S

fSep2

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

For the quarterly period ended March 31, 2020

or

For the transition period from ___________ to ___________

Commission file number001-37550

QUORUM HEALTH CORPORATION

(Exact name of registrant as specified in its charter)

(615) 221-1400
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:  None

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 every Interactive Data File required to be submitted 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 such files).  Yes ☑   No ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

As of May 8, 2020, there were 32,664,536 shares outstanding of the registrant’s Common Stock.

*On April 22, 2020, the New York Stock Exchange (“NYSE”) filed a Form 25 with the Securities and Exchange Commission (the “SEC”) to delist the common stock of Quorum Health Corporation (the “Company”) from the NYSE. The delisting was effective on May 2, 2020, 10 days after the filing date of the Form 25. The deregistration of the Company’s common stock under section 12(b) of the Securities Exchange Act of 1934, as amended, will be effective 90 days, or such shorter period as the SEC may determine, after filing of the Form 25. The Company’s common stock has commenced trading on the OTC Pink Marketplace under the symbol “QHCCQ”.

 

---

QUORUM HEALTH CORPORATION

Quarterly Report on Form 10-Q

Table of Contents

 

 

 

 

 

---

PART I – FINANCIAL INFORMATION

Item 1.Financial Statements

 

QUORUM HEALTH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(In Thousands, Except Earnings per Share and Shares)

 

See accompanying notes

1

---

QUORUM HEALTH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME (LOSS)

(In Thousands)

 

See accompanying notes

2

---

QUORUM HEALTH CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Par Value per Share and Shares)

 

See accompanying notes

3

---

QUORUM HEALTH CORPORATION

UNAUDITED CONSOLIDATED STATEMENT OF EQUITY (DEFICIT)

For the Three Months Ended March 31, 2020

(In Thousands, Except Shares)

 

 

 

QUORUM HEALTH CORPORATION

UNAUDITED CONSOLIDATED STATEMENT OF EQUITY (DEFICIT)

For the Three Months Ended March 31, 2019

(In Thousands, Except Shares)

 

See accompanying notes

4

---

QUORUM HEALTH CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

 

See accompanying notes

 

 

5

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Description of the Business

The principal business of Quorum Health Corporation, a Delaware corporation, and its subsidiaries (collectively, “QHC” or the “Company”) is to provide hospital and outpatient healthcare services in its markets across the United States. As of March 31, 2020, the Company owned or leased a diversified portfolio of 23 hospitals in rural and mid-sized markets, which are located in 13 states and have a total of 1,950 licensed beds. The Company provides outpatient healthcare services through its hospitals and affiliated facilities, including urgent care centers, diagnostic and imaging centers, physician clinics and surgery centers. The Company’s wholly-owned subsidiary, Quorum Health Resources, LLC (“QHR”), provides hospital management advisory and healthcare consulting services to non-affiliated hospitals located throughout the United States. Over 95% of the Company’s net operating revenues are attributable to its hospital operations business.

On April 29, 2016, Community Health Systems, Inc. (“CHS”) completed the spin-off of 38 hospitals, including their affiliated facilities, and Quorum Health Resources, LLC to form Quorum Health Corporation through the distribution of 100% of the common stock of QHC to CHS stockholders of record as of the close of business on April 22, 2016 (the “Spin-off”). In connection with the Spin-off, the Company (i) issued $400 million in aggregate principal amount of 11.625% Senior Notes due 2023 (the “Senior Notes”) on April 22, 2016, pursuant to an Indenture, by and between the Company and Wilmington Savings Fund Society, FSB, as successor trustee to Regions Bank (the “Indenture”); (ii) entered into a credit agreement (the “CS Agreement”), dated April 29, 2016, among the Company, the lenders party thereto and Credit Suisse AG, Cayman Islands Branch (“Credit Suisse”), as administrative agent and collateral agent, consisting of an $880 million senior secured term loan facility (the “Term Loan Facility”) and a $100 million senior secured revolving credit facility (the “Revolving Credit Facility”), or on a combined basis referred to as the “Senior Credit Facility”; and (iii) entered into an ABL Credit Agreement (the “UBS Agreement,” and together with the CS Agreement, collectively, the “Credit Agreements”), dated April 29, 2016, among the Company, the lenders party thereto and UBS AG, Stamford Branch (“UBS”), as administrative agent and collateral agent, providing for a $125 million senior secured asset-based revolving credit facility (the “ABL Credit Facility”).

Basis of Presentation

The condensed consolidated financial statements and accompanying notes of the Company presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”). In the opinion of the Company’s management, the condensed consolidated financial information presented herein includes all adjustments necessary to present fairly the results of operations, financial position and cash flows of the Company for the interim periods presented. Results of operations for interim periods should not be considered indicative of the results of operations expected for the full year ending December 31, 2020. Certain information and disclosures have been condensed or omitted as presented herein and as permitted by the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim period presentation. The Company’s management believes the financial statements and disclosures presented herein are adequate in order to make the information presented not misleading. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes thereto for the year ended December 31, 2019, contained in the Company’s Annual Report on Form 10-K filed with the SEC on April 10, 2020 (the “2019 Annual Report on Form 10-K”).

Going Concern

The Company’s financial statements have been prepared under the assumption that it will continue as a going concern. On April 7, 2020, the Company filed a petition for reorganization under Chapter 11 of the Bankruptcy Code (see further description below). The risks and uncertainties surrounding the Chapter 11 Cases (as defined below), the events of default under the Company’s Credit Agreements and the Indenture governing the Company’s Senior Notes, and the other conditions impacting the Company’s business raise substantial doubt as to the Company’s ability to continue as a going concern. Although Management believes that the reorganization of the Company through the Chapter 11 Cases will position the Company for sustainable growth opportunities, the Chapter 11 filing caused an event of default under the Company’s Credit Agreements and the Indenture governing its Senior Notes, which is stayed during the pendency of the Company’s bankruptcy proceeding. Further, there are several risks and uncertainties associated with the Company’s bankruptcy, including, among others: (a) the Company’s pre-packaged plan of reorganization may never be confirmed or become effective, (b) the Restructuring Support Agreement may be terminated by one or more of the parties thereto, (c) the Bankruptcy Court may grant or deny motions in a manner that is adverse to the Company and its subsidiaries, and (d) the Company’s Chapter 11 Cases may be converted into a Chapter 7 liquidation.

As a result of the defaults under the Company’s Credit Agreements and the Indenture governing its Senior Notes, the Company reclassified certain outstanding debt to current liabilities, see Note 6 — Long-Term Debt for further information.

6

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Chapter 11 Bankruptcy Filing (Subsequent Event)

On April 7, 2020, Quorum Health Corporation and certain of its direct and indirect subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief (the “Chapter 11 Cases”) under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) with the Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The Chapter 11 Cases are being jointly administered under the caption In re Quorum Health Corporation, et al., Case No. 20-10766 (KBO).

The Debtors continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. As debtors-in-possession under the Bankruptcy Code, the Debtors may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. Further, the Debtors filed a variety of “first day” motions with the Bankruptcy Court requesting permission to continue the Company’s business activities in the ordinary course. The Bankruptcy Court entered an order approving the Debtors’ “first day” motions on April 9, 2020 on an interim basis, and the Bankruptcy Court held the final hearing on the “first day” motions on May 6, 2020.

The Company’s filing of the Chapter 11 Cases constituted an event of default that accelerated the Company’s obligations under its debt agreements. Specifically, the filing of the Chapter 11 Cases constituted an event of default under the Credit Agreements and the Indenture. Due to the Chapter 11 Cases, however, the lenders’ ability to exercise remedies under their respective credit agreements and debt instruments was stayed as of the date of the Chapter 11 petition and continues to be stayed.

On April 6, 2020, the Debtors entered into a Restructuring Support Agreement (the “RSA”) with (i) the lenders who (a) constitute more than a majority in number of the lenders under the Senior Credit Facility and (b) hold at least two-thirds of the aggregate outstanding principal amount of the Senior Credit Facility (the “Consenting First Lien Lenders”), and (ii) the holders who (x) constitute a majority in number of the holders of the Senior Notes and (y) hold at least two-thirds of the aggregate outstanding principal amount of the Senior Notes (the “Consenting Noteholders”, and collectively with the Consenting First Lien Lenders, the “Consenting Stakeholders”). The RSA contemplates that the restructuring and recapitalization of the Debtors will occur through a joint prepackaged plan of reorganization in the Chapter 11 Cases (the “Plan”).

The Debtors filed the Plan with the Bankruptcy Court on April 7, 2020. Under the RSA, the Plan must be confirmed and declared effective by the Bankruptcy Court no later than June 21, 2020, but if any required regulatory approval has not been obtained prior to June 21, 2020, then the Company automatically has an additional twenty calendar days to obtain a confirmed and effective Plan. Under the Bankruptcy Code, a majority in number and two-thirds in amount of each impaired class of claims must approve the Plan. The RSA requires the Consenting Stakeholders to vote in favor of and support the Plan, and the Consenting Stakeholders represent the requisite number of votes in each impaired class of creditors entitled to vote on the Plan.

The Plan provides that the reorganized QHC (the “Reorganized QHC”) will pay all of the general unsecured claims against the Debtors’ estate in the ordinary course of business. Moreover, the Plan will allow the Company to reduce its debt by approximately $500 million through the refinancing and paydown of its Senior Credit Facility, the refinancing of its ABL Credit Facility and the extinguishment of its Senior Notes. In exchange for the extinguishment of their claims under the Senior Notes, the Reorganized QHC will issue to the holders of the Senior Notes 100% of the shares of new common stock of the Reorganized QHC, subject to dilution by shares of new common stock issued pursuant to the Equity Commitment Agreement (defined below) and the management incentive plan that will be adopted by the Reorganized QHC. The holders of Senior Notes also will receive interests in a litigation trust established by QHC in the Chapter 11 Cases. The Plan requires, and the Company expects, that all of the Company’s existing shares of common stock, restricted stock, and restricted stock units will be cancelled in the Chapter 11 Cases without receiving any distributions from the Debtors. The Company expects to fund the distributions under the Plan through cash on hand, shares of new common stock of the Reorganized QHC, certain exit financing arrangements, and an equity raise of at least $200 million pursuant to that certain Equity Commitment Agreement, among the Company and certain of the Consenting Noteholders (the “Equity Commitment Agreement”).

Additionally, on April 10, 2020, the Company entered into a Superpriority Secured Debtor-in-Possession Credit Agreement, among the Company, as the borrower, certain subsidiaries of the Company party thereto as guarantors, the lenders party thereto, GLAS USA, LLC, as administrative agent for the lenders, and GLAS Americas, LLC, as collateral agent for the lenders (the “DIP Credit Agreement”), which obtained final approval by the Bankruptcy Court on May 6, 2020. See Note 6 — Long Term Debt – Debtor-in-Possession Credit Agreement for additional information about the DIP Credit Agreement.

The Company cannot predict the ultimate outcome of the Chapter 11 Cases. Although the Company expects the Chapter 11 Cases to be resolved quickly since the Company entered bankruptcy with a joint prepackaged plan of reorganization, third parties may propose alternative plans of reorganization, the RSA may be terminated by one or more of the Consenting Stakeholders or the Company, or the Bankruptcy Court may refuse to confirm the Plan. In the event the Plan is not confirmed or the RSA is terminated, the duration of the Chapter 11 Cases will be extended which will increase the Company’s expenses and reduce the Company’s capital

7

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

resources. Further, even if the Plan is confirmed, although the Company expects the exit financing provided for in the Plan will be sufficient to make all payments required by the Plan, the Company faces many risks and uncertainties that it cannot predict and consequently, there is no guarantee that the exit financing provided for in the Plan will be sufficient to accomplish the Company’s reorganization strategy.

COVID-19 Pandemic

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) a pandemic. The outbreak of the COVID-19 pandemic is materially adversely affecting the Company’s employees, patients, communities and business operations, as well as the U.S. economy and financial markets. The full extent to which the COVID-19 outbreak will impact the Company’s business, results of operations, financial condition and cash flows will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19 and the actions to contain it or treat its impact and the economic impact on local, regional, national and international markets. As the COVID-19 pandemic continues, the Company’s results of operations, financial condition and cash flows are likely to continue to be materially adversely affected, particularly if the pandemic persists for a significant amount of time.

From an operational perspective, the Company is focused on providing the safest possible environment for its employees, physicians and other caregivers, and for the care of its patients. The Company is working with federal, state and local health authorities to respond to COVID-19 cases in the communities it serves and is taking or supporting measures to try to limit the spread of the virus and to mitigate the burden on the healthcare system. Although the Company is implementing considerable safety measures, as a front line provider of healthcare services, it is deeply exposed to the health and economic effects of COVID-19, many of which have and will continue to have a material adverse impact on the Company’s employees, as well as its business, results of operations, financial condition and cash flows that the Company is not currently able to fully quantify. For example, in March 2020, the Company had to furlough certain employees due to the lack of volume at its hospitals, and these furloughs may persist for the duration of the COVID-19 pandemic. The Company is reassigning hospital personnel with pre-existing conditions or restrictions that make them especially vulnerable to COVID-19 where possible, while some are self-quarantining and not available to work at the Company’s facilities during this time. The Company has also instituted a work-from-home policy for certain of its corporate and administrative offices. Even with such steps, exposure to COVID-19 patients has increased the risk for doctors and nurses, which may further reduce the Company’s operating capacity. All of these actions could result in reduced employee morale, labor unrest, work stoppages or other workforce disruptions.

In 2020, the COVID-19 pandemic has resulted in a substantial reduction in the number of elective surgeries, physician office visits and emergency room volumes at the Company’s facilities due to restrictive measures, such as shelter-in-place orders, and general concerns related to the risk of contracting COVID-19 from interacting with the healthcare system. The Company believes that certain of these patient volume declines reflect a deferral of healthcare services utilization to a later period, rather than a permanent reduction in demand for its services. Given the general necessity of the healthcare services that the Company provides, the Company anticipates that this deferral of services may create a backlog of demand in the future, in addition to the resumption of historically normal activity; however, there is no assurance that either will occur. In addition, while many of the hospitals that the Company operates in a wide range of geographies have not experienced major capacity constraints to date, other hospitals in areas that are centers of the COVID-19 outbreak have been overwhelmed, experiencing excessive demand, potentially preventing them from treating all patients who seek care. Despite considerable efforts to source vital supplies, the Company is also experiencing supply chain disruptions, including shortages, delays and significant price increases in equipment, pharmaceuticals and medical supplies, particularly personal protective equipment (“PPE”). Staffing, equipment, and pharmaceutical and medical supplies shortages may also impact the Company’s ability to admit and treat patients.

The Company may also require an increased level of working capital if it experiences extended billing and collection cycles as a result of displaced employees, payors, revenue cycle management contractors, or otherwise. Broad economic factors resulting from the current COVID-19 pandemic, including increasing unemployment rates and reduced consumer spending, also affect the Company’s service mix, revenue mix and patient volumes, as well as its ability to collect outstanding receivables. Business closings and layoffs in the areas the Company operates may lead to increases in the uninsured and underinsured populations and adversely affect demand for its services, as well as the ability of patients and other payers to pay for services as rendered. Any increase in the amount or deterioration in the collectability of patient accounts receivable will adversely affect the Company’s results of operations, financial position and cash flows, requiring an increased level of working capital. If general economic conditions continue to deteriorate or remain uncertain for an extended period of time, the Company’s business, results of operations, financial position and cash flows will continue to be materially adversely affected.

In addition, the Company’s results of operations, financial position and cash flows may be materially adversely affected by federal or state laws, regulations, orders, or other governmental or regulatory actions addressing the current COVID-19 pandemic or

8

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

the U.S. healthcare system, which, if adopted, could result in direct or indirect restrictions to its business, results of operations, financial position and cash flows. The Company may also be subject to lawsuits from patients, employees and others exposed to COVID-19 at its facilities. Such actions may involve large demands, as well as substantial defense costs, though there is no certainty at this time whether any such lawsuits will be filed or the outcome of such lawsuits if filed. The Company’s professional and general liability insurance may not cover all claims against it.

Coronavirus Aid, Relief, and Economic Security Act and the Paycheck Protection Program and Health Care Enhancement Act

Federal and state governments have passed legislation, promulgated regulations, and taken other administrative actions intended to assist healthcare providers in providing care to COVID-19 and other patients during the public health emergency and address revenue losses attributable to COVID-19. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted and on April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act (“PPPHCE Act”) was enacted. The CARES Act includes support for healthcare professionals, patients and hospitals. The CARES Act includes $100 billion in funding to be distributed to eligible providers through the Public Health and Social Services Emergency Fund (“PHSSEF”), expansion of the Medicare Accelerated and Advance Payment Program (“MAAPP”) and changes to the Net Operating Loss (“NOL”) rules and the business interest expense deduction rules under Code Section 163(j).

The PPPHCE Act provides an additional $75 billion to the Department of Health and Human Services (“HHS”) to be distributed to health care providers to reimburse health care-related expenses and lost revenues attributable to COVID-19, as well as an additional $25 billion to facilitate and expand COVID-19 testing. The provision in the PPPHCE Act appropriating the additional $25 billion for health care providers is identical to the provision in the CARES Act that created the initial funding and provides HHS with the same broad authority to issue the funds.

PHSSEF payments (both under the CARES Act and the PPPHCE Act) are intended to reimburse healthcare providers for health care related expenses and lost revenues attributable to COVID-19 and are not required to be repaid provided that recipients attest to and comply with certain terms and conditions, including (in the case of payments under the CARES Act) limitations on balance billing for COVID-19 patients and not using funds received from the PHSSEF to reimburse expenses or losses that have been reimbursed from other sources or that other sources are obligated to reimburse (terms and conditions with respect to payments under the PPPHCE Act have not been issued). If such attestation and compliance cannot be made by a recipient, the funds provided by PHSSEF must be repaid. The payments under the MAAPP are advances on Medicare reimbursement that providers must repay.

Subsequent to March 31, 2020, the Company received $101.0 million in payments through the PHSSEF and the Company may have access to additional funding that may be available to healthcare providers under the CARES Act and PPPHCE Act, although the Company cannot estimate the amount, if any, of such additional funds. In addition, the payments received through the PHSSEF may need to be repaid if the Company is unable to use the funds in accordance with the final regulations of the PHSSEF. Because the regulations under the CARES Act and the PPPHCE Act have yet to be finalized, the extent of the Company’s ability to obtain funding from the CARES Act and the PPPHCE Act is uncertain. As debtors-in-possession under the Bankruptcy Code, the Company is not able to participate in PPPHCEP. In addition, the Company’s NOLs will be substantially reduced based on cancellation of debt income that will be realized by the Company under the Plan, and therefore the Company is expected to receive minimal benefit from the changes to the treatment of NOLs under the CARES Act.

Due to the recent enactment of this legislation and the lack of final regulations, there is a high degree of uncertainty around the CARES Act’s and PPPHCE Act’s implementation and the Company continues to assess their potential impact on its business, results of operations, financial condition and cash flows.

Additionally, the CARES Act permits the deferral of payment of the employer portion of social security taxes between March 27, 2020 and December 31, 2020, with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022. The Company began deferral of the employer portion of social security taxes in late April 2020.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries in which it holds either a direct or indirect ownership of a majority voting interest. Investments in less-than-wholly-owned consolidated subsidiaries of QHC are presented separately in the equity component of the Company’s consolidated balance sheets to distinguish between the interests of QHC and the interests of the noncontrolling investors. Revenues and expenses from these subsidiaries are included in the respective individual line items of the Company’s consolidated statements of income, and net income is presented both in total and separately to distinguish the amounts attributable to the Company and the amounts attributable to the interests of the noncontrolling investors. Noncontrolling interests that are redeemable, or may become redeemable at a fixed or determinable price at the option of the holder or

9

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

upon the occurrence of an event outside of the control of the Company, are presented in mezzanine equity in the Company’s consolidated balance sheets. Intercompany transactions and accounts of the Company are eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. Actual results could differ from those estimates under different assumptions or conditions.

Revenues and Accounts Receivable

Revenue Recognition

The Company reports revenues from patient services at its hospitals and affiliated facilities at the amount that reflects the consideration to which the Company expects to be entitled in exchange for providing patient care. These amounts are due from patients, governmental programs and third-party payors such as Medicare, Medicaid, health maintenance organizations, preferred provider organizations, private insurers and others, and include variable consideration for retroactive revenue adjustments due to settlements of audits, reviews and investigations. Generally, the Company bills the patient and third-party payors several days after the services are performed or the patient is discharged. Revenue is recognized as the performance obligations are satisfied.

Performance obligations are determined based on the nature of the services provided by the Company. Revenue for performance obligations satisfied over time is recognized based on actual charges incurred in relation to total expected (or actual) charges for services anticipated to be provided. The Company believes that this method provides a faithful depiction of the transfer of services over the term of the performance obligation based on the inputs needed to satisfy the obligation. Generally, performance obligations satisfied over time relate to patients in the Company’s hospitals receiving inpatient acute care services. The Company measures the performance obligation from admission into the hospital to the point when it is no longer required to provide services to that patient, which is generally at the time of discharge. Revenue for performance obligations satisfied at a point in time is recognized when goods or services are provided and the Company does not believe it is required to provide additional goods or services to the patient.

Because all of its performance obligations relate to contracts with a duration of less than one year, the Company has elected to apply the optional exemption provided in Financial Accounting Standards Board’s (“FASB”) ASC 606-10-50-14(a) and, therefore, is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period. The unsatisfied or partially unsatisfied performance obligations referred to above are primarily related to inpatient acute care services at the end of the reporting period. The performance obligations for these contracts are generally completed when the patient is discharged, which generally occurs within days or weeks following the end of the reporting period.

The Company determines the transaction price based on standard billing rates for goods and services provided, reduced by contractual adjustments provided to third-party payors, discounts provided to uninsured patients and patient responsibility after insurance in accordance with the Company’s policy, and/or implicit price concessions provided to uninsured patients and patient responsibility after insurance. The Company determines its estimates of contractual adjustments and discounts based on contractual agreements, its discount policies and historical experience. The Company determines its estimate of implicit price concessions based on its historical collection experience with this class of patients.

The Company recognizes revenues related to its QHR business when either the performance obligation has been satisfied or over time as the hospital management advisory and healthcare consulting services are provided, and reports these revenues at the amount expected to be collected from the non-affiliated hospital clients of QHR.

Payor Sources

The primary sources of payment for patient healthcare services are third-party payors, including federal and state agencies administering the Medicare and Medicaid programs, other governmental agencies, managed care health plans, commercial insurance companies, workers’ compensation carriers and employers. Self-pay revenues are the portion of patient service revenues derived from patients who do not have health insurance coverage and the patient responsibility portion of services that are not covered by health insurance plans. Non-patient revenues primarily include revenues from QHR’s hospital management advisory and healthcare consulting services business, rental income and hospital cafeteria sales.

