AdaptHealth Corp. [AHCO] Filings

10-Q 1 ahco-20220331x10q.htm 10-Q

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une

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2022

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

Commission file number: 001-38399

AdaptHealth Corp.

(Exact name of registrant as specified in its charter)

Delaware	82-3677704
(State of Other Jurisdiction of incorporation or Organization)	(I.R.S. Employer Identification No.)

220 West Germantown Pike Suite 250, Plymouth Meeting, PA	19462
(Address of principal executive offices)	(Zip code)

Registrant’s telephone number, including area code: (610) 424-4515

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

		Name Of Each Exchange
Title of Each Class	Trading Symbol(s)	On Which Registered
Common Stock, par value $0.0001 per share	AHCO	The Nasdaq Stock Market LLC

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

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

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.0405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 6, 2022, there were 134,289,067 shares of the Registrant’s Common Stock issued and outstanding.

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ADAPTHEALTH CORP.

FORM 10-Q

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	Page Number
PART I FINANCIAL INFORMATION

Item 1. Interim Consolidated Financial Statements (Unaudited)

Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021	4

Consolidated Statements of Operations for the three months ended March 31, 2022 and 2021	5

Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2022 and 2021	6

Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2022 and 2021	7

Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021	8

Notes to Interim Consolidated Financial Statements	9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

Item 3. Quantitative and Qualitative Disclosures About Market Risk	54

Item 4. Controls and Procedures	54


PART II OTHER INFORMATION	56

Item 1. Legal Proceedings	56

Item 1A. Risk Factors	56

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	56

Item 3. Defaults upon Senior Securities	56

Item 4. Mine Safety Disclosure	56

Item 5. Other Information	56

Item 6. Exhibits	56

Signatures	58

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CERTAIN DEFINED TERMS

Throughout this Quarterly Report on Form 10-Q, unless otherwise specified or the context so requires:

“AdaptHealth Holdings” means AdaptHealth Holdings LLC, a Delaware limited liability company;

“Business Combination” means the transactions completed pursuant to the Agreement and Plan of Merger, dated as of July 8, 2019, by and among DFB Healthcare Acquisitions Corp. a Delaware corporation, DFB Merger Sub LLC, a Delaware limited liability company, our wholly owned subsidiary, AdaptHealth Holdings, AH Representative LLC, BM AH Holdings, LLC, Access Point Medical Inc. and, solely for the purposes described therein, Clifton Offshore Investments L.P., a British Virgin Islands limited partnership, BlueMountain Foinaven Master Fund L.P., a Cayman Islands exempted limited partnership, BMSB L.P. a Delaware limited partnership, BlueMountain Fursan Fund L.P. a Cayman Islands exempted limited partnership, which we completed on November 8, 2019;

“Charter” means our Third Amended and Restated Certificate of Incorporation, filed with the Secretary of State of the State of Delaware on July 28, 2021;

“Class A Common Stock” means the Class A Common Stock, par value $0.0001 per share, created on the Closing of the Business Combination, which, following the filing of the Charter, has been renamed to “Common Stock” (as defined below);

“Class B Common Stock” means the Class B Common Stock, par value $0.0001 per share, created on the Closing of the Business Combination, which following the filing of the Charter, no longer exists;

“Closing of the Business Combination” means the closing of the Business Combination, which occurred on November 8, 2019;

“Common Stock” means our Common Stock, par value $0.0001 per share;

“Exchange Agreement” means the Exchange Agreement, dated as of November 8, 2019, by and among AdaptHealth, AdaptHealth Holdings, and holders of AdaptHealth Units;

“New AdaptHealth Units” common units representing limited liability company interests in AdaptHealth Holdings from and after the Closing of the Business Combination;

“Series B-1 Preferred Stock” means the series of preferred stock of the Company designated as “Series B-1 Convertible Preferred Stock,” par value $0.0001 per share;

“Sponsor” means Deerfield/RAB Ventures LLC;

“Tax Receivable Agreement” means the Tax Receivable Agreement, dated as of November 8, 2019, by and among AdaptHealth, AdaptHealth Holdings, and holders of AdaptHealth Units; and

“Warrants” means, collectively, the warrants that were issued in our initial public offering (our “IPO”) pursuant to the registration statement declared effective on February 15, 2018 and which were redeemed on September 2, 2020 (the “public warrants”) and the warrants initially issued to our Sponsor in a private placement that occurred simultaneously with our IPO (the “private placement warrants”), which private placement warrants have been distributed from the Sponsor to its members.

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CAUTIONARY STATEMENT

In this Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I Item 2, and the documents incorporated by reference herein, we make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for our business. These statements may be preceded by, followed by or include the words “may,” “might,” “will,” “will likely result,” “should,” “estimate,” “plan,” “project,” “forecast,” “intend,” “expect,” “anticipate,” “believe,” “seek,” “continue,” “target” or similar expressions.

