AdaptHealth Corp 8-K/A, filed Jan 21, 2020
AdaptHealth Corp. (AHCO)
About this 8-K/A
AdaptHealth Corp filed this 8-K/A on January 21, 2020, reporting on events of January 1, 2020.
Items reported
- Item 2.01: Completed an acquisition or sale of assets
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
AdaptHealth Corp.
(Exact name of registrant as specified in its charter)
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): January 21, 2020 (January 1, 2020)
|
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
(address of principal executive offices)
19462
(zip code)
(610) 630-6357
(Registrant’s telephone number, including area code)
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ¨ | Written communication pursuant to Rule 425 under the Securities Act (17 UR 230.425) |
| ¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CPR 240.14a-12) |
| ¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ¨ | Pre-commencements communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
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. ¨
| 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 |
Item 2.01 Completion of Acquisition or Disposition of Assets.
On January 1, 2020, AdaptHealth LLC (“Buyer”), a Delaware limited liability company and wholly-owned indirect subsidiary of AdaptHealth Corp., a Delaware corporation (the “Company”), completed its previously announced acquisition of NRE Holding Corporation, a Delaware corporation (“NRE”) and subsidiary of McKesson Medical-Surgical, Inc., a Virginia corporation (“Seller”), pursuant to the Securities Purchase Agreement, dated as of November 21, 2019 (the “Agreement”), by and among Buyer, Seller, NRE and McKesson Patient Care Solutions, Inc., a Pennsylvania corporation and wholly-owned subsidiary of NRE (“PCS”). On the terms and subject to the conditions set forth in the Agreement, at the closing of the Transaction (the “Closing”), Buyer purchased from Seller all of the issued and outstanding equity interests of NRE (the “Transaction”).
Pursuant to the Agreement, the base purchase price was $14 million, subject to customary adjustments for cash, indebtedness, transaction expenses and net working capital (as compared to an agreed target net working capital amount). The total cash paid at the Closing by Buyer was $15 million. In addition, Buyer may be required to make an additional payment of $1.5 million to Seller following the Closing pursuant to the terms and conditions of a Transition Services Agreement executed into in connection with the Closing. The total amount of Buyer’s investment in NRE, including restructuring costs relating to the integration of NRE’s business into the Company’s platform, is expected to be approximately $30 million.
This Current Report on Form 8-K/A amends the Current Report on Form 8-K filed by the Company on January 7, 2020 in order to include the financial statements of PCS and the unaudited pro forma financial information required by Item 9.01 of Form 8-K. The unaudited pro forma financial information included in this Current Report on Form 8-K/A has been presented for informational purposes only, as required by Form 8-K. It does not purport to represent the actual results of operations that AdaptHealth Holdings LLC (“AdaptHealth Holdings”) and PCS would have achieved had the companies been combined during the periods presented in the pro forma financial information and is not intended to project the future results of operations that the combined company may achieve after the acquisition. Except as described above, all other information in the Company’s Current Report on Form 8-K filed on January 7, 2020 remains unchanged.
Forward-looking Statements
Certain statements in this Current Report on Form 8-K/A may constitute “forward-looking statements” for purposes of the federal securities laws. Our forward-looking statements include, but are not limited to, statements regarding our or our management team’s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.
These forward-looking statements are based on information available as of the date of this Current Report on Form 8-K/A, and current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. A further description of such risks and uncertainties can be found in the Company’s filings with the Securities and Exchange Commission, including the Company’s definitive proxy statement in connection with the solicitation of proxies from its stockholders filed with the Securities and Exchange Commission on October 23, 2019.
Item 9.01. Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired.
| · | The audited combined financial statements of PCS, as of and for the years ended March 31, 2019 and 2018, and the related notes to the financial statements incorporated herein by reference to Exhibit 99.2 to this Current Report on Form 8-K/A. |
| · | The unaudited combined financial statements of PCS, as of September 30, 2019 and March 31, 2019 and for the six months ended September 30, 2019 and 2018, and the related notes to the financial statements incorporated herein by reference to Exhibit 99.3 to this Current Report on Form 8-K/A. |
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(b) Pro Forma Financial Information.
| · | The unaudited pro forma condensed combined financial information, and the related notes thereto, of AdaptHealth Holdings LLC and PCS, as of and for the nine months ended September 30, 2019 and for the year ended December 31, 2018, incorporated herein by reference to Exhibit 99.4 to this Current Report on Form 8-K/A. |
(d) Exhibits
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| AdaptHealth Corp. | ||
| By: | /s/ Gregg Holst | |
| Gregg Holst | ||
| Chief Financial Officer | ||
Dated: January 21, 2020
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Exhibit 99.2
PATIENT CARE SOLUTIONS BUSINESS COMBINED FINANCIAL STATEMENTS As of March 31, 2019 and 2018, and for the years ended March 31,2019 and March 31, 2018
INDEX TO COMBINED FINANCIAL INFORMATION Contents COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS 5 COMBINED BALANCE SHEETS 6 COMBINED STATEMENTS OF NET PARENT INVESTMENT 7 COMBINED STATEMENTS OF CASH FLOWS 8 NOTES TO COMBINED FINANICAL STATEMENTS 9 2
GrantThornton GRANT THORNTON LLP 27777 FRANKLIN ROAD, SUTIE 800 SOUTHFIELD, Ml 48034 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS D F +1 248 262 1950 +1 248 350 3581 Board of Directors AdaptHealth Corp. We have audited the accompanying combined financial statements of the Patient Care Solutions Business, which comprise the combined balance sheets as of March 31, 2019 and 2018, and the related combined statements of operations and comprehensive loss, net parent investment, and cash flows for the years then ended, and the related notes to the financial statements. Management's responsibility for the financial statements Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error. Auditor's responsibility Our responsibility is to express an opinion on these combined 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 combined financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the combined 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 combined 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 combined financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. GT.COM Grant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd (GTIL}. GTIL and each of its member firms are separate legal entities and are not a worldwide partnership.
GrantThornton Opinion In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Patient Care Solutions Business as of March 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Southfield, Michigan January 17, 2020
PATIENT CARE SOLUTIONS BUSINESS COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In thousands) · Years Ended March31, 2019 March31, 2018 $ 134,774 $ 144,461 Revenues Cost of sales Gross profit Operating expenses Selling, distribution and administrative expenses Restructuring charges Total operating expenses Operating loss Other expense, net Loss from operations before income taxes Income tax expense Net loss attributable to Patient Care Solutions Business Comprehensive loss Comprehensive loss attributable to Patient Care Solutions (84,995) (91,040) 49,779 53,421 (86,269) (106,196) (7,601) (2,887) (93,870) (109,083) (44,091) 62 (44,029) (55,662) (11) (55,673) (44,029] (55,673) (44,029] (55,673) $ (44,029] $ (55,673) 5
PATIENT CARE SOLUTIONS BUSINESS COMBINED BALANCE SHEETS (In thousands) As of March As of March 31,2019 31,2018 ASSETS Current assets Cash and cash equivalents Receivables, net Contract assets Prepaid expenses and other Total current assets Property, plant and equipment, net Other noncurrent assets Total assets 18,908 16,997 7,548 915 $ 17,659 17,140 $ 719 35,518 1,127 16 44,368 9,263 15 $ 53,646 $ 36,661 -----'--LIABILITIES AND EQUITY Current liabilities Drafts and accounts payable Other accrued liabilities Total current liabilities Other noncurrent liabilities Net parent investment Total liabilities and equity $ 4,103 $ 6,607 ------5 8 80 -----2=1=,2 9 3 9,983 89 27,900 72 4_3.<-,5_7_4 ----.,----8,.:--,6:--:8,--9 53,646 _$ 3_6.:,.6__6_1 $ 6
PATIENT CARE SOLUTIONS BUSINESS COMBINED STATEMENTS OF NET PARENT INVESTMENT (In thousands) Net Parent Investment 18,628 (55,673) 45,734 Balance as of March 31, 2017 Net loss Net transfers from parent Balance as of March 31, 2018 Net loss Cumulative effect on opening net parent investment of adopting accounting standards and other Net transfers from parent Balance as ofMarch31, 2019 $ 8,689 (44,029) 7,964 70,950 --$----------43,-57-4-7
PATIENT CARE SOLUTIONS BUSINESS COMBINED STATEMENTS OF CASH FLOWS (In thousands) Years Ended March 31, 2019 March 31, 2018 Net loss Adjustments to reconcile to net cash used in operating activities: Depreciation Provision for bad debts Other non-cash items Changes in assets and liabilities: Receivables, net Contract assets Prepaid expenses and other Drafts and accounts payable Other accrued liabilities Net cash used in operating activities $ (44,029) $ (55,673) 314 (1,547) 437 485 (11 ,007) 1,690 416 (65) (2,504) {152413} 14,351 225 (6,945) 14,349 (602701} (442215} Investing Activities Payments for property, plant and equipment Net cash used in investing activities {9,000} {130} {92000} (130} Financing Activities Net transfers from parent Net cash provided by financing activities 70 950 45 734 70 950 45 734 Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 1,249 17 659 1,389 16,270 $ 18 908 $ 17,659 8
PATIENT CARE SOLUTIONS BUSINESS NOTES TO COMBINED FINANICAL STATEMENTS (In thousands) 1. Business Overview and Basis of Presentation Patient Care Solutions ("PCS" or "the Company" or "we") is a component of the Medical-Surgical Solutions segment ("MMS") of McKesson Corporation ("McKesson"). McKesson is a global leader in healthcare supply chain management solutions, retail pharmacy, healthcare technology, community oncology and specialty care. MMS distributes medical surgical supplies and provides logistics and other services to healthcare providers in the United States. PCS operations began with the acquisitions of Sterling Medical ("SMS") in 2006 and National Rehab ("NR") in 2012. These two operating units were combined in 2014 to create the PCS business, based in Pittsburgh, PA, with distribution centers in Auburn, AL and Moorestown, NJ. PCS is a direct provider of durable medical supplies and durable medical equipment ("DME") supplies to the patient's home. PCS provides wound care supplies, ostomy supplies, incontinence supplies, diabetic care supplies and breast pumps directly to patients across the United States. The Company maintains extensive national relationships with physicians, medical facilities and customers, and currently serves all 50 states. PCS is similar to a pharmacy in that it provides physician-prescribed medical supplies to patients while billing their insurance directly. Unlike a pharmacy, PCS ships products directly to patients and the billing cycle is more complex than pharmaceuticals due to the robust documentation required for reimbursement. On November 21, 2019, MMS entered into a Securities Purchase Agreement ("Agreement") to sell its Patient Care Solutions business to AdaptHealth Corp ("AH" or the "Buyer") ("Proposed Transaction"). The Proposed Transaction closed on January 1, 2020. Throughout the periods included in these Combined Financial Statements, PCS operated as part of McKesson and consisted of one holding company and one operating company with separate legal status. Separate financial statements have not historically been prepared for PCS. The Combined Financial Statements have been derived from McKesson's historical accounting records as ifPCS 's operations had been conducted independently from McKesson and were prepared on a stand-alone basis in accordance with U.S. generally accepted accounting principles ("GAAP"). As the statements are combined, with amounts being removed from and added to PCS, there is no longer a single stock interest in the carve-out entity. Therefore, the equity interest is presented as Net parent investment ("NPI"). Changes in NPI include net income or loss for the year, net transfers to and from MMS and its subsidiaries, and PCS. The historical results of operations, financial position and cash flows of PCS presented in these Combined Financial Statements may not be indicative of what they would have been had PCS actually been an independent stand-alone entity, nor are they necessarily indicative of PCS 's future results of operations, financial position and cash flows. The Combined Financial Statements include all revenues and costs directly attributable to PCS and an allocation of expenses related to certain McKesson corporate functions (Note 3, "Corporate Allocations, Related Party Transactions and Net Parent Investment"). These expenses have been allocated to PCS based on direct usage or benefit where specifically identifiable, with the remainder allocated primarily on a pro rata basis ofheadcount, usage, or other reasonable measures. PCS considers these allocations to be a reasonable reflection of the utilization of services or the benefit received. However, the allocations may not be indicative of the actual expense that would have been incurred had PCS operated as an independent, stand-alone entity, nor are they indicative ofPCS future expenses. The Combined Financial Statements include assets and liabilities specifically attributable to PCS and certain liabilities that are held by McKesson that are specifically identifiable or otherwise attributable to PCS. McKesson uses a centralized approach for managing cash and financing operations with its segments and subsidiaries. Accordingly, a substantial portion ofPCS 's bank cash balances are transferred to McKesson's cash management accounts regularly by McKesson at its discretion and therefore are not included in the Combined Financial Statements. Only cash balances legally owned by 9
