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 Annual Report on Form 10-K. Certain amounts that appear in this section may not sum due to rounding. 37
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AdaptHealth Corp. OverviewAdaptHealth is a national leader in providing patient-centered, healthcare-at-home solutions including home medical equipment ("HME"), medical supplies, and related services. 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 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. The Company services beneficiaries of Medicare, Medicaid and commercial insurance payors. As ofDecember 31, 2022 ,AdaptHealth serviced approximately 3.9 million patients annually in all 50 states through its network of approximately 725 locations in 47 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
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 authorized payments that were 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$45.8 million made available by CMS under the CARES Act legislation, which was received inApril 2020 . In addition, in connection with an acquisition completed inJuly 2020 ,AdaptHealth 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 inApril 2021 and were applied to services provided and revenue recognized during the period in which the recoupment occurred, which impactedAdaptHealth's cash receipts for services provided during the period in which the amounts were recouped. As ofDecember 31, 2022 the CMS advance payments have been recouped by or repaid to CMS in full and there is no liability to CMS for these amounts as of such date. In addition, inApril 2020 ,AdaptHealth received distributions of the CARES Act PRF of$17.2 million , and subsequent toApril 2020 ,AdaptHealth completed several acquisitions in which the acquired companies received a total of$22.2 million of PRF payments prior to the applicable dates of acquisition. In connection with the accounting for these acquisitions,AdaptHealth recorded assumed liabilities of$7.7 million relating to the PRF payments received by the acquired companies. The PRF payments 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 were required to agree to certain terms and conditions, including, among other things, that the funds would be 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 were required to comply with the reporting requirements described in the terms and conditions and as determined by HHS. As ofDecember 31, 2021 ,AdaptHealth recognized all of the PRF payments it had received, and the liabilities assumed for PRF payments received from acquired companies, as grant income, as it was determined thatAdaptHealth has complied with the terms and conditions associated with the grant. As such, there is no liability recorded inAdaptHealth's consolidated balance sheet relating to the PRF payments as ofDecember 31, 2022 and 2021. HHS has indicated that the CARES Act PRF are subject to ongoing reporting and changes to the terms and conditions, and there have been several updates to such reporting requirements and terms and conditions since they were issued by HHS. Such updates have related to changes to the guidance regarding utilization of the funds granted from the PRF and updates to the reporting requirements of such funds, among other updates. To the extent that there is any future updated guidance from HHS or modifications to the terms and conditions, it may affectAdaptHealth's ability to comply andAdaptHealth could be required to reverse the recognition of the grant income recorded and return a portion of the funds received, which could be material toAdaptHealth .AdaptHealth is continuing to monitor the terms and conditions issued by HHS. 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 38
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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.
Also, as permitted under the CARES Act,AdaptHealth elected to defer certain portions of employer-paid FICA taxes otherwise payable fromMarch 27, 2020 toJanuary 1, 2021 . In total,AdaptHealth deferred$8.6 million under this provision, and paid$4.3 million onJanuary 4, 2022 and$4.3 million onDecember 14, 2022 . There are no further amounts due under this provision as ofDecember 31, 2022 . 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 initially,AdaptHealth experienced declines in net revenue in 2021 and 2020 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). Offsetting these declines in net revenue,AdaptHealth experienced an increase in net revenue in 2021 and 2020 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, the suspension of Medicare sequestration (which had resulted in an approximate 2% increase in Medicare payments to all providers throughMarch 31, 2022 and a 1% increase fromApril 1, 2022 throughJune 30, 2022 ), and regulatory guidance from CMS expanding telemedicine and reducing documentation requirements during the public health emergency period, resulted in increased net revenues for certain products and services. However, Medicare sequestration has resumed onJuly 1, 2022 and will result in a reduction of 2% applied to all Medicare Fee-for-Service claims, which will negatively affectAdaptHealth's net revenue. OnJanuary 30, 2023 ,President Biden announced the intent to end the public health emergency onMay 11, 2023 . Impact of Inflation Current and future inflationary effects may be driven by, among other things, general inflationary cost increases, supply chain disruptions and governmental stimulus or fiscal policies. The cost to manufacture and distribute the equipment and products thatAdaptHealth provides to patients is influenced by the cost of materials, labor, and transportation, including fuel costs.AdaptHealth has recently experienced inflationary pressure and higher costs as a result of the increasing cost of materials, labor and transportation. The increase in the cost of equipment and products is due in part to a shortage in the availability of certain products, the higher cost of shipping, and general inflationary cost increases. Additionally, it is not certain thatAdaptHealth will be able to pass increased costs onto customers to offset inflationary pressures. Continuing increases in inflation could impact the overall demand forAdaptHealth's products and services, its costs for labor, equipment and products, and the margins it is able to realize on its products, all of which could have an adverse impact onAdaptHealth's business, financial position, results of operations and cash flows. In addition, future volatility of general price inflation and the impact of inflation on costs and availability of materials, costs for shipping and warehousing and other operational overhead could adversely affectAdaptHealth's financial results. Although there have been recent increases in inflation,AdaptHealth cannot predict whether these trends will continue.AdaptHealth's primary mitigation efforts relating to these inflationary pressures include utilizingAdaptHealth's purchasing power in negotiations with vendors and the increased use of technology to drive operating efficiencies and control costs, such asAdaptHealth's digital platform for prescriptions, orders and delivery.
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 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 be received from patients or under reimbursement arrangements with Medicare, Medicaid and other third-party payors, including private insurers. Certain trends or uncertainties that may have a material impact on revenue growth and operating results include the Company's ability to obtain new patient starts and to generate referrals from patient referral sources and the ability to meet the increased demand considering supply chain issues and inflationary pressures. 39
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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, 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, 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
certain unique events during the periods discussed herein, including the
following:
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. Refer to Note 3, Acquisitions, included in our consolidated financial statements for the year endedDecember 31, 2022 included in this Annual Report on Form 10-K for additional information regardingAdaptHealth's acquisitions.
Debt
InAugust 2021 ,AdaptHealth issued$600.0 million aggregate principal amount of 5.125% senior unsecured notes (the "5.125% Senior Notes"). The 5.125% Senior Notes will mature onMarch 1, 2030 . Interest on the 5.125% Senior Notes is payable onMarch 1st andSeptember 1st of each year, beginning onMarch 1, 2022 . InJanuary 2021 ,AdaptHealth issued$500.0 million aggregate principal amount of 4.625% senior unsecured notes (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 . InJuly 2020 ,AdaptHealth issued$350.0 million aggregate principal amount of 6.125% senior unsecured notes (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 . Refer to the section below, titled Liquidity and Capital Resources , for additional discussion related toAdaptHealth's senior unsecured notes. InJanuary 2021 ,AdaptHealth refinanced its debt borrowings and entered into a new credit agreement with its existing bank group, which was subsequently amended inApril 2021 (the "2021 Credit Agreement"). Refer to the section below, titled Liquidity and Capital Resources , for additional discussion related to the 2021 Credit Agreement. InJuly 2020 ,AdaptHealth refinanced its then current 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 secured term loan (the "2020 Term Loan") and$200 million in commitments for revolving credit loans. 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). Outstanding amounts borrowed under the 2020 Credit Agreement were repaid in full in connection with theJanuary 2021 refinancing transaction discussed above. InMarch 2019 ,AdaptHealth entered into a Note and Unit Purchase Agreement with an investor. Pursuant to the agreement,AdaptHealth issued a promissory note with a principal amount of$100 million (the "Promissory Note"). InNovember 2019 , the Promissory Note was replaced with a new amended and restated promissory note with a principal amount of$100 million , and the investor converted certain of its members' interests to a$43.5 million promissory note. The new$100 million promissory note, together with the$43.5 million promissory note, are collectively referred to herein 40
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as the "New Promissory Note". InJune 2021 ,AdaptHealth repaid$71.8 million of the outstanding principal balance under the New Promissory Note. InAugust 2021 ,AdaptHealth repaid the remaining outstanding principal balance of$71.7 million under the New Promissory Note. The outstanding principal balance under the New Promissory Note bore interest at 12%.
