ADAPTHEALTH CORP. The following discussion should be read in conjunction withAdaptHealth Corp.'s ("AdaptHealth" or the "Company") consolidated financial statements and the accompanying notes included in this report. All amounts presented are in accordance withU.S. generally accepted accounting principles ("U.S. GAAP"), except as noted. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management's expectations. Factors that could cause such differences include, but are not limited to, those discussed in Item 1A, "Risk Factors", of this report on Form 10-K.AdaptHealth Corp. OverviewAdaptHealth is a national leader in providing patient-centric and technology-enabled chronic disease management solutions including home healthcare equipment, medical supplies to the home and related services inthe United States . The Company 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 and insulin pumps), (iii) home medical equipment ("HME") to patients discharged from acute care and other facilities, (iv) oxygen and related chronic therapy services in the home, and (v) other HME medical devices and supplies on behalf of chronically ill patients with wound care, urological, incontinence, ostomy and nutritional supply needs. The Company services beneficiaries of Medicare, Medicaid and commercial insurance payors. As ofDecember 31, 2020 ,AdaptHealth serviced over approximately 1.9 million patients annually in all 50 states through its network of 283 locations in 42 states. Following its acquisition ofAeroCare inFebruary 2021 ,AdaptHealth services over approximately 3.0 million patients annually in all 50 states through its network of over 500 locations across 46 states. The Company's principal executive offices are located at220 West Germantown Pike , Suite 250,Plymouth Meeting, Pennsylvania 19462.
Impact of the COVID-19 Pandemic
During 2020, the COVID-19 pandemic impactedAdaptHealth's business, as well as its patients, communities, and employees.AdaptHealth's priorities during the COVID-19 pandemic remain protecting the health and safety of its employees (including patient-facing employees providing respiratory and other services), maximizing the availability of its services and products to support patient health needs, and the operational and financial stability of its business. In response to the COVID-19 pandemic and the National Emergency Declaration, datedMarch 13, 2020 ,AdaptHealth activated certain business interruption protocols, including acquisition and distribution of personal protective equipment (PPE) to its patient-facing employees, accelerated capital expenditures of certain products and relocation of significant portions of its workforce to "work-from-home" status. Federal, state, and local authorities have taken several actions designed to assist healthcare providers in providing care to COVID-19 and other patients and to mitigate the adverse economic impact of the COVID-19 pandemic. Legislative actions taken by the federal government include the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which was signed into law onMarch 27, 2020 . Through the CARES Act, the federal government has authorized payments to be distributed to healthcare providers through thePublic Health and Social Services Emergency Fund ("Provider Relief Fund " or "PRF"). Additionally, the CARES Act revised the Medicare accelerated and advance payment program in an attempt to disburse payments to healthcare providers more quickly to mitigate the financial impact on healthcare providers.AdaptHealth increased its cash liquidity by, among other things, seeking recoupable advance payments of approximately$46 million made available by CMS under the CARES Act legislation, which was received inApril 2020 . The recoupment of such amount by CMS will begin inApril 2021 and will be applied to services provided and revenue recognized during the period in which the recoupment occurs. The total of the recoupable advance payments has been deferred as ofDecember 31, 2020 . In addition, inApril 2020 ,AdaptHealth received distributions of the CARES Act PRF of approximately$17 million which are targeted to offset lost revenue and expenditures incurred in connection with the COVID-19 pandemic. The PRF payments are subject to certain restrictions and are subject to recoupment if not used for designated purposes. As a condition to receiving distributions, providers must agree to certain terms and conditions, including, among other things, that the funds are being used for lost revenues and unreimbursed COVID-19 related expenses as defined by theU.S. Department of Health and Human Services ("HHS"). All recipients of PRF payments are required to comply with 47 Table of Contents the reporting requirements described in the terms and conditions and as determined by HHS.AdaptHealth recognizes grant payments as income when there is reasonable assurance that it has complied with the conditions associated with the grant. During the year endedDecember 31, 2020 ,AdaptHealth recognized grant income of$14.3 million related to the PRF payments received.AdaptHealth has deferred$2.7 million of the PRF payments as ofDecember 31, 2020 . As previously noted, HHS guidance related to PRF grant funds is still evolving and subject to change. During September andOctober 2020 , HHS issued updated reporting requirements significantly changing the previous guidance regarding utilization of the funds granted from the PRF under the CARES Act, and inJanuary 2021 HHS issued further guidance updating the reporting requirements relating to PRF grant funds. As a result of the updated guidance from HHS,AdaptHealth could be required to reverse the recognition of the grant income recorded and return a portion of the funds recognized, which could be material toAdaptHealth .AdaptHealth is continuing to monitor the reporting requirements as they evolve. HHS has indicated that the CARES Act PRF funds are subject to ongoing reporting and changes to the terms and conditions. To the extent that reporting requirements and terms and conditions are modified in the future, it may affectAdaptHealth's ability to comply and may require the return of funds. Furthermore, HHS has indicated that it will be closely monitoring and, along with theOffice of Inspector General (United States ) (OIG), auditing providers to ensure that recipients comply with the terms and conditions of relief programs and to prevent fraud and abuse. All providers will be subject to civil and criminal penalties for any deliberate omissions, misrepresentations or falsifications of any information given to HHS. While the impact of the COVID-19 pandemic, the National Emergency Declaration and the various state and local government imposed stay-at-home restrictions did not have a material impact onAdaptHealth's consolidated operating results for the three months endedMarch 31, 2020 ,AdaptHealth began to experience declines in net revenues in certain services associated with elective medical procedures (such as commencement of new CPAP services and medical equipment and orthopedic supply related to facility discharges) in the three months endedJune 30, 2020 , and such declines may continue during the duration of the COVID-19 pandemic. In response to these declines, as well as certain over staffing related to recent acquisitions,AdaptHealth conducted a workforce assessment and implemented a reduction in force inApril 2020 resulting in the elimination of approximately 6% of its workforce. In connection with the workforce reductions,AdaptHealth incurred a one-time charge for severance and related expenses of approximately$1.6 million . Offsetting these declines in net revenue,AdaptHealth is experiencing an increase in net revenue related to increased demand for certain respiratory products (such as oxygen), increased sales in its resupply businesses (primarily as a result of the increased ability to contact patients at home as a result of state and local government imposed stay-at-home orders) and the one-time sale of certain respiratory equipment (primarily ventilators, bi-level PAP devices and oxygen concentrators) to hospitals and local health agencies. Additionally, suspension of Medicare sequestration throughMarch 31, 2021 (resulting in a 2% increase in Medicare payments to all providers), and regulatory guidance from CMS expanding telemedicine and reducing documentation requirements during the emergency period, have resulted in increased net revenues for certain products and services. The full extent of the impact of the COVID-19 pandemic onAdaptHealth's business, results of operations, and financial condition is highly uncertain and will depend on future developments and numerous evolving factors that it may not be able to accurately predict, and could be material toAdaptHealth's consolidated financial statements in future reporting periods.
