10-K/A

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K/A

(Amendment No.1)

 

 

(Mark One)

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

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2021

OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 814-00736

 

 

PENNANTPARK INVESTMENT CORPORATION

(Exact name of registrant as specified in its charter)

 

MARYLAND

 

20-8250744

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

590 Madison Avenue, 15th Floor

New York, N.Y.

 

10022

(Address of principal executive offices)

 

(Zip Code)

(212) 905-1000

(Registrant’s Telephone Number, Including Area Code)

 

 

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

 

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, par value $0.001 per share

PNNT

The Nasdaq Stock Market LLC

 

 

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No .

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No .

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, 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.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

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

The aggregate market value of common stock held by non-affiliates of the Registrant on March 31, 2021 based on the closing price on that date of $5.58 on The Nasdaq Global Select Market was approximately $364 million. For the purposes of calculating the aggregate market value of common stock held by non-affiliates, all directors and executive officers of the Registrant have been treated as affiliates. There were 66,131,651 shares of the Registrant’s common stock outstanding as of March 30, 2022.

 


 

Documents Incorporated by Reference: Portions of the Registrant’s Proxy Statement relating to its 2022 Annual Meeting of Stockholders, filed pursuant to Regulation 14A with the Securities and Exchange Commission on December 8, 2021, are incorporated by reference into Part III of this Annual Report on Form 10-K.

 


 

EXPLANATORY NOTE

 

PennantPark Investment Corporation, a Maryland corporation, or together with its subsidiaries, where applicable, or the Company, which may also be referred to as “we,” “us” or “our,” is filing this Amendment No. 1, or the Amendment, to our Annual Report on Form 10-K for the fiscal year ended September 30, 2021, or the Form 10-K, which was initially filed with the Securities and Exchange Commission, or the SEC, on November 17, 2021.

 

We are filing this Amendment to provide stand-alone audited financial statements for our investment in an unconsolidated controlled portfolio company, PT Networks Intermediate Holdings, LLC, or PT Networks, as of and for the years ended December 31, 2021, 2020 and 2019 (as Exhibit 99.6) as well as of and for the years ended December 31, 2020 and 2019 (as Exhibit 99.7).

 

We have determined that this unconsolidated controlled portfolio company has met the conditions of a significant subsidiary under Rule 1-02(w) of Regulation S-X for which we are required, pursuant to Rule 3-09 of Regulation S-X, to provide separate audited financial statements as exhibits to the Form 10-K. In accordance with Rule 3-09(b)(1), the separate audited financial statements of PT Networks are being filed as an amendment to the Form 10-K, within 90 days after the end of PT Networks’ fiscal year.

 

This Amendment also includes the filing of new Exhibits 31.1, 31.2, 32.1 and 32.2, certifications of our Chief Executive Officer and Chief Financial Officer, pursuant to Rule 13a-14(a) and (b) of the Securities Exchange Act of 1934, as amended.

 

Except as described above, no other changes have been made to the Form 10-K. This Amendment does not reflect subsequent events that may have occurred after the original filing date of the Form 10-K or modify or update in any way disclosures made in the Form 10-K, except as required to reflect the revisions discussed above. Among other things, forward-looking statements made in the Form 10-K have not been revised to reflect events that occurred or facts that became known to us after filing of the Form 10-K, and such forward-looking statements should be read in their historical context. Furthermore, this Amendment should be read in conjunction with the Form 10-K and with our subsequent filings with the SEC.

3


 

PART IV

Item 15. Exhibits and Financial Statement Schedules

The following documents are filed as part of this Annual Report:

(1)
Financial Statements—Refer to Item 8 starting on page 55 of the Registrant’s Annual Report on Form 10-K filed on November 17, 2021.
(2)
Financial Statement Schedules—None.
(3)
Exhibits

 

  3.1

 

Articles of Incorporation (Incorporated by reference to Exhibit 99(a) to the Registrant’s Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2/A (File No. 333-140092), filed on April 5, 2007).

 

 

 

  3.2

 

Second Amended and Restated Bylaws of the Registrant (Incorporated by reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 814-00736), filed on May 11, 2020).

 

 

 

  4.1

 

Form of Share Certificate (Incorporated by reference to Exhibit 99(d)(1) to the Registrant’s Registration Statement on Form N-2 (File No. 333-150033), filed on April 2, 2008).

 

 

 

  4.2

 

Base Indenture, dated as of January 22, 2013, relating to the 6.25% Senior Notes due 2025, between the Registrant and American Stock Transfer & Trust Company, LLC, as trustee (Incorporated by reference to Exhibit 99(d)(8) to the Registrant’s Post-Effective Amendment No.4 to the Registration Statement on Form N-2/A (File No.333-172524), filed on January 22, 2013).

 

 

 

  4.3

 

Second Supplemental Indenture, dated as of September 23, 2014, relating to the 4.50% Notes due 2019, between the Registrant and American Stock Transfer & Trust Company, LLC, as trustee (Incorporated by reference to Exhibit 99 (d)(11) to the Registrant’s Post-Effective Amendment No. 2 to Form N-2 (File No. 333-192782), filed on September 23, 2014.

 

 

 

  4.4

 

Form of 4.50% Notes due 2019 (included as part of Exhibit 4.3).