10

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

The following table provides a summary of net operating revenues by payor source (dollars in thousands):

Contractual Adjustments and Discounts

Agreements with third-party payors typically provide for payments at amounts less than standard billing rates. A summary of the payment arrangements with major third-party payors follows:

Government programs, including Medicare and Medicaid programs, which represent a large portion of the Company’s operating revenues, are highly complex programs to administer and are subject to interpretation of federal and state-specific reimbursement rates, new legislation and final cost report settlements. As a result of investigations by governmental agencies, various health care organizations have received requests for information and notices regarding alleged noncompliance with those laws and regulations. In some instances, these investigations have resulted in organizations entering into significant settlement agreements or findings of criminal and civil liability. Compliance with such laws and regulations may be subject to future government review and interpretation as well as significant regulatory action, including fines, penalties, and potential exclusion from the related programs. There can be no assurance that regulatory authorities will not challenge the Company’s compliance with these laws and regulations, and it is not possible to determine the impact (if any) such claims or penalties would have on the Company.

Contractual adjustments, or differences in standard billing rates and the payments derived from contractual terms with governmental and non-governmental third-party payors, are recorded based on management’s best estimates in the period in which services are performed and a payment methodology is established with the patient. Recorded estimates for past contractual adjustments are subject to change, in large part, due to ongoing contract negotiations and regulation changes, which are typical in the U.S. healthcare industry. Revisions to estimates are recorded as contractual adjustments in the periods in which they become known and may be subject to further revisions. In addition, the contracts the Company has with commercial insurance payors may provide for retroactive audit and review of claims. Self-pay and other payor discounts are incentives offered by the Company to uninsured or underinsured patients and other payors to reduce their costs of healthcare services. Subsequent changes in estimates for third-party payors that are determined to be the result of an adverse change in a payor’s ability to pay are recorded as bad debt expense. Bad debt expense for the three months ended March 31, 2020 and 2019 was not material and is included in other operating expenses in the Company’s consolidated statements of income.

Third-Party Program Reimbursements

Cost report settlements under reimbursement programs with Medicare, Medicaid and other managed care plans for retroactive adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing patient care. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and the Company’s historical experience, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated

11

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

with the retroactive adjustment is subsequently resolved. Estimated settlements are adjusted in future periods as new information becomes available, or as years are settled or are no longer subject to such audits, reviews, and investigations. Previous program reimbursements and final cost report settlements are included in due from and due to third-party payors in the consolidated balance sheets. Net adjustments arising from a change in the transaction price for estimated cost report settlements favorably impacted net operating revenues by $0.1 million and $1.8 million during the three months ended March 31, 2020 and 2019, respectively.

Currently, several states have established supplemental payment programs, including disproportionate share programs, for the purpose of providing reimbursement to providers to offset a portion of the cost of providing care to Medicaid and indigent patients. These state supplemental payment programs are designed with input from The Centers for Medicare & Medicaid Services (“CMS”) and are funded with a combination of federal and state resources, including, in certain instances, taxes, fees or other program expenses (collectively, “provider taxes”) levied on the providers. The receivables and payables associated with these programs are included in due from and due to third-party payors in the consolidated balance sheets.

The following table provides a summary of the components of amounts due from and due to third-party payors, as presented in the consolidated balance sheets (in thousands):

The Company recognizes the revenues and related expenses based on the terms of each program in the period in which the amounts are estimable and revenue collection is reasonably assured. The revenues earned by the Company under these programs are included in net operating revenues and the expenses associated with these programs are included in other operating expenses in the consolidated statements of income.

The following table provides a summary of the portion of Medicaid reimbursements included in the consolidated statements of income that are attributable to state supplemental payment programs (in thousands):

The California Department of Health Care Services administers the Hospital Quality Assurance Fee (“HQAF”) program, imposing a fee on certain general and acute care California hospitals. Revenues generated from these fees provide funding for the non-federal supplemental payments to California hospitals that serve California’s Medi-Cal and uninsured patients. Under the HQAF program, the Company recognized $2.8 million of Medicaid revenues and less than $0.1 million of provider taxes for the three months ended March 31, 2020 and $8.1 million of Medicaid revenues and $2.2 million of provider taxes for the three months ended March 31, 2019.

Self-Pay and Self-Pay After Insurance

Generally, patients who are covered by third-party payors are responsible for related co-pays and deductibles, which vary in amount. The Company also provides services to uninsured patients, and offers those uninsured patients a discount, either by policy or law, from the Company’s standard billing rates. The Company estimates the transaction price for patients with co-pays and deductibles and for uninsured patients based on historical collection experience and current market conditions. The initial estimate of the transaction price is determined by reducing the Company’s standard charges by any contractual adjustments, discounts, and

12

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

implicit price concessions. Subsequent changes to the estimate of the transaction price, if any, are generally recorded as an adjustment to patient service revenue in the period of the change.

Charity Care

In the ordinary course of business, the Company provides services to patients who are financially unable to pay for hospital care. The related charges for those patients who are financially unable to pay that otherwise do not qualify for reimbursement from a governmental program are classified as charity care. The Company determines amounts that qualify for charity care primarily based on the patient’s household income relative to the poverty level guidelines established by the federal government. The Company’s policy is to not pursue collections for such amounts. The related charges which are recorded in operating revenues at the standard billing rates and fully offset in contractual allowances were $11.0 million and $5.0 million for the three months ended March 31, 2020 and 2019, respectively.

Accounts Receivable

Substantially all of the Company’s receivables are related to providing healthcare services to patients at its hospitals and affiliated outpatient facilities. For self-pay and self-pay after insurance receivables, the Company estimates the implicit price concession by reserving a percentage of all self-pay and self-pay after insurance accounts receivable without regard to aging category. The estimate of the implicit price concession is based on a model that considers historical cash collections, expected recoveries and any anticipated changes in trends. The Company’s ability to estimate the implicit price concessions is not significantly impacted by the aging of accounts receivable, as management believes that substantially all of the risk exists at the point in time such accounts are identified as self-pay. Significant changes in payor mix, outsourced third party business office operations, including their efforts in collecting the Company’s accounts receivables, economic conditions, or trends in federal and state governmental healthcare coverage, among others, could affect the Company’s estimates of implicit price concessions for self-pay and self-pay after insurance accounts receivable. The Company also continually reviews its overall estimate of implicit price concessions by monitoring historical cash collections as a percentage of trailing net operating revenues, as well as by analyzing current period net operating revenues and admissions by payor classification, aged accounts receivable by payor, days revenue outstanding, the composition of self-pay receivables between pure self-pay patients and the patient responsibility portion of third-party insured receivables, and the impact of recent divestitures.

Collections are impacted by the economic ability of patients to pay, the effectiveness of the Company’s billing and collection efforts, which are outsourced to a third party, including their current policies on billings, accounts receivable payor classification and collections. The Company’s results are also affected by third party collection agencies and by the ability of the Company to further attempt collection efforts.

The Company has elected the practical expedient allowed under FASB ASC Topic 606 and does not adjust the promised amount of consideration from patients and third-party payors for the effects of a significant financing component due to the Company’s expectation that the period between the time the service is provided to a patient and the time that the patient or a third-party payor pays for that service will be one year or less. However, the Company does, in certain instances, enter into payment agreements with patients that allow payments in excess of one year. For those cases, the financing component is not deemed to be significant to the contract.

The Company has applied the practical expedient provided by FASB ASC Topic 340 and all incremental customer contract acquisition costs are expensed as incurred, as the amortization period of the asset that the Company otherwise would have recognized is one year or less in duration.

Concentration of Credit Risk

The Company grants unsecured credit to its patients, most of whom reside in the service area of the Company’s hospitals and affiliated outpatient facilities and are insured under third-party payor agreements. Because of the economic diversity of the Company’s markets and non-governmental third-party payors, Medicare receivables are a significant concentration of credit risk. Accounts receivable, net of contractual adjustments, from Medicare were $50.4 million and $47.6 million, or 18.6% and 16.6% of total patient accounts receivable as of March 31, 2020 and December 31, 2019, respectively. Additionally, the Company believes Illinois Medicaid represents a significant concentration of credit risk to the Company due to the fiscal problems in the state of Illinois that affect the timing and extent of payments due to providers, which are administered by the state of Illinois under the Medicaid program. The Company’s accounts receivable, net of contractual adjustments, from Illinois Medicaid were $17.6 million and $18.3 million, or 6.5% and 6.4% of total patient accounts receivable as of March 31, 2020 and December 31, 2019, respectively.

The Company’s revenues are particularly sensitive to regulatory and economic changes in certain states where the Company generates significant revenues. Accordingly, any changes in the current demographic, economic, competitive or regulatory conditions in certain states in which revenues are significant could have an adverse effect on the Company’s results of operations, financial position or cash flows. Changes to the Medicaid and other government-managed payor programs in these states, including reductions

13

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

in reimbursement rates or delays in reimbursement payments under state supplemental payment or other programs, could also have a similar adverse effect.

The following table provides a summary of the states in which the Company generates more than 5% of its total net patient revenues as determined in the most recent period (dollars in thousands):

Other Operating Expenses

The following table provides a summary of the major components of other operating expenses (in thousands):

The Company records costs associated with the transition services agreements and other ancillary agreements with CHS in accordance with the terms of these agreements. These costs are included in “Transition services agreements” in the table above and primarily include the costs of providing patient billing and collections (through September 30, 2019, the date of the Company’s transition from CHS to R1 RCM), information technology and payroll services. See Note 16 — Related Party Transactions for additional information on the transition services agreements with CHS.

See Note 17 — Commitments and Contingencies — Insurance Reserves for additional information related to the Company’s insurance reserves and related expenses.

General and Administrative Costs

Substantially all of the Company’s operating costs and expenses are “cost of revenues” items. Operating expenses that could be classified as general and administrative by the Company are costs related to corporate office functions, including, but not limited to tax, treasury, audit, risk management, legal and human resources. These costs are primarily salaries and benefits expenses associated with these corporate office functions. General and administrative costs of the Company were $12.1 million and $12.6 million during the three months ended March 31, 2020 and 2019, respectively.

Legal, Professional and Settlement Costs

Legal, professional and settlement costs in the Company’s consolidated statements of income primarily include legal costs and related settlements, if any, associated with regulatory claims, government investigations into reimbursement payments, strategic initiatives and other litigation matters.

14

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Loss (Gain) on Sale of Hospitals, Net

Loss (gain) on sale of hospitals, net is the loss (gain) incurred by the Company’s divestiture of hospitals and outpatient facilities. It is calculated as the difference between the consideration received from the sale and the carrying values of the associated net assets sold at the date of sale, less certain incremental direct selling costs.

Loss on Closure of Hospitals, Net

Loss on closure of hospitals, net relates to costs incurred by the Company for closure of hospitals and outpatient facilities, and includes severance, loss on disposal of property and equipment, write-down of assets, legal costs, contract termination fees and other costs incurred by the Company related to the closure.

Income Taxes

The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying values of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the provision for (benefit from) income taxes in the consolidated statements of income in the period that includes the enactment date. The Company assesses the likelihood that deferred tax assets will be recovered from future taxable income. To the extent the Company believes that recovery is not likely, a valuation allowance is established. To the extent the Company establishes a valuation allowance or increases this allowance, the related expense is included in the provision for (benefit from) income taxes in the consolidated statements of income. The Company classifies interest and penalties, if any, related to its tax positions as a component of provision for (benefit from) income taxes.

Cash and Cash Equivalents

Cash includes cash on hand and cash with banks. Cash equivalents are short-term, highly liquid investments with a maturity of three months or less from the date acquired that are subject to an insignificant risk of change in value.

Inventories

Inventories, primarily consisting of medical supplies and drugs, are stated at the lower of cost or market on a first-in, first-out basis.

Other Current Assets

Other current assets consist of the current portion of the receivables from CHS related to professional and general liability and workers’ compensation liability insurance reserves that were indemnified by CHS in connection with the Spin-off, non-patient accounts receivable primarily related to QHR and other miscellaneous current assets.

Property and Equipment

Purchases of property and equipment are recorded at cost. Property and equipment acquired in a business combination are recorded at estimated fair value. Routine maintenance and repairs are expensed as incurred. Expenditures that increase capacities or extend useful lives are capitalized. The Company capitalizes interest related to financing of major capital additions with the respective asset. Depreciation is recognized using the straight-line method over the estimated useful life of an asset. The Company depreciates land improvements over 3 to 20 years, buildings and improvements over 5 to 40 years, and equipment and fixtures over 3 to 18 years. The Company also leases certain facilities and equipment under capital lease obligations. These assets are amortized on a straight-line basis over the lesser of the lease term or the remaining useful life of the asset. Property and equipment assets that are held for sale are not depreciated.

Leases

In February 2016, the FASB issued a new accounting standard, ASC Topic 842, related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The

15

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Company adopted ASC Topic 842 effective January 1, 2019 using the modified retrospective transition approach as of the period of adoption. The Company’s financial statements prior to January 1, 2019 were not modified for the application of the new lease standard. Upon adoption of ASC Topic 842, the Company recognized $93.7 million of ROU assets and $95.6 million of lease liabilities associated with operating leases. The accounting for capital leases remained substantially unchanged. In addition, the Company recognized a $0.7 million cumulative effect adjustment that increased accumulated deficit in its consolidated balance sheet at January 1, 2019.

The Company determines if an arrangement is a lease at inception of the contract. Operating leases are included in operating lease ROU assets, current portion of operating lease liabilities, and long-term operating lease liabilities in the consolidated balance sheets. Finance leases are included in property and equipment, current portion of long-term debt, and long-term debt in the consolidated balance sheets.

ROU assets represent the Company’s right to use underlying assets for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the leases. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses an estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. The Company uses the implicit rate when readily determinable.

The Company enters into operating leases for real estate, medical office buildings, other administrative offices, as well as medical and office equipment. The Company’s finance leases consist primarily of the Corporate office and other long-term building leases. The Company’s real estate leases typically have initial lease terms of 5 to 10 years, and equipment leases typically have an initial term of 3 years.

The Company’s real estate leases may include one or more options to renew, with renewals extending the lease term for an additional 5 to 10 years. The exercise of lease renewal options is at the Company’s sole discretion. In general, the Company does not consider renewal options to be reasonably likely to be exercised, therefore renewal options are generally not recognized as part of the ROU assets and lease liabilities. Lease costs for lease payments are recognized on a straight-line basis over the lease term, unless there is a transfer of title or purchase option reasonably certain to be exercised. The Company does not record operating leases with an initial term of 12 months or less (“short-term leases”) in the consolidated balance sheets.

Certain of the Company’s lease agreements contain both lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as medical devices, the lease and non-lease components are accounted for as a single lease component. Additionally, for certain equipment leases containing multiple assets, the Company applies a portfolio approach to account for the assets as one leased asset.

Goodwill

The Company’s hospital operations and QHR’s management advisory and healthcare consulting services operations meet the criteria for classification and separate reporting units for goodwill. Goodwill was initially determined for QHC’s hospital operations reporting unit based on a relative fair value approach as of September 30, 2013 (CHS’s goodwill impairment testing date). Additional goodwill was allocated on a similar basis for four hospitals acquired by CHS in 2014 that were included in the group of hospitals spun-off to QHC. For the QHR reporting unit, goodwill was allocated based on the amount recorded by CHS at the time of its acquisition in 2007. All subsequent goodwill generated from hospital, physician practice or other ancillary business acquisitions is recorded at fair value at the time of acquisition. The Company’s goodwill is tested for impairment at least annually.

A detailed evaluation of potential impairment indicators was performed as of March 31, 2020, which specifically considered the decline in patient volumes as a result of the COVID-19 pandemic and the decline in the fair market value of the Company’s outstanding debt and common stock during the first quarter. On the basis of available evidence as of March 31, 2020, no indicators of impairment were identified. The Company’s impairment tests are based on programs and initiatives being implemented that are designed to achieve its most recent projections. Future negative trends, including potential future impacts of the COVID-19 pandemic, increased operating costs, or higher market interest rates could impact the Company’s future outlook. Such changes impacting the calculation of fair value, the risks of which are amplified by the COVID-19 pandemic, could result in a material impairment charge in the future.

16

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Intangible Assets

The Company’s intangible assets primarily consist of purchase and development costs of software for internal use and contract-based intangible assets, including physician guarantee contracts, medical licenses, hospital management contracts, non-compete agreements and certificates of need. There are no expected residual values related to the Company’s intangible assets. Capitalized software costs are generally amortized over three years, except for software costs for significant system conversions, which are amortized over 8 to 10 years. Capitalized software costs that are in the development stage are not amortized until the related projects are complete. Assets related to physician guarantee contracts, hospital management contracts, non-compete agreements and certificates of need are amortized over the life of the individual contracts. Intangible assets held for sale are not amortized.

Cloud Computing Costs

The Company is in the process of transitioning its information technology services from the IT TSA with CHS. As such, the Company has entered into various cloud computing arrangements related to the Company’s information technology infrastructure, such as financial reporting and budgeting, payroll, compliance and revenue management services. The Company capitalizes certain costs associated with cloud computing arrangements, including, among other items, employee compensation and related benefits and third party consulting costs that are part of the application development stage. These costs are included in other long-term assets on the consolidated balance sheet and are expensed into other operating expenses over the period of the hosting service contract which is generally 5 years. The Company reviews the amounts capitalized for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. The Company has capitalized $8.1 million and $5.8 million of costs related to the implementation of cloud computing arrangements as of March 31, 2020 and December 31, 2019, respectively.

Impairment of Long-Lived Assets and Goodwill

Whenever an event occurs or changes in circumstances indicate that the carrying values of certain long-lived assets may be impaired, the Company projects the undiscounted cash flows expected to be generated by these assets. If the projections indicate that the carrying values are not expected to be recovered, such amounts are reduced to their estimated fair value based on a quoted market price, if available, or an estimated fair value based on valuation techniques available in the circumstances.

Goodwill arising from business combinations is not amortized. Goodwill is evaluated for impairment at the same time every year and when an event occurs or circumstances change that, more likely than not, reduce the fair value of the reporting unit below its carrying value. The Company performs its annual testing of impairment for goodwill in the fourth quarter of each year. The fair value of the Company’s reporting units is estimated using both a discounted cash flow model as well as a multiple model based on earnings before interest, taxes, depreciation and amortization. The cash flow forecasts are adjusted by an appropriate discount rate based on the Company’s best estimate of a market participant’s weighted-average cost of capital. Both models are based on the Company’s best estimate of future revenues and operating costs and are reconciled to the Company’s consolidated market capitalization, with consideration of the amount a potential acquirer would be required to pay, in the form of a control premium, in order to gain sufficient ownership to set policies, direct operations and control management decisions of the Company.

See Note 2 — Impairment of Long-Lived Assets and Goodwill for additional information related to impairment recorded in the consolidated statements of income for the three months ended March 31, 2020 and 2019.

Other Long-Term Assets

Other long-term assets consist of the long-term portion of the receivables from CHS related to professional and general liability and workers’ compensation liability insurance reserves that were indemnified by CHS in connection with the Spin-off, as well as deferred compensation plan assets, cloud computing costs, notes receivable, deposits, investments in unconsolidated subsidiaries and other miscellaneous long-term assets.

Other Current Liabilities

Other current liabilities consists of the current portion of professional and general liability insurance reserves, including the portion indemnified by CHS in connection with the Spin-off, as well as property tax accruals, software license liabilities, physician guarantees and other miscellaneous current liabilities.

Professional and General Liability Insurance and Workers’ Compensation Liability Insurance Reserves

As part of the business of owning and operating hospitals, the Company is subject to legal actions alleging liability on its part. To mitigate a portion of these risks, the Company maintains insurance exceeding a self-insured retention level for these types of claims.

17

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

The Company’s self-insurance reserves reflect the current estimate of all outstanding losses, including incurred but not reported losses, based on actuarial calculations as of period end. The loss estimates included in the actuarial calculations may change in the future based on updated facts and circumstances, including the Company’s claims experience post Spin-off. The Company’s insurance expense includes the actuarially determined estimates of losses for the current year, including claims incurred but not reported, the change in the estimates of losses for prior years based upon actual claims development experience as compared to prior actuarial projections, the insurance premiums for losses in excess of the Company’s self-insured retention levels, the administrative costs of the insurance programs, and interest expense related to the discounted portion of the liability. The Company’s reserves for professional and general liability and workers’ compensation liability claims are based on semi-annual actuarial calculations, which are discounted to present value and consider historical claims data, demographic factors, severity factors and other actuarial assumptions. The reserves for self-insured claims are discounted based on the Company’s risk-free interest rate that corresponds to the period when the self-insured claims are incurred and projected to be paid.

See Note 17 — Commitments and Contingencies for information related to the portion of the Company’s insurance reserves for professional and general liability and workers’ compensation liability that are indemnified by CHS.

Self-Insured Employee Health Benefits

The Company is self-insured for substantially all of the medical benefits of its employees. The Company maintains a liability for its current estimate of incurred but not reported employee health claims based on historical claims data provided by third-party administrators. The undiscounted reserve for self-insured employee health benefits was $6.1 million and $7.8 million as of March 31, 2020 and December 31, 2019, respectively, and is included in accrued salaries and benefits in the consolidated balance sheets. Expense each period is based on the actual claims received during the period plus the impact of any adjustment to the liability for incurred but not reported employee health claims.

Noncontrolling Interests and Redeemable Noncontrolling Interests

The Company’s consolidated financial statements include all assets, liabilities, revenues and expenses of less than 100% owned entities that it controls. Certain of the Company’s consolidated subsidiaries have noncontrolling physician ownership interests with redemption features that require the Company to deliver cash upon the occurrence of certain events outside its control, such as the retirement, death, or disability of a physician-owner. The carrying amount of redeemable noncontrolling interests is recognized in the Company’s consolidated balance sheets at the greater of: (1) the initial carrying amount of these investments, increased or decreased for the noncontrolling interests' share of cumulative net income (loss), net of cumulative amounts distributed to the noncontrolling interest partners, if any, or (2) the redemption value of the investments held by the noncontrolling interest partners.

Assets and Liabilities of Hospitals Held for Sale

The Company reports separately from other assets in the consolidated balance sheet those assets that meet the criteria for classification as held for sale. Generally, assets that meet the criteria include those for which the carrying amount will be settled principally through a sale transaction rather than through continuing use. The asset must be available for immediate sale in its present condition, subject to usual or customary terms, and the sale must be probable to occur in the next 12 months. Similarly, the liabilities of a disposal group are classified as held for sale upon meeting these criteria. Immediately following classification as held for sale, the Company remeasures these assets and liabilities and adjusts the value to the lesser of the carrying amount or fair value less costs to sell. The assets and liabilities classified as held for sale are no longer depreciated or amortized into expense. The carrying values of assets classified as held for sale are reported net of impairment in the consolidated balance sheets.