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. Also, net revenue generated by the Company's diabetes product line is typically higher in the fourth quarter compared to the earlier part of the year due to the timing of when patients meet their annual deductibles and their associated reordering patterns. 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 Free Cash Flow 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 41 -------------------------------------------------------------------------------- Ta bl e of Contents recognized over the service period for equipment (including, but not limited to, CPAP machines, oxygen concentrators, ventilators, hospital beds, wheelchairs and other equipment). Three Months Ended Net Revenue March 31, 2022
June 30, 2022 September 30, 2022 December 31, 2022
(in thousands, except revenue
percentage, "%") $ % $ % $ % $ % Total $ %
(Unaudited)
Net sales revenue - Point in
time
Sleep $ 192,335 27.2 % $ 194,693 26.8 % $ 198,206 26.2 % $ 208,787 26.8 % $ 794,021 26.7 %
Diabetes 151,359 21.4 % 162,259 22.3 % 169,075 22.3 % 188,295 24.1 % 670,988 22.6 %
Supplies to the home 39,865 5.6 % 43,881 6.0 % 47,793 6.3 % 47,787 6.1 % 179,326 6.0 %
Respiratory 8,145 1.2 % 7,891 1.1 % 9,734 1.3 % 8,572 1.1 % 34,342 1.2 %
HME 30,052 4.3 % 30,313 4.2 % 29,463 3.9 % 28,714 3.7 % 118,542 4.0 %
Other 54,199 7.7 % 53,617 7.3 % 58,252 7.7 % 52,393 6.7 % 218,461 7.4 %
Total Net sales revenue $ 475,955 67.4 % $ 492,654 67.7 % $ 512,523 67.7 % $ 534,548 68.5 % $ 2,015,680 67.9 %
Net revenue from fixed monthly
equipment reimbursements
Sleep $ 57,938 8.2 % $ 65,661 9.0 % $ 72,423 9.6 % $ 76,683 9.8 % $ 272,705 9.2 %
Diabetes 3,946 0.6 % 4,034 0.6 % 4,211 0.6 % 3,912 0.5 % 16,103 0.5 %
Respiratory 132,580 18.8 % 128,865 17.7 % 130,618 17.3 % 128,634 16.5 % 520,697 17.5 %
HME 25,725 3.6 % 25,547 3.5 % 25,482 3.4 % 25,502 3.3 % 102,256 3.4 %
Other 10,059 1.4 % 10,853 1.5 % 11,238 1.4 % 11,004 1.4 % 43,154 1.5 %
Total Net revenue from fixed
monthly equipment reimbursements $ 230,248 32.6 % $ 234,960 32.3 % $ 243,972 32.3 % $ 245,735 31.5 % $ 954,915 32.1 %
Total net revenue
Sleep $ 250,273 35.4 % $ 260,354 35.8 % $ 270,629 35.8 % $ 285,470 36.6 % $ 1,066,726 35.9 %
Diabetes 155,305 22.0 % 166,293 22.9 % 173,286 22.9 % 192,207 24.6 % 687,091 23.1 %
Supplies to the home 39,865 5.6 % 43,881 6.0 % 47,793 6.3 % 47,787 6.1 % 179,326 6.0 %
Respiratory 140,725 20.0 % 136,756 18.8 % 140,352 18.6 % 137,206 17.6 % 555,039 18.7 %
HME 55,777 7.9 % 55,860 7.7 % 54,945 7.3 % 54,216 7.0 % 220,798 7.4 %
Other 64,258 9.1 % 64,470 8.8 % 69,490 9.1 % 63,397 8.1 % 261,615 8.9 %
Total Net revenue $ 706,203 100 % $ 727,614 100 % $ 756,495 100 % $ 780,283 100 % $ 2,970,595 100 %
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Three Months Ended
Net Revenue March 31, 2021
June 30, 2021 September 30, 2021 December 31, 2021
(in thousands, except revenue
percentage, "%") $ % $ % $ % $ % Total $ %
(Unaudited)
Net sales revenue - Point in
time
Sleep $ 128,682 26.7 % $ 163,331 26.5 % $ 173,359 26.5 % $ 188,758 26.9 % $ 654,130 26.6 %
Diabetes 95,017 19.7 % 123,314 20.0 % 134,228 20.5 % 175,523 25.0 % 528,082 21.5 %
Supplies to the home 41,363 8.6 % 42,675 6.9 % 42,441 6.5 % 41,351 5.9 % 167,830 6.8 %
Respiratory 5,621 1.2 % 13,154 2.1 % 6,228 1.0 % 6,013 0.9 % 31,016 1.3 %
HME 23,401 4.9 % 29,268 4.7 % 29,919 4.6 % 31,217 4.4 % 113,805 4.6 %
Other 23,181 4.7 % 28,855 4.7 % 45,996 7.1 % 46,511 6.6 % 144,543 6.0 %
Total Net sales revenue $ 317,265 65.8 % $ 400,597 64.9 % $ 432,171 66.2 % $ 489,373 69.7 % $ 1,639,406 66.8 %
Net revenue from fixed monthly
equipment reimbursements
Sleep $ 48,109 10.0 % $ 66,335 10.8 % $ 62,755 9.6 % $ 60,053 8.6 % $ 237,252 9.7 %
Diabetes 2,853 0.6 % 3,216 0.5 % 3,722 0.6 % 3,332 0.5 % 13,123 0.5 %
Respiratory 83,454 17.3 % 111,528 18.1 % 117,918 18.0 % 114,370 16.3 % 427,270 17.4 %
HME 20,380 4.2 % 24,431 4.0 % 26,043 4.0 % 25,082 3.6 % 95,936 3.9 %
Other 10,058 2.1 % 10,910 1.7 % 10,684 1.6 % 9,896 1.3 % 41,548 1.7 %
Total Net revenue from fixed
monthly equipment reimbursements $ 164,854 34.2 % $ 216,420 35.1 % $ 221,122 33.8 % $ 212,733 30.3 % $ 815,129 33.2 %
Total Net revenue
Sleep $ 176,791 36.7 % $ 229,666 37.3 % $ 236,114 36.1 % $ 248,811 35.5 % $ 891,382 36.3 %
Diabetes 97,870 20.3 % 126,530 20.5 % 137,950 21.1 % 178,855 25.5 % 541,205 22.0 %
Supplies to the home 41,363 8.6 % 42,675 6.9 % 42,441 6.5 % 41,351 5.9 % 167,830 6.8 %
Respiratory 89,075 18.5 % 124,682 20.2 % 124,146 19.0 % 120,383 17.2 % 458,286 18.7 %
HME 43,781 9.1 % 53,699 8.7 % 55,962 8.6 % 56,299 8.0 % 209,741 8.5 %
Other 33,239 6.8 % 39,765 6.4 % 56,680 8.7 % 56,407 7.9 % 186,091 7.7 %
Total Net revenue $ 482,119 100 % $ 617,017 100 % $ 653,293 100 % $ 702,106 100 % $ 2,454,535 100 %
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Three Months Ended
Net Revenue March 31, 2020
June 30, 2020 September 30, 2020 December 31, 2020
(in thousands, except revenue
percentage, "%") $ % $ % $ % $ % Total $ %
(Unaudited)
Net sales revenue - Point in
time
Sleep $ 68,894 36.0 % $ 84,421 36.4 % $ 74,655 26.2 % $ 84,890 24.4 % $ 312,860 29.6 %
Diabetes 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 6.6 % 11,463 4.9 % 14,869 5.2 % 15,964 4.6 % 54,689 5.2 %
Total Net sales revenue $ 128,973 67.4 % $ 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 1.3 % 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 32.6 % $ 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 % $ 99,626 35.0 % $ 112,967 32.5 % $ 411,221 38.9 %
Diabetes 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 % $ 232,116 100 % $ 284,405 100 % $ 348,429 100 % $ 1,056,389 100 %
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Results of Operations
Comparison of Year Ended
The following table summarizes
for the years ended
Year Ended December 31,
2022 2021
Revenue Revenue Increase/(Decrease)
(in thousands, except percentages) Dollars Percentage Dollars Percentage Dollars Percentage
(Unaudited)
Net revenue $ 2,970,595 100.0 % $ 2,454,535 100.0 % $ 516,060 21.0 %
Grant income - - % 10,595 0.4 % (10,595) (100.0) %
Costs and expenses:
Cost of net revenue 2,553,169 85.9 % 2,008,925 81.8 % 544,244 27.1 %
General and administrative expenses 162,125 5.5 % 167,505 6.8 % (5,380) (3.2) %
Depreciation and amortization,
excluding patient equipment
depreciation 64,890 2.2 % 63,095 2.6 % 1,795 2.8 %
Total costs and expenses 2,780,184 93.6 % 2,239,525 91.2 % 540,659 24.1 %
Operating income 190,411 6.4 % 225,605 8.8 % (35,194) (15.6) %
Interest expense, net 109,414 3.7 % 95,195 3.9 % 14,219 14.9 %
Change in fair value of warrant
liability (17,158) (0.6) % (53,181) (2.2) % 36,023 (67.7) %
Change in fair value of contingent
consideration common shares
liability - - % (29,389) (1.2) % 29,389 (100.0) %
Loss on extinguishment of debt - - % 20,189 0.8 % (20,189) (100.0) %
Other loss, net 253 - % 1,832 0.1 % (1,579) (86.2) %
Income before income taxes 97,902 3.3 % 190,959 7.4 % (93,057) (48.7) %
Income tax expense 24,769 0.8 % 32,806 1.3 % (8,037) (24.5) %
Net income 73,133 2.5 % 158,153 6.1 % (85,020) (53.8) %
Income attributable to
noncontrolling interests 3,817 0.1 % 1,978 0.1 % 1,839 93.0 %
Net income attributable to
AdaptHealth Corp. $ 69,316 2.4 % $ 156,175 6.0 % $ (86,859) (55.6) %
