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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
XX ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
OR
Commission file number: 001-38399
AdaptHealth Corp.
(Exact name of registrant as specified in its charter)
Delaware
(State of Other Jurisdiction of incorporation or Organization)
220 West Germantown Pike Suite 250, Plymouth Meeting, PA
(Address of principal executive offices)
82-3677704
(I.R.S. Employer Identification No.)
19462
(Zip code)
Registrant’s telephone number, including area code: (610) 630-6357
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Class A Common Stock, par value $0.0001 per share
Trading Symbol(s)
AHCO
Name Of Each Exchange
On Which Registered
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No XX
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No XX
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes XX No ☐
Indicate by check mark whether the Registrant has submitted electronically; every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.0405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes XX No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.
See the definitions of "large accelerated filer,” "accelerated filer,” "smaller reporting company,” and "emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer XX
Non-accelerated filer ☐
Smaller reporting company XX
Emerging growth company XX
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No XX
As of June 30, 2020, the last business day of the Registrant's most recently completed second fiscal quarter, the aggregate market value of the shares of Class A Common Stock, par
value $0.0001 per share, held by non-affiliates of the Registrant, computed based on the closing sale price of $16.10 per share on June 30, 2020, as reported by The Nasdaq Stock Market
LLC, was approximately $184.9 million. Shares of Common Stock held by each executive officer and director and by each shareholder affiliated with a director or an executive officer have
been excluded from this calculation because such persons may be deemed to be affiliates. As of March 12, 2021, there were 114,898,405 shares of the Registrant’s Class A Common Stock
issued and outstanding and 0 shares of the Registrant’s Class B Common Stock issued and outstanding.
Documents Incorporated by Reference
The information called for by Part III is incorporated by reference to the Definitive Proxy Statement for the 2021 Annual Meeting of Stockholders of the Registrant which will be
filed with the U.S. Securities and Exchange Commission not later than April 30, 2021.
TABLE OF CONTENTS
PART I
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Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
PART III
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
PART IV
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CAUTIONARY STATEMENT
In this Annual Report on Form 10-K, including "Management’s Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7, and the documents incorporated by reference herein, we make forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to expectations for future financial performance,
business strategies or expectations for our business. These statements may be preceded by, followed by or include the words "may," "might,"
"will," "will likely result," "should," "estimate," "plan," "project," "forecast," "intend," "expect," "anticipate," "believe," "seek," "continue,"
"target" or similar expressions.
These forward-looking statements are based on information available to us as of the date they were made, and involve a number of
risks and uncertainties which may cause them to turn out to be wrong. Accordingly, forward-looking statements should not be relied upon as
representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect
events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be
required under applicable securities laws. As a result of a number of known and unknown risks and uncertainties, our actual results or
performance may be materially different from those expressed or implied by these forward- looking statements. Some factors that could cause
actual results to differ include:
● competition and the ability of our business to grow and manage growth profitably;
● changes in applicable laws or regulations;
● fluctuations in the U.S. and/or global stock markets;
● the possibility that we may be adversely affected by other economic, business, and/or competitive factors;
● the impact of the coronavirus (COVID-19) pandemic and our response to it;
● failure to consummate or realize the expected benefits of the acquisition of AeroCare Holdings, Inc. ("AeroCare”); and
● other risks and uncertainties set forth in this Form 10-K, as well as the documents incorporated by reference herein.
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SUMMARY RISK FACTORS
Our business is subject to numerous risks and uncertainties, including those described in Item 1A "Risk Factors”. These risks
include, but are not limited to the following:
● the coronavirus (COVID-19) pandemic and the global attempt to contain it;
● our reliance on relatively few suppliers for the majority of our patient service equipment and supplies;
● continuing efforts by private third-party payors to control their costs and our payor contracts being subject to renegotiation or
termination;
● changes in governmental or private payor supply replenishment schedules and our ability to manage the complex and lengthy
reimbursement process;
● our reliance for a significant portion of our revenue on the provision of sleep therapy equipment and supplies to patients;
● consolidation among health insurers and other industry participants;
● our failure to maintain controls and processes over billing and collections;
● our ability to maintain or develop relationships with patient referral sources;
● our ability to successfully design, modify and implement technology-based and other process changes and our dependence on
information systems, including software licensed from third parties;
● competition from numerous other home respiratory and mobility equipment providers;
● changes in medical equipment technology and development of new treatments;
● the risk of rupture or other accidents due to our transport of compressed and liquid oxygen;
● the outsourcing of a portion of our internal business functions to third-party providers;
● our ability to attract and retain key members of senior management and other key personnel;
● our ability to execute our strategic growth plan, which involves the acquisition of other companies, including our ability to integrate
the operations of AeroCare into our business and realize the expected benefits of the AeroCare acquisition;
● the impact of political and economic conditions;
● risks related to government regulation, including federal and state changes to reimbursement and other Medicaid and Medicare
policies, healthcare reform efforts, and our ability to comply with applicable law, including healthcare fraud and abuse and false
claims laws and regulations, and data protection, privacy and security, and consumer protection laws;
● changes in the authorizations or documentation necessary for our products and audits of reimbursement claims by various
governmental and private payor entities;
● significant reimbursement reductions and/or exclusion from markets or product lines;
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● our ability to maintain required licenses and accreditation;
● the impact if we were required to write down all or part of our goodwill and identifiable intangible assets;
● our ability to generate sufficient cash flow or obtain additional capital to fund our operating subsidiaries and finance our growth;
● risks relating to our indebtedness, including our ability to meeting operating covenants and the impact from changes to LIBOR;
● our ability to timely and effectively implement controls and procedures required by the Sarbanes-Oxley Act; and
● significant increased expenses and administrative burdens as a result of being a public company and certain of our management’s
limited experience in operating a public company.
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Item 1. Business
PART I
We are a national leader in providing patient-centric and technology-enabled chronic disease management solutions including home
healthcare equipment, medical supplies to the home and related services in the United States. We focus primarily on providing (i) sleep
therapy equipment, supplies and related services (including CPAP and bi PAP services) to individuals suffering from obstructive sleep apnea
("OSA”), (ii) medical devices and supplies to patients for the treatment of diabetes (including continuous glucose monitors ("CGM”) and
insulin pumps), (iii) home medical equipment ("HME”) to patients discharged from acute care and other facilities, (iv) oxygen and related
chronic therapy services in the home, and (v) other HME medical devices and supplies on behalf of chronically ill patients with wound care,
urological, incontinence, ostomy and nutritional supply needs. We service beneficiaries of Medicare, Medicaid and commercial payors. As of
December 31, 2020, we serviced approximately 1.9 million patients annually in all 50 states through our network of 283 locations in 42 states.
Following our acquisition of AeroCare Holdings, Inc. ("AeroCare”) in February 2021, we service approximately 3.0 million patients annually in
all 50 states through our network of over 500 locations across 46 states. Our principal executive offices are located at 220 West Germantown
Pike, Suite 250, Plymouth Meeting, Pennsylvania 19462.
We were originally formed in November 2017 as a special purpose acquisition company under the name DFB Healthcare Acquisitions
Corp. for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business
combination involving one or more businesses. On November 8, 2019, we completed our initial business combination with AdaptHealth
Holdings LLC ("AdaptHealth Holdings”), a Delaware limited liability company, pursuant to an Agreement and Plan of Merger, dated as of July
8, 2019 (as amended, the "Merger Agreement”), by and among DFB Healthcare Acquisitions Corp. a Delaware corporation (DFB Healthcare
Acquisitions Corp. prior to the Business Combination is referred to herein as "DFB”), DFB Merger Sub LLC, a Delaware limited liability
company (the "Merger Sub”), our wholly owned subsidiary, AdaptHealth Holdings LLC, AH Representative LLC (the "AdaptHealth Holdings
Unitholders’ Representative”), BM AH Holdings, LLC, Access Point Medical Inc. (together the "Blocker Companies”) and, solely for the
purposes described therein, Clifton Offshore Investments L.P., a British Virgin Islands limited partnership (the "A Blocker Seller”),
BlueMountain Foinaven Master Fund L.P., a Cayman Islands exempted limited partnership, BMSB L.P. a Delaware limited partnership,
BlueMountain Fursan Fund L.P. a Cayman Islands exempted limited partnership (collectively, the "BM Blocker Sellers” and together with the
A Blocker Seller, the "Blocker Sellers”). The transactions completed pursuant to the Merger Agreement are collectively referred to herein as
the "Business Combination". As part of the Business Combination, we changed our name from DFB Healthcare Acquisitions Corp. to
AdaptHealth Corp. ("we”, "us”, "our”, "AdaptHealth” or the "Company”). Refer to Note 11, Stockholders’ Equity, included in our
consolidated financial statements for the year ended December 31, 2020 included in this report for additional information.
On February 1, 2021, we acquired 100% of the equity interests of AeroCare Holdings, Inc. (AeroCare). AeroCare is a leading national
technology-enabled respiratory and home medical equipment distribution platform in the United States and offers a comprehensive suite of
direct-to-patient equipment and services including CPAP and BiPAP machines, oxygen concentrators, home ventilators, and other durable
medical equipment products. The total consideration consisted of (i) a cash payment of approximately $1.1 billion at closing, (ii) the issuance
of 13,992,615 shares of the Company’s Class A Common Stock at closing, (iii) the issuance of 130,474.73 shares of the Company’s Series C
Convertible Preferred Stock at closing, and (iv) the issuance of 3,959,912 options to purchase shares of the Company’s Class A Common Stock
in the future, which have a weighted-average exercise price of $6.24 per share and a weighted-average exercise period of approximately 7 years
from the date of closing. On March 3, 2021, the Company’s stockholders approved, for purposes of complying with Nasdaq Listing Rule 5635,
the issuance of shares of the Company’s Class A Common Stock, representing equal to or greater than 20% of the outstanding common stock
or voting power of the Company issuable upon conversion of the Series C Convertible Preferred Stock issued to the former equityholders of
AeroCare, by removal of the conversion restriction that prohibits such conversion of Series C Convertible Preferred Stock. Following the
receipt of the approval of the Company’s stockholders, the holders may elect to convert, and the Company may elect to effect a mandatory
conversion of, each share of Series C Convertible Preferred Stock into 100 shares of Class A Common Stock (subject to certain anti-dilution
adjustments). The Company has elected
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to effect a mandatory conversion of the Series C Convertible Preferred Stock, and the conversion of such shares of Series C Convertible
Preferred Stock to shares of Class A Common Stock is expected to occur on March 19, 2021.