PCS are reflected in the Combined Balance Sheets. Transfers of cash between PCS and McKesson are included within Net transfers from parent on the Combined Statements of Cash Flows and the Combined Statements of Net Parent Investment. McKesson's long-term debt and related interest expense have not been attributed to PCS for any of the periods presented because McKesson's borrowings are neither directly attributable to PCS nor is PCS the legal obligor of such borrowings. All material intercompany transactions and balances within PCS have been eliminated. Transactions between PCS and McKesson have been included in these Combined Financial Statements and substantially all have been effectively settled for cash at the time the transaction is recorded through McKesson's centralized cash management system. Transactions between PCS and other businesses of McKesson are considered related party transactions (Note 3, "Corporate Allocations, Related Party Transactions and Net Parent Investment"). PCS's operations are included in the combined U.S. federal and certain state and local income tax returns filed by McKesson. PCS also files certain separate state and local income tax returns. Income tax expense and other income tax related information contained in these Combined Financial Statements are presented on a separate return basis as if PCS filed its own tax returns ("Separate Return Method"). PCS's tax results as presented in the Combined Financial Statements may not be reflective of the results that PCS will generate in the future. In jurisdictions where PCS has been included in the tax returns filed by McKesson, any income taxes payable resulting from the related income tax provisions have been reflected in the Combined Balance Sheets within Net Parent Investment. 2. Significant Accounting Policies Fiscal period: The Company's fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references to a particular year shall mean the Company's fiscal year. Use of estimates: The preparation of financial statements in conformity with U.S. GAAP requires that we make estimates and assumptions that affect the reported amounts in the Combined Financial Statements and accompanying notes. Actual amounts could differ from those estimated amounts. Significant estimates inherent in the preparation of these Combined Financial Statements include, but are not limited to, accounting for revenue and cost recognition, allocation of expenses related to certain McKesson corporate functions, income taxes including deferred taxes, fair value measurements, legal liabilities and other contingencies. Cash and cash equivalents: PCS participates in McKesson's cash management and financing programs. The cash reflected on the Combined Financial Statements represents cash on hand related to PCS at certain domestic legal entities. The remaining cash and cash equivalents are deposited with several financial institutions. Deposits may exceed the amounts insured by the Federal Deposit Insurance Corporation in the U.S. and similar deposit insurance programs in other jurisdictions. We mitigate the risk of our short-term investment portfolio by depositing funds with reputable financial institutions and monitoring risk profiles. Concentrations of credit risk and receivables: Trade receivables are subject to a concentration of credit risk with customers in the healthcare provider sector, which can be affected by a downturn in the economy and changes in reimbursement policies. This credit risk is mitigated by the size and diversity of the customer base as well as its geographic dispersion. We estimate the receivables for which we do not expect full collection based on historical collection rates and ongoing evaluations of the creditworthiness of our customers. An allowance is recorded in our Combined Financial Statements for these amounts. Shipping and handling costs: We include costs to pack and deliver inventory to our customers in Selling, distribution and administrative expenses. Shipping and handling costs of$9,389 and $8,325 were recognized in 2019 and 2018. 10
Property, plant and equipment: We state our property, plant and equipment ("PPE") at cost and depreciate them under the straight-line method at rates designed to distribute the cost of PPE over estimated service lives ranging from two to ten years. When certain events or changes in operating conditions occur, an impairment assessment may be performed on the recoverability of the carrying amounts. Revenue recognition: Revenue is recognized when the company satisfies a performance obligation by transferring control of a promised good to a customer in an amount that reflects the consideration to which we expect to be entitled for that good. The company generates revenues by providing DME to patients. Revenue is recognized when control of the DME is transferred to the customer which occurs based on our delivery terms with the customer. The Company will ship DME directly to the patient's home and invoice the patient's insurance provider. Revenues are recorded gross as we are the principal in the transaction, have the ability to direct the use of the DME prior to transfer to a customer, are responsible for fulfilling the promise to our customer, have latitude in establishing prices, and control the relationship with the customer. We record our revenue net of sales tax. Revenues are measured based on the amount of consideration that we expect to receive, reduced by estimates for return allowances, discounts and price concessions using historical data under the expected value method. Sales returns, associated assets for the right to recover products from customers, and the associated refund liabilities for returns allowances were not material as of March 31, 2019 and 2018. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in selling, distribution and administrative expenses. Payment terms can vary by the type and location of the customer. The term between invoicing and when payment is due is not significant. The common nature, timing, and risks associated with our contracts with customers for the provision ofDME satisfies the disaggregation criteria for use of a single category of revenue. We elected the practical expedient and generally expense costs to obtain a contract when incurred because the amortization period would have been one year or less. In addition, we elected the practical expedient to not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. Contract Balances Contract assets primarily relate to the Company's rights to consideration for control of DME that has transferred to the customer but not billed at the reporting date. The contract assets are transferred to receivables when the rights become unconditional. The following table summarizes the activity in the Company's contract assets during the fiscal year ended March 31,2019 (in thousands): (In thousand::,) Balance as of March 31, 2018 Cwnulative effect adjustment at April 1, 2018 Revenue recognized $ 7,964 134,774 Amounts collected or invoiced (135,190) Balance as of March 31 2019 $ 7,548 We had no material contract liabilities or deferred contract costs recorded on the Consolidated Balance Sheet as of March 31, 2019. 11
Supplier incentives: Fees for services and other incentives received from suppliers, relating to the purchase or distribution of inventory, are considered product discounts and are generally reported as a reduction to cost of sales. Supplier reserves: We establish reserves against amounts due from suppliers relating to various fees for services and price and rebate incentives, including deductions taken against payments otherwise due to them. These reserve estimates are established based on judgment after considering the status of current outstanding claims, historical experience with the suppliers, the specific incentive programs and any other pertinent information available. We evaluate the amounts due from suppliers on a continual basis and adjust the reserve estimates when appropriate based on changes in facts and circumstances. Adjustments to supplier reserves are generally included within cost of sales. The ultimate outcome of any outstanding claims may be different than our estimate. Income taxes: Income taxes (as presented) attribute deferred income taxes of McKesson to our stand-alone Combined Financial Statements in a manner that is systematic, rational and consistent with the asset and liability method. Accordingly, our income tax provision was prepared following the Separate Return Method, which calculates income taxes for the stand-alone financial statements of each member of the combined group as if the group member were a separate taxpayer and a stand-alone enterprise. As a result, actual tax transactions included in the Consolidated Financial Statements of McKesson may not be included in our separate Combined Financial Statements. Similarly, the tax treatment of certain items reflected in our Combined Financial Statements may not be reflected in the Consolidated Financial Statements and tax returns of McKesson. We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or the tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse, as well as differences related to the timing of the recognition of income and expense. Realization of the future tax benefits related to deferred tax assets is dependent on many factors, including PCS's past earnings history, expected future earnings, the character and jurisdiction of such earnings, reversing taxable temporary differences, unsettled circumstances that, if unfavorably resolved, would adversely affect utilization of its deferred tax assets, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. Tax benefits from uncertain tax positions are recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. The amount recognized is measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon effective settlement. We report interest and penalties on income taxes as income tax expense. Tax positions failing to qualify for initial recognition are recognized in the first subsequent interim period that they meet the more likely than not standard, upon resolution through negotiation or litigation with the taxing authority or on expiration of the statute of limitations. Net parent investment: Net parent investment in the Combined Balance Sheets represents McKesson's historical investment in PCS and includes accumulated net earnings attributable to parent and the net effect of transactions with, and cost allocations from, parent. Note 3, "Corporate Allocations, Related Party Transactions and Net Parent Investment" provides additional information regarding the allocation to PCS for expenses incurred by McKesson. Loss contingencies: We are subject to various claims, including claims with customers and vendors, pending and potential legal actions for damages, investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of our business. When a loss is considered probable and reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss. However, the likelihood of a loss with respect to a particular contingency is often difficult to predict and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information available and the potential effect of future events and decisions by third parties that will determine the ultimate resolution of the contingency. Moreover, it is not uncommon for such matters to be resolved over many years, during which time relevant developments and new information must be reevaluated to determine both the likelihood of potential loss and whether it is possible to reasonably estimate the loss or a range of 12
possible loss. When a material loss is reasonably possible or probable but a reasonable estimate cannot be made, disclosure of the proceeding is provided. Disclosure is also provided when it is reasonably possible that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the recorded provision. We review all contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or range of the loss can be made. As discussed above, development of a meaningful estimate of loss or a range of potential loss is complex when the outcome is directly dependent on negotiations with or decisions by third parties, such as regulatory agencies, the court system and other interested parties. Such factors bear directly on whether it is possible to reasonably estimate a range of potential loss and boundaries of high and low estimate. Restructuring charges: Employee severance costs are generally recognized when payments are probable and amounts are reasonably estimable. Costs related to contracts without future benefit or contract termination are recognized at the earlier of the contract termination or the cease-use dates. Other exit-related costs are recognized as incurred. Recently adopted accounting pronouncements Revenue recognition: In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09") that supersedes ASC 605, Revenue Recognition. Subsequently, the FASB issued several updates to ASU 2014-09, which are codified in Accounting Standards Codification Topic 606 ("ASC 606"). In the first quarter of2019, we adopted amended guidance for revenue recognition using the modified retrospective method and applied the amended guidance to those contracts which were not completed as of April1, 2018. Previously the Company recognized revenue when persuasive evidence of an arrangement existed, product was delivered and title passed to the customer, the price was fixed or determinable, and collection of the amounts were reasonably assured. As the transaction price was deemed fixed and determinable at the time of invoicing, revenue recognition was deferred until this point time. Under ASC 606, the Company recognizes revenue when control of goods is transferred to the customer which occurs based upon our delivery terms with the customer. Accordingly, revenue is recognized at this earlier point in time and a contract asset is recorded until the customer is billed. The cumulative effect of initially applying the new revenue standard was $7,964 and has been recorded as an adjustment to increase the opening balance Net parent investment. The cumulative effect adjustment relates to the recognition of revenue at this earlier point in time. The comparative information has not been restated and is reported in accordance with accounting standard ASC 605, which was in effect for the year ended March 31, 2018. The adoption of the new revenue standard impacted the Combined Financial Statements as follows: 13
