EXHIBIT 99.5

 

 

 

 

 

 

 

PT Network Intermediate Holdings, LLC

Unaudited Consolidated Financial Reports 

December 31, 2018 and 2017

 

 

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|                                                                                                      | Contents |          |
|-----------------------------------------------------------------------------------------------------------|----------|---------------|
|  

Unaudited financial statements of PT Network Intermediate Holdings, LLC                           |     |          |
| Unaudited consolidated balance sheets as of December 31, 2018 and 2017                                    |     | 1             |
| Unaudited consolidated statements of operations for the years ended December 31, 2018 and 2017            |     | 2             |
| Unaudited consolidated statements of members’ equity for the years ended December 31, 2018 and 2017 |     | 3             |
| Unaudited consolidated statements of cash flows for the years ended December 31, 2018 and 2017            |     | 4             |
| Unaudited notes to consolidated financial statements                                                      |     | 5-20          |
| Unaudited schedule I                                                                                      |     | 21-23

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| PT Network Intermediate Holdings, LLC                     |   |                                                                   |   |
|-----------------------------------------------------------|--------|------------------------------------------------------------------------|--------|
| Unaudited Consolidated Balance Sheets                     |   |                                                                   |   |   |
| As of December 31, 2018 and 2017                          |   |                                                                   |   |   |
|                                                      |   |                                                                   |   |   |
| Assets                                                    |   | 2018                                                                   |   | 2017 |
|                                                      |   |                                                                   |   |   |
| Current assets:                                           |   |                                                                   |   |   |
| Cash and cash equivalents                                 |   | $     10,075,723                                   |   | $       7,171,350 |
| Accounts receivable, net                                  |   |         26,061,139             |   |         28,672,401 |
| Prepaid expenses and other current assets                 |   |           1,133,907  |   |           3,906,962 |
| Total current assets                                      |   |         37,270,769             |   |         39,750,713 |
|                                                      |   |                                                                   |   |   |
| Property and equipment, net                               |   |         16,655,730             |   |         16,312,688 |
| Goodwill                                                  |   |       196,234,142                        |   |       196,234,142 |
| Identifiable intangible assets, net                       |   |         10,644,076             |   |         12,400,157 |
| Other assets                                              |   |           1,122,754  |   |              817,316 |
|                                                      |   |                                                                   |   |   |
| Total assets                                              |   | $   261,927,471                                              |   | $   265,515,016 |
|                                                      |   |                                                                   |   |   |
| Liabilities                                               |   |                                                                   |   |   |
|                                                      |   |                                                                   |   |   |
| Current liabilities:                                      |   |                                                                   |   |   |
| Accounts payable                                          |   | $       3,684,425                        |   | $       4,139,058 |
| Accrued expenses                                          |   |                                                                   |   |   |
| Accrued payroll expenses                                  |   |         11,963,714             |   |         12,130,454 |
| Accrued interest and commitment fees expense              |   |           3,714,418  |   |           3,294,769 |
| Other accrued expenses                                    |   |           3,036,242  |   |           2,730,444 |
| Current maturities of long-term debt                      |   |              643,900 |   |           1,625,000 |
| Other current liabilities                                 |   |           3,911,680  |   |                90,315 |
| Total current liabilities                                 |   |         26,954,379             |   |         24,010,040 |
|                                                      |   |                                                                   |   |   |
| Long-term debt, net                                       |   |       177,161,964                        |   |       171,911,035 |
| Other non-current liabilities                             |   |           2,187,986  |   |                99,665 |
| Deferred rent                                             |   |           4,660,642  |   |           3,418,465 |
| Total liabilities                                         |   | $   210,964,971                                              |   | $   199,439,205 |
|                                                      |   |                                                                   |   |   |
| Commitments and contingencies (see Note 8)                |   |                                                                   |   |   |
|                                                      |   |                                                                   |   |   |
| Equity                                                    |   |                                                                   |   |   |
| Members' equity                                           |   | $     50,962,500                                   |   | $     66,075,811 |
|                                                      |   |                                                                   |   |   |
| Total liabilities and members' equity                     |   | $   261,927,471                                              |   | $   265,515,016 |
|                                                      |   |                                                                   |   |   |
| See notes to unaudited consolidated financial statements. |   |                                                                   |

 

 

 

 

 

 

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| PT Network Intermediate Holdings, LLC                     |                                                                             |   |                                                                                                                                               |
|-----------------------------------------------------------|----------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|
| Unaudited Consolidated Statements of Operations           |                                                                             |   |                                                                                                                                               |
| For the years ended December 31, 2018 and 2017            |                                                                             |   |                                                                                                                                               |
|                                                      |                                                                             |   |                                                                                                                                               |
|                                                      | 2018                                                                             |   | 2017                                                                                                                                               |
| Net revenues                                              | $    200,958,685                                             |   | $     170,136,104                                                                                                              |
|                                                      |                                                                             |   |                                                                                                                                               |
| Operating cost:                                           |                                                                             |   |                                                                                                                                               |
| Compensation and benefits                                 |       123,900,259                                  |   |         95,365,758                                                                                         |
| Occupancy                                                 |         23,465,851                       |   |         19,759,015                                                                                         |
| General and administrative                                |           6,962,244            |   |           5,267,820                                                                                        |
| Total cost of revenue                                     |       154,328,354                                  |   |       120,392,593                                                                                                    |
|                                                      |                                                                             |   |                                                                                                                                               |
| Gross Profit                                              |         46,630,331                       |   |         49,743,511                                                                                         |
|                                                      |                                                                             |   |                                                                                                                                               |
| Provision for doubtful accounts                           |           3,419,326            |   |           2,839,176                                                                                        |
| Corporate costs                                           |         53,321,756                       |   |         56,451,802                                                                                         |
| Other expense                                             |           6,000,000            |   |                          - |
|                                                      |                                                                             |   |                                                                                                                                               |
| Operating Loss                                            |        (16,110,751)                                |   |          (9,547,467)                                                                                       |
|                                                      |                                                                             |   |                                                                                                                                               |
| Interest expense                                          |         18,833,166                       |   |         14,454,615                                                                                         |
|                                                      |                                                                             |   |                                                                                                                                               |
| Loss prior to income tax benefit                          |        (34,943,917)                                |   |        (24,002,082)                                                                                                  |
|                                                      |                                                                             |   |                                                                                                                                               |
| Tax benefit                                               |              239,233 |   |                          - |
|                                                      |                                                                             |   |                                                                                                                                               |
| Total net loss                                            | $    (34,704,684)                                            |   | $    (24,002,082)                                                                                                              |
|                                                      |                                                                             |   |                                                                                                                                               |
| See notes to unaudited consolidated financial statements. |                                                                             |   |                                                                                                                                               |

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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| PT Network Intermediate Holdings, LLC                     |                                                                                                          |
|-----------------------------------------------------------|---------------------------------------------------------------------------------------------------------------|
| Unaudited Consolidated Statements of Members' Equity      |                                                                                                          |
| For the years ended December 31, 2018 and 2017            |                                                                                                          |
|                                                      |                                                                                                          |
| Total equity at December 31, 2016                         | $               32,736,280              |
|                                                      |                                                                                                          |
| Member contributions                                      |               46,841,613                |
| Equity issued for acquisitions                            |               10,500,000                |
| Net loss                                                  |               (24,002,082)                        |
|                                                      |                                                                                                          |
| Total equity at December 31, 2017                         |                   66,075,811  |
|                                                      |                                                                                                          |
| Member contributions                                      |                   19,591,373  |
| Net loss                                                  |                  (34,704,684) |
|                                                      |                                                                                                          |
| Total equity at December 31, 2018                         | $               50,962,500                        |
|                                                      |                                                                                                          |
| See notes to unaudited consolidated financial statements. |                                                                                                          |