Stock-Based Compensation

The Company issues restricted stock awards to key employees and directors and recognizes stock-based compensation expense over each of the restricted stock award’s requisite service periods based on the estimated grant date fair value of each restricted stock award. See Note 14 — Stock-Based Compensation for additional information related to stock-based compensation.

Benefit Plans

The Company maintains various benefit plans, including defined contribution plans, deferred compensation plans and a supplemental executive retirement plan, for which certain of the Company’s subsidiaries are the plan sponsors. The rights and obligations of these plans were transferred from CHS to the Company, pursuant to the Separation and Distribution Agreement, which was entered into with CHS in connection with the Spin-off which governed or continue to govern the allocation of employees, assets and liabilities that were transferred to QHC from CHS. Benefits costs are recorded as salaries and benefits expenses in the

18

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

consolidated statements of income. The cumulative liability for these benefit costs is recorded in other long-term liabilities in the consolidated balance sheets.

The Company recognizes the unfunded liability of its defined benefit plan in other long-term liabilities in the consolidated balance sheets. Unrecognized gains (losses) and prior service credits (costs) are recorded as changes in other comprehensive income (loss). The measurement date of the plan’s assets and liabilities coincides with the Company’s year-end. The Company’s pension benefit obligation is measured using actuarial calculations that incorporate discount rates, rate of compensation increases and expected long-term returns on plan assets. The calculations additionally consider expectations related to the retirement age and mortality of plan participants. The Company records pension benefit costs related to all of its plans as salaries and benefits expenses in the consolidated statements of income.

See Note 15 — Benefit Plans for additional information on the Company’s individual plans.

Fair Value of Financial Instruments

The Company utilizes the U.S. GAAP fair value hierarchy to measure the fair value of its financial instruments. The fair value hierarchy distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumption about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

The inputs used to measure fair value are classified into the following fair value hierarchy:

Segment Reporting

The principal business of the Company is to provide healthcare services at its hospitals and outpatient service facilities. The Company’s only other line of business is the hospital management advisory and healthcare consulting services it provides through QHR. The Company has determined that its hospital operations business and QHR business meets the criteria for separate segment reporting. The Company’s corporate functions have been reported in the all other reportable segment. See Note 13 — Segments for additional information related to the Company’s segment reporting.

Recent Accounting Pronouncements

In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other: Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment by eliminating step two from the goodwill impairment test. This ASU instead permits an entity to recognize goodwill impairment as the excess of a reporting unit’s carrying value over the estimated fair value of the reporting unit, to the extent this amount does not exceed the carrying amount of goodwill. The new guidance continues to allow an entity to perform a qualitative assessment of goodwill impairment indicators in lieu of a quantitative assessment in certain situations. The ASU is effective for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted. The adoption of ASU No. 2017-04 did not have a significant impact on the Company’s consolidated results of operations and financial position.

In June 2016, the FASB issued ASU No. 2016-13 — Financial Instruments - Credit Losses to update the methodology used to measure current expected credit losses (“CECL”). This ASU applies to financial assets measured at amortized cost, including loans, held-to-maturity debt securities, net investments in leases, and trade accounts receivable as well as certain off-balance sheet credit exposures, such as loan commitments. This ASU replaces the current incurred loss impairment methodology with a methodology to reflect CECL and requires consideration of a broader range of reasonable and supportable information to explain credit loss estimates. The guidance must be adopted using a modified retrospective transition method through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. This ASU will be effective beginning in the first quarter of the Company’s fiscal year 2023. The Company currently does not expect ASU No. 2016-13 to have a significant impact on its consolidated results of operations, financial position and related disclosures.

19

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

NOTE 2 – IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL

Periodically, the Company evaluates the fair value of hospitals held for sale and intended for divestiture and recognizes any impairment as a result of that evaluation.

The following table provides a summary of the components of impairment recognized (in thousands):

 

NOTE 3 –DIVESTITURES

MetroSouth Medical Center

On March 20, 2020, the Company sold the remaining real property and a portion of the related tangible assets of MetroSouth Medical Center for $1.0 million.

Henderson County Community Hospital

On March 31, 2020, the Company sold 45-bed Henderson County Community Hospital and its affiliated facilities (“Henderson”), located in Lexington, Tennessee, for proceeds of $1.0 million. For the three months ended March 31, 2020 and 2019, the Company’s operating results included pre-tax losses of $1.1 million and $0.3 million, respectively, related to Henderson. In addition to the above, the Company recorded a $1.7 million loss on sale of Henderson for the three months ended March 31, 2020, which included a write-off of allocated goodwill of $0.3 million.

NOTE 4 – PROPERTY AND EQUIPMENT

The following table provides a summary of the components of property and equipment (in thousands):

Depreciation expense was $8.1 million and $10.7 million for the three months ended March 31, 2020 and 2019, respectively. See Note 5 — Goodwill and Intangible Assets for information on amortization expense recorded for property and equipment held under finance lease obligations. See Note 7 — Leases for information on ROU assets held under finance lease obligations.

Purchases of property and equipment accrued in accounts payable were $6.6 million and $8.7 million as of March 31, 2020 and December 31, 2019, respectively.

20

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

NOTE 5 – GOODWILL AND INTANGIBLE ASSETS

Goodwill

The following table provides a summary of changes in goodwill (in thousands):

Goodwill related to the Company’s hospital operations reporting unit was $358.1 million and $358.4 million as of March 31, 2020 and December 31, 2019, respectively. Goodwill related to the hospital management advisory and healthcare consulting services reporting unit was $33.3 million at both March 31, 2020 and December 31, 2019. Total accumulated goodwill impairment losses were $133.5 million at both March 31, 2020 and December 31, 2019.

Intangible Assets

The following table provides a summary of the components of intangible assets (in thousands):

As of March 31, 2020, the Company had $18.6 million of capitalized software costs that are currently in the development stage. Amortization of these costs will begin once the software projects are complete and ready for their intended use. See Note 17 — Commitments and Contingencies — Commitments Related to Information Technology for additional information on certain capitalized software costs related to the Company’s transition of its information technology infrastructure.

21

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Amortization Expense

The following table provides a summary of the components of amortization expense (in thousands):

As of March 31, 2020, the weighted-average remaining amortization period of the Company’s intangible assets subject to amortization, except for capitalized software costs and physician guarantee contracts, was approximately 2.3 years.

NOTE 6 – LONG-TERM DEBT

The following table provides a summary of the components of long-term debt (in thousands):

As discussed below, the Company defaulted on the performance of its covenants under the CS Agreement and the Indenture governing the Company’s Senior Notes. As such, all outstanding debt as of March 31, 2020 and December 31, 2019 related to the Revolving Credit Facility, the Term Loan Facility, the ABL Credit Facility, and the Senior Notes have been classified as current maturities of long-term debt in the accompanying consolidated financial statements.

Debtor-in-Possession Credit Agreement

On April 10, 2020, the Company entered into a Superpriority Secured Debtor-in-Possession Credit Agreement, among the Company, as the borrower, certain subsidiaries of the Company party thereto as guarantors, the lenders party thereto (the “DIP Lenders”), GLAS USA, LLC, as administrative agent for the lenders (the “Administrative Agent”), and GLAS Americas, LLC, as collateral agent for the lenders (the “DIP Credit Agreement”). The Bankruptcy Court entered a final order approving the DIP Credit Agreement on May 6, 2020 (the “Final Order”).

The DIP Credit Agreement allows the Company to borrow term loans (the “DIP Loans”) with an aggregate principal amount of up to $100 million (the “DIP Facility”). The Company may draw up to a maximum principal amount of $60 million under the DIP Facility, and thereafter may draw the remaining portion of the loan commitments not drawn subject to the consent of the required lenders under the DIP Credit Agreement or if needed under the Budget (as defined below).

The DIP Loans bear interest at a rate per annum, at the option of the Company, equal to (i) an adjusted LIBOR (with a floor of 1.00%) plus 10.00% or (ii) an alternate base rate (with a floor of 2.00%) plus 9.00%. The adjusted LIBOR is equal to the rate of

22

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

interest quoted as the London interbank offering rate for deposits in dollars for a term comparable to the interest period applicable to a DIP Loan, adjusted for certain statutory reserves applicable to the Administrative Agent or any DIP Lender under the regulations promulgated by the Board of Governors of the Federal Reserve System of the United States. The alternate base rate is equal to the greatest of (x) the federal funds rate plus 0.5%, (y) the prime rate established by the Administrative Agent, and (z) the adjusted LIBOR in effect plus 1.00%. Upon the occurrence of an event of default, the Administrative Agent is permitted to charge a default rate of interest equal to 2.00% above the rate otherwise applicable. The Company must make interest payments monthly, in arrears, on the first day of each month, upon any prepayment, and at the final maturity date of the DIP Facility.

The Company will use the proceeds of the DIP Loans to fund its operations and working capital during the Chapter 11 Cases, pay obligations arising from or related to the Carve Out, if applicable (as defined below), pay professional fees in connection with the Chapter 11 Cases, make adequate protection payments, and pay fees and expenses incurred in connection with negotiating and implementing the DIP Credit Agreement.

As security for the DIP Loans, the DIP Lenders are entitled to joint and several superpriority claim status in the Chapter 11 Cases. Further, the Debtors granted in favor of the DIP Lenders (i) a first priority security interest in and lien upon (x) the amounts deposited in a segregated deposit account for advances of DIP Loans under the DIP Credit Agreement, and (y) subject to order by the Bankruptcy Court, avoidance actions and the proceeds thereof, and (ii) a junior security interest in and lien upon all of the assets of the Debtors encumbered by the liens established pursuant to the CS Agreement. The guarantors under the CS Agreement also guaranteed the obligations of the Company under the DIP Credit Agreement. The liens and superpriority claims of the DIP Lenders are subject in each case to a carve out (the “Carve Out”) that accounts for certain administrative, court and legal fees payable in connection with the Chapter 11 Cases.

The DIP Credit Agreement contains customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among others, (i) the obligation to deliver a cash flow forecast, setting forth all line-item cumulative receipts and operating disbursements on a weekly basis for a thirteen-week period (the “Budget”), (ii) the obligation to update the Budget every four weeks, (iii) the obligation to achieve certain milestones established by the DIP Lenders, and (iv) the obligation to deliver weekly and monthly operating reports. The Company must use the proceeds of the DIP Loans and operate its business in a manner consistent with the Budget, subject only to variances of 15% for aggregate collections and 15% for aggregate disbursements, tested on a rolling four-week basis.

Moreover, the DIP Credit Agreement contains customary representations and warranties and events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, cross defaults to certain indebtedness, certain bankruptcy-related events (such as the conversion of the Chapter 11 Cases to proceedings under Chapter 7 of the Bankruptcy Code), certain events under ERISA, the liens on the collateral of the DIP Lenders cease to be valid and perfected, and a change of control of the Company. If an event of default occurs, the Administrative Agent, at the request of the requisite DIP Lenders, will be entitled to take various actions after giving notice to the Company, including the acceleration of all amounts due under the DIP Credit Agreement and the termination of the DIP Lenders commitments to make DIP Loans, subject to the terms of the Final Order approving the DIP Credit Agreement.

The DIP Facility will mature upon the earlier to occur of (i) October 10, 2020, (ii) the acceleration of the DIP Loans and the DIP Lenders’ commitments as described above, and (iii) the effective date of the Plan.

Senior Credit Facility

In connection with the Spin-off, on April 29, 2016, the Company entered into a credit agreement (the “CS Agreement”), among the Company, the lenders party thereto and Credit Suisse AG, Cayman Islands Branch (“Credit Suisse”), as administrative agent and collateral agent. On April 11, 2017, the Company executed an agreement with its Senior Credit Facility lenders to amend certain provisions of its Senior Credit Facility (the “CS Amendment”), as described below. On March 14, 2018, the Company executed a second agreement with its Senior Credit Facility lenders to amend certain provisions of its Senior Credit Facility (the “CS Second Amendment”), as described below.

The CS Agreement initially provided for an $880 million senior secured term loan facility (the “Term Loan Facility”) and a $100 million senior secured revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Senior Credit Facility”). The Term Loan Facility was issued at a discount of $17.6 million, or 98% of par value, and has a maturity date of April 29, 2022, subject to customary acceleration events and repayment, extension or refinancing. The Revolving Credit Facility has a maturity date of April 29, 2021, subject to certain customary acceleration events and repayment, extension or refinancing. The CS Amendment reduced the Revolving Credit Facility’s capacity from $100 million to $87.5 million until December 31, 2017, at which time the capacity decreased to $75.0 million. The CS Second Amendment further reduced the Revolving Credit Facility’s capacity to $62.5 million through maturity, effective with the execution of the amendment on March 14, 2018.

23

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

The CS Agreement contains customary covenants, including a maximum permitted Secured Net Leverage Ratio, as determined based on 12 month trailing Consolidated EBITDA, as defined in the CS Agreement. On April 11, 2017, the Company executed the CS Amendment with its Senior Credit Facility lenders to amend the calculation of the Secured Net Leverage Ratio beginning July 1, 2017 through maturity, among other provisions. In addition, the CS Amendment raised the minimum Secured Net Leverage Ratio required for the Company to remain in compliance for certain periods, and also changed the calculation of compliance for specified periods. The CS Second Amendment, which was executed on March 14, 2018, amended the Secured Net Leverage Ratio for the period July 1, 2017 through maturity.

After giving effect to the CS Amendment and the CS Second Amendment, the maximum Secured Net Leverage Ratio permitted under the CS Agreement, as determined based on 12 month trailing Consolidated EBITDA measured as of the last day of each fiscal quarter as defined in the CS Agreement follows:

In addition to amending the calculation of the Secured Net Leverage Ratio and the Maximum Secured Net Leverage Ratio, the CS Amendment and the CS Second Amendment also affected other terms of the CS Agreement as follows:

Prior to the CS Amendment, interest under the Term Loan Facility accrued, at the option of the Company, at adjusted LIBOR, subject to statutory reserves and a floor of 1% plus 5.75%, or the alternate base rate plus 4.75%. Following the CS Amendment, interest under the Term Loan Facility accrues, at the option of the Company, at adjusted LIBOR, subject to statutory reserves and a floor of 1% plus 6.75%, or the alternate base rate plus 5.75%. The effective interest rate on the Term Loan Facility was 8.99% as of March 31, 2020. Interest on outstanding borrowings under the Revolving Credit Facility accrues, at the option of the Company, at adjusted LIBOR, subject to statutory reserves and a floor of 0% plus 2.75%, or the alternate base rate plus 1.75%, and remains unchanged under the CS Amendment and the CS Second Amendment. The effective interest rate on the Revolving Credit Facility was 6.53% as of March 31, 2020.

Borrowings from the Revolving Credit Facility are used for working capital and general corporate purposes. As of March 31, 2020, the Company had $47.0 million of borrowings outstanding on the Revolving Credit Facility and had $15.2 million of letters of credit outstanding that were primarily related to the self-insured retention levels of professional and general liability and workers’ compensation liability insurance as security for the payment of claims. As of March 31, 2020, the Company had borrowing capacity under its Revolving Credit Facility of $0.3 million subject to the restraint of the overall borrowing capacity calculated by the Secured Net Leverage Ratio.

The Company has defaulted on the performance of its covenants under the CS Agreement. The Company filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code on April 7, 2020, which constituted an event of default (the “Bankruptcy Event of Default”). In addition, the Company’s Secured Net Leverage Ratio exceeded 5.00 to 1.00 as of December 31, 2019, which constituted an event of default under the CS Agreement (the “Ratio Event of Default”). Moreover, based on the Bankruptcy Default and Ratio Event of Default, the Company’s management concluded there is substantial doubt regarding the Company’s ability to continue as a going concern within one year from the issuance of its consolidated financial statements. As a result, the Company received a going concern qualification in connection with the external audit report of these consolidated financial statements, which also constituted a default under the CS Agreement (the “Going Concern Default”). The CS Agreement also requires the Company to deliver to Credit Suisse its consolidated audited financial statements within ninety days of the end of the 2019 fiscal year. The Company failed to satisfy this covenant on March 30, 2020, which constituted a default under the CS Agreement (the “FS Delivery Default”). The FS Delivery Default has been cured. The Going Concern Default will mature into an event of default after notice to the Company from the administrative agent and the lapse of a thirty-day cure period.

24

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

The CS Agreement allows the lenders thereunder to accelerate the outstanding indebtedness and foreclose on the collateral subject to liens after the occurrence of an event of default, such as the Bankruptcy Event of Default and Ratio Event of Default. However, the lenders are automatically stayed from enforcing their remedies under the CS Agreement as of the date of the Company’s bankruptcy petition pursuant to the provisions of the Bankruptcy Code.

ABL Credit Facility

In connection with the Spin-off, on April 29, 2016, the Company entered into an ABL Credit Agreement (the “UBS Agreement,” and together with the CS Agreement, collectively, the “Credit Agreements”), among the Company, the lenders party thereto and UBS AG, Stamford Branch (“UBS”), as administrative agent and collateral agent. On April 11, 2017, the Company executed an amendment to the UBS Agreement with its lender party thereto, which aligned the provisions of the UBS Agreement with the CS Amendment. The UBS Agreement provides for a $125 million senior secured asset-based revolving credit facility (the “ABL Credit Facility”). The available borrowings from the ABL Credit Facility, which are based on eligible patient accounts receivable, are used for working capital and general corporate purposes. As of March 31, 2020, the Company had $99.0 million of borrowings outstanding on the ABL Credit Facility and no additional borrowing capacity.

The ABL Credit Facility has a maturity date of April 29, 2021, subject to customary acceleration events and repayment, extension or refinancing. Interest on outstanding borrowings under the ABL Credit Facility accrues, at the option of the Company, at a base rate or LIBOR, subject to statutory reserves and a floor of 0%, except that all swingline borrowings will accrue interest based on the base rate, plus an applicable margin determined by the average excess availability under the ABL Credit Facility for the fiscal quarter immediately preceding the date of determination. The applicable margin ranges from 1.75% to 2.25% for LIBOR advances and from 0.75% to 1.25% for base rate advances. The effective interest rate on the ABL Credit Facility was 3.79% as of March 31, 2020.

The ABL Credit Facility has a “Covenant Trigger Event” definition that requires the Company to maintain excess availability under the ABL Credit Facility equal to or greater than the greater of (i) $12.5 million and (ii) 10% of the aggregate commitments under the ABL Credit Facility. If a Covenant Trigger Event occurs, then the Company is required to maintain a minimum Consolidated Fixed Charge Ratio of 1.10 to 1.00 until such time that a Covenant Trigger Event is no longer continuing. In addition, if excess availability under the ABL Credit Facility were to fall below the greater of (i) 12.5% of the aggregate commitments under the ABL Credit Facility and (ii) $15.0 million, then a “Cash Dominion Event” would be triggered upon which the lenders could assume control of the Company’s cash.

The Company filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code on April 7, 2020. The Company’s filing of the bankruptcy petition constituted an event of default under the UBS Agreement. The UBS Agreement allows the lenders thereunder to accelerate the outstanding indebtedness after the occurrence of an event of default. However, the lenders are automatically stayed from enforcing their remedies under the UBS Agreement as of the date of the Company’s bankruptcy petition pursuant to the provisions of the Bankruptcy Code.

The Company also failed to satisfy its affirmative covenant under the UBS Agreement to deliver to UBS audited consolidated financial statements within 90 days of the end of the 2019 fiscal year. The failure to timely deliver the audited consolidated financial statements of the Company constituted a default under the UBS Agreement, which has since been cured. In addition, the Company’s receipt of a going concern qualification in connection with the external audit report of these consolidated financial statements also constituted a default under the UBS Agreement.

Credit Agreement Covenants

In addition to the specific covenants described above, the Credit Agreements contain customary negative covenants which limit the Company’s ability to, among other things, incur additional indebtedness, create liens, make investments, transfer assets, merge or acquire assets, and make restricted payments, including dividends, distributions and specified payments on other indebtedness. They include customary events of default, including payment defaults, material breaches of representations and warranties, covenant defaults, default on other material indebtedness, customary Employee Retirement Income Security Act (“ERISA”) events of default, bankruptcy and insolvency, material judgments, invalidity of liens on collateral, change of control or cessation of business. The Credit Agreements also requires the Company to deliver audited annual financial statements accompanied by an opinion of the Company’s accountants (which opinion is required to be without a “going concern” qualification). The Credit Agreements also contain customary affirmative covenants and representations and warranties.

Senior Notes

On April 22, 2016, QHC issued $400 million aggregate principal amount of 11.625% Senior Notes due 2023, pursuant to the Indenture. The Senior Notes were issued at a discount of $6.9 million, or 1.734%, in a private placement and are senior unsecured

25

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

obligations of the Company guaranteed on a senior basis by certain of the Company’s subsidiaries (the “Guarantors”). The Senior Notes mature on April 15, 2023 and bear interest at a rate of 11.625% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2016. Interest on the Senior Notes accrues from the date of original issuance and is calculated on the basis of a 360-day year comprised of twelve 30-day months. The effective interest rate on the Senior Notes was 12.49% as of March 31, 2020.

The Indenture contains covenants that, among other things, limit the ability of the Company and certain of its subsidiaries to incur or guarantee additional indebtedness, pay dividends or make other restricted payments, make certain investments, create or incur certain liens, sell assets and subsidiary stock, transfer all or substantially all of its assets or enter into merger or consolidation transactions. The Company defaulted on its obligations under the Indenture when it filed a voluntary petition for bankruptcy relief under Chapter 11 of the Bankruptcy Code on April 7, 2020. The Company’s default allows the trustee to accelerate payment of the Senior Notes; however, the Bankruptcy Code imposes an automatic stay which prevents the lender’s enforcement of this remedy while the Chapter 11 Cases are pending.

On May 17, 2017, the Company exchanged the 11.625% Senior Notes due 2023 (the “Initial Notes”) in the aggregate principal amount of $400 million, which were not registered under the Securities Act of 1933, as amended (the “Securities Act”), for a like principal amount of 11.625% Senior Notes due 2023 (the “Exchange Notes”), which have been registered under the Securities Act. The Initial Notes were substantially identical to the Exchange Notes, except that the Exchange Notes are registered under the Securities Act and are not subject to the transfer restrictions and certain registration rights agreement provisions applicable to the Initial Notes.

