BrightSpring Health Services Inc

Notes to Condensed Consolid ated Financial Statements

1. Significant Accounting Policies

Description of Business

BrightSpring Health Services, Inc. is a leading home and community-based healthcare services platform, focused on delivering complementary pharmacy and provider services to complex patients. Our platform delivers clinical services and pharmacy solutions across Medicare, Medicaid, and commercially-insured populations.

On December 7, 2017, affiliates of Kohlberg Kravis Roberts & Co. L.P. (“KKR”) and Walgreens Boots Alliance, Inc. (“WBA”) purchased PharMerica Corporation (“PharMerica”) and on March 5, 2019, expanded with the acquisition of BrightSpring Health Holdings Corp. The surviving entity has been renamed as BrightSpring Health Services, Inc.

BrightSpring Health Services, Inc. completed its initial public offering (“IPO”) of 53,333,334 shares of its common stock at a price of $13.00 per share and its concurrent offering of 8,000,000 6.75% tangible equity units (“TEUs”) with a stated amount of $50.00 per unit in January 2024 (collectively, “the IPO Offerings”). The net proceeds from the IPO Offerings amounted to $656.5 million and $389.0 million for the common stock and TEUs, respectively, after deducting underwriting discounts and commissions, and offering-related expenses. The shares and TEUs began trading on the Nasdaq Global Select Market on January 26, 2024 under the ticker symbols “BTSG” and “BTSGU,” respectively. BrightSpring Health Services, Inc. used a portion of the net proceeds received from the IPO Offerings to repay certain indebtedness (see Note 5). Additionally, a portion of the net proceeds will be used to pay termination fees in connection with the termination of our monitoring agreement with our controlling stockholders, KKR and WBA (the “Monitoring Agreement”) (see Note 13). The remaining proceeds were retained for general corporate purposes. In connection with the IPO Offerings, the Company also granted equity awards to management and certain other full-time employees (see Note 15).

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of BrightSpring Health Services, Inc. and its subsidiaries (“BrightSpring,” the “Company,” “we,” “us,” or “our”). The Company consolidates its majority-owned and controlled entities, including variable interest entities (“VIEs”) for which the Company is the primary beneficiary. All intercompany balances and transactions have been eliminated.

We record a noncontrolling interest for the allocable portion of income or loss and comprehensive income or loss to which the noncontrolling interest holders are entitled based upon their ownership share of the affiliate. The Company determined noncontrolling interests for certain of these VIEs to be redeemable noncontrolling interests, which are presented in the unaudited condensed consolidated balance sheets as redeemable noncontrolling interests. See Note 11.

Basis of Presentation

In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly our financial position, our results of operations, and our cash flows in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial reporting. Our results of operations for the interim periods presented are not necessarily indicative of the results of our operations for the entire year.

This report should be read in conjunction with our consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2023, which include information and disclosures not included herein. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from the interim financial information presented, as allowed by the rules and regulations of the Securities and Exchange Commission.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts and related disclosures. We rely on historical experience and on various other assumptions that we believe to be reasonable under the circumstances to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Significant estimates are involved in the valuation of accounts receivable, inventory, long-lived assets, definite and indefinite-lived intangibles, derivatives, insurance reserves, stock-based compensation, and goodwill. Actual amounts may differ from these estimates.

Transition Services Agreement

In conjunction with the divestiture of Workforce Solutions on November 1, 2022, BrightSpring entered into a transition services agreement (“TSA”) with the buyer to provide certain transition services in exchange for service fees totaling $15.0 million over the 36 months following the close of the transaction. Services provided primarily include business development, finance and accounting, human resources, IT, facilities management, and compliance. For the three months ended March 31, 2024 and 2023, the Company recognized$1.4 million and $1.9 million, respectively, of other income within selling, general, and administrative expenses in our unaudited condensed consolidated statements of operations related to services rendered under the TSA.

Fair Value of Financial Instruments

At March 31, 2024 and December 31, 2023, the fair value of cash and cash equivalents, accounts receivable, trade accounts payable, and accrued expenses approximated their carrying values because of the short-term nature of these instruments. The carrying amounts of the Company’s long-term debt approximated fair value as interest rates and negotiated terms and conditions are consistent with current market rates due to the close proximity of recent refinancing transactions to the dates of these unaudited condensed consolidated financial statements. All debt classifications and interest rate swaps represent Level 2 fair value measurements. Contingent consideration, which represents future earn-outs associated with acquisitions, represents a Level 3 fair value measurement as there is little or no market data available. Refer to Note 9.