 

 

 

  4.5

 

Third Supplemental Indenture, dated as of September 27, 2019, by and between the Company and American Stock Transfer & Trust Company, LLC, as trustee (Incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K (File No. 814-00736), filed September 27, 2019).

 

 

 

  4.6

 

Form of 5.50% Notes due 2024 (included as part of Exhibit 4.5).

 

 

 

  4.7

 

Fourth Supplemental Indenture, dated as of April 21, 2021, by and between the Company and American Stock Transfer & Trust Company, LLC, as trustee (Incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K (File No. 814-00736), filed April 22, 2021).

 

 

 

  4.8

 

Form of 4.50% Notes due 2026 (included as part of Exhibit 4.7).

 

 

 

  4.9

 

Fifth Supplemental Indenture, dated as of October 21, 2021, by and between the Company and American Stock Transfer & Trust Company, LLC, as trustee (Incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K (File No. 814-00736), filed on October 21, 2021).

 

 

 

  4.10

 

Form of 4.50% Notes due 2026 (included as part of Exhibit 4.9).

 

 

 

 

  4.11

 

Description of Securities (Incorporated by reference to Exhibit 4.7 to the Registrant’s Form 10-K (File No. 814-00736), filed November 21, 2019).

 

 

 

10.1

 

Form of Administration Agreement between the Registrant and PennantPark Investment Administration LLC (Incorporated by reference to Exhibit 99(k)(1) to the Registrant’s Registration Statement on Form N-2 (File No. 333-150033), filed on April 2, 2008).

 

 

 

10.2

 

Dividend Reinvestment Plan (Incorporated by reference to Exhibit 99(e) to the Registrant’s Registration Statement on Form N-2 (File No. 333-150033), filed on April 2, 2008).

 

 

 

10.3

 

First Omnibus Amendment to Second Amended and Restated Senior Secured Revolving Credit Agreement and Second Amended and Restated Guarantee and Security Agreement, dated as of May 25, 2017, among the Registrant, the lenders party thereto and SunTrust Bank, as administrative agent for the lenders (Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 814-00736), filed on August 7, 2017).

 

 

 

10.4

 

Indemnification Agreement, dated as of November 15, 2016, between PennantPark Investment Corporation and each of the directors and officers listed on Schedule A attached thereto (Incorporated by reference to Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K (File No. 814-00736) filed on November 21, 2016).

 

 

 

10.5

 

Third Amended and Restated Investment Advisory Management Agreement, dated as of April 12, 2019, between the Registrant and PennantPark Investment Advisers, LLC (Incorporated by reference to Exhibit (g)(3) to the Registrant’s Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-230014), filed on April 12, 2019).

 

4


 

 

 

 

10.6

 

Second Amendment to Second Amended and Restated Senior Secured Revolving Credit Agreement, dated as of September 4, 2019, by and among PennantPark Investment Corporation, as borrower, the lenders party thereto, SunTrust Bank, as administrative agent and collateral agent, and solely with respect to Section 4.9, PNNT CI (GALLS) Prime Investment Holdings, LLC, PNNT Investment Holdings, LLC, PNNT New Gulf Resources, LLC, PNNT ecoserve, LLC and PNNT Cascade Environmental Holdings, LLC (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K (File No. 814-00736), filed on September 4, 2019).

 

 

 

10.7

 

Amended and Restated Limited Liability Company Agreement of PennantPark Senior Loan Fund, LLC, dated as of July 31, 2020, by and among PennantPark Investment Corporation, Pantheon Private Debt Program SCSp SICAV – RAIF In Respect Of Its Compartment Pantheon Senior Debt Secondaries II (USD) and Solutio Premium Private Debt I SCSp (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K (File No. 814-00736), filed on August 4, 2020).

 

 

 

10.8

 

First Amendment to the Amended and Restated Limited Liability Company Agreement of PennantPark Senior Loan Fund, LLC, dated as of October 31, 2020, by and among PennantPark Investment Corporation, Pantheon Private Debt Program SCSp SICAV – RAIF In Respect Of Its Compartment Pantheon Senior Debt Secondaries II (USD), Pantheon Private Debt Program SCSp SICAV-RAIF In Respect Of Its Compartment Pantheon Credit Opportunities II (USD), Pantheon Private Debt Program SCSp SICAV-RAIF In Respect Of Its Compartment Tubera Credit 2020 and Solutio Premium Private Debt I SCSp (Incorporated by reference to Exhibit 10.12 to the Registrant’s Form 10-K (File No. 814-00736), filed on November 19, 2020).

 

 

 

10.9

 

First Omnibus Amendment, dated as of July 31, 2020, by and among PennantPark Investment Funding I, LLC, as borrower, PennantPark Senior Loan Fund, LLC, as equityholder of the borrower, PennantPark Investment Corporation, PennantPark Investment Advisers, LLC, as servicer, and The Bank of New York Mellon Trust Company, National Association, as collateral agent, Sterling National Bank, as lender and BNP Paribas, as administrative agent and as lender (Incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K (File No. 814-00736), filed on August 4, 2020).

 

 

 

14.1

 

Joint Code of Ethics of the Registrant.

 

 

 

21.1

 

Subsidiaries of the Registrant.

 

 

 

23.1

 

Consent of RSM US LLP.

 

 

 

23.2

 

Consent of BDO USA, LLP.

 

 

 

31.1*

 

Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.

