NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(dollars in thousands, except per share amounts)
1. BASIS OF PRESENTATION AND ORGANIZATION
Business
American Renal Associates Holdings, Inc. (“the Company”) owns 100% of the membership units of its subsidiary American Renal Holdings Intermediate Company, LLC, which itself has no assets other than 100% of the shares of capital stock of American Renal Holdings Inc. All of the Company’s operating activities are conducted through American Renal Holdings Inc. and its operating subsidiaries (“ARH”).
The Company is a national provider of kidney dialysis services for patients suffering from chronic kidney failure, also known as end stage renal disease (“ESRD”). As of March 31, 2020, the Company owned and operated 247 dialysis clinics treating 17,385 patients in 27 states and the District of Columbia. The Company’s operating model is based on shared ownership of its facilities with physicians, known as nephrologists, who specialize in treating kidney-related diseases in the local market served by the clinic. Substantially all clinics are maintained as a separate joint venture (“JV”) in which the Company has a controlling interest and its local nephrologist partners have noncontrolling interests.
Basis of Presentation and Consolidation
The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. The Company’s consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and variable interest entities (“VIEs”) that operate its clinics (“joint ventures”). For its joint ventures, the Company has determined that a majority voting interest and/or contractual rights granted to it provide the Company with the ability to direct the activities of these entities, and therefore the Company has determined that it is the primary beneficiary of these entities. Accordingly, the financial results of these joint ventures are fully consolidated into the Company’s operating results. The equity interests of the outside investors in the equity and results of operations of these consolidated entities are accounted for and presented as noncontrolling interests. All significant intercompany balances and transactions of the Company’s wholly owned subsidiaries and joint ventures, including management fees from subsidiaries, are eliminated in consolidation. Refer to “Note 6 — Variable Interest Entities.”
In the opinion of management, the Company has prepared the accompanying unaudited consolidated financial statements on the same basis as its audited consolidated financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. These unaudited consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2019 (“Form 10-K”). Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.
Use of Estimates
The preparation of financial statements in conformity with U.S GAAP requires the use of estimates and assumptions that affect the reported amounts of revenues, expenses, assets, liabilities and contingencies. Although actual results in subsequent periods will differ from these estimates, such estimates are developed based on the best information available to management and management’s best judgments at the time made. All significant assumptions and estimates underlying the reported amounts in the consolidated financial statements and accompanying notes are regularly reviewed and updated. Changes in estimates are reflected in the financial statements based upon ongoing actual experience, trends or subsequent settlements and realizations, depending on the nature and predictability of the estimates and contingencies.
The most significant assumptions and estimates underlying these financial statements and accompanying notes involve revenue recognition and provisions for uncollectible accounts, impairments and valuation adjustments, the useful lives of property and equipment, fair value measurements, accounting for income taxes, acquisition accounting valuation estimates, commitments and contingencies and stock‑based compensation. Specific risks and contingencies related to these estimates are further addressed within the notes to the consolidated financial statements.
AMERICAN RENAL ASSOCIATES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
(dollars in thousands, except per share amounts)
Segment Information
Accounting pronouncements establish standards for the manner in which public companies report information about operating segments in annual and interim financial statements. Operating segments are identified as components of an enterprise for which separate discrete financial information is evaluated regularly by the chief operating decision-maker in making decisions about how to allocate resources and assess performance. Based on its operating management and financial reporting structure, the Company has determined that it is operating as one reportable business segment, the ownership and operation of dialysis clinics, all of which are located in the United States.
Accounting Pronouncements to be Adopted
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, to reduce complexity in accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, and early application is permitted. The Company is still evaluating certain aspects of this ASU as well as the impact it may have on its consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and related clarifying standards, which replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The FASB issued ASU 2019-10, which updated the effective date for smaller reporting companies to fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is still evaluating certain aspects of this ASU as well as the impacts it may have on its consolidated financial statements and related disclosures.
2. REVENUE
The major component of the Company’s revenues is derived from dialysis treatments and related services. Sources of payment of revenues are principally from government-based programs, including Medicare, Medicaid and state workers’ compensation programs, commercial insurance payors and other sources such as the U.S. Department of Veterans Affairs (the “VA”), hospitals as well as patient self-pay. Patient service operating revenues are reported at the amounts that reflect the consideration to which the Company expects to be entitled in exchange for providing dialysis treatments and related services. Amounts may include variable consideration for discounts, price concessions and retroactive revenue adjustments due to new information obtained, such as actual payment receipt, as well as settlement of audits, reviews and investigations. Third-party payors, patients and other payors are generally billed at least monthly, typically in the month the dialysis treatment is performed, and payment is due upon receipt.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is defined as the unit of account under ASC 606, Revenue from Contracts with Customers. The Company has determined that one performance obligation exists, a single dialysis treatment, which is satisfied over time as a dialysis treatment is provided. While the Company provides patients with other related services, they are considered a bundle of interrelated services with dialysis treatment as the primary service. Revenue is measured using the output method, which is based upon the delivery of a dialysis treatment to the patient. The Company believes that this method reflects the satisfaction of the performance obligation. All performance obligations are satisfied at the end of each reporting period.
The Company maintains a usual and customary fee schedule for dialysis treatment and other related services. However, the transaction price is typically recorded at a discount to the fee schedule. The transaction prices for Medicare and Medicaid programs are based on predetermined net realizable rates per treatment that are established by statutes or regulations. For Medicare programs, the Company receives 80% of the payment directly from Medicare as established under the government’s bundled payment system. The transaction prices for contracted payors are based on contracted rates. For other payors, the Company determines the transaction price based on usual and customary rates for services provided, reduced by contractual and other adjustments which result from differences between the rates charged for services performed and expected reimbursements from third-party payors, discounts provided to uninsured patients in accordance with the Company’s policy,
AMERICAN RENAL ASSOCIATES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
(dollars in thousands, except per share amounts)
and/or implicit price concessions. The Company determines its estimates of contractual allowances and discounts based on contractual agreements, regulatory compliance and historical collection experience. The Company determines its estimates of implicit price concessions based on its historical collection experience with each payor, and where no prior experience exists, it considers information from the patient’s health plan. Amounts billed that have not yet been collected and that meet the conditions for unconditional right to payment are presented as net accounts receivable.
Contractual and other adjustments as well as discounts with third-party payors are considered variable consideration and are included in the determination of the estimated transaction price for providing patient care. In assessing the probability of these claim payments, the Company considers previous payment history when recording a reserve, generally at the patient level, that results in an estimate of expected revenue such that it is probable that a significant revenue reversal will not occur in future periods.
There are significant challenges associated with estimating revenue, with certain transactions taking several years to resolve. Estimates are subject to ongoing insurance coverage changes, geographic coverage differences, differing interpretations of contract coverage and other payor issues, as well as other issues including determining applicable primary and secondary coverage, changes in patient coverage and coordination of benefits. As these estimates are refined over time, both positive and negative adjustments to revenue are recognized in the current period.
Settlements with third-party payors for retroactive adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing dialysis treatments and related services. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and the Company’s historical settlement activity, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty periods end and as adjustments become known (i.e., new information becomes available), or as years are settled or are no longer subject to such audits, reviews, and investigations.
Adjustments arising from a change in the transaction price in instances where the performance obligation was satisfied prior to January 1, 2020 were immaterial for the three months ended March 31, 2020. Adjustments arising from a change in the transaction price in instances where the performance obligation was satisfied prior to January 1, 2019 were immaterial for the three months ended March 31, 2019. These changes in transaction price are mostly attributable to an adjustment for balances with non-contracted payors. When the Company obtains new information, such as actual cash receipts, it adjusts the estimated transaction price.
Amounts pending approval from third-party payors associated with Medicare recovery claims as of March 31, 2020 and December 31, 2019, other than standard monthly billing, consisted of $20,739 and $17,509, respectively. As of March 31, 2020, $9,404 is classified as Prepaid expenses and other current assets and $11,335 is classified as Other long-term assets. As of December 31, 2019, $9,284 is classified as Prepaid expenses and other current assets and $8,225 is classified as Other long-term assets.
The composition of patient care service revenue by payment source is as follows:
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Percentage of Revenues by Payor:
|
2020
|
|
2019
|
Medicare and Medicare Advantage
|
68
|
%
|
|
70
|
%
|
Commercial and other(1)
|
27
|
%
|
|
25
|
%
|
Medicaid and Managed Medicaid
|
5
|
%
|
|
4
|
%
|
Other(2)
|
—
|
%
|
|
1
|
%
|
|
100
|
%
|
|
100
|
%
|
_____________________
|
|
(1)
|
Principally commercial insurance companies and also includes the VA.
|
|
|
(2)
|
Other payments of revenues by payor include hospitals and patient self-pay. “Patient self-pay” revenues consist of payments received directly from patients who are either uninsured or self-pay a portion of the bill.
|
AMERICAN RENAL ASSOCIATES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
(dollars in thousands, except per share amounts)
3. ASSETS HELD FOR SALE
As of March 31, 2020 and December 31, 2019, the Company presented certain clinics in Pennsylvania, Ohio and New Jersey and other property that met the criteria as held for sale as a single asset and liability in its financial statements and recognized a valuation allowance, as necessary, to recognize the net carrying amount at the lower of cost or fair value, less cost to sell. The Company determined that there was a reduction in the valuation allowance of $505 for the three months ended March 31, 2020, which is included as a reduction to Depreciation, amortization and impairment on the Consolidated Statement of Operations. The Company classified the combined carrying value of all assets that met the criteria of held for sale of $49,197 and $50,099 as of March 31, 2020 and December 31, 2019, respectively, to Current assets held for sale on the Consolidated Balance Sheets and classified the combined carrying value of all liabilities that met the criteria of held for sale of $4,291 and $5,767 as of March 31, 2020 and December 31, 2019, respectively, to Current liabilities held for sale on the Consolidated Balance Sheets. These assets and liabilities held for sale include certain clinics in Pennsylvania, Ohio and New Jersey accounted for, in the aggregate, $6,773 of the Company’s patient service operating revenues for the three months ended March 31, 2020.
