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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2015

 

OR

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from      to      .

Commission file number: 001-36520

ADEPTUS HEALTH INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

 

46-5037387

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

2941 Lake Vista Drive

Lewisville, TX

 

75067

(Address of principal executive offices)

 

(Zip Code)

 

(972) 899-6666

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No  

The number of shares of the registrant’s Class A common stock , par value $0.01 per share, outstanding was 9,985,500 as of April 20, 2015.  The number of shares of the registrant’s Class B common stock, par value $0.01 per share, outstanding was 10,781,153 as of April 20, 2015. 

 


 

 

 


 

ADEPTUS HEALTH INC. and SUBSIDIARIES

FORM 10-Q

INDEX 

 

 

 

 

PART I. 

    

FINANCIAL INFORMATION 

5

Item 1. 

 

Financial Statements (Unaudited):

5

 

 

Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014

5

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and 2014

6

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2015 and 2014 

7

 

 

Condensed Consolidated Statement of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2015

8

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014

9

 

 

Notes to Condensed Consolidated Financial Statements

10

Item 2. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

38

Item 4. 

 

Controls and Procedures

38

PART II. 

 

OTHER INFORMATION 

39

Item 1. 

 

Legal Proceedings

39

Item 1A. 

 

Risk Factors

39

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

39

Item 3. 

 

Defaults Upon Senior Securities

39

Item 4. 

 

Mine Safety Disclosure

39

Item 5. 

 

Other Information

39

Item 6. 

 

Exhibits

39

 

 

 

 

 

 

2


 

GENERAL

Unless the context otherwise indicates or requires, references in this Quarterly Report on Form 10-Q to the “Company,” “we,” “us” and “our” refer to Adeptus Health Inc. and its consolidated subsidiaries after giving effect to the Reorganization Transactions (“Reorganization”) described herein and the Initial Public Offering (“IPO”) described herein and to Adeptus Health LLC and its consolidated subsidiaries prior to the Reorganization and IPO.  

On June 30, 2014, we completed our initial public offering of 4,900,000 shares of our Class A common stock at  a price to the public of $22.00 per share and received net proceeds of approximately $96.2 million, after deducting underwriting discounts and commissions and offering expenses.   An additional 735,000 shares were sold to the public,  of which 313,586 shares were sold by a significant stockholder and 421,414 shares were sold by the Company with the proceeds received by the Company used to purchase an equivalent number of LLC Units from such significant stockholderIn connection with the initial public offering, the limited liability company agreement of Adeptus Health LLC was amended and restated to, among other things, modify its capital structure by replacing the different classes of interests previously held by the Adeptus Health LLC owners to a single new class of units called “LLC Units.” In addition, each LLC Unit holder received on a one-for-one basis one share of the Company’s Class B common stock, which entitles the holder to vote on all matters of Adeptus Health Inc. but has no economic rights.  One of the then-existing owners converted a portion of its interest into 4,895,521 shares of Class A common stock. The Company and its then-existing owners also entered into an exchange agreement under which they have the right to exchange their LLC Units and shares of Class B common stock for shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications.

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements, other than statements of historical facts included in this Form 10-Q, including statements concerning our plans, objectives, goals, beliefs, business strategies, future events, business conditions, our results of operations, financial position and our business outlook, business trends and other information, may be forward-looking statements. Words such as “estimates,” “expects,” “contemplates,” “will,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts,” “may,” “should” and variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not historical facts, and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs, estimates and projections will result or be achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.

There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Form 10-Q. Such risks, uncertainties and other important factors that could cause actual results to differ include, among others, the risks, uncertainties and factors set forth under Part I., Item 1A.“Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and in this report, as such risk factors may be updated from time to time in our periodic filings with the SEC, and are accessible on the SEC’s website at www.sec.gov, and also include the following:

 

·

Our ability to implement our growth strategy;

·

Our ability to maintain sufficient levels of cash flow to meet growth expectations;

·

Our ability to protect our brand;

·

Federal and state laws and regulations relating to our facilities, which could lead to the incurrence of significant penalties by us or require us to make significant changes to our operations;

3


 

·

Our ability to locate available facility sites on terms acceptable to us;

·

Competition from hospitals, clinics and other emergency care providers;

·

Our dependence on payments from third-party payors;

·

Our ability to source and procure new products and equipment to meet patient preferences;

·

Our reliance on Medical Properties Trust (“MPT”) and the MPT Master Funding and Development Agreements;  

·

Disruptions in the global financial markets leading to difficulty in borrowing sufficient amounts of capital to finance the carrying costs of inventory, to pay for capital expenditures and operating costs;

·

Our ability or the ability of our healthcare system partners to negotiate favorable contracts or renew existing contracts with third-party payors on favorable terms;

·

Significant changes in our payor mix or case mix resulting from fluctuations in the types of cases treated at our facilities;

·

Significant changes in rules, regulations and systems governing Medicare and Medicaid reimbursements;

·

Material changes in IRS revenue rulings, case law or the interpretation of such rulings;

·

Shortages of, or quality control issues with, emergency care-related products, equipment and medical supplies that could result in a disruption of our operations;

·

The intense competition we face for patients, physician use of our facilities, strategic relationships and commercial payor contracts;

·

The fact that we are subject to significant malpractice and related legal claims;

·

The growth of patient receivables or the deterioration in the ability to collect on those accounts;

·

The impact on us of PPACA, which represents a significant change to the healthcare industry;

·

Ensuring our continued compliance with HIPAA, which could require us to expend significant resources and capital; and

·

The factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 under Part I, Item 1 A, Risk Factors.

We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this report apply only as of the date of this report or as the date they were made and, except as required by applicable law, we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

 

 

 

4


 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Adeptus Health Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

 

2015

 

2014

 

 

 

 

(unaudited)

 

 

(audited)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash

 

$

13,872 

 

$

2,002 

 

 

Restricted cash

 

 

7,868 

 

 

4,795 

 

 

Accounts receivable, less allowance for doubtful accounts of $25,931 and $13,068, respectively

 

 

49,377 

 

 

37,422 

 

 

Other receivables and current assets

 

 

16,028 

 

 

17,137 

 

 

Medical supplies inventory

 

 

4,413 

 

 

4,287 

 

 

Total current assets

 

 

91,558 

 

 

65,643 

 

 

Property and equipment, net

 

 

89,684 

 

 

93,892 

 

 

Investment in unconsolidated joint venture

 

 

1,407 

 

 

2,100 

 

 

Deposits

 

 

1,097 

 

 

1,772 

 

 

Deferred tax assets

 

 

33,829 

 

 

34,084 

 

 

Intangibles, net

 

 

19,570 

 

 

20,015 

 

 

Goodwill

 

 

61,009 

 

 

61,009 

 

 

Other long-term assets

 

 

4,133 

 

 

4,303 

 

 

Total assets

 

$

302,287 

 

$

282,818 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

18,417 

 

$

25,420 

 

 

Accrued compensation

 

 

14,064 

 

 

13,521 

 

 

Current maturities of long-term debt

 

 

2,152 

 

 

1,816 

 

 

Current maturities of capital lease obligations

 

 

86 

 

 

81 

 

 

Deferred rent

 

 

696 

 

 

607 

 

 

Total current liabilities

 

 

35,415 

 

 

41,445 

 

 

Long-term debt, less current maturities

 

 

128,004 

 

 

104,982 

 

 

Payable to related parties pursuant to tax receivable agreement

 

 

30,039 

 

 

30,039 

 

 

Capital lease obligations, less current maturities

 

 

4,032 

 

 

4,056 

 

 

Deferred rent

 

 

2,780 

 

 

2,416 

 

 

Total liabilities

 

 

200,270 

 

 

182,938 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

 

 

 

Preferred stock, par value $0.01 per share; 10,000,000 shares authorized and zero shares issued and outstanding at March 31, 2015

 

 

 —

 

 

 —

 

 

Class A common stock, par value $0.01 per share; 50,000,000 shares authorized, 9,985,500 and 9,845,016 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively

 

 

100 

 

 

98 

 

 

Class B common stock, par value $0.01 per share; 20,000,000 shares authorized 10,781,153 shares issued and outstanding at March 31, 2015

 

 

108 

 

 

108 

 

 

Additional paid-in capital

 

 

51,785 

 

 

51,238 

 

 

Accumulated other comprehensive loss

 

 

(88)

 

 

(74)

 

 

Accumulated deficit

 

 

(2,757)

 

 

(3,351)

 

 

Total shareholders' equity

 

 

49,148 

 

 

48,019 

 

 

Non-controlling interest

 

 

52,869 

 

 

51,861 

 

 

Total equity

 

 

102,017 

 

 

99,880 

 

 

Total liabilities and shareholders' equity

 

$

302,287 

 

$

282,818 

 

 

 

The accompanying notes are an integral part of these unaudited financial statements.

 

5


 

Adeptus Health Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31,

 

 

    

2015

    

2014

    

Revenue:

 

 

 

 

 

 

 

Patient service revenue

 

$

95,902 

 

$

44,529 

 

Provision for bad debt

 

 

(14,945)

 

 

(5,748)

 

Net patient service revenue

 

 

80,957 

 

 

38,781 

 

Management and contract services revenue

 

 

496 

 

 

 —

 

Total net operating revenue

 

 

81,453 

 

 

38,781 

 

Equity in net loss of unconsolidated joint venture

 

 

(694)

 

 

 —

 

Operating expenses:

 

 

 

 

 

 

 

Salaries, wages and benefits

 

 

48,880 

 

 

24,980 

 

General and administrative

 

 

10,464 

 

 

6,220 

 

Other operating expenses

 

 

11,305 

 

 

4,865 

 

Depreciation and amortization

 

 

4,756 

 

 

3,057 

 

Total operating expenses

 

 

75,405 

 

 

39,122 

 

Income (loss) from operations

 

 

5,354 

 

 

(341)

 

Other expense:

 

 

 

 

 

 

 

Interest expense

 

 

(3,274)

 

 

(2,206)

 

Total other expense

 

 

(3,274)

 

 

(2,206)

 

Income (loss) before provision for income taxes

 

 

2,080 

 

 

(2,547)

 

Provision for income taxes

 

 

478 

 

 

220 

 

Net income (loss)

 

 

1,602 

 

 

(2,767)

 

Less: Net income (loss) attributable to non-controlling interest

 

 

1,008 

 

 

(2,767)

 

Net income attributable to Adeptus Health Inc. 

 

$

594 

 

$

 —

 

Net income per share of Class A common stock:

 

 

 

 

 

 

 

Basic

 

$

0.06 

 

$

 —

 

Diluted

 

$

0.06 

 

$

 —

 

Weighted average shares of Class A common stock:

 

 

 

 

 

 

 

Basic

 

 

9,906,845 

 

 

 —

 

Diluted

 

 

9,906,845 

 

 

 —

 

 

The accompanying notes are an integral part of these unaudited financial statements.

6


 

Adeptus Health Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) 

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adeptus Health Inc.

 

Non-controlling Interest

 

Total

 

 

  

Three months ended  March 31,

 

Three months ended  March 31,

 

Three months ended  March 31,

 

 

    

2015

  

2014

  

2015

  

2014

  

2015

  

2014

 

Net income (loss)

  

$

594 

 

$

 —

 

$

1,008 

 

$

(2,767)

 

$

1,602 

 

$

(2,767)

 

Other comprehensive loss, net of tax:

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on interest rate contract

  

 

(14)

 

 

 —

 

 

 —

 

 

 —

 

 

(14)

 

 

 —

 

Comprehensive income (loss)

  

$

580 

 

$

 —

 

$

1,008 

 

$

(2,767)

 

$

1,588 

 

$

(2,767)

 

 

 

The accompanying notes are an integral part of these unaudited financial statements.