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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| PT Network Intermediate Holdings, LLC                                              |                                                                                                                                  |   |
|------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|--------|
| Unaudited Consolidated Statements of Cash Flows                                    |                                                                                                                                  |   |   |
| For the years ended December 31, 2018 and 2017                                     |                                                                                                                                  |   |   |
|                                                                               |                                                                                                                                  |   |   |
|                                                                               | 2018                                                                                                                                  |   | 2017 |
| Cash flows from operating activities:                                              |                                                                                                                                  |   |   |
| Net loss                                                                           | $  (34,704,684)                                                                                                                       |   | $   (24,002,082) |
| Adjustments to reconcile net loss to net cash used in operating activities:        |                                                                                                                                  |   |   |
| Depreciation and amortization                                                      |         8,198,054                                                                             |   |          7,951,330 |
| Provision for doubtful accounts                                                    |         3,419,326                                                                             |   |          2,839,176 |
| Loss on extinguishment of debt                                                     |                       -           |   |             998,460 |
| Changes in operating assets and liabilities, net of effect of businesses acquired: |                                                                                                                                  |   |   |
| (Increase)/Decrease in operating assets:                                           |                                                                                                                                  |   |   |
| Patient receivables, net                                                           |           (808,063)                                                                 |   |       (14,160,062) |
| Prepaid expenses and other assets                                                  |         2,467,617                                                                             |   |         (2,570,200) |
| Increase in operating liabilities:                                                 |                                                                                                                                  |   |   |
| Accounts payable and accrued expenses                                              |            104,074                                                                  |   |          7,163,578 |
| Other liabilities                                                                  |         6,000,000                                                                             |   |                        - |
| Deferred rent                                                                      |         1,542,273                                                                             |   |          2,152,622 |
| Net cash used in operating activities                                              |       (13,781,403)                                                                                      |   |       (19,627,178) |
|                                                                               |                                                                                                                                  |   |   |
| Cash flows from investing activities:                                              |                                                                                                                                  |   |   |
| Business acquisitions, net of cash acquired                                        |             (25,000)                                                      |   |       (91,422,201) |
| Purchases of property and equipment                                                |        (5,509,180)                                                                                      |   |         (8,401,289) |
| Net cash used in investing activities                                              |        (5,534,180)                                                                                      |   |       (99,823,490) |
|                                                                               |                                                                                                                                  |   |   |
| Cash flows from financing activities:                                              |                                                                                                                                  |   |   |
| Borrowings on revolving facilities                                                 |         5,000,000                                                                             |   |                        - |
| Member contributions                                                               |       19,591,371                                                                                        |   |        46,841,613 |
| Proceeds from long-term debt                                                       |                       - |   |        64,315,000 |
| Principal payments on long-term debt                                               |        (2,281,100)                                                                                      |   |       (14,315,000) |
| Payments on capital lease obligations                                              |             (90,315)                                                      |   |              (70,496) |
| Debt issuance costs                                                                |                       -           |   |         (3,241,041) |
| Net cash provided by financing activities                                          |       22,219,956                                                                                        |   |        93,530,076 |
|                                                                               |                                                                                                                                  |   |   |
| Net increase/(decrease) in cash and cash equivalents                               |         2,904,373                                                                             |   |       (25,920,592) |
|                                                                               |                                                                                                                                  |   |   |
| Cash, cash equivalents and restricted cash                                         |                                                                                                                                  |   |   |
| Beginning of period                                                                |         7,171,350                                                                             |   |        33,091,942 |
| End of period                                                                      | $   10,075,723                                                                                                              |   | $       7,171,350 |
|                                                                               |                                                                                                                                  |   |   |
| Supplemental disclosure of cash flow information:                                  |                                                                                                                                  |   |   |
| Cash paid for interest                                                             | $   16,153,279                                                                                                              |   | $       9,359,660 |
|                                                                               |                                                                                                                                  |   |   |
| Non-cash investing and financing activity:                                         |                                                                                                                                  |   |   |
| Equity issued for acquisitions                                                     | $                    -                      |   | $     10,500,000 |
|                                                                               |                                                                                                                                  |   |   |
| See notes to unaudited consolidated financial statements.                          |                                                                                                                                  |   |   |

 

 

 

 

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PT Network Intermediate Holdings, LLC

Unaudited notes to consolidated financial statements

 

Note 1. Nature of Business and Significant Accounting Policies

 

Nature of Business: PT Network Intermediate Holdings, LLC (PTNIH), is a limited liability company formed in the State of Delaware on September 16, 2013. PTNIH wholly owns PT Network, LLC (PTN). PT Network, LLC, d/b/a Pivot Physical Therapy, operates outpatient physical therapy and occupational health clinics that provide physical therapy, sports medicine and athletic training, aquatic therapy, work injury, and sports performance and wellness services. Services are provided at locations throughout Maryland, Virginia, West Virginia, Washington, D.C., Pennsylvania, Delaware, and North Carolina. Additionally, Pivot Physical Therapy provides on-site physical therapy, occupational therapy, and athletic training to job sites across the country.

 

PTNIH operates directly through its subsidiaries, PT Network, LLC, Bayside Physical Therapy, LLC, Cambridge Physical Therapy and SportsCare, LLC, Glen Burnie Physical Therapy & Sports Care, LLC, Maryland SportsCare & Rehab, L.L.C, Maryland Sports Care & Rehabilitation of Salisbury, LLC, Professional SportsCare & Rehab, LLC, Professional SportsCare & Rehab of West Virginia, LLC, Professional SportsCare, LLC, Professional Sportscare & Rehab Associates, LLC, Southern Delaware SportsCare and Rehabilitation, LLC, PTN Transportation, LLC, ActivCare Physical Therapy, LLC, Pivot Occupational Health Holdings LLC, Pivot Athletic Training, LLC, Allegheny &

Chesapeake Physical Therapists Incorporated, Omega Medical Center LLC, Tidewater Physical Therapy, LLC, PhysioHealth, LLC, Dynamic Therapy Services of Pennsylvania, LLC, Dynamic Therapy Services, LLC, Pivot Physical Therapy of Pennsylvania, LLC, PTCG, LL, Pivot Health Professionals, P.C., and Onsite Innovations, LLC (collectively, the Company).

 

The consolidated entities include 24 physical therapy, athletic training, and occupational health companies and a transportation company that earn revenue directly from patient care through their clinic and Onsite Innovations, LLC locations. The clinics primarily generate business from physician referrals. The principal sources of payment for the clinics’ services are commercial health insurance, Medicare, Medicaid, workers’ compensation insurance and proceeds from personal injury cases. Services provided at Onsite Innovations, LLC locations are contract based and the contracted party is the single source of payment.

 

Significant Accounting Policies

 

A summary of the Company’s significant accounting policies follows:

 

Basis of Accounting

The accompanying consolidated financial statements have been prepared using the accrual basis of accounting, whereby revenue is recognized when services are rendered and expenses are recognized when incurred, in accordance with accounting principles generally accepted in the United States (GAAP).

 

Principles of Consolidation

The consolidated financial statements include the accounts and operations of the Company. All intercompany balances, transactions and amounts have been eliminated in consolidation.

 

Cash and Cash Equivalents

The Company maintains its cash and cash equivalents at various financial institutions. The Company considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents. The combined account balances at several institutions typically exceed Federal Deposit Insurance Corporation (FDIC)  insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. The Company has not experienced any losses in such accounts and management believes it is not exposed to any significant credit risk on cash and cash equivalents. 

 

Revenue Recognition

 

Physical Therapy Revenues

Revenues are recognized in the period in which services are rendered. Physical therapy revenues consists of revenues for physical therapy and occupational therapy clinics that provide pre-and post-operative care and treatment for orthopedic related disorders, sports-related injuries, preventative care, rehabilitation of injured workers 

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and neurological-related injuries. Physical therapy revenues (patient revenues less estimated contractual adjustments), which are presented on the consolidated statements of operations, are recognized at the estimated net realizable amounts from third-party payors, patients and others in exchange for services rendered when obligations under the terms of the contract are satisfied. There is an implied contract between the Company and the patient upon each patient visit. Generally, this occurs as the Company provides physical and occupational therapy services, as each service provided is distinct and future services rendered are not dependent on previously rendered services. The Company has agreements with third-party payors that provide for payments to the Company at amounts different from its established rates. See below for further discussion on variable consideration and allowance for doubtful accounts estimates. 

 

Medicare/Medicaid and Blue Cross entities represent approximately 27% and 25%, and 28% and 24% of third-party payor net patient service revenue, respectively, for the years ended December 31, 2018 and 2017. The remaining 48% represents various other commercial payors and patients, respectively.