Debt Issuance Costs

The Company capitalizes financing fees related to acquiring or issuing new debt instruments. These expenditures include bank fees and premiums, legal costs, and filing fees. Debt issuance costs are capitalized and amortized as interest expense over the terms of the related debt using the effective interest rate method. Debt issuance costs related to term loans and specified maturity borrowings are presented as a direct reduction of the carrying value of the debt. Debt issuance costs related to revolving credit facilities and lines of credit are presented as other assets in our unaudited condensed consolidated balance sheets.

Deferred Offering Costs

Deferred offering costs of $5.6 million, which consist of legal, accounting, filing, and other fees and costs directly attributable to the Company’s IPO, were capitalized, and upon completion of the IPO in January 2024, were subsequently recorded in shareholders’ equity as a reduction of proceeds. There were $3.9 million of deferred offering costs included in other assets in the accompanying unaudited condensed consolidated balance sheet as of December 31, 2023.

Government Actions to Mitigate COVID-19’s Impact

On May 11, 2023, the Department of Health and Human Services declared the COVID-19 pandemic is no longer a public health emergency. Through the Coronavirus Aid, Relief, and Economic Security Act, the Paycheck Protection Program and Health Care Enhancement Act, and the Consolidated Appropriations Act, $178 billion of funding was authorized to be distributed to health care providers through the Provider Relief Fund (“PRF”) in response to COVID-19.

The Company received and recognized the following amounts from the PRF (in thousands):

The income recognized in the three months ended March 31, 2023 was offset directly by the expenses incurred within selling, general, and administrative expenses on our unaudited condensed consolidated statements of operations, which resulted in no net financial impact to the Company.

Recently Adopted Accounting Standards

There were no new accounting standards adopted during the three months ended March 31, 2024.

Recently Issued Accounting Standards

In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting. This ASU requires the following disclosures on an annual and interim basis:

•

Significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and included with each reported measure of segment profit/loss;

•

Other segment items by reportable segment, consisting of differences between segment revenue and segment profit/loss not already disclosed above;

•

Other information by reportable segment, including total assets, depreciation and amortization, and capital expenditures; and

•

The title of the CODM and an explanation of how the CODM uses the reported measures of segment profit/loss in assessing segment performance and deciding how to allocate resources.

The amendments in this ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted, and should be applied on a retrospective basis. This ASU will have no impact on the Company’s consolidated financial condition or results of operations. The Company is evaluating the impact to the related segment reporting disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU requires the following disclosures on an annual basis:

•

A tabular rate reconciliation using both percentages and amounts, broken out into specific categories with certain reconciling items at or above 5% of the statutory tax further broken out by nature and/or jurisdiction;

•

Qualitative disclosure of the nature and effect of significant reconciling items by specific categories and individual jurisdictions; and

•

Income taxes paid (net of refunds received), broken out between federal, state/local and foreign, and amounts paid to an individual jurisdiction when 5% or more of the total income taxes paid.

The amendments in this ASU are effective for annual periods beginning after December 15, 2024, with early adoption permitted, and should be applied on a prospective basis. This ASU will have no impact on the Company’s consolidated financial condition or results of operations. The Company is currently evaluating the impact to the income tax disclosures.

2. Revenue

The Company is substantially dependent on revenues received under contracts with federal, state, and local government agencies. Operating funding sources are generally earned from Medicaid, Medicare, commercial insurance reimbursement, and from private and other payors. There isno single customer whose revenue was 10% or more of our consolidated revenue. The following tables set forth revenue by payor type (in millions):

Refer to Note 14 for the disaggregation of revenue by reportable segment.

3. Acquisitions

2024 Acquisition

During the period ended March 31, 2024, we completedone acquisition within the Pharmacy Solutions segment. We entered into the transaction on March 19, 2024, in order to expand our services and geographic offerings. Aggregate consideration for the acquisition was approximately $7.1 million. No cash was acquired as a part of the transaction. The operating results of the acquisition are included in our unaudited condensed consolidated financial statements from the date of the acquisition.

The following table summarizes the consideration paid (in thousands) for the 2024 acquisition and the estimated fair value of the assets acquired at the acquisition date, which are adjusted for measurement-period adjustments through March 31, 2024.