Industry Overview
The HME industry provides critical medical products and recurring supply services, designed to improve quality of life, to patients in
their homes. The HME industry allows patients with complex and chronic conditions to transition to their homes and achieve a greater level of
independence, which is often lost in facility-based settings. While the industry has traditionally treated outpatient and lower acuity ailments,
recent technological improvements have helped make higher acuity treatment more affordable and, in turn, have allowed the industry to shift
to the treatment of more advanced acute ailments. The equipment and supplies that HME providers deliver can support respiratory, mobility,
diabetes management, nutritional and other general home needs (bathroom needs, nutritional needs, hospital beds, among others).
According to the Centers for Medicare & Medicaid Services ("CMS”), the HME industry grew from $40 billion in 2010 to $56 billion in
2018 (representing a 4.3% CAGR), of which the Company estimated its total addressable market for its sleep therapy, oxygen services, mobility
products and hospice HME business lines was approximately $12 billion to $15 billion in 2018. During that time Medicaid data shows a
continued shift of long-term services and supports spending into the home, with 57% of that spending going to home and community-based
services in 2016. According to CMS, the HME market is projected to continue to grow at a 6.1% CAGR over the next nine years. As a result of
the Company’s recent diabetes and home medical supplies acquisitions, the Company believes it has more than doubled its total addressable
market to more than $25 billion. Primary drivers of continued market growth include:
● Aging U.S. Population: The population of adults aged 65 and older in the United States, a significant group of end users of
AdaptHealth’s products and services, is expected to continue to grow and thus grow AdaptHealth’s market opportunity. According
to CMS, in the United States, the population of adults between the ages of 65 and 84 is expected to grow at a 2.5% CAGR through
2030, while the population of adults over 85 is projected to grow at a 2.9% CAGR during that same time period. Not only is the elderly
population expected to grow, but it is also expected to make up a larger percentage of the total U.S. population. According to the U.S.
Census Bureau, the U.S. geriatric population was approximately 15% of the total population in 2014 and is expected to grow to
approximately 24% of the total population by 2060. This growth emphasizes the need for companies, such as AdaptHealth, to provide
efficient and effective equipment to a patient’s home, shortening the amount of time that the patient population spends in an
inpatient setting.
● Increasing Prevalence of Chronic Conditions: HME is necessary to help treat significant health issues affecting millions of
Americans. For example, chronic obstructive pulmonary disease was the third leading cause of death in the United States in 2014 with
over 15 million reported diagnoses, according to the Centers for Disease Control and Prevention ("CDC”). Congestive heart failure,
another condition where HME plays a role in successful treatment, impacts more than five million Americans, according to the CDC.
The CDC also estimates that more than 9% of the U.S. population suffers from diabetes. AdaptHealth believes that CGM and
diabetes represent a $16 billion market segment. AdaptHealth believes that the CGM market could grow by 18% to $3.4 billion by
2022, and the insulin pump market could grow by 12% to $2.2 billion by 2022. Finally, according to the American Sleep Apnea
Association, obstructive sleep apnea affects 20 million people across the nation, with 15 million undiagnosed, including many
individuals younger than 65 years old. As these conditions continue to increase in prevalence, the Company expects that the demand
within the HME industry for suppliers, such as AdaptHealth, will grow with it, positioning the Company to be able to expand its
market reach and penetration.
● Advancements in Technology: Continuing development of technology and supply logistics has enabled more efficient and effective
delivery of care in the home along with the collection of data that can be used for ongoing treatment. This, in turn, has helped grow
AdaptHealth’s total addressable market. With improvements in technology, physicians are often able to monitor patients’ adherence
to prescribed therapy, which previously required admission to a facility. With the advancement of technology, physicians are more
confident in shifting care to a patient’s home and patients are more comfortable receiving care in this setting.
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● Increasing Prevalence of and Preference for In-Home Treatments: The number of conditions that can be treated in the home
continues to grow, with recent additions including chronic wound care, sleep testing, dialysis and chemotherapy. In-home care is
also increasingly becoming the preferred method of treatment, particularly for the elderly population. According to the AARP Public
Policy Institute, 90% of patients over age 55 have indicated a preference to receive care in the home rather than in an institutional
setting. Patient preference is supported by data that has shown that the efficacy of home care is often equivalent to that of facility-
based care. The home setting provides comfort and convenience for a population that often faces barriers to receiving effective
traditional treatment, such as transportation and adherence. By bringing the care to them, the elderly population can maintain a
higher quality of life while still receiving high-quality care and equipment. As a result, more companies within the healthcare industry
that are primarily facility-based are beginning to shift towards in-home offerings. AdaptHealth believes that medical supplies to the
home represents a $10 billion segment.
● Home Care is the Lowest Cost Setting: Not only can in-home care be just as effective as care delivered in a facility-based setting,
but it has also proven to be more cost effective. The cost effectiveness of in-home care is particularly important within the context of
government pressures to lower the cost of care, pushing payors, such as Medicare and Medicaid, and clinicians to seek care settings
that are less costly than hospitals and inpatient facilities. On a daily basis, home healthcare has been estimated by Cain Brothers &
Company, LLC to be approximately seven times less expensive than care provided in skilled nursing facilities, the closest acuity site
of care. Home care generally offers a significant cost reduction opportunity relative to facility-based care without sacrificing quality.
Business Strategy
AdaptHealth’s strategy is to grow its revenue while expanding margins through targeted strategies for organic growth as well as
opportunistic acquisitions that take advantage of AdaptHealth’s scalable, integrated technology platform.
● Drive Market Share Gains in the HME Market: AdaptHealth plans to leverage its technological and clinical advantages as well as
its relationships with key constituents across the HME supply chain to deepen its presence in the HME market. AdaptHealth has
built a strong network of highly diversified referral relationships that its sales force will continue to grow to help expand market
penetration in certain geographies. Primary referral sources include acute care hospitals, sleep laboratories, pulmonologist offices,
skilled nursing facilities and hospice operators, with no one source accounting for a material portion of its annual revenue as of
December 31, 2020. AdaptHealth believes that maintaining and broadening these relationships will drive organic growth.
AdaptHealth’s ability to provide many products across its contracted payors is particularly valuable, especially to providers and
facilities that discharge patients with a variety of product needs and insurance coverages. While some of its HME competitors focus
on certain specific product lines, AdaptHealth is able to offer a wide array of products to its customers. AdaptHealth believes that its
strong referral relationships and broad product portfolio will help drive market share growth.
● Grow through Acquisitions: The HME industry is highly fragmented, with more than 6,000 unique suppliers. AdaptHealth believes
that ongoing reimbursement changes will continue the consolidation trend in the HME industry that has accelerated in recent years.
We believe that, in the current environment, companies with the ability to scale operations possess competitive advantages that can
drive volume to their platforms. As one of a limited number of national HME companies, AdaptHealth plans to continue to evaluate
acquisitions and execute upon attractive opportunities to help drive growth.
● Improve Profitability with Technology-Enabled Platform: AdaptHealth plans to leverage its combined integrated technology system
(based upon third-party applications and proprietary software products) to reduce costs and improve operational efficiency in its
current business and the businesses AdaptHealth acquires. Through December 31, 2020, AdaptHealth has deployed its technology
solutions with respect to the majority of its acquisitions and have worked to establish the ability to improve logistics performance
and operating margins. The acquisition of AeroCare combines two of the industry’s leading technology platforms, which
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AdaptHealth intends to continue to improve to enhance its communications with referral sources and provide better patient service.
Further, AdaptHealth believes both platforms are leaders in tech-enabled devices and are positioned to lead the shift to connected
healthcare through our offerings of various connected devices designed to drive early interventions, reduce hospitalizations and
improve outcomes, making AdaptHealth a value-add partner to payors, providers and patients.
● Expand Product Portfolio: In addition to AdaptHealth’s other growth initiatives, AdaptHealth also plans to augment its product
portfolio to help drive growth. While AdaptHealth offers a suite of products to its referrers and patients, it has identified several key
expansion opportunities, including products in the respiratory device, respiratory medicine, diabetes management, orthotic bracing
and hospice HME markets. AdaptHealth believes that the acquisition of AeroCare greatly enhances the depth of its product offering
in respiratory devices and medicine, allowing it to further address key clinical conditions which, in turn, is expected to help drive
growth across AdaptHealth’s customer base. AdaptHealth’s scale has helped it to be successful in the past when bidding on
Medicare contracts.
● Utilize Value-Based Reimbursement Arrangements: AdaptHealth’s broad HME service offerings and technology-enabled
infrastructure provide it with the opportunity to enter into value-based reimbursement arrangements with its payors and referrers
(including large multi-specialty physician groups, hospital systems, and accountable care organizations) pursuant to which
AdaptHealth provides certain HME services on a per-patient, per-month basis or shares in reduction of HME service costs over
baseline periods. Such arrangements are attractive to risk-bearing providers (such as capitated medical groups) and payors wishing
to reduce administrative costs related to HME services.
Competitive Strengths
AdaptHealth believes that the following strengths will continue to enable it to provide high-quality products and services to its
customers and to create value.
● Differentiated Technology-Enabled Platform: Over the last five years, AdaptHealth has developed an integrated technology system
(based upon leading third-party applications and proprietary software products), which it believes provides a competitive advantage
within the HME industry. AdaptHealth’s integrated platform distinguishes itself from other industry participants by automating
processes that can be complex, prone to mistakes and inefficient. AdaptHealth believes that its platform’s ease of use, improved
compliance and automated, integrated workflow for delivery of care appeals to physicians and payors. Additionally, AdaptHealth
believes its adoption of e-prescribing solutions enhances transparency and reduces clinical errors and delays. AdaptHealth believes
such systems provide better patient service by reducing the time between an order’s receipt and the delivery of the products to the
patient. AdaptHealth believes its model is scalable, supporting future organic growth while also allowing for timely on-boarding of
acquisitions. AdaptHealth believes that this differentiated technology platform will help generate business from new clients, as other
competitors either lack the resources to modernize their infrastructure or utilize systems which do not easily allow for changes from
traditional, less automated models.