 

 

 

31.2*

 

Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.

 

 

 

32.1*

 

Certification of Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2*

 

Certification of Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

99.1

 

Privacy Policy of the Registrant (Incorporated by reference to Exhibit 99.1 to the Registrant’s Annual Report on Form 10-K (File No. 814-00736), filed on November 16, 2011).

 

 

 

99.2

 

Audited Consolidated Financial Statements of RAM Energy Holdings LLC and Subsidiaries for the Year Ended September 30, 2021.

 

 

 

99.3

 

Audited Consolidated Financial Statements of RAM Energy Holdings LLC and Subsidiaries for the Year Ended September 30, 2020.

 

 

 

99.4

 

Audited Consolidated Financial Statements of RAM Energy Holdings LLC and Subsidiaries for the Year Ended September 30, 2019.

 

 

 

99.5

 

Report of RSM US LLP on Senior Securities Table.

 

 

 

99.6*

 

Audited Consolidated Financial Reports of PT Networks Intermediate Holdings, LLC for the Years Ended December 31, 2021, 2020 and 2019.

 

 

 

99.7

 

Audited Consolidated Financial Reports of PT Networks Intermediate Holdings, LLC for the Years Ended December 31, 2020 and 2019.

 

 

 

99.8*

 

Consent of Dixon Hughes Goodman LLP.

 

* Filed herewith

5


 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 on March 30, 2022.

 

By:

 

/s/ ARTHUR H. PENN

Name:

 

Arthur H. Penn

Title:

 

Chief Executive Officer and Chairman of the Board of Directors

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature

 

Title

 

Date

/s/ ARTHUR H. PENN

 

Chief Executive Officer and Chairman of the Board of Directors
(Principal Executive Officer)

 

 

Arthur H. Penn

 

 

 

March 30, 2022

 

 

 

 

 

/s/ RICHARD CHEUNG

 

Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)

 

 

Richard Cheung

 

 

March 30, 2022

 

 

 

 

 

/s/ ADAM K. BERNSTEIN

 

Director

 

 

Adam K. Bernstein

 

 

March 30, 2022

 

 

 

 

 

/s/ JEFFREY FLUG

 

Director

 

 

Jeffrey Flug

 

 

March 30, 2022

 

 

 

 

 

/s/ MARSHALL BROZOST

 

Director

 

 

Marshall Brozost

 

 

March 30, 2022

 

 

 

 

 

/s/ SAMUEL L. KATZ

 

Director

 

 

Samuel L. Katz

 

 

March 30, 2022

 

6


EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302

CHIEF EXECUTIVE OFFICER CERTIFICATION

I, Arthur H. Penn, Chief Executive Officer and Chairman of the Board of Directors of PennantPark Investment Corporation, certify that:

1. I have reviewed this Annual Report on Form 10-K/A of PennantPark Investment Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 30, 2022

 

/s/ Arthur H. Penn

Name:

 

Arthur H. Penn

Title:

 

Chief Executive Officer

 


EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO SECTION 302

CHIEF FINANCIAL OFFICER CERTIFICATION

I, Richard Cheung, Chief Financial Officer of PennantPark Investment Corporation, certify that:

1. I have reviewed this Annual Report on Form 10-K/A of PennantPark Investment Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 30, 2022

 

/s/ Richard Cheung

Name:

 

Richard Cheung

Title:

 

Chief Financial Officer

 


EX-32.1

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)

In connection with the Annual Report on Form 10-K/A of PennantPark Investment Corporation for the annual period ended September 30, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Arthur H. Penn, as Chief Executive Officer of the Registrant hereby certify, to the best of my knowledge that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

 

/s/ Arthur H. Penn

Name:

 

Arthur H. Penn

Title:

 

Chief Executive Officer

Date:

 

March 30, 2022

 


EX-32.2

EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)

In connection with the Annual Report on Form 10-K/A of PennantPark Investment Corporation for the annual period ended September 30, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard Cheung, as Chief Financial Officer of the Registrant hereby certify, to the best of my knowledge that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

 

/s/ Richard Cheung

Name:

 

Richard Cheung

Title:

 

Chief Financial Officer

Date:

 

March 30, 2022

 

 

 

 


EX-99.6

 

Exhibit 99.6

 

 

 

 

 

 

 

PT Network Intermediate Holdings, LLC

Consolidated Financial Reports

December 31, 2021, 2020 and 2019

 

 


 

Contents

 

 

 

Independent Auditors’ Report

 

 

1-2

Financial Statements of PT Network Intermediate Holdings, LLC

 

 

Consolidated Balance Sheets as of December 31, 2021 and 2020

 

3

Consolidated Statements of Operations for the Years Ended December 31, 2021, 2020 and 2019

 

 

4

Consolidated Statements of Mezzanine Equity and Permanent Equity for the Years Ended December 31, 2021, 2020 and 2019

 

 

5

Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019

 

 

6

Notes to Consolidated Financial Statements

 

 

7-26

Schedule I: Condensed Parent Company Financial Statements

 

27-29

 

Notes to Schedule I: Condensed Parent Company Financial Statements

 

30-31

 

 


https://cdn.kscope.io/f19a89d35d4d08ce8444eaf645f1b41f-img15332390_0.jpg 

Independent Auditors’ Report

 

Members and Board of Managers

PT Network Intermediate Holdings, LLC

Towson, MD

 

Opinion

We have audited the accompanying consolidated balance sheets of PT Network Intermediate Holdings, LLC (the Company) as of December 31, 2021 and 2020, and the related consolidated statements of operations, mezzanine equity and permanent equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and schedule I listed in the table of contents (collectively referred to as the financial statements).