On and after April 15, 2019, the Company is entitled, at its option, to redeem all or a portion of the Senior Notes upon not less than 30 nor more than 60 days’ notice, at the following redemption prices specified in the table below, plus accrued and unpaid interest, if any, to the redemption date. The redemption prices are expressed as a percentage of the principal amount on the redemption date. Holders of record on the relevant record date have the right to receive interest due on the relevant interest payment date. In addition, prior to April 15, 2019, the Company could have redeemed some or all of the Senior Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, plus a “make whole” premium, as set forth in the Indenture. The Company was entitled to redeem up to 35% of the aggregate principal amount of the Senior Notes until April 15, 2019 with the net proceeds from certain equity offerings at the redemption price set forth in the Indenture.

The following table provides a summary of the redemption periods and prices related to the Senior Notes:

Debt Issuance Costs and Discounts

The following table provides a summary of unamortized debt issuance costs and discounts (in thousands):

Finance Lease Obligations and Other Debt

The Company’s debt arising from finance lease obligations primarily relates to its corporate office in Brentwood, Tennessee. As of March 31, 2020 and December 31, 2019, this finance lease obligation was $16.0 million and $16.3 million, respectively. The remainder of the Company’s finance lease obligations relate to property and equipment at its hospitals and corporate office. Other debt consists of physician loans and miscellaneous notes payable to banks.

26

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Debt Maturities

The following table provides a summary of debt maturities for each of the next five years and thereafter (in thousands):

Interest Expense, Net

The following table provides a summary of the components of interest expense, net (in thousands):

 

NOTE 7 – LEASES

The Company has operating and finance leases for its corporate office, certain of its hospitals, medical office buildings, medical equipment and office equipment.

The following table provides a summary of the components of lease costs and rent (in thousands):

27

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

The following table provides supplemental balance sheet information related to finance leases (in thousands):

The following table provides supplemental cash flow information related to leases (in thousands):

The following table provides the weighted-average lease terms and discount rates used for the Company’s operating and finance leases:

The following table provides a summary of lease liability maturities for the next five years and thereafter (in thousands):

28

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

 

NOTE 8 – OTHER LONG-TERM ASSETS AND OTHER LONG-TERM LIABILITIES

The following table provides a summary of the major components of other long-term assets (in thousands):

The following table provides a summary of the major components of other long-term liabilities (in thousands):

See Note 17 — Commitments and Contingencies for additional information about the Company’s insurance reserves and Note 15 — Benefit Plans for additional information about the Company’s benefit plan liabilities.

NOTE 9 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of the Company’s cash and cash equivalents, patient accounts receivable, amounts due from and due to third-party payors, restricted cash and accounts payable approximate their fair values due to the short-term maturity of these financial instruments.

The Company recorded impairment related to long-lived assets during the three months ended March 31, 2020 and 2019. See Note 2 — Impairment of Long-Lived Assets and Goodwill for additional information on these impairments. The assessment of fair value was based on Level 3 inputs, as the valuation methodologies used to determine impairment were based on internal projections and unobservable inputs. The portion of the impairment related to hospital assets held for sale was determined based on Level 2 inputs, as the valuation methodologies used to determine impairment considered letters of intent received on these hospitals.

The following table provides a summary of the carrying amounts and estimated fair values of the Company’s long-term debt, including any current maturities of long-term debt (in thousands):

29

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

The Company considers its long-term debt instruments to be measured based on Level 2 inputs. Information about the valuation methodologies used in the determination of the fair values for the Company’s long-term debt instruments follows:

NOTE 10 – EQUITY

Preferred Stock

The Company has authorized 100,000,000 shares of preferred stock, par value of $0.0001 per share. Shares of preferred stock, none of which are outstanding as of March 31, 2020 or December 31, 2019, may be issued in one or more series having such rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences as determined by the Board of Directors, subject to limitations prescribed by Delaware law and by the Company’s amended and restated certificate of incorporation.

Common Stock

The Company has authorized 300,000,000 shares of common stock, par value of $0.0001 per share. As of March 31, 2020 and December 31, 2019, the Company had 32,664,536 shares and 32,871,019 shares, respectively, of common stock issued and outstanding.

Holders of the Company’s common stock are entitled to one vote for each share held of record on all matters for which stockholders may vote. Holders of the Company’s common stock do not have cumulative voting rights in the election of directors. There are no preemptive rights, conversion, redemption or sinking fund provisions applicable to the common stock. In the event of liquidation, dissolution or winding up, holders of common stock are entitled to share ratably in the assets available for distribution. Delaware law prohibits the Company from paying any dividends unless it has capital surplus or net profits available for this purpose. In addition, the Company’s Credit Agreements and the Indenture impose restrictions on its ability to pay dividends.

All outstanding shares of the Company’s common stock, shares of the Company’s restricted stock (whether vested or unvested), and the Company’s restricted stock units (whether vested or unvested) will be cancelled pursuant to the Plan. Therefore, if the Plan is confirmed by the Bankruptcy Court, the holders of such equity interests of the Company will not receive any recovery.

Additional Paid-in Capital

In connection with the Spin-off, the Company issued common stock, as described above, to CHS stockholders. In addition, pursuant to the Separation and Distribution Agreement, CHS contributed capital of $530.6 million, in lieu of a cash settlement payment, related to the remaining intercompany indebtedness with CHS and the Parent’s equity attributable to CHS. See Note 1 — Basis of Presentation and Significant Accounting Policies for additional information related to the Spin-off.

Accumulated Deficit

Accumulated deficit of the Company, as shown in the consolidated balance sheets as of March 31, 2020 and December 31, 2019, represents the Company’s cumulative net losses since the Spin-off and the impact of the adoption of ASC Topic 842.

NOTE 11 – INCOME TAXES

The Company and its subsidiaries are subject to U.S. federal income tax and income tax of multiple state and local jurisdictions. The Company provides for income taxes based on the enacted tax laws and rates in jurisdictions in which it conducts its operations.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law, resulting in significant changes from previous law. One key aspect of the Tax Act that impacts the Company is the limitation on the deductibility of interest expense. The Tax Act provides that net interest expense is limited to 30% of Adjusted Taxable Income (“ATI”). ATI is defined as taxable income computed without regard to deductions for (1) business interest expense and income, (2) net operating losses allowable under Internal

30

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Revenue Code Section 172, and (3) depreciation, amortization, or depletion (for years beginning before January 1, 2022). The Company calculated excess interest expense of $94.2 million for 2018 and an estimated excess interest expense of approximately $99.6 million for 2019 for a total carryforward of $193.8 million which may be carried forward for an indefinite number of years.

On March 27, 2020, the CARES Act was enacted. Included in the CARES Act are numerous income tax provisions including changes to the Net Operating Loss (“NOL”) rules and the business interest expense deduction rules under Code Section 163(j). In addition, the CARES Act temporarily increases the amount of interest expense that business are allowed to deduct on their tax returns by increasing the 30% Adjusted Taxable Income limitation to 50% for tax years 2019 and 2020.

The Company’s effective tax rate was (0.1)% and (0.4)% for the three months ended March 31, 2020 and 2019, respectively. The Company’s deferred income tax liabilities, net were $7.8 million as of March 31, 2020, compared to $7.7 million as of December 31, 2019, a $0.1 million increase. The increase in deferred tax liabilities during the period was due to tax deductible amortization on indefinite-lived intangibles including goodwill net of goodwill written off in divestitures and the reclassification of refundable alternative minimum tax (“AMT”) credit from net deferred taxes to current income taxes receivable.

In the ordinary course of business, there is inherent uncertainty in quantifying the Company’s income tax positions. The Company assesses its income tax positions and records income tax benefits for all tax years subject to examination based on management’s evaluation of the facts, circumstances, and information available at the reporting date. The Company is not aware of any unrecognized income tax benefits; therefore, it has not recorded any such amounts for the three months ended March 31, 2020 and 2019.

NOTE 12 – EARNINGS PER SHARE

The following table provides a summary of the computation of basic and diluted earnings (loss) per share (in thousands, except earnings per share and shares):

Due to the net losses attributable to Quorum Health Corporation in the three months ended March 31, 2020 and 2019, no incremental shares were included in diluted earnings (loss) per share for these periods because the net effect of the shares would be anti-dilutive.

NOTE 13 – SEGMENTS

The Company’s operations consist of two distinct operating segments, its hospital operations business and its hospital management advisory and healthcare consulting services business. The hospital operations segment includes the operations of the Company’s owned and leased hospitals and their affiliated outpatient facilities that provide inpatient and outpatient healthcare services. The hospital management advisory and healthcare consulting services segment includes the operations of QHR. Both segments meet the criteria to be classified as a separate reportable segment. The financial information for the Company’s corporate functions has been reported in the tables below as part of the all other reportable segment.

31

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

The following tables provide a summary of financial information related to the Company’s reportable segments (in thousands):

 

The following table provides a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable U.S. GAAP financial measure (in thousands):

 

NOTE 14 – STOCK-BASED COMPENSATION

On April 1, 2016, the Company adopted the Quorum Health Corporation 2016 Stock Award Plan (“2016 Stock Award Plan”). The Company filed a Registration Statement on Form S-8 on April 29, 2016 to register 4,700,000 shares of QHC common stock that may be issued under the 2016 Stock Award Plan. On February 14, 2019, the Company adopted the Quorum Health Corporation Amended and Restated 2016 Stock Award Plan (the “Amended and Restated 2016 Stock Award Plan”), which was approved by the Company’s stockholders on May 31, 2019. The Company filed a Registration Statement on Form S-8 on February 14, 2019 to register an additional 3,700,000 shares of QHC common stock that may be issued under the Amended and Restated 2016 Stock Award Plan. On December 17, 2018, the Company adopted the Quorum Health Corporation 2018 Restricted Stock Plan (the “2018 Stock Plan”) effective December 18, 2018, which was approved by the Company’s stockholders on May 31, 2019. The Company filed a

32

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Registration Statement on Form S-8 on December 18, 2018 to register 625,000 shares of QHC common stock that may be issued under the 2018 Stock Plan.

As defined in the Separation and Distribution Agreement, QHC and CHS employees who held CHS restricted stock awards on April 22, 2016 (the “Record Date”) received QHC restricted stock awards for the number of whole shares, rounded down, of QHC common stock that they would have received as a shareholder of CHS as if the underlying CHS stock were unrestricted on the Record Date, except, that with respect to a portion of CHS restricted stock awards granted to any QHC employees on March 1, 2016 that were cancelled and forfeited on the Spin-off date. The QHC restricted stock awards received by QHC and CHS employees in connection with the Spin-off vest on the same terms as the CHS restricted stock awards to which they relate, through the continued service by such employees with their respective employer. CHS restricted stock awards were adjusted by increasing the number of shares of CHS stock subject to restricted stock awards by an amount of whole shares, rounded down, necessary to preserve the intrinsic value of such awards at the Spin-off date. QHC did not issue any stock options as part of the distribution of shares to holders of CHS stock options in connection with the Spin-off.

The following table provides a summary of the activity related to unvested restricted stock awards:

The Company recognized stock-based compensation expense of $1.1 million and $1.8 million for the three months ended March 31, 2020 and 2019, respectively. Stock-based compensation expense is recognized as a component of salaries and benefits expenses in the consolidated statements of income. As of March 31, 2020, the Company had unrecognized stock-based compensation expense of $3.4 million related to restricted stock awards.

NOTE 15 – BENEFIT PLANS

The Company maintains various benefit plans, including defined contribution plans, deferred compensation plans, and a supplemental executive retirement plan, of which certain of the Company’s subsidiaries are the plan sponsors. The rights and obligations of certain of these plans were transferred from CHS in connection with the Spin-off, pursuant to the Separation and Distribution Agreement.

Defined Contribution Plans

The Quorum Health Retirement Savings Plan (the “Retirement Savings Plan”) is a defined contribution plan, which was established on January 1, 2016 by CHS in anticipation of the Spin-off. Prior to the Spin-off, the cumulative liability for these benefit costs was recorded in Due to Parent, net. The assets and liabilities under this plan were transferred to QHC in connection with the Spin-off. The Retirement Savings Plan covers the majority of the employees at the Company’s subsidiaries. The Company has other minor defined contribution plans at certain of its hospitals that cover employees under the terms of these individual plans. Total expenses to the Company under all defined contribution plans were $0.5 million and less than $0.4 million for the three months ended March 31, 2020 and 2019, respectively. The benefit costs associated with these defined contribution plans are recorded as salaries and benefits expenses in the consolidated statements of income.

Deferred Compensation Plans

On August 18, 2016, the Compensation Committee of the Board of Directors adopted the Executive Nonqualified Excess Plan Adoption Agreement (the “Adoption Agreement”) and the Executive Nonqualified Excess Plan Document (the “Plan Document”), that together, the Adoption Agreement names as the QHCCS, LLC Nonqualified Deferred Compensation Plan (the “NQDCP”). The NQDCP is an unfunded, nonqualified deferred compensation plan that provides deferred compensation benefits for a select group of management, highly compensated employees and independent contractors of the Company’s wholly-owned subsidiary, QHCCS, LLC, a Delaware limited liability company (“QHCCS”), including the Company’s named executive officers. The NQDCP permits

33

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

participants to defer a portion of their annual base salary, service bonus and performance-based compensation, as well as up to 100% of their incentive compensation in any calendar year. In addition to participant deferrals, QHCCS, and/or its affiliates may make discretionary credits to participants’ accounts for any year. As of March 31, 2020, the assets and liabilities under this plan were $12.6 million and $13.8 million, respectively. As of December 31, 2019, the assets and liabilities under this plan were $15.9 million and $17.2 million, respectively. The assets and liabilities under this plan are included in other long-term assets and other long-term liabilities, respectively, in the consolidated balance sheet.

Supplemental Executive Retirement Plan

On April 1, 2016, the Board adopted the Quorum Health Corporation Supplemental Executive Retirement Plan (the “Original SERP Plan”). Pursuant to the Employee Matters Agreement between the Company and CHS, the Company assumed the liabilities for all obligations under the Original SERP Plan as of April 29, 2016, the Spin-off date, which related to QHC employees, as defined in the Employee Matters Agreement. In addition, as defined by the Employee Matters Agreement, no additional benefits were to accrue under the Original SERP Plan following the Spin-off and no assets were transferred to the Company related to the Original SERP Plan. The accrued benefit liability transferred to the Company for the Original SERP Plan was $6.0 million.

On May 24, 2016, the Board, upon recommendation of the Compensation Committee, approved the Company’s Amended and Restated Supplemental Executive Retirement Plan (the “Amended and Restated SERP”), in order to accrue additional benefits with respect to QHC Employees who otherwise qualify as “Participants” under the Amended and Restated SERP. The Amended and Restated SERP is a noncontributory non-qualified deferred compensation plan under Section 409A of the Internal Revenue Code. The benefit costs under the Amended and Restated SERP were $0.3 million and $0.2 million for the three months ended March 31, 2020 and 2019, respectively, and are included in salaries and benefits expenses in the consolidated statements of income.

The long-term portion of the benefit liability for the Amended and Restated SERP was $4.7 million and $4.4 million as of March 31, 2020 and December 31, 2019, respectively, and is included in other long-term liabilities in the consolidated balance sheets. There was no current portion of the benefit liability as of March 31, 2020 and December 31, 2019.

Director’s Fees Deferral Plan

On September 16, 2016, the Board adopted the Quorum Health Corporation Director’s Fees Deferral Plan (the “Director’s Plan”). Pursuant to the Director’s Plan, members of the Board may elect to defer and accumulate fees and stock units, including retainer fees and fees for attendance at Board meetings and Board committees. Under this plan, a director may elect that all or any specified portion of the director’s fees to be earned during a calendar year be credited to a director’s cash account and/or a director’s stock unit account maintained on the individual director’s behalf in lieu of payment. Payment of amounts credited to a director’s cash account and stock unit account will be made upon a payment commencement event, as defined in the Director’s Plan, in accordance with the payment method elected by each director, either in lump sum or in a number of annual installments, not to exceed 15 installments. The Director’s Plan covers directors of the Board not employed by the Company or any of its subsidiaries. Pursuant to the Director’s Plan, the Company registered and made available for issuance under the Director’s Plan a maximum of 150,000 shares of QHC common stock. On February 14, 2019, the Board adopted the Quorum Health Corporation Amended and Restated Director’s Fees Deferral Plan to allow directors to defer and accumulate the equity portion of their director compensation to a restricted stock unit account. As of March 31, 2020, 150,000 restricted stock units have been accrued under the Director’s Plan in lieu of director cash compensation.

NOTE 16 – RELATED PARTY TRANSACTIONS

CHS was a related party to QHC prior to the Spin-off. The agreements between QHC and CHS as of and subsequent to the Spin-off are described below.

Agreements with CHS Related to the Spin-off

In connection with the Spin-off and effective as of April 29, 2016, the Company entered into certain agreements with CHS that allocated between the Company and CHS the various assets, employees, liabilities and obligations (including investments, property, employee benefits and tax-related assets and liabilities) that were previously part of CHS. In addition, these agreements govern certain relationships between, and activities of, the Company and CHS for a definitive period of time after the Spin-off, as specified by each individual agreement.

34

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

The agreements were as follows:

In addition to the agreements referenced above, the Company entered into certain transition services agreements and other ancillary agreements with CHS, as defined below, defining agreed upon services to be provided by CHS to certain or all QHC hospitals, as determined by each agreement, commencing on the Spin-off date. Certain of these agreements have been terminated as described below. Remaining agreements have terms through April 2021, unless early termination is agreed upon by both parties. Due to the COVID-19 pandemic in 2020 and the limited access to the Company’s hospitals for all functions unrelated to patient care, the transition of the Company’s Computer and Data Processing Services Agreement has been temporarily delayed. As a result, the Company is currently engaged in discussions with CHS regarding an extension of the term of the Computer and Data Processing Transition Services Agreement past April 2021 to meet the Company’s information technology planning needs. The Company expects that these discussions will result in a mutually agreeable extension.

A summary of the major provisions of the transition services agreements that were in place as of March 31, 2020 follows:

The following agreements have been terminated and replaced with external service providers and internal resources:

The total expenses recorded by the Company under the transition services agreements with CHS were $3.2 million and $7.8 million for the three months ended March 31, 2020 and 2019, respectively.

35

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

NOTE 17 - COMMITMENTS AND CONTINGENCIES

Legal Matters

The Company is a party to various legal, regulatory and governmental proceedings incidental to its business. Based on current knowledge, management does not believe that loss contingencies arising from pending legal, regulatory and governmental proceedings, including the matters described herein, will have a material adverse effect on the operating results, financial position or liquidity of the Company. However, in light of the inherent uncertainties involved in these matters, some of which are beyond the Company’s control, and the very large or indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to the Company’s consolidated financial position, results of operations or cash flows for any particular reporting period.

In connection with the Spin-off, CHS agreed to indemnify QHC for certain liabilities relating to outcomes or events occurring prior to the closing of the Spin-off, including (i) certain claims and proceedings known to be outstanding on or prior to the closing date of the Spin-off and (ii) certain claims, proceedings and investigations by governmental authorities or private plaintiffs related to activities occurring at or related to the Company’s healthcare facilities prior to the closing date of the Spin-off, but only to the extent, in the case of clause (ii), that such claims are covered by insurance policies maintained by CHS, including professional and general liability and workers’ compensation liability. In this regard, CHS will continue to be responsible for certain Health Management Associates, Inc. legal matters covered by its contingent value rights agreement that relate to the portion of CHS’ business now held by QHC. Notwithstanding the foregoing, CHS is not indemnifying QHC in respect of any claims or proceedings arising out of, or related to, the business operations of QHR at any time.

With respect to all legal, regulatory and governmental proceedings, the Company considers the likelihood of a negative outcome. If the Company determines the likelihood of a negative outcome with respect to any such matter is probable and the amount of the loss can be reasonably estimated, the Company records an accrual for the estimated amount of loss. If the likelihood of a negative outcome with respect to material matters is reasonably possible and the Company is able to determine an estimate of the amount of possible loss or a range of loss, whether in excess of a related accrued liability or where there is no accrued liability, the Company discloses the estimate of the amount of possible loss or range of loss. However, the Company is unable to estimate an amount of possible loss or range of loss in some instances based on the significant uncertainties involved in, or the preliminary nature of, certain legal, regulatory and governmental matters.

Commercial Litigation and Other Lawsuits

36

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

37

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Insurance Reserves

As part of the business of owning and operating hospitals, the Company is subject to potential professional and general liability and workers’ compensation liability claims or other legal actions alleging liability on its part. The Company is also subject to similar liabilities related to its QHR business.

Prior to the Spin-off, CHS provided professional and general liability insurance and workers’ compensation liability insurance to QHC and indemnified QHC from losses under these insurance arrangements related to the hospital operations business assumed by QHC in the Spin-off. The liabilities for claims prior to the Spin-off and related to QHC’s hospital operations business are determined based on an actuarial study of QHC’s operations and historical claims experience at its hospitals, including during the period of ownership by CHS. Corresponding receivables from CHS are established to reflect the indemnification by CHS for each of these liabilities for claims that related to events and circumstances that occurred prior to the Spin-off. After the Spin-off, QHC entered into its own professional and general liability insurance and workers’ compensation liability insurance arrangements to mitigate the risk for claims exceeding its self-insured retention levels. The Company maintains a self-insured retention level for professional and general liability claims of $5 million per claim and maintains a $0.5 million per claim, high deductible program for workers’ compensation liability claims. Due to the differing nature of its business, the Company maintains separate insurance arrangements for professional and general liability claims related to its subsidiary, QHR. The self-insured retention level for QHR is $6 million for professional and general liability insurance.

The following table provides a summary of the Company’s insurance reserves related to professional and general liability and workers’ compensation liability, distinguished between those indemnified by CHS and those related to the Company’s own risks (in thousands):

38

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

The receivables from CHS are included in other current assets and other long-term assets in the consolidated balance sheets. The liability for the current portion of professional and general liability claims is included in other current liabilities, while the current portion of the liability for workers’ compensation claims is included in accrued salaries and benefits. The long-term portions of both claims liabilities are included in other long-term liabilities.

Commitments Related to Information Technology

The Company currently utilizes MEDHOST INC.’s (“Medhost”) software through its Computer and Data Processing Transition Services Agreement (or “IT TSA”) with CHS. In connection with the Company’s planned transition from the IT TSA with CHS, the Company entered into an agreement with Medhost to deploy Medhost’s Electronic Health Record management platform. This agreement includes software license and service fees. The implementation of the Medhost software is expected to be completed by the end of 2021. The Company has capitalized $18.2 million and $13.2 million of costs related to the implementation of the Medhost software as of March 31, 2020 and December 31, 2019, respectively, which are included in intangible assets, net on the consolidated balance sheet. The total additional cost of this project, including software licenses, implementation fees and maintenance fees, are estimated to be approximately $30.5 million to be incurred through 2025.

