UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d)
of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 14, 2020
AdaptHealth Corp.
(Exact name of registrant as specified in its charter)
Delaware | 001-38399 | 82-3677704 | ||
(State or other jurisdiction of
incorporation) |
(Commission File Number) | (IRS Employer Identification No.) |
220 West Germantown Pike, Suite 250 Plymouth Meeting, PA |
19462 | |
(Address of principal executive offices) | (Zip Code) |
(610) 630-6357
(Registrant’s telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Class A Common Stock, par value $0.0001 per share | AHCO | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company x
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. ¨
Item 7.01. Regulation FD Disclosure.
On December 14, 2020, AdaptHealth LLC (the “Issuer”), an indirect subsidiary of AdaptHealth Corp. (the “Company”), commenced an offering of senior notes (the “Notes”).
On December 14, 2020, the Company issued a press release announcing the offering of the Notes by the Issuer. A copy of the Company’s press release is furnished as Exhibit 99.1 to this Form 8-K and is incorporated herein by reference.
In conjunction with the offering of the Notes, the Issuer issued a confidential preliminary offering memorandum dated December 14, 2020 (the “Offering Memorandum”). Certain information contained in the Offering Memorandum is furnished herewith as Exhibit 99.2 and is incorporated herein by reference.
The information in Exhibits 99.1 and 99.2 shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the Notes in any state in which the offer, solicitation or sale would be unlawful prior to the registration or qualification under the securities laws of any such state. The Notes have not been, and will not be, registered under the Securities Act of 1933, as amended (the “Securities Act”), or the securities laws of any other jurisdiction. The Issuer may not offer or sell the Notes unless the offer or sale would qualify for a registration exemption under the Securities Act and applicable state securities laws.
The information contained herein and attached hereto shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise be subject to the liabilities of that section, nor shall it be deemed to be incorporated by reference in any filing under the Securities Act or the Exchange Act.
Item 9.01. Financial Statements and Exhibits.
Explanatory Note
As previously announced, on December 1, 2020, the Company entered into a definitive agreement to acquire AeroCare Holdings, Inc. (“AeroCare”). For further information related to the proposed acquisition, please see the Company’s Current Report on Form 8-K filed December 7, 2020. The acquisition of AeroCare has not yet been consummated, and there can be no assurance that the transaction will be consummated as contemplated.
Additionally, as previously announced, on July 1, 2020, the Company completed the acquisition of Solara Holdings, LLC. For further information related to the acquisition, please see the Company’s Current Report on Form 8-K filed July 2, 2020.
(a) Financial Statements of Businesses Acquired.
· | The audited consolidated financial statements of AeroCare Holdings, Inc. as of December 31, 2019 and 2018 and for the years then ended and the related notes to the financial statements are incorporated herein by reference to Exhibit 99.3 to this Current Report on Form 8-K. |
· | The unaudited consolidated interim financial statements of AeroCare Holdings, Inc. as of September 30, 2020 and December 31, 2019 and for the nine months ended September 30, 2020 and 2019, and the related notes to the financial statements are incorporated herein by reference to Exhibit 99.4 to this Current Report on Form 8-K. |
· | The unaudited consolidated interim financial statements of Solara Medical Supplies, LLC as of June 30, 2020 and December 31, 2019 and for the three and six months ended June 30, 2020 and 2019, and the related notes to the financial statements are incorporated herein by reference to Exhibit 99.5 to this Current Report on Form 8-K. |
(b) Pro Forma Financial Information.
· | The unaudited pro forma condensed combined financial information, and the related notes thereto, of AdaptHealth Corp. as of and for the nine months ended September 30, 2020 and for the year ended December 31, 2019 are incorporated herein by reference to Exhibit 99.6 to this Current Report on Form 8-K. |
- 2 -
(d) Exhibits
Forward-looking Statements
This Current Report on Form 8-K includes certain statements that are not historical facts but are forward-looking statements for purposes of the safe harbor provisions under the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements generally are accompanied by words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “should,” “would,” “plan,” “predict,” “potential,” “seem,” “seek,” “future,” “outlook,” and similar expressions that predict or indicate future events or trends or that are not statements of historical matters. These forward-looking statements include, but are not limited to, statements regarding projections, estimates and forecasts of revenue and other financial and performance metrics, projections of market opportunity and expectations, the Company’s acquisition pipeline and the impact of the coronavirus (COVID-19) pandemic and our response to it. These statements are based on various assumptions and on the current expectations of Company management and are not predictions of actual performance. These forward-looking statements are provided for illustrative purposes only and are not intended to serve as, and must not be relied on, by any investor as, a guarantee, an assurance, a prediction or a definitive statement of fact or probability. Actual events and circumstances are difficult or impossible to predict and will differ from assumptions. Many actual events and circumstances are beyond the control of the Company.
These forward-looking statements are subject to a number of risks and uncertainties, including the outcome of judicial and administrative proceedings to which the Company may become a party or governmental investigations to which the Company may become subject that could interrupt or limit the Company’s operations, result in adverse judgments, settlements or fines and create negative publicity; changes in the Company’s clients’ preferences, prospects and the competitive conditions prevailing in the healthcare sector; and the impact of the coronavirus (COVID-19) pandemic and the Company’s response to it. A further description of such risks and uncertainties can be found in the Company’s filings with the Securities and Exchange Commission. If the risks materialize or assumptions prove incorrect, actual results could differ materially from the results implied by these forward-looking statements. There may be additional risks that the Company presently knows or that the Company currently believes are immaterial that could also cause actual results to differ from those contained in the forward-looking statements. In addition, forward-looking statements reflect the Company’s expectations, plans or forecasts of future events and views as of the date of this press release. The Company anticipates that subsequent events and developments will cause the Company’s assessments to change. However, while the Company may elect to update these forward-looking statements at some point in the future, the Company specifically disclaims any obligation to do so. These forward-looking statements should not be relied upon as representing the Company’s assessments as of any date subsequent to the date of this press release. Accordingly, undue reliance should not be placed upon the forward-looking statements.
- 3 -
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
Dated: December 14, 2020
AdaptHealth Corp. | ||
By: | /s/ Jason Clemens | |
Name: Jason Clemens | ||
Title: Chief Financial Officer |
Exhibit 23.1
Consent of Independent Auditors
The Board of Directors
AeroCare Holdings, Inc.:
We consent to the incorporation by reference in the registration statements (No. 333-239967 and 333-236011) on Forms S-1 and the registration statement (No. 333-236012) on Form S-8 of AdaptHealth Corp. of our report dated December 11, 2020, with respect to the consolidated balance sheets of AeroCare Holdings, Inc. as of December 31, 2019 and 2018, and the related consolidated statements of income, changes in stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes (collectively, the consolidated financial statements), which report appears in the Form 8-K of AdaptHealth Corp. dated December 14, 2020. Our report refers to a change in the method of accounting for revenue due to the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 14, 2020
Exhibit 99.1
AdaptHealth Announces Proposed Offering of $500 Million
Senior Notes Due 2029
Plymouth Meeting, PA – December 14, 2020 – AdaptHealth Corp. (NASDAQ: AHCO) (“AdaptHealth” or the “Company”), a leading provider of home healthcare equipment, medical supplies to the home and related services in the United States, announced today that its subsidiary, AdaptHealth LLC (the “Issuer”), has commenced, subject to market and other conditions, an offering of $500 million aggregate principal amount of senior notes due 2029 (the “senior notes”).
The gross proceeds from the offering will be deposited into a segregated escrow account pending completion of the Company’s previously announced acquisition of AeroCare Holdings, Inc. (“AeroCare”). At the closing of the AeroCare acquisition, the net proceeds from the offering will be released from escrow and, together with term loan borrowings and cash on hand, will be used to finance the cash portion of the consideration for the AeroCare acquisition and to pay related fees and expenses. The gross proceeds from the offering will replace the outstanding bridge commitment the Issuer has in place with Jefferies Finance LLC in connection with funding the AeroCare acquisition.
The AeroCare acquisition is expected to close in the first quarter of 2021, subject to customary closing conditions. If the AeroCare acquisition is not completed by May 31, 2021 (or such earlier date on which the Issuer determines that the escrow release conditions cannot be satisfied), the Issuer will be required to redeem the senior notes at a redemption price equal to 100% of the principal amount of the senior notes, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.
The senior notes will be guaranteed by certain of the Issuer’s current and future subsidiaries (including AeroCare and its subsidiaries after the consummation of the AeroCare acquisition), as well as the Issuer’s direct parent, AdaptHealth Intermediate Holdco LLC, on a senior unsecured basis.
The senior notes and related guarantees are being offered only to investors who are reasonably believed to be “qualified institutional buyers” in reliance on the exemption from registration set forth in Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and outside the United States to non-U.S. persons in reliance on the exemption from registration set forth in Regulation S under the Securities Act. The senior notes and the related guarantees have not been registered under the Securities Act, or the securities laws of any state or other jurisdiction, and may not be offered or sold in the United States without registration or an applicable exemption from the Securities Act and applicable state securities or blue sky laws and foreign securities laws.
This press release does not constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of senior notes in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.
About AdaptHealth Corp.
AdaptHealth is a leading provider of home healthcare equipment, medical supplies to the home and related services in the United States. AdaptHealth provides a full suite of medical products and solutions designed to help patients manage chronic conditions in the home, adapt to life and thrive. Product and services offerings include (i) sleep therapy equipment, supplies and related services (including CPAP and bi PAP services) to individuals suffering from obstructive sleep apnea, (ii) medical devices and supplies to patients for the treatment of diabetes (including continuous glucose monitors and insulin pumps), (iii) home medical equipment (HME) to patients discharged from acute care and other facilities, (iv) oxygen and related chronic therapy services in the home, and (v) other HME medical devices and supplies on behalf of chronically ill patients with wound care, urological, incontinence, ostomy and nutritional supply needs. The Company is proud to partner with an extensive and highly diversified network of referral sources, including acute care hospitals, sleep labs, pulmonologists, skilled nursing facilities, and clinics. AdaptHealth services beneficiaries of Medicare, Medicaid and commercial insurance payors. AdaptHealth services approximately 1.8 million patients annually in all 50 states through its network of 269 locations in 41 states.
Forward-Looking Statements
This press release includes certain statements that are not historical facts but are forward-looking statements for purposes of the safe harbor provisions under the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements generally are accompanied by words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “should,” “would,” “plan,” “predict,” “potential,” “seem,” “seek,” “future,” “outlook,” and similar expressions that predict or indicate future events or trends or that are not statements of historical matters. These forward-looking statements include, but are not limited to, statements regarding projections, estimates and forecasts of revenue and other financial and performance metrics and projections of market opportunity and expectations and the Company’s acquisition pipeline. These statements are based on various assumptions and on the current expectations of AdaptHealth management and are not predictions of actual performance. These forward-looking statements are provided for illustrative purposes only and are not intended to serve as, and must not be relied on, by any investor as, a guarantee, an assurance, a prediction or a definitive statement of fact or probability. Actual events and circumstances are difficult or impossible to predict and will differ from assumptions. Many actual events and circumstances are beyond the control of the Company.
These forward-looking statements are subject to a number of risks and uncertainties, including the outcome of judicial and administrative proceedings to which the Company may become a party or governmental investigations to which the Company may become subject that could interrupt or limit the Company’s operations, result in adverse judgments, settlements or fines and create negative publicity; changes in the Company’s clients’ preferences, prospects and the competitive conditions prevailing in the healthcare sector; and the impact of the coronavirus (COVID-19) pandemic and the Company’s response to it. A further description of such risks and uncertainties can be found in the Company’s filings with the Securities and Exchange Commission from time to time. If the risks materialize or assumptions prove incorrect, actual results could differ materially from the results implied by these forward-looking statements. There may be additional risks that the Company presently knows or that the Company currently believes are immaterial that could also cause actual results to differ from those contained in the forward-looking statements. In addition, forward-looking statements reflect the Company’s expectations, plans or forecasts of future events and views as of the date of this press release. The Company anticipates that subsequent events and developments will cause the Company’s assessments to change. However, while the Company may elect to update these forward-looking statements at some point in the future, the Company specifically disclaims any obligation to do so. These forward-looking statements should not be relied upon as representing the Company’s assessments as of any date subsequent to the date of this press release. Accordingly, undue reliance should not be placed upon the forward-looking statements.
- 2 -
Contacts
AdaptHealth Corp.
Jason Clemens, CFA
Chief Financial Officer
(484) 301-6599
jclemens@adapthealth.com
Brittany Lett
Vice President, Marketing
(909) 915-4983
blett@adapthealth.com
The Equity Group Inc.
Devin Sullivan
Senior Vice President
(212) 836-9608
dsullivan@equityny.com
Kalle Ahl, CFA
Vice President
(212) 836-9614
kahl@equityny.com
- 3 -
Exhibit 99.2
Excerpts from AdaptHealth LLC’s Confidential Preliminary Offering Memorandum dated December 14, 2020.
Non-GAAP financial measures
We refer to the terms EBITDA, Adjusted EBITDA, Adjusted EBITDA (pro forma, as adjusted) and Adjusted EBITDA less Patient Equipment Capex (pro forma, as adjusted) (each as defined in “Summary—Summary historical and pro forma financial data”) in various places in this offering memorandum. These are supplemental financial measures that are not prepared in accordance with GAAP. Any analysis of non-GAAP financial measures should be used only in conjunction with results presented in accordance with GAAP.
The SEC has adopted rules to regulate the use in filings with the SEC and in public disclosures and press releases of “non-GAAP financial measures,” such as EBITDA, Adjusted EBITDA, Adjusted EBITDA less Patient Equipment Capex, Adjusted EBITDA (pro forma, as adjusted) and Adjusted EBITDA less Patient Equipment Capex (pro forma, as adjusted) and the ratios related thereto. These measures are derived on the basis of methodologies other than in accordance with GAAP. These rules govern the manner in which non-GAAP financial measures are publicly presented and require, among other things:
· | a presentation with equal or greater prominence of the most comparable financial measure or measures calculated and presented in accordance with GAAP; and |
· | a statement disclosing the purposes for which the registrant’s management uses the non-GAAP financial measure. |
The rules prohibit, among other things:
· | the exclusion of charges or liabilities that require, or will require, cash settlement or would have required cash settlement, absent an ability to settle in another manner, from a non-GAAP liquidity measure; and |
· | the adjustment of a non-GAAP performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual, when the nature of the charge or gain is such that it has occurred in the past two years or is reasonably likely to recur within the next two years. |
The non-GAAP financial measures presented in this offering memorandum may not comply with the SEC rules governing the presentation of non-GAAP financial measures. For example, some of the adjustments to EBITDA which comprise Adjusted EBITDA, Adjusted EBITDA (pro forma, as adjusted) and Adjusted EBITDA less Patient Equipment Capex (pro forma, as adjusted) as presented in this offering memorandum would not be allowed under Regulation S-X. In addition, our measurements of EBITDA, Adjusted EBITDA, Adjusted EBITDA (pro forma, as adjusted) and Adjusted EBITDA less Patient Equipment Capex (pro forma, as adjusted) may not be comparable to those of other companies. Please see “Summary—Summary historical and pro forma financial data” for a discussion of our use of EBITDA, Adjusted EBITDA, Adjusted EBITDA (pro forma, as adjusted) and Adjusted EBITDA less Patient Equipment Capex (pro forma, as adjusted) in this offering memorandum, including the reasons that we believe this information is useful to management and to investors and a reconciliation of EBITDA, Adjusted EBITDA, Adjusted EBITDA (pro forma, as adjusted) and Adjusted EBITDA less Patient Equipment Capex (pro forma, as adjusted) to the most closely comparable financial measure calculated in accordance with GAAP.
i
The AeroCare Acquisition
Acquisition overview
On December 1, 2020, we entered into the Merger Agreement to acquire AeroCare, one of the nation’s leading technology-enabled respiratory and HME distributors, for total consideration of approximately $2.0 billion, which includes a cash purchase price of $1.1 billion and 31 million shares (which were valued at $926 million based on the closing price on the date prior to announcement of the transaction and $1.176 billion based on the closing price as of December 10, 2020), subject to customary purchase price adjustments.
We believe that the combination of AdaptHealth and AeroCare brings together industry-leading technology platforms and strengthens our position as a leading independent HME provider creating significantly enhanced scale and geographic reach across the United States. The combined company will be a provider of home healthcare equipment, medical supplies to the home, and related services. We will operate in 47 out of the 48 U.S. continental states, offering greater managed care access, broader product availability, and enhanced customer service to our approximately 2.8 million patients.
1
Note: AdaptHealth figures may vary from previously reported figures as these calculations are periodically refreshed to account for timing of new acquisitions. Figures presented above for AeroCare assume all patients are incremental to AdaptHealth.
(1) | AeroCare information is shown on a pro forma basis for two acquisitions that closed on October 1, 2020. |
(1) | Pro forma for full year contribution from closed acquisitions; twelve months ended September 30, 2020 revenue includes historical contribution of PCS and Solara acquisitions, but excludes certain closed acquisitions. |
(2) | Includes $50 million of cost synergies. |
2
AeroCare overview
AeroCare is a leading technology-enabled respiratory therapy distribution platform that serves U.S. patients with chronic conditions in their homes. AeroCare provides equipment and services for home oxygen, nebulized respiratory medications and sleep therapy for over 995,000 patients across over 300 locations in 30 states. For the twelve months ended September 30, 2020, on a pro forma, as adjusted basis, AeroCare generated net revenue of $652 million and Adjusted EBITDA of $178 million. For a reconciliation of AeroCare’s Adjusted EBITDA to net income, the most directly comparable GAAP measure, please see “—Summary historical and pro forma financial data of AeroCare.”
We believe AeroCare has consistently expanded its product mix distribution and payor channels as the market has evolved over the past several years towards broader respiratory product utilization. AeroCare’s comprehensive respiratory therapy production distribution portfolio includes oxygen concentrators, CPAPs and bi-PAPs, home ventilators, bronchodilator therapy medications and services and other home care products to patients discharged from acute care and other facilities. AeroCare’s representative customer base includes health plans, such as Aetna, Humana, UnitedHealth Group and various blue cross blue shield associations, as well as network managers like CareCentrix and StateServ Hospicelink.
AeroCare is exceptionally well-positioned in a large and growing market as a key link between patients, physicians, payors and original equipment manufacturers with a trusted brand in the home. Through its highly integrated technology platform, AeroCare is transforming operational workflows and enhancing information transparency to drive growth, margins and care quality. AeroCare is highly efficient and has a replicable M&A and integration engine, with 50 acquisitions closed since 2017 and over 150 acquisitions closed since its inception. In addition, AeroCare is committed to providing only the highest quality of care and services for their patients which is shown through their high Google ratings. In September 2020, AeroCare generated 19,000 5-star reviews.
AeroCare was founded in 2000 and is currently headquartered in Orlando, FL. As of September 30, 2020, AeroCare employed approximately 3,800 individuals.
Strategic rationale for the AeroCare Acquisition
We believe the AeroCare Acquisition will provide the following strategic benefits:
· | Combination will be a leading independent HME provider with significantly enhanced scale and geographic reach: The combined company will be a one-stop-shop provider of HME products and services, offering a comprehensive line of oxygen and ventilation, sleep, mobility, wound care, diabetes, incontinence and urology products. This combination will further solidify AdaptHealth’s position as the second largest overall HME provider in the United States. Our geographic footprint will span across 47 states and serve approximately 2.8 million patients per annum. We believe that our enhanced scale will increase our ability to provide patients with a broader range of products delivered more efficiently than competitors, which in turn, improves the patient experience. In addition, as a leading provider with national scale, we believe that we are well positioned to drive stakeholders value by entering new markets through acquisitions and increasing market share in existing markets. |
· | Expands our presence in attractive and fast growing HME markets: AeroCare brings a highly complementary footprint and access to the fast-growing Southeastern geographies where it maintains a substantial presence. The expansion into high growth states such as Florida, Tennessee, Texas, Georgia and South Carolina is expected to be significantly accretive to growth. Each of these states is growing organically at over 10% for the twelve months ended August 31, 2020 compared to the year ended December 31, 2019. We believe the increased geographic diversification will not only drive topline growth and market share but also make our financial profile more stable and resilient to changes in reimbursement or regulatory policies. |
3
· | Combines two industry leading technology platforms: Historically, each company has focused on using technology to reduce costs and advance the patient and referral experiences in ordering home medical equipment and supplies. The combined company will maintain a long-term strategy of delivering connected healthcare in the home, leveraging our advanced technology-enabled platform. AeroCare has developed technology that streamlines delivery and patient communication, and we have made significant progress in the technology of e-prescribing and revenue cycle management. Through the combination of our collective technology strategies, we anticipate being able to achieve both a better customer experience as well as a more efficient operating model. We believe that the integration of AeroCare will enhance our existing platform and help accelerate our growth trajectory. |
· | Provides multiple pathways for future growth, including additional acquisitions in a highly fragmented market: The combined company addresses the large and growing HME ($12 to $15 billion), diabetes ($16 billion) and home medical supplies ($10 billion) markets. Furthermore, positive industry tailwinds such as aging demographics and the increased prevalence of chronic conditions are expected to drive organic growth. Additionally, we believe we are well positioned to continue our M&A strategy and grow through accretive acquisitions. We operate in a highly fragmented market that is made up of thousands of smaller HME competitors and diabetes companies. This combination provides us with additional scale and financial breadth to capitalize on ample future acquisition opportunities. Both companies have extensive and successful M&A track records, having completed over 110 acquisitions between them since 2017. |
· | Strengthens the financial profile of the combined business through achievable cost synergies: We expect that the enhanced capabilities of the combined company will be able to deliver significant cost synergies with the potential for additional revenue synergies that will be accretive to our earnings and operating cash flows. We expect to generate pre-tax run rate cost synergies of approximately $50 million per annum, including approximately $25 million in 2021, which is comprised primarily of revenue cycle management and branch support, direct and indirect spend, branch consolidation, technology, and general and administrative savings. We expect to incur approximately $20 million in costs to achieve these synergies, which are expected to be fully realized by 2022. Furthermore, we believe revenue synergies are potentially achievable and include PAP 90-day compliance, PAP resupply compliance, payment collections efficiency, and cross-selling respiratory medications and diabetes products. Overall, we expect the synergies realized during this combination to lead to enhanced EBITDA margins and financial strength. |
· | Produces a strong senior leadership team with strong cultural alignment: The combination brings together two experienced leadership teams with deep domain expertise in the HME industry and across healthcare who are both committed to the vision of providing quality home health equipment to patients nationwide. By leveraging our respective teams’ strengths and sharing of best practices, we believe that the combined company will be strongly positioned to serve the evolving HME market. |
Reimbursement landscape
CMS’s decision to cancel the 2021 competitive bidding program is a significant development for AdaptHealth. CMS is proposing to reimburse all HME other than off-the-shelf back and knee braces at current rates, to schedule the next round of competitive bidding in 2024, and to make the higher blended rates in rural territory permanent. In total, we believe these changes to the competitive bidding program are significantly positive to the business, and we expect the rate changes for the off-the-shelf back and knee braces to be immaterial to AdaptHealth. For the twelve months ended September 30, 2020, on a pro forma, as adjusted basis, approximately one-third of our revenue is subject to Medicare competitive bidding.
4
Recent developments
Commitment Letter
We intend to fund the cash portion of the consideration for the AeroCare Acquisition and associated costs through cash on hand and incremental debt, including the notes offered hereby and the transactions described below.
In connection with the entry into the Merger Agreement, we entered into a debt commitment letter (the “Commitment Letter”), dated as of December 1, 2020, with Jefferies Finance LLC (“Jefferies Finance”), pursuant to which Jefferies Finance (together with any additional commitment parties party thereto) committed to provide to us (i) a senior secured term loan B facility in an aggregate principal amount of up to $900.0 million (the “Term B Facility”) and (ii) a senior unsecured bridge facility in an aggregate principal amount of up to $450.0 million (the “Bridge Facility”). The proceeds of the notes offered hereby will reduce commitments in respect of the Bridge Facility on a dollar-for-dollar basis, and upon the consummation of this offering, we do not expect to enter into the Bridge Facility. On or prior to the consummation of the AeroCare Acquisition, the commitments in respect of the Term B Facility may be automatically reduced on a dollar-for-dollar basis by certain debt incurrences (excluding the notes) and equity issuances by the Issuer, our parent entities or any of our or their respective subsidiaries.
The Term B Facility and the Bridge Facility are available to (i) to finance the AeroCare Acquisition in part, (ii) to refinance certain of our and AeroCare’s indebtedness and (iii) to pay fees and expenses incurred in connection therewith. The funding of the Term B Facility and the Bridge Facility provided for in the Commitment Letter is contingent on the satisfaction of customary conditions, including, among other things, (i) the execution and delivery of definitive documentation in accordance with the terms sets forth in the Commitment Letter and (ii) the consummation of the AeroCare Acquisition in accordance with the terms of the Merger Agreement. The definitive documentation governing such debt financing has not been finalized, and, accordingly, the actual terms may differ from the description of such terms in the Commitment Letter. See “Description of other indebtedness—Term B Facility.”
We are currently considering various alternatives for our permanent capital structure with respect to the $600.0 million aggregate principal amount in new senior secured term loan borrowings that we expect to incur in connection with the AeroCare Acquisition, which may include an incremental term loan A facility or a combination of a term loan B facility and an incremental term loan A facility. See “Use of proceeds” and “Capitalization.”
Credit Agreement Amendment
On December 14, 2020, we entered into an amendment to the Credit Agreement (the “Credit Agreement Amendment”) to, among other things, permit the AeroCare Acquisition and the incurrence of indebtedness in connection therewith (including the issuance of the notes offered hereby).
Pinnacle acquisition
On October 1, 2020, the Company acquired 100% of the equity interests of Pinnacle Medical Solutions, Inc. (“Pinnacle”). Pinnacle is primarily engaged in the business of distributing insulin pumps, insulin pump supplies, continuous glucose monitoring systems and diabetes test strips in the United States. The total consideration consisted of (i) a cash payment of $81.5 million at closing, (ii) the issuance of 1.0 million shares of Class A Common Stock at closing, (iii) the potential issuance of up to 0.2 million shares of Class A Common Stock in the future which were held back and subject to potential indemnification matters, and (iv) a potential contingent earnout payment of up to $15.0 million based on certain conditions after closing. The cash paid at closing included $2.6 million withheld in escrow to fund certain potential indemnification matters.
5
Put/Call Agreement
On May 25, 2020, we and AdaptHealth Holdings entered into the Put/Call Agreement with certain of the BlueMountain Entities (collectively, the “Option Parties”). On December 9, 2020, we delivered notice exercising our right under the Put/Call Agreement to require the Option Parties to sell 1,898,967 shares of Class A Common Stock to us at a price per share of $15.76, resulting in a $29.9 million payment to the Option Parties (the “Call Exercise”). We expect to settle the Call Exercise on December 14, 2020. See “Certain relationships and related party transactions—Post-Business Combination transactions—BlueMountain Put/Call Agreement.”
Up-C Unwinding
In anticipation of the closing of the AeroCare Acquisition, AdaptHealth will complete an internal restructuring such that, for the fiscal year ending December 31, 2021, it will no longer be an “Up-C”. In connection with this restructuring, a subsidiary of AdaptHealth will merge with and into AdaptHealth Holdings and the members of AdaptHealth Holdings (other than AdaptHealth) will receive one share of Class A Common Stock in exchange for each Consideration Unit. Following the Up-C Unwinding, AdaptHealth Holdings will be a wholly owned subsidiary of AdaptHealth. The Up-C Unwinding is intended to reduce the Company’s tax compliance costs and enhance its ability to structure future acquisitions and will result in the Class A Common Stock being the Company’s only class of Common Stock outstanding.
In addition, on December 7, 2020 prior to the Up-C Unwinding, certain members of the Company’s management elected to exchange an aggregate of 4,652,351 Consideration Units directly or indirectly held thereby for Class A Common Stock subject to the terms of the Exchange Agreement. We elected to deliver an amount in cash as set forth in the Exchange Agreement in lieu of delivering shares of Class A Common Stock for 1,507,808 of such Consideration Units surrendered for exchange pursuant to the Exchange Agreement. The amount in cash delivered in lieu of shares of Class A Common Stock was in an amount sufficient to permit such members of the Company’s management to satisfy their tax obligations in connection with such exchange.
Impact of the COVID-19 pandemic
Our and AeroCare’s priorities during the COVID-19 pandemic remain protecting the health and safety of our respective employees (including patient-facing employees providing respiratory and other services), maximizing the availability of our respective services and products to support patient health needs, and maintaining the operational and financial stability of our respective businesses.