Key Components of Operating Results
Net Revenue. Net revenue is recorded for services thatAdaptHealth provides to patients for home healthcare equipment, medical supplies to the home and related services.AdaptHealth's primary service lines are (i) sleep therapy equipment, supplies and related services (including CPAP and bi PAP services) to individuals suffering from OSA, (ii) medical devices and supplies to patients for the treatment of diabetes (including continuous glucose monitors 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 medical devices and supplies on behalf of chronically ill patients with wound care, urological, incontinence, ostomy and nutritional supply needs. Revenues are recorded either (x) at a point in time for the sale of supplies and disposables, or (y) over the service period for equipment rental (including, but not limited to, CPAP machines, hospital beds, wheelchairs and other equipment), at amounts estimated to 48
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be received from patients or under reimbursement arrangements with Medicare, Medicaid and other third-party payors, including private insurers.
Cost of Net Revenue. Cost of net revenue primarily includes the cost of non-capitalized medical equipment and supplies, distribution expenses, labor costs, facilities rental costs, third-party revenue cycle management costs and depreciation for capitalized patient equipment. Distribution expenses represent the cost incurred to coordinate and deliver products and services to the patients. Included in distribution expenses are leasing, maintenance, licensing and fuel costs for the vehicle fleet; salaries, benefits and other costs related to drivers and dispatch personnel; and amounts paid to couriers. General and Administrative Expenses. General and administrative expenses consist of corporate support costs including information technology, human resources, finance, contracting, legal, compliance leadership, equity-based compensation, transaction expenses and other administrative costs.
Depreciation and Amortization, Excluding Patient Equipment Depreciation. Depreciation expense includes depreciation charges for capital assets other than patient equipment (which is included as part of the cost of net revenue). Amortization expense includes amortization of identifiable intangible assets.
Factors Affecting AdaptHealth's Operating Results
Acquisitions
AdaptHealth accounts for its acquisitions in accordance withFinancial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, Business Combinations, and the operations of the acquired entities are included in the historical results ofAdaptHealth for the periods following the closing of the acquisition. The most significant of these acquisitions impacting the comparability ofAdaptHealth's operating results in 2020 compared to 2019 wereSleepMed Therapies, Inc. ("SleepMed") acquired inJuly 2019 ,Choice Medical Healthcare, Inc. ("Choice") acquired inOctober 2019 , the Patient Care Solutions business ("PCS") acquired from McKesson Corporation inJanuary 2020 ,Healthline Medical Equipment, LLC ("Healthline") acquired inFebruary 2020 ,Advanced Home Care, Inc. ("Advanced") acquired inMarch 2020 ,Solara Medical Supplies, LLC ("Solara") acquired inJuly 2020 ,ActivStyle, Inc. ("ActivStyle") acquired inJuly 2020 ,Family Medical Supply, Inc. ("Family") acquired inAugust 2020 andPinnacle Medical Solutions, Inc. ("Pinnacle") acquired inOctober 2020 . Refer to Note 3, Acquisitions, included in our consolidated financial statements for the year endedDecember 31, 2020 included in this report for additional information regardingAdaptHealth's acquisitions.
Debt and Recapitalization
InJuly 2020 ,AdaptHealth refinanced its debt borrowings and entered into a new credit agreement with a new bank group (the "2020 Credit Agreement"). The 2020 Credit Agreement consisted of a$250 million term loan (the "2020 Term Loan") and$200 million in commitments for revolving credit loans with a$15 million letter of credit sublimit, both with maturities inJuly 2025 . The amount borrowed under the 2020 Term Loan bore interest quarterly at variable rates based upon the sum of (a) the Adjusted LIBOR Rate (subject to a floor) equal to the LIBOR (as defined in the 2020 Credit Agreement) for the applicable interest period, plus (b) an applicable margin ranging from 2.50% to 3.75% per annum based on the Consolidated Total Leverage Ratio (as defined in the 2020 Credit Agreement). InJanuary 2021 , the Company refinanced its borrowings under the 2020 Credit Agreement in connection with the acquisition ofAeroCare Holdings, Inc. Refer to the section Liquidity and Capital Resources below for additional discussion regarding such refinancing. InJuly 2020 ,AdaptHealth LLC ("AdaptHealth LLC "), a wholly owned subsidiary ofAdaptHealth , issued$350.0 million aggregate principal amount of 6.125% senior unsecured notes due 2028 (the "6.125% Senior Notes"). 49
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The 6.125% Senior Notes will mature onAugust 1, 2028 . Interest on the 6.125% Senior Notes is payable onFebruary 1st andAugust 1st of each year, beginning onFebruary 1, 2021 . InMarch 2019 ,AdaptHealth restructured its then existing debt borrowings which consisted of$425 million in credit facilities, including a$300 million initial term loan,$50 million delayed draw term loan, and$75 million revolving credit facility. Outstanding amounts borrowed under such credit facility were repaid in full in connection with theJuly 2020 refinancing transaction discussed above. InMarch 2019 ,AdaptHealth entered into a promissory note agreement with an investor with a principal amount of$100 million (the "Promissory Note"). The transactions consummated with respect to theMarch 2019 debt restructuring discussed above and the Promissory Note are hereinafter referred to as the "2019 Recapitalization." InNovember 2019 , the Company repaid$50 million under the initial term loan. In connection with the closing of the Business Combination, the Promissory Note was replaced with a new amended and restated promissory note with a principal amount of$100.0 million , and the investor converted certain of its members' equity interests to a$43.5 million promissory note. The new$100.0 million promissory note, together with the$43.5 million promissory note, are collectively referred to herein as the "New Promissory Note". The outstanding principal balance under the New Promissory Note is due onNovember 8, 2029 , and bears interest at the following rates (a) for the period starting on the closing date and ending on the seventh anniversary, a rate of 12% per annum, and (b) for the period starting on the day after the seventh anniversary of the closing date and ending on the maturity date, a rate equal to the greater of (i) 15% per annum or (ii) the twelve-month LIBOR plus 12% per annum.
Seasonality
AdaptHealth's business experiences some seasonality. Its patients are generally responsible for a greater percentage of the cost of their treatment or therapy during the early months of the year due to co-insurance, co-payments and deductibles, and therefore may defer treatment and services of certain therapies until meeting their annual deductibles. In addition, changes to employer insurance coverage often go into effect at the beginning of each calendar year which may impact eligibility requirements and delay or defer treatment. These factors may lead to lower net revenue and cash flow in the early part of the year versus the latter half of the year. Additionally, the increased incidence of respiratory infections during the winter season may result in initiation of additional respiratory services such as oxygen therapy for certain patient populations.AdaptHealth's quarterly operating results may fluctuate significantly in the future depending on these and other factors.