The following is a summary of the major categories of assets and liabilities that have been reclassified to held for sale on the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
|
As of December 31, 2019
|
Inventories
|
$
|
269
|
|
|
$
|
265
|
|
Prepaid expenses and other current assets
|
20
|
|
|
20
|
|
Property and equipment, net
|
11,036
|
|
|
11,245
|
|
Operating lease right-of-use assets
|
3,970
|
|
|
5,408
|
|
Goodwill
|
34,184
|
|
|
34,184
|
|
Valuation allowance on disposal group(1)
|
(282
|
)
|
|
(1,023
|
)
|
Total assets held for sale
|
$
|
49,197
|
|
|
$
|
50,099
|
|
|
|
|
|
Operating lease liabilities
|
$
|
4,291
|
|
|
$
|
5,767
|
|
Total liabilities held for sale
|
$
|
4,291
|
|
|
$
|
5,767
|
|
(1) The Company adjusted the carrying value to fair value less costs to sell for certain held for sale assets.
4. FAIR VALUE MEASUREMENTS
The Company’s derivatives (interest rate swap and interest rate cap agreements, income tax receivable agreement and noncontrolling interests subject to put provisions) are accounted for at fair value and are classified and disclosed in one of the following three categories:
Level 1: Financial instruments with unadjusted, quoted prices listed on active market exchanges.
Level 2: Financial instruments determined using prices for recently traded financial instruments with similar underlying terms, as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3: Financial instruments not actively traded on a market exchange. This category includes situations where there is little, if any, market activity for the financial instrument. The prices are determined using significant unobservable inputs or valuation techniques.
The asset or liability fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. There were no changes in the methodologies used at March 31, 2020.
AMERICAN RENAL ASSOCIATES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
(dollars in thousands, except per share amounts)
Derivative agreements—See “Note 8 — Debt” for a discussion of the Company’s methodology for estimating fair value of interest rate swap and interest rate cap agreements.
Income Tax Receivable Agreement—The fair value of the Company’s income tax receivable agreement, entered into on April 26, 2016 in connection with the Company’s initial public offering (“TRA”), relies upon both Level 2 data and Level 3 data. The liability is remeasured at fair value each reporting period with the change in fair value recognized as Change in fair value of income tax receivable agreement in the Company’s Consolidated Statements of Operations. The fair value is calculated using a Monte Carlo simulation-based approach that relies on significant assumptions about the Company’s stock price, stock volatility and risk-free rate as well as the timing and amounts of options exercised. Changes in assumptions based on future events, including the price of the Company’s common stock, will impact the fair value for the TRA. See “Note 13 — Related Party Transactions” for further discussion of the TRA.
Noncontrolling interests subject to put provisions—See “Note 7 — Noncontrolling Interests Subject to Put Provisions” for a discussion of the Company’s methodology for estimating fair value of noncontrolling interests subject to put provisions.
Transfers among levels are calculated on values as of the transfer date. There were no transfers into or out of Level 3 during the three months ended March 31, 2020 and the year ended December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets
|
|
|
|
|
|
|
|
Interest rate derivative agreements (included in Prepaid expenses and other current assets)
|
$
|
153
|
|
|
$
|
—
|
|
|
$
|
153
|
|
|
$
|
—
|
|
Total Assets
|
$
|
153
|
|
|
$
|
—
|
|
|
$
|
153
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Tax Receivable Agreement Liability (included in Income tax receivable agreement payable with a portion included in Accrued expenses and other current liabilities)
|
$
|
1,300
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,300
|
|
Interest rate swap agreement (included in Accrued expense and other current liabilities)
|
2,235
|
|
|
—
|
|
|
2,235
|
|
|
—
|
|
Interest rate swap agreement (included in Other long-term liabilities)
|
632
|
|
|
—
|
|
|
632
|
|
|
—
|
|
Total Liabilities
|
$
|
4,167
|
|
|
$
|
—
|
|
|
$
|
2,867
|
|
|
$
|
1,300
|
|
Temporary Equity
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests subject to put provisions
|
$
|
127,737
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
127,737
|
|
AMERICAN RENAL ASSOCIATES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
(dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets
|
|
|
|
|
|
|
|
Interest rate derivative agreements (included in Prepaid expenses and other current assets)
|
$
|
143
|
|
|
$
|
—
|
|
|
$
|
143
|
|
|
$
|
—
|
|
Total Assets
|
$
|
143
|
|
|
$
|
—
|
|
|
$
|
143
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Tax Receivable Agreement Liability (included in Income tax receivable agreement payable)
|
$
|
3,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,000
|
|
Interest rate swap agreement (included in Accrued expenses and other current liabilities)
|
783
|
|
|
—
|
|
|
783
|
|
|
—
|
|
Interest rate swap agreement (included in Other long-term liabilities)
|
725
|
|
|
—
|
|
|
725
|
|
|
—
|
|
Total Liabilities
|
$
|
4,508
|
|
|
$
|
—
|
|
|
$
|
1,508
|
|
|
$
|
3,000
|
|
Temporary Equity
|
|
|
|
|
|
|
|
|
Noncontrolling interests subject to put provisions
|
$
|
126,483
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
126,483
|
|
The following table provides the fair value rollforward for the three months ended March 31, 2020 for the TRA liability, which is classified as a Level 3 financial instrument:
|
|
|
|
|
Balance at December 31, 2019
|
$
|
3,000
|
|
Options exercised and dividend equivalent payment vesting
|
(1
|
)
|
Total realized/unrealized losses:
|
|
Included in earnings and reported as Change in fair value of income tax receivable agreement
|
(1,699
|
)
|
Balance at March 31, 2020
|
$
|
1,300
|
|
There are no unrealized gains or losses reported in Other Comprehensive Income related to Level 3 financial instruments.
The carrying amounts reported in the accompanying Consolidated Balance Sheets for cash, accounts receivable, accounts payable and accrued liabilities approximate fair value because of their short-term nature.
The fair value of the Company’s debt is estimated using Level 2 inputs based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The Company estimated the fair value of the 2017 Term B Loan Facility, as defined in “Note 8 — Debt” to be $362,780 as of March 31, 2020, compared to a carrying value of $426,800. As of December 31, 2019, the Company estimated the fair value of the first lien term loans to be $407,550 compared to the carrying value of $429,000.
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued compensation and benefits consist of the following:
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Accrued compensation
|
$
|
17,913
|
|
|
$
|
24,526
|
|
Accrued vacation pay
|
14,937
|
|
|
12,670
|
|
|
$
|
32,850
|
|
|
$
|
37,196
|
|
Accrued expenses and other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Refunds due to payors
|
$
|
25,132
|
|
|
$
|
20,085
|
|
Other
|
16,043
|
|
|
10,935
|
|
Accrued settlement (Note 15)
|
6,573
|
|
|
6,573
|
|
|
$
|
47,748
|
|
|
$
|
37,593
|
|
6. VARIABLE INTEREST ENTITIES
The Company has determined that all of the entities it is associated with that qualify as VIEs must be included in its consolidated financial statements. For its joint ventures, the Company has determined that contractual rights granted to it provide the Company with the ability to direct the most significant activities of these entities, including development, administrative and management services. In some cases, the contractual agreements include financial terms that may result in the Company absorbing more than an insignificant amount of the entities’ expected losses. Therefore, the Company has determined that it is the primary beneficiary of these entities. Accordingly, the financial results of these joint ventures are fully consolidated into the Company’s operating results. The equity interests of the outside investors in the equity and results of operations of these consolidated entities are accounted for and presented as noncontrolling interests.
Under U.S. GAAP, VIEs typically include entities for which (i) the entity’s equity is not sufficient to finance its activities without additional subordinated financial support; (ii) the equity holders as a group lack the power to direct the activities that most significantly influence the entity’s economic performance, the obligation to absorb the entity’s expected losses, or the right to receive the entity’s expected returns; or (iii) the voting rights of some investors are not proportional to their obligations to absorb the entity’s losses. The analysis upon which these consolidation determinations rest is complex, involves uncertainties, and requires significant judgment on various matters, some of which could be subject to different interpretations.
The Company relies on the operating activities of certain entities for which it does not own the majority voting interest, but over which it has indirect influence and of which it is considered the primary beneficiary. These entities are subject to the consolidation guidance applicable to VIEs. As of March 31, 2020, these consolidated financial statements include total assets of these VIEs of $17,445 and total liabilities of these VIEs to third parties of $10,017.
Term Loan Holdings
The Company has determined that it is not the primary beneficiary under VIE accounting guidance for Term Loan Holdings LLC (“Term Loan Holdings”). Based on its involvement with Term Loan Holdings, the Company does not have the power to direct the activities which most significantly impact Term Loan Holding’s economic performance, and therefore this entity is not included in the Company’s consolidated financial statements. The Company’s financial responsibility to repay the loans under its guarantee of a proportionate share of each clinic’s borrowing was not a factor in the Company’s assessment of the power criterion. The maximum exposure to loss with respect to Term Loan Holdings is limited to the proportion of the assigned clinic loans which the Company guarantees. See “Note 13 — Related Party Transactions.”