 

 

7


 

Adeptus Health Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adeptus Health Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

Total

 

Non-

 

 

 

 

 

Class A shares

 

Class B shares

 

Paid-in

 

Accumulated

 

Comprehensive

 

Shareholders'

 

Controlling

 

Total

 

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Deficit

    

Loss

 

Equity

    

Interest

    

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014

 

9,845,016 

 

$

98 

 

10,781,153 

 

$

108 

 

$

51,238 

 

$

(3,351)

 

$

(74)

 

$

48,019 

 

$

51,861 

 

$

99,880 

Issuance of Class A restricted shares

 

140,484 

 

 

 

 —

 

 

 —

 

 

(2)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Stock-based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

549 

 

 

 —

 

 

 —

 

 

549 

 

 

 —

 

 

549 

Unrealized loss on interest rate contract

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(14)

 

 

(14)

 

 

 —

 

 

(14)

Net income

 

 

 

 —

 

 

 

 —

 

 

 —

 

 

594 

 

 

 —

 

 

594 

 

 

1,008 

 

 

1,602 

Balance, March 31, 2015

 

9,985,500 

 

$

100 

 

10,781,153 

 

$

108 

 

$

51,785 

 

$

(2,757)

 

$

(88)

 

$

49,148 

 

$

52,869 

 

$

102,017 

The accompanying notes are an integral part of these unaudited financial statements.

 

 

8


 

Adeptus Health Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31,

 

 

    

2015

    

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

1,602 

 

$

(2,767)

 

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

 

 

 

 

Loss from the disposal or impairment of assets

 

 

 —

 

 

 

Depreciation and amortization

 

 

4,756 

 

 

3,057 

 

Deferred taxes

 

 

255 

 

 

 —

 

Amortization of deferred loan costs

 

 

219 

 

 

198 

 

Provision for bad debts

 

 

14,945 

 

 

5,748 

 

Equity in loss of unconsolidated joint venture

 

 

694 

 

 

 —

 

Stock-based compensation

 

 

549 

 

 

160 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Restricted cash

 

 

(3,073)

 

 

(1,028)

 

Accounts receivable

 

 

(26,900)

 

 

(8,050)

 

Other receivables and current assets

 

 

1,109 

 

 

(1,333)

 

Medical supplies inventory

 

 

(126)

 

 

(422)

 

Other long-term assets

 

 

17 

 

 

15 

 

Accounts payable and accrued expenses

 

 

(7,004)

 

 

(1,442)

 

Accrued compensation

 

 

543 

 

 

(1,697)

 

Deferred rent

 

 

453 

 

 

596 

 

Net cash used in operating activities

 

 

(11,961)

 

 

(6,963)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Deposits

 

 

675 

 

 

116 

 

Proceeds from sale of property and equipment

 

 

1,517 

 

 

 —

 

Capital expenditures

 

 

(1,620)

 

 

(10,297)

 

Net cash provided by (used in) investing activities

 

 

572 

 

 

(10,181)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from long-term borrowings

 

 

24,000 

 

 

7,000 

 

Payment of deferred loan costs

 

 

(80)

 

 

(38)

 

Payments on borrowings

 

 

(642)

 

 

(168)

 

Payment of capital lease obligations

 

 

(19)

 

 

(18)

 

Net cash provided by financing activities

 

 

23,259 

 

 

6,776 

 

Net increase (decrease) in cash

 

 

11,870 

 

 

(10,368)

 

Cash, beginning of period

 

 

2,002 

 

 

11,495 

 

Cash, end of period

 

$

13,872 

 

$

1,127 

 

 

See Note 12 for Supplemental Cash Flow Information and Supplemental Noncash Activities

The accompanying notes are an integral part of these unaudited financial statements.

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

NOTE 1—ORGANIZATION 

Adeptus Health Inc. (the "Company") was incorporated as a Delaware corporation on March 7, 2014 for the purpose of facilitating an initial public offering of common equity. The Company is a holding company with its sole material asset being a controlling equity interest in Adeptus Health LLC. As the sole managing member of Adeptus Health LLC, the Company operates and controls all of the business and affairs of Adeptus Health LLC and, through Adeptus Health LLC and its subsidiaries, conducts its business. Prior to the initial public offering, the Company had not engaged in any business or other activities except in connection with its formation and the initial public offering.

Adeptus Health LLC or its predecessors began operations in 2002 and owns and operates First Choice Emergency Room in Texas and in Colorado.  Together with Dignity Health, the Company also owns and operates Dignity Health Arizona General Hospital in Arizona.  First Choice Emergency Room is the largest network of independent freestanding emergency rooms in the United States, delivering both major and minor emergency medical services for adult and pediatric patients. First Choice Emergency Room has experienced rapid growth in recent periods, growing from 14 freestanding facilities at the end of 2012 to 55 freestanding facilities at the end of 2014, and to 62 freestanding facilities at March 31, 2015. The Company’s facilities are currently located in Houston, Dallas/Fort Worth, San Antonio and Austin, Texas.  In Colorado, facilities are in Colorado Springs and Denver.  Dignity Health Arizona General Hospital is a full service general hospital in the Phoenix, Arizona market. 

On June 24, 2014, the Company’s registration statement on Form S-1 (File No. 333-196142) relating to its initial public offering of Class A common stock was declared effective by the Securities and Exchange Commission (“SEC”). The Company sold 4,900,000 shares of Class A common stock in its public offering.  An additional 735,000 shares were sold to the public, of which 313,586 shares were sold by a significant stockholder and 421,414 shares were sold by the Company with the proceeds received by the Company used to purchase an equivalent number of LLC Units from such significant stockholder.  The Company’s stock began trading on the New York Stock Exchange on June 25, 2014 under the symbol “ADPT,” and the initial public offering closed on June 30, 2014.

In connection with the initial public offering, the limited liability company agreement of Adeptus Health LLC was amended and restated to, among other things, modify its capital structure by replacing the different classes of interests previously held by the Adeptus Health LLC owners to a single new class of units called “LLC Units.” In addition, each LLC Unit holder received on a one-for-one basis one share of the Company’s Class B common stock, which entitles the holder to vote on all matters of Adeptus Health Inc. but has no economic rights.  One of the then-existing owners converted a portion of its interest into 4,895,521 shares of the Company’s Class A common stock, which is referred to as the merged entity. The Company and its then-existing owners also entered into an exchange agreement under which they have the right to exchange their LLC Units and shares of Class B common stock for shares of Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. These transactions are collectively referred to as the “Reorganization Transactions.”

The Company consolidates the financial results of Adeptus Health LLC and its subsidiaries and records non-controlling interest for the economic interest in Adeptus Health LLC held by the non-controlling unit holders. The non-controlling interest ownership percentage as of March 31, 2015 was 51.8%.

Prior to the initial public offering, the Company borrowed under the Senior Secured Credit Facility (See Note 8 Debt for further information) to fund a dividend of $60.0 million to the then-existing  owners which was paid in connection with the consummation of the initial public offering. The Company used proceeds from the initial public offering to repay indebtedness under the Senior Secured Credit Facility from this borrowing.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation 

The accompanying unaudited condensed consolidated financial statements and footnotes have been prepared pursuant to the rules and regulations of the SEC. Certain information and note disclosures normally included in audited financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to those rules and regulations. We believe that the disclosures made are adequate to make the information not misleading.

The condensed consolidated financial statements included herein reflect all adjustments (consisting of normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the results for the interim periods presented. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the fiscal year.

These condensed consolidated financial statements and related notes should be read in conjunction with the Company’s December 31, 2014 audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 filed with the SEC on February 27, 2015.  

Accounting Policies and Use of Estimates

The preparation of financial statements in conformity with GAAP requires our management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant accounting policies and estimates include: the useful lives of fixed assets, revenue recognition, allowances for doubtful accounts, leases, reserves for employee health benefit obligations, stock-based compensation, and other contingencies.  Actual results could differ from these estimates. For greater detail regarding these accounting policies and estimates, refer to our Annual Report on Form 10-K  for the fiscal year ended December 31, 2014.

Segment and Geographic Information

The Company’s chief operating decision maker is our Chief Executive Officer, who reviews financial information presented on a company-wide basis. As a result, the Company determined that it has a single reporting segment and operating unit structure.

All of the Company’s revenue for the three months ended March 31, 2015 was earned in the United States.

Cash and Cash Equivalents and Concentrations of Risk 

The Company includes all securities with a maturity date of three months or less at date of purchase as cash equivalents. The Company currently has no cash equivalents. The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant risk related to uninsured bank deposits.

Restricted Cash 

The Company is required to restrict cash for letters of credit related to the Master Funding and Development Agreements, as amended, for the first $255 million in facility fundings. See Note 11 (Commitments and Contingencies)  

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

for more information. Each letter of credit is issued in an amount equal to approximately 50% of one year's base rent relating to completed facilities. As of March 31, 2015 and December 31, 2014, total restricted cash was $7.9 million and $4.8 million, respectively.

Patient Revenue and Accounts Receivable 

Revenues consist primarily of net patient service revenues, which are based on the facilities’ established billing rates less allowances and discounts, principally for patients covered under contractual programs with private insurance companies. Revenue is recognized when services are rendered to patients. Charges for all services provided to insured patients are initially billed and processed by the patients' insurance provider. The Company has agreements with insurance companies that provide for payments to the Company at amounts different from its established rates or as determined by the patient's out of network benefits. Differences between established rates and those set by insurance programs, as well as charity care, employee and prompt pay adjustments, are recorded as adjustments directly to patient service revenue. Fee adjustments of approximately $64.3 million and $22.3 million were recorded for the three months ended March 31, 2015 and 2014, respectively. Amounts not covered by the insurance companies are then billed to the patients. Estimated uncollectible amounts from insured patients are recorded as bad debt expense in the period the services are provided. Collection of payment for services provided to patients without insurance coverage is done at the time of service.

With respect to management and contract service revenues, amounts are recognized as services are provided. The Company is party to an agreement with a full-service healthcare hospital facility to provide management services. As compensation for these services, the Company charges the managed entity a management fee based on a fixed percentage of the entity’s net revenue. The Company also holds minority ownership in this entity.