Key Business Metrics
AdaptHealth focuses on net revenue, EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex as it reviews its performance. Total net revenue is comprised of net sales revenue and net revenue from fixed monthly equipment reimbursements less implicit price concessions. Net sales revenue consists of revenue recognized at a point in time for the sale of supplies and disposables. Net revenue from fixed monthly equipment reimbursements consists of revenue recognized over the service period for equipment (including, but not limited to, CPAP machines, hospital beds, wheelchairs and other equipment). 50 Table of Contents Three Months Ended December 31, March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020 Net Revenue Revenue Revenue Revenue Revenue Revenue (dollars in thousands) Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage
Total Percentage
Net sales revenue: Sleep$ 68,894 36.0 %$ 84,421
36.4 %
5,307 2.8 % 6,372 2.7 % 52,887 18.6 % 94,924 27.2 % 159,490 15.1 %
Supplies to the home 28,032 14.6 % 27,868 12.0 % 44,579 15.7 % 45,145 13.0 % 145,624 13.8 %
Respiratory 2,768 1.4 % 18,114 7.8 % 5,152 1.8 % 2,571 0.7 % 28,605 2.7 %
HME 11,579 6.0 % 12,727 5.5 % 14,998 5.3 % 18,725 5.4 % 58,029 5.5 %
Other 12,393 6.5 % 11,463 4.9 % 14,869 5.2 % 15,964 4.6 % 54,689 5.2 %
Total net sales
revenue $ 128,973 67.3 % $ 160,965 69.3 % $ 207,140 72.8 % $ 262,219 75.3 % $ 759,297 71.9 %
Net revenue from
fixed monthly
equipment
reimbursements:Sleep$ 22,669 11.8 %$ 22,644 9.8 %$ 24,971 8.8 %$ 28,077 8.1 %$ 98,361 9.3 % Diabetes - - % - - % 946 0.3 % 1,521 0.4 % 2,467 0.2 % Respiratory 25,007 13.1 % 30,856 13.3 % 32,269 11.3 % 35,728 10.3 % 123,860 11.7 % HME 12,177 6.4 % 13,262 5.7 % 14,256 5.0 % 16,152 4.6 % 55,847 5.3 % Other 2,613 1.4 % 4,389 1.9 % 4,823 1.8 % 4,732 1.3 % 16,557 1.6 % Total net revenue from fixed monthly equipment reimbursements$ 62,466 32.7 %$ 71,151 30.7 %$ 77,265 27.2 %$ 86,210 24.7 %$ 297,092 28.1 % Total net revenue: Sleep$ 91,563 47.8 %$ 107,065
46.2 %
5,307 2.8 % 6,372 2.7 % 53,833 18.9 % 96,445 27.6 % 161,957 15.3 %
Supplies to the home 28,032 14.6 % 27,868 12.0 % 44,579 15.7 % 45,145 13.0 % 145,624 13.8 %
Respiratory 27,775 14.5 % 48,970 21.1 % 37,421 13.1 % 38,299 11.0 % 152,465 14.4 %
HME 23,756 12.4 % 25,989 11.2 % 29,254 10.3 % 34,877 10.0 % 113,876 10.8 %
Other 15,006 7.9 % 15,852 6.8 % 19,692 7.0 % 20,696 5.9 % 71,246 6.8 %
Total net revenue $ 191,439 100.0 % $ 232,116 100.0 % $ 284,405 100.0 % $ 348,429 100.0 % $ 1,056,389 100.0 %
Three Months Ended December 31,
March 31, 2019 June 30, 2019 September 30, 2019 December 31, 2019
Net Revenue Revenue Revenue Revenue Revenue Revenue
(dollars in thousands) Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage Total Percentage
(Unaudited)
Net sales revenue:
Sleep $ 47,127 39.4 % $ 50,433 40.6 % $ 59,117 43.3 % $ 67,865 45.4 % $ 224,542 42.4 %
Supplies to the home 2,029 1.7 % 1,915 1.6 % 1,966 1.4 % 1,850 1.2 % 7,760 1.5 %
Respiratory 1,279 1.1 % 1,445 1.2 % 1,397 1.0 % 1,659 1.1 % 5,780 1.1 %
HME 10,489 8.8 % 10,236 8.2 % 10,873 8.0 % 10,889 7.3 % 42,487 8.0 %
Other 8,032 6.7 % 8,967 7.2 % 9,711 7.1 % 9,172 6.2 % 35,882 6.7 %
Total net sales
revenue $ 68,956 57.7 % $ 72,996 58.8 % $ 83,064 60.8 % $ 91,435 61.2 % $ 316,451 59.7 %
Net revenue from fixed
monthly equipment
reimbursements:
Sleep $ 18,057 15.1 % $ 18,944 15.3 % $ 20,761 15.2 % $ 23,084 15.4 % $ 80,846 15.3 %
Respiratory 20,429 17.1 % 20,009 16.1 % 19,646 14.4 % 21,334 14.3 % 81,418 15.4 %
HME 10,243 8.6 % 10,202 8.2 % 11,088 8.1 % 11,436 7.6 % 42,969 8.1 %
Other 1,813 1.5 % 2,003 1.6 % 1,892 1.5 % 2,252 1.5 % 7,960 1.5 %
Total net revenue from
fixed monthly
equipment
reimbursements $ 50,542 42.3 % $ 51,158 41.2 % $ 53,387 39.2 % $ 58,106 38.8 % $ 213,193 40.3 %
Total net revenue:
Sleep $ 65,184 54.5 % $ 69,377 55.9 % $ 79,878 58.5 % $ 90,949 60.8 % $ 305,388 57.7 %
Supplies to the home 2,029 1.7 % 1,915 1.6 % 1,966 1.4 % 1,850 1.2 % 7,760 1.5 %
Respiratory 21,708 18.2 % 21,454 17.3 % 21,043 15.4 % 22,993 15.4 % 87,198 16.5 %
HME 20,732 17.4 % 20,438 16.4 % 21,961 16.1 % 22,325 14.9 % 85,456 16.1 %
Other 9,845 8.2 % 10,970 8.8 % 11,603 8.6 % 11,424 7.7 % 43,842 8.2 %
Total net revenue $ 119,498 100.0 % $ 124,154 100.0 % $ 136,451 100.0 % $ 149,541 100.0 % $ 529,644 100.0 %
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Results of Operations
Comparison of Year Ended
The following table summarizes
Year Ended December 31,
2020 2019
Revenue Revenue Increase/(Decrease)
(in thousands, except
percentages) Dollars Percentage Dollars Percentage Dollars Percentage
(unaudited)
Net revenue $ 1,056,389 100.0 % $ 529,644 100.0 % $ 526,745 99.5 %
Grant income 14,277 1.4 % - - % 14,277 NM %
Costs and expenses:
Cost of net revenue 898,601 85.1 % 440,705 83.2 % 457,896 103.9 %
General and administrative
expenses 89,346 8.5 % 56,493 10.7 % 32,853 58.2 %
Depreciation and
amortization, excluding
patient equipment
depreciation 11,373 1.1 % 3,068 0.6 % 8,305 270.7 %
Total costs and expenses 999,320 94.7 % 500,266 94.5 % 499,054 99.8 %
Operating income 71,346 5.3 % 29,378 5.5 % 41,968 142.9 %
Interest expense, net 41,430 3.9 % 39,304 7.4 % 2,126 5.4 %
Loss on extinguishment of
debt 5,316 0.5 % 2,121 0.4 % 3,195 NM %
Change in fair value of
contingent consideration
common shares liability 98,717 9.3 % 2,483 0.5 % 96,234 NM %
Other income, net (3,444) (0.3) % (318) (0.1) % (3,126) NM %
Loss before income taxes (70,673) (8.1) % (14,212) (2.7) % (56,461) 397.3 %
Income tax (benefit) expense (11,955) (1.1) % 739 0.1 % (12,694) NM
Net loss (58,718) (7.0) % (14,951) (2.8) % (43,767) 292.7 %
Income attributable to
noncontrolling interests 5,763 0.5 % 2,111 0.4 % 3,652 173.0 %
Net loss attributable to
AdaptHealth Corp. $ (64,481) (7.5) % $ (17,062) (3.2) % $ (47,419) 277.9 %
Net Revenue. Net revenue for the year ended December 31, 2020 was $1.06 billion
compared to $529.6 million for the year ended December 31, 2019 , an increase of
$526.7 million or 99.5%. The increase in net revenue was driven primarily by (i)
acquisitions completed during 2020, which contributed net revenue of $450.2
million during the year, (ii) organic growth resulting from stronger CPAP
resupply sales and demographic growth in core markets, and (iii) net revenue of
$36.5 million from referral partners and healthcare facilities in support of
their urgent needs for ventilation and oxygen equipment for COVID-19 patients.