In addition, the Company has entered into various cloud computing arrangements related to the transition of the Company’s information technology infrastructure, in areas such as financial reporting and budgeting, payroll, compliance and revenue management services. The Company has incurred $8.1 and $5.8 million of implementation costs related to these cloud computing arrangements as of March 31, 2020 and December 31, 2019, respectively, which are included in other long-term assets on the consolidated balance sheet. The total additional costs of these arrangements, including hosting, implementation fees and maintenance fees, are estimated to be approximately $21.0 million to be incurred through 2025.

The Company will incur additional costs to establish the remainder of its information technology systems which includes additional information technology infrastructure costs, among other things. The Company has capitalized $14.3 million and $10.6 million of information technology infrastructure costs as of March 31, 2020 and December 31, 2019, respectively, which are included in property and equipment, net on the consolidated balance sheet. The estimated additional information technology infrastructure costs are approximately $3.3 million. The Company expects the transition from CHS to be completed by the end of 2021. Upon completion, the Company does not anticipate a significant change in its operating costs related to information technology.

NOTE 18 - SUBSEQUENT EVENTS

On April 7, 2020, the Company and certain of its direct and indirect subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code with the Bankruptcy Court for the District of Delaware in order to implement the financial restructuring of the Company. See Note 1 — Basis of Presentation and Significant Accounting Policies — Chapter 11 Bankruptcy Filing, for a discussion of the Chapter 11 Cases, the RSA, and the Senior Credit Facility.

On April 10, 2020, the Company entered into a Superpriority Secured Debtor-in-Possession Credit Agreement which was approved on an interim basis on April 9, 2020 and on a final basis on May 6, 2020 by the Bankruptcy Court. See Note 6 — Long-Term Debt, for a discussion of the DIP Credit Agreement.

On April 20, 2020, the Company entered into a definitive agreement to sell 133-bed Galesburg Cottage Hospital and its affiliated facilities (“Galesburg”), located in Galesburg, Illinois. The sale is structured as a stock transaction. The transaction is expected to be completed by the end of the second quarter of 2020, subject to customary approvals and conditions.

The CARES Act, which was enacted on March 27, 2020, authorizes $100 billion in funding to hospitals and other healthcare providers to be distributed through the PHSSEF. Payments from the PHSSEF are intended to compensate healthcare providers for lost revenues and incremental expenses incurred in response to the COVID-19 pandemic and are not required to be repaid provided the recipients attest to and comply with certain terms and conditions, including limitations on balance billing and not using PHSSEF funds to reimburse expenses or losses that other sources are obligated to reimburse. HHS initially distributed $30 billion of this funding based on each provider’s share of total Medicare fee-for-service reimbursement in 2019, but has announced that $50 billion in CARES Act funding (including the $30 billion already distributed) will be allocated proportional to each provider’s share of 2018 net patient revenues. HHS has indicated that distribution of the remaining $50 billion will be targeted primarily to hospitals in COVID-19 high impact areas, to rural providers, and to reimburse providers for COVID-19-related treatment of uninsured patients. Subsequent to March 31, 2020, the Company received $101.0 million in payments from the initial PHSSEF payments, which did not qualify for recognition during the three months ended March 31, 2020.

39

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Lastly, the CARES Act provides for deferred payment of the employer portion of social security taxes between March 27, 2020 and December 31, 2020, with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022. The Company began deferring the employer portion of social security taxes in late April 2020.

NOTE 19 - GUARANTOR AND NON-GUARANTOR SUPPLEMENTAL INFORMATION

The Senior Notes are senior unsecured obligations of the Company guaranteed on a senior basis by certain of its existing and subsequently acquired or organized 100% owned domestic subsidiaries (the “Guarantors”). The Senior Notes are fully and unconditionally guaranteed on a joint and several basis, with exceptions considered customary for such guarantees, limited to the release of the guarantee when a subsidiary guarantor’s capital stock is sold, or when a sale of all of the subsidiary guarantor’s assets used in operations occurs.

The condensed consolidating financial statements have been prepared and presented in accordance with SEC Regulation S-X Rule 3-10 “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.”

The accounting policies used in the preparation of this financial information are consistent with the accompanying condensed consolidated financial statements of the Company, except as follows:

The Company’s intercompany activity consists primarily of daily cash transfers, the allocation of certain expenses and expenditures paid by the parent issuer on behalf of its subsidiaries, and the push down of investment in its subsidiaries. The parent issuer’s investment in its subsidiaries reflects the activity since the Spin-off. Likewise, the parent issuer’s equity in earnings of unconsolidated affiliates represents the Company’s earnings since the Spin-off.

40

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

 

 

Condensed Consolidating Statement of Income (Loss)

Three Months Ended March 31, 2020

(In Thousands)

 

 

 

 

41

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

 

Condensed Consolidating Statement of Income (Loss)

Three Months Ended March 31, 2019

(In Thousands)

 

 

 

 

42

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

 

Condensed Consolidating Statement of Comprehensive Income (Loss)

Three Months Ended March 31, 2020

(In Thousands)

 

 

 

Condensed Consolidating Statement of Comprehensive Income (Loss)

Three Months Ended March 31, 2019

(In Thousands)

 

 

43

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

 

Condensed Consolidating Balance Sheet

March 31, 2020

(In Thousands)

 

44

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Condensed Consolidating Balance Sheet

December 31, 2019

(In Thousands)

 

 

45

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Condensed Consolidating Statement of Cash Flows

Three Months Ended March 31, 2020

(In Thousands)

 

 

46

---

QUORUM HEALTH CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

 

Condensed Consolidating Statement of Cash Flows

Three Months Ended March 31, 2019

(In Thousands)

 

 

 

 

 

47

---

 

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

You should read the following discussion of our financial condition, results of operations and cash flows, together with the unaudited condensed consolidated financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and accompanying notes, and additionally the sections entitled “Business” and “Risk Factors,” included in our Annual Report on Form 10-K filed with the SEC on April 10, 2020 (the “2019 Annual Report on Form 10-K”). The financial information discussed below and included in our 2019 Annual Report on Form 10-K may not necessarily reflect what our results of operations, financial position and cash flows may be in the future. Except as otherwise indicated or unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to “we,” “our,” “us,” “QHC” and the “Company” refer to the consolidated business operations of the hospitals and Quorum Health Resources, LLC (“QHR”) that CHS spun off to Quorum Health Corporation on April 29, 2016 (the “Spin-off”). Additionally, all references to “CHS” and “Parent” refer to Community Health Systems, Inc. and its consolidated subsidiaries. References to our financial statements and financial outlook are on a consolidated basis unless otherwise noted.

Forward Looking Statements

Some of the matters discussed in this Quarterly Report on Form 10-Q include forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “thinks,” and similar expressions are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements.

These factors include, but are not limited to, the following:

48

---

 

49

---

 

Although we believe that these forward-looking statements are based upon reasonable assumptions, these assumptions are inherently subject to significant regulatory, economic and competitive uncertainties and contingencies, which are difficult or impossible to predict accurately and may be beyond our control. Accordingly, we cannot give any assurance that our expectations will in fact occur and caution that actual results may differ materially from those in the forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements are made as of the date of this filing. We undertake no obligation to revise or update any forward-looking statements, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

As of March 31, 2020, we owned or leased a diversified portfolio of 23 hospitals in rural and mid-sized markets, which are located in 13 states and have a total of 1,950 licensed beds. Our hospitals provide a broad range of hospital and outpatient healthcare services, including general and acute care, emergency room, general and specialty surgery, critical care, internal medicine, diagnostic services, obstetrics, psychiatric and rehabilitation services. For our hospital operations business, we are paid for our services by governmental agencies, commercial insurers and directly by the patients we serve. We also operate QHR, a leading hospital management advisory and healthcare consulting services business. For our hospital management advisory and healthcare consulting services business, we are paid by the non-affiliated hospitals utilizing our services. Over 95% of our net operating revenues are attributable to our hospital operations business.

Business Strategy Summary

Our business strategy is focused on the following key objectives:

Our business strategy is to provide high quality patient care to the communities we serve; with a near term focus of increasing the effectiveness of our revenue cycle functions, reducing our debt, and refining our services to address the needs of the markets that we represent. We intend to grow our revenues and operating margins by expanding specialty care and outpatient service lines at our hospitals, primarily by recruiting talented physicians and medical staff. We continuously aim to manage our operating costs, primarily through the efficient management of staffing, medical specialist costs and medical supply inventory levels, with a continued focus on enhancing patient safety and quality of care. In addition, our business strategy includes investing capital in renovations, expansion, medical-related technology and equipment at our existing healthcare facilities.

Going Concern

Our financial statements have been prepared under the assumption that we will continue as a going concern. On April 7, 2020, we filed a petition for reorganization under Chapter 11 of the Bankruptcy Code. The risks and uncertainties surrounding the Chapter 11 Cases (as defined below), the events of default under our Credit Agreements and the Indenture governing our Senior Notes, and the other conditions impacting our business raise substantial doubt as to our ability to continue as a going concern.

Although Management believes that the reorganization of the Company through the Chapter 11 Cases will position us for sustainable growth opportunities, the Chapter 11 filing caused an event of default under our Credit Agreements and the Indenture governing our Senior Notes, which is stayed during the pendency of our bankruptcy proceeding. Further, there are several risks and uncertainties associated with our bankruptcy, including, among others: (a) our pre-packaged plan of reorganization may never be confirmed or become effective, (b) the Restructuring Support Agreement may be terminated by one or more of the parties thereto, (c) the Bankruptcy Court may grant or deny motions in a manner that is adverse to us and our subsidiaries, and (d) our Chapter 11 Cases may be converted into a Chapter 7 liquidation.

As a result of the defaults under our Credit Agreements and the Indenture governing our Senior Notes, we reclassified certain outstanding debt to current liabilities. See Note 1 — Basis of Presentation and Significant Accounting Policies — Going Concern and Note 6 — Long-Term Debt in the accompanying consolidated financial statements for additional information.

Bankruptcy Proceedings

On April 7, 2020, Quorum Health Corporation and certain of its direct and indirect subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief (the “Chapter 11 Cases”) under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) with the Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The Chapter 11 Cases are being jointly administered under the caption In re Quorum Health Corporation, et al., Case No. 20-10766 (KBO).

The Debtors continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. As debtors-in-possession

50

---

 

under the Bankruptcy Code, the Debtors may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. Further, the Debtors filed a variety of “first day” motions with the Bankruptcy Court requesting permission to continue the Company’s business activities in the ordinary course. The Bankruptcy Court entered an order approving the Debtors’ “first day” motions on April 9, 2020 on an interim basis, and the Bankruptcy Court held the final hearing on the “first day” motions on May 6, 2020.

Our filing of the Chapter 11 Cases constituted an event of default that accelerated our obligations under our debt agreements. Specifically, the filing of the Chapter 11 Cases constituted an event of default under the Credit Agreements and the Indenture. Due to the Chapter 11 Cases, however, the lenders’ ability to exercise remedies under their respective credit agreements and debt instruments was stayed as of the date of the Chapter 11 petition and continues to be stayed.

On April 6, 2020, the Debtors entered into the RSA with the Consenting Stakeholders. Pursuant to the RSA, the Consenting Stakeholders have agreed to vote in favor of and support the confirmation of the Plan by the Bankruptcy Court. If the Plan is confirmed, the financial restructuring of the Debtors will occur in accordance with the following terms:

The transactions contemplated by the Plan will reduce the amount of our debt by approximately $500 million, which will decrease the amount of our debt service obligations. As a result, we believe that the restructuring contemplated by the Plan will create the capital structure necessary to allow us to make meaningful investments in sustainable growth opportunities after emerging from bankruptcy.

Additionally, on April 10, 2020, we entered into a Superpriority Secured Debtor-in-Possession Credit Agreement, among us, as the borrower, certain of our subsidiaries party thereto as guarantors, the lenders party thereto (the “DIP Lenders”), GLAS USA, LLC, as administrative agent for the lenders (the “Administrative Agent”), and GLAS Americas, LLC, as collateral agent for the lenders (the “DIP Credit Agreement”). The Bankruptcy Court entered a final order approving the DIP Credit Agreement on May 6, 2020 (the “Final Order”).

The DIP Credit Agreement allows us to borrow term loans (the “DIP Loans”) with an aggregate principal amount of up to $100 million (the “DIP Facility”). We may draw up to a maximum principal amount of $60 million under the DIP Facility, and thereafter may draw the remaining portion of the loan commitments not drawn subject to the consent of the required lenders under the DIP Credit Agreement or if needed under the budget.

The DIP Loans bear interest at a rate per annum, at the option of the Company, equal to (i) an adjusted LIBOR (with a floor of 1.00%) plus 10.00% or (ii) an alternate base rate (with a floor of 2.00%) plus 9.00%. Upon the occurrence of an event of default, the Administrative Agent is permitted to charge a default rate of interest equal to 2.00% above the rate otherwise applicable. We must make interest payments monthly, in arrears, on the first day of each month, upon any prepayment, and at the final maturity date of the DIP Facility. The DIP Credit Agreement includes customary representations and warranties, covenants and events of default, including, among others, covenants requiring the Debtors to deliver a budget to the lenders under the DIP Facility and operate in

51

---

 

accordance with an approved form of such budget. We will use the proceeds of the DIP Loans to fund our operations and working capital during the Chapter 11 Cases, pay obligations arising from or related to the Carve Out, if applicable, pay professional fees in connection with the Chapter 11 Cases, make adequate protection payments, and pay fees and expenses incurred in connection with negotiating and implementing the DIP Credit Agreement.

The DIP Facility will mature upon the earlier to occur of (i) October 10, 2020, (ii) the acceleration of the DIP Loans and the DIP Lenders’ commitments as described above, and (iii) the effective date of the Plan.

COVID-19 Pandemic

In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) a pandemic. The outbreak of the COVID-19 pandemic is materially adversely affecting our employees, patients, communities and business operations, as well as the U.S. economy and financial markets. The full extent to which the COVID-19 outbreak will impact our business, results of operations, financial condition and cash flows will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19 and the actions to contain it or treat its impact and the economic impact on local, regional, national and international markets. As the COVID-19 pandemic continues, our results of operations, financial condition and cash flows are likely to continue to be materially adversely affected, particularly if the pandemic persists for a significant amount of time.

From an operational perspective, we are focused on providing the safest possible environment for our employees, physicians and other caregivers, and for the care of our patients, while safeguarding patient information. We are working with federal, state and local health authorities to respond to COVID-19 cases in the communities we serve and are taking or supporting measures to try to limit the spread of the virus and to mitigate the burden on the healthcare system. Although we are implementing considerable safety measures, as a front line provider of healthcare services, we are deeply exposed to the health and economic effects of COVID-19, many of which have and will continue to have a material adverse impact on our employees, as well as our business, results of operations, financial condition and cash flows that we are not currently able to fully quantify. For example, in March 2020, we had to furlough certain employees due to the lack of volume at our hospitals, and these furloughs may persist for the duration of the COVID-19 pandemic. We are reassigning hospital personnel with pre-existing conditions or restrictions that make them especially vulnerable to COVID-19 where possible, while some are self-quarantining and not available to work at our facilities during this time. We have also instituted a work-from-home policy for certain of our corporate and administrative offices. Even with such steps, exposure to COVID-19 patients has increased the risk for our physicians, nurses and other medical staff, which may further reduce our operating capacity. All of these actions could result in reduced employee morale, labor unrest, work stoppages or other workforce disruptions.

In 2020, the COVID-19 pandemic has resulted in a substantial reduction in the number of elective surgeries, physician office visits and emergency room volumes at our facilities due to restrictive measures, such as shelter-in-place orders, and general concerns related to the risk of contracting COVID-19 from interacting with the healthcare system. We believe that certain of these patient volume declines reflect a deferral of healthcare services utilization to a later period, rather than a permanent reduction in demand for our services. Given the general necessity of the healthcare services we provide, we anticipate that this deferral of services may create a backlog of demand in the future, in addition to the resumption of historically normal activity; however, there is no assurance that either will occur. In addition, while many of the hospitals that we operate in a wide range of geographies have not experienced major capacity constraints to date, other hospitals in areas that are centers of the COVID-19 outbreak have been overwhelmed, experiencing excessive demand, potentially preventing them from treating all patients who seek care. Despite considerable efforts to source vital supplies, we are also experiencing supply chain disruptions, including shortages, delays and significant price increases in equipment, pharmaceuticals and medical supplies, particularly personal protective equipment (“PPE”). Staffing, equipment, and pharmaceutical and medical supplies shortages may also impact our ability to admit and treat patients.

We may also require an increased level of working capital if we experience extended billing and collection cycles as a result of displaced employees, payors, revenue cycle management contractors, or otherwise. Broad economic factors resulting from the current COVID-19 pandemic, including increasing unemployment rates and reduced consumer spending, also affect our service mix, revenue mix and patient volumes, as well as our ability to collect outstanding receivables. Business closings and layoffs in the areas we operate may lead to increases in the uninsured and underinsured populations and adversely affect demand for our services, as well as the ability of patients and other payers to pay for services as rendered. Any increase in the amount or deterioration in the collectability of patient accounts receivable will adversely affect our results of operations, financial condition and cash flows, requiring an increased level of working capital. If general economic conditions continue to deteriorate or remain uncertain for an extended period of time, our business, results of operations, financial condition and cash flows will continue to be materially adversely affected.

In addition, our results of operations, financial condition and cash flows may be materially adversely affected by federal or state laws, regulations, orders, or other governmental or regulatory actions addressing the current COVID-19 pandemic or the U.S. healthcare system, which, if adopted, could result in direct or indirect restrictions to our business, results of operations, financial condition and cash flows. We may also be subject to lawsuits from patients, employees and others exposed to COVID-19 at our facilities. Such actions may involve large demands, as well as substantial defense costs, though there is no certainty at this time

52

---

 

whether any such lawsuits will be filed or the outcome of such lawsuits if filed. Our professional and general liability insurance may not cover all claims against us.

Coronavirus Aid, Relief, and Economic Security Act and the Paycheck Protection Program and Health Care Enhancement Act

Federal and state governments have passed legislation, promulgated regulations, and taken other administrative actions intended to assist healthcare providers in providing care to COVID-19 and other patients during the public health emergency and address revenue losses attributable to COVID-19. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted and on April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act (“PPPHCE Act”) was enacted The CARES Act includes support for healthcare professionals, patients and hospitals. The CARES Act includes $100 billion in funding to be distributed to eligible providers through the Public Health and Social Services Emergency Fund (“PHSSEF”) an expansion of the Medicare Accelerated and Advance Payment Program (“MAAPP”) and changes to the Net Operating Loss (“NOL”) rules and the business interest expense deduction rules under Code Section 163(j).

The PPPHCE Act provides an additional $75 billion to the Department of Health and Human Services (“HHS”) to be distributed to healthcare providers to reimburse health care-related expenses and lost revenues attributable to COVID-19, as well as an additional $25 billion to facilitate and expand COVID-19 testing. The provision in the PPPHCE Act appropriating the additional $25 billion for healthcare providers is identical to the provision in the CARES Act that created the initial funding and provides HHS with the same broad authority to issue the funds.

PHSSEF payments (both under the CARES Act and the PPPHCE Act) are intended to reimburse healthcare providers for health care related expenses and lost revenues attributable to COVID-19 and are not required to be repaid, provided, that, recipients attest to and comply with certain terms and conditions, including (in the case of payments under the CARES Act) limitations on balance billing for COVID-19 patients and not using funds received from the PHSSEF to reimburse expenses or losses that have been reimbursed from other sources or that other sources are obligated to reimburse (terms and conditions with respect to payments under the PPPHCE Act have not been issued). If such attestation and compliance cannot be made by a recipient, the funds provided by PHSSEF must be repaid. The payments under MAAPP are advances on Medicare reimbursement that providers must repay.

Subsequent to March 31, 2020, we received $101.0 million in payments through the PHSSEF and we may have access to additional funding that may be available to healthcare providers under the CARES Act and PPPHCE Act, although we cannot know the amount, if any, of such additional funds. In addition, the payments received through the PHSSEF may need to be repaid if we are unable to use the funds in accordance with the final regulations of the PHSSEF. Because the regulations under the CARES Act and the PPPHCE Act have yet to be finalized, the extent of our ability to obtain funding from the CARES Act and the PPPHCE Act is uncertain. As debtors-in-possession under the Bankruptcy Code, we are not able to participate in MAAPP. In addition, our NOLs will be substantially reduced based on cancellation of debt income that will be realized by us under the Plan, and therefore we are expected to receive minimal benefit from the changes to the treatment of NOLs under the CARES Act.

Due to the recent enactment of this legislation and the lack of final regulations, there is a high degree of uncertainty around the CARES Act’s and PPPHCE Act’s implementation and we continue to assess their potential impacts on our business, results of operations, financial condition and cash flows.

Additionally, the CARES Act permits the deferral of payment of the employer portion of social security taxes between March 27, 2020 and December 31, 2020, with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022. We began deferral of the employer portion of social security taxes in late April 2020.

Financial Overview

Our net operating revenues for the three months ended March 31, 2020 decreased $99.0 million to $343.8 million, compared to $442.8 million for the three months ended March 31, 2019, a 22.4% decrease. The $99.0 million decrease was primarily attributable to a $70.7 million decrease in net operating revenues resulting from the hospitals sold or closed during or since the prior period, a $13.2 million reduction in volume, and a $9.5 million decrease in rate, primarily due to a reduction in the collectability of our self-pay patient accounts receivable. Loss from operations for the three months ended March 31, 2020 was $47.4 million, compared to $6.2 million for the three months ended March 31, 2019. Loss from operations in the 2020 period was negatively impacted by an additional $12.0 million of impairment charges, $2.4 million related to losses on sale of one hospital and $11.3 million related to legal, professional and settlement costs. Our operating results for the three months ended March 31, 2020 reflect a 27.8% decrease in total admissions and a 19.5% decrease in total adjusted admissions compared to the same period in 2019. Same-facility admissions decreased 11.0% and same-facility adjusted admissions decreased 3.8% for the three months ended March 31, 2020 compared to the same period in 2019. The decrease in same-facility admissions and adjusted admissions was primarily a result of the COVID-19 pandemic’s restrictive measures, such as shelter-in-place orders, and general concerns related to the risk of contracting COVID-19 from interacting with the healthcare system.

53

---

 

Recent Divestiture Activity

On March 31, 2020, we sold 45-bed Henderson County Community Hospital and its affiliated facilities (“Henderson”), located in Lexington, Tennessee, for proceeds of $1.0 million.