In response to the COVID-19 pandemic and the National Emergency Declaration, dated March 13, 2020, we and AeroCare activated certain business interruption protocols, including acquisition and distribution of personal protective equipment to our respective patient-facing employees, accelerated capital expenditures of certain products and relocation of significant portions of our respective workforces to “work-from-home” status. We also increased our cash liquidity by, among other things, seeking recoupable advance payments of approximately $46 million made available by CMS under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) legislation, which were received in April 2020. AeroCare secured a $20 million incremental loan facility in April 2020. In addition, in April 2020, we received distributions of the CARES Act provider relief funds of approximately $17 million, and AeroCare received $13.8 million, targeted to offset lost revenue and expenditures incurred in connection with the COVID-19 pandemic. The provider relief funds are subject to certain restrictions and are subject to recoupment if not used for designated purposes.
As a result of these actions, and the lack of disruption to date of our respective vendors’ ability to supply product despite the COVID-19 pandemic, we and AeroCare have been able to substantially maintain our respective operations. The U.S. Department of Health and Human Services (“HHS”) has indicated that the CARES Act provider relief funds are subject to ongoing reporting and changes to the terms and conditions. We are currently in the process of determining how much of the CARES Act provider relief funds we and AeroCare will be entitled to based on the terms and conditions of the program, including recent guidance issued by HHS in October 2020. To the extent that reporting requirements and terms and conditions are modified, it may affect our and AeroCare’s ability to comply and may require the return of funds. Furthermore, HHS has indicated that it will be closely monitoring and, along with the Office of Inspector General of the Department of Health and Human Services (the “OIG-HHS”), auditing providers to ensure that recipients comply with the terms and conditions of relief programs and to prevent fraud and abuse. For any deliberate omissions, misrepresentations or falsifications of any information given to HHS, providers may be subject to civil, criminal, and administrative penalties, including the revocation of Medicare billing privileges, exclusion from federal health care programs, and the imposition of fines, civil damages, and imprisonment.
6
While the impact of the COVID-19 pandemic, the National Emergency Declaration and the various state and local government imposed stay-at-home restrictions did not have a material impact on our consolidated operating results for the three months ended March 31, 2020, we and AeroCare began to experience declines in net revenues commencing in April 2020 with respect to certain services associated with elective medical procedures (such as commencement of new CPAP services and medical equipment and, in our case, orthopedic supply related to facility discharges), and commencement of bi-PAP services on behalf of new patients. In response to these declines, as well as specific over-staffing conditions associated with recently completed acquisitions, we conducted a workforce assessment and implemented a reduction in force in April 2020, resulting in the elimination of approximately 6% of our workforce. In connection with the workforce reductions, we incurred a one-time charge for severance and related expenses of approximately $1.6 million.
Offsetting the declines in net revenues associated with the decline in elective medical procedures, we and AeroCare continue to experience an increase in net revenue associated with increased demand for certain respiratory products (such as oxygen) and increased sales in our resupply businesses (primarily as a result of the increased ability to contact patients at home as a result of continuing remote education and work-from-home directives). From April 2020 through September 2020, we also experienced an increase in revenue associated with the one-time sale of certain respiratory equipment (primarily ventilators, bi-level PAP devices and oxygen concentrators) to hospitals and local health agencies. Additionally, suspension of Medicare sequestration through December 31, 2020 (resulting in a 2% increase in Medicare payments to all providers), and recent regulatory guidance from CMS expanding telemedicine and reducing documentation requirements during the emergency period, are expected to result in increased net revenues for certain products and services. Despite the ongoing effects of the COVID-19 pandemic throughout the summer and fall of 2020, our volume of new CPAP and bi-PAP services has substantially rebounded from April 2020 levels; however, there can be no assurance that these services will not decline in connection with a resurgence of the COVID-19 pandemic or otherwise.
The full extent of the impact of the continuing COVID-19 pandemic on our and AeroCare’s respective businesses, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict. For additional information on risk factors that could impact our and AeroCare’s results, please refer to “Risk factors” in this offering memorandum.
Summary historical and pro forma financial data
Summary historical and pro forma financial data of AdaptHealth
The following table presents AdaptHealth’s summary historical and pro forma financial data and operating statistics. The consolidated statements of operations and cash flows for the years ended December 31, 2019 and 2018 and the consolidated balance sheets as of December 31, 2019 and 2018 have been derived from our audited consolidated financial statements incorporated by reference in this offering memorandum. The consolidated statements of operations and cash flows for the year ended December 31, 2017 and the consolidated balance sheet as of December 31, 2017 have been derived from our audited consolidated financial statements not included or incorporated by reference in this offering memorandum.
The summary consolidated statements of operations and cash flows for the nine months ended September 30, 2020 and 2019 and the consolidated balance sheets as of September 30, 2020 and 2019 have been derived from our unaudited condensed consolidated financial statements incorporated by reference in this offering memorandum. Our unaudited condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of management, include all adjustments (consisting only of normal recurring accruals) necessary for a fair statement of the financial position and results of operations as of the dates and for the periods indicated. The summary unaudited pro forma consolidated statement of operations for the twelve months ended September 30, 2020 gives pro forma effect to the PCS Acquisition, the Solara Acquisition, the Public Equity Offering, the July Notes Offering, the Deerfield Exchange and the Transactions as if they had occurred on January 1, 2019. The unaudited pro forma consolidated balance sheet as of September 30, 2020 gives pro forma effect to the Transactions as if they were completed on September 30, 2020. The summary unaudited pro forma financial data for the twelve months ended September 30, 2020 have been derived by adding our pro forma consolidated statement of operations data for the year ended December 31, 2019 to our pro forma consolidated statements of operations data for the nine months ended September 30, 2020 and deducting our pro forma consolidated statements of operations data for the nine months ended September 30, 2019.
7
The Issuer is an indirect subsidiary of AdaptHealth and the sole differences between the consolidated financial results of AdaptHealth and its subsidiaries (including the Issuer, AdaptHealth Intermediate and AdaptHealth Holdings), on the one hand, and the consolidated financial results of the Issuer and its subsidiaries on a standalone basis, on the other hand, relate to (A) the minority interest held in AdaptHealth Holdings by the holders of the AdaptHealth Units, (B) the Preferred Notes and the Put/Call Agreement, which are obligations of AdaptHealth Holdings (and not obligations of the Issuer) and (C) the deferred income taxes related to the investment in AdaptHealth Holdings and the liability related to the Tax Receivable Agreement. Pursuant to the requirements of the Credit Facilities, AdaptHealth, AdaptHealth Holdings and AdaptHealth Intermediate may not own any assets other than the equity interests of their subsidiaries. Accordingly, all cash of AdaptHealth, AdaptHealth Holdings and AdaptHealth Intermediate is contributed to, or held for the benefit of, the Issuer, and the consolidated assets, equity accounts and liabilities of the Issuer do not materially differ from the consolidated assets, equity accounts and liabilities of AdaptHealth, AdaptHealth Holdings and AdaptHealth Intermediate.
Historical | Pro forma | |||||||||||||||||||||||
Year ended December 31, |
Nine months ended September 30 |
Twelve
months ended September 30, |
||||||||||||||||||||||
2017 | 2018 | 2019 | 2019 | 2020 | 2020 | |||||||||||||||||||
(audited) | (unaudited) | |||||||||||||||||||||||
Consolidated statements of operations data: | ||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Net revenue | $ | 192,559 | $ | 345,278 | $ | 529,644 | $ | 380,103 | $ | 707,960 | $ | 1,679,427 | ||||||||||||
Costs and expenses | ||||||||||||||||||||||||
Cost of net revenue (1) | 165,707 | 293,384 | 440,387 | 317,174 | 604,777 | 1,428,081 | ||||||||||||||||||
General and administrative expenses | 9,482 | 18,069 | 56,493 | 31,508 | 57,745 | 107,287 | ||||||||||||||||||
Depreciation and amortization, excluding patient equipment depreciation | 1,282 | 2,734 | 3,068 | 2,439 | 6,398 | 31,609 | ||||||||||||||||||
Total costs and expenses | 176,471 | 314,187 | 499,948 | 351,121 | 668,920 | 1,566,977 | ||||||||||||||||||
Operating income (loss) | 16,088 | 31,091 | 29,696 | 28,982 | 39,040 | 112,450 | ||||||||||||||||||
Interest expense, net | 5,041 | 7,453 | 39,304 | 31,651 | 27,826 | 101,692 | ||||||||||||||||||
Loss on extinguishment of debt, net | 324 | 1,399 | 2,121 | 2,121 | 5,316 | 5,316 | ||||||||||||||||||
Income (loss) before income taxes from continuing operations | 10,723 | 22,239 | (11,729 | ) | (4,790 | ) | 5,898 | 5,442 | ||||||||||||||||
Income tax expense (benefit) | 249 | (2,098 | ) | 1,156 | 5,444 | 2,290 | 5,372 | |||||||||||||||||
Income (loss) from continuing operations | 10,474 | 24,337 | (12,885 | ) | (10,234 | ) | 3,608 | 70 | ||||||||||||||||
Loss from discontinued operations, net of tax | 207 | — | — | — | — | — | ||||||||||||||||||
Net income (loss) | 10,267 | 24,337 | (12,885 | ) | (10,234 | ) | 3,608 | 70 | ||||||||||||||||
Income attributable to noncontrolling interests | 580 | 1,077 | 2,111 | 1,336 | 2,222 | 5,137 | ||||||||||||||||||
Net income (loss) attributable to AdaptHealth Corp. | $ | 9,687 | $ | 23,260 | $ | (14,996 | ) | $ | (11,570 | ) | $ | 1,386 | $ | (5,067 | ) | |||||||||
Consolidated statements of cash flows data: | ||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Net cash provided by operating activities | $ | 45,930 | $ | 68,427 | $ | 60,418 | $ | 43,174 | $ | 145,287 | ||||||||||||||
Net cash used in investing activities | (15,077 | ) | (96,284 | ) | (84,870 | ) | (62,399 | ) | (627,097 | ) | ||||||||||||||
Net cash provided by (used in) financing activities | (30,263 | ) | 48,768 | 76,144 | 2,862 | 677,250 | ||||||||||||||||||
Balance sheet data (as of period end): | ||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 4,274 | $ | 25,186 | $ | 76,878 | $ | 8,823 | $ | 272,318 | $ | 258,785 | ||||||||||||
Total assets | 111,984 | 368,957 | 546,121 | 427,987 | 1,548,826 | 3,892,253 | ||||||||||||||||||
Total liabilities | 112,621 | 266,188 | 575,370 | 564,685 | 1,109,111 | 2,286,398 | ||||||||||||||||||
Total long-term debt, including current portion | 54,781 | 134,185 | 396,833 | 419,432 | 731,209 | 1,795,459 | ||||||||||||||||||
Total secured debt, including long-term debt and capital lease obligations | 65,728 | 155,996 | 278,292 | 347,210 | 270,868 | 870,868 | ||||||||||||||||||
Total stockholders’ equity (deficit) / members’ equity (deficit) | (637 | ) | 102,769 | (29,249 | ) | (136,698 | ) | 439,715 | 1,605,855 | |||||||||||||||
Other financial data: | ||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
EBITDA(2) | $ | 43,580 | $ | 77,569 | $ | 90,142 | $ | 71,938 | $ | 91,585 | $ | 287,513 | ||||||||||||
Adjusted EBITDA(2) | 45,035 | 84,447 | 123,021 | 89,352 | 126,254 | 344,148 | ||||||||||||||||||
Adjusted EBITDA less Patient Equipment Capex(2) | 19,186 | 45,083 | 75,601 | 53,763 | 83,971 | 194,837 | ||||||||||||||||||
Adjusted EBITDA (pro forma, as adjusted)(2) | 488,382 | |||||||||||||||||||||||
Adjusted EBITDA less Patient Equipment Capex (pro forma, as adjusted)(2) |
339,071 |
8
Pro forma, as
September 30,
|
||||
Pro forma, as adjusted financial data(3): | ||||
(in thousands, except ratios) | ||||
Total debt(4) | $ | 1,865,034 | ||
Net debt(5) | 1,735,343 | |||
Interest expense (excluding change in fair value of interest rate swaps)(6) | 102,625 | |||
Ratio of Adjusted EBITDA (pro forma, as adjusted) to interest expense (excluding change in fair value of interest rate swaps)(7) | 4.8 | x | ||
Ratio of total debt to Adjusted EBITDA (pro forma, as adjusted)(8) | 3.8 | x | ||
Ratio of total net debt to Adjusted EBITDA (pro forma, as adjusted)(9) | 3.6 | x |
(1) Includes patient equipment depreciation of $26,534 in 2017, $45,143 in 2018, $59,499 in 2019, $42,638 in the nine months ended September 30, 2019, $51,463 in the nine months ended September 30, 2020 and $148,770 in the pro forma for the twelve months ended September 30, 2020.
(2) The following table reconciles net income (loss) attributable to AdaptHealth Corp., the most directly comparable GAAP measure, to EBITDA, Adjusted EBITDA, Adjusted EBITDA (pro forma, as adjusted) and Adjusted EBITDA less Patient Equipment Capex (pro forma, as adjusted).
Management believes the presentation of these measures is relevant and useful because it allows investors to view our performance in a manner similar to the method management uses, adjusted for items management believes makes it easier to compare its results with other companies that have different financing and capital structures. EBITDA, Adjusted EBITDA, Adjusted EBITDA (pro forma, as adjusted) and Adjusted EBITDA less Patient Equipment Capex (pro forma, as adjusted), as management defines them, may not be comparable to EBITDA, Adjusted EBITDA, Adjusted EBITDA (pro forma, as adjusted), Adjusted EBITDA less Patient Equipment Capex (pro forma, as adjusted) or similarly titled measurements used by other companies. Items added into our calculation of EBITDA, Adjusted EBITDA, Adjusted EBITDA (pro forma, as adjusted) and Adjusted EBITDA less Patient Equipment Capex (pro forma, as adjusted) that will not occur on a continuing basis may have associated cash payments. EBITDA, Adjusted EBITDA, Adjusted EBITDA (pro forma, as adjusted) and Adjusted EBITDA less Patient Equipment Capex (pro forma, as adjusted) should be viewed in conjunction with measurements that are computed in accordance with GAAP. A reconciliation of EBITDA, Adjusted EBITDA, Adjusted EBITDA (pro forma, as adjusted) and Adjusted EBITDA less Patient Equipment Capex (pro forma, as adjusted) to net income (loss) attributable to AdaptHealth Corp., the most closely comparable financial measure calculated in accordance with GAAP, is set forth in the table below.
As noted in the introductory paragraphs, the summary historical and pro forma financial data set forth in this “—Summary historical and pro forma financial data of AdaptHealth” section, including EBITDA, Adjusted EBITDA, Adjusted EBITDA (pro forma, as adjusted) and Adjusted EBITDA less Patient Equipment Capex (pro forma, as adjusted) and related ratios, are for AdaptHealth, and not for the Issuer and its subsidiaries. See “Basis of presentation.”
In addition, certain limitations under the covenants in the indenture that will govern the notes, as well as in the Credit Facilities, are based on ratios that are calculated by reference to measures similar to EBITDA, Adjusted EBITDA, Adjusted EBITDA (pro forma, as adjusted) and Adjusted EBITDA less Patient Equipment Capex (pro forma, as adjusted) and such ratios may be similar to the ratios presented in the table above. However, such measures are not identical to EBITDA, Adjusted EBITDA, Adjusted EBITDA (pro forma, as adjusted) and Adjusted EBITDA less Patient Equipment Capex (pro forma, as adjusted) as we define it in this offering memorandum, and such ratios are not identical to the ratios presented in the table above. If we do not meet the applicable ratio requirement at the applicable time, such covenants would prohibit us from incurring debt, making restricted payments or investments or taking certain other actions, other than, in some cases, pursuant to specified exceptions. See “Description of other indebtedness” and “Description of notes.”
EBITDA, Adjusted EBITDA, Adjusted EBITDA (pro forma, as adjusted) and Adjusted EBITDA less Patient Equipment Capex (pro forma, as adjusted) and the related ratios presented in the table above are not calculated or presented in accordance with GAAP. As a result, these financial measures have limitations as analytical and comparative tools, and you should not consider these items in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
· | they do not reflect all of our cash expenditures or future requirements for capital expenditures or contractual commitments; |
· | they do not reflect changes in, or cash requirements for, working capital needs; |
· | they do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on indebtedness; |
· | they do not reflect income tax expense or the cash requirements to pay taxes; and |
· | although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often be replaced in the future, and EBITDA, Adjusted EBITDA, Adjusted EBITDA (pro forma, as adjusted) and Adjusted EBITDA less Patient Equipment Capex (pro forma, as adjusted) do not reflect any cash requirements for such replacements. |
9
Historical | Pro Forma | |||||||||||||||||||||||
Year ended December 31, |
Nine months ended September 30, |
Twelve
months ended September 30, |
||||||||||||||||||||||
2017 | 2018 | 2019 | 2019 | 2020 | 2020 | |||||||||||||||||||
(audited) | (unaudited) | |||||||||||||||||||||||
Non-GAAP reconciliation: | ||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Net income (loss) attributable to AdaptHealth Corp. | $ | 9,687 | $ | 23,260 | $ | (14,996 | ) | $ | (11,570 | ) | $ | 1,386 | $ | (5,067 | ) | |||||||||
Income attributable to noncontrolling interest | 580 | 1,077 | 2,111 | 1,336 | 2,222 | 5,137 | ||||||||||||||||||
Interest expense (income) – Excluding change in fair value of interest rate swaps | 5,041 | 8,000 | 27,878 | 19,292 | 27,826 | 102,625 | ||||||||||||||||||
Interest expense (income) – Change in fair value of interest rate swaps | — | (547 | ) | 11,426 | 12,359 | — | (933 | ) | ||||||||||||||||
Income tax expense (benefit) | 249 | (2,098 | ) | 1,156 | 5,444 | 2,290 | 5,372 | |||||||||||||||||
Depreciation and amortization | 27,816 | 47,877 | 62,567 | 45,077 | 57,861 | 180,379 | ||||||||||||||||||
Loss from discontinued operations, net of tax | 207 | — | — | — | — | — | ||||||||||||||||||
EBITDA | $ | 43,580 | $ | 77,569 | $ | 90,142 | $ | 71,938 | $ | 91,585 | $ | 287,513 | ||||||||||||
Loss on extinguishment of debt, net(a) | 324 | 1,399 | 2,121 | 2,121 | 5,316 | 5,316 | ||||||||||||||||||
Equity-based compensation expense(b) | 49 | 884 | 11,070 | 5,806 | 10,969 | 18,270 | ||||||||||||||||||
Transaction costs(c) | — | 2,514 | 15,984 | 8,232 | 16,612 | 24,364 | ||||||||||||||||||
Severance(d) | 826 | 1,920 | 2,301 | 721 | 3,245 | 4,825 | ||||||||||||||||||
Other non-recurring (income) expense(e) | 256 | 161 | 1,403 | 534 | (1,473 | ) | 3,860 | |||||||||||||||||
Adjusted EBITDA | $ | 45,035 | $ | 84,447 | $ | 123,021 | $ | 89,352 | $ | 126,254 | $ | 344,148 | ||||||||||||
AeroCare pro forma cost savings(f) | 50,000 | |||||||||||||||||||||||
Pro forma Adjusted EBITDA and cost savings related to acquisitions(g) |
94,234 | |||||||||||||||||||||||
Adjusted EBITDA (pro forma, as adjusted) | $ | 488,382 | ||||||||||||||||||||||
Less: Patient equipment capex(h) | (25,849 | ) | (39,364 | ) | (47,420 | ) | (35,589 | ) | (42,283 | ) | (149,311 | ) | ||||||||||||
Adjusted EBITDA less Patient Equipment Capex | 19,186 | 45,083 | 75,601 | 53,763 | 83,971 | |||||||||||||||||||
Adjusted EBITDA less Patient Equipment Capex (pro forma, as adjusted) |
$ | 339,071 |
(a) Represents write offs of deferred financing costs in 2020, 2019 and 2018 and prepayment penalty expense related to refinancing of debt offset by gain on debt extinguishment in 2018.
(b) Represents equity-based compensation expense to employees and non-employee directors. The higher expense for the nine months ended September 30, 2020 versus the comparable prior year period is due to year-to-date expense for awards granted in late 2019, and overall increased equity-compensation grant activity in 2020. The expense for the year ended December 31, 2019 includes expense resulting from accelerated vesting and modification of certain awards in that period.
(c) Represents transaction costs related to acquisitions, the 2019 Recapitalization, and the Business Combination.
(d) Represents severance costs related to acquisition integration and internal AdaptHealth restructuring and workforce reduction activities.
(e) The nine months ended September 30, 2020 includes $2.9 million of reductions in the fair value of contingent consideration liabilities related to acquisitions, a $0.6 million gain in connection with the sale of a cost method investment, offset by a $1.5 million expense associated with the PCS Transition Services Agreement and $0.5 million of other non-recurring expenses. The year ended December 31, 2019 includes a net $0.9 million increase in the fair value of contingent consideration liabilities and $0.5 million of other non-recurring expenses.
10
(f) Represents the estimated impact of annualized pre-tax cost savings associated with initiatives to be implemented by management following the completion of the AeroCare Acquisition, primarily from centralization, scale and efficiency improvements in revenue cycle management, branch locations, general and administrative, and vendor cost savings. We expect to incur approximately $20 million in costs to achieve these cost savings, which are expected to be fully realized by 2022.
(g) Represents $81.7 million in Adjusted EBITDA from 18 acquisitions by AdaptHealth and $12.5 million in Adjusted EBITDA from 12 acquisitions by AeroCare, in each case completed after September 30, 2019 and including twelve months of Adjusted EBITDA as well as expected cost synergies related to such acquisitions. Such figures are unaudited and have not been reviewed by AdaptHealth’s or AeroCare’s independent auditors. Neither AdaptHealth nor AeroCare has historically experienced significant seasonality in its respective business. See also “―Summary historical and pro forma financial data of AeroCare.”
(h) Represents the value of the patient equipment received during the respective period without regard to whether the equipment is purchased or financed through lease transactions.
(3) Represents financial measures for the twelve months ended September 30, 2020, on a pro forma, as adjusted basis.
(4) Total debt includes the Preferred Notes of AdaptHealth Holdings, as the sole source of payment of cash interest is AdaptHealth LLC, the Issuer.
(5) Net debt as of September 30, 2020 represents total debt on a pro forma, as adjusted basis, less cash and cash equivalents on a pro forma, as adjusted basis of $130 million. The pro forma, as adjusted cash and cash equivalents amount reflects the cash purchase price for certain acquisitions completed subsequent to September 30, 2020, but does not reflect the payment by the Company in December 2020 of (i) $29.9 million to the Option Parties pursuant to the Call Exercise on December 14, 2020 (for more information on the Call Exercise, see “Summary—Recent developments—Put/Call Agreement”) or (ii) $44.3 million to exercise its right to deliver cash in lieu of shares of Class A Common Stock in exchange for certain Consideration Units held by members of management in order for them to satisfy their tax obligations arising from the conversion of such individual’s Consideration Units. See “—Recent developments—Up-C Unwinding.”
(6) Represents interest expense excluding the change in fair value of interest rate swaps for the twelve months ended September 30, 2020, calculated on a pro forma basis. Each one eighth percent increase or decrease in the interest rates governing our indebtedness would result in an approximately $1.7 million change in annual interest expense on our indebtedness.
(7) The ratio of Adjusted EBITDA (pro forma, as adjusted) to interest expense is determined by dividing Adjusted EBITDA (pro forma, as adjusted) by interest expense on a pro forma, as adjusted basis.
(8) The ratio of total debt to Adjusted EBITDA (pro forma, as adjusted) is determined by dividing total debt on a pro forma, as adjusted basis by Adjusted EBITDA (pro forma, as adjusted).
(9) The ratio of total net debt to Adjusted EBITDA (pro forma, as adjusted) is determined by dividing total net debt on a pro forma, as adjusted basis by Adjusted EBITDA (pro forma, as adjusted).
Summary historical and pro forma financial data of AeroCare
The following table presents AeroCare’s summary historical and pro forma financial data. The consolidated statements of operations and cash flows for the years ended December 31, 2019 and 2018 and the consolidated balance sheets as of December 31, 2019 and 2018 have been derived from AeroCare’s audited consolidated financial statements incorporated by reference in this offering memorandum.
11
The summary consolidated statements of operations and cash flows for the nine months ended September 30, 2020 and 2019 and the consolidated balance sheet as of September 30, 2020 have been derived from AeroCare’s unaudited consolidated financial statements incorporated by reference in this offering memorandum. AeroCare’s unaudited consolidated financial statements have been prepared on the same basis as its audited consolidated financial statements and, in the opinion of AeroCare’s management, include all adjustments (consisting only of normal recurring accruals) necessary for a fair statement of the financial position and results of operations as of the dates and for the periods indicated.
Year ended December 31, |
Nine months ended September 30 |
Twelve
months ended September 30, |
||||||||||||||||||
2018 | 2019 | 2019 | 2020 | 2020 | ||||||||||||||||
(audited) | (unaudited) | |||||||||||||||||||
Consolidated statements of operations data: | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Net revenue | $ | 393,418 | $ | 533,649 | $ | 379,245 | $ | 497,664 | $ | 652,068 | ||||||||||
Costs and expenses | ||||||||||||||||||||
Cost of net revenue | 158,187 | 218,369 | 152,675 | 201,907 | 267,601 | |||||||||||||||
Selling, general and administrative expenses | 204,270 | 261,213 | 187,932 | 228,807 | 302,088 | |||||||||||||||
Depreciation and amortization | 5,406 | 6,868 | 4,846 | 6,055 | 8,077 | |||||||||||||||
Total costs and expenses | 367,863 | 486,450 | 345,453 | 436,769 | 577,766 | |||||||||||||||
Operating income (loss) | 25,555 | 47,199 | 33,792 | 60,895 | 74,302 | |||||||||||||||
Other income (expense): | ||||||||||||||||||||
Other income | 2,207 | 3,103 | 2,208 | 2,705 | 3,600 | |||||||||||||||
Interest expense | (7,610 | ) | (14,370 | ) | (9,766 | ) | (11,486 | ) | (16,090 | ) | ||||||||||
Loss on early extinguishment of debt | (1,227 | ) | (1,509 | ) | (1,509 | ) | — | —- | ||||||||||||
Total other expense | (6,630 | ) | (12,776 | ) | (9,067 | ) | (8,781 | ) | (12,490 | ) | ||||||||||
Income before provision for income taxes | 18,925 | 34,423 | 24,725 | 52,114 | 61,812 | |||||||||||||||
Provision for income taxes | 3,036 | 4,001 | 2,694 | 8,179 | 9,486 | |||||||||||||||
Net income | $ | 15,889 | $ | 30,422 | $ | 22,031 | $ | 43,935 | $ | 52,326 | ||||||||||
Consolidated statements of cash flows data: | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Net cash provided by operating activities | $ | 91,202 | $ | 110,982 | $ | 78,125 | $ | 125,012 | ||||||||||||
Net cash used in investing activities | (109,751 | ) | (134,138 | ) | (83,734 | ) | (128,073 | ) | ||||||||||||
Net cash provided by (used in) financing activities | 32,212 | 13,897 | (4,227 | ) | 18,828 | |||||||||||||||
Balance sheet data (as of period end): | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Cash and cash equivalents | $ | 25,709 | $ | 16,450 | $ | 32,217 | $ | 32,217 | ||||||||||||
Total assets | 324,715 | 410,641 | 496,937 | 496,937 | ||||||||||||||||
Total liabilities | 319,310 | 480,096 | 522,982 | 522,982 | ||||||||||||||||
Total long-term debt, including current portion | 233,238 | 367,170 | 389,202 | 389,202 | ||||||||||||||||
Total redeemable convertible preferred stock | 37,179 | 97,086 | 103,092 | 103,092 | ||||||||||||||||
Total stockholders’ equity (deficit) | (31,774 | ) | (166,541 | ) | (129,137 | ) | (129,137 | ) | ||||||||||||
Other financial data: | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
EBITDA(1) | $ | 83,750 | $ | 121,745 | $ | 86,810 | $ | 128,255 | $ | 163,190 | ||||||||||
Adjusted EBITDA(1) | 87,042 | 124,655 | 89,407 | 129,979 | 165,227 | |||||||||||||||
Adjusted EBITDA less Patient Equipment Capex(1) | 21,190 | 41,039 | 27,987 | 59,867 | 72,919 | |||||||||||||||
Adjusted EBITDA (pro forma, as adjusted)(1) | 177,771 | |||||||||||||||||||
Adjusted EBITDA less Patient Equipment Capex (pro forma, as adjusted)(1) | 85,463 |
(1) The following table reconciles net income, the most directly comparable GAAP measure, to EBITDA, Adjusted EBITDA, Adjusted EBITDA (pro forma, as adjusted) and Adjusted EBITDA less Patient Equipment Capex (pro forma, as adjusted).
EBITDA, Adjusted EBITDA, Adjusted EBITDA (pro forma, as adjusted) and Adjusted EBITDA less Patient Equipment Capex (pro forma, as adjusted) are not calculated or presented in accordance with GAAP. As a result, these financial measures have limitations as analytical and comparative tools, and you should not consider these items in isolation, or as a substitute for analysis of our results as reported under GAAP.
