | $ | 2,471,000 | $ | 2,287,000 | |||||
| Less Accumulated Depreciation and Amortization | | (290,000 | ) | (199,000 | ) | |||||
| Total | | $ | 2,181,000 | $ | 2,088,000 | |||||
Depreciation expense totaled $590,000, $429,000 and $135,000 for the year ended December 31, 2019 (Successor), the period from June 1, 2018 to December 31, 2018 (Successor) and the period from January 1, 2018 to May 31, 2018 (Predecessor), respectively.
Accrued expenses consist of the following:
| Successor | ||||||||
|
As of
December 31, 2019 |
As of
December 31, 2018 |
|||||||
| Accrued Distribution to Members | $ | 1,709,000 | $ | 6,288,000 | ||||
| Third-Party Overpayments | 8,263,000 | 6,477,000 | ||||||
| Customer Deposits | 1,415,000 | 2,100,000 | ||||||
| Payroll Liabilities | 2,846,000 | 1,329,000 | ||||||
| Sales and Use Tax Payable | 1,693,000 | 526,000 | ||||||
| Other Accrued Liabilities | 3,601,000 | 1,329,000 | ||||||
| Total | $ | 19,527,000 | $ | 18,049,000 | ||||
F-15
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Debt
Bank Credit Agreement
The Company entered into a secured credit agreement on May 31, 2018, which provided a term loan of $80,000,000 used as part of the Purchase Transaction (Note 6), and also extended availability to a delayed term loan of $15,000,000 and a revolving commitment loan of $10,000,000.
On February 27, 2019, the Company entered into the First Amendment to the Credit Agreement. The Company obtained an additional $72,000,000 of financing. The Company distributed a one-time cash dividend to the members of the LLC totaling $68,837,000. The remaining funds were used for financing fees and legal costs. The financing was accounted for as a debt modification in accordance with ASC 470, Debt, and $2,173,000 of financing fees and legal costs were recorded to debt acquisition costs and $992,000 was recorded to legal fees. The available amounts for the delayed term loan and revolving commitment loan increased to $30,000,000 and $20,000,000, respectively. The Company is subject to certain affirmative and negative covenants, most significantly submitting monthly, quarterly and annual financial statements, as well as monthly compliance notifications. The maturity date was extended to February 27, 2024.
The delayed term loan and revolving commitment loan can be used for working capital, capital expenditures, acquisitions and general corporate purposes. The loans bear interest at either a base rate or an adjusted LIBOR, adjusted by an applicable margin percentage of 5.0% or 6.0% per annum, respectively. The interest rate as of December 31, 2019 and 2018 (Successor) was 7.94463% and 8.52238%, respectively. The loans mature on February 27, 2024 and the payment schedule is as follows:
| Years Ending December 31, | ||||
| 2020 | $ | 1,660,000 | ||
| 2021 | 1,660,000 | |||
| 2022 | 1,660,000 | |||
| 2023 | 1,660,000 | |||
| 2024 | 157,490,000 | |||
| $ | 164,130,000 | |||
Debt is presented net of the debt acquisition costs on the consolidated balance sheets. Debt acquisition costs totaling $2,762,000 and $2,317,000 were incurred, and $640,000 and $1,088,000 of costs were amortized to interest expense, during the year ended December 31, 2019 (Successor) and the period from June 1, 2018 to December 31, 2018 (Successor), respectively.
5. Commitments and Contingencies
Legal
On June 28, 2019, the Company discovered it had experienced a data security incident as the result of a phishing email campaign. The Company, along with third-party forensic investigators, immediately launched an investigation to determine the nature and scope of the activity, and determined the incident occurred at different points in time from April 2, 2019 to June 20, 2019. The investigation determined that the criminal motivation was financial, but the accessed accounts also had emails and attachments containing protected health information (“PHI”) and other personally identifiable information (“PII”), which gave rise to potential notification obligations (since the PII was exposed). Federal and state regulatory and legal requirements mandated various disclosures (individuals potentially affected, U.S. Department of Health and Human Services/Office for Civil Rights, various state attorneys general and the national newswire). To date, there remains no evidence suggesting the access to the accounts targeted PHI or PII.