7. NONCONTROLLING INTERESTS SUBJECT TO PUT PROVISIONS
The Company is party to agreements which contain put provisions which require the Company to purchase a portion or all of the noncontrolling interests held by third parties in certain of its consolidated subsidiaries. These put provisions are exercisable at the third-party owners’ discretion either within specified periods or, in certain cases, upon the occurrence of specific events, including the sale of all or substantially all of the Company’s assets, closure of the clinic, change of control, departure of key executives, third-party members’ death, disability, bankruptcy, retirement, or if third-party members are dissolved and other events, which could accelerate vesting of the put. The Company has evaluated the applicable terms and determined that none of the put rights are mandatorily redeemable. Some of these put rights accelerated as a result of the Company’s IPO. If the remaining unexercised put rights were exercised, the Company would be required to purchase all or a portion of the third-party owners’ noncontrolling interests at the estimated fair value as defined within the put provisions. The majority of the noncontrolling interests subject to put provisions are reported at the greater of the carrying value or estimated
AMERICAN RENAL ASSOCIATES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
(dollars in thousands, except per share amounts)
fair value for accounting purposes, while some of the noncontrolling interests subject to put provisions is stated at the contractual estimated fair value, as outlined in each specific put provision (“redemption value”). The put rights of such noncontrolling interest holders were determined based on inputs that are not readily available in public markets or able to be derived from information available in publicly quoted markets. As such, the Company categorized the put options of the noncontrolling interest holders as Level 3.
The fair value of the noncontrolling interests subject to these put provisions is estimated using the Income, Market and Asset Based approaches. The fair value derived from the methods used is evaluated and weighted, as appropriate, considering the reasonableness of the range of values indicated. Under the Income approach, fair value may be determined by utilizing a Weighted Average Cost of Capital (14.50% - 20.00%) to discount the expected cash flows to a single present value amount using current expectations about those future amounts. Under the Market approach, fair value may be determined by reference to multiples of market-comparable companies or transactions, including revenue and earnings before interest, taxes, depreciation and amortization (“EBITDA”). The estimated fair values of the interests subject to these put provisions can fluctuate, and the implicit multiples at which these obligations may be settled may vary depending upon market conditions and access to the credit and capital markets, which can impact the level of competition for dialysis and non-dialysis related businesses and the economic performance of these businesses.
The Company’s computation of the difference between the redemption value and estimated fair value for accounting purposes of the related noncontrolling interests as of March 31, 2020 and December 31, 2019 is set forth below:
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Redemption value
|
$
|
17,303
|
|
|
$
|
17,303
|
|
Estimated fair values for accounting purposes
|
1,389
|
|
|
1,647
|
|
Difference between the redemption value and estimated fair value for accounting purposes of the related noncontrolling interests
|
$
|
15,914
|
|
|
$
|
15,656
|
|
In addition, the tables below set forth a reconciliation of noncontrolling interests subject to put provisions:
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Noncontrolling interests subject to put provisions stated at estimated fair value for accounting purposes
|
$
|
111,823
|
|
|
$
|
110,827
|
|
Difference between the redemption value and estimated fair value for accounting purposes of the related noncontrolling interests
|
15,914
|
|
|
15,656
|
|
Noncontrolling interests subject to put provisions stated at maximum redemption value
|
$
|
127,737
|
|
|
$
|
126,483
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Change in estimated fair value for accounting purposes
|
$
|
3,586
|
|
|
$
|
412
|
|
Change in the difference between the redemption value and estimated fair value for accounting purposes of the related noncontrolling interests
|
258
|
|
|
741
|
|
Total change in fair value of noncontrolling interests subject to put provisions stated at maximum redemption
|
$
|
3,844
|
|
|
$
|
1,153
|
|
AMERICAN RENAL ASSOCIATES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
(dollars in thousands, except per share amounts)
8. DEBT
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
2017 Credit Agreement - Term B Loan Facility
|
$
|
426,800
|
|
|
$
|
429,000
|
|
2017 Credit Agreement - Revolving Credit Facility
|
100,000
|
|
|
64,500
|
|
Assigned Clinic Loans due to Term Loan Holdings
|
250
|
|
|
866
|
|
Other Term Loans
|
90,107
|
|
|
92,958
|
|
Other Lines of Credit
|
4,763
|
|
|
5,006
|
|
Finance Lease Obligations
|
7,690
|
|
|
7,780
|
|
|
629,610
|
|
|
600,110
|
|
Less: discounts and fees, net of accumulated amortization
|
(11,717
|
)
|
|
(12,496
|
)
|
Less: current maturities
|
(38,011
|
)
|
|
(38,779
|
)
|
|
$
|
579,882
|
|
|
$
|
548,835
|
|
Scheduled maturities of long-term debt as of March 31, 2020 are as follows:
|
|
|
|
|
2020 (remainder)
|
$
|
29,139
|
|
2021
|
27,998
|
|
2022
|
121,426
|
|
2023
|
19,214
|
|
2024
|
418,142
|
|
Thereafter
|
13,691
|
|
|
$
|
629,610
|
|
During the three months ended March 31, 2020, the Company made mandatory principal payments of $2,200 under the 2017 Credit Agreement (as defined below).
2017 Credit Agreement
On June 22, 2017, ARH and American Renal Holdings Intermediate Company, LLC (“ARHIC”) entered into a new credit agreement (the “2017 Credit Agreement”) to refinance the credit facilities under ARH’s then existing prior first lien credit agreement. The 2017 Credit Agreement provides ARH with (a) a $100,000 senior secured revolving credit facility (the “2017 Revolving Credit Facility”); (b) a $440,000 senior secured term B loan facility (the “2017 Term B Loan Facility”), and (c) an uncommitted incremental accordion facility equal to the sum of the greater of (i) $125,000 or (ii) 100% of Consolidated EBITDA (as defined in the 2017 Credit Agreement) plus an amount such that certain leverage ratios will not be exceeded after giving pro forma effect to the increase. The 2017 Revolving Credit Facility is scheduled to mature in June 2022, and the 2017 Term B Loan Facility is scheduled to mature in June 2024. The maturity dates under the 2017 Revolving Credit Facility and the 2017 Term Loan Facility are subject to extension with lender consent according to the terms of the 2017 Credit Agreement.
ARH borrowed the full amount of the 2017 Term B Loan Facility and used such borrowings to repay the outstanding balances under the existing prior first lien credit agreement and to pay a portion of the transaction costs and expenses.
The obligations of ARH under the 2017 Credit Agreement are guaranteed by ARHIC and all of its existing and future wholly owned domestic subsidiaries (collectively, the “Guarantors”) and secured by a pledge of all of ARH’s capital stock and substantially all of the assets of ARH and the Guarantors, including their respective interests in their joint ventures.
On April 26, 2019, ARH entered into an amendment (the “Amendment”) to the 2017 Credit Agreement, waiving certain actual or potential defaults and amending certain covenants and other provisions. Among other things, the waiver
AMERICAN RENAL ASSOCIATES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
(dollars in thousands, except per share amounts)
addressed actual or potential defaults that may have resulted from the Company’s failure to (i) satisfy the maximum consolidated net leverage ratio when required, and (ii) deliver when required certain prior period financial information prepared in accordance with GAAP. In connection with the Amendment, the Company paid $6,021 of fees during the quarter ended June 30, 2019 and agreed to increase the interest rate on borrowings under the 2017 Credit Agreement.
2017 Term B Loan Facility
The 2017 Credit Agreement includes provisions requiring ARH to offer to prepay term B loans in an amount equal to (i) the net cash proceeds above certain thresholds received from (a) asset sales and (b) casualty events resulting in the receipt of insurance proceeds, subject to customary provisions for the reinvestment of such proceeds, (ii) the net cash proceeds from the incurrence of debt not otherwise permitted under the 2017 Credit Agreement, and (iii) a percentage of consolidated excess cash flow retained in the business from the preceding fiscal year minus voluntary prepayments. There is no prepayment required as of March 31, 2020.
ARH is required to make principal payments under the 2017 Term B Loan Facility in equal quarterly installments of $2,200 beginning January 1, 2020.
The 2017 Term B Loan Facility is scheduled to mature in June 2024. The principal amount of the term B loans under the 2017 Term B Loan Facility (“term B loan”) amortize in equal quarterly installments in an aggregate annual amount of (i) 1.00% of the original principal amount of such term B loans through December 31, 2019 and (ii) 2.00% thereafter.
For the period from April 26, 2019 until September 4, 2019, the date on which ARH has delivered the consolidated unaudited financial statements for the fiscal quarter ended March 31, 2019 (the “Covenant Reversion Date”), the term B loans under the 2017 Term B Loan Facility bore interest at a rate equal to, at ARH’s option, either (a) an alternate base rate equal to the higher of (1) the prime rate in effect on such day, (2) the federal funds effective rate plus 0.50% or (3) the Eurodollar rate applicable for a one-month interest period plus 1.00% (collectively, the “ABR Rate”), plus an applicable margin of 4.50% (increased from 2.25% prior to the Amendment), or (b) LIBOR, adjusted for changes in Eurodollar reserves (“Eurodollar Rate”), plus an applicable margin of 5.50% (increased from 3.25% prior to the Amendment). From and after the Covenant Reversion Date, the applicable margin on term B loans is 4.00% for ABR Rate loans and 5.00% for Eurodollar rate loans. As of March 31, 2020, interest payable quarterly was 5.99% per annum.
2017 Revolving Credit Facility
The 2017 Revolving Credit Facility of $100,000 is available through its maturity date of June 2022. Any outstanding loans under the 2017 Revolving Credit Facility bear interest at a rate equal to, at ARH’s option, the ABR Rate or LIBOR, adjusted for changes in Eurodollar reserves, plus, in each case, an applicable margin priced off a grid based upon the consolidated total net leverage ratio of ARH and its restricted subsidiaries. The commitment fee applicable to undrawn revolving commitments under the 2017 Revolving Credit Facility is also priced off a grid based upon the consolidated total net leverage ratio of ARH and its restricted subsidiaries, and as of March 31, 2020, the fee was 0.50%. In the three months ended March 31, 2020, the Company borrowed an additional $35,500 under its 2017 Revolving Credit Facility for a total of $100,000 of borrowings outstanding as of March 31, 2020 representing the full amount available thereunder, which had an interest rate of 5.48%.