12
Year ended
December 31, |
Nine months ended
September 30, |
Twelve
months ended September 30, |
|||||||||||||||||||
2018 | 2019 | 2019 | 2020 | 2020 | |||||||||||||||||
(audited) | (unaudited) | ||||||||||||||||||||
Non-GAAP reconciliation: | |||||||||||||||||||||
(in thousands) | |||||||||||||||||||||
Net income | $ | 15,889 | $ | 30,422 | $ | 22,031 | $ | 43,935 | $ | 52,326 | |||||||||||
Interest expense | 7,610 | 14,370 | 9,766 | 11,486 | 16,090 | ||||||||||||||||
Income tax expense (benefit) | 3,036 | 4,001 | 2,694 | 8,179 | 9,486 | ||||||||||||||||
Depreciation and amortization expense | 57,215 | 72,952 | 52,319 | 64,655 | 85,288 | ||||||||||||||||
EBITDA | $ | 83,750 | $ | 121,745 | $ | 86,810 | $ | 128,255 | $ | 163,190 | |||||||||||
Loss on extinguishment of debt, net | 1,227 | 1,509 | 1,509 | — | — | ||||||||||||||||
Equity-based compensation expense | 2,065 | 1,401 | 1,088 | 1,724 | 2,037 | ||||||||||||||||
Adjusted EBITDA | $ | 87,042 | $ | 124,655 | $ | 89,407 | $ | 129,979 | $ | 165,227 | |||||||||||
Pro forma Adjusted EBITDA and cost savings related to acquisitions(a) | 12,544 | ||||||||||||||||||||
Adjusted EBITDA (pro forma, as adjusted) | $ | 177,771 | |||||||||||||||||||
Less: Patient equipment capex | (65,852 | ) | (83,616 | ) | (61,420 | ) | (70,112 | ) | (92,308 | ) | |||||||||||
Adjusted EBITDA less Patient Equipment Capex | $ | 21,190 | $ | 41,039 | $ | 27,987 | $ | 59,867 | |||||||||||||
Adjusted EBITDA less Patient Equipment Capex (pro forma, as adjusted) | $ | 85,463 |
(a) Represents Adjusted EBITDA from 12 acquisitions by AeroCare completed after September 30, 2019 and including twelve months of Adjusted EBITDA as well as expected cost synergies related to such acquisitions. Such figures are unaudited and have not been reviewed by AeroCare’s independent auditors. AeroCare has not historically experienced significant seasonality in its respective business.
13
AdaptHealth is subject, directly or indirectly, to U.S. federal and state healthcare fraud and abuse and false claims laws and regulations. Prosecutions under such laws have increased in recent years and AdaptHealth may become subject to such litigation. If AdaptHealth is unable to or has not fully complied with such laws, it could face substantial penalties.
AdaptHealth’s operations are subject to various state and federal fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute, the federal Stark Law and the federal False Claims Act. These laws may impact, among other things, AdaptHealth’s sales, marketing and education programs.
The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing or arranging for a good or service, for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the statute has been violated. In addition, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. The Anti-Kickback Statute is broad and, despite a series of narrow safe harbors, prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Penalties for violations of the federal Anti-Kickback Statute include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. Many states have also adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs.
The federal Ethics in Patient Referrals Act of 1989, commonly known as the “Stark Law,” prohibits, subject to certain exceptions, physician referrals of Medicare and, as applicable under state law, Medicaid patients to an entity providing certain “designated health services” if the physician or an immediate family member has any financial relationship with the entity. The Stark Law also prohibits the entity receiving the referral from billing any good or service furnished pursuant to an unlawful referral. Various states have corollary laws to the Stark Law, including laws that require physicians to disclose any financial interest they may have with a healthcare provider to their patients when referring patients to that provider. Both the scope and exceptions for such laws vary from state to state.
14
The federal False Claims Act prohibits persons from knowingly filing, or causing to be filed, a false claim to, or the knowing use of false statements to obtain payment from the federal government. The False Claims Act defines “knowingly” to include actual knowledge, acting in deliberate ignorance of the truth or falsity of information, or acting in deliberate disregard of the truth or falsity of information. False Claims Act liability includes liability for reverse false claims for avoiding or decreasing an obligation to pay or transmit money to the government. This includes False Claims Act liability for failing to report and return overpayments within 60 days of the date on which the overpayment is “identified.” Penalties under the False Claims Act can include exclusion from the Medicare program. In addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act. Suits filed under the False Claims Act, known as qui tam actions, can be brought by any individual on behalf of the government and such individuals, commonly known as “whistleblowers,” may share in any amounts paid by the entity to the government in fines or settlement. The frequency of filing qui tam actions has increased significantly in recent years, causing greater numbers of medical device, pharmaceutical and healthcare companies to have to defend a False Claims Act action. When an entity is determined to have violated the federal False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties for each separate false claim. Various states have also enacted laws modeled after the federal False Claims Act.
For example, as previously disclosed, on July 25, 2017, AdaptHealth was served with a subpoena by the U.S. Attorney’s Office for the United States District Court for the Eastern District of Pennsylvania (“EDPA”) pursuant to 18 U.S.C. §3486 (investigation of a federal health care offense) to produce certain audit records and internal communications regarding ventilator billing. The investigation appears to be focused on billing practices regarding one payor that contracted for bundled payments for certain ventilators. AdaptHealth has cooperated with investigators and, through agreement with the EDPA, has submitted all information requested. An independent third party was retained by AdaptHealth that identified overpayments and underpayments for ventilator billings related to the payor, and a remittance was sent to reconcile that account. On October 3, 2019, AdaptHealth received a follow-up civil investigative demand from the EDPA regarding a document previously produced to the EDPA and patients included in the review by the independent third party. AdaptHealth has responded to the EDPA and supplemented its production as requested. On November 9, 2020, the EDPA indicated to the Company that the investigation remained ongoing and confirmed that a qui tam complaint had been filed in connection with the matter. The EDPA also requested additional information regarding certain patient services and claims refunds processed by AdaptHealth in 2017. The Company is compiling this information and will supplement its production in early January 2021. While AdaptHealth cannot provide any assurance as to whether the EDPA will seek additional information or pursue this matter further, the Company does not believe that the investigation will have a material adverse effect on the Company.
HIPAA, and its implementing regulations, also created additional federal criminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private) and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits, items or services relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.
From time to time, AdaptHealth has been and is involved in various governmental audits, investigations and reviews related to its operations. Reviews and investigations can lead to government actions, resulting in the assessment of damages, civil or criminal fines or penalties, or other sanctions, including restrictions or changes in the way AdaptHealth conducts business, loss of licensure or exclusion from participation in Medicare, Medicaid or other government programs. Additionally, as a result of these investigations, healthcare providers and entities may face litigation or have to agree to settlements that can include monetary penalties and onerous compliance and reporting requirements as part of a consent decree or corporate integrity agreement, or Corporate Integrity Agreement (“CIA”). If AdaptHealth fails to comply with applicable laws, regulations and rules, its financial condition and results of operations could be adversely affected. Furthermore, becoming subject to these governmental investigations, audits and reviews may result in substantial costs and divert management’s attention from the business as AdaptHealth cooperates with the government authorities, regardless of whether the particular investigation, audit or review leads to the identification of underlying issues.
AdaptHealth is unable to predict whether it could be subject to actions under any of these laws, or the impact of such actions. If AdaptHealth is found to be in violation of any of the laws described above or other applicable state and federal fraud and abuse laws, AdaptHealth may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from Medicare, Medicaid and other government healthcare reimbursement programs and the curtailment or restructuring of its operations.
15
Exhibit 99.3
Aerocare holdings, inc. and subsidiaries
Consolidated Financial Statements
Years ended December 31, 2019 and 2018
AeroCare Holdings, Inc. and Subsidiaries
Table of Contents
Page | |
Independent Auditors’ Report | 1 |
Consolidated Financial Statements | |
Consolidated Balance Sheets | 3 |
Consolidated Statements of Income | 4 |
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) | 5 |
Consolidated Statements of Cash Flows | 6 |
Notes to Consolidated Financial Statements | 7 |
Independent Auditors’ Report
The Board of Directors
AeroCare Holdings, Inc.:
We have audited the accompanying consolidated financial statements of AeroCare Holdings, Inc. and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 2019 and 2018, and the related consolidated statements of income, changes in stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated 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 consolidated 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 consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of AeroCare Holdings, Inc. and its subsidiaries as of December 31, 2019 and 2018, and the results of their operations and their cash flows for the years then ended in accordance with U.S. generally accepted accounting principles.
Emphasis of Matter
As discussed in Note 1 to the consolidated financial statements, as of January 1, 2019, the Company changed its method of accounting for revenue due to the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers. Our opinion is not modified with respect to this matter.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 11, 2020
2
AEROCARE HOLDINGS, INC. AND SUBSIDIARIES |
Consolidated Balance Sheets |
December 31, 2019 and 2018 |
2019 | 2018 | |||||||
Assets | ||||||||
Assets: | ||||||||
Cash and cash equivalents | $ | 16,449,910 | $ | 25,708,831 | ||||
Accounts receivable | 71,010,358 | 46,625,145 | ||||||
Other receivables | 1,891,670 | 588,368 | ||||||
Inventories | 14,520,376 | 11,887,150 | ||||||
Prepaid and other current assets | 3,373,588 | 3,183,755 | ||||||
Total current assets | 107,245,902 | 87,993,249 | ||||||
Property and equipment, net | 128,515,720 | 101,046,765 | ||||||
Intangible assets, net | 806,799 | 521,528 | ||||||
Goodwill | 172,762,142 | 134,132,397 | ||||||
Other assets | 1,310,236 | 1,021,605 | ||||||
Total assets | $ | 410,640,799 | $ | 324,715,544 | ||||
Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Deficit | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 51,863,704 | $ | 35,530,174 | ||||
Accrued expenses and other current liabilities | 30,529,859 | 23,432,752 | ||||||
Due to sellers | 3,832,500 | 5,873,750 | ||||||
Deferred revenue | 11,334,309 | 9,160,342 | ||||||
Current portion of notes payable and lines of credit | 17,000,000 | 11,750,000 | ||||||
Total current liabilities | 114,560,372 | 85,747,018 | ||||||
Noncurrent liabilities: | ||||||||
Notes payable and lines of credit, less current portion | 350,170,463 | 221,488,489 | ||||||
Deferred tax liability | 15,365,276 | 12,074,913 | ||||||
Total noncurrent liabilities | 365,535,739 | 233,563,402 | ||||||
Total liabilities | 480,096,111 | 319,310,420 | ||||||
Redeemable convertible preferred stock: | ||||||||
Series A redeemable convertible preferred stock, $0.001 par value per share, 0 and 7,649,933 authorized, issued and oustanding in 2019 and 2018, respectively | — | 28,355,730 | ||||||
Series B redeemable convertible preferred stock, $0.001 par value per share, 0 and 2,025,316 authorized, issued and oustanding in 2019 and 2018, respectively | — | 8,823,689 | ||||||
Series C redeemable convertible preferred stock, $0.001 par value per share, 18,087,434 and 0 authorized, issued and oustanding in 2019 and 2018, respectively (liquidation value of $101,643,839 at December 31, 2019) | 97,086,160 | — | ||||||
Total redeemable convertible preferred stock | 97,086,160 | 37,179,419 | ||||||
Commitments and contingencies (note 12) | ||||||||
Stockholders' deficit: | ||||||||
Common stock, $0.001 par value, 72,000,000 and 65,000,000 shares authorized, respectively, 42,452,058 and 31,701,809 issued and outstanding in 2019 and 2018, respectively | 42,452 | 31,701 | ||||||
Additional paid-in capital | 62,017,829 | 22,217,117 | ||||||
Accumulated deficit | (228,601,753 | ) | (54,023,113 | ) | ||||
Total stockholders' deficit | (166,541,472 | ) | (31,774,295 | ) | ||||
Total liabilities, redeemable convertible preferred stock and stockholders' deficit | $ | 410,640,799 | $ | 324,715,544 |
See accompanying notes to consolidated financial statements
3
AEROCARE HOLDINGS, INC. AND SUBSIDIARIES |
Consolidated Statements of Income |
Years ended December 31, 2019 and 2018 |
2019 | 2018 | |||||||
Net revenue | $ | 533,649,318 | $ | 393,418,087 | ||||
Costs and expenses: | ||||||||
Cost of net revenue | 218,368,993 | 158,186,359 | ||||||
Selling, general, and administrative expenses | 261,213,355 | 204,270,159 | ||||||
Depreciation and amortization expense | 6,867,789 | 5,406,311 | ||||||
Total costs and expenses | 486,450,137 | 367,862,828 | ||||||
Operating income | 47,199,181 | 25,555,259 | ||||||
Other income (expense): | ||||||||
Other income | 3,102,781 | 2,207,027 | ||||||
Interest expense | (14,370,374 | ) | (7,609,894 | ) | ||||
Loss on early extinguishment of debt | (1,509,371 | ) | (1,227,033 | ) | ||||
Total other expense | (12,776,964 | ) | (6,629,900 | ) | ||||
Income before provision for income taxes | 34,422,217 | 18,925,359 | ||||||
Provision for income taxes | 4,000,857 | 3,035,731 | ||||||
Net income | $ | 30,421,360 | $ | 15,889,628 |
See accompanying notes to consolidated financial statements
4
AEROCARE HOLDINGS, INC. AND SUBSIDIARIES |
Consolidated Statements of Changes in Stockholders' Equity (Deficit) |
Years ended December 31, 2019 and 2018 |
Common Stock | ||||||||||||||||||||
Number |
Additional
paid-in |
Retained
earnings (accumulated |
Total stockholders' | |||||||||||||||||
of shares | Amount | capital | deficit) | equity (deficit) | ||||||||||||||||
Balance - December 31, 2017 | 31,037,300 | $ | 31,037 | $ | 20,898,962 | $ | 5,087,259 | $ | 26,017,258 | |||||||||||
Net income | — | — | — | 15,889,628 | 15,889,628 | |||||||||||||||
Dividends paid | — | — | — | (75,000,000 | ) | (75,000,000 | ) | |||||||||||||
Stock-based compensation expense | — | — | 1,635,268 | — | 1,635,268 | |||||||||||||||
Employee stock bonus | 131,176 | 131 | 429,334 | — | 429,465 | |||||||||||||||
Shares in lieu of cash - Buypap.com, LLC | 533,333 | 533 | 1,999,467 | — | 2,000,000 | |||||||||||||||
Dividends accreted | — | — | (2,745,914 | ) | — | (2,745,914 | ) | |||||||||||||
Balance - December 31, 2018 | 31,701,809 | 31,701 | 22,217,117 | (54,023,113 | ) | (31,774,295 | ) | |||||||||||||
Net income | — | — | — | 30,421,360 | 30,421,360 | |||||||||||||||
Dividends paid | — | — | — | (205,000,000 | ) | (205,000,000 | ) | |||||||||||||
Exercise of stock option | 375,000 | 375 | 374,625 | 375,000 | ||||||||||||||||
Conversion of Series A and Series B redeemable convertible preferred stock | 9,675,249 | 9,675 | 39,370,569 | — | 39,380,244 | |||||||||||||||
Stock-based compensation expense | — | — | 1,275,880 | — | 1,275,880 | |||||||||||||||
Employee stock bonus | 33,333 | 34 | 124,966 | — | 125,000 | |||||||||||||||
Shares in lieu of cash - Buypap.com, LLC | 666,667 | 667 | 2,499,333 | — | 2,500,000 | |||||||||||||||
Dividends accreted | — | — | (3,844,661 | ) | — | (3,844,661 | ) | |||||||||||||
Balance - December 31, 2019 | 42,452,058 | $ | 42,452 | $ | 62,017,829 | $ | (228,601,753 | ) | $ | (166,541,472 | ) |
See accompanying notes to consolidated financial statements
5
AEROCARE HOLDINGS, INC. AND SUBSIDIARIES |
Consolidated Statements of Cash Flows |
Years ended December 31, 2019 and 2018 |
2019 | 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 30,421,360 | $ | 15,889,628 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization expense, including patient equipment depreciation | 72,952,820 | 57,214,787 | ||||||
Amortization of deferred financing costs | 361,160 | 559,781 | ||||||
Loss on early extinguishment of debt | 1,509,371 | 1,227,033 | ||||||
Change in deferred tax liability | 3,290,363 | 2,243,730 | ||||||
Stock-based compensation expense | 1,275,880 | 1,635,268 | ||||||
Employee stock bonus | 125,000 | 429,465 | ||||||
Changes in operating assets and liabilities (net of effects of acquired businesses): | ||||||||
Accounts receivable | (18,085,557 | ) | (7,045,389 | ) | ||||
Inventories | (472,794 | ) | 251,920 | |||||
Prepaid and other assets | (292,614 | ) | (1,270,305 | ) | ||||
Accounts payable, accrued expenses, deferred revenue and other current liabilities | 19,896,694 | 20,066,478 | ||||||
Net cash provided by operating activities | 110,981,683 | 91,202,397 | ||||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (93,589,584 | ) | (70,497,890 | ) | ||||
Business acquisitions, net of cash acquired | (40,548,537 | ) | (39,253,169 | ) | ||||
Net cash used in investing activities | (134,138,121 | ) | (109,751,059 | ) | ||||
Cash flows from financing activities | ||||||||
Proceeds from notes payable and lines of credit | 377,950,000 | 276,380,000 | ||||||
Payments on notes payable and lines of credit | (243,950,000 | ) | (161,380,000 | ) | ||||
Payment of deferred financing costs | (2,018,557 | ) | (1,796,511 | ) | ||||
Proceeds from stock option exercises | 375,000 | — | ||||||
Proceeds from issuance of preferred stock | 100,000,000 | — | ||||||
Payments for preferred stock issuance costs | (4,557,676 | ) | — | |||||
Payments on capital lease obligations | — | (43,629 | ) | |||||
Payments on due to sellers | (8,901,250 | ) | (5,948,229 | ) | ||||
Dividend distribution | (205,000,000 | ) | (75,000,000 | ) | ||||
Net cash provided by financing activities | 13,897,517 | 32,211,631 | ||||||
Net (decrease) increase in cash and cash equivalents | (9,258,921 | ) | 13,662,969 | |||||
Cash and cash equivalents - beginning of year | 25,708,831 | 12,045,862 | ||||||
Cash and cash equivalents - end of year | $ | 16,449,910 | $ | 25,708,831 | ||||
Supplemental disclosure of cash flow information | ||||||||
Cash paid for interest | $ | 13,983,113 | $ | 8,560,024 | ||||
Cash paid for income taxes | 1,540,169 | 753,000 | ||||||
Supplemental disclosure of noncash financing activities | ||||||||
Payable to sellers for business acquisitions | $ | 9,360,000 | $ | 5,094,500 | ||||
Dividends accreted on preferred stock Series A and B | 3,844,661 | 2,745,914 | ||||||
Shares in lieu of cash - Buypap.com, LLC | 2,500,000 | 2,000,000 |
See accompanying notes to consolidated financial statements
6
AeroCare Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
(1) Nature of Business and Significant Accounting Policies
(a) | Nature of Business and Ownership |
AeroCare Holdings, Inc. and Subsidiaries (the Company) provides oxygen, respiratory therapy services, medications, and home medical equipment to the home health care market. The Company has branches located in 28 states and is headquartered in Orlando, Florida. The Company’s equipment and supplies are readily available and the Company is not dependent on a single supplier or a few suppliers.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. A summary of the Company’s significant accounting policies follows:
(b) | Principles of Consolidation |
The consolidated financial statements include AeroCare Holdings, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.
(c) | Cash and Cash Equivalents |
The Company maintains cash in demand deposit accounts with federally insured banks. At times, the balances in these accounts may be in excess of federally insured limits. There were no cash equivalents as of December 31, 2019 and 2018.
(d) | Accounts Receivable |
Accounts receivable consists of amounts due from insurance carriers, Medicare, Medicaid and individual customers, all of which are recorded at net realizable value. Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required to record accounts receivable at their net realizable values. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application, claim denial, or account review. Included in accounts receivable are earned but unbilled receivables. Billing delays, ranging from several days to several weeks, can occur due to the Company’s policy of obtaining required payor-specific documentation prior to billing for its services rendered
The Company performs detailed analyses to evaluate the net realizable value of accounts receivable. Specifically, the Company considers historical collections data, accounts receivable aging trends, other operating trends, and relevant business conditions. Because of the continuing changes in the health care industry and third-party reimbursement, it is possible that the Company’s estimates could change, which could have an impact on operations and cash flows.
7 |
(Continued)
|
AeroCare Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
(e) | Inventories |
Inventories principally consist of respiratory equipment and patient billable supplies, which are valued at the lower of cost or net realizable value. Cost is determined on a first-in, first-out method.
(f) | Property and Equipment |
Property and equipment are stated at cost net of accumulated depreciation. Property and equipment acquired in business combinations are stated at fair value as of the date of acquisition. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets which ranges from 13 months to 10 years. The useful lives for patient medical equipment correlate with the medical reimbursement periods. Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments are capitalized as additions to property and equipment. The cost of leasehold improvements on leased office and warehouse space is capitalized and amortized using the straight-line method over the shorter of the life of the applicable lease or the useful life of the improvement. Major overhauls of property and equipment that do not extend the corresponding useful lives are expensed as incurred.
(g) | Long-Lived Assets |
The Company periodically reviews long-lived assets to be held and used in operations for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. An impairment loss is recognized when the estimated, undiscounted, future cash flows from the assets are less than the carrying value of the assets. Assets to be disposed of are reported at the lower of their carrying amount or fair value less cost to sell. No impairment loss was recognized during the years ended December 31, 2019 and 2018.
(h) | Intangible Assets |
Intangible assets consist of acquired trade names, which are recognized at the estimated fair value when acquired. This intangible is being amortized over the estimated useful life of 2 years. Intangible assets subject to amortization are reviewed for potential impairment whenever events or circumstances indicate the carrying amounts may not be recoverable.
(i) | Goodwill |
Goodwill is recognized as a result of a business combination when the price paid for the acquired business exceeds the estimated fair value of its identified net assets. The Company evaluates potential impairment of goodwill at least annually or more frequently if a triggering event is identified. If a triggering event were to occur, the Company will determine if it is more likely than not that the fair value of the entity is less than its carrying amount, including goodwill. When recoverability is unlikely, the Company calculates goodwill impairment as the amount the Company’s carrying value including goodwill exceeds its fair value. Management performed its annual impairment review of goodwill as of December 31, 2019 and 2018 and concluded there was no impairment.
(j) | Deferred Loan Costs |
Deferred loan costs consist of costs incurred in connection with obtaining financing and are amortized using the straight-line method, which approximates the effective interest method over the term of the related financing agreement. Deferred loan costs are included as an offset to notes payable and lines of credit on the accompanying consolidated balance sheets.
8 |
(Continued)
|
AeroCare Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
(k) | Income Taxes |
The Company accounts for income taxes using an asset and liability approach which requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. Deferred income taxes have been provided for the differences between the financial reporting carrying values and the income tax reporting basis of the Company’s assets and liabilities. These temporary differences consist of differences between the timing of the deduction of certain amounts between income tax and financial statement reporting purposes.
(l) | Uncertain Tax Positions |
The Company will recognize a tax benefit in the financial statements for an uncertain tax position only if it is management's assessment that the position is "more likely than not" (i.e., a likelihood greater than 50 percent) to be allowed by the tax jurisdiction based solely on the technical merits of the position. The term "tax position" refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for financial reporting purposes. As of December 31, 2019 and 2018, the Company had no uncertain tax positions that would require recognition or disclosure in the consolidated financial statements. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions.
(m) | Adoption of New Accounting Standard |
The Company adopted FASB ASC Topic 606, Revenue from Contracts with Customers (ASC 606), effective January 1, 2019, using the modified retrospective transition method. The Company's adoption of ASC 606 primarily impacts the presentation of revenues due to the inclusion of variable consideration in the form of implicit price concessions contained in certain of its contracts with customers. Under ASC 606, amounts estimated to be uncollectible are generally considered implicit price concessions that are a direct reduction to net revenue.
9 |
(Continued)
|
AeroCare Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
(n) | Revenue Recognition |
The Company generates revenues for services and related products that the Company provides to patients for home medical equipment, related supplies, and other items. The Company’s revenues are recognized in the period in which services and related products are provided to customers and are recorded either at a point in time for the sale of supplies and disposables, which occurs upon delivery, and when applicable, setup and instruction to customers , or over the fixed monthly service period for equipment. Revenue from shipping and handling charges are not considered a separate deliverable and are recognized at the time the products are shipped or delivered, depending on the terms of the related agreement, and included in sales.
Revenues are recognized when control of the promised good or service is transferred to customers, in an amount that reflects the consideration to which the Company expects to receive from patients or under reimbursement arrangements with Medicare, Medicaid and third-party payors, in exchange for those goods and services.
The Company determines the transaction price based on contractually agreed-upon amounts or rates, adjusted for estimates of variable consideration, such as implicit price concessions. The Company utilizes the expected value method to determine the amount of variable consideration that should be included to arrive at the transaction price, using contractual agreements and historical reimbursement experience within each payor type. The Company applies constraint to the transaction price, such that net revenue is recorded only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in the future. If actual amounts of consideration ultimately received differ from the Company’s estimates, the Company adjusts these estimates, which would affect net revenue in the period such adjustments become known.
Sales revenue is recognized upon transfer of control of products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Revenues for the sale of durable medical equipment and related supplies, including oxygen equipment, ventilators, wheelchairs, hospital beds and infusion pumps, are recognized at the time of delivery.
The Company provides certain equipment to patients which is reimbursed periodically in fixed monthly payments for as long as the patient is using the equipment and medical necessity continues (in certain cases, the fixed monthly payments are capped at a certain amount). The equipment provided to the patient is based upon medical necessity as documented by prescriptions and other documentation received from the patient’s physician. The patient generally does not negotiate or have input with respect to the manufacturer or model of the equipment prescribed by their physician and delivered by the Company. Once initial delivery of this equipment is made to the patient for initial setup, a monthly billing process is established based on the initial setup service date. The Company recognizes the fixed monthly revenue ratably over the service period as earned, less estimated adjustments, and defers revenue for the portion of the monthly bill that is unearned. No separate revenue is earned from the initial setup process. Included in fixed monthly revenue are unbilled amounts for which the revenue recognition criteria had been met as of period-end but were not yet billed to the payor. The estimate of net unbilled fixed monthly revenue recognized is based on historical trends and estimates of future collectability.
10 |
(Continued)
|
AeroCare Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
The Company’s billing system contains payor-specific price tables to reflect the fee schedule amounts in effect or contractually agreed upon by various government and commercial payors for each item of equipment or supply provided to a customer. If the payment amount received differs from the net realizable amount, an adjustment is made to the net revenues in the period that these payment differences are determined. The Company reports revenues in its consolidated financial statements net of such adjustments.
Adoption of ASC 606
The Company adopted ASC 606 effective January 1, 2019, using the modified retrospective transition method. There was no cumulative effect on the opening balance of accumulated deficit as a result of adopting the standard as of January 1, 2019. Results for reporting periods beginning after January 1, 2019 are presented under ASC 606, while comparative information has not been revised and continues to be reported under the accounting standards in effect for those periods.
The Company’s adoption of ASC 606 primarily impacts the presentation of revenues due to the inclusion of variable consideration in the form of implicit price concessions contained in certain of its contracts with customers. Under ASC 606, amounts estimated to be uncollectible are generally considered implicit price concessions that are a direct reduction to net revenue. Prior to adoption of ASC 606, such amounts were classified as bad debt expense. For the year ended December 31, 2019, the Company recorded $4,562,000 of implicit price concessions as a direct reduction of net revenue that would have been recorded as bad debt expense prior to the adoption of ASC 606 compared to $8,599,972 recorded to bad debt expense for the year ended December 31, 2018 which is included in selling, general and administrative expense. The adoption of ASC 606 is not expected to have a material impact on net income or loss on an ongoing basis.
The timing of revenue recognition, billings, and cash collections results in receivables, contract assets, and contract liabilities. The Company did not have contract assets as of December 31, 2019 and 2018. The Company has elected a practical expedient to recognize incremental costs incurred to obtain contracts, which primarily represent sales commissions where the amortization period would be less than one year, as a selling expense when incurred in the consolidated financial statements.
Under ASC 606, the Company recognizes revenue in the consolidated statements of operations and contract assets on the consolidated balance sheets only when services have been provided. Since the Company has performed its obligation under the contract, it has unconditional rights to the consideration recorded as contract assets and therefore classifies those billed and unbilled contract assets as accounts receivable.
Under ASC 606, fixed monthly payments that the Company receives from customers in advance of providing services represent contract liabilities. Such payments primarily relate to patients who are billed monthly in advance and are recognized over the period as earned. The Company had $11,334,309 and $9,160,342 in deferred revenue at December 31, 2019 and 2018, respectively, related to its contracts with customers.