Year Ended March 312 2019 Amount Without Adoption of ASC 606 (In thousands) As Reported Effect of Change Revenues Gross profit Operating Ioss Net loss $ 134,774 49,779 (44,091) (44,029) $ 416 416 416 416 $ 135,190 50,195 (43,675) (43,613) Current assets Contract assets Net parent investment Net parent investment 7,548 (7,548) (43,574) (7,548) (51,122) Recently issued accounting pronouncements not yet adopted Leases: In February 2016, amended guidance was issued for lease arrangements. The amended guidance requires lessees to recognize lease liabilities and right-of-use ("ROU") assets on the balance sheet for all leases with terms longer than 12 months and to provide enhanced disclosures on key information of leasing arrangements. The amended guidance is effective for us commencing in the first quarter of 2020. We will adopt the amended guidance on a modified retrospective basis through a cumulative-effect adjustment to the beginning retained earnings in the period of adoption. We will elect the transition package of practical expedients provided within the amended guidance, which eliminates the requirements to reassess lease identification and lease classification for leases commenced before April I, 2019. We will also elect not to separate lease from non-lease components and to exclude short-term leases with an initial term of 12 months or less from our Combined Balance Sheets. Upon adoption of this amended guidance, we will record $11,449 of operating lease liabilities and $11,159 of operating lease ROU assets. We will have no adjustments to beginning retained earnings. The adoption of this amended guidance did not have a material impact on our condensed consolidated statements of operations and cash flows. 3. Corporate Allocations, Related Party Transactions and Net Parent Investment The Combined Financial Statements reflect allocations of certain expenses from McKesson including, but not limited to, general corporate expenses such as management, legal, human resources, accounting, information technology, shared services processing, and corporate employee benefits including incentive bonuses and share-based compensation. Also reflected are allocations of certain expenses from MMS, including, but not limited to, expenses such as warehouse, management, legal, human resources and compliance. These allocations were net against an allocation made from MMS to the Company for supplier incentives that benefitted the Company but were not previously recorded. We consider these allocations to be a reasonable reflection of the utilization of services by, or the benefits provided to the Company. The allocation methods used primarily include a pro rata basis of headcount, usage, or other reasonable measures. Allocations for these management costs and corporate support services totaled $13,468 and $15,207 in 2019 and 2018 respectively. These costs have been recorded within Cost of sales and Selling, distribution and administrative in the Combined Statements of Operations and Comprehensive Income as follows: Years Ended March31, 2019 March31, 2018 (In thousands) Cost of sales Selling, distribution and administrative $ (2,357) 15,825 $ (1,969) 17,176 $ 13,468 $ 15,207 Total corporate allocations 14
The financial information in these Combined Financial Statements does not necessarily include all the expenses that would have been incurred by PCS had it been a separate, stand-alone entity. Actual costs that may have been incurred if PCS had been a stand-alone company would depend on a number of factors, including the chosen organization structure and functions outsourced or performed by employees. Related party purchases The Company has entered into agreements with McKesson and its subsidiaries, all related to the supply, purchase, and distribution of inventory to the Company's customers. In 2019 and 2018, related party inventory purchases from McKesson and its subsidiaries were $104,078 and $113,314 respectively, and are recorded in Cost of sales on the Combined Statements of Operations and Comprehensive Income. In 2019 and 2018, expenses related to the distribution of inventory by McKesson and its subsidiaries were $7,349 and $7,533, respectively, and are recorded in Selling, distribution and administrative expenses on the Combined Statements of Operations and Comprehensive Income. All related party receivables and payables due from or due to McKesson are settled through the intercompany accounts included within the Net parent investment line on the Combined Balance Sheets. Related party transaction with Change Healthcare The Company has entered into a service agreement with Change Healthcare Technology Enabled Services, LLC ("Change Healthcare"), pursuant to which the Company receives consulting services for patient order support and software implementation. This agreement was terminated in the fourth quarter of 2019. In 2019 and 2018, expenses incurred by the Company related to the Change Healthcare arrangement were $1,352 and $1,245, respectively, and are recorded in Selling, distribution and administrative expenses on the Combined Statements of Operations and Comprehensive Income. Accounts payable related to the Change Healthcare arrangement were not considered material as of March 31, 2019 and March 31, 2018. Net parent investment Historically, McKesson has provided financing, cash management and other treasury services to PCS. The PCS cash balances are swept by McKesson and historically, we have received funding from McKesson for our operating and investing cash needs. Cash transferred to and from McKesson has historically been recorded as intercompany payables and receivables which are reflected in the Net parent investment line on the Combined Balance Sheets. 4. Restructuring Charges On December 8, 2017, the executive management of MMS gave approval to execute the first phase of a restructuring plan to consolidate PCS operations. This phase focused on the consolidation of certain operations, headcount rationalization due to the Brightree system implementation, and related temporary transitional resources. On June 29, 2018, the executive management ofMMS gave approval to execute the second phase of a restructuring plan that consolidated PCS operations (the Plan). The Plan addresses multiple components of PCS operations, including customer service, documentation, authorization, billing, and cash collections. Under the current model, these PCS operations are dispersed throughout 2 separate facilities in Pittsburgh, PA, and 1 additional facility in Moorestown, NJ. Under the new model, these operations will be strategically located within the existing MMS "Hub" locations; specifically, 1 facility in Pittsburgh, PA, and 1 additional facility in Jacksonville, FL. The Plan was approved to support the Company's continuing efforts to lower operating costs while maintaining a high level of operational capabilities and quality of services. In connection with the Plan, PCS terminated various employees and expects to terminate more employees through the third quarter ofFY2020 and provide them with termination benefits in accordance with the existing severance policy established by MMS Human Resources. During FY2020, PCS is planning to consolidate certain facilities. In connection with the consolidations, various non-PCS employees (specifically 15
sales personnel supporting the Extended Care (EC) business) will also be terminated. MMS will provide these employees with termination benefits in accordance with the existing severance policy established by MMS Human Resources. The following restructuring costs are incurred as part of the Plan: 1) Temporary transitional resources to complete the consolidation; 2) Facility exit costs related to the consolidation, including lease exit, decommissioning, accelerated depreciation, move related, duplicative rent, and licensure. During the period ended March 31, 2019, $1,823 of cash payments were made, primarily related to severance. At March 31, 2019, restructuring liabilities of $2,482 were recorded in Other accrued liabilities in our Combined Balance Sheets. Under the Plan, we expect to record total pre-tax charges of approximately $12,225, of which $10,158 of pre-tax charges have been recorded to date. Estimated remaining charges primarily consist of exit-related costs and accelerated depreciation. Restructuring charges for the Plan for the years ended March 31, 2019 and March 31, 2018 directly attributable to PCS consisted of the following: Years Ended March 31, 2019 March 31, 2018 (In thousands) $ $ Severance and employee-related costs, net Exit and other-related costs Asset impairments and accelerated depreciation 1,790 5,334 477 1,637 1 ,250 Total $ 7,601 $ 2,887 The following table summarizes the activity related to the restructuring liabilities associated with the fiscal2019 initiatives for the year ended March 31, 2019: (In thousands) Balance as of March 31, 2017 Restructuring charges recognized Non-cash charges Cash payments Temporary charges $ 475 2,887 (100) (800) Balance as of March 31 2018 2,462 7,601 (477) (1,823) (5,281) Restructuring charges recognized Non-cash charges Cash payments Temporary charges Balance as of March 31, 2019 $ 2,482 5. Income Taxes As previously mentioned, the provision for income taxes is computed as if the Company has filed a separate tax return following the Separate Return Method. The Separate Return Method applies the accounting guidance for income taxes to the standalone financial statements as if the Company were a separate taxpayer and a stand-alone enterprise for the periods presented. The Company's operations are included in the income tax returns of the parent for U.S. federal income 16
tax purposes and with respect to certain consolidated, combined, unitary, or similar group filings for U.S. state or local income tax jurisdictions. Although the Company is showing a hypothetical deferred tax asset for these separate company loss carryforwards on its balance sheet, the losses were actually used by other profitable subsidiaries of its parent and are not available to offset the Company's future taxable income. The Company may also file on a standalone basis with respect to certain other state or local tax jurisdictions in accordance with the taxing jurisdiction's filing requirements. Years Ended March 31, (In thousands) 2019 2018 $ (44,029) $ (55,673) Total income from continuing operations before income taxes (United States) Income tax expense (benefit) related to continuing operations consists of the following: Years Ended March 31, (In thousands) 2019 2018 Current Federal State Total current $ $ Deferred Federal State Total deferred Income tax expense (benefit) $ $ We recorded no income tax expense and our effective tax rate was 0% related to continuing operations in both 2019 and 2018 due to losses in each period and full valuation allowance on our deferred tax assets. The reconciliation of income tax expense (benefit) and the amount computed by applying the statutory federal income tax rate of 21% for 2019 and 31.5% for 2018 to the income before income taxes is as follows: Years Ended March 31, (In thousands) 2019 2018 $ (9,246) (1,179) 45 $ (17,537) (1,931) 40 28,490 Income tax expense at federal statutory rate State income taxes net of federal tax benefit Other Change in tax rate Valuation allowance 10,380 (9,062) Income tax expense (benefit) $ $ In March 2016, amended guidance was issued for employee share-based payment awards. Under the amended guidance, all windfalls and shortfalls related to employee share-based compensation arrangements are recognized within income tax expense. We elected to early adopt this amended guidance in the first quarter of 2017. The primary impact of the adoption was the recognition of tax shortfalls in the income statement on a prospective basis, rather than additional paid-in capital. As a result, we recognized tax expense, before valuation allowance, of$34 in 2019 and $21 in 2018. Deferred tax balances consisted of the following: 17