For the period from April 26, 2019 until the Covenant Reversion Date, outstanding loans under the 2017 Revolving Credit Facility bore interest at a rate equal to, at ARH’s option, either (a) the ABR Rate, plus an applicable margin of 4.25%, or (b) the Eurodollar Rate, plus an applicable margin of 5.25%, instead of pricing each such margin off a grid based upon the consolidated net leverage ratio of ARH and its restricted subsidiaries. From and after the Covenant Reversion Date, any outstanding loans under the revolving credit facility bear interest at a rate equal to, at ARH’s option, either the ABR Rate or the Eurodollar Rate, plus, in each case, an applicable margin priced off a grid based upon the consolidated net leverage ratio of ARH and its restricted subsidiaries, which margin is 1.75% higher than the applicable margin prior to the Amendment. Prior to the Amendment, the commitment fee applicable to undrawn revolving commitments under the 2017 Revolving Credit Facility was priced off a grid based upon the consolidated net leverage ratio of ARH and its restricted subsidiaries. For the period from April 26, 2019 until the Covenant Reversion Date, the commitment fee applicable to undrawn revolving commitments under the 2017 Revolving Credit Facility was 0.50% without regard to the consolidated net leverage ratio.
AMERICAN RENAL ASSOCIATES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
(dollars in thousands, except per share amounts)
The 2017 Credit Agreement contains customary events of default, the occurrence which would permit the lenders to accelerate payment of the full amounts outstanding. Additionally, the 2017 Credit Agreement contains customary representations and warranties, affirmative covenants and negative covenants, including restrictive financial and operating covenants. These include covenants that restrict ARH’s and its restricted subsidiaries’ ability to complete acquisitions, pay cash dividends, incur indebtedness, make investments, sell assets and take certain other corporate actions. The 2017 Credit Agreement events of default, representations and warranties, mandatory prepayments and affirmative and negative covenants are substantially the same as those under the prior first lien credit agreement; provided that the 2017 Credit Agreement contains additional exceptions to the negative covenants that increase the amount ARH and its restricted subsidiaries can use to make restricted payments and increases the flexibility for ARH and its restricted subsidiaries to undertake permitted acquisitions. As of March 31, 2020, ARH was in compliance with all covenants. The 2017 Credit Agreement includes a springing maximum consolidated net leverage ratio financial covenant of 6:1 for the benefit of the lenders under the 2017 Revolving Credit Facility (the “Revolver Financial Covenant”) and, following the Amendment a maximum consolidated net leverage ratio maintenance financial covenant of 7:1 for the benefit of the lenders under both the 2017 Revolving Credit Facility and the 2017 Term B Loan Facility. As of March 31, 2020, the Company was in compliance with the applicable consolidated net leverage ratio.
The Amendment also waived any default or events of default that may have resulted from ARH underpaying any interest payments or letter of credit fees based on the application of a lower applicable rate due to the delivery, prior to the effective date of the Amendment, of inaccurate financial statements if such inaccuracy arose out of the Inaccurate Matters (as defined below). ARH paid accrued interest and letter of credit fees that were ultimately determined to be payable but for such lower applicable rate. The Amendment waived inaccuracies of certain representations and warranties previously made to the extent that the inaccuracies were a result of (i) inaccuracies or errors in financial reporting, accounting and related metrics described in the Current Report on Form 8-K filed by ARAH with the Securities and Exchange Commission on March 27, 2019 (the “March 27 Form 8-K”) or otherwise identified pursuant to, or as a result of, the review of the audit committee of the board of directors of ARAH described in the March 27 Form 8-K, and (ii) any weaknesses in internal control over financial reporting related to the foregoing (together, the “Inaccurate Matters”).
The Company’s clinic-level debt includes third-party term loans and lines of credit, as well as the Assigned Clinic Loans. The loan documents for these clinic-level loans generally include representations and warranties, affirmative covenants and negative covenants, including restrictive financial and operating covenants. The Company has in the past and may in the future be required to seek waivers or amendments to the loan documents for one or more of the Company’s clinics as a result of clinic performance issues or otherwise. For example, due to the factors that led to the restatement of previously issued consolidated financial statements (the “Restatement”) and the Company’s material weaknesses, the Company failed to, among other things, timely deliver certain financial statements to these lenders as required, resulting in defaults under the applicable loan documents. The Company obtained individual waivers or forbearances for the Assigned Clinic Loans and substantially all of its third-party clinic lenders. More recently, the Company entered into agreements on May 6, 2020 with certain of its third-party clinic lenders waiving defaults arising from certain financial covenants at the clinic level. Pursuant to these agreements, the Company agreed to prepay up to an aggregate of $9,917 during 2020 and up to an aggregate of $13,619 during the second quarter of 2021 of the outstanding clinic-level debt, depending on the satisfaction of certain financial covenants for these clinic loans. Of these amounts, the Company is responsible for up to $5,676 and $6,893, respectively, and the Company's physician partners are responsible for the remainder.
Interest Rate Swap Agreement
In March 2017, ARH entered into a forward starting interest rate swap agreement (the “2017 Swap”) with a notional amount of $133,000, as a means of fixing the floating interest rate component on $440,000 of its variable-rate debt under the 2017 Term B Loan Facility, with an effective date of March 31, 2018. The 2017 Swap is designated as a cash flow hedge, with a termination date of March 31, 2021.
As a result of the application of hedge accounting treatment, to the extent the 2017 Swap is effective, the unrealized gains and losses related to the derivative instrument are recorded in accumulated other comprehensive income (loss) and are reclassified into operations in the same period in which the hedged transaction affects earnings. As a result of adopting ASU 2017-12, beginning in the first quarter of 2019, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness is recorded in accumulated other comprehensive income (loss). Those amounts are reclassified to earnings in the same income statement line item that is used to present the earnings effect of the hedged item when the hedged item affects earnings. Hedge effectiveness is tested quarterly. As of March 31, 2020, the instruments were perfectly effective and no amounts were reclassified from accumulated other comprehensive income (loss) into income during
AMERICAN RENAL ASSOCIATES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
(dollars in thousands, except per share amounts)
the three months ended March 31, 2020. Neither the Company nor ARH uses derivative instruments for trading or speculative purposes. The unrealized pre‑tax loss (gain) of $2,148 and $(140) related to the interest rate swap agreement was recorded in accumulated other comprehensive loss during the three months ended March 31, 2020 and 2019, respectively. See “Note 4 — Fair Value Measurements” for the fair value of the derivative instruments and location on the balance sheet as of March 31, 2020 and December 31, 2019.
Effective May 7, 2019, the Company obtained an amendment and waiver related to the 2017 Interest Rate Swap Agreement. The amendment waived any defaults or potential default under the Swap Agreement arising from ARH’s prior delivery of certain inaccurate financial statements, any associated breach of representations and warranties regarding the accuracy of such financial statements, and the delay in the Company’s filing of its Annual Report on Form 10-K for the year ended December 31, 2018.
Interest Rate Cap Agreements
In March 2017, ARH entered into two interest rate cap agreements (the “Caps”) with notional amounts totaling $147,000, as a means of capping the floating interest rate component on $440,000 of its variable-rate debt under the 2017 Term B Loan Facility. The Caps are designated as a cash flow hedge, with a termination date of March 31, 2021.
As a result of the application of hedge accounting treatment, to the extent the Caps are effective, the unrealized gains and losses related to the derivative instrument are recorded in accumulated other comprehensive income (loss) and are reclassified into operations in the same period in which the hedged transaction affects earnings. As a result of adopting ASU 2017-12, beginning in the first quarter of 2019, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness is recorded in accumulated other comprehensive income (loss). Those amounts are reclassified to earnings in the same income statement line item that is used to present the earnings effect of the hedged item when the hedged item affects earnings. Hedge effectiveness is tested quarterly. As of March 31, 2020, the instruments were perfectly effective for accounting purposes, and no amounts were reclassified from accumulated other comprehensive income (loss) into income during the three months ended March 31, 2020. Neither the Company nor ARH uses derivative instruments for trading or speculative purposes. The associated unrealized pre‑tax loss of $1,057 and $889 was recorded in accumulated other comprehensive loss during the three months ended March 31, 2020 and 2019, respectively. See “Note 4 — Fair Value Measurements” for the fair value of the derivative instruments and location on the balance sheet as of March 31, 2020 and December 31, 2019.
Effective May 16, 2019, the Company obtained an amendment and waiver related to the 2017 Interest Rate Cap Agreements. The amendment waived any defaults or potential default under the Cap Agreements arising from ARH’s prior delivery of certain inaccurate financial statements, any associated breach of representations and warranties regarding the accuracy of such financial statements, and the delay in the Company’s filing of its Annual Report on Form 10-K for the year ended December 31, 2018.
As more fully described within “Note 4 — Fair Value Measurements,” the Company uses a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The fair value of the derivative instruments are recorded at fair value based upon valuation models utilizing the income approach and commonly accepted valuation techniques that use inputs from closing prices for similar assets and liabilities in active markets as well as other relevant observable market inputs at quoted intervals such as current interest rates, forward yield curves, and implied volatility. The Company does not believe the ultimate amount that could be realized upon settlement would be materially different from the fair values currently reported.
9. LEASES
The Company adopted ASU 2016-02 effective January 1, 2019. The Company’s lease portfolio primarily consists of real estate leases for its corporate headquarters, regional corporate offices and its facilities which are leased under noncancelable operating and finance leases expiring in various years through 2035. Most lease agreements cover periods from five to fifteen years and contain renewal options of five to ten years at the fair rental value at the time of renewal. Certain leases are subject to rent holidays and/or escalation clauses.