Net Revenue. The comparability of AdaptHealth's net revenue between periods was
impacted by certain factors as described below. The table below presents the
items that impacted the change in AdaptHealth's net revenue between periods.
Variance 2022 vs. 2021
(in thousands, except percentages) $ %
(Unaudited)
Revenue change driver:
Increase from acquisitions $ 439,817 17.9 %
Increase from non-acquired growth 86,359 3.5 %
Decrease in business to business revenue (10,116) (0.4) %
Total change in net revenue $ 516,060 21.0 %
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Net revenue for the years endedDecember 31, 2022 and 2021 was$2,970.6 million and$2,454.5 million , respectively, an increase of$516.1 million or 21.0%. The increase in net revenue was primarily driven by acquisitions, which increased net revenue by$439.8 million , and an increase of$86.4 million related to non-acquired growth. Additionally, net revenue during the years endedDecember 31, 2022 and 2021 were negatively impacted by a recall of certain ventilator, BiPAP, and CPAP devices supplied toAdaptHealth byPhilips Respironics ("Philips)". OnJune 14, 2021 ,AdaptHealth received notice from Philips that these devices would be included in a Philips voluntary recall due to potential health risks to patients. It was not possible to purchase these products from Philips, which led to shortages in the supply chain, and other suppliers were unable to meet the strong patient demand for these products, which materially affectedAdaptHealth's ability to service patient demand for these devices during the year endedDecember 31, 2021 . During 2022, there was improved ability to purchase these products from alternative suppliers but continued shortages in the supply chain materially impactedAdaptHealth's ability to service patient demand for these devices. For the year endedDecember 31, 2022 , net sales revenue (recognized at a point in time) comprised 68% of total net revenue, compared to 67% of total net revenue for the year endedDecember 31, 2021 . For the year endedDecember 31, 2022 , net revenue from fixed monthly equipment reimbursements comprised 32% of total net revenue, compared to 33% of total net revenue for the year endedDecember 31, 2021 .
Grant income. Grant income for the year ended
recognition of amounts received under the CARES Act provider relief funds. See
Item 7. ” Management’s Discussion and Analysis of Financial Results and
Operations – Impact of the COVID-19 Pandemic .”
Cost of Net Revenue.
The following table summarizes cost of net revenue for the years endedDecember 31, 2022 and 2021: Year Ended December 31, 2022 2021 (in thousands, except Increase/(Decrease) percentages) Dollars Revenue Percentage Dollars Revenue Percentage Dollars Percentage (Unaudited) Costs of net revenue: Cost of products and supplies$ 1,199,481 40.4 %$ 955,813 38.9 % $ 243,668 25.5 % Salaries, labor and benefits 770,669 25.9 % 595,668 24.3 % 175,001 29.4 % Patient equipment depreciation 286,288 9.6 % 194,958 7.9 % 91,330 46.8 % Rent and occupancy 64,375 2.2 % 48,586 2.0 % 15,789 32.5 % Other operating expenses 225,719 7.6 % 206,599 8.4 % 19,120 9.3 % Equity-based compensation 6,637 0.2 % 7,301 0.3 % (664) (9.1) % Total cost of net revenue$ 2,553,169 85.9 %$ 2,008,925 81.8 % $ 544,244 27.1 % Cost of net revenue for the years endedDecember 31, 2022 and 2021 was$2,553.2 million and$2,008.9 million , respectively, an increase of$544.2 million or 27.1%. Costs of products and supplies increased by$243.7 million primarily as a result of acquisition growth, increased product costs, increased sales revenue, and general inflationary cost increases. Salaries, labor and benefits increased by$175.0 million , primarily related to acquisition growth, increased headcount, higher wages and commissions, and workforce wage pressure driven by inflation. Patient equipment depreciation was 9.6% of net revenue in 2022 compared to 7.9% in 2021, primarily as a result of a change in product mix. The increase in rent and occupancy and other operating expenses is primarily related to acquisition growth and general inflationary cost increases. The increase in other operating expenses includes increased shipping costs, including fuel costs which have increased by$2.6 million in 2022 compared to 2021. General and Administrative Expenses. General and administrative expenses for the years endedDecember 31, 2022 and 2021 were$162.1 million and$167.5 million , respectively, a decrease of$5.4 million or 3.2%. This decrease is primarily due to lower transaction costs as there was less acquisition activity in 2022 compared to 2021, and lower equity-based compensation expense, offset by higher professional fees including legal, accounting, information-technology, and consulting expenses associated with systems implementation activities and post-implementation support services. General and administrative expenses as a percentage of net revenue was 5.5% in 2022, compared to 6.8% in 2021. General and administrative expenses in 2022 included$6.0 million of transaction costs,$15.8 million of equity-based compensation 46
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expense, and other non-recurring expenses of$19.7 million (including$11.7 million of consulting expenses associated with systems implementation activities and post-implementation support services and$7.4 million of legal fees associated with litigation). General and administrative expenses in 2021 included$47.9 million of transaction costs,$18.0 million of equity-based compensation expense, and other non-recurring expenses of$2.4 million . Excluding the impact of these charges, general and administrative expenses as a percentage of net revenue was 4.1% and 4.0% in 2022 and 2021, respectively. Depreciation and amortization, excluding patient equipment depreciation. Depreciation and amortization, excluding patient equipment depreciation, for the years endedDecember 31, 2022 and 2021 was$64.9 million and$63.1 million , respectively, an increase of$1.8 million . The increase was primarily related to higher depreciation expense associated with fixed assets excluding patient equipment, offset by lower amortization of intangible assets, primarily relating to a contractual rental agreement intangible asset recognized in connection with theAeroCare acquisition that became fully amortized at the end of 2021. Interest Expense, net. Interest expense, net for the years endedDecember 31, 2022 and 2021 was$109.4 million and$95.2 million , respectively. Interest expense related to long-term debt was higher in 2022 compared to 2021 as a result of higher average long-term debt borrowings outstanding during that period and higher interest rates. Interest expense relating toAdaptHealth's credit agreement and senior unsecured notes increased by$8.0 million and$19.8 million , respectively, in 2022 compared to 2021. These increases were offset by$9.5 million of interest expense onAdaptHealth's note payable in 2021 which did not exist in 2022. Such borrowings were primarily used to fund acquisitions. Change in Fair Value of Warrant Liability.AdaptHealth has outstanding warrants to purchase shares of Common Stock, as discussed in Note 11, Stockholders' Equity - Warrants, to the accompanyingDecember 31, 2022 