 

Medicare Reimbursement

 

The Medicare program reimburses outpatient rehabilitation providers based on the Medicare Physician Fee Schedule (“MPFS”). For services provided in 2018, a 0.5% increase has been applied to the fee schedule payment rates; for services provided in 2019, a 0.25% increase will be applied to the fee schedule payment rates before applying the mandatory budget neutrality adjustment. For services provided in 2020 through 2025, a 0.0% percent update will be applied each year to the fee schedule payment rates, before applying the mandatory budget neutrality adjustment. Beginning in 2021, payments to individual therapists (Physical/Occupational Therapist in Private Practice) paid under the fee schedule may be subject to adjustment based on performance in the Merit Based Incentive Payment System (“MIPS”), which measures performance based on certain quality metrics, resource use, and meaningful use of electronic health records. Under the MIPS requirements, a provider’s performance is assessed according to established performance standards each year and then is used to determine an adjustment factor that is applied to the professional’s payment for the corresponding payment year. The provider’s MIPS performance in 2019 will determine the payment adjustment in 2021. Each year from 2019 through 2024, professionals who receive a significant share of their revenues through an alternate payment model (“APM”), (such as accountable care organizations or bundled payment arrangements) that involves risk of financial losses and a quality measurement component will receive a 5% bonus in the corresponding payment year. The bonus payment for APM participation is intended to encourage participation and testing of new APMs and to promote the alignment of incentives across payors. The specifics of the MIPS and APM adjustments will be subject to future notice and comment rule-making.

 

CMS adopted a multiple procedure payment reduction (MPPR) for therapy services in the final update to the MPFS for calendar year 2011. The MPPR applied to all outpatient therapy services paid under Medicare Part B — occupational therapy, physical therapy and speech-language pathology. Under the policy, the Medicare program pays 100% of the practice expense component of the Relative Value Unit (RVU) for the therapy procedure with the highest practice expense RVU, then reduces the payment for the practice expense component for the second and subsequent therapy procedures or units of service furnished during the same day for the same patient, regardless of whether those therapy services are furnished in separate sessions. Since 2013, the practice expense component for the second and subsequent therapy service furnished during the same day for the same patient was reduced by 50%. 

 

Medicare claims for outpatient therapy services furnished by therapy assistants on or after January 1, 2020 must include a modifier indicating the service was furnished by a therapy assistant. Outpatient therapy services furnished on or after January 1, 2022 in whole or part by a therapy assistant will be paid at an amount equal to 85% of the payment amount otherwise applicable for the service. 

 

Statutes, regulations, and payment rules governing the delivery of therapy services to Medicare beneficiaries are complex and subject to interpretation. The Company believes that it is in compliance, in all material respects, with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing that would have a material effect on the Company’s financial statements as of December 31, 2018. Compliance with such laws and regulations can be subject to future government review and interpretation, as well as significant regulatory action including fines, penalties, and exclusion from the Medicare program. 

 

Industrial injury prevention services revenues 

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Revenue from the industrial injury prevention business, which are also included in net revenues in the consolidated statements of operations, are derived from onsite services we provide to clients’ employees including injury prevention, rehabilitation, ergonomic assessments and performance optimization. Revenue from the Company’s industrial injury prevention business is recognized when the services under the terms of the contract are performed. Revenues are recognized at an amount equal to the consideration the Company expects to receive in exchange for providing injury prevention services to its clients. The revenue is determined and recognized based on the contractual terms with the third party. 

 

Other revenues

The Company recognizes revenue for services provided to schools and industrial worksites, for physical or occupational therapy services, and athletic trainers and gym membership fees, which are also included in net revenues in the consolidated statements of operations. Contract terms and rates are agreed to in advance between the Company and third parties. Services are typically performed over the contract period and revenue is recorded as the services are rendered. 

 

The Company had disaggregated revenues for the periods ending December 31, 2018 and 2017 as follows:

 

|                                  |   | 2018                                                                                          |   | 2017                                                                                          |
|---------------------------------------|--------|-----------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
| Physical Therapy                      |   | $       165,210,146                                             |   | $       150,272,630                                             |
| Industrial Injury Prevention Services |   |             29,305,636            |   |             12,882,791            |
| Other                                 |   |               6,442,903 |   |               6,980,683 |
| Total                                 |   | $       200,958,685                                             |   | $       170,136,104                                             |

 

Accounts Receivable, net

Substantially all of the Company’s accounts receivable are related to providing healthcare services to patients whose costs are primarily paid by federal and state governmental authorities, managed care health plans, commercial insurance companies, and workers’ compensation and employer programs. The Company reports accounts receivable at an amount equal to the consideration the Company expects to receive in exchange for providing healthcare services to its patients, which is estimated using contractual provisions associated with specific payors, historical reimbursement rates, and an analysis of past experience to estimate potential adjustments. 

 

The Company also has certain receivables that are related to providing healthcare services to patients whose costs are primarily paid local governments and other third parties. The Company reports these receivables at an amount equal to the consideration the Company expects to receive in exchange for providing healthcare services to its patients. 

 

Allowance for Doubtful Accounts

The Company writes-off amounts that have been deemed to be uncollectible. The Company writes off uncollectible invoices when appropriate collection efforts have been exhausted. The allowance for doubtful accounts is included in accounts receivable, net on the consolidated balance sheets. 

 

Security Deposits

The Company has recorded $921,583 and $817,316 of refundable security deposits as of December 31, 2018 and 2017, respectively, for various physical therapy and occupational health clinics in other assets in the consolidated balance sheets. 

 

Long-Lived Assets

 

Property and equipment, net

Property and equipment, net is stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the improvements or the remaining lease term. 

 

The general range of useful lives is as follows:

 

| Computer equipment and software | 3 years |
|---------------------------------|---------|
| Furniture and office equipment  | 7 years |

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| Medical equipment      | 7 years    |
|------------------------|------------|
| Leasehold improvements | 1-10 years |

 

Finite-lived Intangible Assets

Intangible assets that have finite useful lives are amortized over their useful lives and reported at cost less accumulated amortization and impairment losses, if applicable. The Company's finite-lived intangible assets consist of customer relationships and trade name assets associated with the Company’s historical acquisitions. 

 

Impairment of Long-Lived Assets

Long-lived assets are not required to be tested for impairment annually. However, long-lived assets are tested for impairment whenever circumstances indicate that the carrying amount of the asset may not be recoverable, such as when the disposal of such assets before the end of its previously estimated useful life is likely or there is an adverse change in the market involving the business employing the related assets. The impairment test first requires an assessment of the recoverability of the asset by comparing the net future cash flows of the asset to the carrying value of the asset. The net cash flows of the asset are estimated on an undiscounted, pre-tax basis, and should be based on future cash inflows expected from use of the asset over its remaining useful life, less expected future cash outflows necessary for maintenance, and cash flows associated with the eventual disposition of the asset. If the carrying value of the asset exceeds the net future cash flows of the asset, the asset would not be deemed to be recoverable. An impairment of the asset would then be recognized in an amount equal to the excess of the asset’s carrying value over its estimated fair value, calculated based on the discounted cash flows of the asset.  Significant judgments used for long-lived asset impairment assessments include determining whether events of circumstances indicate that the carrying value of the asset may not be recoverable, identifying asset groupings, identifying the primary assets within each asset grouping, and estimating projected cash flows attributable to the asset grouping. The valuation of long-lived assets at estimated fair value, when required, is performed using Level 2 or Level 3 fair value inputs. 

 

Goodwill and Indefinite-Lived Intangible Assets

The Company records goodwill for the excess purchase price over the fair value of the identifiable net assets acquired in business combinations. The fair value of goodwill is tested for impairment annually, or earlier upon the occurrence of substantive unfavorable changes in economic conditions, industry trends, costs, or cash flows. The impairment test requires judgment, including the identification of reporting units, the assignment of assets, liabilities and goodwill to reporting units, and the determination of fair value of each reporting unit if a quantitative test is performed. If management believes that as a result of our qualitative assessment it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, a quantitative impairment test is not required. As of December 31, 2018 and 2017, the Company has identified a total of three reporting units, of which two reporting units have been allocated goodwill.