AMERICAN RENAL ASSOCIATES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
(dollars in thousands, except per share amounts)
Certain of the Company’s lease agreements include rental payments adjusted periodically for the consumer price index and real estate taxes. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company has lease agreements with lease and non-lease components and has elected to determine by asset class whether to separate these components. The Company has elected not to separate lease and non-lease components for real estate leases. Because the Company’s current leases do not provide an implicit rate of return, the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The incremental borrowing rate represents the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term based on the information available at commencement date of the lease.
The Company leases certain facilities from noncontrolling interest members or entities under the control of noncontrolling interest members. Rent expense under these lease arrangements was $2,828 and $2,835 in the three months ended March 31, 2020 and 2019, respectively. The Company subleases space at certain of these facilities to the noncontrolling interest members. Rental income under these sublease arrangements, which extend to 2033, amounted to $233 and $257 in the three months ended March 31, 2020 and 2019, respectively. Future income of $4,137 due from these related parties are included in sublease income presented below. The Company subleases space in certain of its facilities to nephrologist partners at market values under non‑cancelable operating leases expiring in various years through 2033. Rental income under all subleases, including those noted above, was $462 and $438 in the three months ended March 31, 2020 and 2019, respectively.
The components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Lease Cost
|
March 31, 2020
|
|
March 31, 2019
|
Operating lease cost
|
$
|
8,261
|
|
|
$
|
7,834
|
|
Finance lease cost:
|
|
|
|
Amortization of right-of-use assets
|
165
|
|
|
145
|
|
Interest on lease liabilities
|
178
|
|
|
141
|
|
Short-term lease cost (1)
|
86
|
|
|
72
|
|
Variable lease cost
|
3,031
|
|
|
2,562
|
|
Less: Sublease income
|
(462
|
)
|
|
(438
|
)
|
Total lease cost
|
$
|
11,259
|
|
|
$
|
10,316
|
|
_____________________________
|
|
(1)
|
Short-term leases are leases having a term of twelve months or less. The Company elected to recognize short-term leases on a straight-line basis and does not record a related lease asset or liability for such leases.
|
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Other Information
|
March 31, 2020
|
|
March 31, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows from operating leases
|
$
|
8,211
|
|
|
$
|
7,871
|
|
Operating cash flows from finance leases
|
178
|
|
|
141
|
|
Financing cash flows from finance leases
|
79
|
|
|
15
|
|
Right-of-use assets obtained in exchange for new or modified lease obligations:
|
|
|
|
Operating leases
|
8,851
|
|
|
4,818
|
|
Finance leases
|
—
|
|
|
—
|
|
AMERICAN RENAL ASSOCIATES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
(dollars in thousands, except per share amounts)
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
|
As of December 31, 2019
|
Operating Leases
|
|
|
|
Operating lease right-of-use assets
|
$
|
138,640
|
|
|
$
|
133,899
|
|
|
|
|
|
Current portion of operating lease liabilities
|
$
|
22,926
|
|
|
$
|
22,061
|
|
Long-term operating lease liabilities, less current portion
|
128,055
|
|
|
123,792
|
|
Total operating lease liabilities
|
$
|
150,981
|
|
|
$
|
145,853
|
|
|
|
|
|
Finance Leases
|
|
|
|
Property and equipment, at cost
|
$
|
7,488
|
|
|
$
|
7,499
|
|
Accumulated depreciation
|
(753
|
)
|
|
(588
|
)
|
Property and equipment, net
|
$
|
6,735
|
|
|
$
|
6,911
|
|
|
|
|
|
Current portion of long-term debt
|
$
|
401
|
|
|
$
|
390
|
|
Long-term debt, less current portion
|
7,289
|
|
|
7,390
|
|
Total finance lease liabilities
|
$
|
7,690
|
|
|
$
|
7,780
|
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
|
Operating leases
|
7.2 years
|
|
|
7.1 years
|
|
Finance leases
|
10.7 years
|
|
|
10.9 years
|
|
Weighted Average Discount Rate
|
|
|
|
Operating leases
|
7.0
|
%
|
|
7.0
|
%
|
Finance leases
|
9.8
|
%
|
|
9.7
|
%
|
Future minimum lease payments under noncancelable operating leases, net of sublease receipts and finance leases as of March 31, 2020, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Operating
Leases
|
Less:
Sublease Income
|
Net Operating
Lease
|
|
Finance Leases
|
2020 (excluding the three months ended March 31, 2020)
|
$
|
25,281
|
|
$
|
1,185
|
|
$
|
24,096
|
|
|
$
|
820
|
|
2021
|
32,531
|
|
1,614
|
|
30,917
|
|
|
1,107
|
|
2022
|
30,203
|
|
1,635
|
|
28,568
|
|
|
1,123
|
|
2023
|
25,774
|
|
1,119
|
|
24,655
|
|
|
1,140
|
|
2024
|
21,374
|
|
607
|
|
20,767
|
|
|
1,188
|
|
Thereafter
|
64,570
|
|
2,575
|
|
61,995
|
|
|
7,532
|
|
Total minimum lease payments
|
$
|
199,733
|
|
$
|
8,735
|
|
$
|
190,998
|
|
|
$
|
12,910
|
|
Less: amount representing interest
|
44,461
|
|
|
|
|
5,220
|
|
Present value of lease liabilities held for sale
|
4,291
|
|
|
|
|
—
|
|
Present value of lease liabilities
|
$
|
150,981
|
|
|
|
|
$
|
7,690
|
|
AMERICAN RENAL ASSOCIATES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
(dollars in thousands, except per share amounts)
Future minimum lease payments under noncancelable operating leases, net of sublease receipts and finance leases as of December 31, 2019, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Operating
Leases
|
Less:
Sublease
Income
|
Net Operating
Leases
|
|
Finance Leases
|
2020
|
$
|
32,691
|
|
$
|
1,607
|
|
$
|
31,084
|
|
|
$
|
1,093
|
|
2021
|
31,105
|
|
1,641
|
|
29,464
|
|
|
1,108
|
|
2022
|
28,637
|
|
1,662
|
|
26,975
|
|
|
1,123
|
|
2023
|
24,242
|
|
1,142
|
|
23,100
|
|
|
1,141
|
|
2024
|
19,844
|
|
607
|
|
19,237
|
|
|
1,188
|
|
Thereafter
|
57,893
|
|
2,575
|
|
55,318
|
|
|
7,495
|
|
Total minimum lease payments
|
$
|
194,412
|
|
$
|
9,234
|
|
$
|
185,178
|
|
|
$
|
13,148
|
|
Less: amount representing interest
|
42,792
|
|
|
|
|
5,368
|
|
Present value of lease liabilities held for sale
|
5,767
|
|
|
|
|
—
|
|
Present value of lease liabilities
|
$
|
145,853
|
|
|
|
|
$
|
7,780
|
|
As of March 31, 2020, the Company has an additional finance lease obligation that has not yet commenced of $992. This finance lease is expected to commence during fiscal year 2021 with a lease term of 10 years.
10. INCOME TAXES
The income tax expense included in the accompanying Consolidated Statements of Operations principally relates to the Company’s proportionate share of the pre-tax income of its joint venture subsidiaries. The determination of income tax expense for interim reporting purposes is based upon the estimated effective tax rate for the year adjusted for the impact of any discrete items which are accounted for in the period in which they occur.
In prior years, the Company established a valuation allowance for certain deferred tax assets with respect to which the Company believes future taxable income levels would not be sufficient to realize the tax benefits.
The Company’s effective income tax rate for the three months ended March 31, 2020 and 2019 were 61.7% and (15.8)%, respectively. These rates differ from the federal statutory rate of 21% principally due to the Company’s adoption of alternate tax methods as more fully described below, the portion of pre-tax income that is allocable to noncontrolling interests from the Company’s joint venture subsidiaries, which are pass-through entities for income tax purposes, the valuation allowance, as well as the change in fair value of the TRA liability, which is not deductible for income tax purposes, and also other non-deductible expenses.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to the economic fallout of the 2020 coronavirus pandemic. The CARES Act increases the tax deduction for net operating losses from 80% to 100% for 2018 through 2020, allows net operating losses generated in 2018 through 2020 to be carried back up to five years and increases the deductible interest expense limit from 30% to 50% of taxable EBITDA. The CARES Act also permits the acceleration of tax depreciation related to certain classes of assets placed in service in prior years and increased the charitable contribution limitation from 10% to 25% for the year ended December 31, 2020. As a result of these statutory changes, during the three months ended March 31, 2020, the Company determined it will be able to carry its forecasted 2019 net operating losses of $15,338 back to tax years when the statutory tax rate was 35% resulting in an income tax benefit of $2,147, which is included in income tax benefit in the accompanying Consolidated Statements of Operations. As a result of the CARES Act, the Company released $3,250 of valuation allowance during the three months ended March 31, 2020. The Company continues to evaluate the impact of the CARES Act and takes into consideration the impact it may have on its overall tax provision.
AMERICAN RENAL ASSOCIATES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
(dollars in thousands, except per share amounts)
11. STOCK-BASED COMPENSATION
For the three months ended March 31, 2020 and 2019, stock-based compensation expense was reflected in the accompanying Consolidated Statements of Operations as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Patient care costs
|
$
|
212
|
|
|
$
|
184
|
|
General and administrative
|
2,511
|
|
|
1,217
|
|
Total stock-based compensation before tax
|
$
|
2,723
|
|
|
$
|
1,401
|
|
Income tax benefit
|
$
|
(697
|
)
|
|
$
|
(364
|
)
|
Stock Options
On April 7, 2016, the Company approved the 2016 Omnibus Incentive Plan (the “2016 Plan”). The 2016 Plan authorized the Company to issue options and other awards to directors, officers, employees, consultants and advisors to purchase up to a total of 4,000,000 shares of common stock. As of March 31, 2020, options to purchase an aggregate of 1,307,010 shares of common stock were available for future grants under the 2016 Plan. Additionally, there were stock options outstanding under previous stock option plans as of March 31, 2020.