● National Scale and Operational Excellence: Following AdaptHealth’s acquisition of AeroCare, AdaptHealth services approximately
3.0 million patients annually across all 50 states and performs over 29,000 equipment and supply deliveries a day from over 500
locations across 46 states. AdaptHealth has relationships with national healthcare distribution companies to drop ship certain HME
products directly to patients’ homes in one to two days. AdaptHealth believes that its scale makes it attractive to payors as
AdaptHealth is able to service its patients across the nation. As of December 31, 2020, AdaptHealth has been able to build a network
of more than 1,000 payors, including 10 national insurers. AdaptHealth’s payor network allows its organization to provide in-network
rates for most prospective patients, unlike many of its competitors. AdaptHealth believes that this, in turn, promotes access to its
services among patients, providers and facilities, which helps to support and grow its business. AdaptHealth has a broad
distribution network to leverage with respect to timely and efficient delivery of products. AdaptHealth has strategically located small
depots across the country based upon equipment volume and drive times to support its delivery fleet and help enhance operational
success.
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● Experienced Management Team: AdaptHealth is led by a proven management team with significant experience in the HME and
healthcare services industries. The team has domain knowledge within the industry having been employed at various healthcare
organizations throughout their careers. Multiple members of the management team have also built independent HME companies and
have the proven ability to scale a business within the HME industry. Additionally, several members of the management team have
experience within their specific roles in both private and public company settings. Given the complexity of the highly regulated
industry in which it operates, AdaptHealth believes that management’s experience is a meaningful differentiator relative to its
competitors.
● Proven M&A Success: AdaptHealth’s integrated technology platform includes scalable and centralized front-end and back office
processes that facilitate the effective onboarding of potential acquisitions and help achieve cost synergies. AdaptHealth has
demonstrated its ability to execute upon acquisitions, completing approximately 90 transactions from its founding through December
31, 2020. As AdaptHealth continues to grow, it expects to deploy incrementally more capital and integrate substantially larger targets
over time, which in turn it expects will be a source of continued growth for AdaptHealth.
Company Operations
Product Offering. AdaptHealth delivers home medical equipment and supplies directly to a patient’s home upon discharge from a
hospital and/or receipt of referral. The breadth of AdaptHealth’s products is particularly valuable to acute care hospitals, sleep laboratories
and long-term care facilities that discharge patients with complex conditions and multiple product needs.
AdaptHealth is often paid a fixed monthly amount for certain HME products as designated by CMS or commercial payors, such as
CPAP equipment, wheelchairs, hospital beds, oxygen concentrators, continuous glucose monitors (CGM) and other similar products. These
sales accounted for approximately 28% of AdaptHealth’s net revenue for the year ended December 31, 2020.
For resupply sale and one-time sale products, which include those deemed to be consumables, AdaptHealth receives a single
payment upon sale of the product. These products, which include CPAP masks and related supplies, diabetes management supplies, wound
care supplies, wheelchair cushions accessories, orthopedic bracing, breast pumps and supplies, walkers, commodes and canes, nutritional
supplies and incontinence supplies, accounted for approximately 72% of AdaptHealth’s net revenue for the year ended December 31, 2020.
Supply Chain. AdaptHealth plays an important role in delivering HME products to patients in their homes. Manufacturers of home
medical equipment sell and ship their products to AdaptHealth directly. AdaptHealth also contracts with national healthcare distribution
companies to ship certain HME products directly to patients’ homes. These distributors invoice AdaptHealth for the cost of shipped products
at the time of sale. AdaptHealth receives referrals from a variety of sources, such as acute care hospitals, sleep laboratories, pulmonologist
offices, skilled nursing facilities and hospice operators. AdaptHealth’s products are either shipped to patients’ homes by AdaptHealth-
operated or contracted delivery trucks or shipped using proprietary or third-party distribution services. AdaptHealth bills payors and patients
directly for the products that are delivered and for the services that are provided.
Operating Structure
Management. AdaptHealth is led by a proven management team with experience in the HME industry across a variety of healthcare
organizations. AdaptHealth has a centralized approach for key business processes, including M&A activity, revenue cycle management,
strategic purchases, payor contracting, finance, compliance, legal, human resources, IT and sales management. In addition, AdaptHealth has
centralized many of the functions relating to its CPAP and other resupply businesses. However, AdaptHealth believes that the personalized
nature of customer requirements and referral relationships, characteristic of the home healthcare business, mandate that it emphasize a
localized operating structure as well. AdaptHealth focuses on regional management to respond promptly and effectively to local market
demands and opportunities. AdaptHealth’s regional managers are responsible and accountable for maintaining and developing
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relationships with referral sources, customer service for non-CPAP supply product lines and logistics for non-drop-shipped products.
Following the closing of the acquisition of AeroCare in February 2021, Stephen Griggs has joined Luke McGee as Co-Chief Executive
Officer of AdaptHealth.
IT. AdaptHealth has established an integrated, technology-enabled, centralized platform, distinguishing itself from many of its
competitors who traditionally use less automated processes that are typically complex, can be prone to mistakes and are inefficient.
AdaptHealth’s technology enables automated, compliant, and integrated workflow into patients’ delivery of care. AdaptHealth believes that
this advanced technology platform provides it with a competitive advantage through its unique components that cater to patients and
physicians. AdaptHealth believes that its technology platform has several characteristics that appeal to physicians, including its ease of use,
the improved compliance it enables through its integrated systems and the automated, integrated workflow it provides for patients’ delivery of
care. Additionally, AdaptHealth’s e-prescribing capabilities enhance transparency and reduce transcription and other errors. AdaptHealth
believes that patients are also better served due to the efficiency from time of order to delivery and the seamless integration across points of
care enabled by AdaptHealth’s platform. The integrated system also provides AdaptHealth management with critical information in a timely
manner, allowing them to track performance levels company wide. AdaptHealth is in the process of replacing its mobile delivery software
technology provided by a third party with AeroCare’s proprietary mobile delivery technology called OTL. This technology will allow
AdaptHealth to add many features to its existing technology, such as delivery notification, patient satisfaction applications and referral source
notifications. This application, combined with AdaptHealth’s data warehouse and evolving data lake, will allow AdaptHealth to build out a
360-degree view of its patients and activities, and will ultimately act as a fundamental component of the operating system of AdaptHealth.
AdaptHealth has formed close relationships with its third-party software providers, including Apacheta Corporation, Brightree,
Parachute Health and SnapWorx, LLC, to optimize its HME workflow. An example of this optimization is AdaptHealth’s automated point-of-
delivery technology, which tracks AdaptHealth’s drivers and produces paperless, secure delivery tickets which are uploaded directly to the
patient’s file and available immediately on an enterprise-wide basis. In addition, to address ongoing and growing threats related to
cyberattacks, AdaptHealth continues to deploy market leading defense tools to protect and secure its networks and data.
Revenue Cycle Management. AdaptHealth’s revenue cycle management and billing processes have both manual and computerized
elements that are designed to maintain the integrity of revenue and accounts receivable. Third-party payors that can accommodate electronic
claims submission, such as Medicare, certain state Medicaid payors and many commercial payors, are billed electronically on a daily basis. For
other payors, who are unable to accept electronic submissions, AdaptHealth generates paper claims and invoices.
AdaptHealth contracts with several business process outsourcing providers to provide certain billing and administrative functions
related to revenue cycle management. These providers are based in the Philippines, India and Central America and provide AdaptHealth with
the ability to scale its workforce in a cost-effective manner. As of December 31, 2020, approximately 1,800 full-time equivalent personnel were
provided to AdaptHealth under such arrangements. Following AdaptHealth’s acquisition of AeroCare in February 2021, an additional
approximately 225 full-time equivalent personnel are provided to AdaptHealth under such arrangements.
Sales and Marketing
Sales activities are generally carried out by AdaptHealth’s full-time sales representatives with assistance from on-site liaisons in
certain markets who interact directly with hospital discharge coordinators and patients. AdaptHealth’s sales team works closely with
AdaptHealth’s trained respiratory therapists in carrying out their daily sales activities. AdaptHealth primarily acquires new patients through
referrals. Sources of referrals include acute care hospitals, sleep laboratories, pulmonologist offices, skilled nursing facilities and hospice
operators, among others. AdaptHealth’s sales representatives maintain continual contact with medical professionals across these facilities.
AdaptHealth believes that its relationships with its referral sources are strong and that these entities will continue to be a source of organic
growth
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through new patients. While AdaptHealth views its referral sources as fundamental to its business, no single referral source accounted for a
material amount of its annual revenues as of December 31, 2020.
Acquisitions
Continuing to grow through accretive acquisitions is a key element of AdaptHealth’s growth strategy, and AdaptHealth
continuously reviews its pipeline of potential acquisition candidates. AdaptHealth maintains a dedicated M&A integration team and leverages
its scalable front-end and back-office technology platform to facilitate acquisition integration to help realize short-term cost saving synergies
and longer term revenue growth synergies.
During the year ended December 31, 2020, AdaptHealth completed acquisitions involving 22 companies for aggregate consideration
of approximately $914 million (excluding amounts related to contingent consideration). For the year ended December 31, 2019, AdaptHealth
completed acquisitions involving 18 companies for aggregate consideration of approximately $67 million (excluding amounts related to
contingent consideration).
Suppliers
AdaptHealth purchases home healthcare equipment, medical devices and supplies from a variety of suppliers. AdaptHealth’s sleep
therapy equipment and supplies are primarily provided by two suppliers, its mobility and home services products (such as hospital beds,
wheelchairs, walkers and commodes) are principally supplied by a single supplier and its diabetes services products/CGM products are
primarily provided by two suppliers. Notwithstanding its significant supply relationships with these vendors, AdaptHealth believes that it is
not dependent upon any single supplier and that its product needs can be met by an adequate number of qualified manufacturers.
Facilities
AdaptHealth does not own any properties and leases its headquarters facility located at 220 West Germantown Pike, Suite 250,
Plymouth Meeting, PA. As of December 31, 2020, AdaptHealth serviced approximately 1.9 million patients annually across all 50 states and
performed approximately 17,000 equipment and supply deliveries a day through its network of 283 locations in 42 states. Following the
acquisition of AeroCare in February 2021, AdaptHealth services more than 3.0 million patients annually and performs approximately 29,000
deliveries a day through its network of over 500 locations across 46 states. Full-service locations are typically between 300 and 5,000 square
feet and are usually a combination office and warehouse space. Many of these facilities are accredited to provide patient services, and their
adjacent warehouse space is used for storage of adequate supplies of equipment and accessories for such patient services. AdaptHealth
believes that these facilities are adequate to meet its current needs and expects to add additional facilities in connection with its growth
strategies. AdaptHealth believes that such additional space, when required, will be available on commercially reasonable terms, consistent
with historical cost trends.