Years Ended March 31, (In thousands) 2019 2018 Assets Receivable allowances Compensation and benefit related accruals Accrued Litigation Federal and state riet operating loss Intangibles Other Subtotal Less: valuation allowance Net deferred tax 179 974 $ 6,706 722 3,866 40,614 6,549 487 $ 62,996 4,929 246 69,324 (69,324) 58,944 {58,944} $ $ We assess the available positive and negative evidence to determine whether deferred tax assets are more likely than not to be realized. As a result of this assessment, valuation allowances have been recorded on certain deferred tax assets in various tax jurisdictions. The valuation allowance was approximately $69,324 and $58,944 in 2019 and 2018. The increase of $10,380 in valuation allowances in the current year relates primarily to federal and state net operating losses incurred in certain tax jurisdictions for which no tax benefit was recognized. We have federal and state net operating loss carry forwards of$249,007 and $174,614 as ofMarch 31,2019. Federal and state net operating losses will expire at various dates from 2022 through 2037. We have not recorded any unrecognized tax benefits as of March 31, 2019 and March 31, 2018. Although we report interest and penalties on income taxes as income tax expense, PCS did not recognize any interest or penalties for the years ended March 31, 2019 and 2018. We file income tax returns in the U.S. federal jurisdiction and various U.S. state jurisdictions. The IRS is currently examining our U.S. corporation income tax returns for 2013 through 2015. We are generally subject to audit by taxing authorities in various U.S. state jurisdictions for fiscal years 2010 through the current fiscal year. 2017 Tax Act On December 22, 2017, the U.S. government enacted the 2017 Tax Act, which was comprehensive new tax legislation. The 2017 Tax Act made broad and complex changes to the U.S. tax code that affected our fiscal year 2018 due to the reduction of the U.S. federal corporate tax rate from 35 percent to 21 percent. The SEC Staff issued guidance on income tax accounting for the 2017 Tax Act on December 22, 2017, which allows companies to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. However, even as a result of this guidance, we recognized no net tax impact from re-measurement in 2018 as our deferred taxes were subject to full valuation allowance. During 2019, we have not made any measurement period adjustments to this amount. Our accounting for the impact of the 2017 Tax Act was completed as of the period ending December 31, 2018. 6. Receivables, Net March 31, (In thousands) 2019 March31, 2018 24,589 Trade receivables $ 21,481 $ 1 Other receivables Total 1,439 2,383 22,920 26,972 {9,832} Allowances {5,923} Net $ 16 997 $ 17 140 1. Other receivables primarily include amounts due from vendors for vendor incentives and rebates. 18
7. Property, Plant and Equipment, Net March 31, 2019 March31, 2018 (In thousands) Machinery and equipment Leasehold improvements Construction in progress $ 1,684 732 9,005 $ 3,665 1,067 21 Acctunulated depreciation (2,158) (3,626) Property, plant and equipment, net $ 9,263 $ 1,127 Depreciation expense was $314 and $485 for the years ended March 31, 2019 and 2018, respectively. 8. Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a three-level hierarchy that prioritizes the inputs used in determining fair value by their reliability and preferred use, as follows: Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities. Level 2 - Valuations based on quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data. Level 3 - Valuations based on inputs that are both significant to the fair value measurement and unobservable. At March 31, 2019 and 2018, the carrying amounts of cash, certain cash equivalents, receivables, drafts and accounts payable and other current liabilities approximated their estimated fair values because of the short maturity of these financial instruments. There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the years ended March 31, 2019 and 2018. 9. Other Accrued Liabilities March31, 2019 March31, 2018 (In thousands2 Restructuring reserves Accrued employee expenses Accrued taxes Accrued legal $ 2,482 1,651 329 $ 2,462 1,731 310 15,204 Accrued other 1,418 1,586 Other accrued liabilities $ 5,880 $ 21,293 19
10. Lease Obligations We primarily lease facilities and vehicles under operating leases. Our equipment leases are not material. At March 31, 2019, future minimum lease payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year for the year ending March 31, 2019 are: Noncancelable Operating leases 2020 2021 2022 2023 2024 $ 2,187 2,168 1,846 1,635 1,665 Thereafter 3,140 Total minimun lease 2ayments $ 12,641 Rent expense under operating leases was $1,835 and $1,721 in 2019 and 2018. We recognize rent expense on a straight-line basis over the term of the lease, taking into account, when applicable, lessor incentives for tenant improvements, periods where no rent payment is required and escalations in rent payments over the term of the lease. Deferred rent is recognized for the difference between the rent expense recognized on a straight-line basis and the payments made per the terms of the lease. Remaining terms for facilities leases generally range from one to fifteen years, while remaining terms for equipment leases range from one to six years. Most real property leases contain renewal options (generally for five-year increments) and provisions requiring us to pay property taxes and operating expenses in excess of base period amounts. Sublease rental income was not material for 2019 and 2018. 11. Commitments and Contingent Liabilities In addition to commitments and obligations incurred in our business, we are subject to a variety of claims incidental to the normal conduct of our business, including claims from customers and vendors, pending and potential legal actions for damages, governmental investigations, and other matters. The Company is vigorously defending itself against claims in the legal proceedings described below. If we are unsuccessful in defending, or if we determine to settle, any of these matters, we may be required to pay substantial sums, be subject to injunction or be forced to change how we operate our business, which could have a material adverse impact on our financial position or results of operations. Unless otherwise stated, we are unable to reasonably estimate the loss or a range of possible loss for the matters described below. Often, it is not reasonably possible for us determine that a loss is probable for a claim, or to reasonably estimate the amount of loss or a range of loss, because of the limited information available and the potential effects of future events and decisions by third parties, such as courts and regulators, that will determine the ultimate resolution of the claim. Many of the matters described below are at preliminary stages, raise novel theories of liability or seek an indeterminate amount of damages. It is not uncommon for claims to be resolved over many years. We review loss contingencies at least quarterly, to determine whether the loss probability has changed and whether we can make a reasonable estimate of the possible loss or range of loss. When we determine that a loss from a claim is probable and reasonably estimable, we record a liability in the amount of our estimate for the ultimate loss. We also provide disclosure when it is reasonably possible that a loss may be incurred or when it is reasonably possible that the amount of a loss will exceed our recorded liability. Litigation and Claims Consistent with its obligations under Federal law regarding the repayment of overpayments received from Federal healthcare programs, PCS, under the direction of outside counsel, retained a consultant (FTI) to conduct a sampling of claim payments 20
from Medicare. FTI conducted a retrospective review based on data provided from PCS's legacy claims processing systems. This review, which included a statistically valid sampling methodology and extrapolation, resulted in $15,147 being refunded to the four DME Medicare Administrative Contractors (MACs) in May 2018 for overpayments received between 2011 through 2016. PCS continues to monitor Medicare payments. The Compliance Department oversees this process and works with the Accounts Receivable team to identify and process refunds to the DME MACs in the event overpayments are identified. PCS has received notifications of overpayments from the Recovery Auditor Contractor (RAC) regarding Medicare Part B payments made while the Medicare beneficiary was under a Part A stay or episode of care. Beginning in 2017, refunds in the amount of $42 related to 181 claim audits have been recovered by the RAC. The RAC audits are ongoing and may result in additional refunds. 12. Subsequent Events On January 1, 2020, the Proposed Transaction closed upon satisfaction of all closing conditions pursuant to the Agreement. In connection with the issuance of the March 31, 2019 financial statements, subsequent events were evaluated for financial statement recognition purposes through January 17, 2020. 21
Exhibit 99.3
PATIENT CARE SOLUTIONS BUSINESS
UNAUDITED COMBINED FINANCIAL STATEMENTS
As of September 30, 2019 and March 31, 2019 and for the six months ended
September 30, 2019 and 2018
INDEX TO UNAUDITED COMBINED FINANCIAL INFORMATION
| Contents | |
| COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS | 3 |
| COMBINED BALANCE SHEETS | 4 |
| COMBINED STATEMENTS OF NET PARENT INVESTMENT | 5 |
| COMBINED STATEMENTS OF CASH FLOWS | 6 |
| NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS | 7 |
PATIENT CARE SOLUTIONS BUSINESS
COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
| Six months ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| Revenues | $ | 65,876 | $ | 66,599 | ||||
| Cost of sales | (41,910 | ) | (44,338 | ) | ||||
| Gross profit | 23,966 | 22,261 | ||||||
| Operating expenses | ||||||||
| Selling, distribution and administrative expenses | (39,739 | ) | (42,285 | ) | ||||
| Restructuring charges | (2,497 | ) | (4,688 | ) | ||||
| Total operating expenses | (42,236 | ) | (46,973 | ) | ||||
| Operating loss | (18,270 | ) | (24,712 | ) | ||||
| Other expense, net | 57 | 29 | ||||||
| Loss from operations before income taxes | (18,213 | ) | (24,683 | ) | ||||
| Income tax expense | - | - | ||||||
| Net loss attributable to Patient Care Solutions Business | (18,213 | ) | (24,683 | ) | ||||
| Comprehensive loss | (18,213 | ) | (24,683 | ) | ||||
| Comprehensive loss attributable to Patient Care Solutions Business | $ | (18,213 | ) | $ | (24,683 | ) | ||
3
PATIENT CARE SOLUTIONS BUSINESS
COMBINED BALANCE SHEETS
(In thousands)
(Unaudited)
| As of | As of | |||||||
| September 30, 2019 | March 31, 2019 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 19,478 | $ | 18,908 | ||||
| Receivables, net | 12,762 | 16,997 | ||||||
| Contract assets | 6,885 | 7,548 | ||||||
| Prepaid expenses and other | 843 | 915 | ||||||
| Total current assets | 39,968 | 44,368 | ||||||
| Property, plant and equipment, net | 8,639 | 9,263 | ||||||
| Other noncurrent assets | 10,249 | 15 | ||||||
| Total assets | $ | 58,856 | $ | 53,646 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Current Liabilities | ||||||||
| Drafts and accounts payable | $ | 751 | $ | 4,103 | ||||
| Other accrued liabilities | 6,244 | 5,880 | ||||||
| Total current liabilities | 6,995 | 9,983 | ||||||
| Other noncurrent liabilities | 8,722 | 89 | ||||||
| Net parent investment | 43,139 | 43,574 | ||||||
| Total liabilities and equity | $ | 58,856 | $ | 53,646 | ||||
4
PATIENT CARE SOLUTIONS BUSINESS
COMBINED STATEMENTS OF NET PARENT INVESTMENT
| (In thousands) | ||||
| (Unaudited) | ||||
| Net Parent | ||||
| Investment | ||||
| Balance as of March 31, 2018 | $ | 8,689 | ||
| Net loss | (24,683 | ) | ||
| Cumulative effect on opening net parent investment of adopting accounting standards and other | 7,964 | |||
| Net transfers from parent | 49,645 | |||
| Balance as of September 30, 2018 | $ | 41,615 | ||
| Balance as of March 31, 2019 | $ | 43,574 | ||
| Net loss | (18,213 | ) | ||
| Net transfers from parent | 17,778 | |||
| Balance as of September 30, 2019 | $ | 43,139 | ||
5
PATIENT CARE SOLUTIONS BUSINESS
COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Six months ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| Net loss | $ | (18,213 | ) | $ | (24,683 | ) | ||
| Adjustments to reconcile to net cash provided by operating activities: | ||||||||
| Depreciation | 680 | 202 | ||||||
| Provision for bad debts | (580 | ) | (269 | ) | ||||
| Changes in assets and liabilities, net of acquisitions: | ||||||||
| Receivables | 686 | 4,138 | ||||||
| Contract assets | 663 | (5,832 | ) | |||||
| Prepaid expenses and other | 72 | (153 | ) | |||||
| Drafts and accounts payable | 197 | (6,053 | ) | |||||
| Other accrued liabilities | 364 | (15,413 | ) | |||||
| Operating leases | (920 | ) | - | |||||
| Net cash used in operating activities | (17,051 | ) | (48,063 | ) | ||||
| Investing Activities | ||||||||
| Payments for property, plant and equipment | (157 | ) | (1,143 | ) | ||||
| Net cash used in investing activities | (157 | ) | (1,143 | ) | ||||
| Financing Activities | ||||||||
| Net transfers from parent | 17,778 | 49,645 | ||||||
| Net cash provided by financing activities | 17,778 | 49,645 | ||||||
| Net increase in cash and cash equivalents | 570 | 439 | ||||||
| Cash and cash equivalents at beginning of year | 18,908 | 17,659 | ||||||
| Cash and cash equivalents at end of year | $ | 19,478 | $ | 18,098 | ||||
6
PATIENT CARE SOLUTIONS BUSINESS
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
| 1. | Business Overview and Basis Of Presentation |
Patient Care Solutions (“PCS” or “the Company” or “we”) is a component of the Medical-Surgical Solutions segment (“MMS”) of McKesson Corporation (“McKesson”). McKesson is a global leader in healthcare supply chain management solutions, retail pharmacy, healthcare technology, community oncology and specialty care. MMS distributes medical-surgical supplies and provides logistics and other services to healthcare providers in the United States.
PCS operations began with the acquisitions of Sterling Medical (“SMS”) in 2006 and National Rehab (“NR”) in 2012. These two operating units were combined in 2014 to create the PCS business, based in Pittsburgh, PA, with distribution centers in Auburn, AL and Moorestown, NJ.
PCS is a direct provider of durable medical supplies and durable medical equipment (“DME”) supplies to the patient’s home. PCS provides wound care supplies, ostomy supplies, incontinence supplies, diabetic care supplies and breast pumps directly to patients across the United States. The Company maintains extensive national relationships with physicians, medical facilities and customers, and currently serves all 50 states. PCS is similar to a pharmacy in that it provides physician-prescribed medical supplies to patients while billing their insurance directly. Unlike a pharmacy, PCS ships products directly to patients and the billing cycle is more complex than pharmaceuticals due to the robust documentation required for reimbursement.