11 |
(Continued)
|
AeroCare Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
Disaggregated revenue by product type for the years ended December 31, 2019 and 2018 are as follows:
2019 | 2018 | |||||||
Sleep products | $ | 274,590,734 | $ | 196,632,260 | ||||
Oxygen therapy | 131,276,841 | 114,039,341 | ||||||
Medical equipment supplies and services | 62,830,507 | 44,631,807 | ||||||
Ventilators | 42,594,108 | 23,871,532 | ||||||
Nebulizers and respiratory medication | 14,832,081 | 9,303,457 | ||||||
Other | 7,525,048 | 4,939,691 | ||||||
$ | 533,649,318 | $ | 393,418,087 |
Disaggregated revenue by payor for the years ended December 31, 2019 and 2018 are as follows:
2019 | 2018 | |||||||
Commercial insurance | $ | 168,926,891 | $ | 139,659,722 | ||||
Medicare | 193,091,689 | 121,915,500 | ||||||
Patient pay | 58,354,477 | 41,865,225 | ||||||
Medicaid | 52,579,078 | 39,334,481 | ||||||
Other | 60,697,183 | 50,643,160 | ||||||
$ | 533,649,318 | $ | 393,418,087 |
(o) | Stock-Based Compensation |
Stock-based compensation costs for stock options granted to employees under the Company’s stock option plan are required to be recognized in the consolidated financial statements over the employee’s requisite service period (generally the vesting period of the equity grant) with measurement based upon the fair value of the option on the grant date.
(p) | Self-Insurance Obligations |
The Company has a self-insured health care plan to provide medical and other health benefits to eligible employees and covered dependents. Reinsurance coverage is maintained through a commercial excess coverage policy. The Company’s liability for claims incurred but not paid at December 31, 2019 and 2018, was $3,715,468 and $2,898,235, respectively, and is included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets.
(q) | Concentrations of Credit Risk |
The Company generally does not require collateral or other security in extending credit to patients; however, the Company routinely obtains assignment of (or is otherwise entitled to receive) benefits receivable under the health insurance programs, plans, or policies of its patients (e.g. Medicare, Medicaid, commercial insurance, and managed-care organizations).
12 |
(Continued)
|
AeroCare Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
Included in accounts receivable at December 31, 2019 and 2018, are amounts due from the Medicare and Medicaid programs which represents approximately 40% of total outstanding accounts receivable for both periods.
Revenue from the Medicare and Medicaid programs represent approximately 46% and 41% of the total for the years ended December 31, 2019 and 2018, respectively.
(r) | Recently Issued Accounting Pronouncements |
In February 2016, the FASB issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees will be required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2021. The Company has not yet evaluated the future impact this standard will have on its consolidated financial statements.
(s) | Use of Estimates |
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and loss during the reporting period. Actual results could differ from those estimates.
(t) | Business Combinations |
The Company applies the acquisition method of accounting for business acquisitions. The results of operations of the businesses acquired by the Company are included as of the respective acquisition date. The acquisition-date fair value of the consideration transferred is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. To the extent the acquisition-date fair value of the consideration transferred exceeds the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed, such excess is allocated to goodwill. Patient relationships, medical records and patient lists are not reported as separate intangible assets due to the regulatory requirements and lack of contractual agreements but are part of goodwill. Customer related relationships are not reported as separate intangible assets but are part of goodwill as authorizing physicians are under no obligation to refer the Company’s services to their patients, who are free to change physicians and service providers at any time. The Company may adjust the preliminary purchase price allocation, as necessary, for up to one year after the acquisition closing date if it obtains more information regarding asset valuations and liabilities assumed that existed but were not available at the acquisition date. Acquisition related expenses are recognized separately from the business combination and are expensed as incurred.
(u) | Cost of net revenue |
Cost of net revenue includes the cost of products and supplies sold to patients, patient equipment depreciation and other operating expenses.
(v) | Selling, general and administrative expense |
Distribution expenses are included in selling, general and administrative expenses. Such expense represents the cost incurred to coordinate and deliver products and supplies to the patients. Included in distribution expenses are leasing, maintenance, licensing and fuel costs for the vehicle fleet; occupancy costs (rent, utilities and property taxes), salaries and other costs related to drivers and dispatch personnel; and amounts paid to shipping vendors.
(w) | Fair value of financial instruments |
The Company’s financial instruments consist primarily of cash, accounts receivable, accounts payable and current and long-term debt.
(2) | Acquisitions |
The Company made the following acquisitions to strengthen their current market share in existing markets or to expand into new markets. Each of the following acquisitions is included in the consolidated financial statements from the respective acquisition date. Goodwill generated from the acquisitions was recognized for the excess of the purchase price over tangible and identifiable intangible assets because of the expected contribution of each acquisition to the overall Company strategy. As a result of the acquisitions, $30,750,244 and $22,302,180 of the goodwill acquired during the years ended December 31, 2019 and 2018, respectively, is expected to be deductible for income tax purposes.
13 |
(Continued)
|
AeroCare Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
The following is a summary of acquisitions for 2019:
A | B | C | D | Total | ||||||||||||||||
Purchase Price: | ||||||||||||||||||||
Cash consideration | $ | 14,398,940 | $ | 7,470,000 | $ | 4,800,000 | $ | 13,879,597 | $ | 40,548,537 | ||||||||||
Payable to seller (see Note 12) | 5,000,000 | 830,000 | 1,200,000 | 2,330,000 | 9,360,000 | |||||||||||||||
$ | 19,398,940 | $ | 8,300,000 | $ | 6,000,000 | $ | 16,209,597 | $ | 49,908,537 | |||||||||||
Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed | ||||||||||||||||||||
Accounts receivable | $ | 3,450,000 | $ | 1,150,000 | $ | 900,000 | $ | 2,102,959 | $ | 7,602,959 | ||||||||||
Inventory and fixed assets | 1,314,855 | 1,161,000 | 1,266,000 | 4,719,357 | 8,461,212 | |||||||||||||||
Prepaid and other current assets | 185,850 | - | - | - | 185,850 | |||||||||||||||
Trade names | 377,788 | 124,500 | 88,500 | 225,893 | 816,681 | |||||||||||||||
Goodwill | 19,858,357 | 5,864,500 | 3,745,500 | 9,161,388 | 38,629,745 | |||||||||||||||
Liabilities assumed | (5,787,910 | ) | - | - | - | (5,787,910 | ) | |||||||||||||
Total identified net assets | $ | 19,398,940 | $ | 8,300,000 | $ | 6,000,000 | $ | 16,209,597 | $ | 49,908,537 |
A - Rocky Mountain Medical Equipment, LLC was purchased on November 1, 2019
B - Ours Corporation and IV Care, LLC were purchased on October 1, 2019
C - Grace Medical, Inc. was purchased on April 1, 2019
D - Other acquisitions in 2019
14 |
(Continued)
|
AeroCare Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
The following is a summary of acquisitions for 2018:
A | B | C | D | Total | ||||||||||||||||
Purchase Price: | ||||||||||||||||||||
Cash | $ | 12,750,000 | $ | 13,000,000 | $ | 8,800,000 | $ | 4,703,169 | $ | 39,253,169 | ||||||||||
Payable to seller (see Note 12) | 2,250,000 | - | 2,200,000 | 644,500 | 5,094,500 | |||||||||||||||
$ | 15,000,000 | $ | 13,000,000 | $ | 11,000,000 | $ | 5,347,669 | $ | 44,347,669 | |||||||||||
Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed | ||||||||||||||||||||
Accounts receivable | $ | 1,750,000 | $ | 2,800,000 | $ | - | $ | 565,000 | $ | 5,115,000 | ||||||||||
Inventory and fixed assets | 1,869,000 | 2,170,000 | 3,390,496 | 1,236,750 | 8,666,246 | |||||||||||||||
Prepaid and other current assets | - | 146,027 | - | - | 146,027 | |||||||||||||||
Trade names | 225,000 | 195,000 | 165,000 | 87,769 | 672,769 | |||||||||||||||
Goodwill | 11,156,000 | 7,688,973 | 7,688,030 | 3,458,150 | 29,991,153 | |||||||||||||||
Accrued expenses | - | - | (243,526 | ) | - | (243,526 | ) | |||||||||||||
Total identified net assets | $ | 15,000,000 | $ | 13,000,000 | $ | 11,000,000 | $ | 5,347,669 | $ | 44,347,669 |
A - Medical Necessities and Services, LLC was purchased on June 1, 2018
B - Home Care Medical, Inc. was purchased on October 1, 2018
C - Cornerstone Medical Services--Midwest, LLC and Cornerstone Medical Services of Columbus, LLC were purchased on November 1, 2018.
D - Other acquisitions in 2018
Acquisition related costs for the years ended December 31, 2019 and 2018, were approximately $485,000 and $300,000, respectively, and are recorded in selling, general, and administrative expenses on the accompany consolidated statements of income.
(3) | Property and Equipment |
Property and equipment as of December 31, 2019 and 2018 consist of the following:
2019 | 2018 | |||||||
Equipment | $ | 242,208,526 | $ | 152,202,153 | ||||
Automobiles | 18,141,016 | 12,783,887 | ||||||
Computer equipment | 12,262,016 | 8,792,404 | ||||||
Furniture and fixtures | 1,577,114 | 1,125,851 | ||||||
Building improvements | 1,281,674 | 956,697 | ||||||
Total property and equipment | 275,434,436 | 175,860,992 | ||||||
Less: Accumulated depreciation | (146,954,626 | ) | (74,814,227 | ) | ||||
Property and equipment, net | $ | 128,515,720 | $ | 101,046,765 |
Depreciation expense for the years ended December 31, 2019 and 2018, was $72,421,409 and $56,871,664, respectively. Included in depreciation expense for the years ended December 31, 2019 and 2018, is approximately $66,084,088 and $51,821,917, respectively, relating to depreciation on patient medical equipment, which is included in the consolidated statements of income as part of cost of revenue.
15 |
(Continued)
|
AeroCare Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
(4) Intangible Assets
Intangible assets and accumulated amortization as of December 31, 2019 and 2018 consist of the following:
2019 | 2018 | |||||||
Cost | $ | 3,633,444 | $ | 2,816,762 | ||||
Accumulated amortization | (2,826,645 | ) | (2,295,234 | ) | ||||
$ | 806,799 | $ | 521,528 |
Amortization expense was $531,411 and $343,123 for years ended December 31, 2019 and 2018, respectively, and is included in depreciation and amortization expense in the accompanying consolidated statements of income.
(5) Goodwill
The changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018 are as follows:
Balance at December 31, 2017 | $ | 105,141,244 | ||
Goodwill acquired in business combinations | 29,991,153 | |||
Write off of earnouts previously accrued | (1,000,000 | ) | ||
Balance at December 31, 2018 | 134,132,397 | |||
Goodwill acquired in business combinations | 38,629,745 | |||
Balance at December 31, 2019 | $ | 172,762,142 |
(6) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following as of December 31:
2019 | 2018 | |||||||
Payroll and related benefits | $ | 13,755,849 | $ | 10,411,755 | ||||
Health and other insurance | 4,247,825 | 3,578,527 | ||||||
Acquisition related accruals | 3,634,372 | 2,140,662 | ||||||
Insurance overpayments | 3,098,316 | - | ||||||
Rebates | 1,589,566 | 906,065 | ||||||
Property and other taxes | 1,580,917 | 1,585,673 | ||||||
Purchases | 1,447,983 | 2,100,585 | ||||||
Other | 1,175,031 | 2,709,485 | ||||||
$ | 30,529,859 | $ | 23,432,752 |
16 |
(Continued)
|
AeroCare Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
(7) Operating Leases
The Company has entered into various leases for office and warehouse space under noncancelable operating leases expiring through 2029. The Company is generally responsible for real estate taxes and maintenance and repairs. Rental costs for office and warehouse space for the years ended December 31, 2019 and 2018 were $10,978,689 and $8,255,247, respectively, and is recorded as a component of selling, general, and administrative expenses in the accompanying consolidated statements of income.
As of December 31, 2019, the following is a schedule of future minimum lease payments required under the operating leases:
Year Ending December 31, | Amount | |||
2020 | $ | 8,879,348 | ||
2021 | 6,450,820 | |||
2022 | 4,632,590 | |||
2023 | 2,816,399 | |||
2024 | 1,490,328 | |||
Thereafter | 82,159 |
17 |
(Continued)
|
AeroCare Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
(8) Notes Payable and Lines of Credit
Notes payable and lines of credit consist of the following as of December 31:
18 |
(Continued)
|
AeroCare Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
Principal payments on long-term debt of the Company over the next five years are as follows:
Year Ending December 31, | Amount | |||
2020 | $ | 17,000,000 | ||
2021 | 17,415,625 | |||
2022 | 18,662,500 | |||
2023 | 18,662,500 | |||
2024 | 297,259,375 | |||
Total | $ | 369,000,000 |
In September 2019 and December 2018, the Company entered into the Fourth Amended and Restated Credit Agreement and the Third Amended and Restated Credit Agreement (collectively, the Amendments), respectively. Under both Amendments, previously existing notes payable were repaid and the related unamortized deferred loan costs associated with those prior notes were recorded as a loss on early extinguishment of debt amounting to $1,509,371 and $1,227,033 for the years ended December 31, 2019 and 2018, respectively. The carrying value of the debt approximates the fair value.
The Company is also party to an additional line of credit with the bank holding the note payable. The line of credit is a working capital revolving line for advances up to $10,000,000. The line bears interest at LIBOR plus an applicable margin based on the Company’s total leverage ratio. There was no outstanding balance on the line of credit at December 31, 2019 and 2018.
The Company is required to maintain certain financial and reporting covenants under its debt agreements.
Amortization of deferred loan costs was $361,160 and $559,781 for the years ended December 31, 2019 and 2018, respectively. Unamortized deferred financing costs as of December 31, 2019 and 2018, were $1,829,537 and $1,761,511, respectively.
Subsequent to year-end, the Company entered into an interest rate swap with a notional amount of $150,000,000 against a portion of its note payable. The interest rate swap requires the Company to pay a fixed annual interest rate and receive a floating interest rate based on the 1-month LIBOR rate.
Subsequent to year end, the Company amended the Fourth Amended and Restated Credit Agreement and secured an additional $20,000,000 in term loan borrowings to protect against any shortfalls that may result from the COVID-19 pandemic as a precautionary measure.
(9) Equity
(a) Common Stock
The Company has 72,000,000 and 65,000,000 shares of $0.001 par value common stock authorized with 42,452,058 and 31,701,809 shares issued and outstanding as of December 31, 2019 and 2018, respectively. Holders of common stock have certain rights as identified below.
Dividends – Dividends on common stock are only payable if and when declared by the stockholders. During the years ended December 31, 2019 and 2018, the Company declared and paid $205,000,000 and $75,000,000, respectively, in dividends.
19 |
(Continued)
|
AeroCare Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
Voting – Common stockholders are entitled to one vote for each share of stock.
Redemption –- Common shares do not have any redemption rights.
Issuances – Per the terms of the purchase agreement of Buypap.com, LLC, the sellers were entitled to earn out payments of the Company’s stock once certain conditions were met, as defined in the purchase agreement. During the years ended December 31, 2019 and 2018, the Company issued 666,667 and 533,333 shares of the Company’s common stock to the sellers in the amount of $2,500,000 and $2,000,000, respectively.
(b) Preferred Stock
The Company had authorized and issued 7,649,933 of Series A and 2,025,316 Series B Redeemable Convertible Preferred Stock with a $0.001 par value (the Series A and Series B Stock), with certain rights, preferences, powers, privileges, and restrictions. On October 18, 2019, the A Series and B Series Stock were converted to 7,649,933 and 2,025,316, respectively, shares of the Company’s common stock pursuant to their original conversion terms.
On October 18, 2019, the Company authorized and issued 18,087,434 shares of Series C Redeemable Convertible preferred stock (the Series C) for total proceeds of $100,000,000, with net proceeds of $95,442,324 after payment of $4,557,676 of issuance costs.
In the accompanying consolidated balance sheets, these preferred shares are reported as mezzanine equity based on the contingent redemption characteristics.
A summary of the rights, preferences, powers, privileges, and restrictions of the preferred stock is as follows:
Conversion Rights: Each preferred share shall be convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and nonassessable shares of common stock as is determined by dividing the Series C original issue price ($5.53) by the Series C conversion price in effect at the time of the conversion. The Series C conversion price is initially $5.53. The initial Series C conversion price, and the rate at which shares of Series C preferred stock may be converted into shares of common stock are subject to certain adjustment provisions.
Dividends: From and after the date of the issuance of any shares of Series A, B, and C Preferred Stock, dividends at the per share rate of 8.0% of the Original Issue Price per annum shall accrue on the shares of Series A, B, and C Preferred Stock (the Accruing Dividends), which Accruing Dividends shall accrue from day to day and shall compound on an annual basis, whether or not declared, and shall be cumulative; provided; however, that such Accruing Dividends shall be payable only when, as, and if declared by the board of the Company. At such time all outstanding Accruing Dividends have been paid in full, the Company may (if declared by the board of the Company) distribute dividends among the holders of Preferred Stock and the holders of common stock pro rata based on the number of shares of common stock held by each, determined on an as-if-converted basis (assuming full conversion of all such Preferred Stock) as of the record date with respect to the declaration of such dividends. On December 16, 2018 and September 29, 2019, the Company obtained waivers of this provision in the Stock Purchase Agreements to permit dividends to be issued to both the holders of Preferred Stock and holders of common stock, without payment of the Accruing Dividends. These were one-time waivers and were signed by the stockholders.
20 |
(Continued)
|
AeroCare Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
At the October 18, 2019 conversion date of the Series A and Series B Preferred Stock, the carrying value of the Series A and Series B, including Accruing Dividends of the Series A and Series B Preferred Stock of $7,097,786 and $1,332,659, respectively, were reclassified to additional paid in capital as part of the total conversion balance. Accumulated Accruing Dividends were $1,643,836 and $6,229,620 as of December 31, 2019 and 2018, respectively. As of December 31, 2019 and 2018, no Accruing Dividends have been declared to be paid.
Redemption Privileges: At any time on or after October 18, 2027, upon a receipt of a written notice requesting redemption for a majority of the Series C stockholders, all Series C Preferred Stock shall be redeemed for cash at the Series C original issue price plus accrued and unpaid dividends whether or not declared.
Voting Rights: On any matter presented to the stockholders of the Company for their action or consideration at any meeting of stockholders of the Company, each holder of outstanding shares of Preferred Stock Series C shall be entitled to cast the number of votes equal to the number of whole shares of Common Stock into which the shares of Preferred Stock held by such holder are convertible as of the record date for determining the stockholders entitled to vote on such matters.
Liquidation Preferences: In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the then outstanding preferred shares shall be entitled to be paid out of the assets of Company available for distribution to its stockholders before any payment shall be made to the holders of the Company’s common stockholders an amount per share equal to the greater of (i) original issue price plus accrued and unpaid dividends whether or not declared or (ii) such amount per share as would have been payable had all of the preferred shares been converted into common stock immediately prior to such an event.
When Series C Preferred Stock is outstanding, the Company reserves and keeps available out of its authorized but unused capital stock, common stock for the purpose of effecting the conversion of the Series C Preferred Stock, if so elected by the holders.
The following is a summary of the changes in preferred stock: |
Series A | Series B | Series C | ||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||
Balance, January 1, 2018 | 7,649,933 | $ | 26,263,423 | 2,025,316 | $ | 8,170,082 | - | $ | - | |||||||||||||||
Preferred Dividend Accretion | - | 2,092,307 | - | 653,607 | - | - | ||||||||||||||||||
Balance, December 31, 2018 | 7,649,933 | 28,355,730 | 2,025,316 | 8,823,689 | - | |||||||||||||||||||
Issuance of Series C Preferred Stock, net of issuance costs of $4,557,676 | - | - | - | - | 18,087,434 | 95,442,324 | ||||||||||||||||||
Preferred Dividend Accretion | - | 1,701,531 | - | 499,294 | - | 1,643,836 | ||||||||||||||||||
Conversion of Series A & B Preferred Stock | (7,649,933 | ) | (30,057,261 | ) | (2,025,316 | ) | (9,322,984 | ) | - | - | ||||||||||||||
Balance, December 31, 2019 | - | $ | - | - | $ | - | 18,087,434 | $ | 97,086,160 |
(10) Stock Compensation Plan
On December 27, 2012, the Company established the AeroCare Holdings, Inc. 2012 Stock Option and Grant Plan (the Plan). In accordance with the Plan, the Company initially reserved 3,000,000 shares of common stock to award to officers, employees, directors, and key persons. The Plan was amended in 2016 increasing the maximum number of shares of common stock reserved for issuance under the Plan to 6,026,862. The Plan was amended on October 17, 2019, increasing the number of shares of common stock reserved for issuance under the Plan to 11,124,785. Stock options granted under the Plan may be either Incentive Stock Options or Nonqualified Stock Options.
21 |
(Continued)
|
AeroCare Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
The following table for the years ended December 31, 2019 and 2018, summarizes option activity:
Weighted- | ||||||||||||
Average | ||||||||||||
Stock | Exercise | Exercise | ||||||||||
Options | Price Range | Price | ||||||||||
Outstanding - December 31, 2017 | 4,800,000 | $ | 1.00 - 2.85 | $ | 2.42 | |||||||
Granted | 100,000 | 4.50 | 4.50 | |||||||||
Exercised | (125,000 | ) | 2.85 | 2.85 | ||||||||
Outstanding - December 31, 2018 | 4,775,000 | 1.00 - 2.85 | 2.42 | |||||||||
Granted | 275,000 | 4.50 | 4.50 | |||||||||
Exercised | (375,000 | ) | 1.00 | 1.00 | ||||||||
Outstanding - December 31, 2019 | 4,675,000 | $ | 1.75 - 4.50 | $ | 2.69 |
The Company recognized approximately $1,276,000 and $1,635,000 of stock compensation expense for stock options vesting during the years ended December 31, 2019 and 2018, respectively.
As of December 31, 2019 and 2018, there was approximately $2,511,889 and $2,983,289 of unrecognized compensation costs expected to be recognized over a weighted average period of approximately 2.45 years and 2.58 years, respectively.
As of December 31, 2019, the Company had 6,449,785, remaining options available to be granted under the Plan.
The fair value of each option granted is estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions used for employee and stockholder options:
2019 | 2018 | |||||||
Expected dividend yield | 0.00 | % | 0.00 | % | ||||
Risk-free interest rate | 1.18 | % | 1.18 | % | ||||
Expected life in years | 10 | 10 | ||||||
Fair value of common stock | $ | 4.50 | $ | 4.50 | ||||
Exptected volatility | 50 | % | 50 | % |
The dividend yield is based on the Company’s belief that they will not be declaring dividends over the expected life of the options granted. The risk-free interest rate over the expected term of the options is based on the U.S. Treasury yield in effect at the time of the grants. The expected life is based on management’s representation concerning the expected time to when options are expected to be exercised. Stock price volatility was estimated based on the estimated stock price volatility of a peer group of publicly traded entities over a similar term.
22 |
(Continued)
|
AeroCare Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
The following table as of December 31, 2019 and 2018, summarizes the information about stock options outstanding and exercisable:
2019 | Options Outstanding | Options Exercisable | ||||||||||||||||||||||||||
Weighted- | Weighted- | |||||||||||||||||||||||||||
Average | Weighted- | Average | Weighted- | |||||||||||||||||||||||||
Remaining | Average | Remaining | Average | |||||||||||||||||||||||||
Exercise | Number | Contractual | Exercise | Number | Contractual | Exercise | ||||||||||||||||||||||
Price | Outstanding | Life | Price | Exercisable | Life | Price | ||||||||||||||||||||||
2012 Plan | $1.75 - $4.50 | 4,675,000 | 6.04 Years | 2.69 | 3,100,000 | 5.48 years | $ | 2.42 | ||||||||||||||||||||
Total | 4,675,000 | 3,100,000 |
2018 | Options Outstanding | Options Exercisable | ||||||||||||||||||||||||||
Weighted- | Weighted- | |||||||||||||||||||||||||||
Average | Weighted- | Average | Weighted- | |||||||||||||||||||||||||
Remaining | Average | Remaining | Average | |||||||||||||||||||||||||
Exercise | Number | Contractual | Exercise | Number | Contractual | Exercise | ||||||||||||||||||||||
Price | Outstanding | Life | Price | Exercisable | Life | Price | ||||||||||||||||||||||
Pool A | $1.00 | 375,000 | 4.75 Years | $ | 1.00 | 375,000 | 4.75 Years | $ | 1.00 | |||||||||||||||||||
2012 Plan | $1.75 - $2.85 | 4,400,000 | 7.38 Years | 2.45 | 2,320,000 | 7.00 years | 2.33 | |||||||||||||||||||||
Total | 4,775,000 | 2,695,000 |
Subsequent to year-end, the Company issued 4,147,500 stock options to employees, half of which vest over time and half of which vest according to certain performance measures.
(11) | Income Taxes |
The income tax provision (benefit) for the years ended December 31, 2019 and 2018 is as follows:
2019 | ||||||||||||
Current | Deferred | Total | ||||||||||
Federal | $ | (239,505 | ) | $ | 2,920,688 | $ | 2,681,183 | |||||
State | 950,000 | 369,674 | 1,319,674 | |||||||||
Total | $ | 710,495 | $ | 3,290,362 | $ | 4,000,857 |
2018 | ||||||||||||
Current | Deferred | Total | ||||||||||
Federal | $ | - | $ | 2,356,668 | $ | 2,356,668 | ||||||
State | 792,000 | (112,937 | ) | 679,063 | ||||||||
Total | $ | 792,000 | $ | 2,243,731 | $ | 3,035,731 |
23 |
(Continued)
|
AeroCare Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
Differences between the expected tax (computed by applying the federal corporate income tax rate of 21% to income before income taxes) and actual tax expense for 2019 and 2018 consisted of:
2019 | 2018 | |||||||
Income Tax Expense Computed at the Statutory Federal Tax Rate | $ | 7,228,665 | $ | 3,974,325 | ||||
State Tax, Net of Federal | 987,176 | 536,460 | ||||||
Nondeductible Expenses | 10,577 | 7,935 | ||||||
Stock-based compensation | (4,270,556 | ) | (1,501,558 | ) | ||||
Other | 44,995 | 18,569 | ||||||
Total Income Tax Provision (Benefit) | $ | 4,000,857 | $ | 3,035,731 |
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities as of December 31, 2019 and 2018 are presented below:
2019 | 2018 | |||||||
Deferred Tax Assets (Liabilities): | ||||||||
Allowance for Doubtful Accounts | $ | 3,969,276 | $ | 2,369,729 | ||||
Property and Equipment | (21,339,797 | ) | (15,402,806 | ) | ||||
Goodwill and Intangible Assets | (10,453,410 | ) | (8,542,208 | ) | ||||
Net Operating Loss Carry Forward | 10,993,979 | 8,354,666 | ||||||
Stock-based Compensation | 1,464,676 | 1,145,706 | ||||||
Net Deferred Tax Liabilities | $ | (15,365,276 | ) | $ | (12,074,913 | ) |
Deferred income taxes are determined based on the temporary difference between the financial statement book basis and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. In assessing the realizability of deferred income tax assets, management considers whether it is more likely than not that all, or some portion, of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred income tax liabilities and projected future taxable income in making this assessment. The Company evaluated the realization of its deferred tax assets and, based on available evidence, including the expected reversal of its deferred tax liabilities, no valuation allowance was deemed necessary as of December 31, 2019 nor 2018.
The tax returns for the years before 2016 are no longer subject to examination by federal, state, and local authorities. The above net operating losses are a result of tax returns filed from years ended December 31, 2014 through the December 31, 2018, with an estimate for activity through December 31, 2019. The net operating loss carryforwards begin to expire in 2034. As of December 31, 2019, the Company had federal and state net operating loss carryforwards of approximately $43,438,000 and $47,395,000 respectively.
(12) | Commitments and Contingencies |
(a) | Health Care Industry |
As a health care provider, the Company is subject to extensive government regulation, including numerous laws directed at preventing fraud and abuse and laws regulating reimbursement under various government programs. The marketing, billing, documenting, and other practices of health care companies are all subject to government scrutiny. To ensure compliance with Medicare and other regulations, regional carriers often conduct audits and request patient records and other documents to support claims submitted by the Company for payment of services rendered to customers. Similarly, government agencies periodically open investigations and obtain information from healthcare providers pursuant to legal process.
24 |
(Continued)
|
AeroCare Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
Violations of federal and state regulations can result in severe criminal, civil, and administrative penalties and sanctions, including disqualification from Medicare and other reimbursement programs.
From time to time, the Company receives inquiries from various government agencies requesting customer records and other documents. It has been the Company’s policy to cooperate with all such requests for information. There are several pending government inquiries, but the government has not instituted any proceedings or served the Company with any complaints as a result of these inquiries. However, the Company can give no assurance as to the duration or outcome of these inquiries.