The Company has been working with third-party forensic investigators, federal law enforcement, legal counsel and its insurance carrier. A class action complaint has been filed alleging unspecified monetary damages. The potential range of expenses from the data security incident, including ongoing civil litigation and regulatory responses, is not expected to exceed the Company’s insurable covered amounts.
F-16
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
From time to time, the Company may be subject to claims and litigation arising in the ordinary course of business. Management believes that such litigation and claims will be resolved without material effect on the Company’s consolidated financial position, operations or cash flows.
Other Contingent Liabilities
Third-Party Payor Overpayment Contingency: During the year ended December 31, 2017 (Predecessor), the Company became aware that certain of its receivables were being paid at 100% of the submitted amount from one of its significant third-party payors. The payor primarily reimburses the Company based on the payor’s internal fee schedule, which is based on its internally determined prevailing rates. The Company is working with the payor to determine whether an overpayment has occurred, and if so, how much based on a final determination by the payor as to the definitive reimbursement terms. The Company has accrued approximately $8,263,000 and $6,477,000 as of December 31, 2019 and 2018 (Successor), respectively, for this potential overpayment, contingent upon a determination by the third-party payor.
Affordable Care Act Contingency: The Company did not offer an affordable health care benefit plan to its employees through December 31, 2017 (Predecessor), and will therefore be subject to the employer mandate penalty under the 2013 Affordable Care Act (the “ACA”). Under the terms of the ACA, the Company estimated the Internal Revenue Service, upon notice, would charge a sum of $405,000 based on a penalty per employee for the time during which such benefits were not offered. Through April 1, 2020, the Company has paid $272,000. The Company began offering affordable health care benefits to its employees on April 1, 2018.
Lease Commitments
Operating Lease Obligations: The Company leases three of its five facilities through short-term rental agreements with expiration dates through November 2024. The Company leases its two largest facilities from a related party (Note 10). Future minimum payments under non-cancelable operating leases with initial or remaining terms of more than one year are as follows:
| Years Ending December 31, | ||||
| 2020 | $ | 1,010,000 | ||
| 2021 | 914,000 | |||
| 2022 | 715,000 | |||
| 2023 | 480,000 | |||
| 2024 | 325,000 | |||
| $ | 3,444,000 | |||
Rent expense for the year ended December 31, 2019 (Successor), the period from June 1, 2018 to December 31, 2018 (Successor) and the period from January 1, 2018 to May 31, 2018 (Predecessor) totaled $838,000, $348,000 and $176,000, respectively.
6. Acquisitions
The Company accounts for its acquisitions under the acquisition method and through the application of push-down accounting in accordance with ASC 805, Business Combinations. Accordingly, the results of operations of the acquired entities were included in the Company’s financial statements from the acquisition dates. The purchase price was allocated to the assets acquired based on the estimated fair value at the acquisition date, with the excess of the purchase price over the estimated fair value of the net assets acquired recorded as goodwill. Purchase accounting adjustments associated with goodwill have been recorded as of December 31, 2019 and 2018 (Successor).
F-17
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 31, 2018, Solara Intermediate, LLC acquired all of the stock and operations of Solara Medical Supplies, Inc. (“Purchase Transaction”). The total purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on the estimated fair values as of the acquisition date. Goodwill was recognized as a result of expected growth in this market. For federal income taxes, the Purchase Transaction was treated as a part taxable purchase of assets and a part contribution of assets to Holdings. The purchase price was allocated among the underlying assets and the purchased portion of goodwill is amortizable for tax purposes. The fair value of the acquiree was determined using the income approach, which discounts expected future cash flows to present value. The fair value assigned to the trademarks intangible asset was based on the relief-from-royalty method. The fair value of the leasehold interest was based on the function of the market rent estimated for the properties and the risk rate used to discount the excess additional income and the fair value of payor contracts was based on a discounted cash flow model. These approaches rely on estimates and assumptions determined by management. Purchased intangible assets are amortized on a straight-line basis over the respective useful lives.