On November 21, 2019, MMS entered into a Securities Purchase Agreement (“Agreement”) to sell its Patient Care Solutions business to AdaptHealth Corp (“AH” or the “Buyer”) (“Proposed Transaction”). The Proposed Transaction closed on January 1, 2020.
Throughout the periods included in these Combined Financial Statements, PCS operated as part of McKesson and consisted of one holding company and one operating company with separate legal status. Separate financial statements have not historically been prepared for PCS. The Combined Financial Statements have been derived from McKesson’s historical accounting records as if PCS’s operations had been conducted independently from McKesson and were prepared on a stand-alone basis in accordance with U.S. generally accepted accounting principles (“GAAP”).
As the statements are combined, with amounts being removed from and added to PCS, there is no longer a single stock interest in the carve-out entity. Therefore, the equity interest is presented as Net parent investment (“NPI”). Changes in NPI include net income or loss for the year, net transfers to and from MMS and its subsidiaries, and PCS.
The historical results of operations, financial position and cash flows of PCS presented in these Combined Financial Statements may not be indicative of what they would have been had PCS actually been an independent stand-alone entity, nor are they necessarily indicative of PCS’s future results of operations, financial position and cash flows.
The Combined Financial Statements include all revenues and costs directly attributable to PCS and an allocation of expenses related to certain McKesson corporate functions (Note 3, “Corporate Allocations, Related Party Transactions and Net Parent Investment”). These expenses have been allocated to PCS based on direct usage or benefit where specifically identifiable, with the remainder allocated primarily on a pro rata basis of headcount, usage, or other reasonable measures. PCS considers these allocations to be a reasonable reflection of the utilization of services or the benefit received. However, the allocations may not be indicative of the actual expense that would have been incurred had PCS operated as an independent, stand-alone entity, nor are they indicative of PCS future expenses.
The Combined Financial Statements include assets and liabilities specifically attributable to PCS and certain liabilities that are held by McKesson that are specifically identifiable or otherwise attributable to PCS. McKesson uses a centralized approach for managing cash and financing operations with its segments and subsidiaries. Accordingly, a substantial portion of PCS’s bank cash balances are transferred to McKesson’s cash management accounts regularly by McKesson at its discretion and therefore are not included in the Combined Financial Statements. Only cash balances legally owned by PCS are reflected in the Combined Balance Sheets. Transfers of cash between PCS and McKesson are included within Net transfers from parent on the Combined Statements of Cash Flows and the Combined Statements of Net Parent Investment. McKesson’s long-term debt and related interest expense have not been attributed to PCS for any of the periods presented because McKesson’s borrowings are neither directly attributable to PCS nor is PCS the legal obligor of such borrowings.
7
All material intercompany transactions and balances within PCS have been eliminated. Transactions between PCS and McKesson have been included in these Combined Financial Statements and substantially all have been effectively settled for cash at the time the transaction is recorded through McKesson’s centralized cash management system. Transactions between PCS and other businesses of McKesson are considered related party transactions (Note 3, “Corporate Allocations, Related Party Transactions and Net Parent Investment”).
PCS’s operations are included in the combined U.S. federal and certain state and local income tax returns filed by McKesson. PCS also files certain separate state and local income tax returns. Income tax expense and other income tax related information contained in these Combined Financial Statements are presented on a separate return basis as if PCS filed its own tax returns (“Separate Return Method”). PCS’s tax results as presented in the Combined Financial Statements may not be reflective of the results that PCS will generate in the future. In jurisdictions where PCS has been included in the tax returns filed by McKesson, any income taxes payable resulting from the related income tax provisions have been reflected in the Combined Balance Sheets within Net Parent Investment.
| 2. | Significant Accounting Policies |
Fiscal period: The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references to a particular year shall mean the Company’s fiscal year.
Use of estimates: The preparation of financial statements in conformity with U.S. GAAP requires that we make estimates and assumptions that affect the reported amounts in the combined financial statements and accompanying notes. Actual amounts could differ from those estimated amounts. Significant estimates inherent in the preparation of these Combined Financial Statements include, but are not limited to, accounting for revenue and cost recognition, allocation of expenses related to certain McKesson corporate functions, income taxes including deferred taxes, fair value measurements, legal liabilities and other contingencies.
Cash and cash equivalents: PCS participates in McKesson’s cash management and financing programs. The cash reflected on the Combined Financial Statements represents cash on hand related to PCS at certain domestic legal entities.
The remaining cash and cash equivalents are deposited with several financial institutions. Deposits may exceed the amounts insured by the Federal Deposit Insurance Corporation in the U.S. and similar deposit insurance programs in other jurisdictions. We mitigate the risk of our short-term investment portfolio by depositing funds with reputable financial institutions and monitoring risk profiles.
Concentrations of credit risk and receivables: Trade receivables are subject to a concentration of credit risk with customers in the healthcare provider sector, which can be affected by a downturn in the economy and changes in reimbursement policies. This credit risk is mitigated by the size and diversity of the customer base as well as its geographic dispersion. We estimate the receivables for which we do not expect full collection based on historical collection rates and ongoing evaluations of the creditworthiness of our customers. An allowance is recorded in our Combined Financial Statements for these amounts.
Shipping and handling costs: We include costs to pack and deliver inventory to our customers in selling, distribution and administrative expenses. Shipping and handling costs of $3,553 and $5,097 were recognized in the six months ended September 30, 2019 and 2018.
Property, plant and equipment: We state our property, plant and equipment (“PPE”) at cost and depreciate them under the straight-line method at rates designed to distribute the cost of PPE over estimated service lives ranging from two to ten years. When certain events or changes in operating conditions occur, an impairment assessment may be performed on the recoverability of the carrying amounts.
8
Revenue recognition: Revenue is recognized when the company satisfies a performance obligation by transferring control of a promised good to a customer in an amount that reflects the consideration to which we expect to be entitled for that good. The company generates revenues by providing DME to patients. Revenue is recognized when control of the DME is transferred to the customer which occurs based on our delivery terms with the customer. The Company will ship DME directly to the patient’s home and invoice the patient’s insurance provider.
Revenues are recorded gross as we are the principal in the transaction, have the ability to direct the use of the DME prior to transfer to a customer, are responsible for fulfilling the promise to our customer, have latitude in establishing prices, and control the relationship with the customer. We record our revenue net of sales tax. Revenues are measured based on the amount of consideration that we expect to receive, reduced by estimates for return allowances, discounts and price concessions using historical data under the expected value method. Sales returns, associated assets for the right to recover products from customers, and the associated refund liabilities for returns allowances were not material as of September 30, 2019 and March 31, 2019. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in selling, distribution and administrative expenses.
Payment terms can vary by the type and location of the customer. The term between invoicing and when payment is due is not significant. The common nature, timing, and risks associated with our contracts with customers for the provision of DME satisfies the disaggregation criteria for use of a single category of revenue.
We elected the practical expedient and generally expense costs to obtain a contract when incurred because the amortization period would have been one year or less. In addition, we elected the practical expedient to not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
Contract Balances
Contract assets primarily relate to the Company’s rights to consideration for control of DME that has transferred to the customer but not billed at the reporting date. The contract assets are transferred to receivables when the rights become unconditional. Contract assets were $6,885 and $7,548 as of September 30, 2019 and March 31, 2019, respectively.
We had no material contract liabilities or deferred contract costs recorded on the Consolidated Balance Sheet as of September 30, 2019 and March 31, 2019.
Supplier incentives: Fees for services and other incentives received from suppliers, relating to the purchase or distribution of inventory, are considered product discounts and are generally reported as a reduction to cost of sales.
Supplier reserves: We establish reserves against amounts due from suppliers relating to various fees for services and price and rebate incentives, including deductions taken against payments otherwise due to them. These reserve estimates are established based on judgment after considering the status of current outstanding claims, historical experience with the suppliers, the specific incentive programs and any other pertinent information available. We evaluate the amounts due from suppliers on a continual basis and adjust the reserve estimates when appropriate based on changes in facts and circumstances. Adjustments to supplier reserves are generally included within cost of sales. The ultimate outcome of any outstanding claims may be different than our estimate.
Income taxes: Income taxes (as presented) attribute deferred income taxes of McKesson to our stand-alone Combined Financial Statements in a manner that is systematic, rational and consistent with the asset and liability method. Accordingly, our income tax provision was prepared following the Separate Return Method, which calculates income taxes for the stand-alone financial statements of each member of the combined group as if the group member were a separate taxpayer and a stand-alone enterprise. As a result, actual tax transactions included in the Consolidated Financial Statements of McKesson may not be included in our separate Combined Financial Statements. Similarly, the tax treatment of certain items reflected in our Combined Financial Statements may not be reflected in the Consolidated Financial Statements and tax returns of McKesson.
9
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or the tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse, as well as differences related to the timing of the recognition of income and expense. Realization of the future tax benefits related to deferred tax assets is dependent on many factors, including PCS’s past earnings history, expected future earnings, the character and jurisdiction of such earnings, reversing taxable temporary differences, unsettled circumstances that, if unfavorably resolved, would adversely affect utilization of its deferred tax assets, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset. Tax benefits from uncertain tax positions are recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. The amount recognized is measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon effective settlement. We report interest and penalties on income taxes as income tax expense. Tax positions failing to qualify for initial recognition are recognized in the first subsequent interim period that they meet the more likely than not standard, upon resolution through negotiation or litigation with the taxing authority or on expiration of the statute of limitations.
Net parent investment: Net parent investment in the Combined Balance Sheets represents McKesson’s historical investment in PCS and includes accumulated net earnings attributable to parent and the net effect of transactions with, and cost allocations from, parent. Note 3, “Corporate Allocations, Related Party Transactions and Net Parent Investment” provides additional information regarding the allocation to PCS for expenses incurred by McKesson.
Loss contingencies: We are subject to various claims, including claims with customers and vendors, pending and potential legal actions for damages, investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of our business. When a loss is considered probable and reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss. However, the likelihood of a loss with respect to a particular contingency is often difficult to predict and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information available and the potential effect of future events and decisions by third parties that will determine the ultimate resolution of the contingency. Moreover, it is not uncommon for such matters to be resolved over many years, during which time relevant developments and new information must be reevaluated at least quarterly to determine both the likelihood of potential loss and whether it is possible to reasonably estimate the loss or a range of possible loss. When a material loss is reasonably possible or probable but a reasonable estimate cannot be made, disclosure of the proceeding is provided.
Disclosure is also provided when it is reasonably possible that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the recorded provision. We review all contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or range of the loss can be made. As discussed above, development of a meaningful estimate of loss or a range of potential loss is complex when the outcome is directly dependent on negotiations with or decisions by third parties, such as regulatory agencies, the court system and other interested parties. Such factors bear directly on whether it is possible to reasonably estimate a range of potential loss and boundaries of high and low estimate.
Restructuring charges: Employee severance costs are generally recognized when payments are probable and amounts are reasonably estimable. Costs related to contracts without future benefit or contract termination are recognized at the earlier of the contract termination or the cease-use dates. Other exit-related costs are recognized as incurred.
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Recently adopted accounting pronouncements
Leases: In the first quarter of 2020, we adopted amended guidance for leases using the modified retrospective method. Under the amended guidance, entities are required to recognize operating lease liabilities and operating right-of-use (“ROU”) assets on the balance sheet for all leases with terms longer than 12 months and to provide enhanced disclosures on key information of leasing arrangements.
