Business Context and Reporting Period
DFB Healthcare Acquisitions Corp. (the SPAC that planned to become AdaptHealth Corp.) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The company had not commenced operating activities and generated no operating revenue; its activities consisted primarily of maintaining its trust account and pursuing a healthcare business combination.
On July 8, 2019, DFB entered into an agreement to combine with AdaptHealth Holdings LLC. The proposed transaction contemplated approximately $515 million of merger consideration, primarily in DFB common stock, with up to $50 million payable in cash. The transaction remained subject to stockholder approval and other closing conditions as of the filing date.
Financial Highlights
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Interest income | $1.37 million in 2019; $1.20 million in 2018 | $4.31 million in 2019; $2.73 million in 2018 |
| General and administrative expense | $1.20 million in 2019; $391,000 in 2018 | $3.29 million in 2019; $605,000 in 2018 |
| Income before taxes | $122,000 in 2019; $760,000 in 2018 | $878,000 in 2019; $1.97 million in 2018 |
| Income tax expense | $277,000 in 2019; $242,000 in 2018 | $874,000 in 2019; $546,000 in 2018 |
| Net income (loss) | $(154,000) in 2019; $518,000 in 2018 | $4,000 in 2019; $1.43 million in 2018 |
| Net cash used in operating activities | $1.77 million for the first nine months of 2019; $1.27 million in 2018 |
The filing does not present operating revenue, gross profit, or operating margins because DFB had no operating business. The company’s reported interest income was earned primarily on funds in the trust account. The nine-month 2019 effective tax rate was approximately 98%, compared with approximately 28% in 2018, largely because start-up costs were generally not currently deductible.
Balance Sheet, Liquidity, and Capitalization
- Cash and cash equivalents outside the trust account were $622,000 at September 30, 2019, down from $947,000 at December 31, 2018.
- Cash and marketable securities held in the trust account totaled $255.9 million, compared with $253.0 million at December 31, 2018.
- Current liabilities were $3.20 million, including $3.13 million of accrued expenses, compared with $699,000 at December 31, 2018.
- Deferred underwriting commissions were $7.875 million and become payable only if a business combination is completed, subject to the underwriting agreement.
- Public shares subject to possible redemption totaled $240.6 million, representing 24.1 million shares. Total stockholders’ equity was approximately $5.0 million.
- The company had no long-term debt, capital leases, operating leases, or off-balance-sheet arrangements reported in the filing. It had no borrowings under potential working-capital loans as of September 30, 2019.
During the first nine months of 2019, approximately $1.4 million of trust-account interest was withdrawn for taxes and working capital, including $250,000 for working capital. Management reported a working-capital deficit of approximately $2.4 million and stated that available funds might be insufficient to operate through February 21, 2020.
Material Changes Versus the Prior Comparable Period
- General and administrative expenses increased approximately 443% for the first nine months, to $3.29 million from $605,000, primarily because approximately $2.6 million related to the proposed Adapt transaction.
- Interest income increased approximately 58% for the first nine months, to $4.31 million from $2.73 million.
- Despite higher interest income, nine-month net income declined to approximately $4,000 from $1.43 million because transaction-related expenses and taxes increased substantially.
- Third-quarter results shifted from $518,000 of net income in 2018 to a $154,000 net loss in 2019.
- The trust account increased by approximately $2.9 million, reflecting interest income net of withdrawals, while cash outside the trust account declined by approximately $325,000.
Transaction, Outlook, and Risks
AdaptHealth provides respiratory and mobility medical equipment, including CPAP and oxygen equipment, wheelchairs, walkers, and hospital beds. The filing states that Adapt served more than 1.0 million patients, made approximately 7,000 deliveries per day, and operated through more than 150 locations across 49 states.
On October 15, 2019, after the quarter ended, the merger agreement was amended. The amendment removed the minimum cash closing condition, added a condition concerning regulatory investigations into potential material healthcare-law violations involving Adapt, and added an indemnification obligation relating to certain pre-closing liabilities of Access Point Medical.
The amended PIPE financing contemplated between $5 million and $12.5 million of shares sold at $10 per share, depending on available cash. The sponsor also agreed to transfer approximately 2.44 million to 2.50 million shares and approximately 1.69 million to 1.73 million warrants to Adapt-related holders immediately before closing.
If no business combination occurred by February 21, 2020, the company was required to cease operations, redeem the public shares using the trust account, and liquidate. Management therefore disclosed substantial doubt about the company’s ability to continue as a going concern. Public and private placement warrants could expire worthless if no transaction closed. The filing reported no legal proceedings and no material changes to previously disclosed risk factors.
Investor Verification Priorities
- Verify whether the Adapt transaction closed, the final merger consideration, and the resulting ownership and dilution.
- Verify the final amount of PIPE financing, redemption activity, trust-account proceeds, and any changes to the deferred underwriting commission.
- Assess the regulatory-investigation closing condition and the scope of indemnification for pre-closing Access Point Medical liabilities.
- Reconcile the reported $2.4 million working-capital deficit with subsequent funding, sponsor loans, or transaction proceeds.
- Review the company’s going-concern disclosure and the consequences if the February 21, 2020 liquidation deadline was not extended or satisfied.
- Note that the provided filing is issued by DFB Healthcare Acquisitions Corp.; it is not a financial statement for an already operating AdaptHealth Corp.