(b) | Litigation |
The Company is involved in certain other claims and legal actions in the ordinary course of its business. The ultimate disposition of all such matters is not expected to have a material adverse impact on its financial position, results of operations, or liquidity.
(c) | Acquisition Commitments and Contingencies |
In connection with the 2018 and 2019 acquisitions reported in Note 2, the Company has included contingent additional consideration and hold back payment commitments in the purchase prices of acquisitions.
As part of purchase agreements related to the acquisitions in Note 2, there are “earn out payments” and “hold back payments” due to the sellers. “Earn out payments” are contingent consideration generally dependent upon future earnings of the acquisition and “hold back payments” relate to a portion of the purchase price being withheld until specified dates as defined in the purchase agreement that can be used to offset any claims or liabilities of the seller that the Company has paid. During the years ended December 31, 2019 and 2018, the Company withheld amounts for hold backs totaling $9,360,000 and $5,094,500, respectively, related to acquisitions. The Company made payments of $8,901,250 and $5,948,229 in 2019 and 2018, respectively, against amounts withheld for hold backs and settled $2,500,000 and $2,000,000 of earn outs with the issuance of common stock in 2019 and 2018, respectively. As of December 31, 2019 and 2018, the Company has unpaid earn out and hold back payments of $3,832,500 and $5,873,750, respectively, and are reported as payments due to sellers in the accompanying consolidated balance sheets.
(13) | Other Adjustments |
In connection with the preparation of the consolidated financial statements as of and for the years ended December 31, 2019 and 2018, the Company identified certain adjustments to our historical consolidated financial statements. The Company determined that these adjustments were not material to any period presented.
The Company recorded a cumulative adjustment on January 1, 2018 which increased goodwill and intangible assets by $30,624,055, deferred revenue by $6,713,614, deferred tax liability by $7,656,014 and accumulated deficit by $16,254,427. The Company also recorded certain adjustments to the 2019 and 2018 consolidated statements of income, which resulted in decreases in net revenue of $2,173,967 and $2,446,729, decreases in amortization expense of $8,925,907 and $7,036,615 and an increase (decrease) in provision for income taxes of $2,554,189 and $(25,493), respectively.
25 |
(Continued)
|
AeroCare Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
(14) | Subsequent Events |
In preparing these consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through December 11, 2020, the date the consolidated financial statements were available to be issued.
Subsequent to year-end, the World Health Organization declared the spread of Coronavirus Disease (COVID-19) a worldwide pandemic. The COVID-19 pandemic is having significant effects on global markets, supply chains, businesses, and communities. Specific to the Company, COVID-19 may impact various parts of its 2020 operations and financial results, including, but not limited to, potential loss of revenue due to disruptions in the Company’s supply chain management. Management believes the Company is taking appropriate actions to mitigate the negative impact. However, the full impact of COVID-19 is unknown and cannot be reasonably estimated as these events occurred subsequent to year-end and are still developing.
In response to the COVID-19 pandemic and the National Emergency Declaration, dated March 13, 2020, CMS made funds available to healthcare providers under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) legislation, and in April 2020, the Company received distributions from the CARES Act provider relief funds of $13,758,130 targeted to offset lost revenue and expenditures incurred in connection with the COVID-19 pandemic. The provider relief funds are subject to certain restrictions and are subject to recoupment if not used for designated purposes. The Company is currently in the process of determining how much of the CARES Act provider relief funds it will be entitled to based on the terms and conditions of the program, including recent guidance issued by the U.S. Department of Health and Human Services in October 2020.
On December 1, 2020, the Company entered into a stock purchase agreement and plan of merger with AdaptHealth Corp. for a total purchase price of $1.1 billion in cash and 31 million shares of AdaptHealth Corp. common stock. The transaction is expected to close in January 2021.
During the period January 1, 2020 through December 11, 2020, the Company has closed on an additional nine acquisitions for total consideration of $56,042,060. The Company has recorded $36,927,530 of additional goodwill and $19,114,530 in other working capital as a result of these acquisitions.
On December 9, 2020, the Company signed an agreement with it's bank to use commercially reasonable efforts to arrange an amendment to the Company's existing credit agreement. The amendment will permit a 364-day term loan in a principal amount of up to $150,000,0000, the proceeds of which will be used to finance, in part, a one-time distribution to shareholders of the Company. Terms and conditions of the amendment are expected to be consistent with the terms and conditions of the Company's current credit agreement.
26
Exhibit 99.4
Aerocare holdings, inc. and subsidiaries
Unaudited Consolidated Interim Financial Statements
As of September 30, 2020 and December 31, 2019
And for the Nine Months Ended September 30, 2020 and 2019
AeroCare Holdings, Inc. and Subsidiaries
Unaudited Consolidated Interim Financial Statements
Table of Contents
Page | |
Unaudited Consolidated Interim Financial Statements | |
Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 | 1 |
Consolidated Statements of Income for the Nine Months Ended September 30, 2020 and 2019 | 2 |
Consolidated Statements of Comprehensive Income for the Nine Months ended September 30, 2020 and 2019 | 3 |
Consolidated Statements of Changes in Stockholders’ Deficit for the Nine Months Ended September 30, 2020 and 2019 | 4 |
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 | 5 |
Notes to Unaudited Consolidated Interim Financial Statements | 6 |
AEROCARE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
September 30,
2020 |
December 31,
2019 |
|||||||
Assets | ||||||||
Assets: | ||||||||
Cash and cash equivalents | $ | 32,216,825 | $ | 16,449,910 | ||||
Accounts receivable | 69,364,889 | 71,010,358 | ||||||
Other receivables | 1,277,278 | 1,891,670 | ||||||
Inventories | 28,200,026 | 14,520,376 | ||||||
Prepaid and other current assets | 5,361,578 | 3,373,588 | ||||||
Total current assets | 136,420,596 | 107,245,902 | ||||||
Property and equipment, net | 148,577,598 | 128,515,720 | ||||||
Intangible assets, net | 1,296,072 | 806,799 | ||||||
Goodwill | 208,181,672 | 172,762,142 | ||||||
Other assets | 2,461,486 | 1,310,236 | ||||||
Total assets | $ | 496,937,424 | $ | 410,640,799 | ||||
Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Deficit | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 51,645,716 | $ | 51,863,704 | ||||
Accrued expenses and other current liabilities | 28,165,702 | 30,529,859 | ||||||
Due to sellers | 4,405,000 | 3,832,500 | ||||||
Deferred revenue | 26,026,698 | 11,334,309 | ||||||
Current portion of notes payable and lines of credit | 18,000,000 | 17,000,000 | ||||||
Total current liabilities | 128,243,116 | 114,560,372 | ||||||
Noncurrent liabilities: | ||||||||
Notes payable and lines of credit, less current portion | 371,201,930 | 350,170,463 | ||||||
Interest rate swap | 2,794,167 | — | ||||||
Deferred tax liability | 20,742,576 | 15,365,276 | ||||||
Total noncurrent liabilities | 394,738,673 | 365,535,739 | ||||||
Total liabilities | 522,981,789 | 480,096,111 | ||||||
Redeemable convertible preferred stock: | ||||||||
Series C redeemable convertible preferred stock, $0.001 par value per share, 18,087,434 and 0 authorized, issued and oustanding as of September 30, 2020 and December 31, 2019, respectively (liquidation value of $107,649,315 at September 30, 2020) | 103,091,639 | 97,086,160 | ||||||
Commitments and contingencies (note 11) | ||||||||
Stockholders' deficit: | ||||||||
Common stock, $0.001 Par Value, 72,000,000 shares authorized, and 43,054,554 and 42,452,058 issued, and outstanding as of September 30, 2020 and December 31, 2019, respectively | 43,054 | 42,452 | ||||||
Additional paid-in capital | 60,906,498 | 62,017,829 | ||||||
Treasury stock | (2,625,000 | ) | — | |||||
Accumulated deficit | (184,666,389 | ) | (228,601,753 | ) | ||||
Accumulated other comprehensive loss | (2,794,167 | ) | — | |||||
Total stockholders' deficit | (129,136,004 | ) | (166,541,472 | ) | ||||
Total liabilities, redeemable convertible preferred stock and stockholders' deficit | $ | 496,937,424 | $ | 410,640,799 |
See accompanying notes to unaudited consolidated interim financial statements
1
AEROCARE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
Nine months ended September 30,
2020
2019
Net revenue
$
497,663,564
$
379,244,591
Costs and expenses:
Cost of net revenue
201,906,634
152,675,475
Selling, general, and administrative expenses
228,807,011
187,931,447
Depreciation and amortization expense
6,054,622
4,846,282
Total costs and expenses
436,768,267
345,453,204
Operating income
60,895,297
33,791,386
Other income (expense):
Other income
2,705,024
2,208,316
Interest expense
(11,485,647
)
(9,765,655
)
Loss on early extinguishment of debt
—
(1,509,371
)
Total other expense
(8,780,623
)
(9,066,710
)
Income before provision for income taxes
52,114,674
24,724,676
Provision for income taxes
8,179,310
2,694,298
Net income
$
43,935,364
$
22,030,378
See accompanying notes to unaudited consolidated interim financial statements
2
AEROCARE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
Nine months ended September 30, | ||||||||
2020 | 2019 | |||||||
Net income | $ | 43,935,364 | $ | 22,030,378 | ||||
Interest rate swap agreement | (2,794,167 | ) | — | |||||
Comprehensive income | $ | 41,141,197 | $ | 22,030,378 |
See accompanying notes to unaudited consolidated interim financial statements
3
AEROCARE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Deficit
(Unaudited)
Common Stock | Additional | Accumulated Other | Total | |||||||||||||||||||||||||
Number | paid-in | Treasury | Accumulated | Comprehensive | stockholders' | |||||||||||||||||||||||
of shares | Amount | capital | Stock | deficit | Loss | deficit | ||||||||||||||||||||||
Balance - December 31, 2018 | 31,701,809 | $ | 31,701 | $ | 22,217,117 | $ | $ | (54,023,113 | ) | $ | — | $ | (31,774,295 | ) | ||||||||||||||
Net income | — | — | — | — | 22,030,378 | — | 22,030,378 | |||||||||||||||||||||
Dividends paid | — | — | — | — | (105,000,000 | ) | — | (105,000,000 | ) | |||||||||||||||||||
Stock-based compensation expense | — | — | 963,241 | — | — | — | 963,241 | |||||||||||||||||||||
Employee stock bonus | 33,333 | 34 | 124,966 | — | — | — | 125,000 | |||||||||||||||||||||
Share in lieu of cash - Buypap.com, LLC | 666,667 | 667 | 2,499,333 | — | — | — | 2,500,000 | |||||||||||||||||||||
Dividends accreted | — | — | (2,200,826 | ) | — | — | — | (2,200,826 | ) | |||||||||||||||||||
Balance - September 30, 2019 | 32,401,809 | 32,402 | 23,603,831 | — | (136,992,735 | ) | — | (113,356,502 | ) | |||||||||||||||||||
Balance - December 31, 2019 | 42,452,058 | 42,452 | 62,017,829 | — | (228,601,753 | ) | — | (166,541,472 | ) | |||||||||||||||||||
Net income | — | — | — | — | 43,935,364 | — | 43,935,364 | |||||||||||||||||||||
Common stock repurchases | — | — | — | (2,625,000 | ) | — | — | (2,625,000 | ) | |||||||||||||||||||
Exercise of stock option | 60,000 | 60 | 170,940 | — | — | — | 171,000 | |||||||||||||||||||||
Stock-based compensation expense | — | — | 1,723,750 | — | — | — | 1,723,750 | |||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | (2,794,167 | ) | (2,794,167 | ) | |||||||||||||||||||
Sale of common stock | 542,496 | 542 | 2,999,458 | — | — | — | 3,000,000 | |||||||||||||||||||||
Dividends accreted | — | — | (6,005,479 | ) | — | — | — | (6,005,479 | ) | |||||||||||||||||||
Balance - September 30, 2020 | 43,054,554 | $ | 43,054 | $ | 60,906,498 | $ | (2,625,000 | ) | $ | (184,666,389 | ) | $ | (2,794,167 | ) | $ | (129,136,004 | ) |
See accompanying notes to unaudited consolidated interim financial statements
4
AEROCARE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended September 30, | ||||||||
2020 | 2019 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 43,935,364 | $ | 22,030,378 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization expense, including patient equipment depreciation | 64,655,340 | 52,318,600 | ||||||
Amortization of deferred financing costs | 301,885 | 266,359 | ||||||
Loss on early extinguishment of debt | — | 1,509,371 | ||||||
Change in deferred tax liability | (4,473,767 | ) | 1,218,836 | |||||
Stock-based compensation expense | 1,723,751 | 963,241 | ||||||
Employee stock bonus | — | 125,000 | ||||||
Changes in operating assets and liabilities (net of effects of acquired businesses): | ||||||||
Accounts receivable | 10,599,813 | (9,057,074 | ) | |||||
Inventories | (11,040,650 | ) | (758,272 | ) | ||||
Prepaid and other assets | (2,651,593 | ) | (1,962,971 | ) | ||||
Accounts payable, accrued expenses, deferred revenue and other current liabilities | 21,961,309 | 11,471,335 | ||||||
Net cash provided by operating activities | 125,011,452 | 78,124,803 | ||||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (77,558,560 | ) | (68,438,740 | ) | ||||
Business acquisitions, net of cash acquired | (50,514,060 | ) | (15,295,158 | ) | ||||
Net cash used in investing activities | (128,072,620 | ) | (83,733,898 | ) | ||||
Cash flows from financing activities | ||||||||
Proceeds from notes payable and lines of credit | 34,890,000 | 344,700,000 | ||||||
Payments on notes payable and lines of credit | (13,000,000 | ) | (239,700,000 | ) | ||||
Payment of deferred financing costs | (160,417 | ) | (1,850,572 | ) | ||||
Proceeds from stock option exercises | 171,000 | — | ||||||
Proceeds from issuance of common stock | 3,000,000 | — | ||||||
Payments on capital lease obligations | (2,625,000 | ) | — | |||||
Payments on due to sellers | (3,447,500 | ) | (2,376,250 | ) | ||||
Dividend distribution | — | (105,000,000 | ) | |||||
Net cash provided by (used in) financing activities | 18,828,083 | (4,226,822 | ) | |||||
Net increase (decrease) in cash and cash equivalents | 15,766,915 | (9,835,918 | ) | |||||
Cash and cash equivalents - beginning of year | 16,449,910 | 25,708,831 | ||||||
Cash and cash equivalents - end of period | $ | 32,216,825 | $ | 15,872,913 | ||||
Supplemental disclosure of cash flow information | ||||||||
Cash paid for interest | $ | 11,121,239 | $ | 9,470,245 | ||||
Cash paid for income taxes | 520,004 | 1,849,092 | ||||||
Supplemental disclosure of noncash financing activities | ||||||||
Payable to sellers for business acquisitions | $ | 4,020,000 | $ | 2,700,000 | ||||
Dividends accreted on preferred stock Series A and B | 6,005,479 | 2,200,826 | ||||||
Shares in lieu of cash - Buypap.com, LLC | — | 2,500,000 |
See accompanying notes to unaudited consolidated interim financial statements
5
AeroCare Holdings, Inc. and Subsidiaries
Notes to Unaudited Consolidated Interim Financial Statements
(1) | Nature of Business and Significant Accounting Policies |
(a) | Nature of Business and Ownership |
AeroCare Holdings, Inc. and Subsidiaries (the Company) provides oxygen, respiratory therapy services, medications, and home medical equipment to the home health care market. The Company has branches located in 28 states and is headquartered in Orlando, Florida. The Company’s equipment and supplies are readily available and the Company is not dependent on a single supplier or a few suppliers.
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, the unaudited consolidated interim financial statements include all necessary adjustments for a fair presentation of the financial position and results of operations for the periods presented.
There have been no material changes in the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s consolidated financial statements for the year ended December 31, 2019. A summary of the Company’s significant accounting policies follows:
(b) | Principles of Consolidation |
The unaudited consolidated interim financial statements include AeroCare Holdings, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the unaudited consolidated interim financial statements.
(c) | Cash and Cash Equivalents |
The Company considers all highly liquid securities purchased with original maturities of 90 days or less to be cash equivalents. Cash equivalents are stated at cost, which approximates market value, and consist primarily of money market accounts that are readily convertible to cash. The Company maintains cash in demand deposit accounts with federally insured banks. At times, the balances in these accounts may be in excess of federally insured limits. The Company had $6,673,295 in money market accounts as of September 30, 2020.
(d) | Accounts Receivable |
Accounts receivable consists of amounts due from insurance carriers, Medicare, Medicaid and individual customers, all of which are recorded at net realizable value. Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required to record accounts receivable at their net realizable values. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application, claim denial, or account review. Included in accounts receivable are earned but unbilled receivables. Billing delays, ranging from several days to several weeks, can occur due to the Company’s policy of obtaining required payor-specific documentation prior to billing for its services rendered.
6
AeroCare Holdings, Inc. and Subsidiaries
Notes to Unaudited Consolidated Interim Financial Statements
The Company performs detailed analyses to evaluate the net realizable value of accounts receivable. Specifically, the Company considers historical collections data, accounts receivable aging trends, other operating trends, and relevant business conditions. Because of the continuing changes in the health care industry and third-party reimbursement, it is possible that the Company’s estimates could change, which could have an impact on operations and cash flows.
(e) | Inventories |
Inventories principally consist of respiratory equipment and patient billable supplies, which are valued at the lower of cost or net realizable value. Cost is determined on a first-in, first-out method.
(f) | Property and Equipment |
Property and equipment are stated at cost net of accumulated depreciation. Property and equipment acquired in business combinations are stated at fair value as of the date of acquisition. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets which ranges from 13 months to 10 years. The useful lives for patient medical equipment correlate with the medical reimbursement periods. Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments are capitalized as additions to property and equipment. The cost of leasehold improvements on leased office and warehouse space is capitalized and amortized using the straight-line method over the shorter of the life of the applicable lease or the useful life of the improvement. Major overhauls of property and equipment that do not extend the corresponding useful lives are expensed as incurred.
(g) | Long-Lived Assets |
The Company periodically reviews long-lived assets to be held and used in operations for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. An impairment loss is recognized when the estimated, undiscounted, future cash flows from the assets are less than the carrying value of the assets. Assets to be disposed of are reported at the lower of their carrying amount or fair value less cost to sell. No impairment loss was recognized during the nine months ended September 30, 2020 and 2019.
(h) | Intangible Assets |
Intangible assets consist of acquired trade names which are recognized at their estimated fair value when acquired. These intangibles are being amortized over their estimated useful lives, determined to be 2 years. Intangible assets subject to amortization are reviewed for potential impairment whenever events or circumstances indicated the carrying amounts may not be recoverable.
(i) | Goodwill |
Goodwill is recognized as a result of a business combination when the price paid for the acquired business exceeds the estimated fair value of its identified net assets. The Company evaluates potential impairment of goodwill at least annually or more frequently if a triggering event is identified. If a triggering event were to occur, the Company will determine if it is more likely than not that the fair value of the entity is less than its carrying amount, including goodwill. When recoverability is unlikely, the Company calculates goodwill impairment as the amount the Company’s carrying value including goodwill exceeds its fair value. No impairment loss was recognized during the nine months ended September 30, 2020 and 2019.
7
AeroCare Holdings, Inc. and Subsidiaries
Notes to Unaudited Consolidated Interim Financial Statements
(j) | Deferred Loan Costs |
Deferred loan costs consist of costs incurred in connection with obtaining financing and are amortized using the straight-line method, which approximates the effective interest method over the term of the related financing agreement. Deferred loan costs are included as an offset to notes payable and lines of credit on the accompanying consolidated balance sheets.
(k) | Income Taxes |
The Company accounts for income taxes using an asset and liability approach which requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s unaudited consolidated interim financial statements or tax returns. Deferred income taxes have been provided for the differences between the financial reporting carrying values and the income tax reporting basis of the Company’s assets and liabilities. These temporary differences consist of differences between the timing of the deduction of certain amounts between income tax and financial statement reporting purposes.
(l) | Uncertain Tax Positions |
The Company will recognize a tax benefit in the financial statements for an uncertain tax position only if it is management's assessment that the position is "more likely than not" (i.e., a likelihood greater than 50 percent) to be allowed by the tax jurisdiction based solely on the technical merits of the position. The term "tax position" refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for financial reporting purposes. As of September 30, 2020 and December 31, 2019, the Company does not have an uncertain tax position that qualify for either recognition or disclosure in the unaudited consolidated interim financial statements.
(m) | Adoption of New Accounting Standard |
The Company adopted the FASB ASC Topic 606, Revenue from Contracts with Customers (ASC 606), effective January 1, 2019, using the modified retrospective transition method. There was no cumulative effect on the opening balance of accumulated deficit as a result of adopting the standard as of January 1, 2019. Results for all periods herein are presented under ASC 606.
The Company’s adoption of ASC 606 primarily impacts the presentation of revenues due to the inclusion of variable consideration in the form of implicit price concessions contained in certain of its contracts with customers. Under ASC 606, amounts estimated to be uncollectible are generally considered implicit price concessions that are a direct reduction to net revenue. Prior to adoption of ASC 606, such amounts were classified as bade debt expense. The adoption of ASC 606 is not expected to have a material impact on net income or loss on an ongoing basis.
Under ASC 606, the Company recognizes revenue in the consolidated statements of operations and contract assets on the consolidated balance sheets only when services have been provided. Since the Company has performed its obligation under the contract, it has unconditional rights to the consideration recorded as contract assets and therefore classifies those billed and unbilled contract assets as accounts receivable.
8
AeroCare Holdings, Inc. and Subsidiaries
Notes to Unaudited Consolidated Interim Financial Statements
Under ASC 606, fixed monthly payments that the Company receives from customers in advance of providing services represent contract liabilities. Such payments primarily relate to patients who are billed monthly in advance and are recognized over the period as earned.
(n) | Revenue Recognition |
The Company generates revenues for services and related products that the Company provides to patients for home medical equipment, related supplies, and other items. The Company’s revenues are recognized in the period in which services and related products are provided to customers and are recorded either at a point in time for the sale of supplies and disposables, which occurs upon delivery, and when applicable, setup and instruction to customers , or over the fixed monthly service period for equipment. Revenue from shipping and handling charges are not considered a separate deliverable and are recognized at the time the products are shipped or delivered, depending on the terms of the related agreement, and included in sales.
Revenues are recognized when control of the promised good or service is transferred to customers, in an amount that reflects the consideration to which the Company expects to receive from patients or under reimbursement arrangements with Medicare, Medicaid and third-party payors, in exchange for those goods and services.
The Company determines the transaction price based on contractually agreed-upon amounts or rates, adjusted for estimates of variable consideration, such as implicit price concessions. The Company utilizes the expected value method to determine the amount of variable consideration that should be included to arrive at the transaction price, using contractual agreements and historical reimbursement experience within each payor type. The Company applies constraint to the transaction price, such that net revenue is recorded only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in the future. If actual amounts of consideration ultimately received differ from the Company’s estimates, the Company adjusts these estimates, which would affect net revenue in the period such adjustments become known.
Sales revenue is recognized upon transfer of control of products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Revenues for the sale of durable medical equipment and related supplies, including oxygen equipment, ventilators, wheelchairs, hospital beds and infusion pumps, are recognized at the time of delivery.
The Company provides certain equipment to patients which is reimbursed periodically in fixed monthly payments for as long as the patient is using the equipment and medical necessity continues (in certain cases, the fixed monthly payments are capped at a certain amount). The equipment provided to the patient is based upon medical necessity as documented by prescriptions and other documentation received from the patient’s physician. The patient generally does not negotiate or have input with respect to the manufacturer or model of the equipment prescribed by their physician and delivered by the Company. Once initial delivery of this equipment is made to the patient for initial setup, a monthly billing process is established based on the initial setup service date. The Company recognizes the fixed monthly revenue ratably over the service period as earned, less estimated adjustments, and defers revenue for the portion of the monthly bill that is unearned. No separate revenue is earned from the initial setup process. Included in fixed monthly revenue are unbilled amounts for which the revenue recognition criteria had been met as of period-end but were not yet billed to the payor. The estimate of net unbilled fixed monthly revenue recognized is based on historical trends and estimates of future collectability.
9
AeroCare Holdings, Inc. and Subsidiaries
Notes to Unaudited Consolidated Interim Financial Statements
The Company’s billing system contains payor-specific price tables to reflect the fee schedule amounts in effect or contractually agreed upon by various government and commercial payors for each item of equipment or supply provided to a customer. If the payment amount received differs from the net realizable amount, an adjustment is made to the net revenues in the period that these payment differences are determined. The Company reports revenues in its consolidated financial statements net of such adjustments.
10
AeroCare Holdings, Inc. and Subsidiaries
Notes to Unaudited Consolidated Interim Financial Statements
The timing of revenue recognition, billings, and cash collections results in receivables, contract assets, and contract liabilities. The Company did not have contract assets as of December 31, 2019. The Company has elected a practical expedient to recognize incremental costs incurred to obtain contracts, which primarily represent sales commissions where the amortization period would be less than one year, as a selling expense when incurred in the consolidated financial statements.
Under ASC 606, the Company recognizes revenue in the consolidated statements of operations and contract assets on the consolidated balance sheets only when services have been provided. Since the Company has performed its obligation under the contract, it has unconditional rights to the consideration recorded as contract assets and therefore classifies those billed and unbilled contract assets as accounts receivable.
Under ASC 606, fixed monthly payments that the Company receives from customers in advance of providing services represent contract liabilities. Such payments primarily relate to patients who are billed monthly in advance and are recognized over the period as earned. The Company had $12,268,568 and $11,334,309 in deferred revenue at September 30, 2020 and December 31, 2019, respectively, related to its contracts with customers.
Disaggregated revenue by product type for the nine month periods ended September 30, 2020 and 2019 are as follows:
Disaggregated Revenue
2020 | 2019 | |||||||
Sleep products | $ | 260,621,911 | $ | 191,266,467 | ||||
Oxygen therapy | 110,316,108 | 97,543,638 | ||||||
Medical equipment supplies and services | 53,711,803 | 45,141,136 | ||||||
Ventilators | 47,417,470 | 29,076,425 | ||||||
Nebulizers and respiratory medication | 17,860,038 | 10,151,537 | ||||||
Other | 7,736,234 | 6,065,388 | ||||||
$ | 497,663,564 | $ | 379,244,591 |
Disaggregated revenue by payor for the nine month periods ended September 30, 2020 and 2019 are as follows:
2020 | 2019 | |||||||
Medicare | $ | 201,694,399 | $ | 131,932,738 | ||||
Commercial insurance | 132,420,063 | 123,289,439 | ||||||
Patient pay | 61,979,582 | 43,999,116 | ||||||
Medicaid | 54,396,050 | 36,674,959 | ||||||
Other | 47,173,470 | 43,348,339 | ||||||
$ | 497,663,564 | $ | 379,244,591 |
11
AeroCare Holdings, Inc. and Subsidiaries
Notes to Unaudited Consolidated Interim Financial Statements
In response to the COVID-19 pandemic and the National Emergency Declaration, dated March 13, 2020, CMS made funds available to healthcare providers under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) legislation, and in April 2020, the Company received distributions from the CARES Act provider relief funds of $13,758,130 targeted to offset lost revenue and expenditures incurred in connection with the COVID-19 pandemic. The provider relief funds are subject to certain restrictions and are subject to recoupment if not used for designated purposes. The Company is currently in the process of determining how much of the CARES Act provider relief funds it will be entitled to based on the terms and conditions of the program, including recent guidance issued by the U.S. Department of Health and Human Services in October 2020. The CARES Act provider relief funds of $13,758,130 are included in deferred revenue in the consolidated balance sheet as of September 30, 2020.
(o) | Stock-Based Compensation |
Stock-based compensation costs for stock options granted to employees under the Company’s stock option plan are required to be recognized in the unaudited consolidated interim financial statements over the employee’s requisite service period (generally the vesting period of the equity grant) with measurement based upon the fair value of the option on the grant date.
(p) | Self-Insurance Obligations |
The Company has a self-insured health care plan to provide medical and other health benefits to eligible employees and covered dependents. Reinsurance coverage is maintained through a commercial excess coverage policy. The Company’s liability for claims incurred but not paid at September 30, 2020 and December 31, 2019, was $3,474,049 and $3,715,468, respectively, and is included in accrued expenses and other current liabilities in the accompanying unaudited consolidated balance sheets.
(q) | Concentrations of Credit Risk |
The Company generally does not require collateral or other security in extending credit to patients; however, the Company routinely obtains assignment of (or is otherwise entitled to receive) benefits receivable under the health insurance programs, plans, or policies of its patients (e.g. Medicare, Medicaid, commercial insurance, and managed-care organizations).
Included in accounts receivable at September 30, 2020 and December 31, 2019, are amounts due from the Medicare and Medicaid programs which represents approximately 34% and 40% of total outstanding accounts receivable, respectively.
Revenue from the Medicare and Medicaid programs represent approximately 51% and 44% of the total for the nine months ended September 30, 2020 and 2019, respectively.