The Company is in the process of reviewing the fair value of the assets acquired. We have estimated the fair value of acquired customer relationships, trade names, and non-compete agreements based on the values assigned in prior acquisitions. Based on the Company’s preliminary valuations, the total estimated consideration of $7.1 million has been allocated to assets acquired as of the acquisition date.

The estimated intangible assets consist primarily of$3.9 million in customer relationships, $0.4 million in trade names, and $0.3 million in covenants not to compete. Definite-lived intangible assets have an estimated weighted average useful life of 7.3 years. We expect all of the goodwill will be deductible for tax purposes. The Company believes the resulting amount of goodwill reflects its expectation of synergistic benefits of the acquisition.

The above acquisition contributed approximately $0.8 million in revenue and $0.1 million in operating income during the three months ended March 31, 2024. Pro forma financial data for the 2024 acquisition has not been included as the results of the operations are not material to our unaudited condensed consolidated financial statements.

During the three months ended March 31, 2024, the Company incurred approximately $0.2 million in transaction costs related to the completed 2024 acquisition. These costs are included in selling, general, and administrative expenses in our unaudited condensed consolidated statements of operations.

The Company also purchased the remaining 30% noncontrolling interest in Gateway Pediatric Therapy LLC during the first fiscal quarter of 2024. This transaction did not meet the definition of a business combination in accordance with Accounting Standards Codification 805, Business Combinations. For further discussion, refer to Note 11.

2023 Acquisitions

During the year ended December 31, 2023, we completed five acquisitions within the Pharmacy Solutions and Provider Services segments. We entered into these transactions in order to expand our services and geographic offerings. Aggregate consideration for these acquisitions was approximately $73.1 million. No cash was acquired as a part of these transactions. The operating results of these acquisitions are included in our unaudited condensed consolidated financial statements from the date of each acquisition.

The following table summarizes the consideration paid (in thousands) for these 2023 acquisitions and the estimated fair value of the assets acquired and the liabilities assumed at the acquisition dates, which are adjusted for immaterial measurement-period adjustments through March 31, 2024. Consideration paid for acquisitions by the Pharmacy Solutions and Provider Services segments was $29.8 million and $43.3 million, respectively.

The intangible assets consist primarily of $18.9 million in licenses, $14.0 million in customer relationships, $3.9 million in trade names, and $1.1 million in covenants not to compete. Definite-lived intangible assets have an estimated weighted average useful life of 11.2 years, and the licenses were assigned an indefinite life. We expect all of the goodwill will be deductible for tax purposes. The Company believes the resulting amount of goodwill reflects its expectation of synergistic benefits of the acquisitions.

Measurement period adjustments for 2023 acquisitions recorded in the three months ended March 31, 2024 were not material to the unaudited condensed consolidated financial statements. The Company expects to finalize the purchase price allocation for the 2023 acquisitions prior to the one-year anniversary date of each acquisition.

The above acquisitions contributed approximately $26.8 million in revenue and $0.9 million of operating income during the three months ended March 31, 2024. No 2023 acquisitions were completed during the first fiscal quarter of 2023, as such the acquisitions didnot contribute any revenue or operating income during the three months ended March 31, 2023. Pro forma financial data for 2023 acquisitions has not been included as the results of the operations are not material to our unaudited condensed consolidated financial statements.

During the three months ended March 31, 2023, the Company incurred approximately $0.1 million in transaction costs related to 2023 acquisitions that were completed in subsequent quarters of 2023. These costs are included in selling, general, and administrative expenses in our unaudited condensed consolidated statements of operations.

4. Goodwill and Intangible Assets

A summary of changes to goodwill, by segment, is as follows (in thousands):

• For the period presented, the carrying amount of goodwill is presented net of accumulated impairment losses of $40.9 million.

Intangible assets are as follows (in thousands):

Amortization expense for the three months ended March 31, 2024 and 2023 was $28.6 million and $30.8 million, respectively.

5. Debt and Derivatives

The table below summarizes the total outstanding debt of the Company (in thousands):

The following discussion summarizes the debt agreements and related modifications for the three months ended March 31, 2024 and the year ended December 31, 2023. We were in compliance with all applicable financial debt covenants at March 31, 2024 and December 31, 2023.