These increases were partially offset by reduced demand for certain products
that are related to elective medical services which is attributable to the
coronavirus pandemic, such as CPAP new starts, orthotics, and certain other HME
products, and this trend is expected to remain while the coronavirus crisis
continues. However, the Company's CPAP resupply and other supplies business
remains healthy, as most patients for that business are in their homes and can
be easily contacted to refresh their supplies. Additionally, the coronavirus
pandemic has led to an increased demand for respiratory equipment including
ventilators and oxygen concentrators.
For the year ended December 31, 2020 , net sales revenue (recognized at a point
in time) comprised 72% of total net revenue, compared to 60% of total net
revenue for the year ended December 31, 2019 . The increase in the proportion of
net sales revenue compared to total net revenue was driven primarily by the PCS,
Solara, ActivStyle and Pinnacle acquisitions, which are direct to consumer
supplies businesses, as well as the SleepMed and Choice acquisitions, which are
primarily CPAP resupply businesses. For the year ended December 31, 2020 , net
revenue from fixed monthly equipment reimbursements comprised 28% of total net
revenue, compared to 40% of total net revenue for the year ended December 31,
2019 .
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Grant income. Grant income for the year ended
Cost of Net Revenue.
The following table summarizes cost of net revenue for the years endedDecember 31, 2020 and 2019: Year Ended December 31, 2020 2019 Revenue Revenue Increase/(Decrease)
(in thousands, except
percentages) Dollars Percentage Dollars Percentage Dollars Percentage
(unaudited)
Costs of net revenue:
Cost of products and
supplies $ 441,931 41.8 % $ 156,430 29.5 % $ 285,501 182.5 %
Salaries, labor and
benefits 257,898 24.4 % 153,173 28.9 % 104,725 68.4 %
Patient equipment
depreciation 71,072 6.7 % 59,498 11.2 % 11,574 19.5 %
Rent and occupancy 22,344 2.1 % 13,407 2.5 % 8,937 66.7 %
Other operating expenses 91,659 8.7 % 57,150 10.8 % 34,509 60.4 %
Equity-based compensation 7,845 0.8 % - - % 7,845 NM %
Severance 4,457 0.4 % 858 0.2 % 3,599 419.5 %
Transaction costs 1,147 0.1 % - - % 1,147 NM %
Other non-recurring
expenses 248 - % 189 - % 59 NM %
Total cost of net revenue $ 898,601 85.0 % $ 440,705 83.1 % $ 457,896 103.9 %
Cost of net revenue for the year endedDecember 31, 2020 was$898.6 million compared to$440.7 million for the year endedDecember 31, 2019 , an increase of$457.9 million or 103.9%, which is primarily related to acquisition growth. Costs of products and supplies increased by$285.5 million primarily as a result of acquisition growth, increased CPAP resupply sales, and expenses associated with the coronavirus pandemic, including increased personal protective equipment purchases. Salaries, labor and benefits increased by$104.7 million primarily related to acquisition growth and increased headcount, primarily from the PCS, Solara,ActivStyle and Pinnacle acquisitions. The increase in rent and occupancy and other operating expenses is related to acquisition growth, primarily from the aforementioned acquisitions. Cost of net revenue was 85.0% of net revenue for the year endedDecember 31, 2020 compared to 83.1% for the year endedDecember 31, 2019 . The cost of products and supplies was 41.8% of net revenue in 2020 compared to 29.5% in 2019, while patient equipment depreciation was 6.7% of net revenue in 2020 compared to 11.2% in 2019. These changes are the result of a change in product mix as sales revenue was higher in 2020 compared to 2019, primarily from the PCS, Solara,ActivStyle and Pinnacle acquisitions. General and Administrative Expenses. General and administrative expenses for the year endedDecember 31, 2020 were$89.3 million compared to$56.5 million for the year endedDecember 31, 2019 , an increase of$32.8 million or 58.2%. This increase is primarily due to (1) higher labor costs associated with increased headcount, (2) higher professional fees including legal, accounting and consulting, (3) increased transaction costs related to acquisition growth, (4) higher information technology related expenses, and (5) incremental costs associated with operating as a public company. General and administrative expenses as a percentage of net revenue was 8.5% in 2020, compared to 10.7% in 2019. General and administrative expenses in 2020 included$10.8 million in equity-based compensation expense,$25.4 million in transaction costs,$1.1 million in severance expense and$0.6 million in other non-recurring expenses. General and administrative expenses in 2019 included$11.1 million in equity-based compensation expense,$15.6 million in transaction costs,$1.4 million in severance expense and$0.5 million in other non-recurring expenses. Excluding the impact of these charges, general and administrative expenses as a percentage of net revenue was 4.9% and 5.3% in 2020 and 2019, respectively. Depreciation and amortization, excluding patient equipment depreciation. Depreciation and amortization, excluding patient equipment depreciation, for the year endedDecember 31, 2020 was$11.4 million compared to$3.1 million for the year endedDecember 31, 2019 , an increase of$8.3 million . The increase was
primarily related to
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amortization expense of $6.0 million related to identifiable intangible assets
recognized during 2020. There was no amortization expense of intangible assets
recognized during 2019.
Interest Expense. Interest expense for the year ended December 31, 2020 was
$41.4 million compared to $39.3 million for the year ended December 31, 2019 .
Interest expense related to long-term debt during 2020 increased by $13.5
million compared to 2019 as a result of higher long-term debt borrowings
outstanding during that year. Interest expense during 2019 included non-cash
interest expense of $11.4 million representing the change in fair value of the
Company's interest rate swap agreements; such amount would only be paid out if
the interest rate swap agreements were terminated. On August 22, 2019 ,
AdaptHealth designated its swaps as effective cash flow hedges. Accordingly,
subsequent to August 22, 2019 , changes in the fair value of its interest rate
swaps are recorded as a component of other comprehensive income (loss) in equity
rather than interest expense. As such, there was no non-cash interest expense
related to changes in the fair value of the Company's interest rate swap
agreements during 2020.
Loss on Extinguishment of Debt. Loss on extinguishment of debt for the year
ended December 31, 2020 was $5.3 million which was a result of the write-off of
deferred financing costs related to AdaptHealth refinancing its credit facility
in July 2020 . Loss on extinguishment of debt for the year ended December 31,
2019 was $2.1 million which was a result of the write-off of deferred financing
costs related to the 2019 Recapitalization.