Employees
As of December 31, 2020, AdaptHealth had approximately 4,700 employees. Following AdaptHealth’s acquisition of AeroCare in
February 2021, AdaptHealth has approximately 8,700 employees. AdaptHealth believes that relations between its management and employees
are good.
Competition
The HME market is fragmented and highly competitive. AdaptHealth competes with other large national providers, including Apria
Healthcare, Lincare and Rotech,; regional providers, including DASCO Home Medical Equipment, Binson’s Medical Equipment, Inc., Norco,
Inc. Protech Home Medical Corp. and Spiro Health; and product-specific providers, including Breg, Inc., Byram Healthcare Centers, Inc.,
Inogen, Inc., Acelity L.P., CCS Medical, US Medical and Edgepark, as well as over 6,000 local organizations. In addition, non-HME providers,
including CVS, Amazon and certain manufacturers of HME equipment are considering entering or expanding their presence in the HME
market.
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Consolidation of the HME market is a continuing trend, as required technology investments and reduced reimbursements put
financial pressure on smaller providers. Larger HME providers with integrated technology and automated processes are generally better
positioned to gain market share and more attractive vendor pricing. Competitive bidding also emphasizes the importance of relationships with
both the payors and referral sources. Because payors typically select a limited number of exclusive suppliers and physicians typically refer
based on timely delivery and consistency, relationships with both are critical to the success of competitors in the market.
AdaptHealth believes that the most important competitive factors in the regional and local markets are:
● Reputation with referral sources, including local physicians and hospital-based professionals;
● Service quality and efficient, responsive referral process;
● Differentiated technology platform that provides a superior physician and patient experience;
● Comprehensive offering across the home medical equipment space;
● Broad network of payor contracts and regional insurers;
● Overall ease of doing business; and
● Quality of patient care, including clinical expertise.
AdaptHealth believes that it competes favorably with competitors on the basis of these and other factors.
Legal Proceedings
AdaptHealth is involved in investigations, claims, lawsuits and other proceedings arising in the ordinary course of its business.
These matters involve patient complaints, personnel and employment issues, regulatory matters, personal injury, contract and other
proceedings arising in the ordinary course of business, which have not resulted in any material losses to date. Although AdaptHealth does
not expect the outcome of these proceedings will have a material adverse effect on its financial condition or results of operations, such matters
are inherently unpredictable. Therefore, AdaptHealth could incur judgments or enter into settlements or claims that could materially impact its
financial condition or results of operations.
For example, on July 25, 2017, AdaptHealth Holdings was served with a subpoena by the U.S. Attorney’s Office for the United 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 appears to be 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. An independent third party was retained by AdaptHealth Holdings that identified
overpayments and underpayments for ventilator billings related to the payor, and a remittance was sent to reconcile that account.
AdaptHealth Holdings has cooperated and fully complied with the subpoena. On October 3, 2019 AdaptHealth 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. AdaptHealth has responded to the EDPA and supplemented its production as requested. On November 9, 2020, 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 AdaptHealth in 2017. The Company is compiling this information in coordination with the
EDPA. While AdaptHealth 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.
Additionally, in March 2019, prior to its acquisition by AdaptHealth, AeroCare was served with a civil investigative demand ("CID”)
issued by the United States Attorney for the Western District of Kentucky ("WDKY”).
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The CID seeks to investigate allegations that AeroCare 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. In September 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 AdaptHealth
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 AdaptHealth.
Government Regulation
The federal government and all states in which AdaptHealth currently operates regulate various aspects of AdaptHealth’s business.
In particular, AdaptHealth’s operations are subject to federal laws that regulate the reimbursement of its products and services under various
government programs and that are designed to prevent fraud and abuse. AdaptHealth’s operations are also subject to state laws governing,
among other things, pharmacies, nursing services, medical equipment suppliers and certain types of home health activities. State regulators
may also determine that telephone marketing of AdaptHealth products and services to patients fall within state regulation of telemarketing.
Certain of AdaptHealth’s employees are subject to state laws and regulations governing the licensure and professional practice of respiratory
therapy, pharmacy and nursing.
AdaptHealth maintains a Compliance Program that is designed to meet the guidelines set forth by HHS, and provides ongoing
compliance training designed to keep AdaptHealth’s officers, directors and employees well-educated and up-to-date regarding developments
on relevant topics and to emphasize AdaptHealth’s policy of strict compliance. Federal and state laws require that AdaptHealth obtain facility
and other regulatory licenses and accreditation and that AdaptHealth enroll as a supplier with federal and state health programs.
As a healthcare provider, AdaptHealth is subject to extensive regulation to prevent fraud and abuse and laws regulating
reimbursement under various government programs. The marketing, billing, documenting and other practices of healthcare companies are all
subject to government scrutiny. To ensure compliance with Medicare, Medicaid and other regulations, regional health insurance carriers and
state agencies often conduct audits and request customer records and other documents to support AdaptHealth’s claims submitted for
payment of services rendered to customers. Similarly, government agencies and their contractors periodically open investigations and obtain
information from healthcare providers pursuant to the legal process. Violations of federal and state regulations can result in severe criminal,
civil and administrative penalties and sanctions, including disqualification from Medicare and other reimbursement programs, which could
have a material adverse effect on AdaptHealth’s financial condition and results of operations.
Numerous federal and state laws and regulations, including HIPAA and the HITECH Act, govern the collection, dissemination,
security, use and confidentiality of patient-identifiable health information or personal information. As part of AdaptHealth’s provision of, and
billing for, healthcare equipment and services, AdaptHealth is required to collect and maintain patient-identifiable health information. In
addition, various federal and state legislative and regulatory bodies, or self-regulatory organizations, may expand current laws or regulations,
enact new laws or regulations or issue revised rules or guidance regarding privacy, data protection and consumer protection. For instance, the
CCPA became effective on January 1, 2020. The CCPA gives California residents expanded rights to access and delete their personal
information, opt out of certain personal information sharing and receive detailed information about how their personal information is used by
requiring covered companies to provide new disclosures to California consumers (as that term is broadly defined) and provide such
consumers new ways to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a
private right of action for data breaches that is expected to increase data breach litigation. Although there are limited exemptions for protected
health information and the CCPA’s implementation standards and enforcement practices are likely to remain uncertain for the foreseeable
future, the CCPA may increase AdaptHealth’s compliance costs and potential liability. Many similar privacy laws have been proposed at the
federal level and in other states. New health information standards, whether implemented pursuant
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to HIPAA, the HITECH Act, congressional action or otherwise, could have a significant effect on the manner in which AdaptHealth handles
healthcare-related data and communicate with payers, and the cost of complying with these standards could be significant. If AdaptHealth
does not comply with existing or new laws and regulations related to patient health information, it could be subject to criminal or civil
sanctions.
Additionally, the FTC and many state attorneys general are interpreting existing federal and state consumer protection laws to
impose evolving standards for the online collection, use, dissemination and security of health-related and other personal information. Courts
may also adopt the standards for fair information practices promulgated by the FTC, which concern consumer notice, choice, security and
access. Consumer protection laws require AdaptHealth to publish statements that describe how it handles personal information and choices
individuals may have about the way AdaptHealth handles their personal information. If such information that AdaptHealth publishes is
considered untrue, it may be subject to government claims of unfair or deceptive trade practices, which could lead to significant liabilities and
consequences. Furthermore, according to the FTC, violating consumers’ privacy rights or failing to take appropriate steps to keep consumers’
personal information secure may constitute unfair acts or practices in or affecting commerce in violation of Section 5 of the FTC Act.
Communications with our patients are also subject to laws and regulations governing communications, including the TCPA, the CAN-SPAM
Act, additional fax regulations under the Junk Fax Act and the Telemarketing Sales Rule and Medicare regulations.
Healthcare is an area of rapid regulatory change. Changes in the laws and regulations and new interpretations of existing laws and
regulations may affect permissible activities, the relative costs associated with doing business, and reimbursement amounts paid by federal,
state and other third-party payers. AdaptHealth cannot predict the future of federal, state and local regulation or legislation, including
Medicare and Medicaid statutes and regulations, or possible changes in national healthcare policies. Future legislative and regulatory
changes could have a material adverse effect on AdaptHealth’s financial condition and results of operations.
Implemented Regulation
As a provider of home oxygen, respiratory and other chronic therapy equipment to the home healthcare market, AdaptHealth
participates in Medicare Part B, the Supplementary Medical Insurance Program, which was established by the Social Security Act of 1965.
Providers of home oxygen and other respiratory therapy services and equipment have historically been heavily dependent on Medicare
reimbursement due to the high proportion of elderly persons suffering from respiratory disease. Durable medical equipment, including oxygen
equipment, is traditionally reimbursed by Medicare based on fixed fee schedules.
Impact of the ACA and MIPPA. The ACA, the Medicare Improvements for Patients and Providers Act of 2008 ("MIPPA”), the
Medicare, Medicaid and SCHIP Extension Act of 2007 ("SCHIP Extension Act”), the Deficit Reduction Act of 2005 ("DRA”) and the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003 ("MMA”), contain provisions that directly impacted reimbursement for the
primary respiratory and other DME products provided by AdaptHealth.
In recent years, the U.S. Congress and certain state legislatures have considered and passed a large number of laws intended to
result in significant change to the ACA. The law has been subject to legislative and regulatory changes and court challenges, and the former
presidential administration and certain members of Congress have stated their intent to repeal or make additional significant changes to the
ACA, its implementation or its interpretation. In 2017, the Tax Cuts and Jobs Acts was enacted, which, among other things, removed penalties
for not complying with ACA’s individual mandate to carry health insurance. Because the penalty associated with the individual mandate was
eliminated, a federal judge in Texas ruled in December 2018 that the entire ACA was unconstitutional. On December 18, 2019, the Fifth Circuit
U.S. Court of Appeals upheld the lower court’s finding that the individual mandate is unconstitutional and remanded the case back to the
lower court to reconsider its earlier invalidation of the full ACA. On March 2, 2020, the United States Supreme Court granted the petitions for
writs of certiorari to review this case, although it remains unclear when and how the Supreme Court will rule. These and other efforts to
challenge, repeal or replace the ACA could result in reduced funding state Medicaid programs, lower numbers of insured individuals, and
reduced coverage for insured individuals. There is uncertainty regarding whether, when, and how the ACA will be further changed, what
alternative provisions, if any, will be enacted, and the impact of alternative provisions on providers and
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other healthcare industry participants. Government efforts to repeal or change the ACA or to implement alternative reform measures could
cause AdaptHealth’s revenues to decrease to the extent such legislation reduces Medicaid and/or Medicare reimbursement rates.