The assumptions used for options granted to acquire common stock during 2020 and the fair value at the date of grant under the 2016 Plan are noted in the following table:
|
|
|
|
Three Months Ended March 31, 2020
|
Expected Volatility
|
50%
|
Weighted average expected terms in years
|
6.0
|
Weighted average risk-free interest rate
|
0.935%
|
Expected annual dividend yield
|
—%
|
Weighted average grant-date fair value
|
$3.60
|
Information concerning options activity for options under all option plans to acquire common stock is summarized as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Number
of options
|
|
Weighted-average
exercise price
|
Options outstanding as of January 1, 2020
|
4,803,146
|
|
|
$
|
12.29
|
|
Granted
|
96,765
|
|
|
7.58
|
|
Exercised
|
(44,225
|
)
|
|
3.50
|
|
Forfeited/Canceled
|
(62,710
|
)
|
|
16.27
|
|
Options outstanding as of March 31, 2020
|
4,792,976
|
|
|
$
|
12.22
|
|
Vested and expected to vest as of March 31, 2020
|
4,792,976
|
|
|
$
|
12.22
|
|
Exercisable as of March 31, 2020
|
3,272,342
|
|
|
$
|
9.70
|
|
Restricted Stock Awards
Employees and directors are eligible to receive grants of restricted stock, which entitle the holder to shares of common stock as the awards vest. The Company determines stock-based compensation expense using the fair value method. The fair value of restricted stock is equal to the closing sale price of the Company’s common stock on the date of grant.
AMERICAN RENAL ASSOCIATES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
(dollars in thousands, except per share amounts)
In March 2018, the Company granted approximately 95,000 performance-based restricted stock awards to certain executives, with a weighted average grant date fair value per share of $22.33. These awards will vest at the end of the three-year service period and the quantity of awards that vest is dependent upon the Company’s achievement of defined performance metrics. The Company has determined that certain of the performance conditions for these awards have not been achieved as a result of the Restatement and the Company’s operating performance during the applicable periods, but that the remaining performance conditions are achieved but not vested as of March 31, 2020.
In December 2019, the Company granted approximately 51,500 performance-based restricted stock awards to certain executives, with a weighted average grant date fair value per share of $10.19. These awards will vest over the three-year service period, and the quantity of awards that vest is dependent upon the Company’s achievement of defined performance metrics. The Company has determined that certain of the performance conditions for these awards will not be achieved as a result of the Company’s operating performance during the applicable periods, but that the remaining performance conditions are probable of achievement as of March 31, 2020.
In March 2020, the Company granted approximately 280,953 performance-based restricted stock awards to certain executives, with a weighted average grant date fair value per share of $7.58. These awards will vest over the two-year service period, and the quantity of awards that vest is dependent upon the Company’s achievement of a defined performance metric with multiple performance levels. The Company has determined that an amount between the threshold and target performance levels is probable of achievement and has expensed the awards to this extent as of March 31, 2020.
As of March 31, 2020, a total of 1,126,769 shares of restricted stock were unvested and outstanding, which results in unamortized stock-based compensation of $6,807 to be recognized as stock-based compensation expense over the remaining weighted-average vesting period of 1.74 years.
A summary of restricted stock award activity is as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Number of shares
|
|
Weighted-average grant date fair value per award
|
Unvested as of January 1, 2020
|
579,283
|
|
|
$
|
15.01
|
|
Granted
|
824,336
|
|
|
7.58
|
|
Vested
|
(223,196
|
)
|
|
14.52
|
|
Forfeited/Canceled
|
(53,654
|
)
|
|
18.37
|
|
Unvested as of March 31, 2020
|
1,126,769
|
|
|
$
|
9.08
|
|
Special Dividends and Stock Option Modification
On April 26, 2016, the Company declared and paid a cash dividend to its pre-IPO stockholders equal to $1.30 per share, or $28,886 in the aggregate. In connection with the dividend, all employees with outstanding options had their option exercise price reduced and in some cases were awarded a future dividend equivalent payment, which was paid on vested options and becomes due upon vesting for unvested options. Additionally, in connection with the cash dividend, through March 31, 2020, the Company has made payments equal to $1.30 per share, or $5,396 in the aggregate, to option holders, and, in the case of some performance and market options, a future payment totaling $1,235 will be due upon vesting.
In March 2020, the Company entered into a Transition Services Agreement with an executive, which included terms to modify the vesting conditions of outstanding awards. These modifications are treated as an option modification and the Company accounted for the option modification under ASC Topic 718, Compensation - Stock Compensation. As a result of these modifications, the Company recognized $327 of additional stock compensation expense during the three months ended March 31, 2020.
AMERICAN RENAL ASSOCIATES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
(dollars in thousands, except per share amounts)
12. LOSS PER SHARE
Basic loss per share is computed by dividing net loss attributable to American Renal Associates Holdings, Inc., net of the change in the difference between the redemption value and estimated fair value for accounting purposes of the related noncontrolling interest put provisions, by the weighted-average number of common shares outstanding during the applicable period, less unvested restricted stock. Diluted loss per share is computed using the weighted-average number of common shares outstanding during the applicable period, plus the dilutive effect of outstanding options, using the treasury stock method and the average market price of the Company’s common stock during the applicable period. Certain shares related to some of the Company’s outstanding stock options were excluded from the computation of diluted loss per share because they were anti-dilutive in the periods presented but could be dilutive in the future.
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Basic and Diluted
|
|
|
|
|
|
Net loss attributable to American Renal Associates Holdings, Inc.
|
$
|
(7,234
|
)
|
|
$
|
(10,479
|
)
|
Change in the difference between the redemption value and estimated fair value for accounting purposes of the related noncontrolling interests
|
(258
|
)
|
|
(741
|
)
|
Net loss attributable to common shareholders
|
$
|
(7,492
|
)
|
|
$
|
(11,220
|
)
|
Weighted‑average common shares outstanding, basic
|
32,459,792
|
|
|
32,187,715
|
|
Weighted‑average common shares outstanding, assuming dilution
|
32,459,792
|
|
|
32,187,715
|
|
Loss per share, basic and diluted
|
$
|
(0.23
|
)
|
|
$
|
(0.35
|
)
|
Outstanding options and restricted stock excluded as impact would be anti-dilutive
|
3,469,001
|
|
|
3,573,305
|
|
13. RELATED PARTY TRANSACTIONS
Term Loan Holdings
The Company partly finances clinic development costs of some of its JV subsidiaries by providing intercompany term loans and revolving loans through its wholly owned operating subsidiary American Renal Associates LLC (“ARA OpCo”). On April 26, 2016, the Company transferred substantially all of the then existing intercompany term loans (“assigned clinic loans”) provided to its JV subsidiaries by ARA OpCo to a newly formed entity, Term Loan Holdings LLC (“Term Loan Holdings”), which ownership interest was distributed to pre-IPO stockholders (affiliates of Centerbridge and certain of the Company’s current and former directors and executive officers) pro rata in accordance with their ownership in the Company.
As of March 31, 2020, such assigned clinic loans aggregated $250, had maturities ranging from April 2020 to July 2020, with a weighted average maturity of approximately 0.2 years (June 2020), and interest rates ranging from 4.52% to 6.30%, with a weighted average interest rate of 5.18%. Fixed principal and interest payments with respect to such assigned clinic loans are payable monthly. The Company will continue to administer and manage the assigned clinic loans as servicer pursuant to the terms of a loan servicing agreement as entered into between the Company and Term Loan Holdings. The Company is paid a quarterly fee for its services based on its reasonable costs and expenses, plus a specified percentage of such costs and expenses, which may be adjusted annually based on negotiations between the Company and Term Loan Holdings. The quarterly fee charged for the three months ended March 31, 2020 is immaterial. Each assigned clinic loan is guaranteed by the Company and the applicable joint venture partner or partners in proportion to their respective ownership interests in the applicable joint venture with maturities consistent with the aggregate assigned clinic loans. The maximum potential liability for future payments under the assigned clinic loans, not including interest, is $250, of which the Company guaranteed $132 as of March 31, 2020. These guarantees would become payable if the joint venture fails to meet its obligations under the applicable assigned clinic loan.
AMERICAN RENAL ASSOCIATES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
(dollars in thousands, except per share amounts)
Income Tax Receivable Agreement
On April 26, 2016, the Company entered into the TRA for the benefit of its pre-IPO stockholders, including Centerbridge and certain of its executive officers. The TRA provides for the Company to pay its pre-IPO stockholders on a pro rata basis of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that are actually realized as a result of any deductions (including net operating losses resulting from such deductions) attributable to the exercise of (or any payment, including any dividend equivalent right or payment, in respect of ) any compensatory stock option issued by the Company that is outstanding (whether vested or unvested) as of April 20, 2016, which is the record date set by the board of directors of the Company for this distribution. The Company recorded an estimated liability of $23,400 based on the fair value of the TRA as of April 20, 2016. As of March 31, 2020, the Company’s total liability under the TRA is estimated to be $1,752, including the fair value of the financial instrument of $1,300 as well as accrued but unpaid obligations of $452. The current portion of $840 is included as a component of other accrued expenses on the Consolidated Balance Sheet. The Company paid no amount under the TRA for the three months ended March 31, 2020 or 2019.
Due from Related Party
The Company entered into a sublease agreement with a clinic group, the members of which are also noncontrolling interest shareholders, to provide for various facility buildouts. In connection with this agreement, the Company provided financing in the initial total amount of $2,910. As of March 31, 2020, the loans had maturities ranging from March 2026 to September 2033 and interest rates ranging from 6.0% to 8.1%, with a weighted average interest rate of 6.1%. Fixed principal and interest payments with respect to such loans are payable monthly. As of March 31, 2020, the remaining balance to be paid to the Company was $2,564, of which $190 is included in Prepaid expenses and other current assets and $2,374 is included in Other long-term assets on the Consolidated Balance Sheet.