Change in Fair Value of Contingent Consideration Common Shares Liability. In
connection with the Business Combination, certain former owners of AdaptHealth
Holdings are entitled to contingent consideration common shares. These shares
are liability-classified, and the change in fair value of the contingent
consideration common shares liability represents a non-cash charge for the
change in the estimated fair value of such liability during the period.
Other Income, net. Other income, net for the year ended December 31, 2020
consisted of $4.2 million of net reductions in the fair value of contingent
consideration liabilities related to acquisitions, a gain of $0.6 million
related to the sale of an investment, offset by a $1.5 million expense related
to the PCS Transition Services Agreement and $0.1 million of equity income
related to equity method investments. Other income, net for the year ended
December 31, 2019 consisted of $0.2 million of net reductions in the fair value
of contingent consideration liabilities related to acquisitions and $0.1 million
of equity income related to an equity method investment.
Income Tax (Benefit) Expense. Income tax benefit for the year ended December 31,
2020 was $12.0 million compared to income tax expense of $0.7 million for the
year ended December 31, 2019 . The change in income tax benefit/expense was
primarily related to decreased pre-tax income associated with the tax paying
entities.
EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex
AdaptHealth uses EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex, which are financial measures that are not prepared in accordance with generally accepted accounting principles inthe United States , orU.S. GAAP, to analyze its financial results and believes that they are useful to investors, as a supplement toU.S. GAAP measures. In addition,AdaptHealth's ability to incur additional indebtedness and make investments under its existing credit agreement is governed, in part, by its ability to satisfy tests based on a variation of Adjusted EBITDA less Patient Equipment Capex.
AdaptHealth defines Adjusted EBITDA as EBITDA (as defined above), plus loss on extinguishment of debt, equitybased compensation expense, transaction costs, severance, change in fair value of contingent consideration common shares liability, and non-recurring items of expense (income).AdaptHealth defines Adjusted EBITDA less Patient Equipment Capex as Adjusted EBITDA (as defined above) less patient equipment acquired during the period without regard to whether the equipment was purchased or financed through lease transactions. 54 Table of Contents
AdaptHealth believes Adjusted EBITDA less Patient Equipment Capex is useful to investors in evaluatingAdaptHealth's financial performance.AdaptHealth's business requires significant investment in equipment purchases to maintain its patient equipment inventory. Some equipment title transfers to patients' ownership after a prescribed number of fixed monthly payments. Equipment that does not transfer wears out or oftentimes is not recovered after a patient's use of the equipment terminates.AdaptHealth uses this metric as the profitability measure in its incentive compensation plans that have a profitability component and to evaluate acquisition opportunities, where it is most often used for purposes of contingent consideration arrangements. In addition,AdaptHealth's debt agreements contain covenants that use a variation of Adjusted EBITDA less Patient Equipment Capex for purposes of determining debt covenant compliance. For purposes of this metric, patient equipment capital expenditure is measured as the value of the patient equipment received during the accounting period without regard to whether the equipment is purchased or financed through lease transactions. EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex should not be considered as measures of financial performance underU.S. GAAP, and the items excluded from EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex are significant components in understanding and assessing financial performance. Accordingly, these key business metrics have limitations as an analytical tool. They should not be considered as an alternative to net income or any other performance measures derived in accordance withU.S. GAAP or as an alternative to cash flows from operating activities as a measure ofAdaptHealth's liquidity. The following unaudited table presents the reconciliation of net income (loss) attributable toAdaptHealth , to EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex for the years endedDecember 31, 2020 and 2019: Year Ended December 31, (in thousands) 2020 2019 (Unaudited)
Net loss attributable to AdaptHealth Corp.$ (64,481) $ (17,062) Income attributable to noncontrolling interests 5,763
2,111
Interest expense excluding change in fair value of interest rate swaps 41,430
27,878
Interest expense - change in fair value of interest rate swaps -
11,426
Income tax (benefit) expense (11,955) 739 Depreciation and amortization, including patient equipment depreciation 82,445
62,567
EBITDA 53,202
87,659
Loss on extinguishment of debt (a) 5,316
2,121
Equity-based compensation expense (b) 18,670
11,070
Transaction costs (c) 26,573 15,984
Severance (d) 5,596 2,301Change in fair value of contingent consideration common shares liability (e)
98,717 2,483
Other non-recurring (income) expense (f) (2,455)
1,403
Adjusted EBITDA 205,619
123,021
Less: Patient equipment capex (g) (63,136)
(47,421)
Adjusted EBITDA less Patient Equipment Capex$ 142,483
$ 75,600
(a) Represents write offs of deferred financing costs related to refinancing of
debt.
Represents equity-based compensation expense for awards granted to employees
and non-employee directors. The higher expense in 2020 is due to a full year
(b) of expense for awards granted in late 2019, and overall increased
equity-compensation grant activity in 2020. The 2019 period includes expense
resulting from accelerated vesting and modification of certain awards in that
period.
Represents transaction costs related to acquisitions. The 2019 period also
(c) includes costs associated with the 2019 Recapitalization and the Business
Combination.
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(d) Represents severance costs related to acquisition integration and internal
Represents a non-cash charge for the change in the estimated fair value of
contingent consideration common shares issuable as part of the Business
(e) Combination. Refer to Note 11, Stockholders' Equity - Contingent
Consideration Common Shares, included in the accompanying notes to the
consolidated financial statements for the year ended
additional discussion of such non-cash charge.
The 2020 period includes
contingent consideration liabilities related to acquisitions, a
(f) gain in connection with the sale of a cost method investment, offset by a
and
Represents the value of patient equipment obtained during the respective
(g) period without regard to whether the equipment is purchased or financed
through lease transactions.