consolidated financial statements. These warrants are liability-classified, and the change in fair value of the warrant liability represents a non-cash gain in 2022 and 2021 for the change in the estimated fair value of such liability during the respective periods. Change in Fair Value of Contingent Consideration Common Shares Liability. In connection with the Business Combination, certain former owners ofAdaptHealth Holdings were entitled to contingent consideration common shares, as discussed in Note 11, Stockholders' Equity - Contingent Consideration Common Shares, to the accompanyingDecember 31, 2022 consolidated financial statements. These shares were liability-classified during 2021 and the change in fair value of the contingent consideration common shares liability represents a non-cash gain for the change in the estimated fair value of such liability during the period. AtDecember 31 , 2021,the liability relating to the unearned contingent consideration common shares as of that date was reclassified to stockholders' equity. Since the fair value of these shares was reclassified to stockholders' equity onDecember 31, 2021 , these shares were no longer liability classified as of such date and therefore the changes in the estimated fair value of such shares were not recognized in theAdaptHealth's consolidated statements of operations during 2022. Loss on Extinguishment of Debt. Loss on extinguishment of debt for the year endedDecember 31, 2021 consisted of$16.2 million of debt prepayment penalties and$2.0 million for the write-off of unamortized deferred financing costs in connection with the early repayment ofAdaptHealth's note payable, and$2.0 million for the write-off of unamortized deferred financing costs in connection withAdaptHealth refinancing its credit facility in 2021. Other loss, net. Other loss, net for the year endedDecember 31, 2022 consisted of$3.2 million of expenses associated with legal settlements,$2.2 million of increases in the fair value of contingent consideration liabilities related to acquisitions, and$0.2 million of other charges, offset by income of$2.9 million related to changes inAdaptHealth's estimated TRA liability and$2.4 million in gains from asset sales. Other loss, net for the year endedDecember 31, 2021 consisted of$3.9 million of expenses associated with legal settlements, offset by a$1.9 million gain in connection with the consolidation of an equity method investment and$0.2 million of other income. Income Tax Expense. Income tax expense for the year endedDecember 31, 2022 was$24.8 million compared to income tax expense of$32.8 million for the year endedDecember 31, 2021 . The decrease in income tax expense was due to lower pre-tax income offset by deferred only expense resulting from a decrease in estimated state effective tax rates. 47
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Comparison of Year Ended
The following table summarizes
for the years ended
Year Ended December 31,
2021 2020
(in thousands, except Revenue Revenue Increase/(Decrease)
percentages) Dollars Percentage Dollars Percentage Dollars Percentage
(Unaudited)
Net revenue $ 2,454,535 100.0 % $ 1,056,389 100.0 % $ 1,398,146 132.4 %
Grant income 10,595 0.4 % 14,277 1.4 % (3,682) NM
Costs and expenses:
Cost of net revenue 2,008,925 81.8 % 898,601 85.1 % 1,110,324 123.6 %
General and administrative
expenses 167,505 6.8 % 89,346 8.5 % 78,159 87.5 %
Depreciation and
amortization, excluding
patient equipment
depreciation 63,095 2.6 % 11,373 1.1 % 51,722 454.8 %
Total costs and expenses 2,239,525 91.2 % 999,320 94.6 % 1,240,205 124.1 %
Operating income 225,605 9.2 % 71,346 6.8 % 154,259 216.2 %
Interest expense, net 95,195 3.9 % 41,430 3.9 % 53,765 129.8 %
Change in fair value of
warrant liability (53,181) (2.2) % 135,368 12.8 % (188,549) NM
Change in fair value of
contingent consideration
common shares liability (29,389) (1.2) % 98,717 9.3 % (128,106) NM
Loss on extinguishment of
debt 20,189 0.8 % 5,316 0.5 % 14,873 NM
Other loss (income), net 1,832 0.1 % (3,444) (0.3) % 5,276 NM
Income (loss) before
income taxes 190,959 7.8 % (206,041) (19.5) % 397,000 (192.7) %
Income tax expense
(benefit) 32,806 1.3 % (11,955) (1.1) % 44,761 NM
Net income 158,153 6.4 % (194,086) (18.4) % 352,239 (181.5) %
Income (loss) attributable
to noncontrolling
interests 1,978 0.1 % (32,454) (3.1) % 34,432 NM
Net income (loss)
attributable to
AdaptHealth Corp. $ 156,175 6.4 % $ (161,632) (15.3) % $ 317,807 (196.6) %
Net Revenue. Net revenue for the years ended December 31, 2021 and 2020 was
$2,454.5 million and $1,056.4 million , respectively, an increase of $1,398.1
million or 132.4%. Net revenue for 2021 and 2020 included $10.5 million and
$36.5 million , respectively, from referral partners and healthcare facilities in
support of their urgent needs as the coronavirus pandemic led to an increased
demand for respiratory equipment including ventilators and oxygen concentrators.
Excluding this revenue, net revenue was $2,444.0 million and $1,019.9 million
for the years ended December 31, 2021 and 2020, respectively, an increase of
$1,424.1 million . The increase in net revenue was driven primarily by
acquisitions completed after January 1, 2020 , which increased net revenue by
$1,443.0 million , primarily from the acquisition of AeroCare . This increase in
net revenue was partially offset by planned declines in revenue from the
Company's Patient Care Solutions (PCS) supplies business (which was acquired in
January 2020 ) in connection with the Company's turnaround efforts of that
business executed subsequent to the acquisition. These turnaround efforts at PCS
reduced net revenues for the 2021 period compared to the 2020 period as a result
of the Company's exit from poor
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performing payor contracts and products, which resulted in improved profitability for PCS. Net revenue generated by PCS for the years endedDecember 31, 2021 and 2020 was$110.5 million and$130.2 million , respectively. Additionally, net revenue during the year endedDecember 31, 2021 was impacted by a recall of certain ventilator, BiPAP, and CPAP devices supplied toAdaptHealth byPhilips Respironics (Philips). OnJune 14, 2021 ,AdaptHealth received notice from Philips that these devices would be included in a Philips voluntary recall due to potential health risks to patients. Management estimates that the Philips recall reduced expected net revenue for the year endedDecember 31, 2021 by approximately$40 million to$45 million , with such impact primarily affecting net revenue in the fourth quarter. For the year endedDecember 31, 2021 , net sales revenue (recognized at a point in time) comprised 67% of total net revenue, compared to 72% of total net revenue for the year endedDecember 31, 2020 . For the year endedDecember 31, 2021 , net revenue from fixed monthly equipment reimbursements comprised 33% of total net revenue, compared to 28% of total net revenue for the year endedDecember 31, 2020 . These changes are primarily due to a change in product mix, primarily from the acquisition ofAeroCare .
Grant income. Grant income for the years ended
related to the recognition of amounts received under the CARES Act provider
relief funds.
Cost of Net Revenue.