 

An impairment loss generally would be recognized when the carrying value of a reporting unit exceeds the estimated fair value of equity of the reporting unit. The estimated fair value of a reporting unit is determined by employing income and market approaches. Included in the income and market approaches are assumptions regarding projected revenue, profitability, and capital requirements for each reporting unit. The projected cash flows of each reporting unit are discounted back to the present value to estimate the fair value of each reporting unit as of the impairment testing date under the income approach. Under the market approach, a market multiple is applied to historical and / or projected financial information to estimate the fair value of each reporting unit as of the impairment testing date. The financial projections for each reporting unit are based on management’s knowledge of the industry, management’s understanding of each reporting unit’s recent transactions, and management’s expectations for each reporting unit’s operations. If the financial projections for a reporting unit fail to materialize, the resulting decline in our estimated fair values could result in an impairment charge to the goodwill associated with the respective reporting unit. The valuation of goodwill at estimated fair value, when required, is performed using Level 2 or Level 3 fair value inputs. 

 

The Company performed a quantitative goodwill impairment assessment for our two reporting units with goodwill and the fair value estimates did not indicate any evidence of impairment with respect to goodwill for either reporting unit as of the assessment date.

 

Fair Value of Financial Instruments

The carrying amounts of financial instruments, including cash, accounts receivable, net, accounts payable, accrued expenses, and our line-of-credit approximate fair value due to the short maturity of these instruments. The carrying 

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amount of long-term debt approximates fair value because the interest rates fluctuate with market interest rates. The fair value of debt estimates are based on Level 2 inputs. 

 

Fair Value Measurements

The Company follows the Financial Accounting Standards Board (FASB) authoritative guidance for fair value measurements, which defines fair value as the estimated price at which an asset can be sold or a liability settled in an orderly transaction to a third party under current market conditions, and establishes a framework for measuring fair value in accordance with GAAP.

 

Deferred Financing Costs

Costs associated with acquiring debt are capitalized as deferred financing costs. Debt issuance costs related to a recognized debt liability are presented in the consolidated balance sheets as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. These costs are amortized over the term of the related loans using the straight-line method, which is not materially different than the effective interest method, and are included in interest expense in the consolidated statements of operations.

 

Deferred Rent

Rent payments on operating leases are recognized as an expense on a straight-line basis over the related lease term, which includes renewal options that are reasonably assured of exercise. Generally, renewal options are not considered reasonably assured of exercise. Deferred rent is based on rent expense that is in excess of amounts paid to date. The liability as of December 31, 2018 and 2017 was $2,271,548 and $1,809,602, respectively, and is reported as part of deferred rent in the consolidated balance sheets. 

 

When the Company receives a tenant improvement allowance, it records a liability which is then amortized as a reduction of rent expense over the life of the lease. The liability for tenant improvement allowances, net of amortization, as of December 31, 2018 and 2017 was $2,489,094 and $1,789,896, respectively, and is reported as part of deferred rent and other liabilities in the consolidated balance sheets.

 

Corporate Costs

Corporate costs consist primarily of salaries and benefits of corporate office personnel, rent, insurance costs, depreciation and amortization, travel, legal, compliance, professional, marketing and recruiting fees. 

 

Income Taxes

The Company, with its parent company and parent company affiliates, was formed as a limited liability company under the Delaware Liability Company Act and provisions of the Internal Revenue Code. One subsidiary of the Company is a C Corporation for which a provision for income taxes has been included in the financial statements. These consolidated financial statements contain no provision for income taxes or benefits for PTN and its subsidiaries, other than for the subsidiary described above, as taxable income or loss is reported by the members on their individual income tax returns. The Company’s Operating Agreement provides for the division of LLC profits and losses to the members and the perpetual existence of the entity.

 

Management has evaluated the Company’s tax positions and concluded that the Company has taken no uncertain tax positions that require adjustment to or disclosure in the financial statements.

 

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including disclosure of contingencies, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are used for, but not limited to: amounts realizable for services performed, estimated useful lives of assets, the valuation of goodwill and intangible assets, amounts payable for self-insured losses, and the computation of income taxes. Future events and their effects cannot be predicted with certainty; accordingly, the Company’s accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the financial statements will change as new events occur, as more experience is acquired, as additional information is obtained, and as the Company’s operating environment changes. The Company’s management evaluates and updates assumptions and estimates on an ongoing basis. Actual results could differ from those estimates.

 

Recently Issued Accounting Guidance

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In May 2014, March 2016, April 2016, and December 2016, the FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, ASU 2016-08, Revenue from Contracts with Customers, Principal versus Agent Considerations, ASU 2016-10, Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing, ASU 2016-12, Revenue from Contracts with Customers, Narrow Scope Improvements and Practical Expedients, and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customer (collectively “New Revenue Standard”), respectively, which supersede most of the existing revenue recognition requirements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. The New Revenue Standard is effective for the Company for annual periods beginning after December 15, 2018 (as amended in August 2015 by ASU 2015-14, Deferral of the Effective Date).

 

The Company will implement the New Revenue Standard beginning January 1, 2019 using the modified retrospective transition method. The Company does not believe that the adoption of the New Revenue Standard will result in any material changes to the Company’s financial statements other than the requirement to include incremental financial statement footnote disclosures.

 

In February 2016, the FASB issued amended accounting guidance (ASU 2016-02, Leases) which replaced most existing lease accounting guidance under GAAP. Among other changes, the amended guidance requires that a right-to-use asset, which is an asset that represents the lessee’s right to use, and a lease liability, which is a lessee’s obligation to make lease payments arising for an operating lease measured on a discounted basis, be recognized on the balance sheet by lessees. The amended guidance is effective for the Company starting in the year ending December 31, 2020. Entities can use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements or recognize the cumulative effect of applying the new standard as an adjustment to the opening balance of equity.

 

The Company has operating leases for each of its clinic and certain corporate locations, as well as equipment. As a result, the Company will recognize right of use assets and lease liabilities on the consolidated balance sheet upon adoption of the new leasing standard. Operating lease expense will continue to be recognized as occupancy costs on a straight-line basis over the respective lease terms in the consolidated statements of operations. The Company will implement the new standard beginning January 1, 2020, and expects to elect certain of the practical expedients permitted, including the expedient that permits the Company to retain its existing lease assessment and classification. The Company also expects to elect the transition method in ASU 2018-11 which allows the Company to recognize a cumulative effect adjustment of the standard adoption to the opening balance of equity at the adoption date. The Company continues to evaluate the impact that the pronouncement will have on the Company's financial statements, including footnote disclosures.

 

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment change. The Company will implement the new standard in the year ending December 31, 2020. The Company continues to evaluate the impact that the pronouncement will have on its financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses, which added a new impairment model, known as the current expected credit loss (CECL) model, that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. The CECL model applies to most debt instruments, including trade receivables. The CECL model does not have a minimum threshold for recognition of impairment losses and entities will need to measure expected credit losses on assets that have a low risk of loss. The Company will implement the new standard in the year ending December 31, 2020. Management is currently evaluating the potential impact of these changes on the financial statements.

 

In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). This generally means that an intangible asset is recognized for the software license and, to the extent that the payments attributable to the software license are made over time, a liability also is recognized. If a cloud computing arrangement does not include a software license, the entity should 

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account for the arrangement as a service contract. This generally means that the fees associated with the hosting element of the arrangement are expensed as incurred. The amendment is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The company will implement the new standard in the year ending December 31, 2020. The Company continues to evaluate the impact that the pronouncement will have on its financial statements.

 

Note 2. Business Acquisitions

 

During 2017, the Company entered into thirteen Asset Purchase Agreements, one Stock Purchase Agreement, and one Securities Purchase Agreement, whereby the Company acquired certain assets, assumed certain liabilities, and acquired shares of certain sellers. The aggregate purchase price of these acquisitions consisted of cash, as adjusted for net working capital, of $94,323,113, and equity of $10,500,000 in the Company. The cash consideration was primarily funded through loan proceeds from the new and amended initial term and delayed draw loans disclosed in Note 6. The Company identified intangible assets related to customer relationships and tradename and assigned values of $9,596,397 and $2,781,147, respectively. The remaining excess consideration of $85,472,305 was recognized as goodwill. The fair value of goodwill is attributable to expected increases in revenue and expected cost synergy opportunities in our new geographic footprint.  

 

These acquisitions have been reported in the accompanying consolidated financial statements as business combinations in accordance with FASB guidance. The following table summarizes the aggregate consideration paid, contingent consideration and the fair values of the assets acquired and liabilities assumed recognized at the dates of acquisition. There were no material business acquisitions in 2018.