First Lien Credit Agreement

On March 5, 2019, the Company entered into a First Lien Credit Agreement (the “First Lien”), with Morgan Stanley Senior Funding, Inc., as the Administrative Agent and the Collateral Agent. The First Lien originally consisted of a principal amount of $1,650.0 million. In 2019, an additional delayed draw of $150.0 million was made on the First Lien, resulting in a gross borrowing of $1,800.0 million (“Tranche B-1”). The First Lien, as amended in 2020, provided for the establishment of a Tranche B-2 Term Loan (“Tranche B-2”) in an aggregate principal amount equal to $550.0 million. The First Lien, as amended in 2021, provided for the establishment of a Tranche B-3 Term Loan (“Tranche B-3”) in an aggregate principal amount equal to $675.0 million.

On February 21, 2024, we used a portion of the net proceeds received from the IPO Offerings to repay $343.3 million of the borrowings under the First Lien, and amended the First Lien to establish a new Tranche B-4 Term Loan (“Tranche B-4”) in an aggregate principal amount of $2,566.0 million. The proceeds from Tranche B-4 borrowings were used to refinance the equivalent amount of the remaining First Lien Tranches B-1, B-2, and B-3 borrowings at a rate equal to Secured Overnight Financing Rate

(“SOFR”)plus 3.25%. Tranche B-4 has a maturity date of February 21, 2031. The transaction was accounted for as a debt modification. Principal payments are due on the last business day of each quarter, commencing in the second fiscal quarter of 2024 and equate to 1% of the principal at issuance with a balloon payment due February 21, 2031.

Revolving Credit Facility

The First Lien also extended credit in the form of Revolving Credit Facility (the “Revolver”) made available at any time and from time to time prior to the Revolving Credit Maturity Date (as defined in the First Lien). The Revolver comprises Revolving Credit Loans and Swingline Loans. The Swingline Lender may issue Swingline Loans at any time and from time to time prior to the Revolving Credit Maturity Date, in an aggregated amount outstanding not in excess of $50.0 million. Additionally, the Letter of Credit Issuer may issue standby Letters of Credit at any time, in an aggregate stated amount outstanding not in excess of $82.5 million (the “LC Sublimit”), which reduces the Revolver borrowing capacity. In connection with the First Lien modification on February 21, 2024, borrowings of the Revolver bear interest at a rate equal to, SOFR (with a floor of 0.00%) plus 3.25% for the Revolving Credit Loans or Alternate Base Rate (“ABR”) plus 2.25% for the Swingline Loans. The modification also removed the springing maturity covenant of the Revolver. As such, the Revolver has a Revolving Credit Maturity Date of June 30, 2028.

The total borrowing capacity under the Revolver was $475.0 million as of March 31, 2024 and December 31, 2023. As of March 31, 2024, the Company had no borrowings outstanding under the Revolver and $7.8 million of letters of credit, reducing the available borrowing capacity to approximately $467.2 million. As of December 31, 2023, the Company had $50.7 million of borrowings outstanding under the Revolver and $6.6 million of letters of credit reducing the available borrowing capacity to approximately $417.7 million.

The Company’s First Lien also provides for an additional $55.0 million of letter of credit commitments (the “LC Facility”), which are not subject to the LC Sublimit and do not reduce the Revolver borrowing capacity. As of March 31, 2024 and December 31, 2023, there were $54.3 million of letters of credit outstanding under the LC Facility resulting in an available borrowing capacity of $0.7 million.

Second Lien Credit Agreement

The Company’s amended and restated Second Lien Credit Agreement (the “Second Lien Facility”), with certain Lenders and Wilmington Trust, National Association, as the Administrative Agent and the Collateral Agent consists of a principal amount of $450.0 million. On January 30, 2024, we used a portion of the net proceeds received from the IPO Offerings to repay all outstanding borrowings under the Second Lien Facility. No remaining obligation exists related to the Second Lien Facility. This transaction was accounted for as a debt extinguishment and the Company incurred a loss on extinguishment of debt of $12.7 million related to the write-off of unamortized debt issuance costs.

Derivative Financial Instruments

To manage fluctuations in cash flows resulting from changes in the variable rates, the Company entered into three receive-variable, pay-fixed interest rate swap agreements, all effective September 30, 2022. Taken together with the related debt, these swaps create the economic equivalent of fixed-rate debt, up to the notional amount of the hedged debt. By using a derivative instrument to hedge exposures to changes in interest rates, we expose ourselves to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, the Company is not exposed to the counterparty’s credit risk in those circumstances. The Company mitigates counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties. The derivative instruments entered into by the Company do not contain credit-risk-related contingent features.