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in accordance with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditors' Responsibilities for the Audits of the Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Responsibilities of Management for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

 

In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern for one year after the date the financial statements are issued.

 

 

DHG is registered in the U.S. Patent and Trademark Office to Dixon Hughes Goodman LLP.


https://cdn.kscope.io/f19a89d35d4d08ce8444eaf645f1b41f-img15332390_0.jpg 

 

 

 

Auditors' Responsibilities for the Audits of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance, but is not absolute assurance, and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.

 

In performing an audit in accordance with GAAS, we:

Exercise professional judgment and maintain professional skepticism throughout the audit.
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, no such opinion is expressed.
Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements.
Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern for a reasonable period of time.

 

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.

 

 

/s/ Dixon Hughes Goodman LLP

 

Tampa, FL

March 30, 2022

 

DHG is registered in the U.S. Patent and Trademark Office to Dixon Hughes Goodman LLP.


 

PT Network Intermediate Holdings, LLC

Consolidated Balance Sheets

As of December 31, 2021 and 2020

 

Assets

 

2021

 

 

2020

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

8,563,421

 

 

$

11,999,888

 

Accounts receivable, net

 

 

39,670,925

 

 

 

31,328,970

 

Prepaid expenses and other current assets

 

 

3,337,544

 

 

 

4,576,181

 

Total current assets

 

 

51,571,890

 

 

 

47,905,039

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

7,589,019

 

 

 

9,684,511

 

Goodwill

 

 

210,938,864

 

 

 

196,254,142

 

Identifiable intangible assets, net

 

 

6,347,449

 

 

 

7,637,479

 

Other assets

 

 

1,552,245

 

 

 

1,638,172

 

Total assets

 

$

277,999,467

 

 

$

263,119,343

 

 

 

 

 

 

 

 

Liabilities, mezzanine equity, and members' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable - trade

 

$

3,447,290

 

 

$

3,175,664

 

Accrued expenses:

 

 

 

 

 

 

Accrued compensation expenses

 

 

14,749,643

 

 

 

14,624,625

 

Accrued interest and commitment fees

 

 

1,837,442

 

 

 

1,818,958

 

Other accrued expenses

 

 

10,486,710

 

 

 

2,380,333

 

Current maturities of long-term debt

 

 

2,235,081

 

 

 

1,277,189

 

Other current liabilities

 

 

3,062,068

 

 

 

8,413,019

 

Total current liabilities

 

 

35,818,234

 

 

 

31,689,788

 

 

 

 

 

 

 

 

Accrued interest - PIK notes

 

 

2,267,582

 

 

 

2,100,734

 

Long-term debt, net

 

 

211,347,502

 

 

 

199,482,120

 

Other non-current liabilities

 

 

6,347,175

 

 

 

6,563,087

 

Deferred rent

 

 

3,631,879

 

 

 

3,640,030

 

Total liabilities

 

 

259,412,372

 

 

 

243,475,759

 

Commitments and contingencies (see Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

Mezzanine equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable preferred interests

 

 

16,452,934

 

 

 

14,948,957

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Members' equity - common interests

 

 

2,134,161

 

 

 

4,694,627

 

 

 

 

 

 

 

 

Total liabilities, mezzanine equity, and members' equity

 

$

277,999,467

 

 

$

263,119,343

 

 

See notes to consolidated financial statements.

3

 


 

PT Network Intermediate Holdings, LLC

Consolidated Statements of Operations

For the Years Ended December 31, 2021, 2020 and 2019

 

 

 

2021

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

258,880,665

 

 

$

221,023,889

 

 

$

220,461,783

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

141,922,583

 

 

 

131,507,936

 

 

 

124,197,072

 

Occupancy

 

 

24,512,237

 

 

 

22,326,482

 

 

 

23,855,795

 

General and administrative

 

 

10,236,324

 

 

 

7,270,198

 

 

 

7,808,058

 

Total cost of revenue

 

 

176,671,144

 

 

 

161,104,616

 

 

 

155,860,925

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

82,209,521

 

 

 

59,919,273

 

 

 

64,600,858

 

 

 

 

 

 

 

 

 

 

 

Operating costs:

 

 

 

 

 

 

 

 

 

Provision for doubtful accounts

 

 

5,022,047

 

 

 

4,096,158

 

 

 

3,311,462

 

Corporate costs

 

 

59,387,433

 

 

 

59,823,588

 

 

 

67,332,485

 

Other expense

 

 

7,915,594

 

 

 

1,947,909

 

 

 

3,123,142

 

Total operating costs

 

 

72,325,074

 

 

 

65,867,655

 

 

 

73,767,089

 

 

 

 

 

 

 

 

 

 

 

Other operating income

 

 

12,397,923

 

 

 

3,141,085

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

Operating gain / (loss)

 

 

22,282,370

 

 

 

(2,807,297

)

 

 

(9,166,231

)

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

22,710,666

 

 

 

20,915,529

 

 

 

21,773,628

 

 

 

 

 

 

 

 

 

 

 

Loss prior to income tax

 

 

(428,296

)

 

 

(23,722,826

)

 

 

(30,939,859

)

 

 

 

 

 

 

 

 

 

 

Income tax (benefit) / expense

 

 

628,193

 

 

 

(260,845

)

 

 

367,076

 

 

 

 

 

 

 

 

 

 

 

Total net loss

 

 

(1,056,489

)

 

 

(23,461,981

)

 

 

(31,306,935

)

 

 

 

 

 

 

 

 

 

 

Accretion of redeemable preferred interests

 

 

1,503,977

 

 

 

1,415,700

 

 

 

663,257

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common interests

 

$

(2,560,466

)

 

$

(24,877,681

)

 

$

(31,970,192

)

 

See notes to consolidated financial statements.