MIPPA delayed the implementation of a Medicare competitive bidding program for oxygen equipment and certain other DME items
that was scheduled to begin on July 1, 2008, and instituted a 9.5% price reduction nationwide for these items as of January 1, 2009. The SCHIP
Extension Act reduced Medicare reimbursement amounts for covered Part B drugs, including inhalation drugs that AdaptHealth provides,
beginning April 1, 2008. DRA provisions negatively impacted reimbursement for oxygen equipment beginning in 2006 through the
implementation of a capped rental arrangement. MMA changed the pricing formulas used to establish payment rates for inhalation drug
therapies resulting in significantly reduced reimbursement beginning in 2005, established a competitive acquisition program for DME,
established a RAC program, which implemented a new method for recovery of Medicare overpayments by utilizing private companies
operating on a contingent fee basis to identify and recoup Medicare overpayments, and implemented quality standards and accreditation
requirements for DME suppliers. The RACs are empowered to audit claims submitted by healthcare providers and overpayments identified by
the RACs can be recouped from future payments, including in cases where the reimbursement rules are unclear or subject to differing
interpretations. This activity, as well as the activity of intermediaries and others involved in government reimbursement, may include changes
in long-standing interpretations of reimbursement rules, which could adversely impact AdaptHealth’s future financial condition and results of
operations. In October 2008, CMS established ZPICs and UPICs, who are responsible for ensuring the integrity of all Medicare-related claims.
The ZPICs and UPICs assumed the responsibilities previously held by Medicare’s Program Safeguard Contractors. These legislative and
regulatory provisions, as currently in effect have and will continue to adversely impact AdaptHealth’s financial condition and results of
operations.
Impact of Competitive Bidding. In December 2003, MMA was signed into law. The MMA legislation directly impacted
reimbursement for the primary respiratory and other DME products that AdaptHealth provides. Among other things, MMA established a
competitive acquisition program for DME that was expected to commence in 2008, but was subsequently delayed by further legislation. MMA
instructed CMS to establish and implement programs under which competitive acquisition areas would be established throughout the United
States for purposes of awarding contracts for the furnishing of competitively priced items of DME, including oxygen equipment. The program
was initially intended to be implemented in phases such that competition under the program would occur in nine of the largest metropolitan
statistical areas ("MSAs”) in the first year and an additional 70 of the largest MSAs in a second, subsequent round of bidding. The second
round was subsequently expanded to include 91 MSAs.
For each competitive acquisition area, CMS is required to conduct a competition under which providers submit bids to supply certain
covered items of DME. Successful bidders are expected to meet certain program quality standards in order to be awarded a contract, and only
successful bidders can supply the covered items to Medicare beneficiaries in the respective acquisition area (there are, however, regulations
in place that allow non-contracted suppliers to continue to provide equipment and services to their existing customers at the new prices
determined through the bidding process). Competitive bidding contracts are expected to be re-bid at least every three years. CMS is required
to award contracts to multiple entities submitting bids in each area for an item or service but has the authority to limit the number of
contractors in a competitive acquisition area to the number it determines to be necessary to meet projected demand.
All Medicare DMEPOS Competitive Bidding Program contracts expired on December 31, 2018, and, as a result, there is a temporary
gap in the entire DMEPOS Competitive Bidding Program that CMS stated would last until December 31, 2020 and be replaced by a single
round of competition named "Round 2021” which consolidated the competitive bidding areas ("CBAs”) included in the Round 1 2017 and
Round 2 Recompete DMEPOS Competitive Bidding Programs. Round 2021 contracts were scheduled to become effective on January 1, 2021,
and extend through December 31, 2023. CMS included 16 product categories in Round 2021. On April 10, 2020, CMS announced that due to
the COVID-19 pandemic, it removed the non-invasive ventilators product category from the Round 2021 DMEPOS Competitive Bidding
Program.
On October 27, 2020, CMS announced that it would not award competitive bid contracts in 13 of the 15 remaining product categories
due to a failure to achieve expected savings, and that contract awards would only be made for off-the-shelf ("OTS”) knee and back braces. For
the year ended December 31, 2020, revenue generated with respect
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to providing OTS knee and back braces (excluding amounts generated in non-rural and rural non-bid areas) were not material. AdaptHealth
expects to obtain contracts for OTS knee and back braces, and does not expect the single payment amounts imposed by CMS under such
contracts to have a material impact on the Company.
The competitive bidding process (which is expected to be re-bid every three years) has historically put pressure on the amount
AdaptHealth is reimbursed in the markets in which it exists, as well as in areas that are not subject to the DMEPOS Competitive Bidding
Program. The rates required to win future competitive bids could continue to depress reimbursement rates. AdaptHealth will continue to
monitor developments regarding the DMEPOS Competitive Bidding Program. While AdaptHealth cannot predict the outcome of the DMEPOS
Competitive Bidding Program on its business in the future nor the Medicare payment rates that will be in effect in future years for the items
subjected to competitive bidding, the program may materially adversely affect its financial condition and results of operations.
CMS’s decision to cancel the 2021 competitive bidding program is a significant development for AdaptHealth. CMS is proposing to
reimburse all HME other than off-the-shelf back and knee braces at current rates, to schedule the next round of competitive bidding in 2024,
and to make the higher blended rates in rural territory permanent. In total, AdaptHealth believes these changes to the competitive bidding
program are significantly positive to the business, and AdaptHealth expects the rate changes for the off-the-shelf back and knee braces to be
immaterial to AdaptHealth.
Durable Medical Equipment Medicare Administrative Contractor. In order to ensure that Medicare beneficiaries only receive
medically necessary and appropriate items and services, the Medicare program has adopted a number of documentation requirements. For
example, certain provisions under CMS guidance manuals, local coverage determinations, and the DME MAC Supplier Manuals provide that
clinical information from the "patient’s medical record” is required to justify the initial and ongoing medical necessity for the provision of
DME. Some DME MACs, CMS staff and other government contractors have recently taken the position, among other things, that the
"patient’s medical record” refers not to documentation maintained by the DME supplier but instead to documentation maintained by the
patient’s physician, healthcare facility or other clinician, and that clinical information created by the DME supplier’s personnel and confirmed
by the patient’s physician is not sufficient to establish medical necessity. If treating physicians do not adequately document, among other
things, their diagnoses and plans of care, the risks that AdaptHealth will be subject to audits and payment denials are likely to increase.
Moreover, auditors’ interpretations of these policies are inconsistent and subject to individual interpretation, leading to significant increases
in individual supplier and industry-wide perceived error rates. High error rates could lead to further audit activity and regulatory burdens and
could result in AdaptHealth making significant refunds and other payments to Medicare and other government programs. Accordingly,
AdaptHealth’s future revenues and cash flows from government healthcare programs may be reduced. Private payors also may conduct audits
and may take legal action to recover alleged overpayments. AdaptHealth could be adversely affected in some of the markets in which it
operates if the auditing payor alleges substantial overpayments were made to AdaptHealth due to coding errors or lack of documentation to
support medical necessity determinations. AdaptHealth cannot currently predict the adverse impact these measures might have on its
financial condition and results of operations, but such impact could be material.
Federal and state budgetary and other cost-containment pressures will continue to impact the home respiratory care industry.
AdaptHealth cannot predict whether new federal and state budgetary proposals will be adopted or the effect, if any, such proposals would
have on its financial condition and results of operations.
Availability of Information
We file or furnish annual, quarterly and current reports, proxy statements and other documents with the Securities and Exchange
Commission (the "SEC”) under the Exchange Act. The SEC maintains an internet website at www.sec.gov that contains reports, proxy and
information statements and other information regarding issuers, including us, that file electronically with the SEC.
We also make available free of charge through our website, https://www.adapthealth.com/investor-relations, electronic copies of
certain documents that we file with the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after we electronically file such material
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with, or furnish it to, the SEC. Information on our website or any other website is not incorporated by reference into, and does not constitute a
part of, this Annual Report.
Item 1A. Risk Factors
We operate in a rapidly changing environment that involves a number of risks. The following discussion highlights some of these
risks and others are discussed elsewhere in this report. These and other risks could materially and adversely affect our business, revenue,
financial condition and results of operations.
Risks Related to Our Business and Industry
The recent coronavirus (COVID-19) pandemic and the global attempt to contain it may harm our business, results of operations
and ability to execute on our business plan.
The global spread of the coronavirus (COVID-19) and the various attempts to contain it have created significant volatility,
uncertainty and economic disruption. In response to government mandates, health care advisories and otherwise responding to employee,
customer and supplier concerns, we have altered certain aspects of our operations. Our workforce has had to spend a significant amount of
time working from home, which has not significantly impacted their productivity. While many of our operations can be performed remotely,
there is no guarantee that we remain as effective while working remotely because our team is dispersed, many employees have had additional
personal needs to attend to (such as looking after children as a result of school closures or family who become sick), and employees have or
may become sick themselves and be unable to work. Our suppliers and vendors have similarly had their operations altered. To the extent the
resulting economic disruption continues, we could see some vendors go out of business, resulting in supply constraints and increased costs
or delays in meeting the needs of our patients.
The full extent to which the COVID-19 pandemic and the various responses to it continue to impact our business, operations and
financial results will continue to depend on numerous other evolving factors that we may not be able to accurately predict, including:
● the duration and scope of the pandemic, including disproportionate impacts on the Company’s patient population, the
effectiveness and timing of COVID-19 vaccination campaigns, or any perceived limitations of or setbacks in these efforts;
● governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic;
● the availability and cost to access the capital markets;
● our ability to pursue, diligence, finance and integrate acquisitions;
● our ability to comply with financial and operating covenants in our debt and operating lease agreements;
● potential for goodwill impairment charges;
● our ability to comply with the reporting requirements necessary to retain the CARES Act provider relief funds we received;
● the effect on our patients, physician and facility referral sources and demand for and ability to pay for medical services;
● disruptions or restrictions on our employees’ ability to travel and to work, including as a result of their health and wellbeing;
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● availability of third-party providers to whom we outsource portions of our internal business functions, including billing and
administrative functions relating to revenue cycle management; and
● increased cybersecurity risks as a result of remote working conditions.