Transactions with Executive Officer
The Company licenses software relating to electronic medical record solutions from Kinetic Decision Solutions LLC (“Kinetic”) which is owned 51% by an executive officer of the Company, and 2.5% by his spouse. The executive is also Co-Founder, Chief Executive Officer and Managing Partner of Kinetic. Under the terms of this arrangement, the Company paid to Kinetic $87 and $77 during each of the three months ended March 31, 2020 and 2019, respectively.
The executive officer and his spouse, through a trust in which the executive officer’s spouse is trustee and beneficiary, are partners in certain of the Company’s clinic JVs. The clinics in which the executive officer and/or his spousal trust have an ownership interest all receive intercompany revolving loans made through the Company, and have a portion of their financing in the form of term loans held by Term Loan Holdings. As of March 31, 2020, the aggregate principal amount outstanding of the intercompany revolving loans and assigned clinic loans made to the Company’s joint ventures in which the executive officer and/or his spousal trust have an ownership interest was approximately $2,038. As of March 31, 2020, such loans had maturities ranging from June 2020 to August 2024, with a weighted average maturity of approximately 2.34 years (August 2022), and interest rates ranging from 4.08% to 6.30%, with a weighted average interest rate of 5.00%. Fixed principal and interest payments with respect to such loans are payable monthly. Each loan is secured by the assets of the applicable joint venture clinic and is, and will continue to be, guaranteed by the Company and the executive officer and/or his spousal trust in proportion to each party’s ownership interests in the applicable joint venture. Based on their proportionate ownership interest in such joint ventures, the executive officer and/or his spousal trust guaranteed approximately $458 of such outstanding loans as of March 31, 2020.
14. COMMITMENTS AND CONTINGENCIES
Income Tax Receivable Agreement
As described in “Note 13 — Related Party Transactions,” the Company is a party to the TRA under which it is contractually committed to pay its pre-IPO stockholders on a pro rata basis 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that it actually realizes (or are deemed to realize in the case of an early termination payment by the Company, or a change of control, as discussed below) as a result of any option deductions (as defined in the TRA). The actual amount and timing of any payments under the TRA will vary depending upon a number of factors, including the amount
AMERICAN RENAL ASSOCIATES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
(dollars in thousands, except per share amounts)
and timing of taxable income the Company generates in the future, changes in the income tax rate, whether and when any relevant stock options, as defined in the TRA, are exercised and the value of its common stock at the time of such exercise.
Regulatory
The healthcare industry is subject to numerous laws and regulations of federal, state, and local governments. Government activity has increased with respect to investigations and allegations concerning possible violations by healthcare providers of fraud and abuse statutes and regulations, which could result in the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Compliance with such laws and regulations are subject to government review and interpretations, as well as regulatory actions unknown or unasserted at this time.
15. CERTAIN LEGAL AND OTHER MATTERS
The following is a description of certain lawsuits, claims, governmental investigations and audits and other legal proceedings to which the Company is subject.
Government Inquiries and Investigations
On January 3, 2017, the Company received a subpoena from the United States Attorney’s Office, District of Massachusetts, requesting certain information relating to the Company’s payments and other interactions with the American Kidney Fund and any efforts to educate patients qualified or enrolled in Medicare or Medicaid about enrollment in ACA-compliant individual marketplace plans, among other related matters under applicable healthcare laws. As the Company has done with the other regulators who have expressed interest in such matters, the Company cooperated fully with the government. The Company believes that this investigation related to a complaint, unsealed on August 1, 2019 in the U.S. District Court for the District of Massachusetts, that named certain of its competitors, the AKF and certain unidentified parties as defendants. The complaint alleges violations of the federal False Claims Act and various state false claims acts. The Department of Justice elected not to intervene in the matter. While the Company was not identified as a defendant in the matter, the Company can make no assurance that it will not be named as one of the unidentified defendant parties.
In October 2018, the Staff of the SEC requested that the Company voluntarily provide documents and information relating to certain revenue recognition, collections and related matters. Following receipt of the SEC request, the Company responded by producing documents and information to the Staff. On March 27, 2019, the Company filed a Current Report on Form 8-K (the “March 27 Form 8-K”) that described, among other things, certain preliminary findings arising from the review being conducted by the Audit Committee of the Board, which commenced following receipt of the SEC request. On March 28, 2019, the Company received a subpoena from the Staff of the SEC, which reiterated the SEC’s prior request and required the production of additional documents and information relating to the matters disclosed in the March 27 Form 8-K and related matters. On June 19, 2019, the Company received an additional subpoena from the Staff of the SEC, which required the production of additional related documents and information. The Company has received and may receive additional requests for documents and information from the Staff. The Company has cooperated fully with this investigation and will continue to do so.
Shareholder and Derivative Claims
On March 28, 2019 and April 19, 2019, putative shareholder class action complaints were filed in the United States District Court for the District of New Jersey against the Company and certain of its current and former executive officers. Both complaints alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 thereunder related to the matters disclosed in the March 27 Form 8-K and certain prior filings. The complaints sought unspecified damages on behalf of the individuals or entities that purchased or otherwise acquired ARA’s securities from August 10, 2016 to March 27, 2019. On July 3, 2019, the complaints were consolidated and a lead plaintiff was appointed for the putative shareholder class action complaint, captioned Ali Vandevar, et al. v. American Renal Associates Holdings Inc., et al., No. 19-09074-ES-MA (the “Vandevar Action”). On November 11, 2019, the lead plaintiff filed a consolidated amended complaint against the Company and certain of its current and former executive officers. The amended complaint asserts federal securities laws claims under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder related to the matters disclosed in the March 27 Form 8-K and certain prior filings. On January 17, 2020, the Company filed a
AMERICAN RENAL ASSOCIATES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
(dollars in thousands, except per share amounts)
motion to dismiss the amended complaint. On February 24, 2020, the lead plaintiff filed an opposition to the motion to dismiss. On February 26, 2020, the parties participated in a mediation. On March 11, 2020, the parties reached an agreement in principle to resolve the claims asserted in this lawsuit, and such settlement will be subject to court approval. The principal terms agreed upon by the parties contemplate a settlement payment of $5,775, which is expected to be made by the Company’s insurer, in exchange for a release of claims. The settlement will resolve the claims currently asserted against all defendants in the action without any liability or wrongdoing attributed to them, and defendants continue to deny all of the allegations and claims asserted in this action.
On July 25, 2019, a derivative lawsuit, Luke Johnson v. Joseph A. Carlucci, et al., 2:19-CV-15812-JMV-JBC, was filed, purportedly on behalf of the Company, in the United States District Court for the District of New Jersey against the members of the Company’s board of directors and certain of its current and former executive officers. The lawsuit asserts claims for violations of Section 14(a) of the Exchange Act, breach of fiduciary duties, unjust enrichment and waste of corporate assets based on, among other things, the Restatement and the related material weaknesses in the Company’s internal control over financial reporting, alleged misstatements and omissions in the Company’s 2017 and 2018 proxy statements, compensation paid to the individual defendants and the costs incurred in connection with the Restatement process. The lawsuit seeks, among other things, recovery of damages sustained by the Company as a result of the individual defendants’ alleged misconduct, a direction to the Company to hold an annual meeting of stockholders and reforms to the Company’s corporate governance and internal procedures. The complaint also seeks restitution and costs and attorney’s fees. On October 4, 2019, the court stayed the lawsuit until final resolution of the Vandevar Action. On February 26, 2020, the parties participated in a mediation. On March 27, 2020, the parties reached an agreement in principle to resolve the claims asserted in this lawsuit, and such settlement will be subject to court approval. The principal terms agreed upon by the parties contemplate certain corporate governance actions taken by the Company in exchange for a release of claims. The settlement will resolve the claims currently asserted against all defendants in the action without any liability or wrongdoing attributed to them, and defendants will continue to deny all of the allegations and claims asserted in this action.
The Company, the Board, and its current and former executive officers could become subject to additional litigation relating to these matters.
Other
From time to time, the Company is subject to various legal actions and proceedings involving claims incidental to the conduct of its business, including contractual and related disputes with commercial payors and others and professional and general liability claims, as well as audits and investigations by various government entities. Based on information currently available, established reserves, available insurance coverage and other resources, the Company does not believe that the outcomes of any such pending actions, proceedings or investigations are likely to be, individually or in the aggregate, material to its business, financial condition, results of operations or cash flows. However, legal actions and proceedings are subject to inherent uncertainties, and it is possible that the ultimate resolution of such matters, if unfavorable, may be materially adverse to the Company’s business, financial condition, results of operations or cash flows.
No assurance can be given as to the timing or outcome of the legal matters discussed above, nor can any assurance be given as to whether the filing of these lawsuits and any inquiries will affect the Company’s business relationships, or the Company’s business generally. The Company cannot predict the outcome of any of these matters, and an adverse result in one or more of them could have a material adverse effect on the Company’s business, results of operations and financial condition.
Although the Company is not currently subject to any formal regulatory investigations or proceedings other than those described herein, there is no assurance that any such investigations or proceedings will not be commenced by any U.S. federal or state healthcare or other regulatory agencies. In addition, the Company may in the future be subject to additional inquiries, investigations, litigation or other proceedings or actions, regulatory or otherwise, arising in relation to the matters described above and related litigation and investigative matters. An unfavorable outcome of any such litigation or regulatory proceeding or action could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company also records in Certain legal and other matters, legal fees and other expenses relating to matters that it believes do not reflect its core business operations.