4

 


 

 

PT Network Intermediate Holdings, LLC

Consolidated Statements of Mezzanine Equity and Permanent Equity

For the Years Ended December 31, 2021, 2020 and 2019

 

Mezzanine Equity at December 31, 2018

 

$

-

 

 

 

 

 

Issuance of redeemable preferred interests

 

 

10,770,000

 

Accretion of redeemable preferred interests

 

 

663,257

 

 

 

 

 

Mezzanine Equity at December 31, 2019

 

 

11,433,257

 

 

 

 

 

Issuance of redeemable preferred interests

 

 

2,100,000

 

Accretion of redeemable preferred interests

 

 

1,415,700

 

 

 

 

 

Mezzanine Equity at December 31, 2020

 

 

14,948,957

 

 

 

 

 

Issuance of redeemable preferred interests

 

 

-

 

Accretion of redeemable preferred interests

 

 

1,503,977

 

 

 

 

 

Mezzanine Equity at December 31, 2021

 

$

16,452,934

 

 

 

 

 

Equity at December 31, 2018

 

$

50,962,500

 

 

 

 

 

Member contributions

 

 

9,180,000

 

Net loss attributable to common interests

 

 

(31,970,192

)

 

 

 

 

Equity at December 31, 2019

 

 

28,172,308

 

 

 

 

 

Member contributions

 

 

1,400,000

 

Net loss attributable to common interests

 

 

(24,877,681

)

 

 

 

 

Equity at December 31, 2020

 

$

4,694,627

 

 

 

 

 

Member contributions

 

 

-

 

Net loss attributable to common interests

 

 

(2,560,466

)

 

 

 

 

Equity at December 31, 2021

 

$

2,134,161

 

 

See notes to consolidated financial statements.

5

 


 

 

PT Network Intermediate Holdings, LLC

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2021, 2020 and 2019

 

 

 

2021

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(1,056,489

)

 

$

(23,461,981

)

 

$

(31,306,935

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,627,156

 

 

 

7,256,843

 

 

 

8,412,401

 

Provision for doubtful accounts

 

 

5,022,047

 

 

 

4,096,158

 

 

 

3,311,462

 

Interest paid-in-kind (PIK)

 

 

10,350,709

 

 

 

9,710,809

 

 

 

9,944,550

 

(Gain)/Loss on extinguishment of debt

 

 

(10,000,000

)

 

 

-

 

 

 

1,042,822

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(13,364,001

)

 

 

(12,288,849

)

 

 

(386,603

)

Prepaid expenses and other assets

 

 

1,340,446

 

 

 

(1,913,047

)

 

 

(2,006,582

)

Accounts payable and accrued expenses

 

 

7,277,661

 

 

 

4,365,501

 

 

 

(4,991,212

)

Other liabilities

 

 

(1,563,055

)

 

 

2,438,079

 

 

 

(1,210,817

)

Deferred rent

 

 

(8,151

)

 

 

(734,036

)

 

 

(307,895

)

Medicare Accelerated and Advance Payment Funds

 

 

(5,493,808

)

 

 

7,770,162

 

 

 

-

 

Net cash used in operating activities

 

 

867,485

 

 

 

(2,760,361

)

 

 

(17,498,809

)

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,473,911

)

 

 

(1,245,902

)

 

 

(1,403,420

)

Business acquisitions, net of cash acquired

 

 

(12,417,882

)

 

 

-

 

 

 

-

 

Other

 

 

-

 

 

 

-

 

 

 

(20,000

)

Net cash used in investing activities

 

 

(13,891,793

)

 

 

(1,245,902

)

 

 

(1,423,420

)

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

Borrowings on revolving facilities

 

 

3,000,000

 

 

 

-

 

 

 

2,962,141

 

Payments on revolving facilities

 

 

-

 

 

 

-

 

 

 

(7,962,141

)

Debt issuance costs

 

 

(400,000

)

 

 

-

 

 

 

(2,539,786

)

Proceeds from long-term debt

 

 

10,000,000

 

 

 

 

 

 

 

Principal payments on long-term debt

 

 

(1,277,189

)

 

 

(957,892

)

 

 

-

 

Paycheck Protection Program Loan Proceeds

 

 

-

 

 

 

10,000,000

 

 

 

-

 

Member contributions

 

 

-

 

 

 

3,500,000

 

 

 

19,950,000

 

Other

 

 

-

 

 

 

(21,319

)

 

 

(78,346

)

Net cash provided by financing activities

 

 

11,322,811

 

 

 

12,520,789

 

 

 

12,331,868

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

(3,436,467

)