Patient service revenue before the provision for bad debts by major payor source for the three months ended March 31, 2015 and 2014 were as follows (in thousands):  

 

 

 

 

 

 

 

 

 

 

 

Three months ended  

 

 

 

March 31,

 

 

    

2015

    

2014

 

Third-party payors, including patient portion

 

$

94,279 

 

$

43,672 

 

Self-pay

 

 

1,623 

 

 

857 

 

Total all payors

 

$

95,902 

 

$

44,529 

 

The Company receives payments from third-party payors that have contracts with the Company in Texas and Colorado. As of March 31, 2015, the Company has a contract with Blue Cross Blue Shield of Texas and two MultiPlan arrangements whereby the Company accesses a number of third-party payors at in-network rates. Four major third-party payors accounted for 86.2% and 82.7% of patient service revenue for the three months ended March 31, 2015 and 2014, respectively. These same payors also accounted for 79.9% and 80% of accounts receivable as of March 31, 2015 and

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

December 31, 2014, respectively. The following table sets forth the percentage of patient service revenue earned by major payor source:

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31,

 

 

    

2015

    

2014

    

Payor:

 

 

 

 

 

United HealthCare

 

27.0 

%  

24.5 

%  

Blue Cross Blue Shield

 

25.6 

 

27.7 

 

Aetna

 

19.8 

 

19.1 

 

Cigna

 

13.8 

 

11.4 

 

Other

 

13.8 

 

17.3 

 

 

 

100.0 

%  

100.0 

%  

Accounts receivable are reduced by an allowance for doubtful accounts. In establishing the Company's allowance for doubtful accounts, management considers historical collection experience, the aging of the account, the payor classification, and patient payment patterns. Amounts due directly from patients represent the Company's highest collectability risk. There were not any significant changes in the estimates or assumptions underlying the calculation of the allowance for doubtful accounts for the three months ended March 31, 2015 and 2014.

The Company writes off as bad debt expense uncollectible accounts receivable arising from patient responsibility after all collection efforts have been exhausted and it has been determined such accounts will not be collected. Bad debt write-offs of approximately $2.1 million and $2.9 million were recorded for the three months ended March 31, 2015, and 2014, respectively.

The Company treats anyone that is emergent, including patients that may be eligible for Medicare or Medicaid. These services are provided at no charge to the patient. Total charity care was approximately 8.8% and 8.2% of patient service revenue for the three months ended March 31, 2015 and 2014, respectively.

Advertising Costs 

Advertising costs are expensed as incurred. Advertising expense for the three months ended March 31, 2015 and 2014, was approximately $1.5 million and $1.1 million, respectively, and is included as a component of general and administrative expenses within the unaudited condensed consolidated statements of operations.

Medical Supplies Inventory 

Inventory is carried at the lower of cost or market using the first-in, first-out method and consists of a standard set of medical supplies held in stock at all facilities.

Property and Equipment 

Property and equipment are stated at cost, less accumulated depreciation and amortization computed using the straight-line method over the estimated useful life of each asset. Leasehold improvements are amortized over the shorter of the noncancelable lease term or the estimated useful life of the improvements. When assets are retired, the cost and applicable accumulated depreciation are removed from the respective accounts, and the resulting gain or loss is recognized. Expenditures for normal repairs and maintenance are expensed as incurred. Material expenditures that increase the life of an asset are capitalized and depreciated over the estimated remaining useful life of the asset.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Amortization of assets acquired under capital leases is included as a component of depreciation and amortization expense in the accompanying unaudited condensed consolidated statements of operations. Amortization is calculated using the straight-line method over the shorter of the useful lives or the term of the underlying lease agreements.

Fair Value of Financial Instruments 

The carrying amounts of the Company's financial instruments, including cash, receivables, accounts payable and accrued liabilities approximate their fair value due to their relatively short maturities. At March 31, 2015 and December 31, 2014, the carrying value of the Company's long-term debt was based on the current interest rates and approximates its fair value.

Derivative Instruments and Hedging Activities 

The Company recognizes all derivative instruments as either assets or liabilities in the balance sheet at their respective fair values. For derivatives not designated as a hedging instrument, changes in the fair value are recorded in net earnings immediately. For derivatives designated in hedging relationships, changes in the fair value are either offset through earnings against the change in fair value of the hedged item attributable to the risk being hedged or recognized in accumulated other comprehensive income, to the extent the derivative is effective at offsetting the changes in cash flows being hedged until the hedged item affects earnings.

The Company only enters into derivative contracts that it intends to designate as a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). For all hedging relationships, the Company formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged, how the hedging instrument's effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method used to measure ineffectiveness. The Company also formally assesses, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions. For derivative instruments that are designated and qualify as part of a cash flow hedging relationship, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or years during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

The Company discontinues hedge accounting prospectively when it determines that the derivative is no longer effective in offsetting cash flows attributable to the hedged risk, the derivative expires or is sold, terminated, or exercised or the cash flow hedge is dedesignated because a forecasted transaction is not probable of occurring.

In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company continues to carry the derivative at its fair value on the balance sheet and recognizes any subsequent changes in its fair value in earnings. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting and recognizes immediately in earnings gains and losses that were accumulated in other comprehensive income related to the hedging relationship.

Lease Accounting 

The Company determines whether to account for its facility leases as operating or capital leases depending on the underlying terms of the lease agreement. This determination of classification is complex and requires significant judgment relating to certain information including the estimated fair value and remaining economic life of the facilities,

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

the Company's cost of funds, minimum lease payments and other lease terms. The lease rates under the Company's lease agreements are subject to certain conditional escalation clauses that are recognized when probable or incurred and are based on changes in the consumer price index or certain operational performance measures. As of March 31, 2015, the Company leased 61 facilities, 60 of which the Company classified as operating leases and one of which the Company classified as a capital lease.

Income Taxes 

We provide for income taxes using the asset and liability method. This approach recognizes the amount of federal, state and local taxes payable or refundable for the current year, as well as deferred tax assets and liabilities for the future tax consequence of events recognized in the consolidated financial statements and income tax returns. Deferred income tax assets and liabilities are adjusted to recognize the effects of changes in tax laws or enacted tax rates.

A valuation allowance is required when it is more-likely-than-not that some portion of the deferred tax assets will not be realized. Realization is dependent on generating sufficient future taxable income.

We file a consolidated federal income tax return. State income tax returns are filed on a separate, combined or consolidated basis in accordance with relevant state laws and regulations. LPs, LLPs, LLCs and other pass-through entities that we consolidate file separate federal and state income tax returns. We include the allocable portion of each pass-through entity’s income or loss in our federal income tax return. We allocate the remaining income or loss of each pass-through entity to the other partners or members who are responsible for their portion of the taxes.

Estimated taxes of approximately $0.5 and $0.2 million are included in the provision for income taxes in the financial statements for the three months ended March 31, 2015 and 2014, respectively. The Company's estimate of the potential outcome of any uncertain tax positions is subject to management's assessment of relevant risks, facts, and circumstances existing at that time. The Company uses a more likely than not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

To the extent that the Company's assessment of such tax position changes, the change in estimate is recorded in the period in which the determination is made. The Company reports tax related interest and penalties as a component of the provision for income tax and operating expenses, respectively, if applicable. The Company has not recognized any uncertain tax positions.

Deferred Rent 

The Company records rent expense for operating leases on a straight-line basis over the life of the related leases. The Company has certain facility and equipment leases that allow for leasehold improvements allowance, free rent, and escalating rental payments. Straight-line expenses that are greater than the actual amount paid are recorded as deferred rent and amortized over the life of the lease.

Investment in Unconsolidated Joint Venture

Investments in unconsolidated companies in which the Company exerts significant influence but does not control or otherwise consolidate are accounted for using the equity method. The Company has one such investment with an ownership interest of 49.9%.  

This investment is included as investment in unconsolidated joint venture in the accompanying unaudited condensed consolidated balance sheets.

Equity in net loss of unconsolidated joint venture consists of the Company’s share of the losses generated from its noncontrolling equity investment in one full-service healthcare hospital facility. Because the operations are central to the Company’s business strategy, equity in earnings of unconsolidated affiliates is classified as a component of operating

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

income in the accompanying unaudited condensed consolidated statements of operations. The Company has contracts to manage the facility, which results in the Company having an active role in the operations of the facility and devoting a significant portion of its corporate resources to the fulfillment of these management responsibilities.

 

Recent Accounting Pronouncements 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard will become effective for the Company on January 1, 2018. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

 

NOTE 3—PROPERTY AND EQUIPMENT

Property and equipment consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2015

    

2014

 

Leasehold improvements

 

$

85,008 

 

$

77,354 

 

Computer equipment

 

 

4,147 

 

 

3,700 

 

Medical equipment

 

 

4,452 

 

 

4,213 

 

Office equipment

 

 

5,043 

 

 

4,307 

 

Automobiles

 

 

243 

 

 

243 

 

Land

 

 

6,758 

 

 

8,276 

 

Construction in progress

 

 

1,373 

 

 

8,835 

 

Buildings

 

 

4,667 

 

 

4,667 

 

 

 

 

111,691 

 

 

111,595 

 

Less accumulated depreciation

 

 

(22,007)

 

 

(17,703)

 

Property and equipment, net

 

$

89,684 

 

$

93,892 

 

Assets under capital leases totaled approximately $4.2 million as of March 31, 2015 and December 31, 2014, respectively, and were included within the buildings component of net property and equipment. Accumulated depreciation associated with these capital lease assets totaled approximately $0.4 million and $0.3 million as of March 31, 2015 and December 31, 2014, respectively.

NOTE 4—INVESTMENT IN UNCONSOLIDATED JOINT VENTURE

On October 22, 2014, the Company announced its expansion into Arizona through a joint venture with Dignity Health, one of the nation’s largest health systems. The new partnership has started with Dignity Health Arizona General Hospital, a full-service healthcare hospital facility in Laveen, Arizona, and includes providing for additional access to emergency medical care in the Phoenix area.  Dignity Health Arizona General Hospital is a full-service healthcare hospital facility, licensed by the state as a general hospital. Spanning 39,000 square-feet, the hospital has 16 inpatient rooms, two operating rooms for inpatient and outpatient surgical procedures, an emergency department, a high-complexity laboratory and a full radiology suite. Patients have full access to the Dignity Health area facilities and physicians, and the hospital will provide Phoenix-area residents with 24/7 access to emergency medical care.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The Company accounts for this joint venture under the equity method of accounting as an investment in unconsolidated joint venture, as the Company’s level of influence is significant but does not reach the threshold of controlling the entity.

The following summarizes the unaudited results of operations of our equity method investee (in thousands):

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31,

 

 

2015

 

2014

Statement of Operations Data:

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

Patient service revenue

 

$

3,331 

 

$

 —

Provision for bad debt

 

 

(325)

 

 

 —

Net patient service revenue

 

 

3,006 

 

 

 —

Operating expenses:

 

 

 

 

 

 

Salaries, wages and benefits

 

 

2,118 

 

 

 —

General and administrative

 

 

839 

 

 

 —

Other operating expenses

 

 

1,390 

 

 

 —

Depreciation and amortization

 

 

45 

 

 

 —

Total operating expenses

 

 

4,392 

 

 

 —

Loss from operations

 

 

(1,386)

 

 

 —

Other (expense):

 

 

 

 

 

 

Interest expense

 

 

(4)

 

 

 —

Total other expenses

 

 

(4)

 

 

 —

Net loss

 

$

(1,390)

 

$

 —

 

 

 

 

 

 

 

Equity in loss of unconsolidated joint venture

 

$

(694)

 

$

 —

 

 

NOTE 5—GOODWILL AND OTHER INTANGIBLE ASSETS

The following table summarizes the change in goodwill during the three months ended March 31, 2015 (in thousands):  

 

 

 

 

 

 

Balance at December 31, 2014

    

$

61,009 

 

Adjustments

 

 

 

Balance at March 31, 2015

 

$

61,009 

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The following table summarizes the change in intangible assets during the three months ended March 31, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncompete

 

Trade

 

Domain

 

 

 

 

 

    

Agreements

    

Names

    

Names

    

Total

 

Balance at December 31, 2014

 

$

3,115 

 

$

9,300 

 

$

7,600 

 

$

20,015 

 

Additions

 

 

 

 

 

 

 

 

 

Amortization

 

 

(445)

 

 

 —

 

 

 —

 

 

(445)

 

Balance at March 31, 2015

 

$

2,670 

 

$

9,300 

 

$

7,600 

 

$

19,570 

 

 

 

NOTE 6—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

As of March 31, 2015, the Company maintained one interest rate cap agreement with notional amount totaling $37.5 million. This agreement has the economic effect of capping the LIBOR variable component of the Company's interest rate at a maximum of 3.00% on an equivalent amount of the Company's Term Loan debt. The cap agreement was entered into in November 2013 at a cost of $0.09 million and expires on November 30, 2016. This cap agreement is designated as a cash flow hedge and, as a result, changes in the fair values of this cap agreement are reported in other comprehensive income. As of March 31, 2015, approximately $88,000 of deferred losses on derivative instruments are included in other comprehensive income. The cap agreement does not contain credit-risk contingent features.