The following table summarizes cost of net revenue for the years endedDecember 31, 2021 and 2020: Year Ended December 31, 2021 2020 (in thousands, except Increase/(Decrease) percentages) Dollars Revenue Percentage Dollars Revenue Percentage Dollars Percentage (Unaudited) Costs of net revenue: Cost of products and supplies$ 955,813 38.9%$ 441,931 41.8% $ 513,882 116.3% Salaries, labor and benefits 595,668 24.3% 257,898 24.4% 337,770 131.0% Patient equipment depreciation 194,958 7.9% 71,072 6.7% 123,886 174.3% Rent and occupancy 48,586 2.0% 22,344 2.1% 26,242 117.4% Other operating expenses 206,599 8.4% 97,511 9.3% 109,088 111.9% Equity-based compensation 7,301 0.3% 7,845 0.8% (544) (6.9)% Total cost of net revenue$ 2,008,925 81.8%$ 898,601 85.1% $ 1,110,324 123.6% Cost of net revenue for the years endedDecember 31, 2021 and 2020 was$2,008.9 million and$898.6 million , respectively, an increase of$1,110.3 million or123.6%, which is primarily related to acquisition growth. Costs of products and supplies increased by$513.9 million primarily as a result of acquisition growth, primarily from the acquisition ofAeroCare , and increased net sales revenue. Salaries, labor and benefits increased by$337.8 million , primarily related to acquisition growth and increased headcount, primarily from the acquisition ofAeroCare . The increase in rent and occupancy and other operating expenses is related to acquisition growth. Cost of net revenue was 81.8% of net revenue for the year endedDecember 31, 2021 compared to 85.1% for the year endedDecember 31, 2020 . The cost of products and supplies was 38.9% of net revenue in 2021 compared to 41.8% in 2020, primarily driven by increased scale and reduced vendor pricing. Salaries, labor and benefits was 24.3% of net revenue in 2021 compared to 24.4% in 2020. Patient equipment depreciation was 7.9% of net revenue in 2021 compared to 6.7% in 2020, primarily as a result of a change in product mix as net revenue from fixed monthly equipment reimbursements as a percentage of total net revenue was higher in 2021 compared to 2020, primarily from the acquisition ofAeroCare . General and Administrative Expenses. General and administrative expenses for the years endedDecember 31, 2021 and 2020 were$167.5 million and$89.3 million , respectively, an increase of$78.2 million or 87.5%. This increase is primarily due to (1) increased transaction costs related to acquisition growth, primarily from the acquisition ofAeroCare , (2) higher professional fees including legal, accounting and consulting, including costs for Sarbanes Oxley compliance, (3) 49
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higher labor costs associated with increased headcount, (4) higher equity-based compensation expense as a result of overall increased equity-based compensation grant activity and the accelerated vesting of certain awards, including$2.4 million in connection with the acceleration of vesting of certain equity awards in connection with the separation of the Company's former Co-CEO, and (5) higher information technology-related expenses. General and administrative expenses as a percentage of net revenue was 6.8% in 2021, compared to 8.5% in 2020. General and administrative expenses in 2021 included$47.9 million of transaction costs,$18.0 million of equity-based compensation expense, and other non-recurring expenses of$2.4 million . General and administrative expenses in 2020 included$25.4 million of transaction costs,$10.8 million of equity-based compensation expense, and other non-recurring expenses of$1.1 million . Excluding the impact of these charges, general and administrative expenses as a percentage of net revenue was 4.0% and 4.9% in 2021 and 2020, respectively. Depreciation and amortization, excluding patient equipment depreciation. Depreciation and amortization, excluding patient equipment depreciation, for the years endedDecember 31, 2021 and 2020 was$63.1 million and$11.4 million , respectively, an increase of$51.7 million . The increase was primarily related to amortization expense of$46.5 million related to identifiable intangible assets recognized during 2021, primarily as a result of the acquisition ofAeroCare , as compared to$6.0 million recognized during 2020. Interest Expense, net. Interest expense, net for the years endedDecember 31, 2021 and 2020 was$95.2 million and$41.4 million , respectively. Interest expense related to long-term debt was higher in 2021 compared to 2020 as a result of higher long-term debt borrowings outstanding during that period. Such borrowings were primarily used to fund acquisitions. Change in Fair Value of Warrant Liability.AdaptHealth has outstanding warrants to purchase shares of Common Stock. These warrants are liability-classified, and the change in fair value of the warrant liability represents a non-cash gain in 2021 and a non-cash charge in 2020 for the change in the estimated fair value of such liability during the respective periods. Change in Fair Value of Contingent Consideration Common Shares Liability. In connection with the Business Combination, certain former owners ofAdaptHealth Holdings were entitled to contingent consideration common shares. These shares were liability-classified throughDecember 31, 2021 , and the change in fair value of the contingent consideration common shares liability represents a non-cash gain in 2021 and a non-cash charge in 2020 for the change in the estimated fair value of such liability during the respective periods. Loss on Extinguishment of Debt. Loss on extinguishment of debt for the year endedDecember 31, 2021 consisted of$16.2 million of debt prepayment penalties and$2.0 million for the write-off of unamortized deferred financing costs in connection with the early repayment ofAdaptHealth's note payable, and$2.0 million for the write-off of unamortized deferred financing costs in connection withAdaptHealth refinancing its credit facility in 2021. Loss on extinguishment of debt for the year endedDecember 31, 2020 consisted of the write-off of unamortized deferred financing costs in connection withAdaptHealth refinancing its credit facility inJuly 2020 . Other (Income) Loss, net. Other loss, net for the year endedDecember 31, 2021 consisted of$3.9 million of expenses associated with legal settlements and$1.9 million of other charges, offset by$0.9 million of net reductions in the fair value of contingent consideration liabilities related to acquisitions,$0.7 million of equity income related to equity method investments, a gain of$0.5 million for the receipt of earnout proceeds in connection with an investment that was sold in 2020, and a$1.9 million gain in connection with the consolidation of an equity method investment. Other income, net for the year endedDecember 31, 2020 consisted of$4.2 million in 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,$0.1 million of equity income related to equity method investments, offset by a$1.5 million expense related to a transition services agreement executed in connection with an acquisition completed in 2020. Income Tax Expense (Benefit). Income tax expense for the year endedDecember 31, 2021 was$32.8 million compared to an income tax benefit of$12.0 million for the year endedDecember 31, 2020 . The increase in income tax expense was primarily related to increased pre-tax income andAdaptHealth Holding's change inU.S. federal income tax classification as a result of a tax restructuring completed in 2021. 50
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EBITDA and Adjusted EBITDA
AdaptHealth uses EBITDA and Adjusted EBITDA, which are financial measures that are not 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.
Corp.
expense, net, income tax expense (benefit), and depreciation and amortization.
AdaptHealth defines Adjusted EBITDA as EBITDA (as defined above), plus loss on extinguishment of debt, equity-based compensation expense, transaction costs, change in fair value of the warrant liability, change in fair value of the contingent consideration common shares liability, and certain other non-recurring items of expense or income.
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.
EBITDA and Adjusted EBITDA should not be considered as measures of financial performance underU.S. GAAP, and the items excluded from EBITDA and Adjusted EBITDA 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 Corp. , to EBITDA and Adjusted EBITDA for the years endedDecember 31, 2022 , 2021 and 2020: Year Ended December 31, (in thousands) 2022 2021 2020
(Unaudited)
Net income (loss) attributable to
$ 156,175 $ (161,632) Income (loss) attributable to noncontrolling interests 3,817 1,978 (32,454)
Interest expense excluding change in fair value of
interest rate swaps
109,414 95,195 41,430 Income tax expense (benefit) 24,769 32,806 (11,955) Depreciation and amortization, including patient equipment depreciation 351,178 258,053 82,445 EBITDA 558,494 544,207 (82,166) Loss on extinguishment of debt (a) - 20,189 5,316 Equity-based compensation expense (b) 22,397 25,323 18,670 Transaction costs (c) 6,003 49,081 26,573 Change in fair value of warrant liability (d) (17,158) (53,181) 135,368 Change in fair value of contingent consideration common shares liability (e) - (29,389) 98,717 Other non-recurring expense (income) (f) 24,034 9,688 3,141 Adjusted EBITDA$ 593,770 $ 565,918 $ 205,619 (a)Represents the write-off of unamortized deferred financing costs and other expenses related to refinancing of debt and prepayment penalties for early debt payoff. 51
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(b)Represents equity-based compensation expense for awards granted to employees and non-employee directors. The higher expense in 2021 is primarily due to expense resulting from accelerated vesting of certain awards, including accelerated vesting of certain awards in connection with the separation of the Company's former Co-CEO.