As of March 31, 2024, we have the following interest rate swap agreements with a total notional value of $2.0 billion:

The fair value of the interest rate swaps as of March 31, 2024 and December 31, 2023 was $39.1 million and $24.9 million, respectively, and is reflected in other assets in the unaudited condensed consolidated balance sheets.

Amounts reported in accumulated other comprehensive income (“AOCI”) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. Interest received, including payments made or received under the cash flow hedges, was $9.6 million and $5.1 million for the three months ended March 31, 2024 and 2023, respectively. The Company expects approximately$29.4 million of pre-tax gains to be reclassified out of AOCI into earnings within the next twelve months.

The repayments on and modification of First Lien borrowings and extinguishment of the Second Lien Facility in the first fiscal quarter of 2024 did not impact the effectiveness of the cash flow hedge arrangements outstanding as of March 31, 2024.

6. Tangible Equity Units

Concurrently with the IPO, we issued 8,000,000 TEUs, which have a stated amount of $50.00 per unit. Each TEU is comprised of a prepaid stock purchase contract (“Purchase Contract”) and a senior amortizing note (“Amortizing Note”) due February 1, 2027, each issued by the Company. The Company will pay equal quarterly cash installments of $0.8438 per Amortizing Note on February 1, May 1, August 1 and November 1, commencing on May 1, 2024, except for the May 1, 2024 installment payment, which will be $0.8531 per Amortizing Note. In the aggregate, the annual quarterly cash installments will be the equivalent of 6.75% per year. Each installment payment constitutes a payment of interest and a partial repayment of principal. Each TEU may be separated by a holder into its constituent Purchase Contract and Amortizing Note, each of which is considered a freestanding financial instrument.

The Amortizing Notes will rank equally in right of payment with all other existing and future unsecured senior indebtedness and will rank senior to all of our existing and future indebtedness, if any, that is subordinated to the Amortizing Notes. At any time prior to the second scheduled trading day immediately preceding February 1, 2027, a holder may elect to settle its Purchase Contract early, in whole or in part, at an early settlement rate equal to the minimum settlement rate. The Company has the right to settle the Purchase Contracts on or after November 1, 2024, in whole but not in part, on a date fixed by it at an early mandatory settlement rate equal to the maximum settlement rate, subject to certain exceptions.

The value allocated to the Purchase Contract is reflected net of issuance costs in additional paid-in capital. The value allocated to the Amortizing Notes is reflected in long-term debt in the unaudited condensed consolidated balance sheet, with payments expected in the next twelve months reflected in current portion of long-term debt. Issuance costs related to the Amortizing Notes are reflected as a reduction of the carrying amount and will be amortized through the maturity date using the effective interest rate method. The proceeds from the issuance were allocated to equity and debt based on the relative fair value of the respective components of each TEU as follows (in thousands, except per unit values):

Unless settled earlier at the holder’s option or at the Company's election, each Purchase Contract will, subject to postponement in certain limited circumstances, automatically settle on February 1, 2027 for a number of shares of our common stock, subject to certain anti-dilution adjustments, based upon the 20-day volume-weighted average price (“VWAP”) of our common stock as follows:

The Purchase Contracts are mandatorily convertible into a minimum of 26.2 million shares or a maximum of 30.8 million shares of our common stock on the mandatory settlement date (unless redeemed by us or settled earlier at the unit holder's option). The 26.2 million minimum shares are included in the calculation of basic weighted average shares outstanding. The difference between the minimum and maximum shares represents potentially dilutive securities, which are included in the calculation of diluted weighted average shares outstanding to the extent that the average applicable market value is equal to or greater than $13.00 but is less than or equal to $15.28 during the period. See Note 12.

7. Income Taxes

The provision for income taxes is attributable to U.S federal, state, and foreign income taxes. The Company’s effective tax rate used for interim periods is based on an estimated annual effective tax rate and includes the tax effect of items required to be recorded discretely in the interim periods in which those items occur. A reconciliation of the Company’s effective tax rate is as follows:

During the three months ended March 31, 2024, the Company’s effective tax rate was higher than the U.S. federal income tax rate, primarily as a result of limitations on the deductibility of certain executive compensation that now apply to the Company after the IPO Offerings, which were completed in January 2024. The discrete tax expense for the three months ended March 31, 2024 primarily relates to additional legal settlement accruals recorded in the period, which are not expected to be deductible for tax purposes. See Note 10 for further discussion. The Company’s effective tax rate for the three months ended March 31, 2023 was lower than the U.S. federal income tax rate, primarily as a result of the favorable impact of job credits as a percentage of estimated annual pre-tax book income.