During the COVID-19 crisis, we may not be able to provide the same level of service and products that our patients, physicians and
facility referral sources are used to, which could negatively impact their perception of our products or services. Furthermore, given increased
government expenditures associated with their COVID-19 response, we could see increased government obligations which could negatively
impact our results of operations.
We continue to actively monitor the issues raised by the COVID-19 pandemic and may take further actions that alter our business
operations, as may be required by federal, state, or local authorities, or that we determine are in the best interests of our employees, customers,
and stockholders. It is not clear what the potential effects any such further alterations or modifications may have on our business, including
the effects on our customers, suppliers or vendors, or on our financial results.
The potential effects of COVID-19 could also heighten the risks disclosed in many of our other risk factors that are included below,
including as a result of, but not limited to, the factors listed above.
AdaptHealth’s reliance on relatively few suppliers for the majority of its patient service equipment and supplies could adversely
affect AdaptHealth’s ability to operate.
AdaptHealth currently relies on a relatively small number of suppliers to provide it with the majority of its patient service equipment
and supplies. Significant price increases, or disruptions in the ability to obtain such equipment and supplies from existing suppliers, may force
AdaptHealth to use alternative suppliers. Additionally, any new excise taxes imposed on manufacturers of certain medical equipment could be
passed on to customers, such as AdaptHealth. Such manufacturers may be forced to make other changes to their products or manufacturing
processes that are unacceptable to AdaptHealth, resulting in a need to change suppliers. Any change in suppliers AdaptHealth uses could
cause delays in the delivery of such products and possible losses in revenue, which could adversely affect AdaptHealth’s results of
operations. In addition, alternative suppliers may not be available, or may not provide their products and services at similar or favorable prices.
If AdaptHealth cannot obtain the patient service equipment and supplies it currently uses, or alternatives at similar or favorable prices,
AdaptHealth’s ability to provide such products may be severely impacted, which could have an adverse effect on its business, financial
condition, results of operations, cash flow, capital resources and liquidity. During 2020, the COVID-19 pandemic impacted manufacturing in all
of the regions where AdaptHealth’s suppliers manufacture their products. While the global closures and limitations on movement related to
COVID-19 were temporary, and while such closures, limitations and related impacts have not materially disrupted AdaptHealth’s supply chain
to date, such supply chain disruption remains possible and the financial impact of any such disruption cannot be estimated at this time.
Should such closures and limitations on movement be reinstated or continue for an extended period of time, the impact on our supply chain
could materially and adversely affect our business and results of operations.
AdaptHealth is affected by continuing efforts by private third-party payors to control their costs. If AdaptHealth agrees to lower
its reimbursement rates due to pricing pressures from private third-party payors, AdaptHealth’s financial condition and results of
operations would likely deteriorate.
AdaptHealth derived approximately 62% and 57% of its revenue for the years ended December 31, 2020 and 2019, respectively, from
third-party private payors. Such payors continually seek to control the cost of providing healthcare services through direct contracts with
healthcare providers, increased oversight and greater enrollment of patients in managed care programs and preferred provider organizations.
These private payors are increasingly demanding discounted fee structures, including setting reimbursement rates based on Medicare fee
schedules or requiring healthcare providers or suppliers to assume a greater degree of financial risk related to patient care. Reimbursement
rates under private payor programs may not remain at current levels and may not be sufficient to cover the costs of caring for patients enrolled
in such programs, and AdaptHealth may experience a deterioration in pricing flexibility, changes in payor mix and growth in operating
expenses in excess of increases in payments by private third-
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party payors. AdaptHealth may be compelled to lower its prices due to increased pricing pressures, which could adversely impact
AdaptHealth’s financial condition and results of operations.
Changes in governmental or private payor supply replenishment schedules could adversely affect AdaptHealth.
AdaptHealth generated approximately 29% and 42% of its revenue for the years ended December 31, 2020 and 2019, respectively,
through the sale of masks, tubing and other ancillary products related to patients utilizing CPAP devices. Medicare, Medicaid and private
payors limit the number of times per year that patients may purchase such supplies. To the extent that any governmental or private payor
revises their resupply guidelines to reduce the number of times such supplies can be purchased, such reductions could adversely impact
AdaptHealth’s revenue, financial condition and results of operations.
AdaptHealth generates a significant portion of its revenue from the provision of sleep therapy equipment and supplies to
patients, and AdaptHealth’s success is therefore highly dependent its ability to furnish these items.
Approximately 39% and 58% of AdaptHealth’s revenue for the years ended December 31, 2020 and 2019, respectively, was generated
from the provision of sleep therapy equipment and supplies to patients. AdaptHealth’s ability to execute its growth strategy therefore
depends upon the adoption by patients, physicians and sleep centers, among others, of AdaptHealth’s sleep therapy equipment and supplies
to treat their patients suffering from OSA. There can be no assurance that AdaptHealth will continue to maintain broad acceptance among
physicians and patients. Any failure by AdaptHealth to satisfy physician or patient demand or to maintain meaningful market acceptance will
harm its business and future prospects.
AdaptHealth may be adversely affected by consolidation among health insurers and other industry participants.
In recent years, a number of health insurers have merged or increased efforts to consolidate with other non-governmental payors.
Insurers are also increasingly pursuing alignment initiatives with healthcare providers. Consolidation within the health insurance industry may
result in insurers having increased negotiating leverage and competitive advantages, such as greater access to performance and pricing data.
AdaptHealth’s ability to negotiate prices and favorable terms with health insurers in certain markets could be affected negatively as a result of
this consolidation. In addition, the shift toward value-based payment models could be accelerated if larger insurers, including those engaging
in consolidation activities, find these models to be financially beneficial. There can be no assurance that AdaptHealth will be able to negotiate
favorable terms with payors and otherwise respond effectively to the impact of increased consolidation in the payor industry or vertical
integration efforts.
AdaptHealth’s payor contracts are subject to renegotiation or termination, which could result in a decrease in AdaptHealth’s
revenue or profits.
The majority of AdaptHealth’s payor contracts are subject to unilateral termination by either party on between 30 and 90 days’ prior
written notice. Such contracts are routinely amended (sometimes by unilateral action by payors regarding payment policy), renegotiated,
subjected to a bidding process with AdaptHealth’s competitors, or terminated altogether. Sometimes in the renegotiation process, certain lines
of business may not be renewed or a payor may enlarge its provider network or otherwise change the way it conducts its business in a way
that adversely impacts AdaptHealth’s revenue. In other cases, a payor may reduce its provider network in exchange for lower payment rates.
AdaptHealth’s revenue from a payor may also be adversely affected if the payor alters its utilization management expectations and/or
administrative procedures for payments and audits, changes its order of preference among the providers to which it refers business or
imposes a third-party administrator, network manager or other intermediary. Any reduction in AdaptHealth’s projected home respiratory
therapy/home medical equipment revenues as a result of these or other factors could lead to a reduction in AdaptHealth’s revenues. There can
be no assurance that AdaptHealth’s payor contracts will not be terminated or altered in ways that are unfavorable to AdaptHealth as a result
of renegotiation or such administrative changes. Payors may decide to refer business to their owned provider subsidiaries, such as specialty
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pharmaceuticals and/or HME networks owned by such payors or by third-party management companies. These activities could materially
reduce AdaptHealth’s revenue from these payors.
Changes made by payors to the way they cover products supplied by AdaptHealth could have and adverse impact on
AdaptHealth’s revenue and operations.
Payors that provide coverage for products supplied by AdaptHealth can make changes to their plans and benefit designs that can
have an impact on AdaptHealth’s revenue and operations. Some payors have shifted coverage for CGM from the medical benefit to the
pharmacy benefit for their insureds. The impact of changing the benefit can include changes to the types of providers that can provide CGM,
increased competition from pharmacies, changes to covered amounts, and changes to patient deductibles. Additionally, including CGM under
the pharmacy benefit could allow pharmacy benefit managers to attempt to restrict how beneficiaries obtain CGM, including attempts to shift
to specifically contracted providers with reduced reimbursement to the supplier or pharmacy. AdaptHealth cannot predict whether such
modifications to plan design or benefits will have an adverse impact on its revenue and operations.
If AdaptHealth fails to manage the complex and lengthy reimbursement process, its revenue, financial condition and results of
operations could suffer.
Because AdaptHealth depends upon reimbursement from Medicare, Medicaid and third-party payors for a significant majority of its
revenues, AdaptHealth’s revenue, financial condition and results of operations may be affected by the reimbursement process, which in the
healthcare industry is complex and can involve lengthy delays between the time that services are rendered and the time that the reimbursement
amounts are settled. Depending on the payor, AdaptHealth may be required to obtain certain payor-specific documentation from physicians
and other healthcare providers before submitting claims for reimbursement. Certain payors have filing deadlines and will not pay claims
submitted after such deadlines. AdaptHealth cannot ensure that it will be able to effectively manage the reimbursement process and collect
payments for its equipment and services promptly.
Failure by AdaptHealth to maintain controls and processes over billing and collections or the deterioration of the financial
condition of AdaptHealth’s payors or disputes with third parties could have a significant negative impact on its financial condition and
results of operations.
The collection of accounts receivable requires constant focus and involvement by management and ongoing enhancements to
information systems and billing center operating procedures. There can be no assurance that AdaptHealth will be able to improve upon or
maintain its current levels of collectability and days sales outstanding in future periods. Further, some of AdaptHealth’s payors and/or
patients may experience financial difficulties, or may otherwise not pay accounts receivable when due, resulting in increased write-offs. If
AdaptHealth is unable to properly bill and collect its accounts receivable, its financial condition and results of operations will be adversely
affected. In addition, from time to time AdaptHealth is involved in disputes with various parties, including its payors and their intermediaries
regarding their performance of various contractual or regulatory obligations. These disputes sometimes lead to legal and other proceedings
and cause AdaptHealth to incur costs or experience delays in collections, increases in its accounts receivable or loss of revenue. In addition,
in the event such disputes are not resolved in AdaptHealth’s favor or cause AdaptHealth to terminate its relationships with such parties, there
may be an adverse impact on its financial condition and results of operations.
If AdaptHealth is unable to maintain or develop relationships with patient referral sources, its growth and profitability could be
adversely affected.