The following table summarizes the Company's derivative instruments (in thousands):  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

 

 

2015

 

2014

 

 

    

       Balance Sheet Location       

    

Fair Value

    

Fair Value

 

Derivative designated as hedging instruments

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

Other long-term assets

 

$

 

$

19 

 

 

 

NOTE 7—ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2015

    

2014

 

Accounts payable

 

$

8,461 

 

$

14,133 

 

Accrued expenses

 

 

3,574 

 

 

4,431 

 

Accrued tax distribution to LLC Unit holders

 

 

4,246 

 

 

4,246 

 

Other

 

 

2,136 

 

 

2,610 

 

Total accounts payable and accrued expenses

 

$

18,417 

 

$

25,420 

 

 

 

   

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

NOTE 8—DEBT

The components of debt consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2015

    

2014

 

Term loan

 

$

75,000 

 

$

75,000 

 

Delayed draw term loan

 

 

49,000 

 

 

25,000 

 

Revolving credit

 

 

5,500 

 

 

5,500 

 

Other financing agreements

 

 

656 

 

 

1,298 

 

 

 

 

130,156 

 

 

106,798 

 

Less current maturities

 

 

(2,152)

 

 

(1,816)

 

 

 

$

128,004 

 

$

104,982 

 

On October 31, 2013, the Company entered into a Senior Secured Credit Facility (the “Facility”) for a $75.0 million term loan which matures on October 31, 2018. The Facility includes an additional $165.0 million delayed draw term loan commitment, which, if unused, expires eighteen months after the closing date, and a $10.0 million revolving commitment that matures on October 31, 2018. All of the Company's assets are pledged as collateral under the Facility. The borrowing under the Facility is used by the Company to provide financing for working capital, capital expenditures and for new facility expansion and replaced the Company's existing credit facility.

On March 31, 2014, the Company amended the Facility to, among other things, increase the maximum aggregate amount permitted to be funded by Medical Properties Trust (“MPT”) under the MPT Agreements to $255.0 million. See Note 11 (Commitments and Contingencies) for more information.

On June 11, 2014, the Company entered into a second amendment to the Facility to, among other things, provide for a borrowing under the delayed draw term loan in an aggregate principal amount of up to $75.0 million, up to $60.0 million in principal amount of which will be used to make specified distributions and up to $10.0 million in principal amount of which will be used to repay certain revolving loans.  On June 11, 2014, the Company drew $75.0 million and made the $60.0 million dividend distribution on June 24, 2014.

On April 20, 2015, the Company amended the Facility to, among other things, increase the maximum aggregate amount permitted to be funded by MPT under the MPT Agreements to $505.0 million.

Borrowings under the Facility bear interest, at our option, at a rate equal to an applicable margin over (a) a base rate determined by reference to the highest of (1) the prime rate, (2) the federal funds effective rate plus 0.50% and (3) LIBOR for an interest period of one month plus 1%, or (b) LIBOR for the applicable interest period. The margin for the Facility is 6.50% in the case of base rate loans and 7.50% in the case of LIBOR loans. The Facility includes an unused line fee of 0.50% per annum on the revolving commitment and delayed draw term loan commitment, a draw fee of 1.0% of the principal amount of each borrowing on the delayed draw term loan and an annual Agency fee of $0.1 million. At March 31, 2015 and December 31, 2014, the Company had $56.2 million and $80.2 million available under the delayed draw term commitment, respectively. At each of the periods ended March 31, 2015 and December 31, 2014, the Company had approximately $4.0 million available under the revolving commitment.

The original principal amount of the term loan will be repaid in consecutive quarterly installments of $0.5 million on the last day of each fiscal quarter commencing with the fiscal quarter ending December 31, 2015 and escalating to $0.9 million for each fiscal quarter ending after December 31, 2016. The delayed draw term loans will be repaid in consecutive quarterly installments in an amount based on the repayment calculation contained in the Facility on the last day of each fiscal quarter commencing with the fiscal quarter ending December 31, 2015. The Company will repay the aggregate principal amount of all revolving loans outstanding on the maturity date, October 31, 2018.

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Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The Facility contains certain affirmative covenants, negative covenants, and financial covenants which are measured on a quarterly basis. As of March 31, 2015, the Company was in compliance with all covenant requirements.

In 2014, the Company entered into finance agreements totaling approximately $1.9 million to finance the renewal of certain insurance policies. The finance agreements have fixed interest rates ranging between 2.49% and 3.25% with principal being repaid over 9 to 11 months. In October 2013, the Company renewed certain insurance policies and entered into a finance agreement totaling approximately $0.8 million. The finance agreement has a fixed interest rate of 1.93% with principal being repaid over 9 months.

NOTE 9—TRANSACTIONS WITH RELATED PARTIES

The Company made payments to a significant shareholder of the Company for management services and reimbursement of certain expenses related to an advisory services agreement. The total amount paid to this related party was approximately $2,000 and $0.6 million for the three months ended March 31, 2015 and 2014, respectively.  In connection with the consummation of the initial public offering, the advisory services agreement was terminated and the Company paid a one-time termination payment fee of $2.0 million in July 2014.

The Company made payments for contractor services to various related-party vendors, which totaled approximately $10,000 and $16,000 for the three months ended March 31, 2015 and 2014, respectively.

We entered into a license and master services agreement with IO Phoenix One, LLC, or IO, an affiliate of a significant shareholder on November 22, 2013, pursuant to which IO stores and maintains our data centers and modules at its Phoenix, Arizona location. We pay approximately $4,000 per month in license fees with an initial term of 36 months. The total amount payable under the agreement is approximately $148,000, with payments beginning on February 15, 2014.

NOTE 10—EMPLOYEE BENEFIT PLANS

The Company provides a 401(k) savings plan to all employees who have met certain eligibility requirements, including performing one month of service with the Company. The 401(k) plan permits matching and discretionary employer contributions. During the three months ended March 31, 2015 and 2014, the Company contributed approximately $0.9 million and $0.5 million to the 401(k) Plan for 2014 and 2013 matching contributions, respectively.

NOTE 11—COMMITMENTS AND CONTINGENCIES

Litigation and Asserted Claims 

The Company is a defendant in various legal proceedings arising in the ordinary course of business. While, management believes the outcome of pending litigation and claims will not have a material adverse effect on the Company's consolidated financial condition, operations, or cash flows, litigation is subject to inherent uncertainties. 

Insurance Arrangements 

The Company is self-insured for employee health benefits. Accruals for losses are provided based upon claims experience and actuarial assumptions, including provisions for incurred but not reported losses. At both March 31, 2015 and December 31, 2014, the Company has an accrual of approximately $0.7 million for incurred but not reported claims, which is included in accrued compensation within the condensed consolidated balance sheets.

The Company is insured for worker's compensation claims up to $1.0 million per accident and per employee with a policy limit of $1.0 million. The Company submits periodic payments to its insurance broker based upon

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Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

estimated payroll. Worker's compensation expense for each of the three months ended March 31, 2015 and 2014 was approximately $0.1 million. The Company is insured for professional liability claims up to $1.0 million per incident and $3.0 million per facility with an aggregate policy limit of $20.0 million.

Leases 

The Company leases certain medical facilities and equipment under various noncancelable operating leases. In June 2013, the Company entered into an initial MPT Agreement (the “Initial MPT Agreement”) with an affiliate of Medical Properties Trust (“MPT”) to fund future facility development and construction. The lessor to the MPT Agreement will acquire parcels of land, fund the ground-up construction of new freestanding emergency room facilities and lease the facilities to the Company upon completion of construction. Under the terms of the agreement, the lessor is to fund all hard and soft costs, including the project purchase price, closing costs and pursuit costs for the assets relating to the construction of up to twenty-five facilities with a maximum aggregate funding of $100.0 million. Each completed project will be leased for an initial term of 15 years, with three 5-year renewal options. The Company follows the guidance in ASC 840, Leases, and ASC 810, Consolidation, in evaluating the lease as a build-to-suit lease transaction to determine whether the Company would be considered the accounting owner of the facilities during the construction period. In applying the accounting guidance, the Company concluded that the one facility completed in 2013 under this arrangement qualified for capitalization.

In July 2014, the Company entered into an additional Master Funding and Development Agreement (the “Additional MPT Agreement” and, together with the Initial MPT Agreement, the “MPT Agreements”) with MPT to fund future new freestanding emergency rooms and hospitals. This agreement is separate from and in addition to the Company’s Initial MPT Agreement. The Additional MPT Agreement allows for an additional maximum aggregate funding of $150.0 million. All other material terms remain consistent with the Initial MPT Agreement.

On April 20, 2015, the Company entered into an amendment to the Additional MPT Agreement which adds an additional aggregate funding of $250.0 million, increasing the maximum aggregate funding under all of the MPT Agreements to $505.0 million. All newly constructed facilities under the MPT Agreements will have initial terms of 15 years, with three five-year renewal options.

In addition to the MPT Agreements, the Company has entered into similar agreements with certain developers to fund and lead the development efforts on the construction of future facilities. As of March 31, 2015, the Company had total receivables of $9.5 million from the lessor to the MPT agreements and certain other developers for soft costs incurred for facilities currently under development.

The Company leases approximately 80,000 square feet for its corporate headquarters. Lease expense associated with this lease was $0.4 million and $0.2 million for the three months ended March 31, 2015 and 2014, respectively.

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Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Future minimum lease payments required under noncancelable operating leases and future minimum, capital lease payments as of March 31, 2015 were as follows (in thousands):  

 

 

 

 

 

 

 

 

 

 

 

Capital

 

Operating

 

Years ending December 31,

    

leases

    

leases

 

2015 (9 months)

 

$

392 

 

$

21,230 

 

2016

 

 

533 

 

 

26,887 

 

2017

 

 

543 

 

 

24,522 

 

2018

 

 

554 

 

 

20,438 

 

2019

 

 

566 

 

 

17,115 

 

Thereafter

 

 

5,512 

 

 

147,191 

 

Total future minimum lease payments

 

$

8,100 

 

$

257,383 

 

Less: Amounts representing interest

 

 

(3,982)

 

 

 

 

Present value of minimum lease payments

 

 

4,118 

 

 

 

 

Current portion of capital lease obligations

 

 

86 

 

 

 

 

Long-term portion of capital lease payments

 

$

4,032 

 

 

 

 

Rent expense totaled approximately $7.1 million and $2.0 million for the three months ended March 31, 2015 and 2014, respectively and is included as a component of other operating expenses within the unaudited condensed consolidated statements of operations.