Pursuant to the terms of the acquisition agreement, the purchase price was $178,690,000 and comprised the following:
| Cash | $ | 114,801,000 | ||
| Equity Rollover | 26,000,000 | |||
| Contingent Consideration | 19,690,000 | |||
| Escrow | 16,000,000 | |||
| Seller’s Fees | 2,199,000 | |||
| | $ | 178,690,000 |
To finance the transaction, the Company secured $80,000,000 in debt (Note 4) and raised $89,574,000 through the sale of member Common and Preferred Units (Note 8). The Company incurred approximately $7,528,000 of acquisition-related costs, which were recorded on Holdings’ records as a pass-through of equity on the Company’s records. The Company also incurred approximately $2,317,000 related to debt issuance costs.
The amounts held in escrow are held for indemnity and adjustments to the purchase price, and funds will be distributed from the account as the contingencies related to the transaction are released.
The purchase agreement contained a contingent performance payment of up to $21,000,000, which is based on a third-party payor’s gross profit performance during the fiscal year ended December 31, 2019. Quarterly payments were based on a defined calculation and were due beginning on March 31, 2019 and ended with the final payment made on June 11, 2020 (Note 11). As of December 31, 2019 and 2018 (Successor), the fair value of the contingent performance payment is calculated based on the present value of the expected future cash flows discounted at an effective debt interest rate. The Company processed $15,750,000 of payments as of December 31, 2019.
See the table below for the allocation of the purchase price.
On September 7, 2018, the Company acquired all of the stock and operations of J.M.R. Medical, Inc. (“J.M.R.”) for a purchase price of $195,000, which was funded with cash. The Company also incurred $10,000 of acquisition-related costs, which were expensed as incurred. J.M.R. is located in Ohio and is a provider of durable medical equipment products.
On November 30, 2018, the Company acquired all of the stock and the operations of Huey’s Home Medical, Inc. (“Huey”) for a purchase price of $345,000, which was funded with cash. The Company also incurred $34,000 of acquisition-related costs, which were expensed as incurred. Huey is located in Illinois and is a provider of durable medical equipment products.
F-18
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 7, 2018, the Company acquired all of the stock and the operations of Pal-Med, Inc. (“Pal-Med”) for a purchase price of $1,850,000, which was funded with cash. The Company also incurred $30,000 of acquisition-related costs, which were expensed as incurred. Pal-Med is located in South Carolina and is a provider of durable medical equipment products.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of each acquisition date:
| |
Solara Medical
Supplies, Inc. |
J.M.R. | Huey | Pal-Med | Total | |||||||||||||||
| Assets Acquired: | | | | | | |||||||||||||||
| Cash | $ | — | $ | — | $ | 10,000 | $ | 176,000 | $ | 186,000 | ||||||||||
| Accounts Receivable | 12,028,000 | — | 14,000 | 298,000 | 12,340,000 | |||||||||||||||
| Inventories | 1,991,000 | — | — | 176,000 | 2,167,000 | |||||||||||||||
| Prepaid Expenses and Other | | | | | | |||||||||||||||
| Current Assets | 726,000 | — | 2,000 | 101,000 | 829,000 | |||||||||||||||
| Property and Equipment | 1,164,000 | — | 3,000 | 30,000 | 1,197,000 | |||||||||||||||
| Goodwill | 109,153,000 | 195,000 | 367,000 | 1,209,000 | 110,924,000 | |||||||||||||||