12
AeroCare Holdings, Inc. and Subsidiaries
Notes to Unaudited Consolidated Interim Financial Statements
(r) | Recently Issued Accounting Pronouncements |
In February 2016, the FASB issued Accounting Standards Update (ASU) 2016-02, Leases (ASC 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees will be required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2021. The Company is still evaluating the impact on its results of operations and does not expect the adoption of this standard will have an impact on liquidity.
(s) | Use of Estimates |
The preparation of unaudited consolidated interim financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated interim financial statements and the reported amounts of income and loss during the reporting period. Actual results could differ from those estimates.
(t) | Business Combinations |
The Company applies the acquisition method of accounting for business acquisitions. The results of operations of the businesses acquired by the Company are included as of the respective acquisition date. The acquisition-date fair value of the consideration transferred is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. To the extent the acquisition-date fair value of the consideration transferred exceeds the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed, such excess is allocated to goodwill. Patient relationships, medical records and patient lists are not reported as separate intangible assets due to the regulatory requirements and lack of contractual agreements but are part of goodwill. Customer related relationships are not reported as separate intangible assets but are part of goodwill as authorizing physicians are under no obligation to refer the Company’s services to their patients, who are free to change physicians and service providers at any time. The Company may adjust the preliminary purchase price allocation, as necessary, for up to one year after the acquisition closing date if it obtains more information regarding asset valuations and liabilities assumed that existed but were not available at the acquisition date. Acquisition related expenses are recognized separately from the business combination and are expensed as incurred.
(u) | Cost of net revenue |
Cost of net revenue includes the cost of products and supplies sold to patients, patient equipment depreciation and other operating expenses.
(v) | Selling, general and administrative expense |
Distribution expenses are included in selling, general and administrative expenses. Such expense represents the cost incurred to coordinate and deliver products and supplies to the patients. Included in distribution expenses are leasing, maintenance, licensing and fuel costs for the vehicle fleet; occupancy costs (rent, utilities and property taxes), salaries and other costs related to drivers and dispatch personnel; and amounts paid to shipping vendors.
(w) | Fair value of financial instruments |
The Company's financial instruments consist primarily of cash, accounts receivable, accounts payable and current and long-term debt.
(2) | Acquisitions |
During the nine months ended September 30, 2020 and 2019, the Company completed several acquisitions to strengthen their current market share in existing markets or to expand into new markets. Each of the following acquisitions is included in the unaudited consolidated interim financial statements from the respective acquisition date. Goodwill generated from the acquisitions was recognized for the excess of the purchase price over tangible and identifiable intangible assets because of the expected contribution of each acquisition to the overall Company strategy. As a result of the acquisitions, $35,207,905 in goodwill is expected to be deductible for income tax purposes. The estimated fair values of the net assets of acquired businesses as described below are subject to change resulting from such items as working capital adjustments post-acquisition. As a result, the acquisition accounting for certain acquired businesses could change in subsequent periods resulting in adjustments to goodwill once finalized.
13
AeroCare Holdings, Inc. and Subsidiaries
Notes to Unaudited Consolidated Interim Financial Statements
The following is a summary of acquisitions for the nine months ended September 30, 2020:
A | B | C | D | Total | ||||||||||||||||
Purchase Price: | ||||||||||||||||||||
Cash consideration | $ | 6,300,000 | $ | 28,437,647 | $ | 12,000,000 | $ | 5,634,412 | $ | 52,372,060 | ||||||||||
Payable to seller (see Note 11) | - | 3,000,000 | - | 1,020,000 | 4,020,000 | |||||||||||||||
$ | 6,300,000 | $ | 31,437,647 | $ | 12,000,000 | $ | 6,654,413 | $ | 56,392,060 | |||||||||||
Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed | ||||||||||||||||||||
Accounts receivable | $ | 1,100,000 | $ | 4,575,000 | $ | 1,625,000 | $ | 1,039,952 | $ | 8,339,952 | ||||||||||
Inventory and fixed assets | 1,258,500 | 5,410,000 | 1,547,000 | 1,231,000 | 9,446,500 | |||||||||||||||
Prepaid and other current assets | - | 487,647 | - | - | 487,647 | |||||||||||||||
Trade names | 94,500 | 471,565 | 180,000 | 94,366 | 840,431 | |||||||||||||||
Goodwill | 3,847,000 | 20,493,435 | 8,648,000 | 4,289,095 | 37,277,530 | |||||||||||||||
Total identified net assets | $ | 6,300,000 | $ | 31,437,647 | $ | 12,000,000 | $ | 6,654,413 | $ | 56,392,060 |
A - CHI Health at Home was purchased on July 1, 2020
B - Airway Oxygen, Inc. was purchased on September 30, 2020
C - Total Home Health was purchased on September 30, 2020
D - Other acquisitions in 2020
14
AeroCare Holdings, Inc. and Subsidiaries
Notes to Unaudited Consolidated Interim Financial Statements
The following is a summary of acquisitions for the nine months ended September 30, 2019:
A | B | Total | ||||||||||
Purchase Price: | ||||||||||||
Cash consideration | $ | 4,800,000 | $ | 10,495,158 | $ | 15,295,158 | ||||||
Payable to seller (see Note 11) | 1,200,000 | 1,500,000 | 2,700,000 | |||||||||
$ | 6,000,000 | $ | 11,995,158 | $ | 17,995,158 | |||||||
Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed | ||||||||||||
Accounts receivable | $ | 900,000 | $ | 1,477,218 | $ | 2,377,218 | ||||||
Inventory and fixed assets | 1,266,000 | 3,750,267 | 5,016,267 | |||||||||
Trade names | 88,500 | 162,676 | 251,176 | |||||||||
Goodwill | 3,745,500 | 6,604,997 | 10,350,497 | |||||||||
Total identified net assets | $ | 6,000,000 | $ | 11,995,158 | $ | 17,995,158 |
A - Grace Medical, Inc. was purchased on April 1, 2019
B - Other acquisitions in 2019
Acquisition related costs for the nine months ended September 30, 2020 and 2019, were approximately $420,000 and $345,000, respectively, and are recorded in selling, general, and administrative expenses on the accompany consolidated statements of operations.
(3) | Property and Equipment |
Property and equipment as of September 30, 2020 and December 31, 2019 consist of the following:
September 30,
2020 |
December 31,
2019 |
|||||||
Equipment | $ | 320,746,084 | $ | 242,208,526 | ||||
Automobiles | 20,635,263 | 18,141,016 | ||||||
Computer equipment | 14,263,759 | 12,262,016 | ||||||
Furniture and fixtures | 2,020,030 | 1,577,114 | ||||||
Building improvements | 1,738,222 | 1,281,674 | ||||||
Total property and equipment | 359,403,359 | 275,434,436 | ||||||
Less: Accumulated depreciation | (210,825,761 | ) | (146,954,626 | ) | ||||
Property and equipment, net | $ | 148,577,598 | $ | 128,515,720 |
Depreciation expense for the nine months ended September 30, 2020 and 2019, was $64,304,182 and $52,105,744, respectively. Included in depreciation expense for the nine months ended September 30, 2020 and 2019, is $58,600,718 and $47,589,875, respectively, relating to depreciation on patient medical equipment, which is included in the consolidated statements of income as part of cost of revenue.
15
AEROCARE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Interim Financial Statements
(4) | Intangible Assets |
Intangible assets and accumulated amortization as of September 30, 2020 and December 31, 2019 consist of the following:
September 30,
2020 |
December 31,
2019 |
|||||||
Cost | $ | 4,473,875 | $ | 3,633,444 | ||||
Accumulated amortization | (3,177,802 | ) | (2,826,645 | ) | ||||
$ | 1,296,072 | $ | 806,799 |
Amortization expense was $351,158 and $212,856 for the nine months ended September 30, 2020 and 2019, respectively, and is included in depreciation and amortization expense in the accompanying consolidated statements of income.
(5) | Goodwill |
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. The change in the carrying amount of goodwill for the nine months ended September 30, 2020 was as follows:
Balance at December 31, 2019 | $ | 172,762,142 | |
Goodwill acquired in business combinations | 37,277,530 | ||
Sale of rehab business | (1,858,000 | ) | |
Balance at September 30, 2020 | $ | 208,181,672 |
(6) | Accrued Expenses and Other Current Liabilities |
Accrued expenses and other current liabilities consist of the following as of September 30, 2020 and December 31, 2019:
September 30,
2020 |
December 31,
2019 |
|||||||
Payroll and related benefits | $ | 11,872,150 | $ | 13,755,849 | ||||
Health and other insurance | 3,495,510 | 4,247,825 | ||||||
Acquisition related accruals | 3,327,945 | 3,634,372 | ||||||
Insurance overpayments | 382,940 | 3,098,316 | ||||||
Rebates | 554,775 | 1,589,566 | ||||||
Property and other taxes | 2,738,086 | 1,580,917 | ||||||
Purchases | 1,787,514 | 1,447,983 | ||||||
Other | 4,006,781 | 1,175,031 | ||||||
$ | 28,165,702 | $ | 30,529,859 |
16
AEROCARE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Interim Financial Statements
(7) | Operating Leases |
The Company has entered into various leases for office and warehouse space under noncancelable operating leases expiring through 2029. The Company is generally responsible for real estate taxes and maintenance and repairs. Rental costs for office and warehouse space for the nine months ended September 30, 2020 and 2019 were $10,172,551 and $7,906,146, respectively, and is recorded as a component of selling, general, and administrative expenses in the accompanying consolidated statements of income.
As September 30, 2020, the following is a schedule of future minimum lease payments required under the operating leases:
Twelve Months Ended September 30, | Amount | |||
2021 | $ | 9,536,544 | ||
2022 | 6,874,741 | |||
2023 | 3,779,999 | |||
2024 | 1,441,024 | |||
Thereafter | 291,212 |
(8) | Notes Payable and Lines of Credit |
Notes payable and lines of credit consist of the following as of September 30, 2020 and December 31, 2019:
17
AEROCARE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Interim Financial Statements
Description |
September 30,
2020 |
December 31,
2019 |
||||||
Note payable with a bank in the amount of $360,000,000 as per the Fourth Amended and Restated Credit Agreement dated September 30, 2019, as amended. Principal and interest is payable quarterly; interest rate is determined based on LIBOR plus an applicable margin based on the Company's total leverage ratio (rate of 3.16% at September 30, 2020). The note matures on September 30, 2024. The note is secured by a blanket assignment of business assets. | $ | 342,750,000 | $ | 335,750,000 | ||||
Acquisition revolving loan dated September 30, 2019 with a bank; total commitment of $100,000,000. Company can draw on this loan through September 30, 2021 in order to fund future acquisitions. Interest is payable quarterly; interest rate is determined based on LIBOR plus an applicable margin based on the Company's total leverage ratio (rate of 3.16% at September 30, 2020). At the termination of the revolver period, this loan converts to a term loan. The note matures on September 30, 2024. The note is secured by a blanket assignment of business assets. | 48,140,000 | 33,250,000 | ||||||
Total | 390,890,000 | 369,000,000 | ||||||
Less: Current portion | (18,000,000 | ) | (17,000,000 | ) | ||||
Less: Deferred loan costs | (1,688,070 | ) | (1,829,537 | ) | ||||
Long-term portion | $ | 371,201,930 | $ | 350,170,463 |
Principal payments on long-term debt of the Company over the next five years are as follows:
Twelve Months Ended September 30, | Amount | |||
2021 | 18,000,000 | |||
2022 | 20,407,000 | |||
2023 | 20,407,000 | |||
2024 | 332,076,000 | |||
Total | $ | 390,890,000 |
In September 2019, the Company entered into the Fourth Amended and Restated Credit Agreement (the Amendment). Under the Amendment, previously existing notes payable were repaid and the related unamortized deferred loan costs associated with those prior notes were recorded as a loss on early extinguishment of debt amounting to $1,509,371 for the nine months ended September 30, 2019. The carrying value of the debt approximates the fair value.
18
AEROCARE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Interim Financial Statements
The Company is also party to an additional line of credit with the bank holding the note payable. The line of credit is a working capital revolving line for advances up to $10,000,000. The line bears interest at LIBOR plus an applicable margin based on the Company’s total leverage ratio. There was no outstanding balance on the line of credit at September 30, 2020 and December 31, 2019.
The Company is required to maintain certain financial and reporting covenants under its debt agreements.
In March 2020, the Company entered into an interest rate swap with a notional amount of $150,000,000 against a portion of its note payable. The interest rate swap requires the Company to pay a fixed annual interest rate and receive a floating interest rate based on the 1-month LIBOR rate. The Company designated its swap as an effective cash flow hedge of interest rate risk. Accordingly, changes in the fair value of the interest rate swap are recorded as a component of accumulated other comprehensive income (loss) within stockholders' deficit and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings. The fair value of the interest rate swap agreement was $2,794,167 and is included in non-current liabilities in the consolidated balance sheet.
In April 2020, the Company amended the Fourth Amended and Restated Credit Agreement and secured an additional $20,000,000 in term loan borrowings to protect against any shortfalls that may result from the COVID-19 pandemic as a precautionary measure.
(9) | Equity |
(a) | Common Stock |
The Company has 72,000,000 and 72,000,000 shares of $0.001 par value common stock authorized with 43,054,554 and 42,452,058 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively. Holders of common stock have certain rights as identified below.
Dividends – Dividends on common stock are only payable if and when declared by the stockholders. During the nine months ended September 30, 2020 there were no dividends declared. During the nine months ended September 30, 2019, the Company declared and paid $105,000,000 in dividends.
Voting – Common stockholders are entitled to one vote for each share of stock.
Redemption –- Common shares do not have any redemption rights.
Issuances – Per the terms of the purchase agreement of Buypap.com, LLC, the sellers were entitled to earn out payments of the Company’s stock once certain conditions were met, as defined in the purchase agreement. During the nine months ended September 30, 2020, the Company issued no common stock to the sellers. During the nine months ended September 30, 2019, the Company issued 666,6667 shares of the Company’s common stock to the sellers in the amount of $2,500,000.
(b) | Preferred Stock |
The Company had authorized and issued 7,649,933 of Series A and 2,025,316 Series B Redeemable Convertible Preferred Stock with a $0.001 par value (the A and B Stock), with certain rights, preferences, powers, privileges, and restrictions. On October 18, 2019, the A Series and B Series Stock were converted to 7,649,933 and 2,025,316, respectively, shares of the Company’s common stock pursuant to their original conversion terms.
19
AEROCARE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Interim Financial Statements
On October 18, 2019, the Company authorized and issued 18,087,434 shares of Series C Redeemable Convertible preferred stock (the Series C) for total proceeds of $100,000,000, with net proceeds of $95,442,324 after payment of $4,557,676 of issuance costs.
In the accompanying consolidated balance sheets, these preferred shares are reported as mezzanine equity based on the contingent redemption characteristics.
A summary of the rights, preferences, powers, privileges, and restrictions of the preferred stock is as follows:
Conversion Rights: Each preferred share shall be convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and nonassessable shares of common stock as is determined by dividing the Series C original issue price ($5.53) by the Series C conversion price in effect at the time of the conversion. The Series C conversion price is initially $5.53. The initial Series C conversion price, and the rate at which shares of Series C preferred stock may be converted into shares of common stock are subject to certain adjustment provisions.
Dividends: From and after the date of the issuance of any shares of Series A, B, and C Preferred Stock, dividends at the per share rate of 8.0% of the Original Issue Price per annum shall accrue on the shares of Series A, B, and C Preferred Stock (the Accruing Dividends), which Accruing Dividends shall accrue from day to day and shall compound on an annual basis, whether or not declared, and shall be cumulative; provided; however, that such Accruing Dividends shall be payable only when, as, and if declared by the board of the Company. At such time all outstanding Accruing Dividends have been paid in full, the Company may (if declared by the board of the Company) distribute dividends among the holders of Preferred Stock and the holders of common stock pro rata based on the number of shares of common stock held by each, determined on an as-if-converted basis (assuming full conversion of all such Preferred Stock) as of the record date with respect to the declaration of such dividends. On December 16, 2018 and September 29, 2019, the Company obtained waivers of this provision in the Stock Purchase Agreements to permit dividends to be issued to both the holders of Preferred Stock and holders of common stock, without payment of the Accruing Dividends. These were one-time waivers and were signed by the stockholders.
At the October 18, 2019 conversion date of the Series A and Series B Preferred Stock, the carrying value of the Series A and Series B, including Accruing Dividends of the Series A and Series B Preferred Stock of $7,097,786 and $1,332,659, respectively, were reclassified to additional paid in capital as part of the total conversion balance. Accumulated Accruing Dividends were $6,005,479 and $1,643,836 as of September 30, 2020 and December 31, 2019, respectively. As of September 30, 2020 and December 31, 2019, no Accruing Dividends have been declared to be paid.
Redemption Privileges: At any time on or after October 18, 2027, upon a receipt of a written notice requesting redemption for a majority of the Series C stockholders, all Series C Preferred Stock shall be redeemed for cash at the Series C original issue price plus accrued and unpaid dividends whether or not declared.
Voting Rights: On any matter presented to the stockholders of the Company for their action or consideration at any meeting of stockholders of the Company, each holder of outstanding shares of Preferred Stock Series C shall be entitled to cast the number of votes equal to the number of whole shares of Common Stock into which the shares of Preferred Stock held by such holder are convertible as of the record date for determining the stockholders entitled to vote on such matters.
20
AEROCARE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Interim Financial Statements
Liquidation Preferences: In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the then outstanding preferred shares shall be entitled to be paid out of the assets of Company available for distribution to its stockholders before any payment shall be made to the holders of the Company’s common stockholders an amount per share equal to the greater of (i) original issue price plus accrued and unpaid dividends whether or not declared or (ii) such amount per share as would have been payable had all of the preferred shares been converted into common stock immediately prior to such an event.
When Series C Preferred Stock is outstanding, the Company reserves and keeps available out of its authorized but unused capital stock, common stock for the purpose of effecting the conversion of the Series C Preferred Stock, if so elected by the holders.
The following is a summary of the changes in preferred stock:
Series A | Series B | Series C | ||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||
Balance, January 1, 2019 | 7,649,933 | $ | 28,355,730 | 2,025,316 | $ | 8,823,689 | - | $ | - | |||||||||||||||
Preferred Dividend Accretion | - | 1,701,531 | - | 499,294 | - | - | ||||||||||||||||||
Balance, September 30, 2019 | 7,649,933 | 30,057,261 | 2,025,316 | 9,322,983 | - | |||||||||||||||||||
Balance, January 1, 2020 | - | - | - | - | 18,087,434 | 97,086,160 | ||||||||||||||||||
Preferred Dividend Accretion | - | - | - | - | - | 6,005,479 | ||||||||||||||||||
Balance, September 30, 2020 | - | $ | - | - | $ | - | 18,087,434 | $ | 103,091,639 |
(10) | Income Taxes |
The Company is subject to U.S. federal, state and local income taxes. For the nine months ended September 30, 2020 and 2019, the Company recorded income tax expense of $8,179,310 and $2,694,298, respectively.
(11) | Commitments and Contingencies |
(a) | Health Care Industry |
As a health care provider, the Company is subject to extensive government regulation, including numerous laws directed at preventing fraud and abuse and laws regulating reimbursement under various government programs. The marketing, billing, documenting, and other practices of health care companies are all subject to government scrutiny. To ensure compliance with Medicare and other regulations, regional carriers often conduct audits and request patient records and other documents to support claims submitted by the Company for payment of services rendered to customers. Similarly, government agencies periodically open investigations and obtain information from healthcare providers pursuant to legal process.
21
AEROCARE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Interim Financial Statements
Violations of federal and state regulations can result in severe criminal, civil, and administrative penalties and sanctions, including disqualification from Medicare and other reimbursement programs.
From time to time, the Company receives inquiries from various government agencies requesting customer records and other documents. It has been the Company’s policy to cooperate with all such requests for information. There are several pending government inquiries, but the government has not instituted any proceedings or served the Company with any complaints as a result of these inquiries. However, the Company can give no assurance as to the duration or outcome of these inquiries.
(b) | Litigation |
The Company is involved in certain other claims and legal actions in the ordinary course of its business. The ultimate disposition of all such matters is not expected to have a material adverse impact on its financial position, results of operations, or liquidity.
(c) | Acquisition Commitments and Contingencies |
In connection with the 2018 and 2019 acquisitions reported in Note 2, the Company has included contingent additional consideration and hold back payment commitments in the purchase prices of acquisitions.
As part of purchase agreements related to the acquisitions in Note 2, there are “earn out payments” and “hold back payments” due to the sellers. “Earn out payments” are contingent consideration generally dependent upon future earnings of the acquisition and “hold back payments” relate to a portion of the purchase price being withheld until specified dates as defined in the purchase agreement that can be used to offset any claims or liabilities of the seller that the Company has paid. During the nine months ended September 30, 2020 and 2019, the Company withheld amounts for hold backs totaling $4,020,000 and $2,700,000, respectively, related to acquisitions. The Company made payments of $3,447,500 and $2,376,250 in the nine months ended September 30, 2020 and 2019, respectively, against amounts withheld for hold backs and settled $2,500,000 of earn outs with the issuance of common stock in the nine months ended September 30, 2019. As of September 30, 2020 and December 31, 2019, the Company has unpaid hold back payments of $4,405,000 and $3,833,000, respectively, and are reported as payments due to sellers in the accompanying consolidated balance sheets.
(12) | Subsequent Events |
In preparing these unaudited consolidated interim financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through December 11, 2020, the date the unaudited consolidated interim financial statements were available to be issued.
On December 1, 2020, the Company entered into a stock purchase agreement and plan of merger with AdaptHealth Corp. for a total purchase price of $1.1 billion in cash and 31 million shares of AdaptHealth Corp. common stock. The transaction is expected to close in January 2021.
On December 9, 2020, the Company signed an agreement with it's bank to use commercially reasonable efforts to arrange an amendment to the Company's existing credit agreement. The amendment will permit a 364-day term loan in a principal amount of up to $150,000,0000, the proceeds of which will be used to finance, in part, a one-time distribution to shareholders of the Company. Terms and conditions of the amendment are expected to be consistent with the terms and conditions of the Company's current credit agreement."
22
Exhibit 99.5
SOLARA MEDICAL SUPPLIES, LLC
UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
AS OF JUNE 30, 2020 AND DECEMBER 31, 2019,
AND FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019
SOLARA MEDICAL SUPPLIES
UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
TABLE OF CONTENTS
Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019 | 1 |
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019 | 2 |
Consolidated Statements of Members’ Equity (Deficit) for the Six Months Ended June 30, 2020 and 2019 | 3 |
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019 | 4 |
Notes to Unaudited Consolidated Interim Financial Statements | 5-17 |
SOLARA MEDICAL SUPPLIES, LLC
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, 2020 | December 31, 2019 | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash | $ | 12,069,000 | $ | 9,768,000 | ||||
Accounts Receivable, Net | 30,345,000 | 26,970,000 | ||||||
Inventory | 13,845,000 | 18,213,000 | ||||||
Prepaid Expenses and Other Current Assets | 2,697,000 | 3,155,000 | ||||||
Total Current Assets | $ | 58,956,000 | $ | 58,106,000 | ||||
Property and Equipment, Net | 2,404,000 | 2,181,000 | ||||||
Rental Pumps, Net | 1,972,000 | 2,323,000 | ||||||
Goodwill | 119,355,000 | 110,355,000 | ||||||
Intangible Assets, Net | 57,440,000 | 54,801,000 | ||||||
Other Assets | 70,000 | 70,000 | ||||||
TOTAL ASSETS | $ | 240,197,000 | $ | 227,836,000 | ||||
LIABILITIES AND MEMBERS’ (DEFICIT) EQUITY | ||||||||
Current Liabilities | ||||||||
Accounts Payable | $ | 18,839,000 | $ | 26,498,000 | ||||
Accrued Expenses | 34,264,000 | 19,527,000 | ||||||
Debt, Current Portion | 1,660,000 | 1,660,000 | ||||||
Contingent Consideration, Current Portion | — | 5,156,000 | ||||||
Total Current Liabilities | $ | 54,763,000 | $ | 52,841,000 | ||||
Debt, Net of Debt Acquisition Costs | 189,480,000 | 159,708,000 | ||||||
Other Long-Term Liabilities | 138,000 | 149,000 | ||||||
TOTAL LIABILITIES | $ | 244,381,000 | $ | 212,698,000 | ||||
Commitments and Contingencies (Note 5) | ||||||||
Members’ (Deficit) Equity | ||||||||
Common Units | 944,000 | 944,000 | ||||||
Preferred Units (Class A) | 63,240,000 | 63,240,000 | ||||||
Preferred Units (Class B) | 25,740,000 | 25,740,000 | ||||||
Accumulated Deficit | (94,108,000 | ) | (74,786,000 | ) | ||||
TOTAL MEMBERS’ (DEFICIT) EQUITY | $ | (4,184,000 | ) | $ | 15,138,000 | |||
TOTAL LIABILITIES AND MEMBERS’ (DEFICIT) EQUITY | $ | 240,197,000 | $ | 227,836,000 |
See accompanying notes to the unaudited consolidated interim financial statements.
1 | P a g e |
SOLARA MEDICAL SUPPLIES, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenue, Net | $ | 45,197,000 | $ | 45,477,000 | $ | 84,878,000 | $ | 83,153,000 | ||||||||
Cost of Goods Sold | 28,626,000 | 27,487,000 | 53,013,000 | 51,153,000 | ||||||||||||
Gross Profit | $ | 16,571,000 | $ | 17,990,000 | $ | 31,865,000 | $ | 32,000,000 | ||||||||
Operating Expenses | ||||||||||||||||
Selling, General and Administrative Expenses | 28,792,000 | 10,823,000 | 41,190,000 | 22,354,000 | ||||||||||||
Operating (Loss) Income | $ | (12,221,000 | ) | $ | 7,167,000 | $ | (9,325,000 | ) | $ | 9,646,000 | ||||||
Interest Expense | (3,804,000 | ) | (3,420,000 | ) | (7,369,000 | ) | (5,815,000 | ) | ||||||||
Other Income | 32,000 | 40,000 | 63,000 | 66,000 | ||||||||||||
(Loss) Income Before Income Taxes | $ | (15,993,000 | ) | $ | 3,787,000 | $ | (16,631,000 | ) | $ | 3,897,000 | ||||||
Income Tax Expense | — | (130,000 | ) | — | (203,000 | ) | ||||||||||
Net (Loss) Income | $ | (15,993,000 | ) | $ | 3,657,000 | $ | (16,631,000 | ) | $ | 3,694,000 |
See accompanying notes to the unaudited consolidated interim financial statements.
2 | P a g e |
SOLARA MEDICAL SUPPLIES, LLC
CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY (DEFICIT)
(UNAUDITED)
Common Units | Preferred Units (Class A) | Preferred Units (Class B) | Accumulated | Total Members’ | ||||||||||||||||||||||||||||
Amount | Number of Units | Amount | Number of Units | Amount | Number of Units | Deficit | Equity (Deficit) | |||||||||||||||||||||||||
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 | ||||||||||||||||||
Distributions to Members | — | — | — | — | — | — | (2,091,000 | ) | (2,091,000 | ) | ||||||||||||||||||||||
Net Loss | — | — | — | — | — | — | (638,000 | ) | (638,000 | ) | ||||||||||||||||||||||
Balance at March 31, 2020 | $ | 944,000 | 898,740 | $ | 63,240,000 | 63,240 | $ | 25,740,000 | 25,740 | $ | (77,515,000 | ) | $ | 12,409,000 | ||||||||||||||||||
Distributions to Members | — | — | — | — | — | — | (600,000 | ) | (600,000 | ) | ||||||||||||||||||||||
Net Loss | — | — | — | — | — | — | (15,993,000 | ) | (15,993,000 | ) | ||||||||||||||||||||||
Balance at June 30, 2020 | $ | 944,000 | 898,740 | $ | 63,240,000 | 63,240 | $ | 25,740,000 | 25,740 | $ | (94,108,000 | ) | $ | (4,184,000 | ) |
Common Units | Preferred Units (Class A) | Preferred Units (Class B) | Accumulated | Total Members’ | ||||||||||||||||||||||||||||
Amount | Number of Units | Amount | Number of Units | Amount | Number of Units | Deficit | Equity | |||||||||||||||||||||||||
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 | — | — | — | — | — | — | (71,059,000 | ) | (71,059,000 | ) | ||||||||||||||||||||||
Net Income | — | — | — | — | — | — | 37,000 | 37,000 | ||||||||||||||||||||||||
Balance at March 31, 2019 | $ | 944,000 | 898,740 | $ | 63,240,000 | 63,240 | $ | 25,740,000 | 25,740 | $ | (75,595,000 | ) | $ | 14,329,000 | ||||||||||||||||||
Distributions to Members | — | — | — | — | — | — | (2,130,000 | ) | (2,130,000 | ) | ||||||||||||||||||||||
Net Income | — | — | — | — | — | — | 3,657,000 | 3,657,000 | ||||||||||||||||||||||||
Balance at June 30, 2019 | $ | 944,000 | 898,740 | $ | 63,240,000 | 63,240 | $ | 25,740,000 | 25,740 | $ | (74,068,000 | ) | $ | 15,856,000 |
See accompanying notes to the unaudited consolidated interim financial statements.