(c)Represents transaction costs and expenses related to integration efforts
related to acquisitions.
(d)Represents a non-cash gain or charge for the change in the estimated fair value of the warrant liability. Refer to Note 11, Stockholders' Equity - Warrants, included in the accompanying notes to the consolidated financial statements for the year endedDecember 31, 2022 for additional discussion of such non-cash gain or charge. (e)Represents a non-cash gain or charge for the change in the estimated fair value of the contingent consideration common shares liability. Refer to Note 11, Stockholders' Equity - Contingent Consideration Common Shares, included in the accompanying notes to the consolidated financial statements for the year endedDecember 31, 2022 for additional discussion of such non-cash gain or charge. (f)The 2022 period consists of$11.7 million of consulting expenses associated with systems implementation activities and post-implementation support services,$10.5 million of expenses associated with litigation, a$0.8 million loss related to the write-off of an investment, and$3.9 million of net other non-recurring expenses, offset by income of$2.9 million related to changes inAdaptHealth's estimated TRA liability. The 2021 period includes$2.1 million of expenses related to legal and other costs associated with the separation of the Company's former Co-CEO,$3.9 million of expenses associated with litigation, claims and settlements,$1.9 million of expenses associated with lease terminations, and$4.6 million of net other non-recurring expenses, offset by a$1.9 million gain in connection with the consolidation of an equity method investment, and$0.9 million of net reductions in the fair value of contingent consideration liabilities related to acquisitions. The 2020 period includes a$1.5 million expense related to a transition services agreement executed in connection with an acquisition completed in 2020 and$5.8 million of net other non-recurring expenses, offset by$4.2 million of net reductions in the fair value of contingent consideration liabilities related to acquisitions.
Free Cash Flow
AdaptHealth uses free cash flow, which is a financial measure that is not in accordance withU.S. GAAP, in its operational and financial decision-making and believes free cash flow is useful to investors because similar measures are frequently used by securities analysts, investors, ratings agencies and other interested parties to evaluateAdaptHealth's competitors and to measure the ability of companies to service their debt.AdaptHealth's presentation of free cash flow should not be construed as a measure of liquidity or discretionary cash available toAdaptHealth to fund its cash needs, including investing in the growth of its business and meeting its obligations.AdaptHealth defines free cash flow as net cash provided by operating activities less cash paid for purchases of equipment and other fixed assets. For further discussion on free cash flow, including a reconciliation from cash flows provided by operating activities, refer to Liquidity and Capital Resources - Free Cash Flow below.
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 capital expenditures including patient equipment, product and supply costs, salaries, labor, benefits and other employee-related costs, third-party customer service, billing and collections and logistics costs, acquisitions and debt service, and to fund share repurchases.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. 52
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AdaptHealth may seek additional equity or debt financing in connection with the growth of its business, primarily for acquisitions. In addition, economic conditions may cause 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 adversely affected. As ofDecember 31, 2022 ,AdaptHealth had approximately$46.3 million of cash and cash equivalents. InApril 2020 ,AdaptHealth received distributions of the CARES Act PRF of$17.2 million , and subsequent toApril 2020 ,AdaptHealth completed several acquisitions in which the acquired companies received a total of$22.2 million of PRF payments prior to the applicable dates of acquisition. In connection with the accounting for these acquisitions,AdaptHealth recorded assumed liabilities of$7.7 million relating to the PRF payments received by the acquired companies. The PRF payments 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 were required to agree to certain terms and conditions, including, among other things, that the funds would be 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 were required to comply with the reporting requirements described in the terms and conditions and as determined by HHS. As ofDecember 31, 2021 ,AdaptHealth recognized all of the PRF payments it had received, and the liabilities assumed for PRF payments received from acquired companies, as grant income, as it was determined thatAdaptHealth has complied with the terms and conditions associated with the grant. As such, there is no liability recorded inAdaptHealth's consolidated balance sheet relating to the PRF payments as ofDecember 31, 2022 and 2021. HHS has indicated that the CARES Act PRF are subject to ongoing reporting and changes to the terms and conditions, and there have been several updates to such reporting requirements and terms and conditions since they were issued by HHS. Such updates have related to changes to the guidance regarding utilization of the funds granted from the PRF and updates to the reporting requirements of such funds, among other updates. To the extent that there is any future updated guidance from HHS or modifications to the terms and conditions, it may affectAdaptHealth's ability to comply andAdaptHealth could be required to reverse the recognition of the grant income recorded and return a portion of the funds received, which could be material toAdaptHealth .AdaptHealth is continuing to monitor the terms and conditions issued by HHS. 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. Also, as permitted under the CARES Act,AdaptHealth elected to defer certain portions of employer-paid FICA taxes otherwise payable fromMarch 27, 2020 toJanuary 1, 2021 . In total,AdaptHealth deferred$8.6 million under this provision, and paid$4.3 million onJanuary 4, 2022 and$4.3 million onDecember 14, 2022 . There are no further amounts due under this provision as ofDecember 31, 2022 . AtDecember 31, 2022 ,AdaptHealth had$765.0 million outstanding under its existing credit facility. InJanuary 2021 ,AdaptHealth refinanced its debt borrowings and entered into a new credit agreement, which was subsequently amended inApril 2021 (the "2021 Credit Agreement"). The 2021 Credit Agreement consists of a$800 million term loan (the "2021 Term Loan") and$450 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$5.0 million beginningJune 30, 2021 throughMarch 31, 2023 , increasing to$10.0 million beginningJune 30, 2023 throughDecember 31, 2025 , and the unpaid principal balance is due at maturity inJanuary 2026 . 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. As ofDecember 31, 2022 , there were no outstanding borrowings under the 2021 Revolver. As of the date of this filing, there was$25.0 million of outstanding borrowings under the 2021 Revolver. 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 zero percent 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. 53
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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 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.AdaptHealth was in compliance with all debt covenants as ofDecember 31, 2022 . InAugust 2021 ,AdaptHealth LLC issued$600.0 million aggregate principal amount of 5.125% senior unsecured notes (the "5.125% Senior Notes"). The 5.125% Senior Notes will mature onMarch 1, 2030 . Interest on the 5.125% Senior Notes is payable onMarch 1st andSeptember 1st of each year, beginning onMarch 1, 2022 . The 5.125% Senior Notes will be redeemable atAdaptHealth's option, in whole or in part, at any time on or afterMarch 1, 2025 , and the redemption price for the 5.125% Senior Notes if redeemed during the 12 months beginning (i)March 1, 2025 is 102.563%, (ii)March 1, 2026 is 101.281%, (iii)March 1, 2027 and thereafter is 100.000%, in each case together with accrued and unpaid interest.AdaptHealth may also redeem some or all of the 5.125% Senior Notes beforeMarch 1, 2025 at a redemption price of 100% of the principal amount of the 5.125% Senior Notes, plus a "make-whole" premium, together with accrued and unpaid interest. In addition,AdaptHealth may redeem up to 40% of the original aggregate principal amount of the 5.125% Senior Notes beforeMarch 1, 2025 with the proceeds from certain equity offerings at a redemption price equal to 105.125% of the principal amount of the 5.125% Senior Notes, together with accrued and unpaid interest. Furthermore,AdaptHealth may be required to make an offer to purchase the 5.125% Senior Notes upon the sale of certain assets or upon specific kinds of changes of control. InJanuary 2021 ,AdaptHealth LLC issued$500.0 million aggregate principal amount of 4.625% senior unsecured notes (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 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 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 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. InJuly 2020 ,AdaptHealth LLC issued$350.0 million aggregate principal amount of 6.125% senior unsecured notes (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'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 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 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 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. As ofDecember 31, 2022 and 2021,AdaptHealth had working capital of$129.1 million and$170.2 million , respectively. A significant portion ofAdaptHealth's assets consists of accounts receivable from third-party payors that are responsible for payment for the products and services thatAdaptHealth provides. 54
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Cash Flow. The following table presents selected data from
consolidated statements of cash flows for years ended
and 2020:
Year Ended December 31,
(in thousands) 2022 2021 2020
(Unaudited)
Net cash provided by operating activities $ 373,867 $ 275,679 $ 195,634
Net cash used in investing activities (411,171) (1,824,753) (815,703)
Net cash (used in) provided by financing activities (66,051) 1,598,739 643,153
Net (decrease) increase in cash and cash
equivalents (103,355) 49,665 23,084
Cash and cash equivalents at beginning of period 149,627 99,962 76,878
Cash and cash equivalents at end of period $ 46,272 $ 149,627 $ 99,962
Net cash provided by operating activities for the years ended December 31, 2022
and 2021 was $373.9 million and $275.7 million , respectively, an increase of
$98.2 million . The increase was the result of (1) a $85.0 million reduction in
net income, (2) a net increase of $139.4 million in non-cash charges, primarily
from depreciation and amortization, the change in the estimated fair value of
the warrant liability and contingent consideration common shares liability,
equity-based compensation expense, and loss on extinguishment of debt, (3) an
increase of $1.5 million in payments for contingent consideration related to
acquisitions, and (4) a net $45.3 million increase resulting from the change in
operating assets and liabilities, primarily from the change in accounts
receivable, inventory and accounts payable and accrued expenses.