 

NOTE 12—SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information and supplemental noncash activities consisted of the following for the three months ended March 31(in thousands):

 

 

 

 

 

 

 

 

 

 

    

March 31, 2015

    

March 31, 2014

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Interest paid

 

$

2,897 

 

$

2,021 

 

Supplemental noncash activities:

 

 

 

 

 

 

 

Acquisition of property and equipment in accounts payable and accrued expenses

 

$

 —

 

$

918 

 

Assets acquired through capital lease

 

 

 —

 

 

176 

 

Accrual of owner distributions

 

 

 —

 

 

483 

 

 

 

 

NOTE 13—STOCK BASED COMPENSATION

In connection with the initial public offering, the Company’s Board of Directors adopted the Adeptus Health Inc. 2014 Omnibus Incentive Plan (the “Omnibus Incentive Plan”).  The Omnibus Incentive Plan provides for the granting of stock options, restricted stock and other stock-based or performance-based awards to directors, officers, employees, consultants and advisors of the Company and its affiliates. The total number of shares of Class A common stock that may be issued under the Omnibus Incentive Plan is 1,033,500At March 31, 2015, 187,644 stock-based awards had been issued under the Omnibus Incentive Plan (excluding forfeitures) and 845,856 stock-based awards remained available for equity grants.

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Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

During the three months ended March 31, 2015, the Company issued, net of forfeitures, to certain members of our management team, 140,484 restricted Class A shares with fair values of ranging from $35.03 to $37.40 per share, and which vest over a period of 1 to 4 years.

The Company also has one legacy equity-compensation plan, under which it has issued agreements awarding incentive units (restricted units) in the Company to certain employees and non-employee directors. In conjunction with the Reorganization Transactions, these restricted units were replaced with LLC Units with consistent restrictive terms. The restricted units are subject to such conditions as continued employment, passage of time and/or satisfaction of performance criteria as specified in the agreements. The restricted units vest over 3 to 4 years from the date of grant. The Company used a waterfall calculation, based on the capital structure and payout of each class of debt and equity, and a present value pricing model less marketability discount to determine the fair values of the restricted units. The Company did not issue any incentive units under the legacy plan during the three months ended March 31, 2015 and 2014.  

The Company recorded compensation expense of  $0.4 million and $0.2 million, adjusted for forfeitures, during the three months ended March 31, 2015 and 2014, respectively, related to restricted units with time-based vesting schedules. Compensation expense for the value of the portion of the time-based restricted unit that is ultimately expected to vest is recognized using a straight-line method over the vesting period, adjusted for forfeitures.  On February 18, 2015, our Board of Directors accelerated the vesting of all performance-based units. As a result of the acceleration, the Company recognized $0.1 million of additional stock-based compensation expense for the three months ended March 31, 2015. 

 

 

14. INCOME TAXES

The Company makes estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes.

The Company’s provision for income taxes in interim periods is based on our estimated annual effective tax rate. The estimated annual effective tax rate calculation does not include the effect of discrete events that may occur during the year. The effect of these events, if any, is recorded in the quarter in which the event occurs.

Prior to the Reorganization, we were not a federal taxpayer. The Company’s effective tax rate for the period differs from the statutory rates due primarily to state taxes that are not based on pre-tax income/(loss) but on gross margin resulting in state tax expense with little relation to pre-tax income and even in periods of pretax losses.

The Company’s deferred tax assets of $33.8 million are composed of $19.5 million due to the underlying basis difference in Adeptus Health LLC, $8.1 million related to the tax receivable agreement and $6.2 million related to taxable losses.

Tax Receivable Agreement

Upon the consummation of the Company’s initial public offering, the Company entered into a tax receivable agreement with the LLC Unit holders after the closing of the offering that provides for the payment from time to time by the Company to the LLC Unit holders of 85% of the amount of the benefits, if any, that the Company is deemed to realize as a result of increases in tax basis and certain other tax benefits related to exchanges of LLC Units pursuant to the exchange agreement, including tax benefits attributable to payments under the tax receivable agreement.  These payment obligations are obligations of the Company.  For purposes of the tax receivable agreement, the benefit deemed realized by the Company was computed by comparing its actual income tax liability (calculated with certain assumptions) to the amount of such taxes that the Company would have been required to pay had there been no increase

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Table of Contents

Adeptus Health Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

to the tax basis of the assets of Adeptus Health LLC as a result of the exchanges and had the Company not entered into the tax receivable agreement. The step-up in basis will depend on the fair value of the LLC Units at conversion.

As of March 31, 2015, the Company has recorded an estimated payable pursuant to the tax receivable agreement of $30.0 million related to certain transactions in conjunction with the initial public offering that are expected to give rise to certain tax benefits in the future.

 

15. NET INCOME PER SHARE

Prior to the consummation of the Company’s initial public offering, the Company did not have outstanding common stock. However, in conjunction with the closing of the initial public offering, an existing owner exchanged their LLC Units for shares of the Company’s Class A common stock Basic net income per share is computed by dividing the net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by using the weighted average number of common shares outstanding, including potential dilutive shares of common stock assuming the dilutive effect of outstanding stock options and restricted stock using the treasury stock method. 

The following table sets forth the computation of basic and diluted net income per common share:

 

 

 

 

 

 

 

 

 

 

Three months ended  

 

 

 

    

 

March 31, 2015

 

 

Numerator

 

 

 

 

 

Net income attributable to Adeptus Health Inc.

 

$

594 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Denominator for basic net income per Class A common share-weighted average shares

 

 

9,906,845 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

Restricted shares

 

 

 —

 

 

 

 

 

 

 

 

Denominator for diluted net income per Class A common share-weighted average shares

 

 

9,906,845 

 

 

 

 

 

 

 

 

Net income attributable to Adeptus Health Inc. per Class A common share - Basic

 

$

0.06 

 

 

 

 

 

 

 

 

Net income attributable to Adeptus Health Inc. per Class A common share - Diluted

 

$

0.06 

 

 

 

Earnings per share information is not applicable for reporting periods prior to the initial public offering. The shares of Class B common stock do not share in the earnings or losses of Adeptus Health Inc. and are therefore not participating securities. Accordingly, basic and diluted net loss per share of Class B common stock has not been presented.

 

16. SUBSEQUENT EVENTS

On April 21, 2015, the Company announced the formation of a partnership with University of Colorado Health (UCHealth) to enhance access to emergency medical care in Colorado.  Under the partnership, UCHealth will hold a majority stake in the Company’s freestanding emergency rooms throughout Colorado Springs, northern Colorado and the Denver Metro area.  This partnership will also include hospital locations planned for Colorado Springs and Denver.

 

 

24


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the respective condensed consolidated financial statements and related footnotes of Adeptus Health Inc. included in Part I of this Quarterly  Report on Form 10-Q, as well as our consolidated audited financial statements and related notes included in our 2014 Annual Report on Form 10-K . This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those discussed in the section herein entitled “Forward Looking Statements” and in the section of the 2014 Annual Report on Form 10-K entitled Part I, "Item 1.A. Risk Factors.”

Overview

We own and operate First Choice Emergency Rooms in Texas and Colorado.  Together with Dignity Health, the company also owns and operates Dignity Health Arizona General Hospital in Arizona.  First Choice Emergency Room is the largest and oldest network of independent freestanding emergency rooms in the United States. We have experienced rapid growth in recent periods, growing from 14 freestanding facilities at the end of 2012 to 55 freestanding facilities at the end of 2014 and to 62  freestanding facilities as of March 31, 2015. Our facilities are currently located in the Houston, Dallas/Fort Worth, San Antonio and Austin, Texas markets, as well as in the Colorado Springs and Denver, Colorado and Phoenix, Arizona markets. By the end of 2015, we expect to be operating 79 facilities in our target markets.

Since our founding in 2002, our mission has been to address the need within our local communities for immediate and convenient access to quality emergency care in a patient-friendly, cost-effective setting. We believe we are transforming the emergency care experience with a differentiated and convenient care delivery model which improves access, reduces wait times and provides high-quality clinical and diagnostic services on-site. Our facilities are fully licensed and provide comprehensive, emergency care with an acuity mix that we believe is comparable to hospital-based emergency rooms.

Initial Public Offering

On June 30, 2014, we completed our initial public offering of 4,900,000 shares of our Class A common stock at a price to the public of $22.00 per share and received net proceeds of approximately $96.2 million, after deducting underwriting discounts and commissions and offering expenses.   An additional 735,000 shares were sold to the public, of which 313,586 shares were sold by a significant stockholder and 421,414 shares were sold by the Company with the proceeds received by the Company used to purchase an equivalent number of LLC Units from such significant stockholderIn connection with the initial public offering, the limited liability company agreement of Adeptus Health LLC was amended and restated to, among other things, modify its capital structure by replacing the different classes of interests previously held by the Adeptus Health LLC owners to a single new class of units called “LLC Units.” In addition, each LLC Unit holder received on a one-for-one basis one share of the Company’s Class B common stock, which entitles the holder to vote on all matters of Adeptus Health Inc. but has no economic rights.  One of the then-existing owners converted a portion of its interest into 4,895,521 shares of Class A common stock. The Company and its then-existing owners also entered into an exchange agreement under which they have the right to exchange their LLC Units and shares of Class B common stock for shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassificationsWe used the net proceeds from the initial public offering to purchase LLC Units from Adeptus Health LLC.  Adeptus Health LLC used the proceeds it received as a result of our purchase of LLC Units to reduce outstanding borrowings under its credit agreement and for general corporate purposes.

Industry Trends

The emergency room remains a critical access point for millions of Americans who experience sudden serious illness or injury in the United States each year. The availability of that care is under pressure and threatened by a wide range of factors, including shrinking capacity and an increasing demand for services. According to AHA, from 1992 to 2012, the number of emergency room visits increased by 46.7%, while the number of emergency departments decreased

25


 

by 11.4%. The number of emergency room visits exceeded 130 million in 2012, or approximately 247 visits per minute, and care previously provided in inpatient settings is now increasingly being provided in emergency departments.

Factors affecting access to emergency care include availability of emergency departments, capacity of emergency departments, and availability of staffing in emergency departments. ACEP's National Report Card on U.S. emergency care rates the access to emergency care category with a near-failing grade of "D-" and a grade of "D+" for the overall emergency room system. As the largest operator of freestanding emergency rooms, we believe we are an essential part of the solution, providing access to high-quality emergency care and offering a significantly improved patient experience relative to traditional hospital emergency departments.

Key Revenue Drivers

Our revenue growth is primarily driven by facility expansion, increasing patient volumes and reimbursement rates.

Facility Expansion

We add new facilities based on capacity, location, demographics and competitive considerations. We expect the new facilities we open to be the primary driver of our revenue growth. Our results of operations have been and will continue to be materially affected by the timing and number of new facility openings and the amount of new facility opening costs incurred. A new facility builds its patient volumes over time and, as a result, generally has lower revenue than our more mature facilities. A new facility generally takes up to 12 months to achieve a level of operating performance comparable to our similar existing facilities.

Patient Volume

We generate revenue by providing emergency care to patients based upon the estimated amounts due from commercial insurance providers, patients and other third-party payors. Revenue per treatment is sensitive to the mix of services used in treating a patient. Our patient volumes are directly correlated to our new facility openings, our targeted marketing efforts and external factors such as severity of annually recurring viruses that lead to increases in patient visits. Revenue is recognized when services are rendered to patients.