3 | P a g e |
SOLARA MEDICAL SUPPLIES, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, | ||||||||
2020 | 2019 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net (Loss) Income | $ | (16,631,000 | ) | $ | 3,694,000 | |||
Adjustments to Reconcile Net (Loss) Income to Net Cash (Used in) Provided by Operating Activities: | ||||||||
Depreciation and Amortization | 3,587,000 | 3,542,000 | ||||||
Rental Pump Amortization | 2,122,000 | 2,002,000 | ||||||
Deferred Rent | (11,000 | ) | — | |||||
Change in Fair Value of Contingent Liability | 56,000 | 171,000 | ||||||
Bad Debt Expense and Contractual Allowance | 2,567,000 | 3,456,000 | ||||||
Amortization of Debt Acquisition Costs | 356,000 | 160,000 | ||||||
Changes in Operating Assets and Liabilities: | ||||||||
Accounts Receivable, Net | (5,942,000 | ) | (373,000 | ) | ||||
Inventory | 3,839,000 | (1,261,000 | ) | |||||
Prepaid Expenses and Other Current Assets | 458,000 | (859,000 | ) | |||||
Accounts Payable | (7,660,000 | ) | (2,602,000 | ) | ||||
Accrued Expenses | 14,738,000 | (3,452,000 | ) | |||||
Net Cash (Used in) Provided by Operating Activities | $ | (2,521,000 | ) | $ | 4,478,000 | |||
Cash Flows from Investing Activities: | ||||||||
Purchases of Property and Equipment | (548,000 | ) | (363,000 | ) | ||||
Payments for Business Acquisition | (16,143,000 | ) | — | |||||
Purchase of Intangible Asset | — | (25,000 | ) | |||||
Purchase Price Adjustment | — | 423,000 | ||||||
Net Cash (Used in) Provided by Investing Activities | $ | (16,691,000 | ) | $ | 35,000 | |||
Cash Flows from Financing Activities: | ||||||||
Proceeds from Term Loan | 14,255,000 | 78,000,000 | ||||||
Proceeds from Revolving Line of Credit | 20,000,000 | — | ||||||
Payments of Debt Acquisition Costs | — | (2,170,000 | ) | |||||
Repayments of Term Loan | (839,000 | ) | (760,000 | ) | ||||
Repayments of Revolving Line of Credit | (4,000,000 | ) | — | |||||
Distributions to Members | (2,691,000 | ) | (73,189,000 | ) | ||||
Members' Contributions | — | 350,000 | ||||||
Payments of Contingent Consideration | (5,212,000 | ) | (6,008,000 | ) | ||||
Net Cash Provided by (Used in) Financing Activities | $ | 21,513,000 | $ | (3,777,000 | ) | |||
Increase in Cash | $ | 2,301,000 | $ | 736,000 | ||||
Cash, Beginning of Period | 9,768,000 | 10,643,000 | ||||||
Cash, End of Period | $ | 12,069,000 | $ | 11,379,000 | ||||
Supplemental Disclosures of Cash Flow Information: | ||||||||
Cash Paid During the Period for Interest | $ | 7,013,000 | $ | 5,655,000 | ||||
Cash Paid During the Period for Income Taxes | — | 73,000 |
See accompanying notes to the unaudited consolidated interim financial statements
4 | P a g e |
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. General Information
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
The unaudited consolidated interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of management, the unaudited consolidated interim financial statements include all necessary adjustments for a fair presentation of the financial position and results of operations for the periods presented.
Basis of Consolidation
The unaudited consolidated interim financial statements include the accounts of Solara Medical Supplies, LLC and its wholly owned subsidiaries. All intercompany accounts and transactions were eliminated at consolidation.
2. Summary of Significant Accounting Policies
There have been no material changes in the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s consolidated financial statements for the year ended December 31, 2019.
Use of Estimates
The preparation of financial statements in conformity with U.S. 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.
5 | P a g e |
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
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 three months ended June 30, 2020, the Company had three third-party payors representing 18.8%, 18.1% and 9.4% of net revenue, and during the three months ended June 30, 2019, these third-party payors represented 13.3%, 21.6% and 18.6% of net revenue. During the six months ended June 30, 2020, the Company had three third-party payors representing 18.5%, 17.3% and 11.5% of net revenue, and during the six months ended June 30, 2019, these third-party payors represented 13.3%, 22.6% and 17.9% of net revenue. As of June 30, 2020, these third-party payors represented 6.4%, 3.8% and 25.9% of gross accounts receivable, and as of December 31, 2019, these third-party payors represented 11.3%, 7.9% and 18.5% of gross accounts receivable.
During the three months ended June 30, 2020, the Company purchased 71.2% and 10.7% of its inventory from two suppliers. During the three months ended June 30, 2019, the Company purchased 63.9% and 13.8% of its inventory from two suppliers. During the six months ended June 30, 2020, the Company purchased 63.9% and 13.4% of its inventory from two suppliers. During the six months ended June 30, 2019, the Company purchased 62.6% and 14.3% of its inventory from two suppliers
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 June 30, 2020 and December 31, 2019, the allowance for doubtful accounts balance was $5,592,000 and $3,877,000, respectively, and the contractual allowance was $5,921,000 and $5,069,000, 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.
6 | P a g e |
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
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 $3,825,000 and $1,853,000, respectively, at June 30, 2020 and $4,869,000 and $2,546,000, respectively, at December 31, 2019. Total depreciation expense related to rental pumps was $995,000 and $1,046,000 for the three months ended June 30, 2020 and 2019, respectively. Total depreciation expense related to rental pumps was $2,122,000 and $2,002,000 for the six months ended June 30, 2020 and 2019, respectively.
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 six months ended June 30, 2020 and 2019.
Revenue Recognition
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. Revenue from pump equipment rentals is recognized over the reimbursement term of the contract with the customer, which is typically 13 to 15 months.
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.
7 | P a g e |
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
The following are the Company’s revenues from performance obligations and their timing of transfer of goods and services:
Three Months Ended June 30, | ||||||||||
Performance Obligations | 2020 | 2019 | Timing of Transfer | |||||||
Product Sales | $ | 44,110,000 | $ | 44,175,000 | Point in Time | |||||
Pump Equipment Rentals | 1,087,000 | 1,302,000 | Over Time | |||||||
$ | 45,197,000 | $ | 45,477,000 |
Six Months Ended June 30, | ||||||||||
Performance Obligations | 2020 | 2019 | Timing of Transfer | |||||||
Product Sales | $ | 82,496,000 | $ | 80,682,000 | Point in Time | |||||
Pump Equipment Rentals | 2,382,000 | 2,471,000 | Over Time | |||||||
$ | 84,878,000 | $ | 83,153,000 |
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.
8 | P a g e |
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO UNAUDITED CONSOLIDATED INTERIM 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 June 30, 2020 and December 31, 2019 approximate fair value due to the timing of the debt draw-down in relation to the balance sheet date. There were no liabilities measured at fair value on a recurring basis as of June 30, 2020. Liabilities measured at fair value on a recurring basis as of December 31, 2019 were as follows:
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Balance | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | |||||||||||||
Contingent Consideration | $ | 5,156,000 | $ | — | $ | — | $ | 5,156,000 |
The contingent consideration is the result of the purchase of Solara Medical Supplies, Inc. and is calculated based on the present value of the expected future cash flows discounted at an interest rate consistent with what the Company could obtain from a third-party lender. The contingent consideration was recorded as a current liability at December 31, 2019 based on the expected payment date.
9 | P a g e |
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
The following table provides a reconciliation for the Company’s liabilities measured at fair value using significant unobservable inputs (Level 3) for the six months ended June 30, 2020 and 2019:
Income Taxes
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 consolidated interim financial statements related to the business activities of Solara Medical Supplies, LLC. The income tax expense recorded during the three and six months ended June 30, 2019 mainly relates to a taxable gain recognized upon liquidation of a wholly owned C corporation subsidiary of the Company.
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 Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 and a right-of-use asset representing its right to use the underlying asset for the lease term. The Company is required to adopt the new standard for the annual reporting period beginning January 1, 2022, and interim reporting periods beginning January 1, 2023. 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.
10 | P a g e |
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
3. Balance Sheet Details
Property and equipment consist of the following:
Useful Life | June 30, 2020 | December 31, 2019 | ||||||||
Leasehold Improvements | 5 Years (or remaining lease term) | $ | 861,000 | $ | 848,000 | |||||
Furniture and Fixtures | 7 Years | 477,000 | 476,000 | |||||||
Software | 3 Years | 518,000 | 361,000 | |||||||
Computer Equipment | 5 Years | 254,000 | 206,000 | |||||||
Vehicles | 6 Years | 13,000 | 13,000 | |||||||
Construction in Process | 897,000 | 567,000 | ||||||||
$ | 3,020,000 | $ | 2,471,000 | |||||||
Less Accumulated Depreciation and Amortization | (616,000 | ) | (290,000 | ) | ||||||
Total | $ | 2,404,000 | $ | 2,181,000 |
Depreciation expense totaled $166,000 and $146,000 for the three months ended June 30, 2020 and 2019, respectively. Depreciation expense totaled $326,000 and $283,000 for the six months ended June 30, 2020 and 2019, respectively.
Accrued expenses consist of the following:
June 30, 2020 | December 31, 2019 | |||||||
Transaction Costs (Note 10) | $ | 15,129,000 | $ | — | ||||
Third-Party Overpayments | 8,790,000 | 8,263,000 | ||||||
Customer Deposits | 1,377,000 | 1,415,000 | ||||||
Payroll Liabilities | 3,319,000 | 2,846,000 | ||||||
CARES Act CMS Advanced Payments | 3,699,000 | — | ||||||
CARES Act Provider Relief Funds | 1,136,000 | — | ||||||
Sales and Use Tax Payable | 241,000 | 1,693,000 | ||||||
Accrued Distribution to Members | — | 1,709,000 | ||||||
Other Accrued Liabilities | 573,000 | 3,601,000 | ||||||
Total | $ | 34,264,000 | $ | 19,527,000 |
In response to the COVID-19 pandemic and the National Emergency Declaration, dated March 13, 2020, the Company increased its cash liquidity by, among other things, seeking recoupable advance payments of $3,779,000 made available by the Centers for Medicare & Medicaid Services (CMS) under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) legislation, which was received in April 2020. The recoupment of such amount by CMS began during the three months ended June 30, 2020 and $80,000 was recouped as of June 30, 2020. Such recoupments are applied to services provided and revenue recognized during the period in which the recoupment occurs. In addition, in April 2020, the Company received distributions from the CARES Act provider relief funds of $1,136,000 targeted to offset lost revenue and expenditures incurred in connection with the COVID-19 pandemic. The provider relief funds are subject to certain restrictions and are subject to recoupment if not used for designated purposes. The Company is currently in the process of determining how much of the CARES Act provider relief funds it will be entitled to based on the terms and conditions of the program, including recent guidance issued by the U.S. Department of Health and Human Services in October 2020. The balance of the CMS recoupable advance payments and the CARES Act provider relief funds are included in accrued expenses in the consolidated interim balance sheets as of June 30, 2020 as indicated in the table above.
11 | P a g e |
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO UNAUDITED CONSOLIDATED INTERIM 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 for Solara Medical Supplies, Inc., 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 used the proceeds from this transaction to distribute 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 $2,170,000 of financing fees and legal costs were recorded to debt acquisition costs and $992,000 was recorded to legal fee expense during the six months ended June 30, 2019. In addition, 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.
Borrowings under 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 for the delayed term loan as of June 30, 2020 and December 31, 2019 was 8.25% and 7.94%, respectively. The loans mature on February 27, 2024.
During the six months ended June 30, 2020, the Company borrowed $9,032,000 from the delayed term loan which was used to partially fund the acquisition of certain assets of the diabetes supplies business of Active Healthcare, Inc. (Note 6).
On June 9, 2020, the Company borrowed $5,223,000 from the delayed term loan and used the majority of the funds to make the final contingent performance payment of $5,212,000 related to the purchase transaction for Solara Medical Supplies, Inc.
During the six months ended June 30, 2020, the Company borrowed $20,000,000 from the revolving commitment loan and repaid $4,000,000 during the period. The balance outstanding under the revolving commitment loan was $16,000,000 at June 30, 2020. The borrowings under the revolving commitment loan had an interest rate of 8.25% as of June 30, 2020.
12 | P a g e |
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
During the six months ended June 30, 2019, the Company borrowed $6,000,000 from the delayed term loan and used the funds to make a contingent performance payment of $6,008,000 related to the purchase transaction for Solara Medical Supplies, Inc.
Debt is presented net of the debt acquisition costs on the consolidated balance sheets. There were no debt acquisition costs incurred during the six months ended June 30, 2020. Debt acquisition costs totaling $2,170,000 were incurred during the six months ended June 30, 2019. Debt acquisition costs of $356,000 and $160,000 were amortized to interest expense during the six months ended June 30, 2020 and 2019, 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.
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, 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 $8,790,000 and $8,263,000 as of June 30, 2020 and December 31, 2019, respectively, for this potential overpayment, contingent upon a determination by the third-party payor.
13 | P a g e |
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Affordable Care Act Contingency: The Company did not offer an affordable health care benefit plan to its employees through December 31, 2017 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 June 30, 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 9). Future minimum payments under non-cancelable operating leases with initial or remaining terms of more than one year are as follows:
Twelve Months Ending June 30, | ||||
2021 | $ | 1,009,000 | ||
2022 | 772,000 | |||
2023 | 626,000 | |||
2024 | 351,000 | |||
2025 | 148,000 | |||
$ | 2,906,000 |
Rent expense for the three months ended June 30, 2020 and 2019 totaled $247,000 and $165,000, respectively. Rent expense for the six months ended June 30, 2020 and 2019 totaled $495,000 and $341,000, respectively.
6. Acquisition
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 are included in the Company’s financial statements from the acquisition dates. The fair value of the consideration paid is allocated to the net assets acquired based on their estimated fair value at the acquisition date, with the excess of the consideration paid over the estimated fair value of the net assets acquired recorded as goodwill.
On May 19, 2020, the Company acquired certain assets of the diabetes supplies business of Active Healthcare, Inc. (“Active Healthcare”). Active Healthcare is located in North Carolina and is a direct-to-patient provider of continuous glucose monitors, insulin pumps and diabetes supplies. The total consideration paid consisted of a cash payment of $16,143,000. Based upon management’s evaluation, which is preliminary and subject to adjustment, the Company allocated the consideration paid to the estimated fair values of the net assets acquired on a provisional basis, including $1,243,000 to inventory, $5,900,000 to identifiable intangible assets and $9,000,000 to goodwill. Goodwill was recognized as a result of expected growth in the market and is expected to be amortizable for tax purposes. The Company is still evaluating the fair value of acquired payor contracts and trademarks for which provisional amounts were recorded and expects to finalize such evaluation as soon as practicable but no later than one year from the acquisition date. To partially fund the acquisition of Active Healthcare, the Company borrowed $9,032,000 from the delayed term loan (Note 4).
14 | P a g e |
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
7. Goodwill and Intangible Assets
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. The change in the carrying amount of goodwill for the six months ended June 30, 2020 was as follows:
Beginning Balance | $ | 110,355,000 | ||
Acquired goodwill during the period | 9,000,000 | |||
Ending Balance | $ | 119,355,000 |
Goodwill is amortizable for tax purposes.
Identifiable intangible assets that are separable and have determinable useful lives are valued separately and amortized over their benefit period. The following table presents the activity of the Company’s identifiable intangible assets for the six months ended June 30, 2020 and 2019:
Leasehold | ||||||||||||||||
Payor Contracts | Trademarks | Interest | Domain Name | |||||||||||||
Six Months Ended June 30, 2020: | ||||||||||||||||
Beginning Balance | $ | 38,724,000 | $ | 15,992,000 | $ | 61,000 | $ | 24,000 | ||||||||
Acquired during the period | 4,176,000 | 1,724,000 | — | — | ||||||||||||
Amortization Expense | (2,300,000 | ) | (950,000 | ) | (9,000 | ) | (2,000 | ) | ||||||||
Ending Balance | $ | 40,600,000 | $ | 16,766,000 | $ | 52,000 | $ | 22,000 |
Leasehold | ||||||||||||||||
Payor Contracts | Trademarks | Interest | Domain Name | |||||||||||||
Six Months Ended June 30, 2019: | ||||||||||||||||
Beginning Balance | $ | 43,325,000 | $ | 17,892,000 | $ | 79,000 | $ | — | ||||||||
Purchase of Intangible Asset | — | — | — | 25,000 | ||||||||||||
Amortization Expense | (2,300,000 | ) | (950,000 | ) | (9,000 | ) | — | |||||||||
Ending Balance | $ | 41,025,000 | $ | 16,942,000 | $ | 70,000 | $ | 25,000 |
15 | P a g e |
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
At June 30, 2020, the weighted-average amortization period of the identifiable intangible assets in the aggregate is 8.1 years. Total amortization expense of intangible assets above was $1,630,000 and $1,629,000 for the three months ended June 30, 2020 and 2019, respectively, and was $3,261,000 and $3,259,000 for the six months ended June 30, 2020 and 2019, respectively, and is included in Selling, General and Administrative Expenses in the accompanying consolidated statements of operations. Future amortization for the next five years and thereafter is as follows:
Twelve Months Ending June 30, | ||||
2021 | $ | 7,111,000 | ||
2022 | 7,111,000 | |||
2023 | 7,111,000 | |||
2024 | 7,108,000 | |||
2025 | 7,094,000 | |||
Thereafter | 21,905,000 | |||
$ | 57,440,000 |
8. Members’ Equity
The Company operates under the LLC Agreement established on May 31, 2018. 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 six months ended June 30, 2020 and 2019, tax distributions of $2,691,000 and $4,352,000 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).
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 six months ended June 30, 2019, the Company issued 3,000 Common Units totaling $48,000 and 302 Class A Preferred Units totaling $302,000.
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 June 30, 2020 and December 31, 2019, 34,000 and 218,000 time-vesting and performance-vesting incentive units were outstanding. Equity-based compensation was not significant and was therefore not recorded in the periods presented in the accompanying consolidated interim financial statements.
16 | P a g e |
SOLARA MEDICAL SUPPLIES, LLC
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
9. Related-Party Transactions
The Company leases two of its facilities from a related party. Total cash payments and lease expenditures under the leases totaled $152,000 and $145,000 for the three months ended June 30, 2020 and 2019, respectively. Total cash payments and lease expenditures under the leases totaled $303,000 and $290,000 for the six months ended June 30, 2020 and 2019, respectively.
The Company pays related-party management fees. Total cash payments for the fees totaled $507,000 and $510,000 for the three months ended June 30, 2020 and 2019, respectively. Total cash payments for the fees totaled $1,026,000 and $1,004,000 for the six months ended June 30, 2020 and 2019, respectively.
10. Subsequent Events
Subsequent events were evaluated through the date the consolidated interim financial statements were available to be issued, December 1, 2020.
On May 25, 2020, Holdings entered into a stock purchase agreement and agreement and plan of merger with AdaptHealth Corp. The transaction closed on July 1, 2020. The total purchase price per the agreement consisted of $362,500,000 in cash and $62,500,000 in AdaptHealth Corp. common stock, subject to adjustment. As of June 30, 2020, the Company recorded accrued transaction costs of $15,129,000 related to this transaction, which is included in Accrued Expenses in the accompanying consolidated balance sheets.
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.
17 | P a g e |
Exhibit 99.6
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION OF ADAPTHEALTH CORP.
The following unaudited pro forma condensed combined financial information presents the unaudited pro forma condensed combined balance sheet as of September 30, 2020 and the unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2020 and 2019 and the year ended December 31, 2019 based upon the combined historical financial statements of AdaptHealth Corp. (“AdaptHealth”), the Patient Care Solutions business (“PCS”), Solara Medical Supplies, LLC (“Solara”) and AeroCare Holdings, Inc. and its subsidiaries (“AeroCare”), after giving effect to (1) AdaptHealth’s acquisition of PCS on January 2, 2020 (the “PCS Acquisition”), (2) AdaptHealth’s acquisition of Solara on July 1, 2020 (the “Solara Acquisition”), and (3) AdaptHealth’s recently announced proposed acquisition of AeroCare (the “AeroCare Acquisition”), which is expected to close in the first quarter of 2021, subject to certain customary closing conditions and regulatory approvals, including expiration or termination of all applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and related adjustments described in the accompanying notes.
The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2020 and 2019 and for the year ended December 31, 2019 give pro forma effect to the PCS Acquisition, the Solara Acquisition, and the AeroCare Acquisition, as if they had occurred on January 1, 2019. The unaudited pro forma condensed combined balance sheet as of September 30, 2020 gives pro forma effect to the AeroCare Acquisition as if it was completed on September 30, 2020.
The unaudited pro forma condensed combined financial information should be read in conjunction with the following:
· | the audited historical financial statements of AdaptHealth and the notes thereto as included in the Form 10-K filed on March 6, 2020; |
· | the unaudited historical financial statements of AdaptHealth and the notes thereto as included in the Form 10-Q filed on November 6, 2020; |
· | the audited and unaudited historical financial statements of PCS and the notes thereto as included in the Form S-1/A filed on March 9, 2020; |
· | the audited and unaudited historical financial statements of Solara and the notes thereto as included in the Form 8-K filed on June 18, 2020; |
· | the unaudited historical financial statements of Solara and the notes thereto included elsewhere in this Form 8-K; and; |
· | the audited and unaudited historical financial statements of AeroCare and the notes thereto included elsewere in this Form 8-K. |
The unaudited pro forma condensed combined financial information is provided for informational purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the PCS Acquisition, the Solara Acquisition and the AeroCare Acquisition had been completed as of the dates set forth above, nor is it indicative of the future results or financial position of the combined company. The unaudited pro forma condensed combined financial information also does not give effect to the potential impact of any anticipated synergies, operating efficiencies or cost savings resulting from favorable vendor pricing had AdaptHealth owned PCS, Solara and AeroCare in the periods indicated above, or any integration costs and benefits from restructuring plans.
In May 2020, the SEC adopted Release No.33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses” (the “Final Rule”). The Final Rule is effective on January 1, 2021, however, voluntary early adoption is permitted. AdaptHealth has elected to early adopt the provisions of the Final Rule, and the unaudited pro forma condensed combined financial information herein is presented in accordance therewith.
ADAPTHEALTH CORP.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
September 30, 2020
AdaptHealth | AeroCare | Pro Forma | AdaptHealth | |||||||||||||||
(in thousands) | Historical | Reclassified (1) | Adjustments | Note 3 | Pro-Forma | |||||||||||||
Assets | ||||||||||||||||||
Current assets: | ||||||||||||||||||
Cash and cash equivalents | $ | 272,318 | $ | 32,217 | $ | (45,750 | ) | (a) | $ | 258,785 | ||||||||
Accounts receivable, net | 147,335 | 69,365 | - | 216,700 | ||||||||||||||
Inventory | 46,477 | 28,200 | - | 74,677 | ||||||||||||||
Prepaid and other current assets | 18,255 | 6,638 | - | 24,893 | ||||||||||||||
Total current assets | 484,385 | 136,420 | (45,750 | ) | 575,055 | |||||||||||||
Equipment and other fixed assets, net | 101,656 | 148,578 | - | 250,234 | ||||||||||||||
Goodwill |
810,480 | 208,182 | 1,832,959 | (b) | 2,851,621 | |||||||||||||
Intangible asset, net | 94,725 | 1,296 | 105,704 | (c) | 201,725 | |||||||||||||
Other assets | 6,466 | 2,461 | - | 8,927 | ||||||||||||||
Deferred tax asset | 51,114 | - | (46,423 | ) | (d) | 4,691 | ||||||||||||
Total assets | $ | 1,548,826 | $ | 496,937 | $ | 1,846,490 | $ | 3,892,253 | ||||||||||
Liabilities and Stockholders' Equity (Deficit) | ||||||||||||||||||
Current liabilities: | ||||||||||||||||||
Accounts payable and accrued expenses | $ | 192,337 | $ | 79,812 | $ | - | $ | 272,149 | ||||||||||
Current portion of capital lease obligations | 19,699 | - | - | 19,699 | ||||||||||||||
Current portion of long-term debt | 8,479 | 18,000 | (12,000 | ) | (e) | 14,479 | ||||||||||||
Contract Liabilities | 13,231 | 26,026 | - | 39,257 | ||||||||||||||
Other liabilities | 81,059 | 4,405 | - | 85,464 | ||||||||||||||
Total current liabilities | 314,805 | 128,243 | (12,000 | ) | 431,048 | |||||||||||||
Long-term debt, less current portion | 722,730 | 371,202 | 687,048 | (f) | 1,780,980 | |||||||||||||
Other long-term liabilities | 71,576 | 23,537 | (20,743 | ) | (d) | 74,370 | ||||||||||||
Total liabilities | $ | 1,109,111 | $ | 522,982 | $ | 654,305 | $ | 2,286,398 | ||||||||||
Total stockholders' equity (deficit): | ||||||||||||||||||
Total stockholders' equity (deficit) attributable to AdaptHealth Corp. | 448,630 | (26,045 | ) | 1,192,185 | (g) | $ | 1,614,770 | |||||||||||
Noncontrolling interest in subsidiaries | (8,915 | ) | - | - | (8,915 | ) | ||||||||||||
Total stockholders' equity (deficit) | 439,715 | (26,045 | ) | 1,192,185 | 1,605,855 | |||||||||||||
Total Liabilities and Stockholders' Equity (Deficit) | $ | 1,548,826 | $ | 496,937 | $ | 1,846,490 | $ | 3,892,253 |
(1) | Refer to Note 2 for reclassification of AeroCare historical information. |
ADAPTHEALTH CORP.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020
AdaptHealth | Solara | AeroCare | Pro Forma | AdaptHealth | ||||||||||||||||||
(in thousands, except per share data) | Historical | Reclassified (1) | Reclassified (1) | Adjustments | Note 3 | Pro-Forma | ||||||||||||||||
Net revenue | $ | 707,960 | $ | 83,155 | $ | 497,664 | $ | - | $ | 1,288,779 | ||||||||||||
Costs and expenses: | ||||||||||||||||||||||
Cost of net revenue | 604,777 | 70,834 | 413,294 | - | 1,088,905 | |||||||||||||||||
General and administrative expenses | 57,745 | 17,998 | 14,738 | (15,129 | ) | (h) | 75,352 | |||||||||||||||
Depreciation and amortization, excluding patient equipment depreciation | 6,398 | 3,587 | 6,055 | 8,662 | (i) | 24,702 | ||||||||||||||||
Total costs and expenses | 668,920 | 92,419 | 434,087 | (6,467 | ) | 1,188,959 | ||||||||||||||||
Operating income (loss) | 39,040 | (9,264 | ) | 63,577 | 6,467 | 99,820 | ||||||||||||||||
Interest expense, net | 27,826 | 7,367 | 11,463 | 30,398 | (j) | 77,054 | ||||||||||||||||
Loss on extinguishment of debt, net | 5,316 | - | - | - | 5,316 | |||||||||||||||||
Income (loss) before income taxes | 5,898 | (16,631 | ) | 52,114 | (23,931 | ) | 17,450 | |||||||||||||||
Income tax expense | 2,290 | - | 8,179 | (6,281 | ) | (k) | 4,188 | |||||||||||||||
Net income (loss) | 3,608 | (16,631 | ) | 43,935 | (17,650 | ) | 13,262 | |||||||||||||||
Income attributable to noncontrolling interests | 2,222 | - | - | 4,114 | (l) | 6,336 | ||||||||||||||||
Net income (loss) attributable to AdaptHealth Corp. | $ | 1,386 | $ | (16,631 | ) | $ | 43,935 | $ | (21,764 | ) | $ | 6,926 | ||||||||||
Net income (loss) per common share: | ||||||||||||||||||||||
Basic | $ | 0.03 | $ | 0.08 | ||||||||||||||||||
Diluted | $ | 0.02 | $ | 0.07 | ||||||||||||||||||
Weighted average shares outstanding for net income (loss) attributable to AdaptHealth Corp.: | ||||||||||||||||||||||
Basic | 47,986 | 42,816 | (m) | 90,802 | ||||||||||||||||||
Diluted | 50,848 | 42,816 | (m) | 93,664 |
(1) | Refer to Note 2 for reclassification of Solara and AeroCare historical information. |
ADAPTHEALTH CORP.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2019
AdaptHealth | PCS | Solara | AeroCare | Pro Forma | AdaptHealth | |||||||||||||||||||||
(in thousands, except per share data) | Historical | Reclassified (1) | Reclassified (1) | Reclassified (1) | Adjustments | Note 3 | Pro-Forma | |||||||||||||||||||
Net revenue | $ | 529,644 | $ | 132,885 | $ | 179,572 | $ | 533,649 | $ | - | $ | 1,375,750 | ||||||||||||||
Costs and expenses: | ||||||||||||||||||||||||||
Cost of net revenue | 440,386 | 163,772 | 142,627 | 460,376 | - | 1,207,161 | ||||||||||||||||||||
General and administrative expenses | 56,493 | 5,563 | 4,043 | 16,127 | - | 82,226 | ||||||||||||||||||||
Depreciation and amortization, excluding patient equipment depreciation | 3,068 | 235 | 7,110 | 6,868 | 12,149 | (n) | 29,430 | |||||||||||||||||||
Total costs and expenses | 499,947 | 169,570 | 153,780 | 483,371 | 12,149 | 1,318,817 | ||||||||||||||||||||
Operating income (loss) | 29,697 | (36,685 | ) | 25,792 | 50,278 | (12,149 | ) | 56,933 | ||||||||||||||||||
Interest expense, net | 39,305 | (90 | ) | 13,261 | 14,346 | 39,954 | (o) | 106,776 | ||||||||||||||||||
Loss on extinguishment of debt, net | 2,121 | - | - | 1,509 | (1,509 | ) | (p) | 2,121 | ||||||||||||||||||
Income (loss) before income taxes | (11,729 | ) | (36,595 | ) | 12,531 | 34,423 | (50,594 | ) | (51,964 | ) | ||||||||||||||||
Income tax expense | 1,156 | - | 294 | 4,001 | (329 | ) | (k) | 5,122 | ||||||||||||||||||
Net income (loss) | (12,885 | ) | (36,595 | ) | 12,237 | 30,422 | (50,265 | ) | (57,086 | ) | ||||||||||||||||
Income attributable to noncontrolling interests | 2,111 | - | - | - | (1,974 | ) | (l) | 137 | ||||||||||||||||||
Net income (loss) attributable to AdaptHealth Corp. | $ | (14,996 | ) | $ | (36,595 | ) | $ | 12,237 | $ | 30,422 | $ | (48,291 | ) | $ | (57,223 | ) | ||||||||||
Net income (loss) per common share: | ||||||||||||||||||||||||||
Basic and diluted | $ | (0.66 | ) | $ | (0.80 | ) | ||||||||||||||||||||
Weighted average shares outstanding for net income (loss) attributable to AdaptHealth Corp.: | ||||||||||||||||||||||||||
Basic and diluted | 22,557 | 48,724 | (m) | 71,281 |
(1) | Refer to Note 2 for reclassification of PCS, Solara and AeroCare historical information. |
ADAPTHEALTH CORP.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019
AdaptHealth | PCS | Solara | AeroCare | Pro Forma | AdaptHealth | |||||||||||||||||||||||
(in thousands, except per share data) | Historical | Reclassified (1) | Reclassified (1) | Reclassified (1) | Adjustments | Note 3 | Pro-Forma | |||||||||||||||||||||
Net revenue | $ | 380,103 | $ | 99,217 | $ | 126,537 | $ | 379,245 | $ | - | $ | 985,102 | ||||||||||||||||
Costs and expenses: | ||||||||||||||||||||||||||||
Cost of net revenue | 317,174 | 122,843 | 100,542 | 327,426 | - | 867,985 | ||||||||||||||||||||||
General and administrative expenses | 31,508 | 4,165 | 3,625 | 10,993 | - | 50,291 | ||||||||||||||||||||||
Depreciation and amortization, excluding patient equipment depreciation | 2,439 | 727 | 5,331 | 4,846 | 9,180 | (q) | 22,523 | |||||||||||||||||||||
Total costs and expenses | 351,121 | 127,735 | 109,498 | 343,265 | 9,180 | 940,799 | ||||||||||||||||||||||
Operating income (loss) | 28,982 | (28,518 | ) | 17,039 | 35,980 | (9,180 | ) | 44,303 | ||||||||||||||||||||
Interest expense, net | 31,651 | (73 | ) | 9,207 | 9,746 | 31,607 | (r) | 82,138 | ||||||||||||||||||||
Loss on extinguishment of debt, net | 2,121 | - | - | 1,509 | (1,509 | ) | (p) | 2,121 | ||||||||||||||||||||
Income (loss) before income taxes | (4,790 | ) | (28,445 | ) | 7,832 | 24,725 | (39,278 | ) | (39,956 | ) | ||||||||||||||||||
Income tax expense | 5,444 | - | - | 2,694 | (4,200 | ) | (k) | 3,938 | ||||||||||||||||||||
Net income (loss) | (10,234 | ) | (28,445 | ) | 7,832 | 22,031 | (35,078 | ) | (43,894 | ) | ||||||||||||||||||
Income attributable to noncontrolling interests | 1,336 | - | - | - | - | 1,336 | ||||||||||||||||||||||
Net income (loss) attributable to AdaptHealth Corp. | $ | (11,570 | ) | $ | (28,445 | ) | $ | 7,832 | $ | 22,031 | $ | (35,078 | ) | $ | (45,230 | ) | ||||||||||||
Net income (loss) per common share: | ||||||||||||||||||||||||||||
Basic and diluted | $ | (0.60 | ) | $ | (0.67 | ) | ||||||||||||||||||||||
Weighted average shares outstanding for net income (loss) attributable to AdaptHealth Corp.: | ||||||||||||||||||||||||||||
Basic and diluted | 19,130 | 48,724 | (m) | 67,854 |
(1) | Refer to Note 2 for reclassification of PCS, Solara and AeroCare historical information. |
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Note 1—General Information
Basis of presentation
The historical financial information has been adjusted in the unaudited pro forma condensed combined financial information to give effect to events that reflect the GAAP accounting for the PCS Acquisition, the Solara Acquisition, and the AeroCare Acquisition (collectively, the “Acquisitions”), and are prepared to illustrate the estimated effects of the Acquisitions to the Company’s audited and unaudited historical consolidated financial statements.