 

 

8,514,526

 

 

 

(6,590,361

)

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents - Beginning of period

 

 

11,999,888

 

 

 

3,485,362

 

 

 

10,075,723

 

Cash and cash equivalents - End of period

 

$

8,563,421

 

 

$

11,999,888

 

 

$

3,485,362

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

8,680,433

 

 

$

9,361,635

 

 

$

10,900,534

 

 

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

Capital expenditures accrued or payable

 

$

165,844

 

 

$

59,435

 

 

$

128,994

 

PIK interest converted to long-term debt

 

$

10,183,861

 

 

$

9,685,046

 

 

$

7,869,579

 

Increase in obligations from deferral of lender fees

 

$

2,083,466

 

 

$

695,748

 

 

$

595,334

 

PPP loan forgiveness

 

$

10,000,000

 

 

$

-

 

 

$

-

 

Accretion of redeemable preferred interests

 

$

1,503,977

 

 

$

1,415,700

 

 

$

663,257

 

Deferred consideration in business acquisitions

 

$

2,568,000

 

 

 

-

 

 

 

-

 

 

See notes to consolidated financial statements.

6

 


 

 

PT Network Intermediate Holdings, LLC

Notes to Consolidated Financial Statements

 

Note 1. Nature of Business and Significant Accounting Policies

 

Nature of Business

 

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

 

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

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

 

The 27 consolidated entities include a holding company, 25 physical therapy, athletic training, and occupational health companies and a transportation company. The operating entities earn revenue directly from patient care through their clinic and Onsite Innovations, LLC locations. The clinics primarily generate business from physician referrals. The principal sources of payment for the clinics’ services are commercial health insurance, Medicare, Medicaid, workers’ compensation insurance and proceeds from personal injury cases. Services provided at Onsite Innovations, LLC locations are contract based and the contracted party is the single source of payment.

 

Significant Accounting Policies

 

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

 

Basis of Accounting

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

 

Principles of Consolidation

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

 

Cash and Cash Equivalents

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

 

Revenue Recognition

 

Physical Therapy Revenues

Revenues are recognized in the period in which services are rendered. Physical therapy revenues, which are included in net revenues in the consolidated statements of operations, consists of revenues for physical therapy and

7

 


 

 

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

 

Industrial injury prevention services revenues

Revenues from the industrial injury prevention business, which are also included in net revenues in the consolidated statements of operations, are derived from onsite services provided to clients’ employees including injury prevention, rehabilitation, ergonomic assessments and performance optimization. Revenue from the Company’s industrial injury prevention business is recognized when obligations under the terms of the contract are satisfied. Revenues are recognized at an amount equal to the consideration the Company expects to receive in exchange for providing injury prevention services to its clients. The revenue is determined and recognized based on the contractual terms with the third party under the series guidance of ASC 606. Variable fees, which can include per-hour or per-event charges, are recognized in the period that the underlying services are performed based on the variable consideration exception applicable for services that comprise a series.

 

Other revenues

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

 

The Company had disaggregated revenues for the years ended December 31, 2021, 2020 and 2019 as follows:

 

 

 

2021

 

 

2020

 

 

2019

 

Physical Therapy

 

$

200,378,057

 

 

$

163,193,317

 

 

$

182,405,511

 

Industrial Injury Prevention Services

 

 

53,539,534

 

 

 

52,911,151

 

 

 

32,353,277

 

Other

 

 

4,963,074

 

 

 

4,919,421

 

 

 

5,702,995

 

Total

 

$

258,880,665

 

 

$

221,023,889

 

 

$

220,461,783

 

 

The Company recorded a contract liability of $322,610 and $242,048 at December 31, 2020 and 2019, respectively, for services that were billed to certain industrial injury prevention clients but services had not yet been rendered. Approximately $322,610 and $242,048 of this liability was subsequently earned and recognized as part of operating revenues during 2021 and 2020, respectively. As of December 31, 2021, the contract liability balance was $695,253 and is expected to be recognized over the next year.

 

As discussed in Note 15, in 2020, the Company received advanced payments totaling $7,770,162 under the Medicare Accelerated and Advance Payments Program (MAAPP). The advance represents a contract liability for services to be performed in 2021 and 2022. The advance will be recognized as revenue and the contract liability offset as the related services are performed. CMS recouped $5,493,808 of Medicare payments during the year ended December 31, 2021. As of December 31, 2021, the Company owes CMS $2,276,354 which is included in other current liabilities on the consolidated balance sheet.

 

Revenue recognized for the years ended December 31, 2021, 2020 and 2019 from performance obligations partially satisfied in prior periods was not material and there were no material contract assets as of December 31, 2021 and 2020. The Company applied the practical expedients related to the series guidance and shorter-term (original contract

8

 


 

 

term of one year or less) to not disclose the aggregate transaction price allocated to unsatisfied performance obligations.

 

The Company does not capitalize any costs to obtain or fulfill a contract.

 

Accounts Receivable, net

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

 

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

 

Allowance for Doubtful Accounts

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

 

Security Deposits

The Company has recorded $903,109 and $892,228 of refundable security deposits as of December 31, 2021 and 2020, respectively, for various physical therapy and occupational health clinics in other assets in the consolidated balance sheet.