| Intangible Assets | 65,099,000 | — | — | — | 65,099,000 | |||||||||||||||
| Other Assets | 1,406,000 | — | — | — | 1,406,000 | |||||||||||||||
| Total Assets Acquired | $ | 191,567,000 | $ | 195,000 | $ | 396,000 | $ | 1,990,000 | $ | 194,148,000 | ||||||||||
| Liabilities Assumed: | | | | | | |||||||||||||||
| Accounts Payable | (4,156,000 | ) | — | (2,000 | ) | (50,000 | ) | (4,208,000 | ) | |||||||||||
| Accrued Expenses and Other | | | | | | |||||||||||||||
| Current Liabilities | (8,721,000 | ) | — | (49,000 | ) | (90,000 | ) | (8,860,000 | ) | |||||||||||
| Total Liabilities Assumed | $ | (12,877,000 | ) | $ | — | $ | (51,000 | ) | $ | (140,000 | ) | $ | (13,068,000 | ) | ||||||
| Total Net Assets Acquired | $ | 178,690,000 | $ | 195,000 | $ | 345,000 | $ | 1,850,000 | $ | 181,080,000 | ||||||||||
7. Goodwill and Intangible Assets
The change in the carrying amount of goodwill for the year ended December 31, 2019 (Successor) and the period from June 1, 2018 to December 31, 2018 (Successor) were as follows:
| |
Gross
Carrying Amount |
|||
| Successor Balance at June 1, 2018 | $ | 109,153,000 | ||
| Acquired Goodwill During the Period | 1,771,000 | |||
| Successor Balance at December 31, 2018 | $ | 110,924,000 | ||
| Measurement Period Adjustment | (569,000 | ) | ||
| Successor Balance at December 31, 2019 | $ | 110,355,000 | ||
F-19
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Identifiable intangible assets that are separable and have determinable useful lives are valued separately and amortized over their benefit period. The following is the gross carrying value and accumulated amortization of the Company’s intangible assets identifiable as of December 31, 2019 and 2018 (Successor):
| |
Payor
Contracts |
Trademarks |
Leasehold
Interest |
Domain Name | ||||||||||||
| Successor Balance at June 1, 2018 | $ | 46,010,000 | $ | 19,000,000 | $ | 89,000 | $ | — | ||||||||
| Amortization Expense | (2,685,000 | ) | (1,108,000 | ) | (10,000 | ) | — | |||||||||
| Successor Balance at December 31, 2018 | $ | 43,325,000 | $ | 17,892,000 | $ | 79,000 | $ | — | ||||||||
| Purchase of Intangible Asset | — | — | — | 25,000 | ||||||||||||
| Decrease | — | — | — | — | ||||||||||||
| Amortization Expense | (4,601,000 | ) | (1,900,000 | ) | (18,000 | ) | (1,000 | ) | ||||||||
| Successor Balance at December 31, 2019 | $ | 38,724,000 | $ | 15,992,000 | $ | 61,000 | $ | 24,000 | ||||||||
The weighted-average amortization period of the identifiable intangible assets in the aggregate is 8.4 years. Total amortization expense of identifiable intangible assets above was $6,520,000 and $3,803,000 for the year ended December 31, 2019 (Successor) and the period from June 1, 2018 to December 31, 2018 (Successor), respectively. Future amortization for the next five years and thereafter is as follows:
| Year Ending December 31, | | |||
| 2020 | $ | 6,520,000 | ||
| 2021 | 6,520,000 | |||
| 2022 | 6,520,000 | |||
| 2023 | 6,520,000 | |||
| 2024 | 6,520,000 | |||
| Thereafter | 22,201,000 | |||
| | $ | 54,801,000 | ||
F-20
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Members’ Equity (Successor)
The Company operates under the LLC Agreement established on May 31, 2018 as part of the Purchase Transaction. The LLC Agreement designates Class A and Class B Common Units and Class A and Class B Preferred Units. Class Z units only come into effect upon the consummation of a liquidity event.
Class A Common Unitholders are granted one vote per vested unit. Class B Common Unitholders and Class A and Class B Preferred Unitholders have no voting rights.