Patient volume is supported through marketing programs focused on educating communities about the convenient and high-quality emergency care we provide. Through our targeted marketing campaigns, which include direct mail, radio, outdoor advertising, digital and social media, we aim to increase our patient volumes by reaching a broad base of potential patients in order to increase brand awareness. We also have a dedicated field marketing team that works to educate local communities in which we operate about the access and care available at our facilities. Our dedicated field marketing team targets specific audiences by attending local chamber of commerce meetings, meeting with primary care physicians and visiting with school nurses and athletic directors, in order to increase patient volumes within a facility's local community.

Our patient volume is also influenced by conditions that may be beyond our direct control, some of which are seasonal. These conditions include the timing, location and severity of influenza, allergens and other annually recurring viruses, which at times leads to severe upper respiratory concerns.

Reimbursement Rates and Acuity Mix 

The majority of our net patient revenue is derived from patients with commercial health insurance coverage. The reimbursement rates set by third-party payors tend to be higher for higher acuity visits, reflecting their higher complexity. Consistent with billing practices at all emergency rooms and in light of the fact our facilities are open 24 hours a day, seven days a week and staffed with Board-certified physicians, we bill payors a facility fee, a professional services fee and other related fees. The reimbursement rates we have been able to negotiate have held relatively stable; however, the mix of both acuity and payors can vary period to period, changing the overall blended

26


 

reimbursement rate. With select payors, we have the ability to make annual increases in our billed amounts. Although we may begin to do so in the near term, we currently do not bill Medicare or Medicaid for the care we provide.

Seasonality

Our patient volumes are sensitive to seasonal fluctuations in emergency activity. Typically, winter months see a higher occurrence of influenza, bronchitis, pneumonia and similar illnesses; however, the timing and severity of these outbreaks can vary dramatically. Additionally, as consumers shift towards high deductible insurance plans, they are responsible for a greater percentage of their bill, particularly in the early months of the year before other healthcare spending has occurred, which may lead to an increase in bad debt expense during that period. Our quarterly operating results may fluctuate significantly in the future depending on these and other factors.

Sources of Revenue by Payor

We receive payments for services rendered to patients from third-party payors or from our patients directly, as described in more detail below. Generally, our revenue is determined by a number of factors, including the payor mix, the number and nature of procedures performed and the rate of payment for the procedures.

Patient service revenue before the provision for bad debt by major payor source for the periods indicated is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

March 31,

 

 

    

2015

    

2014

    

Third-party payors, including patient portion(1)

 

$

94,279 

 

$

43,672 

 

Self-pay

 

 

1,623 

 

 

857 

 

Total all payors

 

$

95,902 

 

$

44,529 

 

 


(1)

Patient portion includes deductibles and co-payments.

Four major third-party payors accounted for 86.2%, and 82.7%, of our patient service revenue for the three months ended March 31, 2015 and 2014, respectively. These same payors also accounted for 80% of our accounts receivable as of March 31, 2015 and December 31, 2014, respectively. The following table presents a breakdown by major payor source of the percentage of net patient revenues for the periods indicated:

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31,

 

 

    

2015

    

2014

    

Payor:

 

 

 

 

 

United HealthCare

 

27.0 

%  

24.5 

%  

Blue Cross Blue Shield

 

25.6 

 

27.7 

 

Aetna

 

19.8 

 

19.1 

 

Cigna

 

13.8 

 

11.4 

 

Other

 

13.8 

 

17.3 

 

 

 

100.0 

%  

100.0 

%  

 

 

 

27


 

Third-Party Payors

Third-party payors include health insurance companies as well as related payments from patients for deductibles and co-payments and have historically comprised the vast majority of our patient service revenue. We enter into contracts with health insurance companies and other health benefit groups by granting discounts to such organizations in return for the patient volume they provide.

Most of our commercial revenue is attributable to contracts where a fee is negotiated relative to the service provided at our facilities. Our contracts are structured as either case-rate contracts or as discounts to billed charges. In a case rate contract, a set fee is assigned to visits based on acuity level. We also enter into contracts with payors based on a discount of our billed charges. There are contracted rates for both the professional component and the technical component. Each portion of the claim is billed separately and paid based on the patient's emergency room benefits received.

First Choice Emergency Rooms, like hospital emergency rooms, are full-service emergency rooms licensed by the states of Texas and Colorado. As such, we collect the emergency room benefits based on a patient's specific insurance plan. Additionally, Texas insurance law provides that all fully funded insurance plans should pay all emergency claims at the in-network benefit rate, regardless of the provider's contract status.

Self-Pay

Self-pay consists of out-of-pocket payments for treatments by patients not otherwise covered by third-party payors. For the three months ended March 31, 2015 and 2014, self-pay payments accounted for 1.7% and 1.9% of our patient service revenue, respectively.

Charity Care

Charity care consists of the write-off of all charges associated with patients who are treated but do not have commercial insurance or the ability to self-pay. This includes all charges associated with care provided to patients covered by Medicare and/or Medicaid, as we do not currently receive reimbursements under those programs. For the three months ended March 31, 2015 and 2014, charity care write-offs represented 8.8% and 8.2%, of our patient service revenue, respectively. 

Key Performance Measures

The key performance measures we use to evaluate our business focus on the number of patient visits, or patient volume, same-store revenue and Adjusted EBITDA. As a result of our strategy of partnering with Dignity Health for Dignity Health Arizona General Hospital, we review unconsolidated facility revenues and also manage our facilities utilizing certain supplemental systemwide growth metrics, including systemwide net patient services revenue and systemwide patient volume.

Patient Volume

We utilize patient volume to forecast our expected net revenue and as a basis by which to measure certain costs of the business. We track patient volume at the facility level. The number of patients we treat is influenced by factors we control and also by conditions that may be beyond our direct control. See "—Key Revenue Drivers."

Same-Store Revenue

We begin comparing same-store revenue for a new facility on the first day of the 16th full fiscal month following the facility's opening, which is when we believe same-store comparison becomes meaningful. When a facility is relocated, we continue to include revenue from that facility in same-store revenue. Same-store revenue allows us to evaluate how our facility base is performing by measuring the change in period-over-period net revenue in facilities that have been open for 15 months or more. Various factors affect same-store revenue, including outbreaks of illnesses,

28


 

changes in marketing and competition. Opening new facilities is an important part of our growth strategy. These new facilities, within 15 months after opening, generally have historically generated between approximately $4.5 million to $5.5 million in annual net revenue and on average have historically incurred approximately $3.5 million in annual operating expenses. On that basis, our average annual estimated operating income, excluding depreciation and amortization, for such facilities has historically been between $1.0 million and $2.0 million, which would represent a facility operating margin, excluding depreciation and amortization, of between approximately 20% and 35%. As we continue to pursue our growth strategy, we anticipate that a significant percentage of our revenue will come from stores not yet included in our same-store revenue calculation.

Systemwide Net Patient Services Revenue

The revenues and expenses of equity method facilities are not directly included in our consolidated GAAP results. Only the net income earned from such facilities is reported on a net basis in the line item Equity in net loss of unconsolidated joint venture. Because of this, management supplementally focuses on non-GAAP systemwide results, which measure results from all our facilities, including revenues from our consolidated facilities and our equity method facilities (without adjustment based on our percentage of ownership).

For the three months ended March 31, 2015, systemwide net patient services revenue grew by 116.5% to $84.0 million for the three months ended March 31, 2015, from $38.8 million for the three months ended March 31, 2014.  The growth in systemwide net patient services revenue was due to the impact of increased patient volumes from the expansion of the number of freestanding facilities from 32 to 62, higher acuity levels and annual gross charge increases, coupled with opening Dignity Health Arizona General Hospital, a full service general hospital located in Laveen, Arizona. For the three-months ended March 31, 2015, systemwide patient volume grew by 86.4% to 51,617 compared to 27,698 for the three months ended March 31, 2014.

The following table summarizes our systemwide net patient services revenue for the periods indicated (in thousands):

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

March 31,

 

    

2015

 

2014

Net Patient Services Revenue:

 

 

 

 

 

 

Consolidated facilities

 

$

80,957 

 

$

38,781 

Unconsolidated joint venture

 

 

3,003 

 

 

 —

Systemwide net patient services revenue

 

$

83,960 

 

$

38,781 

 

Adjusted EBITDA

We define Adjusted EBITDA as net income before interest, taxes, depreciation, and amortization, further adjusted to eliminate the impact of certain additional items, including advisory services paid to a significant shareholder, facility pre-opening expenses, management recruiting expenses, stock compensation expense, costs associated with our initial public offering and other non-recurring costs. Adjusted EBITDA is included in this Quarterly Report on Form 10-Q because it is a key metric used by management to assess our financial performance. We use Adjusted EBITDA to supplement GAAP measures of performance in order to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. Adjusted EBITDA is also frequently used by analysts, investors and other interested parties to evaluate companies in our industry.

Adjusted EBITDA is a non-GAAP measure of our financial performance and should not be considered as an alternative to net income (loss) as a measure of financial performance, or any other performance measure derived in accordance with GAAP, nor should it be construed as an inference that our future results will be unaffected by unusual

29


 

or other items. In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments in this presentation, such as preopening expenses, stock compensation expense, and other adjustments. Additionally, Adjusted EBITDA is not intended to be a measure of free cash flow for management's discretionary use, as it does not reflect certain cash requirements such as tax payments, debt service requirements, capital expenditures, facility openings and certain other cash costs that may recur in the future. Adjusted EBITDA contains certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs and cash costs to replace assets being depreciated and amortized. Management compensates for these limitations by supplementally relying on our GAAP results in addition to using Adjusted EBITDA. Our presentation of Adjusted EBITDA is not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.

The following table sets forth a reconciliation of our Adjusted EBITDA to net income (loss) using data derived from our condensed consolidated financial statements for the periods indicated (in thousands):  

 

 

 

Three months ended

 

 

 

March 31,

 

 

    

2015

    

2014

    

Net income (loss)

 

$
1,602 

 

($2,767)

 

Depreciation and amortization

 

4,756 

 

3,057 

 

Interest expense(a)

 

3,274 

 

2,206 

 

Provision for income taxes

 

478 

 

220 

 

Advisory Services Agreement fees and expenses(b)

 

 -

 

138 

 

Preopening expenses(c)

 

2,099 

 

1,408 

 

Management recruiting expenses(d)

 

 -

 

99 

 

Stock compensation expense(e)

 

549 

 

159 

 

Other(f)

 

505 

 

572 

 

Total adjustments

 

11,661 

 

7,859 

 

Adjusted EBITDA

 

$
13,263 

 

$
5,092 

 


(a)

Consists of interest expense and fees of $3.3 million and $2.2 million for the three months ended March 31, 2015 and 2014, respectively. 

(b)

Consists of management fees and expenses paid to a significant shareholder under our Advisory Services Agreement. The Advisory Services Agreement was terminated in connection with the consummation of our initial public offering in June 2014.

(c)

Includes labor, marketing costs and occupancy costs prior to opening a facility.

(d)

Third-party costs and fees involved in recruiting our management team.

(e)

Stock compensation expense associated with grants of management incentive units.