Liquidity and Capital Resources
AdaptHealth's principal sources of liquidity are its operating cash flows, borrowings under its credit agreements and other debt arrangements, and proceeds from equity issuances.AdaptHealth has used these funds to meet its capital requirements, which primarily consist of salaries, labor, benefits and other employee-related costs, product and supply costs, third-party customer service, billing and collections and logistics costs, capital expenditures including patient equipment, acquisitions and debt service.AdaptHealth's future capital expenditure requirements will depend on many factors, including its patient volume and revenue growth rates.AdaptHealth's capital expenditures are made in advance of patients beginning service. Certain operating costs are incurred at the beginning of the equipment service period and during initial patient set up.AdaptHealth believes that its expected operating cash flows, together with its existing cash, cash equivalents, and amounts available under its existing credit agreement, will continue to be sufficient to fund its operations and growth strategies for at least the next twelve months.AdaptHealth intends to seek additional equity or debt financing in connection with the growth of its business, primarily acquisitions. In addition, the COVID-19 pandemic has caused disruption in the capital markets, which could make financing more difficult and/or expensive. In the event that additional financing is required from outside sources,AdaptHealth may not be able to raise it on acceptable terms or at all. If additional capital is unavailable when desired,AdaptHealth's business, results of operations, and financial condition would be materially and adversely affected. As ofDecember 31, 2020 ,AdaptHealth had approximately$100 million of cash and cash equivalents. To supplement its cash liquidity, inApril 2020 ,AdaptHealth received recoupable advance payments of approximately$46 million which were made available by CMS under the CARES Act. The recoupment of such amount by CMS will begin inApril 2021 and will be applied to services provided and revenue recognized during the period in which the recoupment occurs. The total of the recoupable advance payments has been deferred as ofDecember 31, 2020 . In addition, inApril 2020 ,AdaptHealth received distributions of the CARES Act provider relief funds of approximately$17 million which are targeted to offset lost revenue and expenditures incurred in connection with the COVID-19 pandemic. The provider relief funds are subject to certain restrictions and are subject to recoupment if not used for designated purposes. As a condition to receiving distributions, providers must agree to certain terms and conditions, including, among other things, that the funds are being used for lost revenues and unreimbursed COVID-19 related expenses as defined by HHS. During the year endedDecember 31, 2020 ,AdaptHealth recognized grant income of$14.3 million related to the provider relief fund payments received.AdaptHealth has deferred$2.7 million of the provider relief fund payments as ofDecember 31, 2020 . As previously noted, HHS guidance related to provider relief funds is still evolving and subject to change. During September andOctober 2020 , HHS issued updated reporting requirements significantly changing the previous guidance regarding utilization of the funds granted from the provider relief funds under the CARES Act, and inJanuary 2021 HHS issued further guidance updating the reporting requirements relating to 56
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provider relief grant funds. As a result of the updated guidance from HHS,AdaptHealth could be required to reverse the recognition of the grant income recorded and return a portion of the funds recognized, which could be material toAdaptHealth .AdaptHealth is continuing to monitor the reporting requirements as they evolve. HHS has indicated that the CARES Act provider relief funds are subject to ongoing reporting and changes to the terms and conditions. To the extent that reporting requirements and terms and conditions are modified in the future, it may affectAdaptHealth's ability to comply and may require the return of funds. Furthermore, HHS has indicated that it will be closely monitoring and, along with theOffice of Inspector General (United States ) (OIG), auditing providers to ensure that recipients comply with the terms and conditions of relief programs and to prevent fraud and abuse. All providers will be subject to civil and criminal penalties for any deliberate omissions, misrepresentations or falsifications of any information given to HHS. In addition, in connection with certain acquisitions completed during the year endedDecember 31, 2020 ,AdaptHealth assumed liabilities of$3.7 million and$1.9 million relating to funds previously received by the acquired companies for CMS recoupable advance payments and the CARES Act provider relief funds, respectively, which are deferred atDecember 31, 2020 . InMarch 2020 ,AdaptHealth borrowed$20.0 million under its then existing credit facility as a precaution in light of the COVID-19 pandemic and such amount was repaid inApril 2020 . Also, as permitted under the CARES Act,AdaptHealth has elected to defer certain portions of employer-paid FICA taxes otherwise payable fromMarch 27, 2020 toJanuary 1, 2021 , which will be paid in two equal installments onDecember 31, 2021 andDecember 31, 2022 . During the year endedDecember 31, 2020 ,AdaptHealth deferred a total of$8.6 million pursuant to this provision, of which$4.3 million is included in other current liabilities and$4.3 million is included in other long-term liabilities in the consolidated balance sheets as ofDecember 31, 2020 . OnJanuary 8, 2021 ,AdaptHealth issued 8.45 million shares of Class A Common Stock at a price of$33.00 per share pursuant to an underwritten public offering (the "2021 Stock Offering") for gross proceeds of$278.9 million . In connection with this transaction, the Company received proceeds of$265.6 million which is net of the underwriting discount. A portion of the proceeds from the 2021 Stock Offering were used to partially finance the cash portion of the purchase price for the acquisition ofAeroCare Holdings, Inc. onFebruary 1, 2021 , and to pay related fees and expenses. AtDecember 31, 2020 ,AdaptHealth had$303.4 million outstanding under its then existing credit facility. InJuly 2020 ,AdaptHealth refinanced its debt borrowings and entered into a new credit agreement with a new bank group (the "2020 Credit Agreement"). OnJanuary 20, 2021 ,AdaptHealth refinanced its debt borrowings under the 2020 Credit Agreement and entered into a new credit agreement (the "2021 Credit Agreement"). The 2021 Credit Agreement consists of a$700 million term loan (the 2021 Term Loan) and$250 million in commitments for revolving credit loans with a$55 million letter of credit sublimit (the "2021 Revolver"), both with maturities inJanuary 2026 . The borrowing under the 2021 Term Loan requires quarterly principal repayments of$4.375 million beginningJune 30, 2021 throughMarch 31, 2023 , increasing to$8.75 million beginningJune 30, 2023 throughDecember 31, 2025 , and the unpaid principal balance is due at maturity inJanuary 2026 . Borrowings under the 2021 Term Loan were used in part to partially finance the cash portion of the purchase price for the acquisition ofAeroCare Holdings, Inc. onFebruary 1, 2021 , to repay existing amounts outstanding under the 2020 Credit Agreement, and to pay related fees and expenses. No amounts were borrowed under the 2021 Revolver as ofDecember 31, 2020 . Borrowings under the 2021 Revolver may be used for working capital and other general corporate purposes, including for capital expenditures and acquisitions permitted under the 2021 Credit Agreement. Amounts borrowed under the 2021 Credit Agreement bear interest quarterly at variable rates based upon the sum of (a) the Adjusted LIBOR Rate (subject to a floor) equal to the LIBOR (as defined) for the applicable interest period multiplied by the statutory reserve rate, plus (b) an applicable margin (as defined) ranging from 1.50% to 3.25% per annum based on the Consolidated Senior Secured Leverage Ratio (as defined). The 2021 Revolver carries a commitment fee during the term of the 2021 Credit Agreement ranging from 0.25% to 0.50% per annum of the actual daily undrawn portion of the 2021 Revolver based on the Consolidated Senior Secured Leverage Ratio. Under the 2021 Credit Agreement,AdaptHealth is subject to a number of restrictive covenants that, among other things, impose operating and financial restrictions onAdaptHealth . Financial covenants include a Consolidated Total Leverage Ratio and a Consolidated Interest Coverage Ratio, both as defined in the 2021 Credit Agreement. The 2021 Credit Agreement also contains certain customary events of default, including, among other things, failure to make payments when due thereunder, failure to observe or perform certain covenants, cross-defaults, bankruptcy and insolvency-related events, and non-compliance with healthcare laws. Any borrowing under the 2021 Credit Agreement may be repaid, in whole or in part, at any time and from time to time without premium or penalty, other than customary 57