AdaptHealth’s historical results reflect AdaptHealth’s unaudited consolidated balance sheet as of September 30, 2020, unaudited consolidated statement of operations for the nine months ended September 30, 2020 and 2019, and audited consolidated statement of operations for the year ended December 31, 2019. PCS’s historical results reflect PCS’s unaudited consolidated statement of operations for the twelve-month period ended December 31, 2019 and unaudited consolidated statement of operations for the nine month period ended September 30, 2019. Solara’s historical results reflect Solara’s unaudited consolidated statement of operations for the six months ended June 30, 2020, audited consolidated statement of operations for year ended December 31, 2019, and unaudited consolidated statement of operations for the nine months ended September 30, 2019. AeroCare’s historical results reflect AeroCare’s unaudited consolidated balance sheet as of September 30, 2020, unaudited consolidated statements of income for the nine months ended September 30, 2020 and 2019, and audited consolidated statement of income for the year ended December 31, 2019.
Description of the PCS Acquisition
On January 2, 2020, AdaptHealth purchased 100% of the equity interests of PCS, a subsidiary of McKesson Corporation (“McKesson”). PCS currently provides wound care supplies, ostomy supplies, urological supplies, incontinence supplies, diabetic care supplies, and breast pumps directly to patients across the United States. PCS maintains extensive national relationships with physicians, medical facilities and customers, and currently serves all 50 states. AdaptHealth allocated the consideration paid to the estimated fair values of the net assets acquired on a provisional basis, including $17.4 million to accounts receivable, $0.5 million to equipment and other fixed assets, $0.1 million to goodwill, and $4.0 million of net liabilities to other working capital accounts. Management of AdaptHealth will finalize the measurement of the separately identifiable assets acquired and the liabilities assumed at the acquisition date in accordance with the requirements of FASB ASC Topic 805, Business Combinations, as soon as practicable but no later than one year from the acquisition date. In addition, AdaptHealth may be required to make an additional payment of $1.5 million to McKesson after the closing of the PCS Acquisition pursuant to the terms and conditions of a Transition Services Agreement executed in connection with the PCS Acquisition.
Description of the Solara Acquisition
On July 1, 2020, AdaptHealth acquired 100% of the equity interests of Solara. AdaptHealth believes Solara is an independent distributor of continuous glucose monitors (“CGM”) in the United States and offers a comprehensive suite of direct-to-patient diabetes management supplies to patients throughout the country, including CGMs, insulin pumps and other diabetic supplies. Solara maintains extensive relationships with leading national manufacturers, managed healthcare plans and is a registered pharmacy in all 50 states. AdaptHealth allocated the consideration paid to the estimated fair values of the net assets acquired on a provisional basis, including $12.1 million to cash and cash equivalents, $15.1 million to accounts receivable, $15.0 million to inventory, $4.4 million to equipment and other fixed assets, $85.7 million to indentifiable intangible assets, $347.1 million to goodwill, $22.4 million to accounts payable and accrued expenses, and $3.0 million of net liabilities to other working capital accounts. Management of AdaptHealth will finalize the measurement of the separately identifiable assets acquired and the liabilities assumed at the acquisition date in accordance with the requirements of FASB ASC Topic 805, Business Combinations, as soon as practicable but no later than one year from the acquisition date.
Description of the AeroCare Acquisition
On December 1, 2020, AdaptHealth entered into a definitive merger agreement (the “Merger Agreement”) pursuant to which AdaptHealth agreed to acquire AeroCare, on the terms and subject to the conditions as further described in the Merger Agreement. The AeroCare Acquisition is expected to close in the first quarter of 2021, subject to the satisfaction or waiver of the closing conditions as described in the Merger Agreement. AeroCare is a leading national technology-enabled respiratory and home medical equipment distribution platform in the United States and offers a comprehensive suite of direct-to-patient equipment and services including CPAP and bi-PAP machines, oxygen concentrators, home ventilators, and other durable medical equipment products. AeroCare maintains extensive relationships with leading national manufacturers and managed healthcare plans, and services patients in over 300 locations across 30 states.
The purchase consideration for the AeroCare Acquisition is expected to consist of $1.1 billion in cash plus shares of AdaptHealth Corp. Class A Common Stock and shares of AdaptHealth Corp. Series C Preferred Stock, representing, in the aggregate, on an as-converted basis, the economic equivalent of 31 million shares of AdaptHealth Corp. Class A Common Stock. The cash portion of the purchase price is subject to customary adjustments for cash, indebtedness, transaction expenses and net working capital (as compared to an agreed target net working capital amount) and certain other adjustments and subject to escrows to fund certain potential indemnification matters and potential amounts owed by AeroCare equityholders with respect to post-closing purchase price adjustments, if any. AdaptHealth intends to fund the cash portion of the purchase consideration for the AeroCare Acquisition and associated costs through cash on hand and incremental debt.
As described above, the purchase consideration for the AeroCare Acquisition is expected to include such number of shares of AdaptHealth Corp. Class A Common Stock and AdaptHealth Corp. Series C Preferred Stock representing the economic equivalent of 31 million shares of AdaptHealth Corp. Class A Common Stock, which was used to estimate the fair value of the purchase consideration for purposes of the unaudited pro forma condensed combined financial information. A preliminary estimate of the purchase consideration, assuming the transaction closed on December 10, 2020, is as follows (in thousands, except stock price):
Cash consideration | $ | 1,100,000 | |
Number of economic equivalent shares of Class A Common Stock | 31,000 | ||
AdaptHealth Corp. common stock price | $ | 37.94 | |
Equity consideration | $ | 1,176,140 | |
Total estimated purchase consideration | $ | 2,276,140 |
For pro forma purposes, the fair value of the AdaptHealth Corp. Class A Common Stock used in determining the estimated purchase consideration was $37.94 per share based on the closing price of AdaptHealth Corp. Class A Common Stock on December 10, 2020. The final purchase consideration could significantly differ from the amounts presented in the unaudited pro forma condensed combined financial information due to changes in AdaptHealth Corp.’s Class A Common Stock price as of the closing date of the AeroCare Acquisition. A sensitivity analysis related to the fluctuation in the AdaptHealth Corp. common stock price was performed to assess the impact a hypothetical change of 20% on the closing price of AdaptHealth Corp.Class A Common Stock on December 10, 2020 would have on the estimated purchase consideration and goodwill as of the closing date.
The following table shows the change in stock price and the impact on the equity consideration included in the total estimated purchase consideration (dollars in thousands, except stock price):
Equity | ||||||||
Change in Stock Price | Stock Price | Consideration | ||||||
Increase 20% | $ | 45.53 | $ | 1,411,430 | ||||
Decrease 20% | $ | 30.35 | $ | 940,850 |
Other than as described above relating to the equity consideration, the unaudited pro forma condensed combined balance sheet as of September 30, 2020 gives pro forma effect to the AeroCare Acquisition as if it was completed on September 30, 2020, and includes an allocation of the estimated purchase consideration to the estimated fair value of AeroCare’s net assets at such date, including $32.2 million to cash and cash equivalents, $69.3 million to accounts receivable, $28.2 million to inventory, $148.6 million to equipment and other fixed assets, $107.0 million to estimated identifiable intangible assets, $2,041.1 million to goodwill, $79.8 million to accounts payable and accrued expenses, $12.3 million to contract liabilities, $46.4 million to deferred tax liabilities, and $11.8 million of other net liabilities.
Basis of the Pro Forma Presentation
Upon consummation of the AeroCare Acquisition, AeroCare will adopt AdaptHealth’s accounting policies. AdaptHealth may identify differences between the accounting policies among the companies, that when conformed, could have a material impact on the consolidated financial statements of the combined entity.
Note 2—Reclassifications to Historical Financial Information of PCS, Solara and AeroCare
Certain balances and transactions presented in the historical financial statements of PCS, Solara and AeroCare included within the unaudited pro forma condensed combined financial information have been reclassified to conform to the presentation of the financial statements of AdaptHealth as indicated in the tables below.
AeroCare Balance Sheet Reclassifications at September 30, 2020
As per | As | |||||||||||
(in thousands) | Financial Statements | Reclassifications | Reclassified | |||||||||
Assets: | ||||||||||||
Other receivables | $ | 1,277 | $ | (1,277 | ) | $ | - | |||||
Prepaid and other current assets | $ | 5,361 | $ | 1,277 | $ | 6,638 | ||||||
Liabilities: | ||||||||||||
Accounts payable and accrued expenses | $ | - | $ | 79,812 | $ | 79,812 | ||||||
Accounts payable | $ | 51,646 | $ | (51,646 | ) | $ | - | |||||
Accrued expenses and other current liabilties | $ | 28,166 | $ | (28,166 | ) | $ | - | |||||
Due to sellers | $ | 4,405 | $ | (4,405 | ) | $ | - | |||||
Other liabilities | $ | - | $ | 4,405 | $ | 4,405 | ||||||
Interest rate swap | $ | 2,794 | $ | (2,794 | ) | $ | - | |||||
Deferred tax liability | $ | 20,743 | $ | (20,743 | ) | $ | - | |||||
Other long-term liabilities | $ | - | $ | 23,537 | $ | 23,537 | ||||||
Redeemable convertible preferred stock: | ||||||||||||
Total redeemable convertible preferred stock | $ | 103,092 | $ | (103,092 | ) | $ | - | |||||
Total stockholders' equity (deficit): | ||||||||||||
Total stockholders' equity (deficit) attributable to AdaptHealth Corp. | $ | - | $ | (26,045 | ) | $ | (26,045 | ) | ||||
Total stockholders' deficit | $ | (129,137 | ) | $ | 129,137 | $ | - |
AeroCare Statement of Operations Reclassifications for the Nine Months Ended September 30, 2020
As per | As | |||||||||||
(in thousands) | Financial Statements | Reclassifications | Reclassified | |||||||||
Costs and expenses: | ||||||||||||
Cost of Sales | $ | 201,907 | $ | 211,387 | $ | 413,294 | ||||||
General and administrative expenses | $ | - | $ | 14,738 | $ | 14,738 | ||||||
Selling, general and administrative expenses | $ | 228,807 | $ | (228,807 | ) | $ | - | |||||
Interest expense (income) | $ | 11,486 | $ | (23 | ) | $ | 11,463 | |||||
Other income | $ | (2,705 | ) | $ | 2,705 | $ | - |
AeroCare Statement of Operations Reclassifications for the Twelve Months Ended December 31, 2019
As per | As | |||||||||||
(in thousands) | Financial Statements | Reclassifications | Reclassified | |||||||||
Costs and expenses: | ||||||||||||
Cost of net revenue | $ | 218,369 | $ | 242,007 | $ | 460,376 | ||||||
General and administrative expenses | $ | - | $ | 16,127 | $ | 16,127 | ||||||
Selling, general, and administrative expenses | $ | 261,213 | $ | (261,213 | ) | $ | - | |||||
Interest expense (income) | $ | 14,370 | $ | (24 | ) | $ | 14,346 | |||||
Other income | $ | (3,103 | ) | $ | 3,103 | $ | - |
AeroCare Statement of Operations Reclassifications for the Nine Months Ended September 30, 2019
As per | As | |||||||||||
(in thousands) | Financial Statements | Reclassifications | Reclassified | |||||||||
Costs and expenses: | ||||||||||||
Cost of Sales | $ | 152,675 | $ | 174,751 | $ | 327,426 | ||||||
General and administrative expenses | $ | - | $ | 10,993 | $ | 10,993 | ||||||
Selling, general and administrative expenses | $ | 187,932 | $ | (187,932 | ) | $ | - | |||||
Interest expense (income) | $ | 9,766 | $ | (20 | ) | $ | 9,746 | |||||
$Other income | $ | (2,208 | ) | $ | 2,208 | $ | - |
Solara Statement of Operations Reclassifications for the Six Months Ended June 30, 2020
As per | As | |||||||||||
(in thousands) | Financial Statements | Reclassifications | Reclassified | |||||||||
Net revenue | $ | 84,878 | $ | (1,723 | ) | $ | 83,155 | |||||
Costs and expenses: | ||||||||||||
Cost of Sales | $ | 53,013 | $ | 17,821 | $ | 70,834 | ||||||
General and administrative expenses | $ | - | $ | 17,998 | $ | 17,998 | ||||||
Depreciation and amortization, excluding patient equipment depreciation | $ | - | $ | 3,587 | $ | 3,587 | ||||||
Selling, general and administrative expenses | $ | 41,190 | $ | (41,190 | ) | $ | - | |||||
Interest expense (income) | $ | 7,369 | $ | (2 | ) | $ | 7,367 | |||||
Other income | $ | (63 | ) | $ | 63 | $ | - |
Solara Statement of Operations Reclassifications for the Twelve Months Ended December 31, 2019
As per | As | |||||||||||
(in thousands) | Financial Statements | Reclassifications | Reclassified | |||||||||
Net revenue | $ | 183,352 | $ | (3,780 | ) | $ | 179,572 | |||||
Costs and expenses: | ||||||||||||
Cost of Sales | $ | 113,335 | $ | 29,292 | $ | 142,627 | ||||||
General and administrative expenses | $ | - | $ | 4,043 | $ | 4,043 | ||||||
Depreciation and amortization, excluding patient equipment depreciation | $ | - | $ | 7,110 | $ | 7,110 | ||||||
Selling, general and administrative expenses | $ | 44,360 | $ | (44,360 | ) | $ | - | |||||
Other income | $ | (135 | ) | $ | 135 | $ | - |
Solara Statement of Operations Reclassifications for the Nine Months Ended September 30, 2019
(in thousands) |
As per Internal
Financial Statements |
Reclassifications |
As
Reclassified |
|||||||||
Net revenue | $ | 129,236 | $ | (2,699 | ) | $ | 126,537 | |||||
Costs and expenses: | ||||||||||||
Cost of Sales | $ | 79,643 | $ | 20,899 | $ | 100,542 | ||||||
General and administrative expenses | $ | - | $ | 3,625 | $ | 3,625 | ||||||
Depreciation and amortization, excluding patient equipment depreciation | $ | - | $ | 5,331 | $ | 5,331 | ||||||
Selling, general and administrative expenses | $ | 32,651 | $ | (32,651 | ) | $ | - | |||||
Other income | $ | (97 | ) | $ | 97 | $ | - |
PCS Statement of Operations Reclassifications for the Twelve Months Ended December 31, 2019
(in thousands) |
As per Internal
Financial Statements |
Reclassifications |
As
Reclassified |
|||||||||
Costs and expenses: | ||||||||||||
Cost of Sales | $ | 82,263 | $ | 81,509 | $ | 163,772 | ||||||
General and administrative expenses | $ | - | $ | 5,563 | $ | 5,563 | ||||||
Depreciation and amortization, excluding patient equipment depreciation | $ | - | $ | 235 | $ | 235 | ||||||
Selling, distribution, and administrative expenses | $ | 82,483 | $ | (82,483 | ) | $ | - | |||||
Restructuring Charges | $ | 4,838 | $ | (4,838 | ) | $ | - | |||||
Interest expense (income) | $ | - | $ | (90 | ) | $ | (90 | ) | ||||
Other expense, net | $ | (104 | ) | $ | 104 | $ | - |
PCS Statement of Operations Reclassifications for the Nine Months Ended September 30, 2019
(in thousands) |
As per Internal
Financial Statements |
Reclassifications |
As
Reclassified |
|||||||||
Costs and expenses: | ||||||||||||
Cost of Sales | $ | 60,310 | $ | 62,533 | $ | 122,843 | ||||||
General and administrative expenses | $ | - | $ | 4,165 | $ | 4,165 | ||||||
Depreciation and amortization, excluding patient equipment depreciation | $ | - | $ | 727 | $ | 727 | ||||||
Selling, distribution, and administrative expenses | $ | 63,346 | $ | (63,346 | ) | $ | - | |||||
Restructuring Charges | $ | 4,090 | $ | (4,090 | ) | $ | - | |||||
Interest expense (income) | $ | - | $ | (73 | ) | $ | (73 | ) | ||||
Other expense, net | $ | (84 | ) | $ | 84 | $ | - |
Note 3—Pro Forma Adjustments
Adjustments to the Unaudited Pro Forma Condensed Combined Balance Sheet
The pro forma adjustments included in the unaudited pro forma condensed combined balance sheet as of September 30, 2020 are as follows:
(a) | Represents the following adjustments: |
(1) | increase of $500.0 million to reflect the estimated gross proceeds from the issuance of unsecured senior notes to partially fund the cash portion of the purchase price in connection with the AeroCare Acquisition ; | |
(2) | increase of $600.0 million to reflect the estimated gross proceeds from senior secured borrowings to partially fund the cash portion of the purchase price in connection with the AeroCare Acquisition; | |
(3) | reduction of $1,100.0 million to reflect the estimated cash portion of the purchase price in connection with the AeroCare Acquisition; and | |
(4) | reduction of $45.8 million to reflect the payment of transaction fees and expenses in connection with the unsecured senior notes, the senior secured borrowings and other fees and expenses associated with the AeroCare Acquisition. |
(b) | Represents the following adjustments: (1) reduction of $208.2 million representing goodwill included in the historical September 30, 2020 balance sheet of AeroCare, and (2) increase of $2,041.1 million to reflect estimated goodwill in connection with AdaptHealth’s acquisition accounting for the AeroCare Acquisition. |
(c) | Represents the following adjustments: (1) reduction of $1.3 million representing identifiable intangible assets included in the historical September 30, 2020 balance sheet of AeroCare and (2) increase of $107.0 million to reflect estimated identifiable intangible assets in connection with AdaptHealth’s acquisition accounting for the AeroCare Acquisition. |
(d) | Represents the following adjustments: (1) decrease of $25.7 million to net deferred tax assets to reflect estimated deferred tax liabilities in connection with AdaptHealth’s acquisition accounting for the AeroCare Acquisition, and (2) decrease to other long-term liabilities and corresponding decrease to net deferred tax assets of $20.7 million representing deferred tax liabilities included in the historical September 30, 2020 balance sheet of AeroCare. |
(e) | Represents the following adjustments: (1) reduction of $18.0 million representing the current portion of long-term debt balance included in the historical September 30, 2020 balance sheet of AeroCare that will be repaid with a portion of the cash consideration on the closing of the AeroCare Acquisition, and (2) increase of $6.0 million to reflect the current portion of long-term debt that is expected to be incurred to partially fund the AeroCare Acquisition. |
(f) | Represents the following adjustments: (1) reduction of $371.2 million representing the long-term debt balance included in the historical September 30, 2020 balance sheet of AeroCare that is not expected to be assumed by AdaptHealth in connection with the AeroCare Acquisition, and (2) increase of $1,058.2 million to reflect the net long-term debt, less current portion, that is expected to be incurred to partially fund the AeroCare Acquisition. |
(g) | Represents the following adjustments: (1) increase of $26.1 million representing the elimination of the aggregate total redeemable convertible preferred stock and stockholders’ deficit balances included in the historical September 30, 2020 balance sheet of AeroCare, (2) increase of $1,176.1 million to reflect the issuance of AdaptHealth Corp. Class A Common Stock to the sellers in connection with the AeroCare Acquisition, and (3) reduction of $10.0 million to reflect the estimated transaction costs associated with the AeroCare Acquisition. |
Adjustments to the Unaudited Pro Forma Condensed Combined Statements of Operations
The pro forma adjustments included in the unaudited pro forma condensed combined statements of operations for the nine-month periods ended September 30, 2020 and 2019 and for the year ended December 31, 2019 are as follows:
(h) | Represents the elimination of Solara’s historical transaction costs relating to the Solara Acquisition. |
(i) | Represents the following adjustments: (1) elimination of Solara’s historical intangible amortization expense of $3.3 million; (2) elimination of AeroCare’s historical intangible amortization expense of $0.3 million; (3) increase of $4.3 million to reflect estimated amortization expense associated with the estimated identifiable intangible assets related to AdaptHealth’s acquisition accounting for the Solara Acquisition, and (4) increase of $8.0 million to reflect estimated amortization expense associated with the estimated identifiable intangible assets related to AdaptHealth’s acquisition accounting for the AeroCare Acquisition. |
(j) | Represents the following adjustments: (1) elimination of Solara’s historical interest expense of $7.4 million, (2) elimination of AeroCare’s historical interest expense of $11.5 million, and (3) increase of $49.3 million to reflect estimated incremental interest expense associated with AdaptHealth’s debt structure as of September 30, 2020, and the expected issuance of the unsecured senior notes and senior secured borrowings in order to fund the cash portion of the purchase consideration in connection with the AeroCare Acquisition. |
(k) | Adjustment to eliminate the historical tax expense of AdaptHealth, Solara and AeroCare and to record the estimated tax provisions of the combined entities on a pro forma basis using a pro forma effective tax rate for the respective period. However, the effective tax rate of the combined company could be different depending on post-acquisition activities. |
(l) | Represents the pro forma adjustment to the noncontrolling interest resulting from the PCS Acquisition, the Solara Acquisition and the AeroCare Acquisition. |
(m) | Represents adjustment to the AdaptHealth historical weighted average basic and diluted common shares outstanding to include incremental shares expected to be issued in connection with the AeroCare Acquisition, and the shares issued in connection with the Solara Acquisition and related equity financing. |
(n) | Represents the following adjustments: (1) elimination of Solara’s historical intangible amortization expense of $6.5 million; (2) elimination of AeroCare’s historical intangible amortization expense of $0.6 million; (3) increase of $8.5 million to reflect estimated amortization expense associated with the estimated identifiable intangible assets related to AdaptHealth’s acquisition accounting for the Solara Acquisition, and (4) increase of $10.7 million to reflect estimated amortization expense associated with the estimated identifiable intangible assets related to AdaptHealth’s acquisition accounting for the AeroCare Acquisition. |
(o) | Represents the following adjustments: (1) elimination of Solara’s historical interest expense of $13.3 million, (2) elimination of AeroCare’s historical interest expense of $14.3 million, and (3) increase of $67.6 million to reflect estimated incremental interest expense associated with AdaptHealth’s debt structure as of September 30, 2020, and the expected issuance of the unsecured senior notes and senior secured borrowings in order to fund the cash portion of the purchase consideration in connection with the AeroCare Acquisition. |
(p) | Represents adjustment to eliminate AeroCare’s historical loss on extinguishment of debt. |
(q) | Represents the following adjustments: (1) elimination of Solara’s historical intangible amortization expense of $4.9 million; (2) elimination of AeroCare’s historical intangible amortization expense of $0.3 million; (3) increase of $6.4 million to reflect estimated amortization expense associated with the estimated identifiable intangible assets related to AdaptHealth’s acquisition accounting for the Solara Acquisition, and (4) increase of $8.0 million to reflect estimated amortization expense associated with the estimated identifiable intangible assets related to AdaptHealth’s acquisition accounting for the AeroCare Acquisition. |
(r) | Represents the following adjustments: (1) elimination of Solara’s historical interest expense of $9.2 million, (2) elimination of AeroCare’s historical interest expense of $9.7 million, and (3) increase of $50.5 million to reflect estimated incremental interest expense associated with AdaptHealth’s debt structure as of September 30, 2020, and the expected issuance of the unsecured senior notes and senior secured borrowings in order to fund the cash portion of the purchase consideration in connection with the AeroCare Acquisition. |