AdaptHealth’s success depends in large part on referrals from acute care hospitals, sleep laboratories, pulmonologist and
endocrinologist offices, skilled nursing facilities, hospice operators and other patient referral sources in the communities served by
AdaptHealth. By law, referral sources cannot be contractually obligated to refer patients to any specific provider. In addition, AdaptHealth’s
relationships with referral sources are subject to federal and state healthcare laws such as the federal Anti-Kickback Statute and the Stark Law
to the extent these services provide a financial benefit to or relieve a financial burden for a potential referral source, or are subsequently found
not to be for fair market value. See "Risk Factors — Risks Related to Our Business and Industry — AdaptHealth is subject, directly or
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indirectly, to United States federal and state healthcare fraud and abuse and false claims laws and regulations. Prosecutions under such laws
have increased in recent years and AdaptHealth may become subject to such litigation. If AdaptHealth is unable to or has not fully complied
with such laws, it could face substantial penalties.” However, there can be no assurance that other market participants will not attempt to steer
patients to competing post-acute providers or otherwise limit AdaptHealth’s access to potential referrals. The establishment of joint ventures
or networks between referral sources, such as acute care hospitals, and other post-acute providers may hinder patient referrals to
AdaptHealth. AdaptHealth’s growth and profitability depend on its ability to establish and maintain close working relationships with patient
referral sources and to increase awareness and acceptance of the benefits of inpatient rehabilitation, home health, and hospice care by its
referral sources and their patients. There can be no assurance that AdaptHealth will be able to maintain its existing referral source
relationships or that it will be able to develop and maintain new relationships in existing or new markets. AdaptHealth’s loss of, or failure to
maintain, existing relationships or its failure to develop new relationships could adversely affect its ability to grow its business and operate
profitably.
AdaptHealth’s business depends on its information systems, including software licensed from third parties, and any failure or
significant disruptions of these systems, security breaches or loss of data could materially affect our business, results of operations and
financial condition.
AdaptHealth’s business depends on the proper functioning and availability of its computer systems and networks. AdaptHealth
relies on an external service provider to provide continual maintenance, upgrading and enhancement of AdaptHealth’s primary information
systems used for its operational needs. AdaptHealth licenses third-party software that supports intake, personnel scheduling and other
human resources functions, office clinical and centralized billing and receivables management in an integrated database, enabling AdaptHealth
to standardize the care delivered across its network of locations and monitor its performance and consumer outcomes. AdaptHealth also uses
a third-party software provider for its order processing and inventory management platform. To the extent that its third-party providers fail to
support, maintain and upgrade such software or systems, or if AdaptHealth loses its licenses with third-party providers, the efficiency of
AdaptHealth’s operations could be disrupted or reduced.
The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusion, including by computer hackers,
foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and
intrusions from around the world have increased. In addition, the prevalent use of mobile devices that access confidential information
increases the risk of data security breaches, which could lead to the loss of confidential information or other intellectual property. As a result
of the COVID-19 pandemic, AdaptHealth faces increased cybersecurity risks due to its reliance on internet technology and the number of its
employees who are working remotely, which may create additional opportunities for cybercriminals to exploit vulnerabilities. AdaptHealth can
provide no assurance that its current information technology systems, or those of the third parties upon which it relies, are fully protected
against cybersecurity threats. It is possible that AdaptHealth or its third-party vendors may experience cybersecurity and other breach
incidents that remain undetected for an extended period. Even when a security breach is detected, the full extent of the breach may not be
determined immediately. If AdaptHealth experiences a reduction in the performance, reliability, or availability of its information systems, its
operations and ability to process transactions and produce timely and accurate reports could be adversely affected. If AdaptHealth
experiences difficulties with the transition and integration of information systems or is unable to implement, maintain, or expand its systems
properly, AdaptHealth could suffer from, among other things, operational disruptions, delays, cessation of service, regulatory problems,
increases in administrative expenses and other harm to its business and competitive position.
There can be no assurance that AdaptHealth’s and its third-party software providers’ safety and security measures and disaster
recovery plan will prevent damage, interruption or breach of its information systems and operations. Because the techniques used to obtain
unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect, AdaptHealth may be
unable to anticipate these techniques or implement adequate preventive measures. In addition, hardware, software or applications
AdaptHealth develops or procures from third parties may contain defects in design or manufacture or other problems that could unexpectedly
compromise the security of its information systems. Unauthorized parties may attempt to gain access to AdaptHealth’s systems or facilities, or
those of third parties with whom AdaptHealth does business, through fraud or other forms of deceiving its employees or contractors. On
occasion, AdaptHealth has acquired additional information systems through its business acquisitions. AdaptHealth has upgraded and
expanded its information system capabilities and has committed significant
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resources to maintain, protect, enhance existing systems and develop new systems to keep pace with continuing changes in technology,
evolving industry and regulatory standards, and changing customer preferences. In addition, costs and potential problems and interruptions
associated with the implementation of new or upgraded systems and technology or with maintenance or adequate support of existing systems
also could disrupt or reduce the efficiency of AdaptHealth’s operations. A cyber security attack or other incident that bypasses
AdaptHealth’s information systems security could cause a security breach which may lead to a material disruption to its information systems
infrastructure or business and may involve a significant loss of business or patient health information. If a cyber-security attack or other
unauthorized attempt to access AdaptHealth’s systems or facilities were to be successful, it could result in the theft, destruction, loss,
misappropriation or release of confidential information or intellectual property, and could cause operational or business delays that may
materially impact AdaptHealth’s ability to provide various healthcare services.
Any successful cyber security attack or other unauthorized attempt to access AdaptHealth’s or its acquisition targets’ systems or
facilities also could result in negative publicity which could damage its reputation or brand with its patients, referral sources, payors or other
third parties and could subject AdaptHealth to substantial penalties under HIPAA and other federal and state data protection laws, in addition
to private litigation with those affected. Failure to maintain the security and functionality of AdaptHealth’s information systems and related
software, or a failure to defend a cyber-security attack or other attempt to gain unauthorized access to AdaptHealth’s or its acquisition
targets’ systems, facilities or patient health information, could expose AdaptHealth to a number of adverse consequences, the vast majority of
which are not insurable, including but not limited to disruptions in AdaptHealth’s operations, regulatory and other civil and criminal penalties,
fines, investigations and enforcement actions (including, but not limited to, those arising from the SEC, Federal Trade Commission, the Office
of Inspector General or state attorneys general), private litigation with those affected by the data breach, loss of customers, disputes with
payors and increased operating expense, which could adversely impact AdaptHealth’s financial condition and results of operations.
For example, on June 28, 2019, Solara Medical Supplies ("Solara”), which was acquired by AdaptHealth in July 2020, determined that
an unauthorized third-party gained access to a limited number of employee Microsoft Office accounts beginning in April 2019, as a result of a
phishing email campaign. Solara undertook a comprehensive review of the accounts to identify what personal information was stored within
the accounts and to whom that information related. In connection with the incident, Solara notified potentially affected individuals and
reported this incident to law enforcement and relevant state and federal regulators. Investigations by applicable regulators are ongoing, and
Solara is defending a class action regarding the incident in federal court. At this time, we cannot predict the outcome of any such investigation
or litigation, although responding to these matters or any unfavorable outcome in connection therewith could have an adverse impact on
AdaptHealth’s financial condition and results of operations following consummation of the acquisition of Solara.
AdaptHealth experiences competition from numerous other home respiratory and mobility equipment providers, and this
competition could adversely affect its revenues and its business.
The home respiratory and mobility equipment markets are highly competitive and include a large number of providers, some of which
are national providers, but most of which are either regional or local providers, including hospital systems, physician specialists and sleep
labs. The primary competitive factors are quality considerations such as responsiveness, access to payor contracts, the technical ability of the
professional staff and the ability to provide comprehensive services. These markets are very fragmented. Some of AdaptHealth’s competitors
may now or in the future have greater financial or marketing resources than AdaptHealth. In addition, in certain markets, competitors may have
more effective sales and marketing activities. AdaptHealth’s largest national home respiratory/home medical equipment provider competitors
include Apria Healthcare Group Inc., Lincare Holdings Inc. and Rotech Healthcare Inc. The rest of the homecare market in the United States
consists of regional providers and product-specific providers, as well as numerous local organizations. Hospitals and health systems are
routinely looking to provide coverage and better control of post-acute healthcare services, including homecare services of the types
AdaptHealth provides. These trends may continue as new payment models evolve, including bundled payment models, shared savings
programs, value-based purchasing and other payment systems.
There are relatively few barriers to entry in local home healthcare markets, and new entrants to the home respiratory/home medical
equipment markets could have a material adverse effect on AdaptHealth’s business, results of
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operations and financial condition. A number of manufacturers of home respiratory equipment currently provide equipment directly to patients
on a limited basis. Such manufacturers have the ability to provide their equipment at prices below those charged by AdaptHealth, and there
can be no assurance that such direct-to-patient sales efforts will not increase in the future or that such manufacturers will not seek
reimbursement contracts directly with AdaptHealth’s third-party payors, who could seek to provide equipment directly to patients from the
manufacturer. In addition, pharmacy benefit managers, including CVS Health Corporation and the OptumRx business of UnitedHealth Group
Incorporated, could enter the HME market and compete with AdaptHealth. Large technology companies, such as Amazon.com, Inc. and
Alphabet Inc., have disrupted other supply businesses and have publicly stated an interest in entering the healthcare market. In the event
such companies enter the HME market, AdaptHealth may experience a loss of referrals or revenue.
Changes in medical equipment technology and development of new treatments may cause AdaptHealth’s current equipment or
services to become obsolete.
AdaptHealth evaluates changes in home medical equipment technology and treatments on an ongoing basis for purposes of
determining the feasibility of replacing or supplementing items currently included in the patient service equipment inventory and services that
AdaptHealth offers patients. AdaptHealth’s selection of medical equipment and services is formulated on the basis of a variety of factors,
including overall quality, functional reliability, availability of supply, payor reimbursement policies, product features, labor costs associated
with the technology, acquisition, repair and ownership costs and overall patient and referral source demand, as well as patient therapeutic and
lifestyle benefits. Manufacturers continue to invest in research and development to introduce new products to the marketplace. It is possible
that major changes in available technology, payor benefit or coverage policies related to those changes or the preferences of patients and
referral sources may cause AdaptHealth’s current product offerings to become less competitive or obsolete, and it will be necessary to adapt
to those changes. Unanticipated changes could cause AdaptHealth to incur increased capital expenditures and accelerated equipment write-
offs, and could force AdaptHealth to alter its sales, operations and marketing strategies.
AdaptHealth’s operations involve the transport of compressed and liquid oxygen, which carries an inherent risk of rupture or
other accidents with the potential to cause substantial loss.