We elected the transition package of practical expedients provided within the amended guidance, which eliminates the requirements to reassess lease identification and lease classification for leases commenced before April 1, 2019. We also elected not to separate lease from non-lease components and to exclude short-term leases with an initial term of 12 months or less from our Combined Balance Sheets.
Upon adoption of this amended guidance, we recorded $11,449 of operating lease liabilities and $11,159 of operating lease ROU assets. We had no adjustments to beginning retained earnings. The adoption of this amended guidance did not have a material impact on our Combined Statements of Operations and Comprehensive Loss and Cash Flows.
| 3. | Corporate Allocations, Related Party Transactions and Net Parent Investment |
The Combined Financial Statements reflect allocations of certain expenses from McKesson including, but not limited to, general corporate expenses such as management, legal, human resources, accounting, information technology, shared services processing, and corporate employee benefits including incentive bonuses and share-based compensation. Also reflected are allocations of certain expenses from MMS, including, but not limited to, expenses such as warehouse, management, legal, human resources and compliance. These allocations were net against an allocation made from MMS to the Company for supplier incentives that benefitted the Company but were not previously recorded. We consider these allocations to be a reasonable reflection of the utilization of services by, or the benefits provided to, the Company. The allocation methods used primarily include a pro rata basis of headcount, usage, or other reasonable measures. Allocations for these management costs and corporate support services totaled $7,216 and $6,876 in the six months ended on September 30, 2019 and 2018 respectively.
These costs have been recorded within Cost of sales and Selling, distribution and administrative in the Combined Statements of Operations and Comprehensive Loss as follows:
| Six months ended September 30, | ||||||||
| (In thousands) | 2019 | 2018 | ||||||
| Cost of sales | $ | (1,178 | ) | $ | (1,178 | ) | ||
| Selling, distribution and administrative | 8,394 | 8,054 | ||||||
| Total corporate allocations | $ | 7,216 | $ | 6,876 | ||||
The financial information in these Combined Financial Statements does not necessarily include all the expenses that would have been incurred by PCS had it been a separate, stand-alone entity. Actual costs that may have been incurred if PCS had been a stand-alone company would depend on a number of factors, including the chosen organization structure and functions outsourced or performed by employees.
Related party purchases
The Company has entered into agreements with McKesson and its subsidiaries, all related to the supply, purchase, and distribution of inventory to the Company’s customers. For the six months ended September 30, 2019 and 2018, related party inventory purchases from McKesson and its subsidiaries were $49,428 and $53,525 respectively, and are recorded in Cost of sales on the Combined Statements of Operations and Comprehensive Loss. For the six months ended September 30, 2019 and 2018, expenses related to the distribution of inventory by McKesson and its subsidiaries were $2,257 and $1,656, respectively, and are recorded in Selling, distribution and administrative expenses on the Combined Statements of Operations and Comprehensive Loss. All related party receivables and payables due from or due to McKesson are settled through the intercompany accounts included within the Net parent investment line on the Combined Balance Sheets.
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Related party transaction with Change Healthcare
The Company has entered into a service agreement with Change Healthcare Technology Enabled Services, LLC (“Change Healthcare”), pursuant to which the Company receives consulting services for patient order support and software implementation. This agreement was terminated in the fourth quarter of 2019.
During the six months ended September 30, 2018, expenses incurred by the Company related to the Change Healthcare arrangement were $824, and are recorded in Selling, distribution and administrative expenses on the Combined Statements of Operations and Comprehensive Loss. Accounts payable related to the Change Healthcare arrangement were not considered material as of September 30, 2018. There were no expenses for the six months ended September 30, 2019, and no Accounts Payable recorded as of September 30, 2019.
Net Parent Investment
Historically, McKesson has provided financing, cash management and other treasury services to PCS. The PCS cash balances are swept by McKesson and historically, we have received funding from McKesson for our operating and investing cash needs. Cash transferred to and from McKesson has historically been recorded as intercompany payables and receivables which are reflected in the Net parent investment line on the Combined Balance Sheets.
| 4. | Restructuring Charges |
On December 8, 2017, the executive management of MMS gave approval to execute the first phase of a restructuring plan to consolidate PCS operations. This phase focused on the consolidation of certain operations, headcount rationalization due to the Brightree system implementation, and related temporary transitional resources.
On June 29, 2018, the executive management of MMS gave approval to execute the second phase of a restructuring plan that will consolidate PCS operations (the “Plan”). The Plan addresses multiple components of PCS operations, including customer service, documentation, authorization, billing, and cash collections. Under the current model, these PCS operations are dispersed throughout 2 separate facilities in Pittsburgh, PA, and 1 additional facility in Moorestown, NJ. Under the new model, these operations will be strategically located within the existing MMS “Hub” locations; specifically, 1 facility in Pittsburgh, PA, and 1 additional facility in Jacksonville, FL.
The Plan was approved to support the company’s continuing efforts to lower operating costs while maintaining a high level of operational capabilities and quality of services. In connection with the Plan, PCS terminated various employees and expects to terminate more employees through the third quarter of FY2020 and provides them with termination benefits in accordance with the existing severance policy established by MMS Human Resources. During FY2020, PCS is planning on completely vacating the facility in Moorestown, NJ and in connection with the closure of the facility, various non-PCS employees (specifically sales personnel supporting the Extended Care (EC) business) will also be terminated. MMS will provide these employees with termination benefits in accordance with the existing severance policy established by MMS Human Resources.
The following restructuring costs are incurred as part of the Plan:
1) Temporary transitional resources to complete the consolidation;
2) Facility exit costs related to the consolidation, including lease exit, decommissioning, accelerated depreciation, move-related, duplicative rent, and licensure.
During the six months ended September 30, 2019, $504 of cash payments were made, primarily related to severance. At, September 30, 2019, the restructuring liabilities of $1,376 were recorded in Other accrued liabilities in our Combined Balance Sheets.
Under the Plan, we expect to record total pre-tax charges of approximately $12,862 of which $12,654 of pre-tax charges have been recorded to date. Estimated remaining charges primarily consist of exit-related costs and accelerated depreciation.
Restructuring charges for the Plan for the six months ended September 30, 2019 and September 30, 2018 directly attributable to PCS consisted of the following:
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| Six months ended September 30, | ||||||||
| (In thousands) | 2019 | 2018 | ||||||
| Severance and employee-related costs, net | $ | (371 | ) | $ | 2,640 | |||
| Exit and other-related costs | 2,868 | 1,858 | ||||||
| Asset impairments and accelerated depreciation | - | 191 | ||||||
| Total | $ | 2,497 | $ | 4,688 | ||||
The following table summarizes the activity related to the restructuring liabilities associated with the Plan during the first six months of 2019:
| (In thousands) | ||||
| Balance as of March 31, 2019 | $ | 2,482 | ||
| Restructuring charges recognized | 2,497 | |||
| Cash payments | (504 | ) | ||
| Temporary costs | (3,099 | ) | ||
| Balance as of September 30, 2019 | $ | 1,376 | ||
| 5. | Income Taxes |
During the second quarters of 2020 and 2019, we recorded no income tax expense related to continuing operations due to losses in each period and full valuation allowance on our deferred tax assets. Similarly, during the first six months of 2020 and 2019, we recorded no income tax expense related to continuing operations due to losses in each period and full valuation allowance on our deferred tax assets.
We file income tax returns in the U.S. federal jurisdiction and various U.S. state jurisdictions. The IRS is currently examining our U.S. corporation income tax returns for 2013 through 2015. We are generally subject to audit by taxing authorities in various U.S. states and in foreign jurisdictions for fiscal years 2012 through the current fiscal year.
| 6. | Fair Value Measurements |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a three-level hierarchy that prioritizes the inputs used in determining fair value by their reliability and preferred use, as follows:
Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities.
Level 2 - Valuations based on quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Valuations based on inputs that are both significant to the fair value measurement and unobservable.
At September 30, 2019 and March 31, 2019, the carrying amounts of cash, certain cash equivalents, receivables, drafts and accounts payable and other current liabilities approximated their estimated fair values because of the short maturity of these financial instruments.
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There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the six months ended September 30, 2019 and 2018.
| 7. | Other Accrued Liabilities |
| September 30, | March 31, | |||||||
| (In thousands) | 2019 | 2019 | ||||||
| Restructuring reserves | $ | 1,376 | $ | 2,482 | ||||
| Accrued employee expenses | 3,130 | 1,651 | ||||||
| Accrued taxes | 294 | 329 | ||||||
| Refunds payable | 428 | 461 | ||||||
| Accrued other | 1,016 | 957 | ||||||
| Other accrued liabilities | $ | 6,244 | $ | 5,880 | ||||
| 8. | Leases |
We primarily lease facilities under operating leases and vehicles under short-term leases. Our equipment leases are not material. We recognize lease expense on a straight-line basis over the term of the lease, taking into account, when applicable, lessor incentives for tenant improvements, periods where no rent payment is required and escalations in rent payments over the term of the lease. Remaining terms for facility leases range from four months to seven years. Most facility leases contain renewal options which range from one to five year increments. Generally, the renewal option periods are not included within the lease term as we are not reasonably certain to exercise that right at lease commencement. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
ROU assets and operating lease liabilities are recognized at the lease commencement date. ROU assets represent our right to use an underlying asset for the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease liabilities are recognized based on the present value of the future lease payments over the lease term discounted at our incremental borrowing rate as the implicit rate in the lease is not readily determinable for most of our leases. We estimate the discount rate as our incremental borrowing rate based on qualitative factors including Company-specific credit rating, lease term, general economic and the interest rate environment. For existing leases that commenced prior to the adoption of the amended leasing guidance, we determined the discount rate on April 1, 2019 using the full lease term. Operating lease liabilities are recorded in Other accrued liabilities and Other noncurrent liabilities, and the corresponding lease assets are recorded in Other noncurrent assets in our Combined Balance Sheets.
Supplemental balance sheet information related to leases was as follows:
| (In thousands) | September 30, 2019 | |||
| Operating leases | ||||
| Operating lease right-of-use assets | $ | 10,234 | ||
| Current portion of operating lease liabilities | 1,934 | |||
| Long-term operating lease liabilities | 8,627 | |||
| Total operating lease liabilities | $ | 10,561 | ||
| Weighted average remaining lease term (years) | ||||
| Operating leases | 5.82 | |||
| Weighted average discount rate | ||||
| Operating leases | 3.30 | |||
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The components of lease cost were as follows:
| Six Months Ended | ||||
| (In thousands) | September 30, 2019 | |||
| Short-term lease cost | $ | 1,083 | ||
| Operating lease cost | 161 | |||
| Variable lease cost¹ | 80 | |||
| Total lease cost² | $ | 1,323 | ||
| 1. | These amounts include payments for maintenance, taxes, payments affected by the consumer price index and other similar metrics and payments contingent on usage. |
| 2. | These amounts are recorded within Selling, distribution and administrative expenses in the Combined Statements of Operations and Comprehensive Loss. |
We did not recognize any sublease income for the six months ended September 30, 2019.