These forward-looking statements are based on information available to us as of the date they were made, and involve a number of risks and uncertainties which may cause them to turn out to be wrong. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward- looking statements. Some factors that could cause actual results to differ include:

●

competition and the ability of our business to grow and manage growth profitably;

●

changes in applicable laws or regulations;

●

fluctuations in the U.S. and/or global stock markets;

●

the possibility that we may be adversely affected by other economic, business, and/or competitive factors;

●

the impact of the coronavirus (COVID-19) pandemic and our response to it;

●

failure to consummate or realize the expected benefits of acquisitions, and

●

other risks and uncertainties set forth in this Form 10-Q, as well as the documents incorporated by reference herein.

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PART I – FINANCIAL INFORMATION

Item 1. Interim Consolidated Financial Statements

ADAPTHEALTH CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)


	March 31,		December 31,
	2022		2021
Assets
Current assets:
Cash and cash equivalents	$	119,428	$	149,627
Accounts receivable		369,898		359,896
Inventory		99,636		123,095
Prepaid and other current assets		26,026		37,440
Total current assets		614,988		670,058
Equipment and other fixed assets, net		424,764		398,577
Operating lease right-of-use assets		142,092		147,760
Goodwill		3,515,066		3,512,567
Identifiable intangible assets, net		192,370		202,231
Other assets		15,170		15,098
Deferred tax assets		299,891		304,193
Total Assets	$	5,204,341	$	5,250,484
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses	$	316,051	$	358,384
Current portion of finance lease obligations		8,692		15,446
Current portion of operating lease obligations		30,597		31,418
Current portion of long-term debt		20,000		20,000
Contract liabilities		30,613		31,370
Other liabilities		37,602		43,194
Total current liabilities		443,555		499,812
Long-term debt, less current portion		2,179,730		2,183,552
Operating lease obligations, less current portion		115,420		120,180
Other long-term liabilities		313,963		322,487
Warrant liability		31,047		57,764
Total Liabilities		3,083,715		3,183,795
Commitments and contingencies (note 14)
Stockholders' Equity:
Common Stock, par value of $0.0001 per share, 300,000,000 shares authorized; 134,245,536 and 133,843,732 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively		13		13
Preferred Stock, par value of $0.0001 per share, 5,000,000 shares authorized; 124,060 and 124,060 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively		1		1
Additional paid-in capital		2,112,976		2,107,267
Accumulated deficit		(1,271)		(43,021)
Accumulated other comprehensive income (loss)		3,644		(2,354)
Total stockholders' equity attributable to AdaptHealth Corp.		2,115,363		2,061,906
Noncontrolling interests in subsidiaries		5,263		4,783
Total Stockholders' Equity		2,120,626		2,066,689
Total Liabilities and Stockholders' Equity	$	5,204,341	$	5,250,484

See accompanying notes to unaudited interim consolidated financial statements.

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ADAPTHEALTH CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)


	Three Months Ended March 31,
	2022		2021
Net revenue	$	706,203	$	482,119
Costs and expenses:
Cost of net revenue		597,122		396,698
General and administrative expenses		41,444		56,632
Depreciation and amortization, excluding patient equipment depreciation		16,085		13,380
Total costs and expenses		654,651		466,710
Operating income		51,552		15,409
Interest expense, net		24,776		22,185
Change in fair value of warrant liability (note 10)		(26,717)		(3,168)
Change in fair value of contingent consideration common shares liability (note 10)		—		(1,965)
Loss on extinguishment of debt		—		4,213
Other (income) loss, net		5,660		(519)
Income (loss) before income taxes		47,833		(5,337)
Income tax expense (benefit)		5,603		(1,695)
Net income (loss)		42,230		(3,642)
Income attributable to noncontrolling interest		480		324
Net income (loss) attributable to AdaptHealth Corp.	$	41,750	$	(3,966)

Weighted average common shares outstanding - basic		134,023		111,109
Weighted average common shares outstanding - diluted		138,483		115,995

Basic net income (loss) per share ⁽¹⁾	$	0.29	$	(0.04)
Diluted net income (loss) per share ⁽¹⁾	$	0.08	$	(0.08)

(1)

See Note 11, Earnings (Loss) Per Share, to the unaudited interim consolidated financial statements for the calculations of basic and diluted net income (loss) per share.

See accompanying notes to unaudited interim consolidated financial statements.

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ADAPTHEALTH CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(IN THOUSANDS)

(UNAUDITED)


	Three Months Ended March 31,
	2022		2021
Net income (loss)	$	42,230	$	(3,642)
Other comprehensive income:
Interest rate swap agreements, inclusive of reclassification adjustment		5,998		1,876
Comprehensive income (loss)		48,228		(1,766)

Income attributable to noncontrolling interest		480		324
Comprehensive income (loss) attributable to AdaptHealth Corp.	$	47,748	$	(2,090)

See accompanying notes to unaudited interim consolidated financial statements.