AMERICAN RENAL ASSOCIATES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Unaudited)
(dollars in thousands, except per share amounts)
Resolved Matters
The wholly owned operating subsidiary of ARA, American Renal Associates LLC (“ARA OpCo”), and its subsidiary, American Renal Management LLC (“ARM”), were defendants in lawsuits filed by affiliates of UnitedHealth Group Incorporated (“United”) in the United States District Court for the Southern District of Florida (Case Number 9:16-cv-81180-KAM), filed July 1, 2016, and the United States District Court for the District of Massachusetts (Case Number 1:18-cv-10622-ADB), filed March 30, 2018. On July 2, 2018, ARA OpCo and ARM executed a binding Settlement Term Sheet with the plaintiffs with respect to a settlement to resolve all ongoing litigation between the Company and United, and on August 1, 2018, the parties entered into a final settlement agreement (the “Settlement Agreement”) on substantially the same terms as provided in the Settlement Term Sheet. The Settlement Agreement included a release of all claims arising from or related to the above-referenced litigations that were asserted or that could have been asserted against the Company or against the nephrologists or other healthcare providers who have entered into joint venture arrangements or medical directorships with the Company (the “Joint Venture Providers”) and the joint venture entities without any admission of liability or wrongdoing. Pursuant to the Settlement Agreement, the Company will make total settlement payments of $32,000, inclusive of administrative fees and fees for plaintiffs’ counsel, in five installments, with an initial present value of $29,614, which is included in Certain legal and other matters in the Consolidated Statement of Operations during the year ended December 31, 2018. As of March 31, 2020, of the remaining present value of $12,532, $6,573 is classified as Accrued expenses and other current liabilities and $5,959 is classified in Other long-term liabilities. The Company paid the first installment of $10,000 on August 1, 2018 and the second installment of $8,000 August 1, 2019 and the Company expects to pay $7,000 on August 1, 2020, $3,500 on August 1, 2021 and $3,500 on August 1, 2022. The Company also agreed to share certain information with United and to follow certain procedures with respect to patients covered by United. Subject to the mutual releases provided in the Settlement Agreement, United also agreed to renew, reinstate, and/or not to terminate the network agreements for any Joint Venture Providers whose network agreements United terminated or chose not to renew from August 1, 2017 through the date of the Settlement Agreement. The Settlement Agreement included customary terms and conditions. In connection with the Settlement Agreement, the Company also entered into a three-year national network agreement with United on August 1, 2018 that provides for specified reimbursement rates for patients covered by Medicare Advantage, Medicaid HMO and commercial insurance products over the term of the agreement. The in-network agreement went into effect on September 1, 2018.
16. CHANGES IN OWNERSHIP INTEREST IN CONSOLIDATED SUBSIDIARIES
The effects of changes in the Company’s ownership interest in consolidated subsidiaries on the Company’s equity are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Net loss attributable to American Renal Holdings Associates, Inc.
|
$
|
(7,234
|
)
|
|
$
|
(10,479
|
)
|
Increase (decrease) in paid-in capital for the sales of noncontrolling interest
|
3,448
|
|
|
(1,328
|
)
|
Decrease in paid-in capital for the purchase of noncontrolling interest and adjustments to ownership interest
|
—
|
|
|
50
|
|
Net transfers to/from noncontrolling interests
|
$
|
3,448
|
|
|
$
|
(1,278
|
)
|
Net loss attributable to American Renal Holdings Associates, Inc., net of transfers to/from noncontrolling interests
|
$
|
(3,786
|
)
|
|
$
|
(11,757
|
)
|
17. RECENT AND SUBSEQUENT EVENTS
COVID-19 Pandemic
In December 2019, there was an outbreak of a new strain of coronavirus (“COVID-19”). In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. As a provider of essential healthcare services, the Company is significantly exposed to the health and economic effects of COVID-19 and has seen a significant impact on its employees, patients and business operations. The COVID-19 pandemic did not significantly impact the Company's financial results for the three months ended March 31, 2020.
The Company believes that the economic disruptions and unprecedented market volatilities and uncertainties resulting from the COVID-19 outbreak represent indicators of impairment for its indefinite-life and long-lived assets, including its tradename. As a result, the Company performed interim impairment tests of its indefinite-life and long-lived assets as of March 31, 2020, which resulted in no impairment.
The Company is carefully monitoring the impact of the COVID-19 pandemic on its operating and financial performance. The amounts and types of revenue, expense, and cash flow impacts will be dependent on numerous factors, including the nature of the COVID-19 pandemic, such as its rate of spread, duration, and geographic coverage; the legal, regulatory, and administrative developments related to the pandemic at federal, state, and local levels; and the Company’s infectious disease prevention and control efforts. The Company began to experience increased expenses and a reduction in treatment volume in connection with the pandemic beginning in March, as discussed below. The Company expects to see a more significant impact on its operating and financial performance due to the COVID-19 pandemic in the second quarter, which may also continue into the third quarter and beyond. The Company has undertaken measures designed to mitigate this impact, but these measures may not be sufficient to fully offset the pandemic’s operating and financial effects on its business. These effects will likely continue for the duration of the pandemic and may increase further in the event the severity or geographic coverage of the pandemic increase. We cannot at this time accurately predict the ultimate impact that COVID-19 will have on our operating and financial performance, but the adverse impact could be material.
Treatment Volume
Patients suffering from end-stage renal disease generally have co-morbidities that often place them at increased risk with COVID-19, which may result in increased patient hospitalizations, missed treatments and higher mortality. Through March 31, 2020, the Company experienced an immaterial reduction in treatment volume as a result of patients contracting COVID-19, but this impact increased subsequent to March 31, 2020 and could become material in the event of a prolonged or increasingly severe pandemic. Further, broad economic factors resulting from the pandemic, including increasing unemployment rates, may lead to increases in uninsured patients and patients with lower-paying government insurance programs. The impact of this may be delayed or mitigated as a result of patients accessing COBRA and exchange plans but could have a material impact on the Company's longer term earnings. A significant reduction in treatment volume or in the number of patients with commercial insurance would have a material adverse effect on the Company's revenues, earnings and cash flows.
Expense Management
In light of its increased expenses and the potential impact to revenue from the COVID-19 pandemic, as well as the Company's first quarter 2020 performance, the Company has and will continue to implement cost saving initiatives, including temporary reductions in executive compensation, reducing discretionary spending, including travel, increased management of existing corporate headcount and other temporary corporate expense initiatives. The Company does not expect any of these cost savings initiatives to directly impact clinic staff or regional operations teams that are providing on-site support to its clinics during the pandemic. The Company also expects that, with the pandemic, it will re-prioritize its capital expenditures and continue its slower pace of de novo clinic development.
Balance Sheet, Cash Flow and Liquidity
During the first quarter of 2020, the Company did not experience any significant issues in billing or cash collections directly associated with the COVID-19 pandemic; however, it may experience delays in the future due to lower claims operations staffing levels and longer call waiting times at certain of the Company's commercial payors.
The CARES Act is a relief package intended to assist many aspects of the American economy, and includes provisions to expand existing and introduce new programs to provide additional sources of liquidity to healthcare providers.
Medicare Accelerated and Advance Payment Program
In March 2020, in an action unrelated to the CARES Act, CMS expanded its existing Accelerated and Advance Payment Program to a broader group of Medicare providers and suppliers for the duration of the COVID-19 public health emergency. Payments under this program are intended to provide necessary funds when there is a disruption in Medicare claims submission and/or claims processing. The Company's facilities can request up to 100% of the Medicare fee-for-service payment amount for a three-month period. CMS has instructed its Medicare Administrative Contractors to review and issue advance payments within seven calendar days of receiving an advance payment request. Repayment of advance payments will commence 120 days after the date the payment is issued and will be effectuated via an automatic 100% offset against future
claims payments. The Company's facilities that use this program will have 210 days to repay the advance payment. In April 2020, the Company's facilities applied for and received an aggregate of $82,666 in advanced payments under this program.
CARES Act Provider Relief Fund
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act includes $100 billion in funds to be provided to hospitals and other healthcare providers to support healthcare-related expenses or lost revenue attributable to COVID-19 and to ensure uninsured individuals are able to obtain testing and treatment for COVID-19. On April 10, 2020, CMS began distribution of $30 billion of the funds to providers based on the provider’s share of total Medicare fee-for-service reimbursements in 2019. As part of this distribution, the Company's facilities received approximately $26,595 in the aggregate during April 2020. HHS requires providers, within 30 days of receipt of these funds, to submit an attestation accepting certain terms and condition. If a provider does not wish to comply with these terms and conditions, the provider must remit the full payment to HHS. Several of the terms and conditions originally published by HHS are unclear and pose interpretative questions that remain subject to clarification, including specifics on the allowable uses for the relief funds. Accordingly, the Company has determined to leave these funds segregated in special accounts and not spend or otherwise disperse these funds while it is assessing the terms and conditions that HHS will require. The Company's ability to utilize and retain some or all of the provider relief grant funds will depend on the magnitude, timing and nature of the impact of COVID-19, as well as the guidelines and rules of the program, which will ultimately determine how these funds can be used to offset lost revenue and increased expenses associated with the COVID-19 pandemic.
Temporary suspension of the automatic 2% reduction of Medicare program payments, known as “sequestration”
The CARES Act suspended for the period from May 2020 through December 2020 the 2% Medicare reimbursement reduction that has been in place since April 1, 2013. As a result, the Company currently expects to receive an increase in patient service operating revenues of approximately $5,000 for the period from May 2020 through December 2020 from this suspension.
Social Security Payroll Match
The CARES Act provides for the deferral of the social security payroll tax match of 6.2% through the end of 2020. The Company expects that this will allow it to delay funding approximately $12,000 to $13,000 of payroll taxes. Half of this amount (approximately $6,000 to $6,500) will be payable in December 2021 and the other half in December 2022. While this expense will continue to be recorded in the Consolidated Statement of Operations and accrued on the Consolidated Balance Sheet during 2020, the deferral of the payment will provide the Company additional liquidity during the deferral period.
See “Note 10 — Income Taxes” for discussion of the impacts of the CARES Act on the Company's income taxes for the three months ended March 31, 2020.