 

Long-Lived Assets

 

Property and equipment, net

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

 

The general range of useful lives is as follows:

 

Computer equipment and software

3 years

Furniture and office equipment

7 years

Medical equipment

7 years

Leasehold improvements

1-10 years

 

Finite-lived Intangible Assets

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

 

Impairment of Long-Lived Assets

Long-lived assets are not required to be tested for impairment annually. However, long-lived assets are tested for impairment whenever circumstances indicate that the carrying amount of the asset may not be recoverable, such as when the disposal of such assets before the end of its previously estimated useful life is likely or there is an adverse change in the market involving the business employing the related assets. The impairment test first requires an assessment of the recoverability of the asset by comparing the net future cash flows of the asset to the carrying value of the asset. The net cash flows of the asset are estimated on an undiscounted, pre-tax basis, and should be based on future cash inflows expected from use of the asset over its remaining useful life, less expected future cash outflows necessary for maintenance, and cash flows associated with the eventual disposition of the asset. If the carrying value of the asset exceeds the net future cash flows of the asset, the asset would not be deemed to be recoverable. An

9

 


 

 

impairment of the asset would then be recognized in an amount equal to the excess of the asset’s carrying value over its estimated fair value. Significant judgments used for long-lived asset impairment assessments include determining whether events of circumstances indicate that the carrying value of the asset may not be recoverable, identifying asset groupings, identifying the primary assets within each asset grouping, and estimating projected cash flows attributable to the asset grouping. The valuation of long-lived assets at estimated fair value, when required, is performed using Level 2 or Level 3 fair value inputs. There were no impairment charges related to long-lived assets in 2021, 2020 or 2019.

 

Goodwill

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

 

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

 

The Company assessed goodwill for impairment for the two reporting units with goodwill and did not identify any evidence of impairment with respect to goodwill for either reporting unit as of the assessment dates.

 

Fair Value of Financial Instruments

The carrying amounts of financial instruments, including cash, accounts receivable, net, accounts payable, accrued expenses, and our line-of-credit approximate fair value due to the short maturity of these instruments. The carrying amount of long-term debt approximates fair value because the interest rates fluctuate with market interest rates. The fair value of debt estimates are based on Level 2 inputs.

 

Fair Value Measurements

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

 

Debt Issuance Costs

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

 

Deferred Rent

Rent payments on operating leases are recognized as an expense on a straight-line basis over the related lease term, which includes renewal options that are reasonably assured of exercise. Generally, renewal options are not considered reasonably assured of exercise. Deferred rent is based on cumulative rent expense that is in excess of amounts paid to date. The liability as of December 31, 2021 and 2020 was $2,523,504 and $2,035,019, respectively, and is reported as part of deferred rent in the consolidated balance sheets.

 

10

 


 

 

When the Company receives a tenant improvement allowance, it records a liability which is then amortized as a reduction of rent expense over the related lease term. The liability for tenant improvement allowances, net of amortization, as of December 31, 2021 and 2020 was $1,108,375 and $1,605,011, respectively, and is reported as part of deferred rent in the consolidated balance sheets.

 

Corporate Costs

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

 

Income Taxes

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

 

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

 

Use of Estimates

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

 

Reclassifications

The Company made certain reclassifications of prior year amounts to conform to the current year presentation. Such reclassifications had no impact on previously reported net loss.

 

Recently Adopted Accounting Guidance

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

 

The Company implemented the New Revenue Standard beginning January 1, 2019 using the modified retrospective transition method. The adoption of the New Revenue Standard did not result in any material changes to the Company’s consolidated financial statements other than the requirement to include incremental quantitative and qualitative disclosures such as certain disaggregation of revenue disclosures.

 

The Company completed the adoption of ASU 2016-13, Financial Instruments – Credit Losses on January 1, 2020. The financial instruments subject to ASU 2016-13 are the Company’s accounts receivable derived from contracts with customers. A significant portion of the Company’s accounts receivable are from highly-solvent, creditworthy payers

11

 


 

 

including governmental programs such as Medicare and Medicaid, and highly regulated commercial insurers. The Company’s estimate of expected credit losses as of January 1, 2020, using its expected credit loss evaluation process, resulted in no adjustments to the allowance for credit losses and no cumulative-effect adjustment to members' equity on the adoption date of the standard.

 

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment change. The Company completed the adoption of this standard effective January 1, 2020 and there was no impact to goodwill from the Company’s adoption of this change.

 

In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). This generally means that an intangible asset is recognized for the software license and, to the extent that the payments attributable to the software license are made over time, a liability also is recognized. If a cloud computing arrangement does not include a software license, the entity should account for the arrangement as a service contract. This generally means that the fees associated with the hosting element of the arrangement are expensed as incurred. The amendment is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. The Company implemented the new standard on January 1, 2020 and capitalized certain implementation costs that were incurred in a cloud computing arrangement that is a service contract related to system conversions. The Company assigned useful lives of 3 – 5 years to these costs based on the term of the underlying service contract. Costs are amortized to general and administrative costs on the consolidated statements of operations. These costs are presented as components of prepaid expenses and other current assets and other assets on the consolidated balance sheets as of December 31, 2021.