Healthcare Reform

The healthcare industry in the United States remains subject to continuing regulatory and market uncertainty due to recent reforms and reform proposals. The current presidential administration and certain members of Congress have sought to repeal or make significant changes to the Affordable Care Act. In addition, governmental agencies and courts have narrowed the scope of the law’s reforms through subsequent interpretation. Courts and government agencies could eliminate provisions of the Affordable Care Act that are beneficial to us and leave in effect provisions that reduce our reimbursement. In addition, government and private payors’ efforts to fundamentally change the finance and delivery of health care may have an adverse effect on our business, results of operations, cash flow and liquidity. For example, certain members of Congress have proposed measures that would expand government-sponsored coverage of healthcare expenses, including single-payor proposals. Other industry groups, such as large employers and private payors and their affiliates, have also proposed reforms to the structure of private health insurance. The extent to which the COVID-19 pandemic could impact the future of healthcare reform, including the Affordable Care Act, will depend on future developments that are highly uncertain and cannot be accurately predicted. Although the future impact of the COVID-19 pandemic is uncertain, it has emphasized the importance of hospitals and front line service providers.

California Hospital Quality Assurance Fee Program

The HQAF program provides funding for supplemental payments to hospitals that serve Medi-Cal and uninsured patients. Revenues generated from fees assessed on certain general and acute care California hospitals fund the non-federal supplemental payments to California’s safety-net hospitals while drawing down federal matching funds that are issued as supplemental payments to hospitals for care of Medi-Cal patients. In November 2016, California voters approved a state constitutional amendment measure that extends indefinitely the statute that imposes fees on California hospitals seeking federal matching funds.

The fourth phase of the HQAF program expired on December 31, 2016. The California Department of Health Care Services (“DHCS”) submitted the Phase V HQAF program package to CMS on March 30, 2017 for approval of the overall program structure and the fees or provider tax rates for the program period January 1, 2017 through June 30, 2019, and the fee-for-service inpatient and outpatient upper payments limits (“UPL”) for each of the state fiscal years in the period January 1, 2017 through June 30, 2019. CMS issued formal approval of Phase V HQAF on December 15, 2017. The approvals included the inpatient and outpatient fee-for-service supplemental payments and the overall tax structure. However, CMS has not yet issued a decision on the managed care components of the Phase V HQAF program and, therefore, the payment amounts in the draft model are not finalized. In addition, the supplemental Medi-Cal managed care payments made through the new directed payment mechanism have been estimated using inpatient utilization data publicly reported to the California Office of Statewide Health Planning and Development for the fiscal year ending in 2015. However, the directed payments will be made for inpatient and outpatient services provided to in-network patients during the current state fiscal year. Phase V of California’s HQAF program expired on June 30, 2019 and the next phase of the program, Phase VI, began July 1, 2019 and is a 30 month program.

The California State Plan Amendments related to the Medicaid inpatient and outpatient fee-for-service has been formally approved by CMS in letters dated February 25, 2020. Additionally, the hospital assessment portion of the HQAF VI has formally been approved by CMS in a letter dated February 14, 2020. Of the total supplemental payments in the HQAF VI program by all hospitals, our portion represents 0.16%. We are estimating that our net impact for Phase VI over the 30-month period, January 1, 2019 through December 31, 2021, will be $27.6 million. While uncertainties regarding the timing and amount of payments under the HQAF program exist, our estimates of future cash collections at this time, net of any provider taxes, including those related to previous programs, are $2.8 million in 2020 and $0.9 million in 2021. While we are able to estimate the net impact of Phase VI, the timeline regarding receipt of the supplemental payments has not been released by the State of California for Phase VI and therefore is not included in our estimate of future cash collections.

Medicare Disproportionate Share Hospital Litigation

Medicare makes additional payments to hospitals that treat a disproportionately high share of low-income patients, Prior to October 1, 2013, disproportionate share hospital (“DSH”) payments were based on each hospital’s low income utilization for each payment year (the “Pre-ACA DSH Formula”). In the final rule regarding IPPS payment and policy changes for FFY 2005, CMS revised its policy on the calculation of one of the ratios used in the Pre-ACA DSH Formula. The revised policy included Medicare Advantage patients in the utilization of Original Medicare Plan patients. A group of hospitals challenged the policy change claiming that CMS failed to provide adequate notice and comment period prior to promulgating a DSH rate calculation methodology change. In June 2019, the U.S. Supreme Court ruled in Azar v. Allina Health Services that CMS failed to comply with statutory notice and comment rulemaking procedures before announcing the policy change related to Medicare DSH payments. The case was remanded to the lower district court which ordered CMS to go back and review its policy. Presently, CMS is reviewing its policy and is expected to

54

---

 

formalize through formal notice and comment rulemaking in the future. It is unknown but anticipated that CMS may attempt to formalize its old policy and make it retroactive. This would likely lead to further legal challenges. The outcome of this case is still unknown but a favorable outcome could have a material positive impact on our future revenues and cash flows.

Other Government Regulations

Our hospital operations business is highly regulated. We are required to comply with extensive, complicated and overlapping governmental laws and regulations at the federal, state and local levels. These laws and regulations govern every aspect of how our hospitals conduct their operations, including the service lines that must be offered for licensure as an acute care hospital, restrictions related to employing physicians, and requirements applicable to eligibility and payment structures under the Medicare and Medicaid programs. The failure to comply with these laws and regulations can result in severe penalties including criminal penalties, civil sanctions, and the loss of our ability to qualify for participation in the Medicare and Medicaid programs.

Rules, regulations and laws imposed on the U.S. healthcare industry are subject to ongoing and frequent changes with little or no notice and are often interpreted and applied differently by various regulatory agencies with authority to enforce such requirements. Each change or conflicting interpretation may require us to make changes at our hospitals and other healthcare facilities related to aspects such as space usage, equipment, technology, staffing and service lines. We may also be required to revise or implement operating policies and procedures that were previously believed to be compliant. The cost of compliance with governmental laws and regulations is a significant component of our overall operating costs. Furthermore, these costs have been rising in recent years due to new regulatory requirements and increasing enforcement provisions. Management anticipates that compliance costs will continue to grow in the foreseeable future. The U.S. healthcare industry has seen a number of ongoing investigations related to patient referrals, physician recruiting and employment practices, cost reporting and billing practices, medical necessity of inpatient admissions, physician office leasing, laboratory and home healthcare services, physician ownership of hospitals and other healthcare providers, and joint ventures involving hospitals and physicians. Hospitals continue to be one of the primary focus areas of the Office of Inspector General (“OIG”), Department of Justice (“DOJ”) and other governmental fraud and abuse regulatory authorities and programs.

As a result of the COVID-19 pandemic, there has been temporary relief for a number of healthcare regulations, including HIPPA regulations to encourage the utilization of telehealth programs as well as state and federal medical licensing requirements typically imposed on healthcare facilities.

Basis of Presentation

Our financial statements have been prepared under the assumption that QHC will continue as a going concern, but management has concluded there is substantial doubt about our ability to continue as a going concern. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Financial Outlook” for additional information regarding factors impacting our future earnings projections and management’s plans which, as of March 31, 2020, do not alleviate the substantial doubt about our ability to continue as a going concern.

On April 7, 2020, we filed a voluntary petition for bankruptcy under Chapter 11 of the Bankruptcy Code. The filing of the bankruptcy petition constituted an event of default under our Credit Agreements and the indenture governing our Senior Notes. Management has concluded that our bankruptcy proceedings also create substantial doubt about our ability to continue as a going concern. The audit report issued by our independent registered public accounting firm in connection with our audited consolidated and combined financial statements included in the 2019 Annual Report on Form 10-K contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.

Revenues

We generate revenues by providing healthcare services at our hospitals and affiliated outpatient service facilities to patients seeking medical treatment. Hospital revenues depend on, among other factors, inpatient occupancy and acuity levels, the volume of outpatient procedures and the charges and negotiated reimbursement rates for the healthcare services provided. Our primary sources of payment for patient healthcare services are third-party payors, including the Medicare and Medicaid programs, Medicare and Medicaid managed care programs, commercial insurance companies, other managed care programs, workers’ compensation carriers and employers. Self-pay revenues are the portion of our revenues generated from providing healthcare services to patients who do not have health insurance coverage as well as the patient responsibility portion of charges that are not covered for an individual by a health insurance program or plan. We generate revenues related to our QHR business when hospital management advisory and healthcare consulting services are provided. We generate other non-patient revenues primarily from rental income and hospital cafeteria sales.

Amounts we collect for medical treatment of patients covered by Medicare, Medicaid and non-governmental third-party payors are generally less than our standard billing rates. Our standard charges and reimbursement rates for routine inpatient services vary significantly depending on the type of medical procedure performed and the geographical location of the hospital. Differences in our

55

---

 

standard billing rates and the amounts we expect to collect from third-party payors are classified as contractual adjustments. The reimbursements we ultimately receive as payments for services are determined for each patient instance of care, based on the contractual terms we negotiate with third-party payors or based on federal and state regulations related to governmental healthcare programs. Except for emergency department services, our policy is to determine the payment methodology with patients prior to when the services are performed. Self-pay and other payor discounts are incentives offered to uninsured or underinsured patients or other payors to reduce their costs of healthcare services. Our collection levels are impacted by significant changes in payor mix, centralized business office operations, including outsourced efforts in collecting our accounts receivables, economic conditions or trends in federal and state governmental healthcare coverage, among other things. See “Overview — Coronavirus Aid, Relief, and Economic Security Act and the Paycheck Protection Program and Health Care Enhancement Act” for information related to the CARES Act and the potential impact in 2020 on our reimbursement under governmental healthcare programs.

The following table provides a summary of our net operating revenues for the three months ended March 31, 2020 and 2019 by payor source (dollars in thousands):

Charity Care

In the ordinary course of business, we provide services to patients who are financially unable to pay for hospital care. The related charges for those patients who are financially unable to pay that otherwise do not qualify for reimbursement from a governmental program are classified as charity care. We determine amounts that qualify for charity care primarily based on the patient’s household income relative to the poverty level guidelines established by the federal government. Our policy is not to pursue collections for such amounts; therefore, the related charges are recorded in operating revenues at the standard billing rates and fully offset in contractual adjustments in the same period.

Critical Accounting Policies

The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts and related disclosures. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. The critical accounting estimates and judgments presented below are not intended to be a comprehensive list of all our accounting policies that require estimates, but are limited to those that involve a higher degree of judgment and complexity. We believe the current assumptions and other considerations used to estimate amounts in our financial statements are appropriate. If actual results differ from these assumptions and considerations, the resulting impact could have a material adverse effect on our results of operations and financial condition.

Third-Party Reimbursements and State Supplemental Payment Programs

Our estimates of our patient revenues due from third-party payors are highly complex and include interpretations of governmental regulations and payor-specific contractual agreements that are frequently changing. The Medicare and Medicaid programs, which are the payor sources for a major portion of our patient revenues, are subject to interpretation of federal and state-specific reimbursement rates, new or changing legislation and final cost report settlements. Contractual adjustments are recorded in the period services are performed and the patient’s method of payment is verified. Estimates for contractual adjustments are subject to change, in large part, due to ongoing contract negotiations and regulatory changes, which is typical in the U.S. healthcare industry. Revisions to estimates for contractual adjustments are recorded in the periods in which they become known and may be subject to further revisions.

We use a third-party automated contractual adjustments system to calculate our contractual adjustments each month. Contractual adjustments are calculated utilizing historical paid claims data by payor source. The key assumptions used by the system to calculate the current period estimated contractual adjustments are derived on a payor-specific basis from the estimated contractual reimbursement percentage and historical paid claims data. The automated contractual adjustments system does not include patient account level information, as it estimates an average contractual adjustment for each payor source. Actual reimbursement payments we receive from third-party payors could be different from the amounts we estimated and recorded. If the actual contractual

56

---

 

reimbursement percentages by payor source differed by 1% from our estimated contractual reimbursement percentages, our net loss for the three months ended March 31, 2020 would have changed by $13.1 million. If we applied a 1% differential to our patient accounts receivable due from governmental, managed care and commercial third-party payors as of March 31, 2020, patient accounts receivable, net would have changed by $13.1 million.

Cost report settlements under reimbursement programs with Medicare, Medicaid and other managed care plans are estimated and recorded in the period patient services are performed and any revisions to estimates of previous program reimbursements are recorded in subsequent periods until the final cost report settlements are determined. We account for cost report settlements in contractual adjustments in our consolidated statements of income and recognize these amounts as due from and due to third-party payors on our consolidated balance sheets. Contractual adjustments related to previous program reimbursements and final cost report settlements favorably impacted net operating revenues by $0.1 million and $1.8 million during the three months ended March 31, 2020 and 2019, respectively.

Several states have established supplemental payment programs, including disproportionate share programs, for the purpose of providing reimbursement to providers to offset a portion of the cost of providing care to Medicaid and indigent patients. The amounts due to us under such programs are included in due from third-party payors on our balance sheets. Some of these programs have participation costs, referred to as fees or provider taxes. We record these costs in due to third-party payors on our consolidated balance sheets. We recognize the reimbursement payments due to us from these programs in the periods amounts are estimable and revenue collection is reasonably assured. We record the revenues as favorable contractual adjustments in our net operating revenues and the related provider taxes as other operating expenses in our statements of income. See “Overview — Coronavirus Aid, Relief, and Economic Security Act and the Paycheck Protection Program and Health Care Enhancement Act” for information related to the CARES Act and the potential impact in 2020 on our reimbursement under governmental healthcare programs.

The following table shows the portion of our Medicaid reimbursements attributable to state supplemental payment programs for the three months ended March 31, 2020 and 2019 (in thousands):

The California Department of Health Care Services administers the HQAF program, imposing a fee on certain general and acute care California hospitals. Revenues generated from these fees provide funding for the non-federal supplemental payments to California hospitals that serve California’s Medi-Cal and uninsured patients. Under the HQAF program, we recognized $2.8 million of Medicaid revenues and less than $0.1 million of provider taxes for the three months ended March 31, 2020 and $8.1 million of Medicaid revenues and $2.2 million of provider taxes for the three months ended March 31, 2019.

The following table provides a summary of the components of amounts due from and due to third-party payors (in thousands):

Accounts Receivable

Substantially all of our accounts receivable are related to providing healthcare services to patients at our hospitals and affiliated outpatient facilities. Collection of these accounts receivable is our primary source of cash and is critical to our operating performance. Our primary collection risks relate to uninsured patients and the patient financial responsibility portion of payments due from insured patients, generally co-pays and deductibles. Our policy is to verify the health insurance coverage of a patient prior to the procedure date for all medical treatment scheduled in advance. We do not verify insurance coverage in advance of treatment for walk-in and emergency room patients.

57

---

 

Collections are impacted by the economic ability of patients to pay and the effectiveness of our billing and collection efforts, which are outsourced to a third party, including their current policies on billings, accounts receivable payor classifications and collections. Our results are also affected by the effectiveness of third party collection agencies and our own efforts to further attempt collection. Significant changes in payor mix, centralized business office operations, including outsourced efforts in collecting our accounts receivables, economic conditions or trends in federal and state governmental healthcare coverage, among other things, could affect our collection levels.

Our policy is to write off gross accounts receivable if the balance is under $10.00 or when such amounts are placed with outside secondary collection agencies. We believe this policy accurately reflects the likelihood of recovery consistent with our ongoing collection efforts and is consistent with practices within the U.S. healthcare industry. We had $572.1 million and $534.4 million of past due patient account balances at March 31, 2020 and December 31, 2019, respectively, being pursued by secondary collection agencies. We expect to collect less than 3%, net of estimated collection fees, of the amounts being pursued by these secondary collection agencies. These amounts have been written-off and they are not included in accounts receivable in our consolidated balance sheets. Any amounts collected are recognized as revenue upon receipt.

For self-pay receivables, the total amount of contractual adjustments, discounts and implicit price concessions that reduces these receivables to their net carrying value were $649.5 million and $648.5 million as of March 31, 2020 and December 31, 2019, respectively. If our actual collection percentage differed by 1% from our estimated collection percentage as a result of a change in recoveries, our net loss for the three months ended March 31, 2020 would have changed $6.9 million.

Days revenue outstanding related to patients accounts receivable, excluding amounts recorded as due to or due from third-party payors, was 70 days and 69 days as of March 31, 2020 and December 31, 2019, respectively.

Impairment of Long-Lived Assets and Goodwill

Whenever an event occurs or changes in circumstances indicate that the carrying values of certain long-lived assets may be impaired, we project the undiscounted cash flows expected to be generated by those assets. If the projections indicate that the carrying values are not expected to be recovered, the assets are reduced to their estimated fair value based on a quoted market price, if available, or an estimated value based on valuation techniques available in the circumstances.

During the three months ended March 31, 2020, we evaluated the fair value of hospitals intended for divestiture. In connection with this evaluation, we recognized long-lived asset impairment of $12.0 million during the three months ended March 31, 2020, which consisted of $10.6 million of property and equipment, $1.2 million of capitalized software costs and $0.2 million of other long-lived assets. During the three months ended March 31, 2019, we evaluated the fair value of hospitals intended for divestiture. In connection with this evaluation, we recognized long-lived asset impairment of $8.9 million during the three months ended March 31, 2019, which consisted of $8.4 million of property and equipment and $0.5 million of capitalized software costs.

Our hospital operations and hospital management advisory and healthcare consulting services operations meet the criteria to be classified as reporting units for goodwill. Goodwill is evaluated for impairment annually at the same time every year and when an event occurs or circumstances change that, more likely than not, reduce the fair value of a reporting unit below its carrying value. There is a two-step method for determining goodwill impairment. Step one is to compare the fair value of the reporting unit with the unit’s carrying amount, including goodwill. If this test indicates the fair value is less than the carrying value, then step two is required. Step two is to compare the implied fair value of the reporting unit’s goodwill with the carrying value of the reporting unit’s goodwill. When an indicator of potential impairment is identified in interim periods, we evaluate goodwill for impairment at such date.

We perform our annual goodwill impairment evaluation in the fourth quarter of each year. For our annual evaluation, we estimate the fair value of each of our reporting units utilizing two modeling approaches, a discounted cash flow model and an earnings multiple model. The discounted cash flow model applies a discount rate to our cash flow forecasts that is based on our best estimate of a market participant’s weighted-average cost of capital. The earnings multiple model applies a market supported multiple to EBITDA. Both models are based on our best estimate of future revenues and operating costs and expenses as of the testing date. Additionally, the results of both models are reconciled to our consolidated market capitalization, which considers the amount a potential buyer would be required to pay, in the form of a control premium, to gain sufficient ownership to set policies, direct operations and control management decisions of our company.

A detailed evaluation of potential impairment indicators was performed as of March 31, 2020, which specifically considered the decline in patient volumes as a result of the COVID-19 pandemic and the decline in the fair market value of our outstanding debt and common stock during the first quarter. On the basis of available evidence as of March 31, 2020, no indicators of impairment were identified. Our impairment tests are based on programs and initiatives being implemented that are designed to achieve our most recent projections. Future negative trends, including potential future impacts of the COVID-19 pandemic, increased operating costs, or higher market interest rates could impact our future outlook. Such changes impacting the calculation of fair value, the risks of which are amplified by the COVID-19 pandemic, could result in a material impairment charge in the future.

58

---

 

Professional and General Liability Insurance and Workers’ Compensation Liability Insurance Reserves

As part of the business of owning and operating hospitals, we are subject to legal actions alleging liability on our part. To mitigate a portion of this risk, we maintain insurance exceeding a self-insured retention level for these types of claims. Our self-insurance reserves reflect the current estimate of all outstanding losses, including incurred but not reported losses, based on actuarial calculations as of period end. The loss estimates included in the actuarial calculations may change in the future due to updated facts and circumstances, including our claims experience post Spin-off. Insurance expense in the income statements include the actuarially determined estimates for losses in the current year, including claims incurred but not reported, the changes in estimates for losses in prior years based on actual claims development experience as compared to prior actuarial projections, the insurance premiums for losses related to policies obtained to cover amounts in excess of our self-insured retention levels, the administrative costs of the insurance programs, and interest expense related to the discounted portions of these liabilities. Our reserves for professional and general liability and workers’ compensation liability claims are based on semi-annual actuarial calculations, which are discounted to present value and consider historical claims data, demographic factors, severity factors and other actuarial assumptions. The liabilities for self-insured claims are discounted based on our risk-free interest rate that corresponds to the period when the self-insured claims are incurred and projected to be paid.

A portion of our reserves for workers’ compensation and professional and general liability claims included on our balance sheets relates to reserved claims and incurred but not reported claims prior to the Spin-off. These claims were fully indemnified by CHS under the terms of the Separation and Distribution Agreement. As a result, we have a corresponding receivable from CHS related to these claims on our consolidated balance sheets. See Note 17 — Commitments and Contingencies in our accompanying consolidated financial statements for a table that summarizes the receivables and liabilities associated with our workers’ compensation liability and professional and general liability claims as of March 31, 2020 and December 31, 2019.

Income Taxes

The breadth of our operations and the complexity of tax regulations require assessments of uncertainties and judgments in estimating the amount of income taxes that we will ultimately pay. The amount of final income taxes ultimately paid by us is dependent upon many factors, including negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation and resolution of disputes arising from federal and state tax audits in the normal course of business.

We calculate our provision for income taxes and account for income taxes using the asset and liability method. Under this method, deferred income taxes are recorded to represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred income taxes during the year. Deferred income taxes result from differences between the financial and tax basis of our assets and liabilities and are adjusted for changes in tax rates and the enactment of new or amended tax laws.

Under the asset and liability method, valuation allowances are recorded to reduce deferred income tax assets when it is more likely than not that a tax benefit will not be realized. We assess the realization of our deferred tax assets to determine whether an income tax valuation allowance is required. Based on all available evidence, both positive and negative, and the weight of that evidence to the extent such evidence can be objectively verified, we determine whether it is more likely than not that all or a portion of the deferred tax assets will be realized. The main factors that we consider include:

In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record deferred income tax benefits for all tax years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date about the ability to realize the benefit of the deferred tax assets or tax positions. For those tax positions where it is more likely than not that a future tax benefit will be sustained, our policy is to record the largest amount of income tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that an income tax benefit will not be sustained in the future, we do not recognize a deferred tax benefit in our financial statements. We record interest and penalties, net of any applicable tax benefit, related to income taxes, if any, as a component of the provision for income taxes when applicable.

59

---

 

Recent Accounting Pronouncements

In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other: Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment by eliminating step two from the goodwill impairment test. This ASU instead permits an entity to recognize goodwill impairment as the excess of a reporting unit's carrying value over the estimated fair value of the reporting unit, to the extent this amount does not exceed the carrying amount of goodwill. The new guidance continues to allow an entity to perform a qualitative assessment of goodwill impairment indicators in lieu of a quantitative assessment in certain situations. The ASU is effective for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted. The adoption of ASU 2017-04 did not have a significant impact on our consolidated results of operations and financial position.