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breakage costs, and any amounts repaid under the 2021 Revolver may be reborrowed. Mandatory prepayments are required under the 2021 Revolver when borrowings and letter of credit usage exceed the total commitments for revolving credit loans. Mandatory prepayments are also required in connection with the disposition of assets to the extent not reinvested, unpermitted debt transactions, and excess cash flow, as defined, if certain leverage tests are not met. InJuly 2020 ,AdaptHealth LLC issued$350.0 million aggregate principal amount of 6.125% senior unsecured notes due 2028 (the "6.125% Senior Notes"). The 6.125% Senior Notes will mature onAugust 1, 2028 . Interest on the 6.125% Senior Notes is payable onFebruary 1st andAugust 1st of each year, beginning onFebruary 1, 2021 . The 6.125% Senior Notes will be redeemable atAdaptHealth LLC's option, in whole or in part, at any time on or afterAugust 1, 2023 , and the redemption price for the 6.125% Senior Notes if redeemed during the 12 months beginning (i)August 1, 2023 is 103.063%, (ii)August 1, 2024 is 102.042%, (iii)August 1, 2025 is 101.021% and (iv)August 1, 2026 and thereafter is 100.000%, in each case together with accrued and unpaid interest.AdaptHealth LLC may also redeem some or all of the 6.125% Senior Notes beforeAugust 1, 2023 at a redemption price of 100% of the principal amount of the 6.125% Senior Notes, plus a "make-whole" premium, together with accrued and unpaid interest. In addition,AdaptHealth LLC may redeem up to 40% of the original aggregate principal amount of the 6.125% Senior Notes beforeAugust 1, 2023 with the proceeds from certain equity offerings at a redemption price equal to 106.125% of the principal amount of the 6.125% Senior Notes , together with accrued and unpaid interest. Furthermore,AdaptHealth LLC may be required to make an offer to purchase the 6.125% Senior Notes upon the sale of certain assets or upon specific kinds of changes of control. OnJanuary 4, 2021 ,AdaptHealth LLC issued$500.0 million aggregate principal amount of 4.625% senior unsecured notes due 2029 (the "4.625% Senior Notes"). The 4.625% Senior Notes will mature onAugust 1, 2029 . Interest on the 4.625% Senior Notes is payable onFebruary 1st andAugust 1st of each year, beginning onAugust 1, 2021 . The 4.625% Senior Notes will be redeemable atAdaptHealth's option, in whole or in part, at any time on or afterFebruary 1, 2024 , and the redemption price for the 4.625% Senior Notes if redeemed during the 12 months beginning (i)February 1, 2024 is 102.313%, (ii)February 1, 2025 is 101.156%, and (iii)February 1, 2026 and thereafter is 100.000%, in each case together with accrued and unpaid interest.AdaptHealth LLC may also redeem some or all of the 4.625% Senior Notes beforeFebruary 1, 2024 at a redemption price of 100% of the principal amount of the 4.625% Senior Notes, plus a "make-whole" premium, together with accrued and unpaid interest. In addition,AdaptHealth LLC may redeem up to 40% of the original aggregate principal amount of the 4.625% Senior Notes beforeFebruary 1, 2024 with the proceeds from certain equity offerings at a redemption price equal to 104.625% of the principal amount of the 4.625% Senior Notes, together with accrued and unpaid interest. Furthermore,AdaptHealth LLC may be required to make an offer to purchase the 4.625% Senior Notes upon the sale of certain assets or upon specific kinds of changes of control. The proceeds from the issuance of the 4.625% Senior Notes were used to partially finance the cash portion of the purchase price for the acquisition ofAeroCare Holdings, Inc. onFebruary 1, 2021 , and to pay related fees and expenses. InMarch 2019 ,AdaptHealth entered into a promissory note agreement with an investor with a principal amount of$100 million (the "Promissory Note"). InNovember 2019 , in connection with the transactions completed as part of the Business Combination, the Promissory Note was replaced with a new amended and restated promissory note with a principal amount of$100.0 million , and the investor converted certain of its members' equity interests to a$43.5 million promissory note. The new$100.0 million promissory note, together with the$43.5 million promissory note, are collectively referred to herein as the "New Promissory Note". The outstanding principal balance under the New Promissory Note is due onNovember 8, 2029 , and bears interest at the following rates (a) for the period starting on the closing date and ending on the seventh anniversary, a rate of 12% per annum, and (b) for the period starting on the day after the seventh anniversary of the closing date and ending on the maturity date, a rate equal to the greater of (i) 15% per annum or (ii) the twelve-month LIBOR plus 12% per annum. The interest under the New Promissory Note is required to be paid in cash. At any time followingSeptember 20, 2021 ,AdaptHealth may prepay, in whole (but not in part), the outstanding principal amount, together with all accrued and unpaid interest thereon. IfAdaptHealth elects to prepay the New Promissory Note prior toSeptember 21, 2023 , then the amount due and payable shall be subject to a make-whole premium equal to a percentage of the total amount of outstanding principal and accrued interest through the date of such prepayment. The make-whole premium percentage during the period fromSeptember 21, 2021 throughSeptember 20, 2022 is 10%, and fromSeptember 21, 2022 throughSeptember 20, 2023 is 5%. In addition, if 58
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AdaptHealth desires to consummate any Qualified Acquisition (as defined in the New Promissory Note) without the consent of the investor,AdaptHealth may proceed with such acquisition if the New Promissory Note is prepaid at the closing of such acquisition. If such acquisition occurs prior toSeptember 21, 2023 , then the amount due and payable shall be subject to a make-whole premium equal to a percentage of the total amount of outstanding principal and accrued interest through the date of such prepayment. The make-whole premium percentage during the period fromSeptember 21, 2020 throughSeptember 20, 2021 is 15%, fromSeptember 21, 2021 throughSeptember 20, 2022 is 10%, and fromSeptember 21, 2022 throughSeptember 20, 2023 is 5%. Further, if a Sale of the Company (as defined in the New Promissory Note) occurs prior to the maturity date, then, effective immediately prior to and contingent upon the consummation of such transaction, the outstanding principal, together with all accrued and unpaid interest, shall be due and payable. If such transaction occurs prior toSeptember 21, 2023 , then the amount due and payable shall be subject to a make-whole premium equal to a percentage of the total amount of outstanding principal and accrued interest through the date of such prepayment. The make-whole premium percentage during the period fromNovember 8, 2019 throughSeptember 20, 2022 is 10%, and fromSeptember 21, 2022 throughSeptember 20, 2023 is 5%. AtDecember 31, 2020 and 2019,AdaptHealth had a working capital deficit of$58.8 million and working capital of$27.4 million , respectively. A significant portion ofAdaptHealth's assets consists of accounts receivable from third-party payors that are responsible for payment for the equipment and the services thatAdaptHealth provides. Cash Flow. The following table presents selected data fromAdaptHealth's consolidated statement of cash flows for the years endedDecember 31, 2020 and 2019: Year Ended December 31, (in thousands) 2020 2019 (unaudited)
Net cash provided by operating activities$ 195,634 $
60,418
Net cash used in investing activities (815,703)
(84,870)
Net cash provided by financing activities 643,153
76,144
Net increase (decrease) in cash and cash equivalents 23,084
51,692
Cash and cash equivalents at beginning of period 76,878
25,186
Cash and cash equivalents at end of period$ 99,962 $
76,878 Net cash provided by operating activities for the year endedDecember 31, 2020 was$195.6 million compared to$60.4 million for the year endedDecember 31, 2019 , an increase of$135.2 million . The increase was the result of (1) a$43.8 million increase in net loss, (2) a net increase of$107.8 million in non-cash charges, primarily from a non-cash charge relating to the change in the estimated fair value of contingent consideration common shares, depreciation, amortization, non-cash interest expense relating to the Company's interest rate swaps, equity-based compensation expense, write-off of deferred financing costs, and changes in fair value of contingent consideration, (3) a$1.0 million payment of contingent consideration, (4) receipt of approximately$46 million of recoupable advanced payments from CMS in connection with the CARES Act, (5) receipt of approximately$17 million pursuant to the CARES Act provider relief funds, (6) a$21.6 million change in deferred income taxes, and (7) a net$30.8 million increase in cash resulting from the change in operating assets and liabilities, primarily resulting from the change in accounts receivable and accounts payable and accrued expenses for the period. Net cash used in investing activities for the year endedDecember 31, 2020 was$815.7 million compared to$84.9 million for the year endedDecember 31, 2019 . The use of funds in the year endedDecember 31, 2020 consisted of$769.3 million for business acquisitions, primarily from the Solara,ActivStyle , Advanced and Pinnacle acquisitions,$39.8 million for equipment and other fixed asset purchases,$8.6 million for the purchase of equity and cost-method investments, offset by$2.0 million of cash proceeds from the sale of an investment. The use of funds in the year endedDecember 31, 2019 consisted of$63.5 million for acquisitions, primarily from the Gould's,SleepMed and Choice acquisitions, and$21.4 million for equipment and other fixed asset purchases.