Supplemental cash flow information related to leases was as follows:
| Six Months Ended | ||||
| (In thousands) | September 30, 2019 | |||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Operating cash flows from operating leases | $ | 1,101 | ||
| Right-of-use assets obtained in exchange for lease obligations: | ||||
| Operating leases | $ | 11,481 | ||
Maturities of lease liabilities as of September 30, 2019 were as follows:
| (In thousands) | Operating leases | |||
| The remainder of 2020 | $ | 1,112 | ||
| 2021 | 2,199 | |||
| 2022 | 1,862 | |||
| 2023 | 1,651 | |||
| 2024 | 1,666 | |||
| Thereafter | 3,140 | |||
| Total lease payments | 11,630 | |||
| Less imputed interest | 1,069 | |||
| Present value of lease liabilities | $ | 10,561 | ||
As previously disclosed in our 2019 Combined Financial Statements and under the previous lease accounting, the minimum lease payments required under operating leases were as follows as of March 31, 2019:
| Noncancelable | ||||
| (In thousands) | operating leases | |||
| 2020 | $ | 2,187 | ||
| 2021 | 2,168 | |||
| 2022 | 1,846 | |||
| 2023 | 1,635 | |||
| 2024 | 1,665 | |||
| Thereafter | 3,140 | |||
| Total minimum lease payments | $ | 12,641 | ||
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| 9. | Commitments and Contingent Liabilities |
In addition to commitments and obligations incurred in our business, we are subject to a variety of claims incidental to the normal conduct of our business, including claims from customers and vendors, pending and potential legal actions for damages, governmental investigations, and other matters. The Company is vigorously defending itself against claims in the legal proceedings described below. If we are unsuccessful in defending, or if we determine to settle, any of these matters, we may be required to pay substantial sums, be subject to injunction or be forced to change how we operate our business, which could have a material adverse impact on our financial position or results of operations.
Unless otherwise stated, we are unable to reasonably estimate the loss or a range of possible loss for the matters described below. Often, it is not reasonably possible for us determine that a loss is probable for a claim, or to reasonably estimate the amount of loss or a range of loss, because of the limited information available and the potential effects of future events and decisions by third parties, such as courts and regulators, that will determine the ultimate resolution of the claim. Many of the matters described below are at preliminary stages, raise novel theories of liability or seek an indeterminate amount of damages. It is not uncommon for claims to be resolved over many years. We review loss contingencies at least quarterly, to determine whether the loss probability has changed and whether we can make a reasonable estimate of the possible loss or range of loss. When we determine that a loss from a claim is probable and reasonably estimable, we record a liability in the amount of our estimate for the ultimate loss. We also provide disclosure when it is reasonably possible that a loss may be incurred or when it is reasonably possible that the amount of a loss will exceed our recorded liability.
Litigation and Claims
Consistent with its obligations under Federal law regarding the repayment of overpayments received from Federal healthcare programs, PCS, under the direction of outside counsel, retained a consultant (FTI) to conduct a sampling of claim payments from Medicare. FTI conducted a retrospective review based on data provided from PCS’s legacy claims processing systems. This review, which included a statistically valid sampling methodology and extrapolation, resulted in $15,147 being refunded to the four DME Medicare Administrative Contractors (“MACs”) in May 2018 for overpayments received between 2011 through 2016.
PCS continues to monitor Medicare payments. The Compliance Department oversees this process and works with the Accounts Receivable team to identify and process refunds to the DME MACs in the event overpayments are identified.
PCS has received notifications of overpayments from the Recovery Auditor Contractor (RAC) regarding Medicare Part B payments made while the Medicare beneficiary was under a Part A stay or episode of care. Beginning in 2017, refunds in the amount of $42 related to 181 claim audits have been recovered by the RAC. The RAC audits are ongoing and may result in additional refunds.
| 10. | Subsequent Events |
On January 1, 2020, the Proposed Transaction closed upon satisfaction of all closing conditions pursuant to the Agreement.
In connection with the issuance of the September 30, 2019 financial statements, subsequent events were evaluated for financial statement recognition purposes through January 17, 2020.
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Exhibit 99.4
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION OF ADAPTHEALTH CORP.
The following unaudited pro forma condensed combined information presents the unaudited pro forma condensed combined balance sheet as of September 30, 2019 and the unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2019 and the year ended December 31, 2018 based upon the combined historical financial statements of AdaptHealth Corp.’s subsidiary, AdaptHealth Holdings LLC (“AdaptHealth”), and the Patient Care Solutions business (“PCS”) after giving effect to AdaptHealth Corp.’s acquisition of PCS from McKesson Corporation (the “PCS Acquisition”) and related adjustments described in the accompanying notes.
The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2019 and for the year ended December 31, 2018 give pro forma effect to the PCS Acquisition as if it had occurred on January 1, 2018. The unaudited pro forma condensed combined balance sheet as of September 30, 2019 gives pro forma effect to the PCS Acquisition as if it was completed on September 30, 2019.
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 Proxy Statement filed on October 23, 2019. |
| · | The unaudited historical financial statements of AdaptHealth and the notes thereto as included in the Current Report on Form 8-K filed on November 14, 2019. |
| · | The audited and unaudited historical financial statements of PCS and the notes thereto included elsewhere in this Current Report on Form 8-K/A. |
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 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 Corp. owned PCS in the periods indicated above, or any integration costs and benefits from restructuring plans.
ADAPTHEALTH CORP.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
September 30, 2019
| AdaptHealth | ||||||||||||||||||
| Holdings LLC | PCS | Pro Forma | Pro Forma | |||||||||||||||
| (in thousands) | Historical | Reclassified (1) | Adjustments | Note 3 | Combined | |||||||||||||
| Assets | ||||||||||||||||||
| Current assets: | ||||||||||||||||||
| Cash and cash equivalents | $ | 8,823 | $ | 19,478 | $ | (19,480 | ) | (a) | $ | 8,821 | ||||||||
| Accounts receivable, net | 73,670 | 19,647 | - | 93,317 | ||||||||||||||
| Inventory | 14,234 | - | - | 14,234 | ||||||||||||||
| Prepaid and other current assets | 6,350 | 843 | (725 | ) | (b) | 6,468 | ||||||||||||
| Total current assets | 103,077 | 39,968 | (20,205 | ) | 122,840 | |||||||||||||
| Equipment and other fixed assets, net | 66,706 | 8,639 | - | 75,345 | ||||||||||||||
| Goodwill | 245,346 | - | - | 245,346 | ||||||||||||||
| Other assets | 5,893 | 10,249 | (10,234 | ) | (c) | 5,908 | ||||||||||||
| Deferred tax asset | 6,965 | - | - | 6,965 | ||||||||||||||
| Total assets | $ | 427,987 | $ | 58,856 | $ | (30,439 | ) | $ | 456,404 | |||||||||
| Liabilities and Stockholders'/Members' Equity (Deficit) | ||||||||||||||||||
| Current liabilities: | ||||||||||||||||||
| Accounts payable and accrued expenses | $ | 90,456 | $ | 4,012 | $ | (1,386 | ) | (d) | $ | 93,082 | ||||||||
| Current portion of capital lease obligations | 21,656 | - | - | 21,656 | ||||||||||||||
| Current portion of long-term debt | 8,894 | - | - | 8,894 | ||||||||||||||
| Deferred revenue | 9,097 | - | - | 9,097 | ||||||||||||||
| Other liabilities | 8,609 | 2,983 | (2,983 | ) | (e) | 8,609 | ||||||||||||
| Total current liabilities | 138,712 | 6,995 | (4,369 | ) | 141,338 | |||||||||||||
| Long-term debt, less current portion | 410,538 | - | 15,000 | (f) | 425,538 | |||||||||||||
| Capital lease obligations, less current portion | 236 | - | - | 236 | ||||||||||||||
| Other long-term liabilities | 15,199 | 8,722 | (8,627 | ) | (g) | 15,294 | ||||||||||||
| Total liabilities | 564,685 | 15,717 | 2,004 | 582,406 | ||||||||||||||
| Commitments and contingencies | ||||||||||||||||||
| Total stockholders'/members' equity (deficit) | (139,561 | ) | 43,139 | (32,443 | ) | (h) | (128,865 | ) | ||||||||||
| Total stockholders'/members' equity (deficit) attributable to AdaptHealth Holdings LLC | (139,561 | ) | 3,139 | (32,443 | ) | (128,865 | ) | |||||||||||
| Noncontrolling interest in subsidiaries | 2,863 | - | - | 2,863 | ||||||||||||||
| Total stockholders'/members' equity (deficit) | (136,698 | ) | 43,139 | (32,443 | ) | (126,002 | ) | |||||||||||
| Total Liabilities and Stockholders'/Members' Equity (Deficit) | $ | 427,987 | $ | 58,856 | $ | (30,439 | ) | $ | 456,404 | |||||||||
| (1) | Refer to Note 2 for reclassification of PCS historical information. |
ADAPTHEALTH CORP.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019
| AdaptHealth | ||||||||||||||||||
| Holdings LLC | PCS | Pro Forma | Pro Forma | |||||||||||||||
| (in thousands except share and per share amounts) | Historical | Reclassified (1) | Adjustments | Note 3 | Combined | |||||||||||||
| Revenue: | ||||||||||||||||||
| Revenue, net of contractual allowances and discounts | $ | 400,958 | $ | 99,955 | $ | - | $ | 500,913 | ||||||||||
| Provision for doubtful accounts | (20,855 | ) | (738 | ) | - | (21,593 | ) | |||||||||||
| Net revenue less provision for doubtful accounts | 380,103 | 99,217 | - | 479,320 | ||||||||||||||
| Costs and expenses: | ||||||||||||||||||
| Cost of net revenue | 317,174 | 122,845 | - | 440,019 | ||||||||||||||
| General and administrative expenses | 31,508 | 4,165 | - | 35,673 | ||||||||||||||
| Depreciation, excluding patient equipment depreciation | 2,439 | 727 | - | 3,166 | ||||||||||||||
| Total costs and expenses | 351,121 | 127,737 | - | 478,858 | ||||||||||||||
| Operating (loss) income | 28,982 | (28,520 | ) | - | 462 | |||||||||||||
| Interest (income) expense | 31,651 | (75 | ) | 552 | (i) | 32,128 | ||||||||||||
| Loss on extinguishment of debt, net | 2,121 | - | - | 2,121 | ||||||||||||||
| Income before income taxes | (4,790 | ) | (28,445 | ) | (552 | ) | (33,787 | ) | ||||||||||
| Income tax expense | 5,444 | - | - | 5,444 | ||||||||||||||
| Net income | (10,234 | ) | (28,445 | ) | (552 | ) | (39,231 | ) | ||||||||||
| Income attributable to noncontrolling interest | 1,336 | - | - | 1,336 | ||||||||||||||
| Net income attributable to AdaptHealth Holdings LLC | $ | (11,570 | ) | $ | (28,445 | ) | $ | (552 | ) | $ | (40,567 | ) | ||||||
| (1) | Refer to Note 2 for reclassification of PCS historical information. |
ADAPTHEALTH CORP.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2018
| AdaptHealth | ||||||||||||||||||
| Holdings LLC | PCS | Pro Forma | Pro Forma | |||||||||||||||
| (in thousands except share and per share amounts) | Historical | Reclassified (1) | Adjustments | Note 3 | Combined | |||||||||||||
| Revenue: | ||||||||||||||||||
| Revenue, net of contractual allowances and discounts | $ | 361,054 | $ | 136,321 | $ | - | $ | 497,375 | ||||||||||
| Provision for doubtful accounts | (15,776 | ) | (1,547 | ) | - | (17,323 | ) | |||||||||||
| Net revenue less provision for doubtful accounts | 345,278 | 134,774 | - | 480,052 | ||||||||||||||
| Costs and expenses: | ||||||||||||||||||
| Cost of net revenue | 293,384 | 173,308 | - | 466,692 | ||||||||||||||
| General and administrative expenses | 18,069 | 5,253 | - | 23,322 | ||||||||||||||
| Depreciation, excluding patient equipment depreciation | 2,734 | 314 | - | 3,048 | ||||||||||||||
| Total costs and expenses | 314,187 | 178,875 | - | 493,062 | ||||||||||||||
| Operating (loss) income | 31,091 | (44,101 | ) | - | (13,010 | ) | ||||||||||||
| Interest (income) expense | 7,453 | (72 | ) | 737 | (i) | 8,118 | ||||||||||||
| Loss on extinguishment of debt, net | 1,399 | - | - | 1,399 | ||||||||||||||
| Income before income taxes | 22,239 | (44,029 | ) | (737 | ) | (22,527 | ) | |||||||||||
| Income tax benefit | (2,098 | ) | - | - | (2,098 | ) | ||||||||||||
| Net income | 24,337 | (44,029 | ) | (737 | ) | (20,429 | ) | |||||||||||
| Income attributable to noncontrolling interest | 1,077 | - | - | 1,077 | ||||||||||||||
| Net income attributable to AdaptHealth Holdings LLC | $ | 23,260 | $ | (44,029 | ) | $ | (737 | ) | $ | (21,506 | ) | |||||||
| (1) | Refer to Note 2 for reclassification of PCS historical information. |
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Note 1—Description of the PCS Acquisition
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 are (1) directly attributable to the PCS Acquisition, (2) factually supportable, and (3) with respect to the statement of operations, expected to have a continuing impact on the combined results. The pro forma adjustments are prepared to illustrate the estimated effect of the PCS Acquisition.