In June 2016, the FASB issued ASU No. 2016-13 — Financial Instruments - Credit Losses to update the methodology used to measure current expected credit losses (“CECL”). This ASU applies to financial assets measured at amortized cost, including loans, held-to-maturity debt securities, net investments in leases, and trade accounts receivable as well as certain off-balance sheet credit exposures, such as loan commitments. This ASU replaces the current incurred loss impairment methodology with a methodology to reflect CECL and requires consideration of a broader range of reasonable and supportable information to explain credit loss estimates. The guidance must be adopted using a modified retrospective transition method through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. This ASU will be effective beginning in the first quarter of our fiscal year 2023. We currently do not expect ASU No. 2016-13 to have a significant impact on our consolidated results of operations, financial position and related disclosures.

Results of Operations

We have summarized our results of operations, including certain financial and operating data for the three months ended March 31, 2020 and 2019 on a comparative basis below. The definitions of certain terms used throughout the remainder of “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” follows:

Same-facility. Same-facility financial and operating data, as presented in the comparative discussions herein, excludes hospitals that were sold or closed prior to and as of the end of the current reporting period. Our same-facility operating results for the three months ended March 31, 2020 and 2019, which are reported herein, have been adjusted to exclude the operating results of the following hospitals and their affiliated entities.

Divestitures Group. The divestitures group, as of March 31, 2020, includes all hospitals that had been sold or closed by us since the Spin-off through March 31, 2020 as shown in the table above. This group of hospitals has certain ongoing operations during the wind-down periods related to the assets and liabilities which were not part of the hospital sale, which typically includes patient accounts receivable, third-party receivables and accounts payable.

Licensed Beds. Licensed beds are the number of beds for which the appropriate state agency licenses a hospital, regardless of whether the beds are actually available for patient use.

Admissions. Admissions represent the number of patients admitted for inpatient services.

Adjusted Admissions. Adjusted admissions are computed by multiplying admissions by gross patient revenues and then dividing that number by gross inpatient revenues.

60

---

 

Surgeries. Surgeries represent the number of inpatient and outpatient surgeries.

Emergency room visits. Emergency room visits represent the number of patients registered and treated in our emergency rooms.

Medicare case mix index. Medicare case mix index is a relative value assigned to a diagnosis-related group of patients that is used in determining the allocation of resources necessary to treat the patients in that group. Medicare case mix index is calculated as the average case mix index for all Medicare admissions during the period.

Hospital operations man-hours per adjusted admission. Hospital operations man-hours per adjusted admission is calculated as total paid employed and contract labor hours at both our hospitals and affiliated outpatient facilities divided by adjusted admissions. It is used by management as a measurement of productivity.

Days revenue outstanding. Days revenue outstanding approximates the average collection period for patient accounts receivable. It is calculated by dividing net patient accounts receivable at the end of the period by average net operating revenues per day for the most recent three months. Net patient accounts receivable excludes the amounts reported as due from and to third-party payors related to final cost report settlements and state supplemental payment programs.

EBITDA. EBITDA is a non-GAAP financial measure that consists of net income (loss) before interest, income taxes, depreciation and amortization.

Adjusted EBITDA. Adjusted EBITDA, also a non-GAAP financial measure, is EBITDA adjusted to add back the effect of certain legal, professional and settlement costs, impairment of long-lived assets and goodwill, net gain (loss) on sale of hospitals, net loss on closure of hospitals, transition of TSAs, change in actuarial estimates, severance costs for post-spin headcount reductions and executive severance. We use Adjusted EBITDA as a measure of financial performance. Adjusted EBITDA is a key measure used by our management to assess the operating performance of our hospital operations business and to make decisions on the allocation of resources. Additionally, management uses Adjusted EBITDA in assessing our consolidated results of operations and in comparing our results of operations between periods.

Same-facility Adjusted EBITDA. Same-facility Adjusted EBITDA, also a non-GAAP financial measure, is further adjusted to exclude the effect of EBITDA of the divestitures group. We present Same-facility Adjusted EBITDA because management believes this measure provides investors and other users of our financial statements with additional information about how management assesses our results of operations.

61

---

 

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

The following table provides a summary of our results of operations, both in dollars and as a percentage of net operating revenues (dollars in thousands):

The following table reconciles Adjusted EBITDA and Same-facility Adjusted EBITDA to net income (loss), the most directly comparable U.S. GAAP financial measure (in thousands):

62

---

 

Revenues

The following table provides information related to our net operating revenues (dollars in thousands, except per adjusted admission amounts):

The following table provides information related to our net operating revenues by payor source (dollars in thousands):

63

---

 

The following table provides information related to certain drivers of our net operating revenues:

Net operating revenues for the three months ended March 31, 2020 decreased $99.0 million compared to the three months ended March 31, 2019, consisting of a $93.1 million decrease in net patient revenues and a $5.9 million decrease in non-patient revenues. Our decrease in net patient revenues consisted of a $70.4 million decline related to the divestitures group and a $22.7 million decline related to our same-facility hospitals. The $22.7 million decline in our same-facility net patient revenues was primarily due to a $13.2 million decrease resulting from lower admissions and surgical volume, and a $9.5 million decrease in rate, primarily due to a reduction in the collectability of our self-pay patient accounts receivable. On a consolidated basis, admissions and adjusted admissions declined 27.8% and 19.5%, respectively, when comparing the first quarter of 2020 to the same period in 2019. On a same-facility basis, admissions and adjusted admissions decreased 11.0% and 3.8%, respectively, when comparing the first quarter of 2020 to the same period in 2019. The decrease in same-facility admissions and adjusted admissions was primarily a result of the COVID-19 pandemic’s restrictive measures, such as shelter-in-place orders, and general concerns related to the risk of contracting COVID-19 from interacting with the healthcare system.

Salaries and Benefits

The following table provides information related to our salaries and benefits expenses (dollars in thousands, except per adjusted admission amounts):

Salaries and benefits decreased $48.8 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. Salaries and benefits declined $41.5 million related to the divestitures group and $7.3 million related to same-facility salaries and benefits. The same-facility decrease of $7.3 million was primarily related to outsourcing of our revenue to R1 RCM and the reduction in same-facility adjusted admissions of 3.8% and a reduction of same-facility surgeries of 4.5%.

Supplies

The following table provides information related to our supplies expense (dollars in thousands, except per adjusted admissions amounts):

64

---

 

Supplies expense decreased $9.4 million for the three months ended March 31, 2020 when compared to the three months ended March 31, 2019, which included a $7.8 million decline related to the divestitures group and a $1.6 million decline related to our same-facility hospitals. The $1.6 million decline in our same-facility hospitals was primarily due to a reduction in same-facility adjusted admissions of 3.8% and a reduction of same-facility surgeries of 4.5%.

Other Operating Expenses

The following table provides information related to our other operating expenses (dollars in thousands):

Other operating expenses decreased $11.9 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. Other operating expenses declined $23.1 million related to the divestitures group offset by an $11.2 million increase related to our same-facility hospitals. The same-facility increase of $11.2 million was primarily due to a $5.0 million net increase in expenses related to the outsourcing of our revenue cycle services to R1 RCM on October 1, 2019 which were offset by a reduction in our salaries and wages, $2.3 million increase in costs associated with the transition of our transition services agreements from CHS and a $0.8 million increase in director fees.

Depreciation and Amortization

Depreciation and amortization expense decreased $2.4 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019. This decrease was primarily due to the overall reduction in our long-lived assets due to the divestiture or closure of three hospitals in 2019 and to impairment charges since the prior year same period.

Lease Costs and Rent

Lease costs and rent expense decreased $1.7 million during the three months ended March 31, 2020 compared to the three months ended March 31, 2019, which included a $1.5 million decline related to the divestitures group and a $0.2 million decline related to our same-facility hospitals.

Legal, Professional and Settlement Costs

Legal, professional and settlement costs increased $10.7 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The increase was primarily the result of $11.3 million of costs associated with our bankruptcy proceeding, offset by a reduction in other litigation matters. The legal, professional and settlement costs include legal costs and related settlements, if any, related to regulatory claims, government investigations into reimbursement payments, bankruptcy proceedings, strategic initiatives and other litigation matters. See Note 17 — Commitments and Contingencies in the accompanying consolidated financial statements for additional information on these matters.

Impairment of Long-Lived Assets and Goodwill

For the three months ended March 31, 2020, we recognized $12.0 million of impairment to long-lived assets of certain hospitals which we have identified as potential divestiture candidates or for which we have received letters of intent. For the three months ended March 31, 2019, we recognized $8.9 million of impairment to long-lived assets and goodwill of certain hospitals which we identified as potential divestiture candidates or for which we had received letters of intent.

Loss (Gain) on Sale of Hospitals, Net

We recognized a $2.4 million loss on the sale of hospitals, net in the three months ended March 31, 2020 primarily related to the sale of Henderson.

65

---

 

Interest Expense, Net

The following table provides information related to interest expense, net (dollars in thousands):

Interest expense, net decreased $0.2 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily due to payments on our Term Loan Facility which lowered the overall interest expense, offset by a reduction of interest income due to a decline in past due accounts receivable from the State of Illinois. See Liquidity and Capital Resources below and Note 6 — Long-Term Debt in the accompanying consolidated financial statements for additional information on our indebtedness.

Provision for (Benefit from) Income Taxes

The provision for income taxes decreased $0.1 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. Our effective tax rates were (0.1)% and (0.4)% for the three months ended March 31, 2020 and 2019, respectively.

Liquidity and Capital Resources

Financial Outlook

Our primary sources of liquidity are cash flows from operations, proceeds from divestitures and available borrowing capacity under our DIP Facility (discussed below). Our cash flows are negatively impacted by the significant amount of interest expense associated with the high debt leverage put in place to affect the Spin-off. Interest payments were $18.2 million for both the three month periods ended March 31, 2020 and 2019.

Our financial statements have been prepared under the assumption that we will continue as a going concern. On April 7, 2020, we filed a petition for reorganization under Chapter 11 of the Bankruptcy Code on April 7, 2020. The risks and uncertainties surrounding the Chapter 11 Cases, the events of default under our credit agreements and the indenture governing our Senior Notes, and the other conditions impacting our business raise substantial doubt as to our ability to continue as a going concern.

Although Management believes that the reorganization of the Company through Chapter 11 will position us for sustainable growth opportunities, the Chapter 11 filing caused an event of default under our Credit Agreements and the indenture governing our Senior Notes, which is stayed during the pendency of our bankruptcy proceeding. Further, there are several risks and uncertainties associated with our bankruptcy, including, among others: (a) our joint prepackaged plan of reorganization may never be confirmed or becomes effective, (b) the Restructuring Support Agreement may be terminated by one or more of the parties thereto, (c) the Bankruptcy Court may grant or deny motions in a manner that is adverse to us and our subsidiaries, and (c) our Chapter 11 case may be converted into a Chapter 7 liquidation. Thus, management also has concluded that there is substantial doubt our ability to continue as a going concern due to the risks and uncertainties involved in our reorganization under Chapter 11 of the Bankruptcy Code.

Sources of Liquidity Related to the Chapter 11 Cases

On April 10, 2020, we entered into a Superpriority Secured Debtor-in-Possession Credit Agreement, among us, as the borrower, certain of our subsidiaries party thereto as guarantors, the lenders party thereto (the “DIP Lenders”), GLAS USA, LLC, as administrative agent for the lenders (the “Administrative Agent”), and GLAS Americas, LLC, as collateral agent for the lenders (the “DIP Credit Agreement”). The Bankruptcy Court entered a final order approving the DIP Credit Agreement on May 6, 2020 (the “Final Order”).

The DIP Credit Agreement allows us to borrow term loans (the “DIP Loans”) with an aggregate principal amount of up to $100 million (the “DIP Facility”). We may draw up to a maximum principal amount of $60 million under the DIP Facility, and thereafter may draw the remaining portion of the loan commitments not drawn subject to the consent of the required lenders under the DIP Credit Agreement or if needed under the Budget (as defined below).

66

---

 

We expect to fund the distributions under the Plan through cash on hand, the new common stock of the Reorganized QHC, certain exit financing arrangements and an equity raise of at least $200 million (which amount may be increased in certain circumstances to $250 million) (the “Equity Commitment Aggregate Amount”) pursuant to the Equity Commitment Agreement. The Equity Commitment Agreement requires certain Consenting Noteholders (the “Equity Commitment Parties”) to commit at least the Equity Commitment Aggregate Amount in new funds to purchase shares of new common stock in the Reorganized QHC at a purchase price of $7.50 per share. Additionally, the Reorganized QHC will issue to the Equity Commitment Parties shares of new common stock in an amount equal to 7.5% of the Equity Commitment Aggregate Amount, issued at a premium price per share of $10.00 (the “Equity Commitment Premium”). We must pay the Equity Commitment Premium to the Equity Commitment Parties in cash under certain circumstances. The equity offering will be conducted in accordance with the exemption from registration set forth in Section 4(a)(2) of the Securities Act. Furthermore, the closing of the equity offering is subject to the satisfaction of customary conditions precedent by the Debtors, including, among others, the RSA has not been terminated, the Plan has been confirmed and declared effective by the Bankruptcy Court, and all other government approvals (including anti-trust approval, if applicable) have been obtained by the Debtors.

Furthermore, the Plan provides that the Debtors will emerge from the Chapter 11 Cases with the following exit financing arrangements: (a) a new senior secured term loan facility in an aggregate principal amount of $738.3 million minus an aggregate paydown amount of at least $50 million but no more than $100 million (the “Exit Facility”), as determined by the Required Equity Commitment Parties; and (b) a new senior secured asset-based credit facility (the “Exit ABL Facility”). The Exit Facility will replace the Senior Credit Facility, and the Exit ABL Facility will replace the ABL Credit Facility.

COVID-19 Pandemic

As previously discussed, we may require an increased level of working capital if we experience extended billing and collection cycles as a result of displaced employees, payors, revenue cycle management contractors, or otherwise. Any increase in the amount or deterioration in the collectability of patient accounts receivable will adversely affect our cash flows and results of operations, requiring an increased level of working capital. While the economic impact brought by, and the duration of, COVID-19 is difficult to assess or predict, the COVID-19 pandemic could result in significant disruption of global financial markets, reducing our ability to access capital in the future, which could negatively affect our liquidity in the future. In addition, although we may have access to potential additional sources of liquidity through funding that may be available to healthcare providers under the recently enacted CARES Act, there can be no assurance regarding the extent of our access to such funding based on a number of factors, including our filing of the Chapter 11 Cases.

Subsequent to March 31, 2020, we received relief via the CARES Act which included $101.0 million in payments through the PHSSEF. As previously noted, PHSSEF payments are not required to be repaid, subject to certain terms and conditions. Additionally, the CARES Act permits the deferral of payment of the employer portion of social security taxes between March 27, 2020 and December 31, 2020, with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022. We began the deferral of the employer portion of social security taxes in late April 2020.

Statements of Cash Flows

The following table provides a summary of our cash flows (in thousands):

Net cash used in operating activities was $8.7 million for the three months ended March 31, 2020 compared to net cash provided by operating activities of $8.1 million for the three months ended March 31, 2019, a $16.8 million decrease. The changes in operating assets and liabilities on a comparative basis for the three months ended March 31, 2020 and 2019 were impacted by the impending bankruptcy, the effects of COVID-19 and our normal business operations.

Net cash used in investing activities was $10.7 million for the three months ended March 31, 2020 compared to net cash used in investing activities of $8.2 million for the three months ended March 31, 2019, a $2.5 million increase. Capital expenditures for property and equipment increased $2.0 million, primarily due to increased investment in a standalone information system infrastructure.

Net cash provided by financing activities was $47.6 million for the three months ended March 31, 2020, compared to net cash used in financing activities of $1.4 million for the three months ended March 31, 2019, a $49.0 million increase. This increase was primarily due to a $47.0 million increase in our net borrowings under revolving credit facilities in the 2020 period compared to the 2019 period.

67

---

 

Capital Expenditures

Capital expenditures for property, equipment and software were $12.0 million and $9.5 million for the three months ended March 31, 2020 and 2019, respectively. In addition, we had $6.6 million and $2.8 million of capital expenditures related to property and equipment accrued in accounts payable at March 31, 2020 and 2019, respectively. Our capital expenditures primarily consist of purchases of medical equipment, renovations at our hospitals and investments in a standalone information system infrastructure.

Capital Resources

Our net working capital was $(1,203.5) million and $(1,141.8) million as of March 31, 2020 and December 31, 2019, respectively, a $61.8 million decrease. The decrease in our net working capital in 2020 when compared to 2019 was primarily due to an increase in current debt due to increased borrowing under the revolving credit facilities and a decrease in patient accounts receivable partially due to reduced volumes related to COVID-19. In addition, we had an $11.3 million increase in accrued interest primarily related to timing of interest payments on our Senior Notes. The changes in net working capital were impacted by the impending bankruptcy, the effects of COVID-19 and our normal business operations.

Debt

The following table provides a summary of activity related to our long-term debt including current maturities (in thousands):

As discussed below, we defaulted on the performance of our covenants under the CS Agreement and the indenture governing our Senior Notes. As such, all outstanding debt as of March 31, 2020 and December 31, 2019 related to the Revolving Credit Facility, the Term Loan Facility, the ABL Credit Facility, and the Senior Notes have been classified as current maturities of long-term debt in our accompanying consolidated financial statements.

The following table provides a summary of our long-term debt, allocated between fixed and variable debt (dollars in thousands):

Debtor-in-Possession Credit Agreement

On April 10, 2020, we entered into a Superpriority Secured Debtor-in-Possession Credit Agreement, among us, as the borrower, certain of our subsidiaries party thereto as guarantors, the lenders party thereto (the “DIP Lenders”), GLAS USA, LLC, as administrative agent for the lenders (the “Administrative Agent”), and GLAS Americas, LLC, as collateral agent for the lenders (the “DIP Credit Agreement”). The Bankruptcy Court entered a final order approving the DIP Credit Agreement on May 6, 2020 (the “Final Order”).

The DIP Credit Agreement allows us to borrow term loans (the “DIP Loans”) with an aggregate principal amount of up to $100 million (the “DIP Facility”). We may draw up to a maximum principal amount of $60 million under the DIP Facility, and thereafter

68

---

 

may draw the remaining portion of the loan commitments not drawn subject to the consent of the required lenders under the DIP Credit Agreement or if needed under the Budget (as defined below).

The DIP Loans bear interest at a rate per annum, at our option, equal to (i) an adjusted LIBOR (with a floor of 1.00%) plus 10.00% or (ii) an alternate base rate (with a floor of 2.00%) plus 9.00%. The adjusted LIBOR is equal to the rate of interest quoted as the London interbank offering rate for deposits in dollars for a term comparable to the interest period applicable to a DIP Loan, adjusted for certain statutory reserves applicable to the Administrative Agent or any DIP Lender under the regulations promulgated by the Board of Governors of the Federal Reserve System of the United States. The alternate base rate is equal to the greatest of (x) the federal funds rate plus 0.5%, (y) the prime rate established by the Administrative Agent, and (z) the adjusted LIBOR in effect plus 1.00%. Upon the occurrence of an event of default, the Administrative Agent is permitted to charge a default rate of interest equal to 2.00% above the rate otherwise applicable. We must make interest payments monthly, in arrears, on the first day of each month, upon any prepayment, and at the final maturity date of the DIP Facility.

We will use the proceeds of the DIP Loans to fund our operations and working capital during the Chapter 11 Cases, pay obligations arising from or related to the Carve Out (as defined below), pay professional fees in connection with the Chapter 11 Cases, make adequate protection payments, and pay fees and expenses incurred in connection with negotiating and implementing the DIP Credit Agreement.

As security for the DIP Loans, the DIP Lenders are entitled to joint and several superpriority claim status in the Chapter 11 Cases. Further, the Debtors granted in favor of the DIP Lenders (i) a first priority security interest in and lien upon (x) the amounts deposited in a segregated deposit account for advances of DIP Loans under the DIP Credit Agreement, and (y) subject to order by the Bankruptcy Court, avoidance actions and the proceeds thereof, and (ii) a junior security interest in and lien upon all of the assets of the Debtors encumbered by the liens established pursuant to the CS Agreement. The guarantors under the CS Agreement also guaranteed the obligations of the Company under the DIP Credit Agreement. The liens and superpriority claims of the DIP Lenders are subject in each case to a carve out (the “Carve Out”) that accounts for certain administrative, court and legal fees payable in connection with the Chapter 11 Cases.

The DIP Credit Agreement contains customary affirmative and negative covenants applicable to us and our subsidiaries, including, among others, (i) the obligation to deliver a cash flow forecast, setting forth all line-item cumulative receipts and operating disbursements on a weekly basis for a thirteen-week period (the “Budget”), (ii) the obligation to update the Budget every four weeks, (iii) the obligation to achieve certain milestones established by the DIP Lenders, and (iv) the obligation to deliver weekly and monthly operating reports. We must use the proceeds of the DIP Loans and operate our business in a manner consistent with the Budget, subject only to variances of 15% for aggregate collections and 15% for aggregate disbursements, tested on a rolling four-week basis.

Moreover, the DIP Credit Agreement contains certain customary representations and warranties and events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, cross defaults to certain indebtedness, certain bankruptcy-related events (such as the conversion of the Chapter 11 Cases to proceedings under Chapter 7 of the Bankruptcy Code), certain events under ERISA, the liens on the collateral of the DIP Lenders cease to be valid and perfected, and a change of control of the Company. If an event of default occurs, the Administrative Agent, at the request of the requisite DIP Lenders, will be entitled to take various actions after giving notice to us, including the acceleration of all amounts due under the DIP Credit Agreement and the termination of the DIP Lenders’ commitments to make DIP Loans, subject to the terms of the Final Order approving the DIP Credit Agreement.

The DIP Facility will mature upon the earlier to occur of (i) October 10, 2020, (ii) the acceleration of the DIP Loans and the DIP Lenders’ commitments as described above, and (iii) the effective date of the Plan.

Senior Credit Facility

In connection with the Spin-off, on April 29, 2016 we entered into a credit agreement (the “CS Agreement”), among us, the lenders party thereto and Credit Suisse AG, Cayman Islands Branch (“Credit Suisse”), as administrative agent and collateral agent. The CS Agreement initially provided for an $880 million senior secured term loan facility (the “Term Loan Facility”) and a $100 million senior secured revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Senior Credit Facility”). The Term Loan Facility was issued at a discount of $17.6 million, or 98% of par value, and has a maturity date of April 29, 2022, subject to customary acceleration events and repayment, extension or refinancing. The Revolving Credit Facility has a maturity date of April 29, 2021, subject to certain customary acceleration events and repayment, extension or refinancing.