Net cash provided by financing activities for the year ended
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by financing activities for the year endedDecember 31, 2020 consisted of proceeds of$591.3 million from borrowings on long-term debt and lines of credit, proceeds of$350.0 million from the issuance of senior unsecured notes, proceeds of$225.0 million from the sale of shares of Class A Common Stock and Preferred Stock in connection with private placement transactions, proceeds of$142.6 million from the issuance of shares of Class A Common Stock in connection with a public underwritten offering, proceeds of$24.5 million from the exercise of warrants, and proceeds of$0.1 million in connection with the employee stock purchase plan, offset by total repayments of$586.5 million on long-term debt and capital lease obligations, payments of$11.7 million for equity issuance costs, payments of$13.1 million for debt issuance costs, payments of$44.3 million in connection with the exchange of shares of Class B Common Stock for cash, payment of$29.9 million in connection with the Put/Call Agreement, distributions to noncontrolling interests of$0.8 million , a$0.7 million payment of deferred purchase price in connection with an acquisition, payments of$3.2 million of contingent consideration related to acquisitions, and net payments of$0.1 million relating to tax withholdings associated with equity-based compensation activity. Net cash provided by financing activities for the year endedDecember 31, 2019 was primarily related to the 2019 Recapitalization and the Business Combination, and consisted of$360.5 million of borrowings from long-term debt and lines of credit,$20.0 million of proceeds from the sale of members' interests, net proceeds of$148.9 million from the transactions completed in connection with the Business Combination, and proceeds of$100.0 million from a preferred debt issuance, offset by total repayments of$274.9 million on long-term debt and capital lease obligations, payments of$9.0 million for financing costs, payments of$0.8 million for equity issuance costs, payment of$3.7 million for the redemption of members' interests, payment of$13.0 million for earnout liabilities in connection with the Verus Acquisition and the HMEI Acquisition, distributions to members of$250.0 million , distributions to noncontrolling interests of$1.3 million , and net payments of$0.6 million relating to tax withholdings associated with equity-based compensation activity.
Critical Accounting Policies and Significant Estimates
The discussion and analysis of the Company's financial condition and results of operations is based upon the Company's consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of the Company's consolidated financial statements requires its management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. The Company's management bases its estimates, assumptions and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Different assumptions and judgments would change the estimates used in the preparation of the Company's consolidated financial statements which, in turn, could change the results from those reported. In addition, actual results may differ from these estimates and such differences could be material to the Company's financial position and results of operations. Critical accounting policies and significant estimates are those that the Company's management considers the most important to the portrayal of the Company's financial condition and results of operations because they require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company's critical accounting policies and significant estimates in relation to its consolidated financial statements include those related to revenue recognition, accounts receivable, business combinations, and goodwill valuation. 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.
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Performance obligations are determined based on the nature of the services provided. The majority of the Company's services and related products represent a bundle of services that are not capable of being distinct and as such, are treated as a single performance obligation satisfied over time as services are rendered. 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 durable medical equipment and related supplies, including oxygen equipment, ventilators, wheelchairs, hospital beds and infusion pumps, are recognized when control of the promised good or service is transferred to customers, which is generally upon shipment for direct to consumer supplies and upon delivery to the home for durable medical equipment. 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 have input with respect to 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 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.
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.
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 bad debt 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.
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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. In the event that a third-party payor does not accept the claim, the customer is ultimately responsible for payment for the products or services. The Company recognizes revenue in the 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.
Business Combinations
The Company applies the acquisition method of accounting for business acquisitions. The results of operations of the businesses acquired by the Company are included as of the respective acquisition date. The acquisition-date fair value of the consideration transferred, including the fair value of any contingent consideration, is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. To the extent the acquisition-date fair value of the consideration transferred exceeds the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed, such excess is allocated to goodwill. Patient relationships, medical records and patient lists are not reported as separate intangible assets due to the regulatory requirements and lack of contractual agreements but are part of goodwill. Customer related relationships are not reported as separate intangible assets but are part of goodwill as authorizing physicians are under no obligation to refer the Company's services to their patients, who are free to change physicians and service providers at any time. The Company may adjust the preliminary purchase price allocation, as necessary, as it obtains more information regarding asset valuations and liabilities assumed that existed but were not available at the acquisition date, which is generally up to one year after the acquisition closing date. Acquisition related expenses are recognized separately from the business combination and are expensed as incurred.
Valuation of
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 tested for impairment annually and upon the occurrence of a triggering event or change in circumstances indicating a possible impairment. 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 review of goodwill during the fourth quarter of each year. The impairment testing can be performed on either a quantitative or qualitative basis. The Company first assesses qualitative factors to determine whether it is necessary to perform quantitative goodwill impairment testing. If determined necessary, the Company applies the quantitative impairment test to identify and measure the amount of impairment, if any. The Company's long-lived assets, such as equipment and other fixed assets and definite-lived intangible assets, are reviewed 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 intangible assets consist of payor contracts, developed technology and tradenames. 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 tested for impairment consistent with the Company's long-lived assets. The following table summarizes the useful lives of the intangible assets acquired: 62 Table of Contents Payor contracts 10 years Developed technology 5 years Tradenames 5 to 10 years
Recent Accounting Pronouncements
Recently issued accounting pronouncements that may be relevant to the Company's operations but have not yet been adopted are outlined in Note 2 (dd), Recently Issued Accounting Pronouncements, to its consolidated financial statements included elsewhere in this report.
Off-Balance Sheet Arrangements
As of
Commitments and Contingencies
In the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of its business that cover a wide range of matters. In accordance with the Financial Accounting Standards Board Accounting Standards Codification Topic 450, Accounting for Contingencies, the Company records accruals for such loss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company's management believes any liability that may ultimately result from its resolution will not have a material adverse effect on the Company's financial conditions or results of operations.
Other contingencies arising in the normal course of business relate to acquisitions and the related contingent purchase prices and deferred payments.
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