(f)

For the three months ended March 31, 2015, we incurred terminated real-estate development costs totaling $32,000 and costs to develop long-term strategic goals and objectives totaling $0.5 million. For the three months ended March 31, 2014, we incurred terminated real-estate development costs totaling $0.2 million, costs to develop long-term strategic goals and objectives totaling approximately $0.3 million and board fees and travel expenses paid to members of the board of directors totaling approximately $60,000.

30


 

Results of Operations

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31,  2014 

The following table summarizes our results of operations for the three months ended March 31, 2015 and 2014 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of

 

 

 

 

 

 

 

 

 

Change from prior

 

net patient

 

 

 

 

 

 

 

 

 

period

 

service revenue

 

 

    

2015

    

2014

    

$  

    

%

    

2015

    

2014

    

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patient service revenue

 

$

95,902 

 

$

44,529 

 

$

51,373 

 

115.4 

%

 

 

 

 

Provision for bad debt

 

 

(14,945)

 

 

(5,748)

 

 

(9,197)

 

160.0 

 

 

 

 

 

Net patient service revenue

 

 

80,957 

 

 

38,781 

 

 

42,176 

 

108.8 

 

100 

%

100 

%

Management and contract services revenue

 

 

496 

 

 

 —

 

 

496 

 

 -

 

0.6 

 

 -

 

Total net operating revenue

 

 

81,453 

 

 

38,781 

 

 

42,672 

 

110.0 

 

100.6 

 

100.0 

 

Equity in loss of unconsolidated joint venture

 

 

(694)

 

 

 —

 

 

(694)

 

 -

 

(0.9)

 

 -

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

 

48,880 

 

 

24,980 

 

 

23,900 

 

95.7 

 

60.4 

 

64.4 

 

General and administrative

 

 

10,464 

 

 

6,220 

 

 

4,244 

 

68.2 

 

12.9 

 

16.0 

 

Other operating expenses

 

 

11,305 

 

 

4,865 

 

 

6,440 

 

132.4 

 

14.0 

 

12.5 

 

Depreciation and amortization

 

 

4,756 

 

 

3,057 

 

 

1,699 

 

55.6 

 

5.9 

 

7.9 

 

Total operating expenses

 

 

75,405 

 

 

39,122 

 

 

36,283 

 

92.7 

 

93.1 

 

100.9 

 

Income (loss) from operations

 

 

5,354 

 

 

(341)

 

 

5,695 

 

(1,670.1)

 

6.6 

 

(0.9)

 

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(3,274)

 

 

(2,206)

 

 

(1,068)

 

48.4 

 

(4.0)

 

(5.7)

 

Total other expense

 

 

(3,274)

 

 

(2,206)

 

 

(1,068)

 

48.4 

 

(4.0)

 

(5.7)

 

Income (loss) before provision for income taxes

 

 

2,080 

 

 

(2,547)

 

 

4,627 

 

(181.7)

 

2.6 

 

(6.6)

 

Provision for income taxes

 

 

478 

 

 

220 

 

 

258 

 

117.3 

 

0.6 

 

0.6 

 

Net income (loss)

 

$

1,602 

 

$

(2,767)

 

$

4,369 

 

(157.9)

%

2.0 

%

(7.1)

%

 

Overall

Our results for the three months ended March 31, 2015 reflect a 110.0% increase in net operating revenue to  $81.5 million and net income of $1.6 million compared to a  net loss of $2.8 million for the three months ended March 31,  2014. The net income is primarily attributable to a $42.7 million increase in net operating revenue, partially offset by increases in salaries, wages and benefits and other costs related to our growth initiatives, interest expense associated with our long-term debt and additional depreciation and amortization expense.

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Revenue

Patient Service Revenue

Patient service revenue increased by $51.4 million, or 115.4%, to $95.9 million for the three months ended March 31, 2015, from $44.5 million for the three months ended March 31, 2014. This increase was primarily attributable to a  71.0% increase in patient volumes generated from new facilities, an increase in the number of high acuity patients and annual gross charge increases beginning in late February 2015. 

Provision for Bad Debt

Our provision for bad debt increased by $9.2 million to $14.9 million for the three months ended March 31, 2015, from $5.7 million for the three months ended March 31, 2014. Of this increase, $6.2 million was attributable to revenue generated from new facilities and the remainder was attributable to an increase in patient volume coupled with a shift in payor mix from third party payors to patients.

Net Patient Service Revenue

As a result of the factors described above, our net patient service revenue increased by $42.2 million, or 108.8%, to $81.0 million for the three months ended March 31, 2015, from $38.8 million for the three months ended March 31, 2014.  

Total Net Operating Revenue

Our consolidated total net operating revenue, which exclude revenues from facilities in which the Company owns a noncontrolling interest, increased $42.7 million, or 110.0%, for the three months ended March 31, 2015 compared to the three months ended March 31, 2014. The increase was primarily attributable to the impact of increased patient volumes from the expansion of the number of freestanding facilities from 32 to 62, higher acuity levels and annual gross charge increases.  Patient volume at our consolidated facilities increased to 46,155 during the three months ended March 31, 2015 from 27,698 during the three months ended March 31, 2014.

Equity in Net Loss of Unconsolidated Joint Venture

The Company recorded $0.7 million in equity in net loss of unconsolidated joint venture for the three months ended March 31, 2015 as a result of entering into a joint venture with Dignity Health in October 2014.

Operating Expenses

Salaries, Wages and Benefits

Salaries, wages and benefits increased by $23.9 million to $48.9 million for the three months ended March 31, 2015, from $25.0 million for the three months ended March 31, 2014. This increase was primarily attributable to an increase in new facilities, which contributed $19.8 million in facility compensation. The remaining $4.1 million increase was primarily attributable to our continued efforts to add staff to support new facility growth. 

General and Administrative

General and administrative expenses increased by $4.2 million to $10.5 million for the three months ended March 31, 2015, from $6.2 million for the three months ended March 31, 2014. This increase was primarily attributable to $0.9 million in additional marketing costs associated with opening new facilities and our consumer awareness program, $0.9 million in additional facility utilities and insurance expenses, $0.9 million in legal and accounting expenses associated with opening new facilities, $0.1 million in travel expenses associated with increased headcount and the opening of new facilities outside of the Dallas/Fort Worth market and $1.4 million in other corporate expenses.  

32


 

Other Operating Expenses

Other operating expenses increased by $6.4 million to $11.3 million for the three months ended March 31, 2015, from $4.9 million for the three months ended March 31, 2014. This increase was primarily attributable to $4.8 million in additional lease costs for buildings and medical equipment at new and existing facilities, $0.2 million increase in lease costs for corporate office space and $0.5 million in property insurance and building maintenance for new and existing facilities. Patient care and supply costs at new facilities contributed $1.4 million in additional expenses, offset by a decrease of $0.5 million at legacy facilities.  

Depreciation and Amortization

Depreciation and amortization expenses increased by $1.7 million to $4.8 million for the three months ended March 31, 2015, from $3.1 million for the three months ended March 31, 2014. This increase was primarily attributable to the construction of new facilities that opened during 2014 and 2015, as well as new equipment at those facilities.

Other (Expense) Income

Interest Expense

Interest expense primarily consists of interest on our Senior Secured Credit Facility and on one facility treated as a capital lease. Our interest expense increased by $1.1 million to $3.3 million for the three months ended March 31, 2015, compared to $2.2 million for the three months ended March 31, 2014. This increase was primarily attributable to an increase in borrowings to fund construction and working capital needs of new facilities.

Income Before Provision for Income Taxes

As a result of the factors described above, we recorded income before provision for income taxes of $2.1 million for the three months ended March 31, 2015, compared to a net loss of $2.5 million for the three months ended March 31, 2014.  

Provision for Income Taxes

For the three months ended March 31, 2015, we recorded income tax expense of $0.5 million, which consists of $0.3 million of federal income tax expense and Texas margin tax of $0.2 million. Prior to the Reorganization, we were not a federal taxpayer.  Due to the timing of the Company’s initial public offering, federal income taxes were not calculated on activity prior to June 25, 2014. The Company’s effective tax rate for the period subsequent to the Reorganization differs from the statutory rate due primarily to state taxes that are not based on pre-tax income (loss) but on gross margin resulting in state tax expense even in periods of pretax losses.

The Company’s provision for income taxes in interim periods is based on our estimated annual effective tax rate. The estimated annual effective tax rate calculation does not include the effect of discrete events that may occur during the year. The effect of these events, if any, is recorded in the quarter in which the event occurs.

Net Income 

As a result of the factors described above, we recorded net income of $1.6 million for the three months ended March 31, 2015, compared to a  net loss of $2.8 million for the three months ended March 31, 2014.

Liquidity and Capital Resources

We rely on cash flows from operations, the Senior Secured Credit Facility and the MPT Agreements (each as described below) as our primary sources of liquidity. In June 2014  we sold 4,900,000 shares of Class A common stock in an initial public offering, resulting in proceeds, net of transaction expenses, of $96.2 million. We used part of the net proceeds from the initial public offering to reduce outstanding borrowings under our senior secured credit facility. An

33


 

additional 735,000 shares of Class A common stock were sold to the public, of which 313,586 shares were sold by a significant stockholder and 421,414 shares were sold by the Company with the proceeds received by the Company used to purchase an equivalent number of LLC Units from such significant stockholder.

 

Upon the consummation of our initial public offering, we entered into a tax receivable agreement with the Unit holders of Adeptus Health LLC, which provides for the payment from time to time by us to the Unit holders of Adeptus Health LLC of 85% of the amount of the benefits, if any, that we deemed to realize as a result of increases in tax basis and certain other tax benefits related to exchanges of LLC Units pursuant to the exchange agreement, including tax benefits attributable to payments under the tax receivable agreement.  These payment obligations are obligations of Adeptus Health Inc.  For purposes of the tax receivable agreement, the benefit deemed realized by Adeptus Health Inc. will be computed by comparing its actual income tax liability (calculated with certain assumptions) to the amount of such taxes that we would have been required to pay had there been no increase to the tax basis of the assets of Adeptus Health LLC as a result of the exchanges and had Adeptus Health Inc. not entered into the tax receivable agreement.

Our primary cash needs are construction costs for our new facilities, compensation of our personnel, purchases of medical supplies, facility leases, equipment rentals, marketing initiatives, service of long-term debt and any payments made under the tax receivable agreement.    We believe that cash we expect to generate from operations, the availability of borrowings under the Senior Secured Credit Facility and funds available under the MPT Agreements will be sufficient to meet liquidity requirements, including any payments made under the tax receivable agreement, anticipated capital expenditures and payments due under our Senior Secured Credit Facility and MPT Agreements for at least 12 months.

 

As of March 31, 2015, our principal sources of liquidity included cash of $13.9 million, funds available under our Senior Secured Credit Facility line of credit of $10.0 million, net of $5.5 million and $0.5 million of outstanding borrowing and letters of credit, respectively, and $60.2 million in funds available under our credit facility. As of March 31, 2015, we also had $12.2 million available under the MPT Agreements.  On April 20, 2015, we entered into an amendment to the Additional MPT Agreement (as described below) which added an additional aggregate funding of $250.0 million.