 

Recently Issued Accounting Guidance

In February 2016, the FASB issued amended accounting guidance (ASU 2016-02, Leases) which replaced most existing lease accounting guidance under GAAP. Among other changes, the amended guidance requires that a right-to-use asset, which is an asset that represents the lessee’s right to use, and a lease liability, which is a lessee’s obligation to make lease payments arising for an operating lease measured on a discounted basis, be recognized on the balance sheet by lessees. The amended guidance is effective for the Company starting in the year ended December 31, 2022. Entities can use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the consolidated financial statements or recognize the cumulative effect of applying the new standard as an adjustment to the opening balance of equity.

 

The Company has operating leases for each of its clinic and certain corporate locations, as well as equipment. As a result, the Company will recognize right of use assets and lease liabilities on the consolidated balance sheet upon adoption of the new leasing standard. Operating lease expense will continue to be recognized as occupancy costs on a straight-line basis over the respective lease terms in the consolidated statement of operations. The Company will implement the new standard beginning January 1, 2022, and will elect certain practical expedients, including the expedient that permits the Company to retain its existing lease assessment and classification. The Company will also elect the transition method in ASU 2018-11, Leases (Topic 842):Targeted Improvements which allows the Company to recognize a cumulative effect adjustment of the standard adoption to the opening balance of equity at the adoption date. The Company will continue to evaluate the impact that the pronouncement will have on the Company's consolidated financial statements, including footnote disclosures.

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional expedients and exceptions to the guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The new guidance was effective upon issuance, and the Company is allowed to elect to apply the amendments prospectively through December 31, 2022. Borrowings under the Amended Credit Agreement bear interest based on LIBOR or an alternate base rate. Provisions within the agreement currently provide the Company with the ability to replace LIBOR with a different reference rate in the event LIBOR ceases to exist. The impact of the adoption was immaterial.

 

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832), which requires business entities to disclose information about certain government assistance they receive if they account for the transactions by applying

12

 


 

 

a grant or contribution model by analogy (for example, International Financial Reporting Standards (IFRS) guidance in International Accounting Standard (IAS) 20 or guidance on contributions for not-for-profit entities in ASC 958-605). For transactions in the scope of the new standard, business entities will need to provide information about the nature of the transaction and the accounting policy used, the significant terms and conditions associated with the transaction, and the amounts and financial statement line items affected by the transaction. The new guidance is effective for annual reporting periods beginning after December 15, 2021; however, early adoption is permitted. The disclosure requirements can be applied either prospectively or retrospectively. The Company will adopt ASU 2021-10 as of January 1, 2022 and does not expect ASU 2021-10 to have an impact on the Company's consolidated financial statements upon adoption.

 

Note 2. Business Combinations

 

During 2021, the Company entered into four Asset Purchase Agreements, and one Stock Purchase Agreement, whereby the Company acquired certain assets, assumed no liabilities, and acquired shares of certain sellers. The aggregate purchase price of these acquisitions consisted of cash of $12,021,882, deferred cash consideration of $1,914,000 and contingent consideration of $1,050,000. The contingent consideration is based on the achievement of certain earnings targets with measurement periods from 2022 through 2024. The cash consideration was primarily funded through loan proceeds from the new Second Lien term loan disclosed in Note 6. The Company identified prepaid expenses, fixed assets and intangible assets related to tradename and assigned values of $15,882, $13,450 and $271,829, respectively. The remaining excess consideration of $14,684,721 was recognized as goodwill. The fair value of goodwill is attributable to expected increases in revenue and expected cost synergy opportunities in our new geographic footprint.

 

These acquisitions have been reported in the accompanying consolidated financial statements as business combinations in accordance with FASB guidance. The following table summarizes the aggregate consideration paid, contingent consideration and the fair values of the assets acquired recognized at the dates of acquisition. There were no business acquisitions in 2020.

 

Consideration:

 

 

 

Cash

 

$

12,021,882

 

Deferred cash consideration

 

 

1,914,000

 

Contingent Consideration

 

 

1,050,000

 

Total consideration

 

$

14,985,882

 

 

 

 

 

Recognized amounts of identifiable assets acquired:

 

 

 

Prepaid expenses

 

 

15,882

 

Fixed assets

 

 

13,450

 

Tradename

 

 

271,829

 

Total identifiable net assets

 

 

301,161

 

 

 

 

 

Goodwill

 

 

14,684,721

 

Net assets acquired

 

$

14,985,882

 

 

The Company incurred transaction costs of $320,540 in connection with these and other proposed but not consummated business acquisitions, which are expensed as incurred and presented as part of corporate costs on the consolidated statements of operations as of December 31, 2021. All purchase price allocations for the 2021 business acquisitions were finalized in 2021 and there were no measurement period adjustments in 2022. The weighted-average amortization period of the identified intangible assets from these acquisitions is one year for tradename.

 

Note 3. Goodwill and Intangible Assets, net

 

Goodwill

The carrying amount of goodwill as of December 31, 2021 and 2020 was $210,938,864 and $196,254,142, respectively.

 

Intangible Assets, net

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

 

13

 


 

 

 

 

Useful Life
ranges

 

Intangible
Assets, net,
balance as of
December 31,
2019

 

 

Amortization
Expense

 

 

Intangible
Assets, net,
balance as of
December 31,
2020

 

Trade names, net of accumulated amortization of $3,889,800 and $4,088,828 as of December 31, 2019 and 2020, respectively

 

1 - 7 years

 

$

863,491

 

 

$

199,028

 

 

$

664,463