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ADAPTHEALTH CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(IN THOUSANDS)

(UNAUDITED)


											Accumulated
							Additional				other		Noncontrolling
	Common Stock			Preferred Stock			paid-in		Accumulated		comprehensive		interests in
	Shares	Amount		Shares	Amount		capital		deficit		income (loss)		subsidiaries		Total
Balance, December 31, 2021	133,844	$	13	124	$	1	$	2,107,267	$	(43,021)	$	(2,354)	$	4,783	$	2,066,689
Equity-based compensation	187		—	—		—		5,502		—		—		—		5,502
Exercise of stock options	184		—	—		—		723		—		—		—		723
Payments for tax withholdings from restricted stock vesting and stock option exercises	—		—	—		—		(1,269)		—		—		—		(1,269)
Common Stock issued in connection with employee stock purchase plan	31		—	—		—		753		—		—		—		753
Net income	—		—	—		—		—		41,750		—		480		42,230
Change in fair value of interest rate swaps, inclusive of reclassification adjustment	—		—	—		—		—		—		5,998		—		5,998
Balance, March 31, 2022	134,246	$	13	124	$	1	$	2,112,976	$	(1,271)	$	3,644	$	5,263	$	2,120,626


														Accumulated
										Additional				other		Noncontrolling
	Class A Common Stock			Class B Common Stock			Preferred Stock			paid-in		Accumulated		comprehensive		interests in
	Shares	Amount		Shares	Amount		Shares	Amount		capital		deficit		income (loss)		subsidiaries		Total
Balance, December 31, 2020	76,458	$	8	13,219	$	1	164	$	1	$	558,486	$	(199,196)	$	(4,411)	$	(74,044)	$	280,845
Issuance of Class A Common Stock for acquisitions	14,092		2	—		—	—		—		564,986		—		—		—		564,988
Issuance of Series C Preferred Stock for an acquisition	—		—	—		—	130		—		523,856		—		—		—		523,856
Issuance of stock options for an acquisition	—		—	—		—	—		—		134,683		—		—		—		134,683
Exchange of Class B Common Stock for Class A Common Stock	13,219		1	(13,219)		(1)	—		—		(77,919)		—		—		77,919		—
Equity-based compensation	172		—	—		—	—		—		8,582		—		—		—		8,582
Cashless exercise of stock options	9		—	—		—	—		—		—		—		—		—		—
Issuance of Class A Common Stock, net of offering costs of $13,832	8,450		1	—		—	—		—		265,017		—		—		—		265,018
Conversion of Series B-1 Preferred Stock to Class A Common Stock	3,950		—	—		—	(40)		—		—		—		—		—		—
Conversion of Series C-1 Preferred Stock to Class A Common Stock	13,047		1	—		—	(130)		—		(1)		—		—		—		—
Class A Common Stock issued in connection with employee stock purchase plan	8		—	—		—	—		—		314		—		—		—		314
Net income (loss)	—		—	—		—	—		—		—		(3,966)		—		324		(3,642)
Equity activity resulting from the Tax Receivable Agreement	—		—	—		—	—		—		16,768		—		—		—		16,768
Change in fair value of interest rate swaps, inclusive of reclassification adjustment	—		—	—		—	—		—		—		—		1,876		—		1,876
Other	(19)		—	—		—	—		—		(810)		—		—		—		(810)
Balance, March 31, 2021	129,386	$	13	—	$	—	124	$	1	$	1,993,962	$	(203,162)	$	(2,535)	$	4,199	$	1,792,478

See accompanying notes to unaudited interim consolidated financial statements.

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ADAPTHEALTH CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)