 

Cash Flows

The following table summarizes our cash flows for the periods indicated (in thousands):  

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

March 31,

 

 

 

2015

    

2014

Net cash used in operating activities

 

$

(11,961)

 

$

(6,963)

 

Net cash provided by (used in) investing activities

 

 

572 

 

 

(10,181)

 

Net cash provided by financing activities

 

 

23,259 

 

 

6,776 

 

Net increase (decrease) in cash

 

$

11,870 

 

$

(10,368)

 

Net Cash from Operating Activities

Net cash used in operating activities increased by $5.0 million to $12.0 million for the three months ended March 31, 2015, from $7.0 million used in operating activities for the same period in 2014. This increase was primarily attributable to labor costs on new facilities where revenue is ramping up, equipment lease costs associated with new facilities, new facility preopening expenses, marketing expenses, increases in accounts receivable balances due to increased revenues, restricted cash requirements related to the MPT Agreements and interest payments.

34


 

Net Cash from Investing Activities

Net cash provided by investing activities increased by $10.8 million to $0.6 million for the three months ended March 31, 2015, from $10.2 million used by investing activities for the same period in 2014. This increase was primarily attributable to a shift in the mix of the number of facility constructions funded by us versus MPT or other third party developers.  

Net Cash from Financing Activities

Net cash provided by financing activities increased by $16.5 million to $23.3 million for the three months ended March 31, 2015, from $6.8 million for the same period in 2014. This increase was primarily attributable to a net increase over the same period in prior year in borrowings under our Senior Secured Credit Facility to finance construction and ongoing operations of new facilities.  

Off Balance Sheet Arrangements

During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purpose arrangements. We lease certain medical facilities and equipment under various non-cancelable operating leases. See "—Obligations and Commitments—Operating Lease Obligations."

As a result of our strategy of partnering with Dignity Health for Dignity Health Arizona General Hospital, we do not own a controlling interest in this facility.  At March 31, 2015, we accounted for this joint venture under the equity method.  Similar to our consolidated facilities, this joint venture has debts. With respect to this joint venture, these debts are not included in our consolidated financial statements. At March 31, 2015, the total debt on the balance sheet of the joint venture was approximately $0.3 million. Our ownership in this joint venture was 49.9% at March 31, 2015.

As described above, our unconsolidated joint venture  is structured as an LLC.  This joint venture does not provide financing, liquidity, or market or credit risk support for us. 

Obligations and Commitments

The following is a summary of our contractual obligations as of March 31, 2015 (in thousands):  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

Less than 1 year

 

1-3           years

 

3-5       years

 

More than 5 years

Long-term debt obligations

 

$          130,156

 

$       1,324

 

$      9,713

 

$     119,119

 

$                -

Capital lease obligations(1)

 

8,100 

 

392 

 

1,076 

 

1,120 

 

5,512 

Operating lease obligations

 

257,383 

 

21,230 

 

51,409 

 

37,553 

 

147,191 

Total

 

$          395,639

 

$     22,946

 

$    62,198

 

$     157,792

 

$    152,703

 


(1)

Includes amounts representing interest.

Senior Secured Credit Facility

On October 31, 2013, we entered into a Senior Secured Credit Facility (the “Facility”) for a $75.0 million term loan, which matures on October 31, 2018. The Facility includes an additional $165.0 million delayed draw term loan commitment, which, if unused, expires eighteen months after the closing date, and a $10.0 million revolving commitment that matures on October 31, 2018. All of our assets are pledged as collateral under the Senior Secured

35


 

Credit Facility.  Borrowings under the Facility are used by us to provide financing for working capital and capital expenditures for new facility expansion and replaced our original credit facility.

On March 31, 2014, we amended the Facility to, among other things, increase the maximum aggregate amount permitted to be funded by Medical Properties Trust (“MPT”) under the MPT Agreements  (as defined below) to $255.0 million.

On June 11, 2014, we entered into a second amendment to the Facility to, among other things, provide for a delayed draw term loan in an aggregate principal amount of up to $75.0 million, up to $60.0 million of which will be used to make specified distributions and up to $10.0 million to repay certain revolving loans.  On June 11, 2014, we drew $75.0 million and made the $60.0 million dividend distribution on June 24, 2014.

Borrowings under the Facility bear interest, at our option, at a rate equal to an applicable margin over (a) a base rate determined by reference to the highest of (1) the prime rate, (2) the federal funds effective rate plus 0.50% and (3) LIBOR for an interest period of one month plus 1%, or (b) LIBOR for the applicable interest period. The margin for the Senior Secured Credit Facility is 6.50% in the case of base rate loans and 7.50% in the case of LIBOR loans. The Facility includes an unused line fee of 0.50% per annum on the revolving commitment and delayed draw term loan commitment, a draw fee of 1.0% of the principal amount of each borrowing on the delayed draw term loan and an annual Agency fee of $0.1 million. As of March 31, 2015, we had $56.2 million and approximately $4.0 million available under the delayed draw term commitment and the revolving commitment, respectively.

The original principal amount of the term loan will be repaid in consecutive quarterly installments of $0.5 million on the last day of each fiscal quarter commencing with the fiscal quarter ending December 31, 2015 and escalating to $0.9 million for each fiscal quarter ending after December 31, 2016. If drawn, the delayed draw term loan will be repaid in consecutive quarterly installments in an amount based on the repayment calculation contained in the Facility on the last day of each fiscal quarter commencing with the fiscal quarter ending December 31, 2015. We will repay the aggregate principal amount of all revolving loans outstanding on the maturity date, October 31, 2018.

The Senior Secured Credit Facility contains certain affirmative covenants, negative covenants, and financial covenants, which are measured on a quarterly basis. As of March 31, 2015, we were in compliance with all covenant requirements.

Capital Lease Obligations

Assets under capital leases totaled approximately $4.2 million as of March 31, 2015, and were included within the buildings component of net property and equipment. Accumulated amortization associated with these capital lease assets totaled approximately $0.4 million for the three months ended March 31, 2015. 

Operating Lease Obligations

We lease certain medical facilities and equipment under various non-cancelable operating leases. In June 2013, we entered into a Master Funding and Development Agreement (the Initial MPT Agreement”) with an affiliate of Medical Properties Trust (“MPT) to fund future facilities. Pursuant to the Initial MPT Agreement, MPT will acquire parcels of land, fund the ground-up construction of new freestanding emergency room facilities and lease the facilities to us upon completion of construction. Under the terms of the agreement, MPT is required to fund all hard and soft costs, including the project purchase price, closing costs and pursuit costs for the assets relating to the construction of up to 25 facilities with a maximum aggregate funding of $100.0 million.  The maximum aggregate funding has been met. Each completed project will be leased for an initial term of 15 years, with three five-year renewal options. We follow the guidance in Accounting Standards Codification, or ASC, 840, Leases, and ASC 810, Consolidation, in evaluating the lease as a build-to-suit lease transaction to determine whether we would be considered the accounting owner of the facilities during the construction period. In applying the accounting guidance, we concluded that one facility completed in 2013 under this arrangement qualified for capitalization.

36


 

In July 2014, we entered into an additional Master Funding and Development Agreement (the “Additional MPT Agreement” and, together with the Initial MPT Agreement, the “MPT Agreements”) with MPT to fund future new freestanding emergency rooms and hospitals. This agreement is separate from and in addition to our Initial MPT Agreement. The new agreement allows a maximum aggregate funding of $150.0 million, of which $12.2 million remained available as of March 31, 2015. All other material terms remain consistent with the Initial MPT Agreement.  On April 20, 2015, the Company entered into an amendment to the Additional MPT Agreement which adds an additional aggregate funding of $250.0 million, increasing the maximum aggregate funding under all of the MPT Agreements to $505.0 million.  All newly constructed facilities under the MPT Agreements will have initial terms of 15 years, with three five-year renewal options.

In addition to the MPT Agreements, the Company has entered into similar agreements with certain developers to fund and lead the development efforts on the construction of future facilities. As of March 31, 2015, the Company had total receivables of $9.5 million from the lessor to the MPT Agreements and certain developers for soft costs incurred for facilities currently under development.

We lease approximately 80,000 square feet for our corporate headquarters. Lease expense associated with this lease was $0.4 million for the three months ended March 31, 2015.  

Capital Expenditures

Our current plans for our business contemplate capital expenditures to expand our operations. The MPT Agreements will be used to fund a significant portion of our new facilities. We typically incur approximately $0.2 million in capital expenditures related to each MPT-funded facility. Facilities funded under the MPT Agreements will be operating leases and thus not considered a capital expenditure.

The table below provides our total capital expenditures for the period  (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

March 31,

 

 

2015

    

2014

Leasehold improvements

 

$

198 

 

$

7,045 

Computer equipment

 

 

447 

 

 

545 

Medical equipment

 

 

239 

 

 

449 

Office equipment

 

 

736 

 

 

735 

Automobiles

 

 

 

 

Land

 

 

 —

 

 

1,518 

Buildings

 

 

 —

 

 

 

 

$

1,620 

 

$

10,297 

 

New Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2018. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

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Critical Accounting Policies

Our application of critical accounting policies require our management to make certain assumptions about matters that are uncertain at the time the accounting estimate is made, where our management could reasonably use different estimates, or where accounting changes may reasonably occur from period to period, and in each case would have a material effect on our financial statements.

 

For a discussion of our critical accounting estimates, see the Part II., Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014. There have been no material changes in our critical accounting policies since December 31, 2014.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We are exposed to market risks related to changes in variable interest rates. As of March 31, 2015, we had $130.2 million of indebtedness (excluding capital leases) which is at variable interest rates. In seeking to reduce the risks and costs associated with such activities, we manage exposure to changes in interest rates primarily through the use of derivatives. As of March 31, 2015, we have hedged the variable interest rate risk with an interest rate cap covering approximately 30.0% of our indebtedness. We do not use financial instruments for trading or other speculative purposes, nor do we use leveraged financial instruments.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and our Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d - 15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter ended March 31, 2015, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings  

From time to time, we are party to various legal proceedings that have arisen in the normal course of conducting business. While, we do not believe the results of these proceedings, individually or in the aggregate, will have a material adverse effect on our business, financial condition, results of operations or liquidity, litigation is subject to inherent uncertainties. 

Item 1A. Risk Factors

In addition to the other information contained in this Quarterly Report on Form 10-Q, the risks and uncertainties that we believe could materially affect our business, financial condition or future results and are most important for you to consider are discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.  Additional risks and uncertainties which are not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also materially and adversely affect any of our business , financial position or future results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities  

None. 

Item 4. Mine Safety Disclosure 

Not applicable.

Item 5. Other Information  

None.

Item 6. Exhibits 

See the Exhibit Index immediately following the signature page of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

ADEPTUS HEALTH INC.

 

 

Date: May 1, 2015

/s/ Timothy L. Fielding

 

Timothy L. Fielding

 

(Chief Financial Officer and Authorized Officer)

 

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EXHIBIT INDEX

 

 

 

Exhibit
Number

    

Exhibit Description

10.1

 

Amendment to Master Funding and Development Agreement, dated as of April 20, 2015, between MPT Operating Partnership, L.P., Adeptus Health LLC and the other signatories party thereto  (incorporated by reference to Exhibit 10.8 of the Registrant’s Registration Statement on Form S-1 (File No. 333-203652) filed with the SEC on April 27, 2015).

 

 

 

10.2†

 

Form of Amendment No. 1 to Messrs. Hall’s, Cherrington’s and Fielding’s Amended and Restated Restricted Units Agreements

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1

 

Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2

 

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

† Management compensatory plan or arrangement. 

 

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time. 

41