Interest under the Term Loan Facility accrues, at our option, at adjusted LIBOR, subject to statutory reserves and a floor of 1% plus 6.75%, or the alternate base rate plus 5.75%. The effective interest rate on the Term Loan Facility was 8.99% as of March 31, 2020. Interest on outstanding borrowings under the Revolving Credit Facility accrues, at our option, at adjusted LIBOR, subject to statutory reserves and a floor of 0% plus 2.75%, or the alternate base rate plus 1.75%. The effective interest rate on the Revolving Credit Facility was 6.53% as of March 31, 2020.

We have defaulted on the performance of our covenants under the CS Agreement. We filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code on April 7, 2020, which constituted an event of default (the “Bankruptcy Event of

69

---

 

Default”). In addition, our Secured Net Leverage Ratio exceeded 5.00 to 1.00 as of December 31, 2019, which constituted an event of default under the CS Agreement (the “Ratio Event of Default”). Moreover, based on the Bankruptcy Default and Ratio Event of Default, our management concluded there is substantial doubt regarding our ability to continue as a going concern within one year from the issuance of our consolidated financial statements. As a result, we received a going concern qualification in connection with the external audit report of the consolidated financial statements included in this Annual Report on Form 10-K, which also constituted a default under the CS Agreement (the “Going Concern Default’). The CS Agreement also requires us to deliver to Credit Suisse our consolidated audited financial statements within ninety days of the end of the 2019 fiscal year. We failed to satisfy this covenant on March 31, 2020, which constituted a default under the CS Agreement (the “FS Delivery Default”). The FS Delivery Default has been cured. The Going Concern Default will mature into an event of default after notice to us from the administrative agent and the lapse of a thirty-day cure period.

The CS Agreement allows the lenders thereunder to accelerate the outstanding indebtedness and foreclose on the collateral subject to liens after the occurrence of an event of default, such as the Bankruptcy Event of Default and Ratio Event of Default. However, the lenders are automatically stayed from enforcing their remedies under the CS Agreement as of the date of our bankruptcy petition pursuant to the provisions of the Bankruptcy Code.

ABL Credit Facility

In connection with the Spin-off on April 29, 2016, we entered into an ABL Credit Agreement (the “UBS Agreement,” and together with the CS Agreement, collectively, the “Credit Agreements”), among us, the lenders party thereto and UBS AG, Stamford Branch (“UBS”), as administrative agent and collateral agent. The UBS Agreement provided for a $125 million senior secured asset-based revolving credit facility (the “ABL Credit Facility”).

We filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code on April 7, 2020, as discussed above. Our filing of the bankruptcy petition constituted an event of default under the UBS Agreement. The UBS Agreement allows the lenders thereunder to accelerate the outstanding indebtedness after the occurrence of an event of default. However, the lenders are automatically stayed from enforcing their remedies under the UBS Agreement as of the date of our bankruptcy petition pursuant to the provisions of the Bankruptcy Code.

We also failed to satisfy our affirmative covenant under the UBS Agreement to deliver to UBS audited consolidated financial statements within 90 days of the end of the 2019 fiscal year. The failure to timely deliver the audited consolidated financial statements of the Company constituted a default under the UBS Agreement, which has since been cured. In addition, our receipt of a going concern qualification in connection with the external audit report of these consolidated financial statements also constituted a default under the UBS Agreement.

Senior Notes

On April 22, 2016, we issued $400 million aggregate principal amount of 11.625% Senior Notes due 2023, pursuant to the Indenture. The Senior Notes were issued at a discount of $6.9 million, or 1.734%, in a private placement and are senior unsecured obligations guaranteed on a senior basis by certain of our subsidiaries (the “Guarantors”). The Senior Notes mature on April 15, 2023 and bear interest at a rate of 11.625% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2016. Interest on the Senior Notes accrues from the date of original issuance and is calculated on the basis of a 360-day year comprised of twelve 30-day months. The effective interest rate on the Senior Notes was 12.49% as of March 31, 2020.

The Indenture contains covenants that, among other things, limit our ability and certain of our subsidiaries’ ability to incur or guarantee additional indebtedness, pay dividends or make other restricted payments, make certain investments, create or incur certain liens, sell assets and subsidiary stock, transfer all or substantially all of our assets or enter into merger or consolidation transactions. We defaulted on our obligations under the Indenture when we filed a voluntary petition for bankruptcy relief under Chapter 11 of the Bankruptcy Code on April 7, 2020, as discussed above. Our default allows the trustee to accelerate payment of the Senior Notes; however, the Bankruptcy Code imposes an automatic stay which prevents the lender’s enforcement of this remedy while the Chapter 11 Cases are pending.

Finance Lease Obligations and Other Debt

Our debt arising from finance lease obligations primarily relates to our corporate office in Brentwood, Tennessee. As of March 31, 2020 and December 31, 2019, this finance lease obligation was $16.0 million and $16.3 million, respectively. The remainder of our finance lease obligations relate to property and equipment at our hospitals and corporate office. Other debt consists of physician loans and miscellaneous notes payable to banks.

Redeemable and Non-Redeemable Noncontrolling Interests

Our financial statements include all assets, liabilities, revenues and expenses of less than 100% owned entities that we control. Accordingly, we have recorded noncontrolling interests in the earnings and equity of such entities. Certain of our consolidated subsidiaries have noncontrolling physician ownership interests with redemption features that require us to deliver cash upon the

70

---

 

occurrence of certain events outside of our control, such as the retirement, death, or disability of a physician-owner. We record the carrying amount of redeemable noncontrolling interests at the greater of: (1) the initial carrying amount increased or decreased for the noncontrolling interests' share of cumulative net income (loss), net of cumulative amounts distributed, if any, or (2) the redemption value. As of March 31, 2020, we had redeemable noncontrolling interests of $2.3 million and non-redeemable noncontrolling interests of $15.5 million that are included in our balance sheet.

Inflation

The healthcare industry is labor intensive. Salaries, benefits and other labor-related costs increase during periods of inflation and periods of labor shortages for nurses and other medical staff, which may differ depending on the geographic area in which a hospital is located. In addition, the Affordable Care Act is subject to ongoing revisions and possible repeal and replacement, which may lead to substantially higher costs to us related to providing employee medical benefits. We are also exposed to rising costs for medical supplies and drugs due to inflationary pressures on our suppliers, including our group purchasing organization. We have implemented cost control measures to monitor and manage the impact of rising operating costs and expenses on our operating margins, including, among others, the reduction of costs in non-labor intensive categories. In addition we are also exposed to rising costs for medical supplies and drugs due to the COVID-19 outbreak. Despite considerable efforts to source vital supplies, in 2020 we are experiencing supply chain disruptions, including shortages, delays and significant price increases in equipment, pharmaceuticals and medical supplies, particularly personal protective equipment. We cannot make assurances that we will be able to adequately offset the impact that any future increases in labor costs, employee medical benefit costs or other operating costs and expenses may have on our business which could adversely impact our operating margins in the future.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk associated with changes in interest rates on our variable rate debt. In connection with the Spin-off, on April 29, 2016, we entered into two credit facilities, the Senior Credit Facility and the ABL Credit Facility, that subject us to variable interest rates tied to LIBOR or a base rate. In addition, the DIP Facility subjects us to variable interest rates tied to an adjusted LIBOR or an alternate base rate. Furthermore, the Plan provides that we will emerge from the Chapter 11 Cases with exit financing arrangements, and depending on the final terms, such exit financing arrangements may expose us to variable rate interest risk. As of March 31, 2020, we had outstanding principal amount of debt, excluding unamortized debt issuance costs and discounts, of $884.3 million subject to variable rates of interest, which included $146.0 million of borrowings outstanding under revolving credit facilities as of March 31, 2020. If the interest rate on our variable rate debt outstanding as of March 31, 2020, after taking into consideration the 1% floor on our Term Loan Facility, was 100 basis points higher for the three months ended March 31, 2020, the additional interest expense impacting net income (loss) would have been $2.2 million, or $0.07 per basic and diluted share. We do not currently have any derivative or hedging arrangements, or other known exposures, to changes in interest rates.

The chief executive of the United Kingdom Financial Conduct Authority, or the "FCA", which regulates LIBOR, announced in July 2017 that the FCA intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Federal Reserve Bank of New York has published the Secured Overnight Financing Rate (SOFR) as an alternative to LIBOR and is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities. Due to the uncertainty surrounding the future of LIBOR, it is expected that a transition away from the widespread use of LIBOR to alternative benchmark rates will occur by the end of 2021. Changing to an alternative interest rate may lead to additional volatility in interest rates and could cause our debt service obligations to increase. If the alternative rate of interest under the Senior Credit Facility was used for the three months ended March 31, 2020, we would have incurred additional interest expense of $1.6 million.

Item 4. Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective (at the reasonable assurance level) to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in our internal control over financial reporting during the three months ended March 31, 2020 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

71

---

 

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to lawsuits and other legal matters arising in the ordinary course of our business, including claims of damages for personal injuries, medical malpractice, breach of hospital management contracts, breach of other contracts, wrongful restriction of or interference with physicians’ staffing privileges and other employment-related claims. In certain of these claims, plaintiffs request payment for damages, including punitive damages that may not be covered by our insurance policies. Healthcare facilities are also subject to the regulation and oversight of various federal and state governmental agencies. The healthcare industry has seen numerous ongoing investigations related to compliance and billing practices and hospitals, in particular, continue to be the subject of governmental fraud and abuse programs and a primary enforcement target for the OIG and DOJ. We regularly monitor and from time to time, we detect issues of non-compliance with federal healthcare laws pertaining to claims submission and reimbursement payment practices or financial relationships with physicians. We avail ourselves of various mechanisms to address potential overpayments arising out of these issues, including repayment of claims, rebilling of claims, and participation in voluntary disclosure protocols offered by CMS and the OIG. Participating in voluntary repayment of claims and voluntary disclosure protocols can have the potential for significant settlement obligations or even enforcement action. Additionally, under the federal False Claims Act, private parties have the right to bring qui tam, or “whistleblower,” suits against healthcare facilities that submit false claims for payments to, or improperly retain overpayments from, governmental payors. Some states have adopted similar state whistleblower and false claims provisions. Qui tam or “whistleblower” actions initiated under the civil False Claims Act may be pending but placed under seal by the court to comply with the False Claims Act’s requirements for filing such suits. As a result, they could lead to proceedings without our knowledge. Certain of our healthcare facilities have received, and from time to time other healthcare facilities may receive, inquiries or subpoenas from fiscal intermediaries or federal and state agencies. Any proceedings against us may involve potentially substantial settlement amounts, as well as the possibility of civil, criminal, or administrative fines, penalties or other sanctions which could be material. Settlements of suits involving Medicare and Medicaid issues routinely require both monetary payments as well as corporate integrity agreements from the offending healthcare company. Depending on how the underlying conduct is interpreted by the inquiring or investigating federal or state agency, the resolution could have a material adverse effect on our results of operations, financial condition and cash flows.

In connection with the Spin-off, CHS agreed to indemnify us for certain liabilities relating to outcomes or events occurring prior to the closing of the Spin-off, including (i) certain claims and proceedings known to be outstanding on or prior to the Spin-off and (ii) certain claims, proceedings and investigations by governmental authorities or private plaintiffs related to activities occurring at or related to our healthcare facilities prior to the closing date of the Spin-off, but only to the extent, in the case of clause (ii), that such claims are covered by insurance policies maintained by CHS, including professional and general liability and workers’ compensation liability. In this regard, CHS will continue to be responsible for certain Health Management Associates, Inc. legal matters covered by its contingent value rights agreement that relate to the portion of CHS’s business now held by us.

We do not control and cannot predict with certainty the progress or final outcome of discussions with government agencies, investigations and legal proceedings against us. Therefore, the final amounts paid to resolve such matters, claims and obligations could be material and could materially differ from amounts currently recorded, if any. Any such changes in our estimates or any adverse judgments could materially adversely impact our future results of operations, financial condition and cash flows.

For information regarding material pending legal proceedings in which we are involved, see Note 17 — Commitments and Contingencies in the accompanying financial statements, which is incorporated by reference.

Bankruptcy Proceedings

On April 7, 2020, Quorum Health Corporation and certain of its direct and indirect subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief (the “Chapter 11 Cases”) under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The Chapter 11 Cases are being jointly administered under the caption In re Quorum Health Corporation, et al., Case No. 20-10766 (KBO).

The Debtors continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. As debtors-in-possession under the Bankruptcy Code, the Debtors may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. Further, the Debtors filed a variety of “first day” motions with the Bankruptcy Court requesting permission to continue the Company’s business activities in the ordinary course. The Bankruptcy Court entered an order approving the Debtors’ “first day” motions on April 9, 2020 on an interim basis, and the Bankruptcy Court held the final hearing on the “first day” motions on May 6, 2020.

Our filing of the Chapter 11 Cases constituted an event of default that accelerated our obligations under our debt agreements. Specifically, the filing of the Chapter 11 Cases constituted an event of default under (a) the Credit Agreement, among us, the lenders party thereto and Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent, with respect to the Senior

72

---

 

Credit Facility; (b) the ABL Credit Agreement, among us, the lenders party thereto and UBS AG, Stamford Branch, as administrative agent and collateral agent, with respect to the ABL Credit Facility; and (c) the Indenture, dated as of April 22, 2016, by and between us and Wilmington Savings Fund Society, FSB, as successor trustee to Regions Bank, with respect to the Senior Notes. Due to the Chapter 11 Cases, however, the lenders’ ability to exercise remedies under their respective credit agreements and debt instruments was stayed as of the date of the Chapter 11 petition and continues to be stayed.

On April 6, 2020, the Debtors entered into a Restructuring Support Agreement (the “RSA”) with (i) the lenders who (a) constitute more than a majority in number of the lenders under the Senior Credit Facility and (b) hold at least two-thirds of the aggregate outstanding principal amount of the Senior Credit Facility (the “Consenting First Lien Lenders”), and (ii) the holders who (x) constitute a majority in number of the holders of the Senior Notes and (y) hold at least two-thirds of the aggregate outstanding principal amount of the Senior Notes (the “Consenting Noteholders”, and collectively with the Consenting First Lien Lenders, the “Consenting Stakeholders”). The RSA contemplates that the restructuring and recapitalization of the Debtors will occur through a joint prepackaged plan of reorganization in the Chapter 11 Cases (the “Plan”). Under the RSA, we must seek to have the Plan confirmed and declared effective by no later June 21, 2020, provided that if any required regulatory approval has not been obtained prior to June 21, 2020, then we automatically have an additional twenty calendar days to obtain a confirmed and effective Plan. Under the Bankruptcy Code, a majority in number and two-thirds in amount of each impaired class of claims must approve the Plan. The RSA requires the Consenting Stakeholders to vote in favor of and support the Plan, and the Consenting Stakeholders represent the requisite number of votes in each impaired class of creditors entitled to vote on the Plan.

The Plan provides that the reorganized QHC (the “Reorganized QHC”) will pay all of the general unsecured claims against the Debtors’ estate in the ordinary course of business. Moreover, the Plan will allow us to reduce our debt by approximately $500 million through the refinancing and paydown of our Senior Credit Facility, the refinancing of our ABL Credit Facility and the extinguishment of our Senior Notes. In exchange for the extinguishment of their claims under the Senior Notes, the Reorganized QHC will issue to the holders of the Senior Notes 100% of the shares of new common stock of the Reorganized QHC, subject to dilution by shares of new common stock issued pursuant to the Equity Commitment Agreement (defined below) and the management incentive plan that will be adopted by the Reorganized QHC. The holders of Senior Notes also will receive interests in a litigation trust established by QHC in the Chapter 11 Cases. The Plan requires, and we expect, that all of our existing shares of common stock, restricted stock, and restricted stock units will be cancelled in the Chapter 11 Cases without receiving any distributions from the Debtors. We expect to fund the distributions under the Plan through cash on hand, shares of new common stock of the Reorganized QHC, certain exit financing arrangements, and an equity raise of at least $200 million pursuant to that certain Equity Commitment Agreement, among us and certain of the Consenting Noteholders (the “Equity Commitment Agreement”).

Additionally, on April 10, 2020, we entered into a Superpriority Secured Debtor-in-Possession Credit Agreement, among us, as the borrower, certain of our subsidiaries party thereto as guarantors, the lenders party thereto, GLAS USA, LLC, as administrative agent for the lenders, and GLAS Americas, LLC, as collateral agent for the lenders (the “DIP Credit Agreement”). The Bankruptcy Court entered a final order approving the DIP Credit Agreement on May 6, 2020. See Note 6 – Long Term Debt – Debtor-in-Possession Credit Agreement for additional information about the DIP Credit Agreement.

We cannot predict the ultimate outcome of our Chapter 11 Cases at this time. Although we expect the Chapter 11 Cases to be resolved quickly since we entered bankruptcy with a joint prepackaged plan of reorganization, third parties may propose alternative plans of reorganization, the RSA may be terminated by one or more of the Consenting Stakeholders or the Company, or the Bankruptcy Court may refuse to confirm the Plan. In the event the Plan is not confirmed or the RSA is terminated, the duration of our Chapter 11 Cases will be extended which will increase our expenses and reduce our capital resources. Further, even if our Plan is confirmed, although we expect that the exit financing provided for in the Plan will be sufficient to make all payments required by the Plan, we face many risks and uncertainties that we cannot predict and consequently, there is no guarantee that the exit financing provided for in the Plan will be sufficient to accomplish our reorganization strategy.

Item 1A. Risk Factors

Except as set forth below, there have been no material changes to the risk factors discussed in the 2019 Annual Report on Form 10-K.

The Coronavirus Aid, Relief, and Economic Security Act and the Paycheck Protection Program and Health Care Enhancement Act were recently enacted, and there is a high degree of uncertainty surrounding their implementation. Because the regulations under the CARES Act and the PPPHCE Act have yet to be finalized, the extent of our ability to obtain funding from the CARES Act and the PPPHCE Act is uncertain.

Federal and state governments have passed legislation, promulgated regulations, and taken other administrative actions intended to assist healthcare providers in providing care to COVID-19 and other patients during the public health emergency and address revenue losses attributable to COVID-19. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted and on April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act (“PPPHCE Act”) was enacted. The CARES Act includes support for healthcare professionals, patients and hospitals. The CARES Act includes $100 billion

73

---

 

in funding to be distributed to eligible providers through the Public Health and Social Services Emergency Fund (“PHSSEF”), expansion of the Medicare Accelerated and Advance Payment Program (“MAAPP”), and changes to the Net Operating Loss (“NOL”) rules and the business interest expense deduction rules under Code Section 163(j). The PPPHCE Act provides an additional $75 billion to the Department of Health and Human Services (“HHS”) to be distributed to healthcare providers to reimburse health care-related expenses and lost revenues attributable to COVID-19, as well as an additional $25 billion to facilitate and expand COVID-19 testing. The provision in the PPPHCE Act appropriating the additional $25 billion for healthcare providers is identical to the provision in the CARES Act that created the initial funding and provides HHS with the same broad authority to issue the funds. PHSSEF payments (both under the CARES Act and the PPPHCE Act) are intended to reimburse healthcare providers for health care related expenses and lost revenues attributable to COVID-19 and are not required to be repaid, provided, that, recipients attest to and comply with certain terms and conditions, including (in the case of payments under the CARES Act) limitations on balance billing for COVID-19 patients and not using funds received from the PHSSEF to reimburse expenses or losses that have been reimbursed from other sources or that other sources are obligated to reimburse (terms and conditions with respect to payments under the PPPHCE Act have not been issued). If such attestation and compliance cannot be made by a recipient, the funds provided by PHSSEF must be repaid. The payments under MAAPP are advances on Medicare reimbursement that providers must repay.

Subsequent to March 31, 2020, the Company received $101.0 million in payments through the PHSSEF and it may have access to additional funding that may be available to healthcare providers under the CARES Act and PPPHCE Act, although we cannot know the amount, if any, of such additional funds. In addition, the payments received through the PHSSEF may need to be repaid if we are unable to use the funds in accordance with the final regulations of the PHSSEF. Because the regulations under the CARES Act and the PPPHCE Act have yet to be finalized, the extent of our ability to obtain funding from the CARES Act and the PPPHCE Act is uncertain. As debtors-in-possession under the Bankruptcy Code, we are not able to participate in MAAPP. In addition, the Company’s NOLs will be substantially reduced based on cancellation of debt income that will be realized by the Company under the Plan, and therefore the Company is expected to receive minimal benefit from the changes to the treatment of NOLs under the CARES Act. Due to the recent enactment of this legislation and the lack of final regulations, there is a high degree of uncertainty around the CARES Act’s and PPPHCE Act’s implementation and we continue to assess their potential impact on our business, results of operations, financial condition and cash flows.

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

The following table provides the information with respect to purchases made by us of shares of our common stock during each of the months during the three-month period ended March 31, 2020:

⁽¹⁾ Represents shares of common stock surrendered to us by certain employees to satisfy tax withholding obligations in connection with the vesting of restricted stock previously awarded to such employees under our Amended and Restated 2016 Stock Award Plan.

Item 3. Defaults Upon Senior Securities

The Company’s filing of the Chapter 11 Cases constituted an event of default under (a) the Credit Agreement, among the Company, the lenders party thereto and Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent (the “CS Agreement”), providing for the Senior Credit Facility; (b) the ABL Credit Agreement, among the Company, the lenders party thereto and UBS AG, Stamford Branch, as administrative agent and collateral agent (the “UBS Agreement”), providing for the ABL Credit Facility; and (c) the Indenture, dated as of April 22, 2016, by and between the Company and Wilmington Savings Fund Society, FSB, as successor trustee to Regions Bank (the “Indenture”), governing the Senior Notes.

Additional defaults also have occurred under the CS Agreement and UBS Agreement. The Company’s Secured Net Leverage Ratio exceeded 5.00 to 1.00 as of December 31, 2019, which constituted an event of default under the CS Agreement. Moreover, the Company received a going concern qualification in connection with the external audit report of its consolidated financial statements for the year ended December 31, 2019, which constituted a default under the CS Agreement and the UBS Agreement.

As previously disclosed, any efforts to enforce the Company’s obligations under the CS Agreement, UBS Agreement, and Indenture are automatically stayed as a result of the Chapter 11 Cases, and the creditors’ rights of enforcement in respect of the foregoing debt instruments are subject to the applicable provisions of the Bankruptcy Code.

74

---

 

Item 6. Exhibits

 

75

---

 

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.

 

Date: May 15, 2020

76