8. Detail of Certain Balance Sheet Accounts

Prepaid expenses and other current assets consist of the following (in thousands):

Other assets consist of the following (in thousands):

Accrued expenses consist of the following (in thousands):

Long-term liabilities consist of the following (in thousands):

9. Fair Value

Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques:

A.

Market approach: Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

B.

Cost approach: Amount that would be required to replace the service capacity of an asset (replacement cost).

C.

Income approach: Techniques to convert future amounts to a single present amount based upon market expectations (including present value techniques, option-pricing and excess earnings models).

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The financial assets or liabilities recorded at fair value on a recurring basis at March 31, 2024 are set forth in the table below (in thousands):

The financial assets or liabilities recorded at fair value on a recurring basis at December 31, 2023 are set forth in the table below (in thousands):

The fair values of our interest rate swaps are based upon Level 2 inputs, which include valuation models. The key inputs for the valuation models are quoted market prices, interest rates, forward yield curves, and credit risk adjustments that are necessary to reflect the probability of default by the counterparty or us. For disclosures about the fair value measurements of our derivative instruments, refer to Note 5.

The contingent consideration represents future earn-outs associated with acquisitions. Contingent consideration liabilities are recognized as part of the purchase price at the estimated fair value on the acquisition date. The fair values of the liabilities associated with the contingent consideration were derived using the income approach with unobservable inputs, which included future earnings forecasts and present value assumptions, and there was little or no market data (Level 3). The Company will re-assess the fair values on each reporting period thereafter until settlement. These liabilities are classified as accrued expenses and long-term liabilities in our accompanying unaudited condensed consolidated balance sheets.

10. Commitments and Contingencies

Legal Proceedings

On March 4, 2011, Relator Marc Silver, on behalf of the U.S. Government and various state governments, filed a complaint in the United States District Court for the District of New Jersey (“the District Court”) against PharMerica, seeking relief, with respect to alleged violations of the federal False Claims Act and state false claims acts, including three times the amount of damages to the federal government plus civil penalties and no less than a certain amount for each alleged false claim, as well as any other recoveries or relief provided for by the federal False Claims Act; damages, fines, penalties, and other recoveries or relief permitted under state false claims acts; and other forms of relief, including attorneys’ fees. The complaint alleged that, in violation of the Anti-Kickback Statute and the False Claims Act, PharMerica offered below-cost or below-fair-market-value prices on drugs in exchange for so-called preferred or exclusive provider status that would allow PharMerica to dispense drugs to patients for which PharMerica could bill federal health care program payers. The U.S. Government and state governments declined to intervene in the case.

The District Court issued an order dismissing the case in full in 2016. In 2018, however, the Third Circuit Court of Appeals issued an order reinstating the case. In April 2023, the District Court issued an order denying Relator’s motion seeking to strike portions of the opinions of PharMerica’s experts and granted in part PharMerica’s motions to exclude Relator’s experts. On June 28, 2023, the District Court issued an order setting a trial date of December 4, 2023. On November 6, 2023, the District Court denied our motion for summary judgment. On November 18, 2023, the Company agreed to settle the matter without admitting liability. The parties are in the process of negotiating a final settlement agreement, which is subject to the approval of the United States Department of Justice and the District Court. It is anticipated that settlement, provided the United States Department of Justice and District Court approve, will be finalized in or around the second fiscal quarter of 2024. The estimated financial impact of the settlement is $120.0 million;$110.0 million is included in accrued expenses and$10.0 million in long-term liabilities in the unaudited condensed consolidated balance sheet as of March 31, 2024. As of December 31, 2023 the estimated financial impact of the settlement was $115.0 million, $105.0 million of which was included in accrued expenses and $10.0 million in long term liabilities in the unaudited condensed consolidated balance sheet.

The Company is also party to various legal and/or administrative proceedings arising out of the operation of our programs and arising in the ordinary course of business. We record accruals for such contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

Other than the Silver matter discussed above, we do not believe the ultimate liability, if any, for outstanding proceedings or claims, individually or in the aggregate, in excess of amounts already provided, will have a material adverse effect on our consolidated financial condition, results of operations, or cash flows. It is reasonably possible that an adverse determination might have an impact on a particular period. While we believe our provision for legal contingencies is adequate, the outcome of legal proceedings is difficult to predict, and we may settle legal claims or be subject to judgments for amounts that exceed our estimates.