AdaptHealth’s historical results reflect AdaptHealth’s audited consolidated statement of operations for the year ended December 31, 2018, unaudited condensed consolidated balance sheet as of September 30, 2019 and unaudited condensed consolidated statement of operations for the nine months ended September 30, 2019. PCS’ historical results reflect the audited combined statement of operations for PCS’ fiscal year ended March 31, 2019, unaudited condensed combined balance sheet as of September 30, 2019 and unaudited condensed combined statement of operations for the nine months ended September 30, 2019.
Description of the PCS Acquisition
On November 21, 2019, AdaptHealth LLC, a Delaware limited liability company (“Buyer”) and a wholly-owned indirect subsidiary of AdaptHealth Corp., McKesson Medical-Surgical, Inc., a Virginia corporation (“Seller”), NRE Holding Corporation, a Delaware corporation (“NRE”), and McKesson Patient Care Solutions, Inc., a Pennsylvania corporation, entered into a Securities Purchase Agreement (the “Agreement”), pursuant to which Seller agreed to sell to Buyer, and Buyer agreed to purchase from the Seller, all of the issued and outstanding equity interests of NRE (the “Transaction”). The Transaction closed on January 1, 2020 upon satisfaction of all closing conditions pursuant to the Agreement. In connection with the Transaction, AdaptHealth Corp. acquired PCS from McKesson Corporation. PCS 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.
The base purchase price for the Transaction was $14.0 million, subject to customary adjustments for cash, indebtedness, transaction expenses and net working capital (as compared to an agreed target net working capital amount). The total cash paid at closing was $15.0 million. In addition, Buyer may be required to make an additional payment of $1.5 million to Seller after the closing of the Transaction pursuant to the terms and conditions of a Transition Services Agreement executed in connection with the Transaction. The total investment, including restructuring costs until the business is fully integrated on AdaptHealth Corp.’s platform in the latter half of 2020, is expected to be approximately $30 million.
The following table summarizes the preliminary allocation of the purchase price to the estimated fair values of the net assets acquired at the date of the Transaction. AdaptHealth Corp. is still in the process of finalizing the purchase price allocation.
| (in thousands) | ||||
| Cash consideration | $ | 15,002 | ||
| Fair value of net assets acquired: | ||||
| Accounts receivables | $ | 19,647 | ||
| Prepaid and other current assets | 118 | |||
| Other assets | 15 | |||
| Equipment and other fixed assets | 8,639 | |||
| Accounts payable and accrued expenses | (2,626 | ) | ||
| Other liabilities | (95 | ) | ||
| Net assets acquired | $ | 25,698 | ||
| Bargain purchase gain | $ | 10,696 | ||
Management of AdaptHealth Corp. 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. In accordance with FASB ASC Topic 805, management will review the procedures it uses to identify and measure the assets acquired and liabilities assumed in order to ensure that the measurements appropriately reflect the consideration of all available information as of the acquisition date. Based on the information currently available to management, it is estimated that a bargain purchase gain will be recorded in connection with the PCS Acquisition. Management has determined that a gain on this transaction may be appropriate given the Seller desired to exit the home medical equipment business operated by PCS.
Basis of the Pro Forma Presentation
Upon consummation of the PCS Acquisition, PCS will adopt AdaptHealth Corp.’s accounting policies. AdaptHealth Corp. 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
Certain balances and transactions presented in the historical financial statements of PCS included within the unaudited pro forma condensed combined financial information have been reclassified to conform to the presentation of financial statements of AdaptHealth as indicated in the tables below.
PCS Balance Sheet Reclassifications at September 30, 2019
| As per | ||||||||||||
| (in thousands) | Financial Statements | Reclassifications | As
Reclassified | |||||||||
| Assets | ||||||||||||
| Accounts receivable, net | $ | 12,762 | $ | 6,885 | $ | 19,647 | ||||||
| Contract Assets | 6,885 | (6,885 | ) | - | ||||||||
| Liabilities and Stockholders'/Members' Equity (Deficit) | ||||||||||||
| Current liabilities: | ||||||||||||
| Accounts payable and accrued expenses | 751 | 3,261 | 4,012 | |||||||||
| Other accrued liabilities | 6,244 | (6,244 | ) | - | ||||||||
| Other liabilities | - | 2,983 | 2,983 | |||||||||
| Total stockholders'/members' equity (deficit) | ||||||||||||
| Total stockholders'/members' equity (deficit) attributable to AdaptHealth Holdings LLC | - | 43,139 | 43,139 | |||||||||
| Net parent investment | 43,139 | (43,139 | ) | - | ||||||||
PCS Statement of Operations Reclassifications for the Nine Months Ended September 30, 2019
| As per | ||||||||||||
| (in thousands) | Financial Statements | Reclassifications | As Reclassified | |||||||||
| Revenue: | ||||||||||||
| Revenue, net of contractual allowances and discounts | $ | 99,217 | $ | 738 | $ | 99,955 | ||||||
| Provision for doubtful accounts | - | (738 | ) | (738 | ) | |||||||
| Costs and expenses: | ||||||||||||
| Cost of net revenue | 60,310 | 62,535 | 122,845 | |||||||||
| General and administrative expenses | - | 4,165 | 4,165 | |||||||||
| Depreciation, excluding patient equipment depreciation | - | 727 | 727 | |||||||||
| Selling, distribution, and administrative expenses | 63,346 | (63,346 | ) | - | ||||||||
| Restructuring Charges | 4,090 | (4,090 | ) | - | ||||||||
| Interest (income) expense | - | (75 | ) | (75 | ) | |||||||
| Other expense, net | (84 | ) | 84 | - | ||||||||
PCS Statement of Operations Reclassification for the Year Ended March 31, 2019
| As per | ||||||||||||
| (in thousands) | Financial Statements | Reclassifications | As Reclassified | |||||||||
| Revenue: | ||||||||||||
| Revenue, net of contractual allowances and discounts | $ | 134,774 | $ | 1,547 | $ | 136,321 | ||||||
| Provision for doubtful accounts | - | (1,547 | ) | (1,547 | ) | |||||||
| Costs and expenses: | ||||||||||||
| Cost of net revenue | 84,995 | 88,313 | 173,308 | |||||||||
| General and administrative expenses | - | 5,253 | 5,253 | |||||||||
| Depreciation, excluding patient equipment depreciation | - | 314 | 314 | |||||||||
| Selling, distribution, and administrative expenses | 86,269 | (86,269 | ) | - | ||||||||
| Restructuring Charges | 7,601 | (7,601 | ) | - | ||||||||
| Interest (income) expense | - | (72 | ) | (72 | ) | |||||||
| Other expense, net | (62 | ) | 62 | - | ||||||||
Note 3—Pro Forma Adjustments
Adjustments to the Unaudited Pro Forma Condensed Combined Balance Sheet (in thousands)
The pro forma adjustments included in the unaudited pro forma condensed combined balance sheet as of September 30, 2019 are as follows:
| a) | Represents the following adjustments (1) reduction of $19,478 representing PCS’ September 30, 2019 cash balance since cash was not acquired in connection with the PCS Acquisition, (2) payment of $15,002 representing the cash paid at closing of the PCS Acquisition, and (3) proceeds from debt of $15,000 to fund the cash portion of the purchase price of the PCS Acquisition. It is noted that while AdaptHealth Corp. did not finance the PCS Acquisition by incurring debt when the closing occurred, the pro-forma adjustments include debt financing since AdaptHealth did not have enough cash at September 30, 2019 to fund the PCS Acquisition. |
| b) | Represents adjustment to reflect certain assets included in the historical September 30, 2019 balance sheet of PCS that were not acquired by AdaptHealth Corp. |
| c) | Represents adjustment to reflect operating lease right-of-use assets included in the historical September 30, 2019 balance sheet of PCS as a result of PCS’ adoption of amended accounting guidance related to lease arrangements. This is included as a pro-forma adjustment since AdaptHealth Corp. has not yet adopted such accounting guidance. |
| d) | Represents adjustment to reflect certain accrued expenses included in the historical September 30, 2019 balance sheet of PCS that were not assumed by AdaptHealth Corp. |
| e) | Represents adjustments to reflect (1) restructuring liablities of $1,376 included in the historical September 30, 2019 balance sheet of PCS that were not assumed by AdaptHealth Corp., and (2) operating lease liabilities of $1,607 included in the historical September 30, 2019 balance sheet of PCS as a result of PCS’ adoption of amended accounting guidance related to lease arrangements. This is included as a pro-forma adjustment since AdaptHealth Corp. has not yet adopted such accounting guidance. |
| f) | Represents proceeds from debt to fund the cash portion of the purchase price of the PCS Acquisition. It is noted that while AdaptHealth Corp. did not finance the PCS Acquisition by incurring debt when the closing occurred, the pro-forma adjustments include debt financing since AdaptHealth did not have enough cash at September 30, 2019 to fund the PCS Acquisition. |
| g) | Represents adjustment to reflect operating lease liabilities included in the historical September 30, 2019 balance sheet of PCS as a result of PCS’ adoption of amended accounting guidance related to lease arrangements. This is included as a pro-forma adjustment since AdaptHealth Corp. has not yet adopted such accounting guidance. |
| h) | Represents adjustment to equity resulting from the preliminary estimated acquisition accounting in connection with the PCS Acquisition. This includes the impact of an estimated $10.7 million bargain purchase gain, calculated as if the net assets of PCS were acquired on September 30, 2019. The bargain purchase gain is not reflected in the unaudited pro forma combined statements of operations because it is a nonrecurring item that is directly related to the transaction. |
Adjustments to the Unaudited Pro Forma Condensed Combined Statements of Operations
The pro forma adjustments included in the unaudited pro forma condensed combined statement of operations for the nine month period ended September 30, 2019 and for the fiscal year ended December 31, 2018 are as follows:
| i) | Represents adjustments to include incremental interest expense for borrowings on the AdaptHealth revolver with an interest rate of 5.41%, offset by lower undrawn revolver fees. It is noted that while AdaptHealth Corp. did not finance the PCS Acquisition by incurring debt when the closing occurred, the pro-forma adjustments include debt financing since AdaptHealth Corp. did not have enough cash at September 30, 2019 to fund the PCS Acquisition. |