Net cash provided by operating activities for the years ended December 31, 2021
and 2020 was $275.7 million and $195.6 million , respectively, an increase of
$80.1 million . The increase was the result of (1) a $352.2 million improvement
in net income, (2) a net decrease of $85.4 million in non-cash charges,
primarily from the change in the estimated fair value of the contingent
consideration common shares liability and warrant liability, amortization,
equity-based compensation expense, write-off of deferred financing costs, loss
on extinguishment of debt, non-cash reduction in the carrying amount of
operating lease right-of-use assets and changes in fair value of contingent
consideration, (3) a $43.5 million change in deferred income taxes, (4) a net
$139.2 million decrease resulting from the change in operating assets and
liabilities, primarily from the change in accounts receivable, inventory and
accounts payable and accrued expenses (excluding the impact of cash received in
the 2020 period in connection with the CARES Act discussed below), and (5) a
decrease of $28.0 million in operating lease obligations, which was offset by
the receipt of $45.8 million of recoupable advanced payments from CMS and the
receipt of $17.2 million of provider relief fund payments in connection with the
CARES Act in 2020.
Net cash used in investing activities for the years ended December 31, 2022 ,
2021 and 2020 was $411.2 million , $1,824.8 million and $815.7 million ,
respectively. The use of funds in 2022 consisted of $19.0 million for business
acquisitions, $391.4 million for equipment and other fixed asset purchases and
$0.7 million for other investments. The use of funds in 2021 consisted of
$1,620.3 million for business acquisitions, primarily for the AeroCare
acquisition, $203.3 million for equipment and other fixed asset purchases and
$1.1 million for other investments. The use of funds in 2020 consisted of $769.3
million for business acquisitions, primarily for the Solara, ActivStyle ,
Advanced and Pinnacle acquisitions, $39.8 million for equipment and other fixed
asset purchases, $8.7 million for other investments, offset by $2.0 million of
cash proceeds from the sale of an investment.
Net cash used in financing activities for 2022 was $66.1 million and consisted
of repayments of $36.2 million on long-term debt and finance lease obligations,
payments of $14.5 million for contingent consideration and deferred purchase
price related to acquisitions, payments of $14.0 million for common stock
repurchases under a share repurchase program, a payment of $2.0 million for a
distribution to noncontrolling interests, and payments of $3.5 million for tax
withholdings associated with equity-based compensation activity and stock option
exercises, offset by proceeds of $1.6 million in connection with the employee
stock purchase plan and proceeds of $2.5 million relating to stock option
exercises.
Net cash provided by financing activities for 2021 was $1,598.7 million and
consisted of proceeds of $1,165.0 million from borrowings on long-term debt and
lines of credit, proceeds of $1,100.0 million from the issuance of senior
unsecured notes, proceeds of $278.9 million from the issuance of shares of
Common Stock in connection with a public underwritten offering, proceeds of
$12.3 million from the exercise of stock options, and proceeds of $1.0 million
in connection with the employee stock purchase plan, offset by total repayments
of $869.4 million on long-term debt and
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finance lease obligations, payments of$13.8 million for equity issuance costs, payments of$29.2 million for debt issuance costs, payments of$25.2 million for contingent consideration and deferred purchase price related to acquisitions, payments of$16.1 million for debt prepayment penalties, payments of$1.1 million for distributions to noncontrolling interests, and payments of$3.6 million relating to tax withholdings associated with equity-based compensation activity and stock option exercises. Net cash provided by financing activities for 2020 was$643.2 million and 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$13.0 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 , payments of$4.0 million for contingent consideration and deferred purchase price related to acquisitions, and payments of$0.1 million relating to tax withholdings associated with equity-based compensation activity.
Free Cash Flow
The following table reconciles net cash provided by operating activities to free cash flow, which is a non-GAAP measure, for the years endedDecember 31, 2022 , 2021 and 2020: Year Ended December 31, (in thousands) 2022 2021 2020 (Unaudited)
Net cash provided by operating activities
$ 195,634 Purchases of equipment and other fixed assets (391,423) (203,308) (39,755) Free cash flow$ (17,556) $ 72,371 $ 155,879 Free cash flow was negative$17.6 million for the year endedDecember 31, 2022 , compared to positive$72.4 million and$155.9 million for the years endedDecember 31, 2021 and 2020, respectively. The reduction in free cash flow was primarily due to higher net cash provided by operating activities due to an increase in the source of cash for improved results from operations, offset by an increase in, and timing of, purchases of patient medical equipment for operating requirements.
Critical Accounting Policies and Critical 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 critical 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 critical estimates in relation to its consolidated financial statements include those related to revenue recognition, accounts receivable, and valuation of goodwill and long-lived assets. 56
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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), durable 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 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 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.
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 cash collections
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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.
Valuation of
The Company has a significant amount of goodwill on its balance sheet that resulted from the business acquisitions the Company has made.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 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. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors, such as estimates of a reporting unit's fair value and judgment about impairment triggering events. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill impairment test will prove to be accurate predictions of the future.
Long-Lived Assets
The Company's long-lived assets, such as equipment and other fixed 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. The following table summarizes the useful lives of the identifiable intangible assets acquired: Tradenames 5 to 10 years Payor contracts 10 years Contractual rental agreements 2 years Developed technology 5 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, Summary of
Significant Accounting Policies – (cc) Recently Issued Accounting
Pronouncements, to its consolidated financial statements included in this
report.