11. Redeemable Noncontrolling Interests

The Company has a 60% ownership interest in SHC Medical Partners LLC (“Abode Care Partners”) and a 55% ownership interest in Harvest Grove LTC LLC (“Harvest Grove”) each of which meets the definition of a VIE. The Company is deemed to be the primary beneficiary of these VIEs because it possesses the power to direct activities of the VIEs that most significantly impact their economic performance and has the obligation to absorb losses or the right to receive benefits from the VIEs that are significant to them. Through a management agreement with the respective entities, we manage and handle all day-to-day operating decisions for Abode Care Partners and Harvest Grove. The terms of the agreements prohibit us from using the assets of each entity to satisfy the obligations of other entities. The combined assets of the entities, excluding goodwill and intangible assets, are insignificant to the Company’s unaudited condensed consolidated balance sheets.

The respective joint venture agreements contain both a put option for the minority partners and a call option for the Company, requiring or allowing the Company, in certain circumstances, to purchase the partners’ remaining interest in the joint ventures at a price based on predetermined earnings multiples. Each of these options is to be triggered upon the occurrence of specified events and/or upon the passage of time. The Company calculates the redemption amount related to the Abode Care Partners and Harvest Grove options using a Monte Carlo simulation and records the amount, if any, by which the redemption amount exceeds the carrying value as a charge to accumulated deficit.

The total redeemable noncontrolling interest associated with Abode Care Partners was $5.2 million and $5.5 million as of March 31, 2024 and December 31, 2023, respectively. There wasno change in the recorded redemption amount for Abode Care Partners for the three months ended March 31, 2024 or 2023. The total redeemable noncontrolling interest associated with Harvest Grove was $1.1 million and $1.0 million as of March 31, 2024 and December 31, 2023, respectively. There wasno change in the recorded redemption amount for Harvest Grove for the three months ended March 31, 2024 or 2023.

On March 1, 2024, the Company purchased the remaining 30% noncontrolling interest related to Gateway Pediatric Therapy LLC (“Gateway”) for $5.4 million, $0.3 million of which was paid during the first fiscal quarter of 2024. The remaining $5.1 million is recorded in trade accounts payable in the unaudited condensed consolidated balance sheet as of March 31, 2024. As of March 31, 2024, the Company owns 100% of common stock in Gateway. As of December 31, 2023, Gateway met the definition of a VIE and the Company was deemed to be the primary beneficiary of the VIE. The total redeemable noncontrolling interest associated with the Company's 70% ownership in Gateway was $20.6 million as of December 31, 2023. The difference between cash consideration for the purchase of noncontrolling interest and the redeemable noncontrolling interest recorded in the unaudited condensed consolidated balance sheet of $15.0 million was recognized in additional paid-in capital as of the purchase date.

The following table summarizes the changes in the carrying value of the Company’s redeemable noncontrolling interest (in thousands):

12. Earnings Per Share

Basic net (loss) earnings per share of common stock is calculated by dividing net (loss) income attributable to common shareholders by the weighted average number of shares outstanding for the reporting period. Diluted net (loss) earnings per share of common stock is computed by giving effect to all potential weighted average dilutive common stock. In periods of net loss, no potentially dilutive common shares are included in the diluted shares outstanding as the effect is anti-dilutive.

The number of additional shares of common stock related to stock option awards subject to only a time-based condition is calculated using the treasury stock method, if dilutive. Stock option awards subject to a performance condition are not included in the denominator of the diluted earnings per share calculation using the treasury stock method for the three months ended March 31, 2023 as the performance condition had not been satisfied. Upon completion of the IPO in January 2024, the performance condition was met. Thus, the number of additional shares of common stock related to stock option awards subject to a performance condition are included in the denominator of the diluted earnings per share calculation using the treasury stock method for the three months ended March 31, 2024, if dilutive.

The number of additional shares of common stock related to restricted stock units (“RSUs”) is reflected in the denominator of the diluted earnings per share calculation using the treasury stock method, if dilutive.

For the three months ended March 31, 2024, the TEUs were assumed to be outstanding at the minimum settlement amount for weighted-average shares for basic earnings per share. For diluted earnings per share, the shares were assumed to be settled at a conversion factor based on the 20-day VWAP per share of the Company's common stock not to exceed 3.8461 shares per Purchase Contract, if dilutive. See Note 6 for further discussion of TEUs.