	Three Months Ended March 31,
	2022		2021
Cash flows from operating activities:
Net income (loss)	$	42,230	$	(3,642)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization, including patient equipment depreciation		77,030		47,206
Equity-based compensation		5,502		8,582
Change in fair value of contingent consideration common shares liability		—		(1,965)
Change in fair value of warrant liability		(26,717)		(3,168)
Reduction in the carrying amount of operating lease right-of-use assets		7,484		6,957
Deferred income tax expense (benefit)		4,303		(1,695)
Change in fair value of interest rate swaps, net of reclassification adjustment		(726)		(709)
Amortization of deferred financing costs		1,309		894
Write-off of deferred financing costs		—		4,213
Other		—		266
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable		(9,481)		(7,344)
Inventory		21,331		16,444
Prepaid and other assets		12,237		2,589
Operating lease obligations		(7,420)		(6,806)
Operating liabilities		(60,631)		(43,442)
Net cash provided by operating activities		66,451		18,380
Cash flows from investing activities:
Payments for business acquisitions, net of cash acquired		(2,932)		(1,178,168)
Purchases of equipment and other fixed assets		(77,166)		(35,596)
Net cash used in investing activities		(80,098)		(1,213,764)
Cash flows from financing activities:
Proceeds from borrowings on long-term debt and lines of credit		—		795,000
Repayments on long-term debt and lines of credit		(5,000)		(303,771)
Repayments of finance lease obligations		(8,156)		(9,854)
Proceeds from the exercise of stock options		723		—
Proceeds received in connection with employee stock purchase plan		753		314
Proceeds from the issuance of senior unsecured notes		—		500,000
Proceeds from the issuance of Class A Common Stock		—		278,850
Payments for equity issuance costs		—		(13,832)
Payments of deferred financing costs		—		(16,148)
Payments for tax withholdings from restricted stock vesting and stock option exercises		(1,269)		(810)
Payments of contingent consideration and deferred purchase price from acquisitions		(3,603)		(2,190)
Net cash (used in) provided by financing activities		(16,552)		1,227,559
Net (decrease) increase in cash and cash equivalents		(30,199)		32,175
Cash and cash equivalents at beginning of period		149,627		99,962
Cash and cash equivalents at end of period	$	119,428	$	132,137
Supplemental disclosures:
Cash paid for interest	$	43,931	$	16,188
Cash paid for income taxes		11		2,802
Noncash investing and financing activities:
Equipment acquired under finance lease obligations	$	1,335	$	7,445
Unpaid equipment and other fixed asset purchases at end of period		26,194		19,200
Assets subject to operating lease obligations		2,627		10,750
Operating lease obligations		(2,627)		(10,750)
Equity consideration issued in connection with acquisitions		—		1,223,527
Deferred purchase price in connection with acquisitions		308		423

See accompanying notes to unaudited interim consolidated financial statements.

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ADAPTHEALTH CORP. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements (Unaudited)

(1) General Information

AdaptHealth Corp. and subsidiaries (AdaptHealth or the Company), a Delaware Corporation, is a national leader in providing patient-centered, healthcare-at-home solutions including home medical equipment (HME), medical supplies, and related services. AdaptHealth focuses primarily on providing (i) sleep therapy equipment, supplies and related services (including CPAP and bi PAP services) to individuals suffering from obstructive sleep apnea (OSA), (ii) medical devices and supplies to patients for the treatment of diabetes (including continuous glucose monitors (CGM) and insulin pumps), (iii) home medical equipment to patients discharged from acute care and other facilities, (iv) oxygen and related chronic therapy services in the home, and (v) other HME devices and supplies on behalf of chronically ill patients with wound care, urological, incontinence, ostomy and nutritional supply needs. AdaptHealth services beneficiaries of Medicare, Medicaid and commercial insurance payors.

The interim consolidated financial statements are unaudited, but reflect all normal recurring adjustments that are, in the opinion of management, necessary to fairly present the information set forth herein. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Interim results are not necessarily indicative of the results for a full year.

There have been no material changes in the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

(a) Basis of Presentation

The interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). In the opinion of management, the interim consolidated financial statements include all necessary adjustments for a fair presentation of the financial position and results of operations for the periods presented.

(b) Basis of Consolidation

The accompanying interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.

(d) Accounting Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and reported amounts of revenues and expenses during the reporting period. Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable. Significant areas requiring the use of management estimates relate to revenue recognition and the valuation of accounts receivable (implicit price concession), income taxes, contingent consideration,

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ADAPTHEALTH CORP. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements (Unaudited) (Continued)

equity-based compensation, interest rate swaps, warrant liability and long-lived assets, including goodwill and identifiable intangible assets. Actual results could differ from those estimates.

(e) Valuation of Goodwill

The Company has a significant amount of goodwill on its balance sheet that resulted from the business acquisitions the Company has made in recent years. Goodwill is not amortized and is assessed for impairment annually and upon the occurrence of a triggering event or change in circumstances indicating a possible impairment. Such triggering events potentially warranting an interim goodwill impairment assessment include, among other factors, declines in historical or projected revenue, operating income or cash flows, and declines in the Company’s stock price or market capitalization. Such changes in circumstance can include, among others, changes in the legal environment, reimbursement environment, operating performance, and/or future prospects. The Company performs its annual impairment assessment of goodwill during the fourth quarter of each year. The impairment assessment can be performed on either a quantitative or qualitative basis. The Company first assesses qualitative factors to determine whether it is necessary to perform a quantitative goodwill impairment analysis. If determined necessary, the Company applies the quantitative impairment test to identify and measure the amount of impairment, if any. During the three months ended March 31, 2022, the Company experienced an additional decline in its market capitalization as a result of a decline in the Company’s stock price. The Company considered such decline to represent a triggering event requiring management to perform a goodwill impairment assessment as of March 31, 2022. Refer to note 5, Goodwill and Identifiable Intangible Assets, for additional details.