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 FASB ASC Topic 450, Accounting
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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. Significant judgment is required to determine both probability and the estimated amount. The Company reviews its accruals at least quarterly and adjusts accordingly to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information. At this time, the Company has no material accruals related to lawsuits, claims, investigations and proceedings. While there can be no assurance, based on the Company's evaluation of information currently available, the Company's management believes any liability that may ultimately result from resolution of such loss contingencies will not have a material adverse effect on the Company's financial conditions or results of operations. However, the Company's assessment may be affected by limited information. Accordingly, the Company's assessment may change in the future based upon availability of new information and further developments in the proceedings of such matters. The results of legal proceedings are inherently uncertain, and material adverse outcomes are possible. In connection with the Company's acquisition ofPPS HME Holdings LLC ("PPS"), inMay 2018 , the Company assumed a Corporate Integrity Agreement ("CIA") at one of PPS' subsidiaries,Braden Partners L.P. d/b/a Pacific Pulmonary Services (BP). The CIA was entered into with theOffice of Inspector General of the U.S. Department of Health and Human Services ("OIG"). The CIA had a five-year term which expired as ofApril 2022 . In connection with the acquisition and integration of PPS byAdaptHealth , the OIG confirmed that the requirements of the CIA imposed upon BP would only apply to the operations of BP and therefore no operations of any otherAdaptHealth affiliate are subject to the requirements of the CIA following the acquisition. OnDecember 16, 2021 , the OIG notified PPS that its report for the period endedMarch 31, 2021 had been accepted and PPS had satisfied its obligations under the CIA as of such date. OnMay 24, 2022 , the Company submitted its final report under the CIA for the period endedMarch 31, 2022 . OnJanuary 12, 2023 , the OIG notified PPS that its report for the period endedMarch 31, 2022 had been accepted and PPS had satisfied its obligations under the CIA as of such date. As a result, the OIG also advised PPS that it had complied with its obligations under the CIA and therefore the term of the CIA had concluded. OnJuly 25, 2017 ,AdaptHealth Holdings LLC , aDelaware limited liability company ("AdaptHealth Holdings "), was served with a subpoena by theU.S. Attorney's Office for theUnited States District Court for the Eastern District of Pennsylvania ("EDPA") pursuant to 18 U.S.C. §3486 to produce certain audit records and internal communications regarding ventilator billing. The investigation focused on billing practices regarding one payor that contracted for bundled payments for certain ventilators.AdaptHealth Holdings has cooperated with investigators and, through agreement with the EDPA, has submitted all information requested in the Company's possession. An independent third party was retained byAdaptHealth Holdings that identified overpayments and underpayments for ventilator billings related to the payor, and a remittance was sent to reconcile that account. OnOctober 3, 2019 , the Company received a follow-up civil investigative demand from the EDPA regarding a document previously produced to the EDPA and patients included in the review by the independent third party. The Company has responded to the EDPA and supplemented its production as requested with any relevant documents in the Company's possession. During subsequent communications, the EDPA indicated to the Company that the investigation remained ongoing. The EDPA also requested additional information regarding certain patient services and claims refunds processed by the Company in 2017. The Company produced this information in coordination with the EDPA. The EDPA has also raised questions regarding other aspects of ventilator billing. While the Company cannot provide any assurance as to whether the EDPA will seek additional information or pursue this matter further, it does not believe that the investigation will have a material adverse effect on the Company. InMarch 2019 , prior to its acquisition by the Company,AeroCare was served with a civil investigative demand (CID) issued bythe United States Attorney for theWestern District ofKentucky ("WDKY"). The CID seeks to investigate allegations thatAeroCare improperly billed, or caused others to improperly bill, for oxygen tank contents that were not delivered to beneficiaries. The WDKY has requested documents related to such oxygen tank content billing as well as other categories of information.AeroCare has cooperated with the WDKY and has produced documents and provided explanations of its billing practices. InSeptember 2020 , the WDKY indicated the investigation includes alleged violations of the federal False Claims Act and as well as alleged violations of state Medicaid false claims acts in ten states.AeroCare has cooperated fully with the investigation and has indicated to the WDKY that concerns raised do not accurately identify Medicare coverage criteria and that state Medicaid coverage requirements generally do not provide for separate reimbursement for portable gaseous oxygen contents in the circumstances at issue. While the Company cannot provide any assurance as to whether the WDKY will seek additional information or pursue this matter further, it does not believe that the investigation will have a material adverse effect on the Company.
On
Company, filed a purported class action complaint against the Company and
certain of its current and former officers in the
for the Eastern District of Pennsylvania
purports to be asserted on behalf of a class of persons
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who purchased the Company's stock betweenNovember 11, 2019 andJuly 16, 2021 . The Complaint generally alleges that the Company and certain of its current and former officers violated federal securities laws by making allegedly false and misleading statements and/or failing to disclose material information regarding the Company's organic growth trajectory. The Complaint seeks unspecified damages. OnOctober 14, 2021 , the Delaware County Employees Retirement System and the Bucks County Employees Retirement System were named Lead Plaintiffs. Pursuant to the scheduling order, Lead Plaintiffs filed a consolidated complaint onNovember 22, 2021 (the "Consolidated Complaint"), which asserts substantially the same claim, but adds a number of current and former directors of the Company as additional defendants and a new theory of recovery based on the Company's alleged failure to disclose information concerning the Company's former Co-CEO's alleged tax fraud arising from certain past private activity (the "Consolidated Class Action"). OnJanuary 20, 2022 , the defendants filed a motion to dismiss the Consolidated Complaint. Lead Plaintiffs' opposition to defendants' motion was filed onMarch 21, 2022 , and defendants' reply was filed onApril 15, 2022 . OnJune 9, 2022 , the court issued an opinion and order denying the defendants' motion to dismiss the Consolidated Complaint. OnJuly 15, 2022 , the court entered a scheduling order providing for, inter alia, a schedule for completing class certification discovery, as well as setting a briefing schedule for motions for class certification. Pursuant to the scheduling order, Lead Plaintiffs filed their motion for class certification onJuly 28, 2022 . OnDecember 12, 2022 , the court entered an amended scheduling order with respect to class certification discovery and remaining briefing on Lead Plaintiffs' motion for class certification. Pursuant to the amended scheduling order, the defendants' opposition to Lead Plaintiffs' motion for class certification is due to be filed onMarch 30, 2023 ; and Lead Plaintiffs' reply is due to be filed onMay 22, 2023 . The Company intends to vigorously defend against the allegations contained in the Consolidated Complaint, but there can be no assurance that the defense will be successful. OnDecember 6, 2021 , a putative shareholder of the Company,Carol Hessler , filed a shareholder derivative complaint against certain current and former directors and officers of the Company in theUnited States District Court for the Eastern District of Pennsylvania (the "Derivative Complaint"). The Derivative Complaint generally alleges that the defendants breached their fiduciary duties owed to the Company by allegedly causing or allowing misrepresentations and/or omissions regarding the Company's organic growth and the Company's former Co-CEO's alleged criminal activity, failing to maintain an adequate system of oversight, disclosure controls and procedures, and internal controls over financial reporting and due diligence into the Company's management team, and engaging in insider trading. The Derivative Complaint also alleges claims for waste of corporate assets and unjust enrichment. Finally, the Derivative Complaint alleges that certain of the individual defendants violated Section 14(a) of the Securities Exchange Act by allegedly negligently issuing, causing to be issued, and participating in the issuance of materially misleading statements to stockholders in the Company's Proxy Statements on Schedule DEF 14A in connection with a Special Meeting of Stockholders, held onMarch 3, 2021 , and the 2021 Annual Meeting of Stockholders, held onJuly 27, 2021 . The Derivative Complaint seeks, among other things, an award of money damages.
On
final resolution of the Consolidated Class Action. On
so-ordered the parties’ stipulation.
The Company intends to vigorously defend against the allegations contained in the Derivative Complaint, but there can be no assurance that the defense will be successful. OnMay 2, 2022 , theU.S. Attorney's Office for the Southern District of New York issued a civil investigative demand to a subsidiary of the Company, pursuant to the False Claims Act, 31 U.S.C. § 3733 ("FCA") surrounding whether the subsidiary submitted false claims in violation of theFCA related to its billing of, and reimbursements from, federal health care programs for ventilators provided to patients fromJanuary 1, 2015 to the present. The Company is fully cooperating with the investigation. Given the investigation is in the early stages, it is not possible to determine whether it will have a material adverse effect on the Company.
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