Upon a liquidity event, distributions will be made first to Class A Preferred Unitholders, second to Class B Preferred Unitholders, and then to Common Unitholders.
Under the LLC Agreement, each Unitholder is to receive a tax distribution equal to the income amount allocated to each Unitholder multiplied by the applicable tax rate. For the year ended December 31, 2019 (Successor) and the period from June 1, 2018 to December 31, 2018 (Successor), tax distributions of $13,613,000 and $6,288,000 were recorded, respectively.
On February 27, 2019, the members were distributed a one-time cash dividend totaling $68,837,000 in conjunction with the First Amendment to the Credit Agreement (Note 4).
As part of the Purchase Transaction, on May 31, 2018, the Company issued 895,740 Common Units totaling $896,000. The Company also issued 62,938 Class A Preferred Units and 25,740 Class B Preferred Units, totaling $62,938,000 and $25,740,000, respectively. During the year ended December 31, 2019 (Successor), the Company issued 3,000 Common Units totaling $48,000 and 302 Class A Preferred Units totaling $302,000.
F-21
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity-based Compensation
In May 2018, the Company adopted the Management Incentive Unit Plan. The Company grants incentive units to certain members of management and the units have a 25% time-vesting component over five years and a 75% performance-vesting component, which becomes vested upon consummation of a liquidity event. As of December 31, 2019, there were 34,000 and 218,000 time-vesting and performance-vesting incentive units outstanding, respectively. As of December 31, 2018, there were 15,000 and 160,000 time-vesting and performance-vesting incentive units outstanding, respectively. Equity-based compensation was not significant and is therefore not recorded for the periods presented in the accompanying consolidated financial statements.
9. Stockholder’s Equity (Predecessor)
The Company was originally incorporated in the State of California in 1996 as Nationwide Diabetes Supply Company, and filed Amended Articles of Incorporation effective in March 2001 as Solara Medical Supplies. During the period from January 1, 2018 to May 31, 2018 (Predecessor), the Company had one class of no-par common stock authorized, issued and outstanding. All shares were owned by a sole stockholder until May 31, 2018 when they were dissolved as part of the Purchase Transaction (Note 6).
10. Related-Party Transactions
The Company leases two of its facilities from a related party. Total cash payments and lease expenditures under the leases totaled $592,000, $362,000 and $157,000 for the year ended December 31, 2019 (Successor), the period from June 1, 2018 to December 31, 2018 (Successor) and the period from January 1, 2018 to May 31, 2018 (Predecessor), respectively.
The Company pays related-party management fees. Total cash payments for the fees totaled $2,050,000 and $434,000 for the year ended December 31, 2019 (Successor) and the period from June 1, 2018 to December 31, 2018 (Successor), respectively.
11. Subsequent Events
Subsequent events were evaluated through the date the financial statements were available to be issued, June 16, 2020.
On both March 20, 2020 and March 25, 2020, the Company borrowed $10,000,000 from the revolving loan commitment, resulting in an outstanding balance of $20,000,000.
On May 19, 2020, the Company acquired certain assets of Active Healthcare, Inc. The total purchase price was $16,143,000. Any adjustments to the purchase price allocation of this acquisition will be made as soon as practicable but no later than one year from the acquisition date.
On May 25, 2020, Holdings entered into a stock purchase agreement and agreement and plan of merger with AdaptHealth Corp. for a total purchase price of $362,500,000 in cash and $62,500,000 in AdaptHealth Corp. common stock. The transaction is expected to close in July 2020.
On June 9, 2020, the Company borrowed $5,223,000 from the delayed term loan and used the funds to make the final contingent performance payment related to the Purchase Transaction (Note 6).
The spread of COVID-19, a novel strain of the coronavirus, appears to be altering the behavior of businesses and people in a manner that is having negative effects on local, regional and global economies. The extent to which COVID-19 impacts the operations of the Company in the future will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, containment and treatment procedures. The Company does not anticipate the effects of COVID-19 having a significant impact on the Company’s operations.
F-22