 

|                                                               |   | December 31, 2017                                                                                                                          |
|--------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|
|                                                               |   |                                                                                                                                       |
| Consideration:                                                     |   |                                                                                                                                       |
| Cash                                                               |   | $           94,323,113                                                                   |
| Equity                                                             |   |               10,500,000                                             |
| Total consideration                                                |   | $         104,823,113                                                                              |
|                                                               |   |                                                                                                                                       |
| Recognized amounts of identifiable assets acquired                 |   |                                                                                                                                       |
| and liabilities assumed:                                           |   |                                                                                                                                       |
| Cash and cash equivalents                                          |   | $             3,691,351                                                        |
|       Accounts receivable, net       |   |                 5,567,234                                  |
| Prepaid expenses and other current assets                          |   |                    571,911                       |
| Property and equipment, net                                        |   |                 2,720,174                                  |
| Tradename                                                          |   |                 2,781,147                                  |
| Customer relationships                                             |   |                 9,596,397                                  |
| Other assets                                                       |   |                        5,475 |
| Accounts payable                                                   |   |                (1,717,706)                                           |
| Accrued expenses                                                   |   |                (1,876,613)                                           |
|        Other current liabilities     |   |                   (290,805)                      |
|        Other non-current liabilities |   |               (1,697,757)                                            |
| Total identifiable net assets                                      |   |                19,350,808                                            |
|                                                               |   |                                                                                                                                       |
| Goodwill                                                           |   |                85,472,305                                            |
| Net assets acquired                                                |   | $          104,823,113                                                                   |

 

The Company incurred transaction costs of $10,832,814 in connection with these and other proposed but not consummated business acquisitions, which are expensed as incurred and presented as part of corporate costs on the consolidated statements of operations as of December 31, 2017. Goodwill from these acquisitions of approximately $31,300,000 is expected to be deductible for income tax purposes. In 2017, the Company recorded a $790,440 measurement period adjustment to goodwill for a working capital adjustment related to an acquisition in 2016. All purchase price allocations for the 2017 business acquisitions were finalized in 2017 and there were no measurement period adjustments in 2018. The weighted-average amortization period of the identified intangible assets from these acquisitions is 3.4 years for tradename and 9.0 years for customer relationships. 

 

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Note 3.  Goodwill and Intangible Assets, net

 

Goodwill

The carrying amount of goodwill as of December 31, 2016 was $110,761,841. During 2017, there were $85,472,305 of additions to goodwill. The carrying amount of goodwill as of December 31, 2018 and 2017 was $196,254,146. There were no additions, disposals, or goodwill impairments that occurred for the year ending December 31, 2018. 

 

Intangible assets, net

The balance and activity of finite-lived intangible assets is shown in the tables below:

|                                                                                                                            | Useful Life ranges |   | Intangible Assets, net, balance as of December 31, 2016 | Amortization Expense | Intangible Assets, net, balance as of December 31, 2017 |
|---------------------------------------------------------------------------------------------------------------------------------|--------------------|--------|---------------------------------------------------------|----------------------|---------------------------------------------------------|
| Trade names, net of accumulated amortization of $765,508 and $3,238,961 as of December 31, 2016 and 2017, respectively

   | 1 - 7 years        | $      | 3,987,783                                               | $                    | 2,473,453                                               |   | 1,514,330 |
| Customer relationships, net of accumulated amortization of $303,556 and $852,604 as of December 31, 2016 and 2017, respectively | 9 years            | $      | 11,434,874                                              | $                    | 549,048                                                 |   | 10,885,826 |

 

|                                                                                                                              | Useful Life ranges |   | Intangible Assets, net, balance as of December 31, 2017 | Amortization Expense | Intangible Assets, net, balance as of December 31, 2018 |
|-----------------------------------------------------------------------------------------------------------------------------------|--------------------|--------|---------------------------------------------------------|----------------------|---------------------------------------------------------|
| Trade names, net of accumulated amortization of $3,238,961 and $3,690,772 as of December 31, 2017 and 2018, respectively

   | 1 - 7 years        | $      | 1,514,330                                               | $                    | 451,811                                                 |   | 1,062,519 |
| Customer relationships, net of accumulated amortization of $852,604 and $2,156,874 as of December 31, 2017 and 2018, respectively | 9 years            | $      | 10,885,826                                              | $                    | 1,304,270                                               |   | 9,581,556 |

 

Amortization of intangible assets, net, is recognized on a straight-line basis over the estimated useful lives of intangible assets. No impairments of finite-lived intangible assets were recorded for the year ending December 31, 

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2018 or 2017. Estimated amortization expense of the Company’s finite-lived intangible assets for each of the five succeeding years and thereafter is as follows:

 

|        |                           |                                                                                                                                              |                        |                           |                                                                                                                                                |
|--------|---------------------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------------------|---------------------------|------------------------------------------------------------------------------------------------------------------------------------------------|
|   | Trade names               |                                                                                                                                         | Customer relationships |
|   | Years Ending December 31, | Annual Amount                                                                                                                                |                   | Years Ending December 31, | Annual Amount                                                                                                                                  |
|   | 2019                      | $                      199,029 |                   | 2019                      | $                      1,304,270 |
|   | 2020                      | $                      199,029 |                   | 2020                      | $                      1,304,270 |
|   | 2021                      | $                      199,029 |                   | 2021                      | $                      1,304,270 |
|   | 2022                      | $                      177,600 |                   | 2022                      | $                      1,304,270 |
|   | 2023                      | $                      168,528 |                   | 2023                      | $                      1,304,270 |
|   | Thereafter                | $                      119,304                     |                   | Thereafter                | $                      3,060,206 |

 

Note 4. Property and Equipment, net

 

Property and equipment consists of the following at December 31, 2018 and 2017:

 

|                            | 2018                                                                  |   | 2017                                                                  |
|---------------------------------|-----------------------------------------------------------------------|--------|-----------------------------------------------------------------------|
| Computer equipment and software | $       3,415,590                       |   | $       2,547,292                       |
| Furniture and office equipment  |           2,257,004 |   |           1,889,674 |
| Medical equipment               |           6,456,760 |   |           5,297,096 |
| Leasehold improvements          |         14,426,769            |   |         12,441,279            |
|                            |         26,556,123            |   |         22,175,341            |
| Less accumulated depreciation   |         (9,900,393)           |   |         (5,863,141)           |
|                            | $     16,655,730                                  |   | $     16,312,200                                  |

 

Depreciation expense was $5,191,139 and $3,898,444 for the years ended December 31, 2018 and 2017, respectively. There were no impairments recorded for the years ending December 31, 2018 and 2017. 

 

Note 5.  Accounts Receivable, net 

 

Accounts receivable, net consist of the following at December 31, 2018 and 2017:

 

|                                                            | 2018                                                                                                       |   | 2017                                                                                                      |
|-----------------------------------------------------------------|------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------|
| Gross accounts receivable                                       | $          68,343,951                                    |   | $          53,591,402                                   |
| Allowance for third-party contractual discounts and adjustments |            (41,651,184)                                  |   |            (24,546,757)                                 |
| Allowance for uncollectible accounts                            |                  (631,628) |   |                 (372,244) |
| Accounts receivable, net                                        | $          26,061,139                                    |   | $          28,672,401                                   |

 

Below is a rollforward of the allowance for uncollectible accounts for the years ended December 31, 2018 and 2017:

 

| Valuation Account                                     | Balance at December 31, 2016 | Additions Charged to Expenses | Deductions | Balance at December 31, 2017 | Additions Charged to Expenses | Deductions | Balance at December 31, 2018 |
|-------------------------------------------------------|------------------------------|-------------------------------|------------|------------------------------|-------------------------------|------------|------------------------------|
| Allowance for doubtful accounts - accounts receivable | 270,917                      | 2,839,176                     | 2,737,849  | 372,244                      | 3,419,326                     | 3,159,942  | 631,628                      |

 

Medicare/Medicaid and commercial insurance providers represent approximately 21% and 66%, and 21% and 69%, of gross accounts receivable at December 31, 2018 and 2017, respectively. The remainder is due from patients. Accounts receivable are carried based on total patient charges. The contractual allowances include estimates for third-party contractual and other adjustments. Management determines the allowance for uncollectible accounts by using historical experience applied to an aging of accounts. Accounts receivable are written off when deemed uncollectible.