The following table sets forth the computation of basic and diluted net loss per share attributable to common shareholders (in thousands, except per share amounts):

The following potentially common share equivalents were excluded from the computation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented, as well as options that are contingent upon the satisfaction of certain conditions which were not satisfied by the end of the period (in thousands):

All share and per share amounts have been retroactively adjusted to reflect the effects of the stock split that occurred in January 2024. See Note 15.

13. Related Party Transactions

The Company was party to a Monitoring Agreement with KKR and WBA, which required payment of an aggregate advisory fee equivalent to 1% of consolidated earnings before interest, taxes, depreciation, and amortization (“EBITDA”), payable in quarterly installments in arrears at the end of each quarter. The Company recognized $0.7 million and $1.4 million in monitoring and advisory fees for the three months ended March 31, 2024 and 2023, respectively, as a component of selling, general, and administrative expenses in our accompanying unaudited condensed consolidated statements of operations. The Monitoring Agreement terminated upon the completion of the IPO Offerings in January 2024. As a result, the Company will pay $22.7 million in termination fees to KKR and WBA in accordance with the terms of the Monitoring Agreement. As of March 31, 2024, the termination fees were included in trade accounts payable in our unaudited condensed consolidated balance sheet and as selling, general, and administrative expense in our unaudited condensed consolidated statement of operations.

KKR Capital Markets LLC, a wholly owned subsidiary of KKR, acted as an arranger and bookrunner for the financing transactions in the first fiscal quarter of 2024, for which the Company paid a fee of $1.9 million. There wereno similar fees paid to KKR Capital Markets LLC during the three months ended March 31, 2023. KKR Capital Markets LLC also acted as an underwriter in the IPO Offerings and received $7.4 million in underwriting discounts and commissions.

KKR has ownership interests in a broad range of portfolio companies, and we may enter into commercial transactions for goods or services in the ordinary course of business with these companies. We do not believe such transactions are material to our business.

The Company has agreements with WBA and/or certain of its affiliates under which the Company purchases significant volume of inventory, including a Joinder Agreement to the Pharmaceutical Purchase and Distribution Agreement between WBA and AmerisourceBergen Drug Corporation. The Company, as a third-party beneficiary to the Pharmaceutical Purchase and Distribution Agreement, has the right to participate in certain pricing and payment related terms as well as appoint WBA to negotiate certain commercialand other mutually agreed upon terms for generic pharmaceutical products in accordance with guiding principles that address topics such as improvements in pricing and notification regarding switches in suppliers.

14. Segment Information

Our CODM evaluates the performance of our segments and allocates resources to them based on segment EBITDA. Segment assets are not reviewed by the Company’s CODM and, therefore, are not disclosed.

Insignificant amounts of revenue and costs of goods and services may be recorded at the corporate level and are not attributable to a particular segment. Unallocated selling, general, and administrative expenses are those costs for functions performed in a centralized manner and therefore are not attributable to a particular segment. These costs include accounting, finance, human resources, legal, information technology, corporate office support, and overall corporate management.

The following tables set forth information about the Company’s reportable segments, along with the items necessary to reconcile the segment information to the totals reported in the Company’s unaudited condensed consolidated statements of operations as follows (in thousands):

(1)

Balance includes depreciation and amortization expense that relates to revenue-generating assets

(2)

Balance is inclusive of any depreciation and amortization expense recorded in cost of goods and cost of services

15. Common Stock, Preferred Stock, and Share-Based Compensation

Common Stock and Preferred Stock

The Company’s Board of Directors approved a 15.7027-for-one stock split of the Company’s common stock on January 24, 2024. The stock split became effective on January 25, 2024. The par value per share of the Company’s common stock remained unchanged at $0.01 per share, and the authorized shares of the Company’s common stock was increased from 8,750,000 to 137,398,625. Upon completion of the IPO Offerings in January 2024, the Company's Board of Directors approved an amendment to our articles of incorporation to authorize 1,500,000,000 and 250,000,000 shares of common stock and preferred stock, respectively, each with a par value of $0.01 per share.

Share-Based Compensation

Upon completion of the IPO and included in the results for the three months ended March 31, 2024, the Company recognized $8.1 million of costs related to new equity awards granted to management under the 2024 Stock Plan. Additionally, the performance condition was satisfied for the Tier I and Tier II performance-vesting options under the 2017 Stock Plan upon completion of the IPO which resulted in $15.0 million of previously unrecognized share-based compensation expense being recognized in the three months ended March 31, 2024.