(f) Long-Lived Assets

The Company’s long-lived assets, such as equipment and other fixed assets, operating lease right-of-use assets and definite-lived identifiable intangible assets, are assessed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Definite-lived identifiable intangible assets consist of tradenames, payor contracts, contractual rental agreements and developed technology. These assets are amortized using the straight-line method over their estimated useful lives, which reflects the pattern in which the economic benefits of the assets are expected to be consumed. These assets are assessed for impairment consistent with the Company’s long-lived assets. In addition to consideration of impairment upon the events or changes in circumstances described above, management regularly evaluates the remaining useful lives of its long-lived assets. The following table summarizes the useful lives of the Company’s identifiable intangible assets acquired:


Tradenames	5 to 10	years
Payor contracts	10	years
Contractual rental agreements	2	years
Developed technology	5	years

The Company did not incur any impairment charges on long-lived assets for the three months ended March 31, 2022 and 2021.

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ADAPTHEALTH CORP. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements (Unaudited) (Continued)

(g) Business Segment

The Company’s chief operating decision-makers are its Chief Executive Officer and President, who make resource allocation decisions and assess performance based on financial information presented on an aggregate basis. There are no segment managers who are held accountable by the chief operating decision-makers, or anyone else, for any planning, strategy and key decision-making regarding operations. The corporate office is responsible for contract negotiation with vendors and payors, corporate compliance with healthcare laws and regulations, and revenue cycle management, among other corporate supporting functions. Accordingly, the Company has a single reportable segment and operating segment structure.

(h) Accounting for Leases

The Company adopted FASB Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) (ASC 842) with an effective date of January 1, 2021, using the modified retrospective approach, for leases that existed on January 1, 2021. ASC 842 requires the Company to recognize a lease liability, which represents the discounted obligation to make future minimum lease payments, and a corresponding right-of-use (ROU) asset on its consolidated balance sheet for most leases, and disclose key information about leasing arrangements. The Company elected to apply certain practical expedients permitted under the transition guidance within ASC 842 to leases that commenced before January 1, 2021, including the package of practical expedients, which, among other things, permits lease agreements that are twelve months or less to be excluded from the balance sheet, and permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. Due to the Company’s election of these practical expedients, the Company carried forward certain historical conclusions for existing contracts, including conclusions related to the existence and classification of leases and to initial direct costs. ASC 842 applies to a number of arrangements to which the Company is a party.

Whenever the Company enters into a new arrangement, it must determine, at the inception date, whether the arrangement is or contains a lease. This determination generally depends on whether the arrangement conveys to the Company the right to control the use of an explicitly or implicitly identified asset for a period of time in exchange for consideration. Control of an underlying asset is conveyed to the Company if the Company obtains the rights to direct the use of and obtain substantially all the economic benefits from the use of the underlying asset.

If a lease exists, the Company must then determine the separate lease and non-lease components of the arrangement. Each right to use an underlying asset conveyed by a lease arrangement should generally be considered a separate lease component if it both: (i) can benefit the Company without depending on other resources not readily available to the Company and (ii) does not significantly affect and is not significantly affected by other rights of use conveyed by the lease. Aspects of a lease arrangement that transfer other goods or services to the Company but do not meet the definition of lease components are considered non-lease components. The consideration owed by the Company pursuant to a lease arrangement is generally allocated to each lease and non-lease component for accounting purposes. However, the Company has elected, for all of its leases, to not separate lease and non-lease components. Each lease component is accounted for separately from other lease components, but together with the associated non-lease components.

For each lease, the Company must then determine the lease term, the present value of lease payments and the classification of the lease as either an operating or finance lease.

The lease term is the period of the lease not cancellable by the Company, together with periods covered by: (i) renewal options the Company is reasonably certain to exercise, (ii) termination options the Company is reasonably certain not to exercise, and (iii) renewal or termination options that are controlled by the lessor.

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Notes to Interim Consolidated Financial Statements (Unaudited) (Continued)

The present value of lease payments is calculated based on:

●

Lease payments – lease payments include fixed and certain variable payments, less lease incentives, together with amounts probable of being owed by the Company under residual value guarantees and, if reasonably certain of being paid, the cost of certain renewal options and early termination penalties set forth in the lease arrangement. Lease payments exclude consideration that is not related to the transfer of goods and services of the Company.

●

Discount rate – the discount rate must be determined based on information available to the Company upon the commencement of the lease. Lessees are required to use the rate implicit in the lease whenever such rate is readily available; however, as the implicit rate in the Company’s leases is generally not readily determinable, the Company generally uses the hypothetical incremental borrowing rate it would have to pay to borrow an amount equal to the lease payments, on a collateralized basis, over a timeframe similar to the lease term.

In making the determination of whether a lease is an operating lease or a finance lease, the Company considers the lease term in relation to the economic life of the leased asset, the present value of lease payments in relation to the fair value of the leased asset and certain other factors, including the lessee’s and lessor’s rights, obligations, and economic incentives over the term of the lease.