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Contractual allowances result from the differences between the rates charged for services performed and expected reimbursements by both insurance companies and government sponsored healthcare programs for such services. Medicare regulations and the various third party payors and managed care contracts are often complex and may include multiple reimbursement mechanisms payable for the services provided in our clinics. We estimate contractual allowances based on our interpretation of the applicable regulations, payor contracts, and the historical collection experience of the clinic and apply an appropriate contractual allowance reserve percentage to the gross accounts receivable balances for each clinic. Based on our historical experience, calculating the contractual allowance reserve percentage at the clinic level is sufficient to allow us to provide the necessary detail and accuracy with our collectability estimates. However, the services authorized and provided and related reimbursement are subject to interpretation that could result in payments that differ from our estimates. Payor terms are periodically revised necessitating continual review and assessment of the estimates made by management. Our billing systems may not capture the exact change in our contractual allowance reserve estimate from period to period. Therefore, in order to assess the accuracy of our revenues and hence our contractual allowance reserves, our management regularly compares its cash collections to corresponding net revenues measured both in the aggregate and on a clinic-by-clinic basis.

 

Note 6.  Credit Agreements

 

PTN’s credit agreement provides for a revolving line-of-credit, initial term loan, and delayed draw term loan with commitments of $10,000,000, $130,000,000, and $50,000,000, respectively. This credit agreement was amended and restated effective October 12, 2017. The commitments for the amended revolving line-of-credit, term loan, and delayed draw term loan (collectively, the First Lien Credit Agreement) remain unchanged. 

 

On October 12, 2017, PTN entered into a credit agreement with a different lender, which provides for an initial term loan and delayed draw term loan with commitments of $49,000,000 and $11,000,000, respectively, (collectively, the Second Lien Credit Agreement). The Second Lien Credit Agreement is subordinated to the First Lien Credit Agreement. 

 

The term loans and delayed draw loans under the First and Second Lien Credit Agreements can be designated as Index Rate loans at the index rate plus applicable index margin, as defined in the applicable agreements. Interest accrues on LIBOR loans at LIBOR plus an applicable LIBOR margin, as defined in the applicable agreements. The interest rates on the First Lien Credit Agreement initial term loan and revolving line of credit were 7.93% and 10.00%, respectively, at December 31, 2018. There was no interest rate election for the delayed draw term loan under the First Lien Credit Agreement. The interest rates on the Second Lien Credit Agreement initial term loan and delayed draw term loan were 12.43% and 12.34%, respectively at December 31, 2018. 

 

The First Lien Credit Agreement requires quarterly calendar principal repayments in installments of $325,000 beginning in December 2017 through September 2021, with the balance due on the maturity date. The Second Lien Credit Agreement requires repayment of all outstanding borrowings on the maturity date. 

 

All loans under the credit agreements are collateralized by all of PTN’s assets and the Company’s member equity interest. All facilities under the First Lien Credit Facilities mature on November 30, 2021. All facilities under the Second Lien Facilities mature on April 12, 2023. 

 

The credit agreements are subject to certain financial and non-financial covenants. PTN was in breach of certain financial covenants during 2018, resulting in a required prepayment of the 2019 principal of $656,100 on the First Lien Credit Agreement. This prepayment occurred in August 2018. 

 

In January 2019, PTN entered into forbearance agreements with its lenders. See Note 14 for further disclosure of a restructuring that occurred in June 2019. 

 

Beginning with the year ended December 31, 2018, the initial term loans under the First and Second Lien Credit Agreements also require mandatory prepayment within ten days of the issuance of annual December 31 audited financial statements, in an amount equal to 50% of excess cash flow for such year, as defined in the applicable agreements, based upon PTN’s leverage ratio financial covenant. 

 

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There was no outstanding balance on the First Lien Credit Agreement delayed draw term loan at December 31, 2018. The outstanding balances on the First Lien Credit Agreement initial term loan and revolving line-of-credit were $127,718,900 and $5,000,000, respectively, at December 31, 2018. 

 

The outstanding balances on the Second Lien Credit Agreement initial term loan and delayed draw term were $49,000,000 and $1,000,000, respectively, at December 31, 2018. 

 

Aggregate future maturities required on long-term debt, at December 31, 2018, are as follows (see Note 14 for future maturities required under restructured credit agreements):

 

| Years ending December 31:                          |   |                                                                                                                                                          |
|----------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2019                                               |   | $             643,900                                                                             |
| 2020                                               |   |             1,300,000                                                                             |
| 2021                                               |   |         130,775,000                                                                                                             |
| 2022                                               |   |                           - |
| 2023                                               |   |                           -           |
| Thereafter                                         |   |           50,000,000                                                                                                  |
|                                               |   |         182,718,900                                                                                                             |
| Less unamortized deferred financing costs          |   |           (4,913,036)                                                                                       |
| Total long-term debt, including current maturities |   |         177,805,864                                                                                                             |
| Less current maturities                            |   |             (643,900)                                                                                       |
| Total long-term debt                               |   | $      177,161,964                                                                                                              |

 

Deferred financing costs, which are classified as a reduction to the carrying amount of the debt above, consist of the following at December 31, 2018:

 

| Cost                     |   | $          6,839,696           |
|--------------------------|--------|------------------------------------------------------------------------|
| Accumulated amortization |   |          (1,926,660)           |
|                     |   | $          4,913,036 |

 

Amortization of deferred financing costs was $1,550,925 and $1,223,117 for the years ended December 31, 2018 and 2017, respectively, and is included in interest expense on the consolidated statements of operations. Amortization for the next five years and thereafter is as follows:

 

| Years ending December 31: |   |                                                                                                    |
|---------------------------|--------|---------------------------------------------------------------------------------------------------------|
| 2019                      |   | $      1,539,267                                                                    |
| 2020                      |   |             1,527,609                       |
| 2021                      |   |             1,417,785                       |
| 2022                      |   |                331,646            |
| 2023                      |   |                  96,729 |
|                      |   | $     4,913,036                                                                               |

 

Interest expense was $16,592,893 and $11,754,290 for the years ended December 31, 2018 and 2017, respectively, and is included in interest expense on the consolidated statements of operations. Accrued interest and commitment fees on the First and Second Lien Credit Agreements was $3,714,418 and $3,294,769 at December 31, 2018 and 2017, respectively. 

 

The Company recorded a loss on extinguishment of debt of $988,460 resulting from the modification of the amended and restated credit agreement dated October 12, 2017. This expense is part of interest expense on the consolidated statements of operations for the year ended December 31, 2017. 

 

Note 7.  Employee Benefit Plans

 

The operating company (PTN) sponsors the Pivot Physical Therapy 401(k) Plan for the benefit of substantially all employees of PTN. Under the plan, employees can contribute a portion of their compensation on a pre- or post- tax basis. The Company has the option to make matching contributions to the plan. The Company’s matching contribution expense was $957,213 and $679,231 for the years ended December 31, 2018 and 2017, respectively, and is included in accrued compensation expenses on the consolidated balance sheets. 

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Note 8. Commitments and Contingencies

 

Operating leases: The Company has operating leases for equipment and for each of its operating and corporate locations, which expire at various dates beginning in January 2019 through January 2029. The Company’s future minimum rental commitments with original or remaining terms in excess of one year are as follows:

 

| Years ending December 31: |   |                                             |
|---------------------------|--------|--------------------------------------------------|
| 2019                      |   | $    17,450,415              |
| 2020                      |   |        14,232,332  |
| 2021                      |   |        10,768,667  |
| 2022                      |   |          7,104,450 |
| 2023                      |   |          3,711,154 |
| Thereafter                |   |          6,528,264 |
|                      |   | $    59,795,283              |

 

The minimum lease payments above do not include common area and maintenance (CAM) charges, which are also required contractual obligations under the operating leases. They also include the minimum lease terms and not optional renewal periods. The CAM charges are not fixed and can fluctuate from year to year. Rent expense, including CAM charges, was $20,223,056 and $17,335,637 for the years ended December 31, 2018 and 2017, respectively, and is included as a component of occupancy expense or corporate costs, depending on the nature and use of the underlying asset, on the consolidated statements of operations. 

 

Self-insurance: The Company has a self-insurance medical and dental plan for its employees. Losses are limited through the use of stop-loss policies from reinsurers. Specific losses for claims are limited to $100,000 annually per covered employee. The Company’s aggregate annual loss limitation is based on a formula that considers, among other things, the total number of employees. The Company paid claims of $6,949,397 and $7,407,216 during the years ended December 31, 2018 and 2017, respectively. The Company accrued an estimate for claims incurred but not reported of $414,764 and $210,000 at December 31, 2018 and 2017, respectively.

 

Note 9. Related Party Transactions

 

The Company’s operating subsidiary has advisory services agreements with CI Capital Partners II, L.P. (CI), the Company’s former private equity sponsor, and InTandem Capital Partners, LLC, an entity related to CI. Total advisory fees and related expenses were $303,171 and $2,702,438 for the years ended December 31, 2018 and 2017, respectively, and are included in corporate costs in the consolidated statements of operations. These fees are subordinated to PTN’s debt service obligation disclosed in Note 6. Total accrued fees were $170,296 and $449,951 for the years ended December 31, 2018 and 2017, respectively, and are included in accounts payable and other accrued expenses on the consolidated balance sheets. These advisory agreements were terminated in conjunction with the restructuring event disclosed in Note 14. 

 

Lease agreements: The Company leases office space for certain of its operating locations and one of its corporate locations from real estate holding companies owned by employees or officers of the Company. Rent expense for these facilities was approximately $2,492,561 and $2,921,000 for the years ended December 31, 2018 and 2017, respectively, and is included as a component of occupancy costs or corporate costs on the consolidated statements of operations, depending on the underlying use of the asset.

 

Note 10.  Certain Significant Risks and Uncertainties

 

Government regulation: The Company and others in the health care business are subject to certain inherent risks, including the following.

 

Substantial dependence on revenue derived from reimbursement by the federal Medicare and state

Medicaid programs, which have been drastically cut in recent years and which entail exposure to various healthcare fraud statues; government regulations, government budgetary constraints, and proposed legislative and regulatory changes; and lawsuits alleging malpractice and related claims. Such inherent risks require the use of certain 

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management estimates in the preparation of the Company’s financial statements and it is reasonably possible that a change in such estimates may occur in the near term.

 

The Company’s operations are subject to a variety of federal, state, and local legal and regulatory risks,

including without limitation, the federal Anti-Kickback statute and the federal Ethics in Patient Referral Act (so-called Stark Law), many of which apply to virtually all companies engaged in the health care services industry. The Anti-Kickback statute prohibits, among other things, the offer, payment, solicitation or receipt of any form of remuneration in return for the referral of Medicare and Medicaid patients. The Stark Law prohibits, with limited exceptions, financial relationships between ancillary service providers and referring physicians.

 

The Medicaid and Medicare programs are highly regulated. Compliance with laws and regulations governing the Medicare and Medicaid programs is subject to government review and interpretation, as well as significant regulatory action, including fines, penalties and possible exclusion from the Medicare and Medicaid programs. The failure of the Company to comply with applicable reimbursement regulations could adversely affect the Company’s business. It is not possible to quantify fully the effect of potential legislative or regulatory changes, the administration of such legislation or any other governmental initiatives on the Company’s business. Accordingly, there can be no assurance that the impact of these changes or any future health care legislation will not adversely affect the Company’s business. There can be no assurance that payments under governmental and private third-party payor programs will be timely, will remain at levels comparable to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs.

 

The Company’s financial condition and results of operations may be materially and adversely affected by the reimbursement process, which in the healthcare industry is complex and can involve lengthy delays. In addition, under the Medicare program, if the federal government makes a formal demand for reimbursement, even related to contested items, payment must be made for those items before the provider is given an opportunity to appeal and resolve the case.

 

Malpractice insurance: The Company has malpractice insurance policies covering all therapists providing services for the Company. The insurance coverage is $1,000,000 per incident and $3,000,000 aggregate per Named Insured entity per policy year subject to a $10,000,000 policy aggregate. The Company also purchases $10,000,000 in excess liability coverage. The Company believes this is adequate coverage to protect against any outstanding claims and litigation.

 

Litigation: The Company is involved in claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of activities or liquidity. See Note 13 for further discussion of certain settlement agreements reached in 2018. 

 

Note 11. Income Taxes

 

New tax legislation: The United States government approved and signed into law on December 22, 2017, the Tax Cuts and Jobs Act reform legislation. This legislation makes significant changes in U.S. tax law including a reduction in the corporate tax rates, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate tax rate from the current graduated system, with a top rate of 35%, to a flat rate of 21% starting in 2018.

 

Deferred income taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

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The income tax benefit is composed of the following at December 31, 2018 and is included on the consolidated statements of operations.:

 

| Deferred:       |      |
|-----------------|-----------|
| Federal         | $ 157,791 |
| State and local | 81,442    |
| Income benefit  | $ 239,233 |

 

The company has recorded a valuation allowance of $218,332 at December 31, 2018, as management does not expect to realize the full benefit of interest deductions in future years. The Company did not have a material amount of income tax expense or benefit for the year ended December 31, 2017, and there were no material deferred tax assets or deferred tax liabilities at December 31, 2017.

 

The significant temporary differences that give rise to deferred tax assets and liabilities are as follows: 

 

| Deferred tax assets:                    |                     |
|-----------------------------------------|--------------------------|
| Federal net operating loss carryforward | $    253,281   |
| State net operating loss carryforward   | 93,800                   |
| Interest deduction limitation           | 218,332                  |
| Accrued Vacation                        | 25,045                   |
| Other                                   | 13,494                   |
| Total deferred tax assets               | $      603,952 |

 

| Deferred tax liabilities:                              |                                                                           |
|--------------------------------------------------------|--------------------------------------------------------------------------------|
|   Property and equipment                     | $       122,359                                  |
|   Other                                      |             24,028 |
|     Total deferred tax liabilities |          146,387                       |
|                                                   |          457,565                       |
| Less valuation allowance                               |         (218,332)                      |
|     Net deferred tax asset         | $      239,233                                   |

 

Note 12.  Members’ Equity

 

The Company had common units authorized, issued and outstanding for the years ending December 31, 2018 and 2017.  

 

During 2017, the Company received $46,841,613 of contributions in exchange for common units in the Company. Additionally, $10,500,000 of common units were issued as part of purchase considerations to certain sellers of acquired businesses. 

 

During 2018, the Company received $19,591,373 of contributions in exchange for common units in the Company. 

 

Note 13. Other Liabilities

 

The Company is obligated under capital leases for vehicles which expire at various dates through 2020.

 

Future minimum payments required under the leases together with their present value as of December 31, 2018, are as follows:

 

| Years ending December 31:               |   |                                                                                                                 |
|-----------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------|
| 2019                                    |   | $                85,232              |
| 2020                                    |   |                    22,122  |
| Total minimum lease payments            |   |                  107,354             |
| Less amount representing interest       |   |                    (7,689) |
| Present value of minimum lease payments |   |                    99,665  |
| Less current portion                    |   |                    78,346  |
| Long-term portion                       |   | $                21,319              |

 

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Note 14.  Subsequent Events

 

In January 2019, PTN was unable to meet its obligation for scheduled interest payments and loan commitment fees in accordance with the terms of the First Lien Facilities and Second lien Facilities, resulting in default of the credit agreements. In response to this default, PTN’s lenders executed forbearance agreements and amended credit agreements with its First Lien Agent, the Second Lien Agent, each First Lien Lender and each Second Lien Lender. 

 

In April 2019, the First Lien Agent, the Second Lien Agent, each First Lien Lender and each Second Lien Lender entered into a Restructuring Support Agreement (RSA) with respect to a proposed restructuring of the Loan Parties, which provided for consensual restructuring of the Company’s debt and equity structure (Restructuring). This agreement was amended and restated in June 2019. 