Generally, upon the commencement of a lease, the Company will record a lease liability and a ROU asset. However, the Company has elected, for all underlying leases with initial terms of twelve months or less (known as short-term leases), to not recognize a lease liability or ROU asset. Lease liabilities are initially recorded at lease commencement as the present value of future lease payments. ROU assets are initially recorded at lease commencement as the initial amount of the lease liability, together with the following, if applicable: (i) initial direct costs incurred by the lessee and (ii) lease payments made by the lessor net of lease incentives received, prior to lease commencement.

Over the lease term, the Company generally increases its lease liabilities using the effective interest method and decreases its lease liabilities for lease payments made. For finance leases, amortization and interest expense are recognized separately in the consolidated statements of operations, with amortization expense generally recorded on a straight-line basis over the lease term and interest expense recorded using the effective interest method. For operating leases, a single lease cost is generally recognized in the consolidated statements of operations on a straight-line basis over the lease term unless an impairment has been recorded with respect to a leased asset. Lease costs for short-term leases not recognized in the consolidated balance sheets are recognized in the consolidated statements of operations on a straight-line basis over the lease term. Variable lease costs not initially included in the lease liability and ROU asset impairment charges are expensed as incurred. ROU assets are assessed for impairment, similar to other long-lived assets.

(i) Recently Issued Accounting Pronouncements

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848), which provides optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. Specifically, the guidance permits an entity, when certain criteria are met, to consider amendments to contracts made to comply with reference rate reform to meet the definition of a modification under U.S. GAAP. It further allows hedge accounting to be maintained and a one-time transfer or sale of qualifying held-to-maturity securities. The expedients and exceptions provided by the amendments are permitted to be adopted any time through December 31, 2022 and do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for certain optional expedients elected for certain hedging relationships existing as of December 31, 2022. In April 2022, the FASB issued a proposed amendment to Topic 848 which, if approved, would defer the required adoption date of Topic 848 to December 31, 2024, with early adoption permitted. The Company is

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Notes to Interim Consolidated Financial Statements (Unaudited) (Continued)

currently evaluating the effect that this standard will have on its consolidated financial statements and related disclosures.

(j) Recently Adopted Accounting Pronouncements

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350), which requires an entity to perform a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). This standard eliminated the prior two-step goodwill impairment test, under which a goodwill impairment loss was measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The Company adopted this standard during the year ended December 31, 2021, which did not have an impact on its consolidated financial position, results of operations or cash flows.

In August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) (ASU 2020-06). The guidance in ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock. In addition, ASU 2020-06 improves and amends the related earnings per share guidance. The Company adopted this standard on January 1, 2022 using the modified retrospective approach. The adoption of this standard did not have an impact on the Company’s consolidated financial position, results of operations, cash flows or earnings per share amounts.

(2) Revenue Recognition and Accounts Receivable

Revenue Recognition

The Company generates revenues for services and related products that the Company provides to patients for home medical equipment, related supplies, and other items. The Company’s revenues are recognized in the period in which services and related products are provided to customers and are recorded either at a point in time for the sale of supplies and disposables, or over the fixed monthly service period for equipment.

Revenues are recognized when control of the promised good or service is transferred to customers, in an amount that reflects the consideration to which the Company expects to receive from patients or under reimbursement arrangements with Medicare, Medicaid and third-party payors, in exchange for those goods and services.

The Company determines the transaction price based on contractually agreed-upon amounts or rates, adjusted for estimates of variable consideration, such as implicit price concessions. The Company utilizes the expected value method to determine the amount of variable consideration that should be included to arrive at the transaction price, using contractual agreements and historical reimbursement experience within each payor type. The Company applies constraint to the transaction price, such that net revenue is recorded only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in the future. If actual amounts of consideration ultimately received differ from the Company’s estimates, the Company adjusts these estimates, which would affect net revenue in the period such adjustments become known.

Sales revenue is recognized upon transfer of control of products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Revenues for the sale of sleep therapy equipment supplies (including CPAP resupply products), home medical equipment and related supplies (including wheelchairs, hospital beds and infusion pumps), diabetic medical devices and supplies (including continuous glucose monitors (CGM) and insulin pumps), and other HME products and supplies are recognized when control of the promised good or service is transferred to customers, which is generally upon shipment for direct to consumer medical devices and supplies and upon delivery to the home for home medical equipment.

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Notes to Interim Consolidated Financial Statements (Unaudited) (Continued)

The Company provides certain equipment to patients which is reimbursed periodically in fixed monthly payments for as long as the patient is using the equipment and medical necessity continues (in certain cases, the fixed monthly payments are capped at a certain amount). The equipment provided to the patient is based upon medical necessity as documented by prescriptions and other documentation received from the patient’s physician. The patient generally does not negotiate or select the manufacturer or model of the equipment prescribed by their physician and delivered by the Company. Once initial delivery of this equipment is made to the patient for initial setup, a monthly billing process is established based on the initial setup service date. The Company recognizes the fixed monthly revenue ratably over the service period as earned, less estimated adjustments, and defers revenue for the portion of the monthly bill that is unearned. No separate revenue is earned from the initial setup process. Included in fixed monthly revenue are unbilled amounts for which the revenue recognition criteria had been met as of period-end but were not yet billed to the payor. The estimate of net unbilled fixed monthly revenue recognized is based on historical trends and estimates of future collectability.

The Company’s billing system contains payor-specific price tables that reflect the fee schedule amounts in effect or contractually agreed upon by various government and commercial insurance payors for each item of equipment or supply provided to a customer. Revenues are recorded based on the applicable fee schedule. The Company has established a contractual allowance to account for adjustments that result from differences between the payment amount received and the expected realizable amount. If the payment amount received differs from the net realizable amount, an adjustment is recorded to revenues in the period that these payment differences are determined. The Company reports revenues in its consolidated financial statements net of such adjustments.

The Company recognizes revenue in the consolidated statements of operations and contract assets on the consolidated balance sheets only when services have been provided. Since the Company has performed its obligation under the contract, it has unconditional rights to the consideration recorded as contract assets and therefore classifies those billed and unbilled contract assets as accounts receivable.

Fixed monthly payments that the Company receives from customers in advance of providing services represent contract liabilities. Such payments primarily relate to patients who are billed monthly in advance and are recognized over the period as earned.

The Company disaggregates net revenue from contracts with customers by payor type and by core service lines. The Company believes that disaggregation of net revenue into these categories depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The payment terms and conditions within the Company’s revenue-generating contracts vary by payor type and payor source.

The composition of net revenue by payor type for the three months ended March 31, 2022 and 2021 are as follows (in thousands):


	Three Months Ended March 31,
	2022		2021
Insurance	$	420,890	$	290,010
Government		181,650		133,730
Patient pay		103,663		58,379
Net revenue	$	706,203	$	482,119

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Notes to Interim Consolidated Financial Statements (Unaudited) (Continued)

The composition of net revenue by core service lines for the three months ended March 31, 2022 and 2021 are as follows (in thousands):


	Three Months Ended March 31,
	2022		2021
Net sales revenue:
Sleep	$	192,335	$	128,682
Diabetes		151,359		95,017
Supplies to the home		39,865		41,363
Respiratory		8,145		5,621
HME		30,851		24,156
Other		53,400		22,426
Total net sales revenue	$	475,955	$	317,265

Net revenue from fixed monthly equipment reimbursements:
Sleep	$	57,938	$	48,109
Diabetes		3,946		2,853
Respiratory		132,580		83,454
HME		25,725		20,380
Other		10,059		10,058
Total net revenue from fixed monthly equipment reimbursements	$	230,248	$	164,854

Total net revenue:
Sleep	$	250,273	$	176,791
Diabetes		155,305		97,870
Supplies to the home		39,865		41,363
Respiratory		140,725		89,075
HME		56,576		44,536
Other		63,459		32,484
Total net revenue	$	706,203	$	482,119

In response to the COVID-19 pandemic and the National Emergency Declaration, dated March 13, 2020, the Company increased its cash liquidity by, among other things, seeking recoupable advance payments of $45.8 million made available by the Centers for Medicare & Medicaid Services (CMS) under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) legislation, which was received in April 2020. In addition, in connection with an acquisition completed in July 2020, the Company assumed a liability of $3.7 million relating to CMS recoupable advance payments received by the acquired company prior to the date of acquisition. The recoupment of the advance payments by CMS began in April 2021 and is being applied to services provided and revenue recognized during the period in which the recoupment occurs, and will impact the Company’s cash receipts for services provided until such time all amounts have been recouped. During the three months ended March 31, 2022, CMS recouped $5.2 million of the advance payments. As of March 31, 2022, the Company has deferred $7.5 million related to the CMS recoupable advance payments, which is included in other current liabilities in the consolidated balance sheets.

Accounts Receivable

Due to the continuing changes in the healthcare industry and third-party reimbursement environment, certain estimates are required to record accounts receivable at their net realizable values. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. The complexity of third-party billing arrangements and laws and regulations governing Medicare and Medicaid may result in adjustments to amounts originally recorded.

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Notes to Interim Consolidated Financial Statements (Unaudited) (Continued)

The Company performs a periodic analysis to review the valuation of accounts receivable and collectability of outstanding balances. Management’s evaluation takes into consideration such factors as historical cash collections experience, business and economic conditions, trends in healthcare coverage, other collection indicators and information about specific receivables. The Company’s evaluation also considers the age and composition of the outstanding amounts in determining their estimated net realizable value.