 

At Restructuring closing, the Second Lien Lenders contributed cash of $15,000,000 on a pro-rata basis to the Company in exchange for $6,000,000 of voting Class A common units and $9,000,000 of non-voting preferred units. Preferred units have a preferred return of LIBOR (floor of 1%) plus 10% compounded annually, on unreturned preferred unit invested capital, and preferred distribution rights. The funds were then contributed by the Company to PTN and used for the following purposes: (i) to pay-off the First Lien revolving line of credit and accrued interest; (ii) to pay forbearance fees due on the First Lien credit agreement; (iii) to pay accrued interest on the First Lien term loan and revolving line of credit, fees and expenses; and (iv) to pay legal fees. The remaining funds were available for general business purposes.

 

The RSA and the Company’s amended and restated LLC agreement provide for the Second Lien Lenders to contribute an additional $10,000,000 on a delayed draw basis as needed by the Company. This additional funding, if needed, will be exchanged for $4,000,000 of voting Class A common units and $6,000,000 of non-voting preferred units.

 

In addition, the RSA and the Company’s amended and restated LLC agreement provide for Sale Carveout Rights and Transaction Bonus Rights, as defined in a separate Carveout, Intercreditor and Subordination Agreement and Release, for certain current and former employees, in the event of a future sale or change in control transaction.

The forbearance agreements were amended and extended up to the closing date, and terminated on June 28, 2019, upon execution of the restructured credit agreements. The restructured First Lien credit agreement and Second Lien credit agreement require the Company to maintain certain financial and non-financial covenants, as defined in the credit agreements. 

 

The Company assumed PTN’s obligation as the borrower under the restructured Second Lien credit agreement. 

 

The restructured credit agreements include the following terms:

 

| Restructured Terms                                                                                                        | Restructured First Lien 

Credit Agreement | Restructured Second Lien 

Credit Agreement |
|---------------------------------------------------------------------------------------------------------------------------|--------------------------------------------|---------------------------------------------|
| Borrower                                                                                                                  | PT Network, LLC                            | PT Network Intermediate Holdings, LLC       |
| Outstanding balance of term loans                                                                                         | $127,718,900                               | $54,221,183                                 |
| Revolving loan commitment                                                                                                 | $10,000,000                                | -                                           |
| Interest rates:                                                                                                           |                                       |                                        |
|     Index rate loans - cash                                                                           | Index rate plus 4.5%                       | Index rate plus 9%                          |
|     LIBOR loans - cash                                                                                | LIBOR (floor 1%) plus 5.5%                 | LIBOR (floor 1%) plus 10%                   |
|     PIK – subject to terms of credit    

    agreement | 2%                                         |                                        |
| Maturity date                                                                                                             | November 30, 2023                          | November 30, 2024                           |
| Loan amortization - quarterly                                                                                             | 0% through March 31, 2020                  | Due at maturity                             |
|                                                                                                                      | 0.25% through March 31, 2022               |                                        |
|                                                                                                                      | 0.50% thereafter                           |                                        |
|                                                                                                                      |                                       |                                        |

 

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Additionally, there are certain forbearance and restructuring fees that are due upon the maturity of these credit agreements. In accordance with the restructured credit agreements, aggregate future maturities required on long-term debt are as follows:

 

| Years ending December 31: |          |
|---------------------------|---------------|
| 2020                      | 957,892       |
| 2021                      | 1,277,189     |
| 2022                      | 2,235,081     |
| 2023                      | 124,022,763   |
| 2024                      | 57,690,888    |
|                      | $ 186,183,813 |

 

In June 2019, the Company entered into confidential settlement and release agreements with related parties. The first settlement agreement provides for payments totaling $4,000,000. The second settlement agreement provides for payments totaling $2,000,000. These settlements have been recognized as other expense on the consolidated statements of operations, and as other current and other non-current liabilities on the consolidated balance sheets at December 31, 2018. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Schedule I: Unaudited Condensed Parent Company Financial Statements

 

| PT Network Intermediate Holdings, LLC                  |                                                                                                                         |   |                                                                                                                         |
|--------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------|
| Unaudited Balance Sheets (Parent Company Only)         |                                                                                                                         |   |                                                                                                                         |
| December 31, 2018 and 2017                             |                                                                                                                         |   |                                                                                                                         |
|                                                   |                                                                                                                         |   |                                                                                                                         |
| Assets                                                 | 2018                                                                                                                         |   | 2017                                                                                                                         |
|                                                   |                                                                                                                         |   |                                                                                                                         |
| Current assets                                         | $                      - |   | $                      - |
|                                                   |                                                                                                                         |   |                                                                                                                         |
| Investment in consolidated subsidiaries                |         50,962,500                                                                   |   |         66,075,811                                                                   |
|                                                   |                                                                                                                         |   |                                                                                                                         |
| Total assets                                           | $     50,962,500                                                                                         |   | $     66,075,811                                                                                         |
|                                                   |                                                                                                                         |   |                                                                                                                         |
|                                                   |                                                                                                                         |   |                                                                                                                         |
| Liabilities                                            | $                      - |   | $                      - |
|                                                   |                                                                                                                         |   |                                                                                                                         |
| Total liabilities                                      | $                      - |   | $                      - |
|                                                   |                                                                                                                         |   |                                                                                                                         |
| Commitments and contingencies (see Note 2)             |                                                                                                                         |   |                                                                                                                         |
|                                                   |                                                                                                                         |   |                                                                                                                         |
| Equity                                                 |                                                                                                                         |   |                                                                                                                         |
| Members' equity                                        | $     50,962,500                                                                                         |   | $     66,075,811                                                                                         |
|                                                   |                                                                                                                         |   |                                                                                                                         |
| Total liabilities and members' equity                  | $     50,962,500                                                                                         |   | $     66,075,811                                                                                         |
|                                                   |                                                                                                                         |   |                                                                                                                         |
| See notes to unaudited condensed financial statements. |                                                                                                                         |   |                                                                                                                         |

 

 

21

 

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Schedule I: Unaudited Condensed Parent Company Financial Statements (continued)

 

| PT Network Intermediate Holdings, LLC                    |                                  |   |                                  |
|----------------------------------------------------------|---------------------------------------|--------|---------------------------------------|
| Unaudited Statements of Operations (Parent Company Only) |                                  |   |                                  |
| December 31, 2018 and 2017                               |                                  |   |                                  |
|                                                     |                                  |   |                                  |
|                                                     | 2018                                  |   | 2017                                  |
|                                                     |                                  |   |                                  |
| Equity in net loss of subsidiaries                       | $    (34,704,684) |   | $    (24,002,082) |
|                                                     |                                  |   |                                  |
| Total net loss                                           | $    (34,704,684) |   | $    (24,002,082) |
|                                                     |                                  |   |                                  |
| See notes to unaudited condensed financial statements.   |                                  |   |                                  |

 

22

 

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Schedule I: Unaudited Condensed Parent Company Financial Statements (continued)

 

| PT Network Intermediate Holdings, LLC                    |   |   |   |   |
|----------------------------------------------------------|--------|--------|--------|--------|
| Unaudited Statements of Cash Flows (Parent Company Only) |   |   |   |   |
| December 31, 2018 and 2017                               |   |   |   |   |

 

PT Network Intermediate Holdings, LLC (PTNIH) does not maintain a bank account as all cash transactions are at the PT Network, LLC (PTN) level or other consolidated subsidiaries. There was no cash activity for the years ended December 31, 2018 and 2017 at the PTNIH level. 

 

PTNIH had the following non-cash investing and financing activity for the period:

 

| Acquisition of additional equity interest in a consolidated subsidiary in exchange for issuance of common interests in PTNIH |   | $     10,500,000 |
|------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|

 

Notes to Unaudited Schedule I

 

Note 1. Basis of Presentation

 

PTNIH is a holding company and conducts substantially all of its business operations through its subsidiaries. These condensed Parent Company financial statements and related notes have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X, as the restricted net assets of the subsidiaries of PTNIH exceed 25% of the consolidated net assets of PTNIH as stipulated by Rule 5-04, Section I from Regulation S-X. Any information, other than listed herein, is omitted as the information is either not applicable or has been furnished in the consolidated financial statements or notes thereto. These statements should be read in conjunction with the consolidated financial statements and the notes to the consolidated financial statements.

 

Note 2. Guarantees

 

All loans under the credit agreements discussed in Note 6 of the Consolidated Financial Statements are collateralized by all of PT Network, LLC's assets and PTNIH’s member equity interest.

 

See Note 6 of the Consolidated Financial Statements in this Report for information regarding the guarantees provided by PTNIH.

 

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