Receivables are considered past due when not collected by established due dates. Specific patient balances are written off after collection efforts have been followed and the account has been determined to be uncollectible. Revisions in reserve estimates are recorded as an adjustment to net revenue in the period of revision.

Included in accounts receivable are earned but unbilled accounts receivables. Billing delays, ranging from several days to several weeks, can occur due to the Company’s policy of compiling required payor specific documentation prior to billing for its services rendered. As of March 31, 2022 and December 31, 2021, the Company’s unbilled accounts receivable was $19.8 million and $23.8 million, respectively.

(3) Acquisitions

During the three months ended March 31, 2022 and 2021, the Company completed several acquisitions to strengthen its current market share in existing markets or to expand into new markets. Each of the Company’s acquisitions was accounted for using the acquisition method pursuant to the requirements of FASB ASC Topic 805, Business Combinations, and are included in the Company’s consolidated financial statements since the respective acquisition date. The goodwill generated from these acquisitions is attributable to expected growth and cost synergies and the expected contribution of each acquisition to the Company’s overall strategy. The goodwill recorded during the three months ended March 31, 2022 is not expected to be deductible for tax purposes. The estimated fair values of the net assets of acquired businesses as described below are subject to change resulting from such items as receipt of final valuations and working capital adjustments post-acquisition. As a result, the acquisition accounting for certain acquired businesses could change in subsequent periods resulting in adjustments to goodwill once finalized. Also, see subsection, “Pro forma information” of this Note 3 for pro forma information on net revenue and operating income.

Three Months Ended March 31, 2022

During the three months ended March 31, 2022, the Company acquired 100% of the equity interests of a provider of home medical equipment and acquired certain assets of the home medical equipment business of a provider of HME.

The following table summarizes the consideration paid at closing for all acquisitions during the three months ended March 31, 2022 (in thousands):


Cash	$	2,467
Deferred payments		308
Total	$	2,775

The Company allocated the consideration paid to the net assets acquired based on their estimated acquisition date fair values. The Company is still evaluating the fair value of certain assets and liabilities for which provisional amounts were recorded and expects to finalize such valuations during the remainder of 2022. Based upon management’s

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Notes to Interim Consolidated Financial Statements (Unaudited) (Continued)

evaluation, which is preliminary and subject to completion of working capital and other adjustments, the consideration paid for all acquisitions during 2022 was allocated as follows (in thousands):


Cash	$	21
Accounts receivable		521
Inventory		284
Equipment and other fixed assets		85
Goodwill		2,013
Identifiable intangible assets		100
Accounts payable and accrued expenses		(249)
Net assets acquired	$	2,775

During the three months ended March 31, 2022, the Company paid net cash of $0.5 million relating to working capital and other adjustments associated with businesses that were acquired during 2021, which was recorded as an increase to goodwill during the period.

Three Months Ended March 31, 2021

On February 1, 2021, the Company acquired 100% of the equity interests of AeroCare Holdings, Inc. (AeroCare). AeroCare is a leading national technology-enabled respiratory and home medical equipment distribution platform in the United States and offers a comprehensive suite of direct-to-patient equipment and services including CPAP and BiPAP machines, oxygen concentrators, home ventilators, and other home medical equipment products. The total consideration paid at closing consisted of (i) a cash payment of $1.1 billion, (ii) the issuance of 13,992,615 shares of the Company’s Class A Common Stock, (iii) the issuance of 130,474.73 shares of the Company’s Series C Convertible Preferred Stock, and (iv) the issuance of 3,959,892 fully vested options to purchase shares of the Company’s Class A Common Stock in the future, which had a weighted-average exercise price of $6.24 per share and a weighted-average remaining exercise period of approximately 7 years from the date of closing. Refer to Note 10, Stockholders’ Equity, for additional discussion of the Series C Convertible Preferred Stock issued in connection with the acquisition of AeroCare.

In addition, during the three months ended March 31, 2021, the Company acquired 100% of the equity interests of three providers of home medical equipment and acquired certain assets of the home medical equipment businesses of two providers of HME.

The following table summarizes the consideration paid at closing for all acquisitions during the three months ended March 31, 2021 (in thousands):

AdaptHealth Corp. [AHCO] Filings
10-Q	[2022-05-10]
10-K	[2022-03-01]
10-Q	[2021-11-09]
10-Q	[2021-08-06]
10-Q	[2021-05-10]
10-K	[2021-03-16]
10-Q	[2020-11-06]
10-Q	[2020-08-07]
S-1	[2020-07-21]
S-1	[2020-06-29]
10-Q	[2020-05-08]
10-K	[2020-03-06]
10-Q	[2019-11-05]
10-Q	[2019-07-31]
10-Q	[2019-05-14]
10-K	[2019-03-29]
10-Q	[2018-11-08]
10-Q	[2018-08-08]
10-Q	[2018-05-15]
S-1	[2017-12-29]