AdaptHealth’s operations are subject to the many hazards inherent in the transportation of medical gas products and compressed
and liquid oxygen, including ruptures, leaks and fires. These risks could result in substantial losses due to personal injury or loss of life,
severe damage to and destruction of property and equipment and pollution or other environmental damage and may result in curtailment or
suspension of AdaptHealth’s related operations. If a significant accident or event occurs, it could adversely affect AdaptHealth’s business,
financial position and results of operations. Additionally, corrective action plans, fines or other sanctions may be levied by government
regulators who oversee transportation of hazardous materials such as compressed or liquid oxygen.
AdaptHealth provides a significant number of patients with oxygen-based therapy, and from time to time, AdaptHealth has operated
medical gas facilities in several states subject to federal and state regulatory requirements. AdaptHealth’s medical gas facilities and operations
are subject to extensive regulation by the Food and Drug Administration ("FDA”) and other federal and state authorities. The FDA regulates
medical gases, including medical oxygen, pursuant to its authority under the federal Food, Drug and Cosmetic Act. Among other
requirements, the FDA’s current Good Manufacturing Practice ("cGMP”) regulations impose certain quality control, documentation and
recordkeeping requirements on the receipt, processing and distribution of medical gas. Further, in each such state, its medical gas facilities
would be subject to regulation under state health and safety laws, which vary from state to state. The FDA and state authorities conduct
periodic, unannounced inspections at medical gas facilities to assess compliance with the cGMP and other regulations, and AdaptHealth
expends significant time, money and resources in an effort to achieve substantial compliance with the cGMP regulations and other federal and
state law requirements at each of its medical gas facilities. AdaptHealth also complies with the FDA’s requirement for medical gas providers to
register their sites with the agency. There can be no assurance, however, that these efforts will be successful and that AdaptHealth’s medical
gas facilities will maintain compliance with federal and state law regulations. Failure by AdaptHealth to maintain regulatory compliance at its
medical gas facilities could result in enforcement action, including warning letters, fines, product recalls or seizures, temporary or permanent
injunctions, or suspensions in operations at one or more
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locations, and civil or criminal penalties which would materially harm its business, financial condition, results of operations, cash flow, capital
resources and liquidity.
Our ability to successfully operate our business is largely dependent upon the efforts of certain key personnel of AdaptHealth,
including senior management. The loss of such key personnel could negatively impact our operations and financial results.
AdaptHealth is highly dependent on the performance and continued efforts of its senior management team. AdaptHealth’s future
success is dependent on its ability to continue to attract and retain qualified executive officers and senior management. Any inability to
manage AdaptHealth’s operations effectively could adversely impact its financial condition and results of operations.
Our ability to successfully operate our business is also dependent upon the efforts of certain other key personnel of AdaptHealth. It
is possible that AdaptHealth will lose some key personnel, the loss of which could negatively impact our operations and profitability.
AdaptHealth’s strategic growth plan, which involves the acquisition of other companies, may not succeed.
AdaptHealth’s strategic plan calls for significant growth in its business over the next several years through an increase in its density
in select markets where it is established as well as the expansion of its geographic footprint into new markets. This growth would place
significant demands on AdaptHealth’s management team, systems, internal controls and financial and professional resources. As a result,
AdaptHealth could be required to incur expenses for hiring additional qualified personnel, retaining professionals to assist in developing the
appropriate control systems and expanding AdaptHealth’s information technology infrastructure. If AdaptHealth is unable to effectively
manage growth, its financial results could be adversely impacted.
AdaptHealth’s strategic plan also contemplates continued growth from future acquisitions of home medical equipment providers.
AdaptHealth may face increased competition for attractive acquisition candidates, which may limit the number of acquisition opportunities
available to AdaptHealth or lead to the payment of higher prices for its acquisitions. Without successful acquisitions, AdaptHealth’s future
growth rate could decline. In addition, AdaptHealth cannot guarantee that any future acquisitions, if consummated, will result in further
growth.
AdaptHealth’s strategic plan contemplates successful integration of acquired home medical equipment providers with AdaptHealth’s
existing business, including reduction in operating expenses with respect to the acquired companies. Integrating an acquisition could be
expensive and time-consuming and could disrupt AdaptHealth’s ongoing business, negatively affect cash flow and distract management and
other key personnel from day-to-day operations. AdaptHealth may not be able to combine successfully the operations of recently acquired
companies with its operations, and, even if such integration is accomplished, AdaptHealth may never realize the potential benefits of such
acquisition.
The integration of acquisitions requires significant attention from management, may impose substantial demands on AdaptHealth’s
operations or other projects and may impose challenges on us including, but not limited to, consistencies in business standards, procedures,
policies and business cultures. There can be no assurance that any future acquisitions, if consummated, will result in further growth.
Specific integration risks relating to the acquisition of other companies by AdaptHealth may include:
● difficulties related to combining previously separate businesses into a single unit, including patient transitions, product and service
offerings, distribution and operational capabilities and business cultures;
● availability of financing to the extent needed to fund acquisitions;
● customer loss and other general business disruption;
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● managing the integration process while completing other independent acquisitions or dispositions;
● diversion of management’s attention from day-to-day operations;
● assumption of liabilities of an acquired business, including unforeseen or contingent liabilities or liabilities in excess of the amounts
estimated;
● failure to realize anticipated benefits and synergies, such as cost savings and revenue enhancements;
● potentially substantial costs and expenses associated with acquisitions and dispositions;
● failure to retain and motivate key employees;
● coordinating research and development activities to enhance the introduction of new products and services;
● difficulties in establishing and applying AdaptHealth’s internal control over financial reporting and disclosure controls and
procedures to an acquired business;
● obtaining necessary regulatory licenses and payor-specific approvals, which may impact the timing of when AdaptHealth is to bill
and collect for services rendered;
● AdaptHealth’s ability to transition patients in a timely manner may impact AdaptHealth’s ability to collect amounts for services
rendered;
● AdaptHealth’s estimates for revenue accruals during the integration of acquisitions may require adjustments in future periods as the
transition of patient information is finalized; and
● delays in obtaining new government and commercial payor identification numbers for acquired branches, resulting in a slowdown
and/or loss of associated revenue.
In addition, AdaptHealth faces competition for acquisition candidates, which may limit the number of acquisition opportunities
available to AdaptHealth or lead to the payment of higher prices for its acquisitions. There can be no assurance that AdaptHealth will be able
to identify suitable acquisition opportunities in the future or that any such opportunities, if identified, will be consummated on favorable
terms, if at all. Without successful acquisitions, AdaptHealth’s future growth rate could decline.
While AdaptHealth conducts due diligence in connection with any acquisition opportunity, there may be risks or liabilities that such
due diligence efforts fail to discover that are not disclosed to AdaptHealth or that AdaptHealth inadequately assesses. The failure to timely
identify any material liabilities associated with any acquisitions could adversely impact AdaptHealth’s financial condition and results of
operations.
Political and economic conditions, including significant global or regional developments such as economic and political events,
international conflicts, natural disasters and public health crises that are out of AdaptHealth’s control, could adversely affect its revenue,
financial condition and results of operations.
AdaptHealth’s business can be affected by a number of factors that are beyond its control, such as general geopolitical, economic
and business conditions, financial services market conditions, and general political and economic developments, including slower economic
growth, disruptions in financial markets, economic downturns in the form of either contained or widespread recessionary conditions, inflation,
elevated unemployment levels, sluggish or uneven economic recovery, government actions impacting trade agreements including the
imposition of trade restrictions such as tariffs and retaliatory counter measures, government deficit reduction, tax legislation increasing the
federal corporate income tax rates, natural and other disasters and public health crises affecting the operations of AdaptHealth or its
customers or suppliers. The COVID-19 pandemic has exacerbated many of these conditions. Any Medicare, Medicaid or
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third-party payor reimbursement reductions as a result of such factors could adversely impact AdaptHealth’s business, financial condition,
results of operations, cash flow, capital resources and liquidity. Turmoil in the financial markets, including in the capital and credit markets,
and any uncertainty over its breadth, depth and duration may put pressure on the global economy and could have a negative effect on
AdaptHealth’s business. Further, historical worldwide financial and credit turmoil could reduce the availability of liquidity and credit to fund
the continuation and expansion of business operations worldwide. The shortage of liquidity and credit combined with substantial losses in
worldwide equity markets could cause an economic recession in the United States or worldwide. If financial markets in the United States,
Europe and Asia experience extreme disruption, including, among other things, extreme volatility in security prices, severely diminished
liquidity and credit availability, rating downgrades of certain investments and declining valuations of others, governments may take
unprecedented actions intended to address extreme market conditions that may include severely restricted credit and declines in real estate
values. If conditions in the global economy, U.S. economy or other key vertical or geographic markets are weak or uncertain, AdaptHealth
could experience material adverse impacts on its revenue, financial condition and results of operations.
AdaptHealth currently outsources, and from time to time in the future may outsource, a portion of its internal business functions
to third-party providers. Outsourcing these functions has significant risks, and AdaptHealth’s failure to manage these risks successfully
could materially adversely affect its business, results of operations, and financial condition.
AdaptHealth currently, and from time to time in the future, may outsource portions of its internal business functions, including billing
and administrative functions relating to revenue cycle management, to third-party providers in India, the Philippines and Central America.
These third-party providers may not comply on a timely basis with all of AdaptHealth’s requirements, or may not provide AdaptHealth with an
acceptable level of service. In addition, AdaptHealth’s reliance on third-party providers could have significant negative consequences,
including significant disruptions in its operations and significantly increased costs to undertake its operations, either of which could damage
AdaptHealth’s relationships with its customers. In addition, AdaptHealth’s outsourced functions may be negatively impacted by any number
of factors, including political unrest; public health crises; social unrest; terrorism; war; vandalism; currency fluctuations; changes to the law of
India, the Philippines, the United States or any of the states or other jurisdictions in which AdaptHealth does business or outsources
operations; or increases in the cost of labor and supplies in India, the Philippines or Central America or any other jurisdiction in which
AdaptHealth outsources any portion of its internal business functions. AdaptHealth’s outsourced operations may also be affected by trade
restrictions, such as tariffs or other trade controls. As a result of its outsourcing activities, it may also be more difficult for AdaptHealth to
recruit and retain qualified employees for its business needs at any time. AdaptHealth’s failure to successfully outsource certain of its
business functions could materially adversely affect its business, results of operations, and financial condition.
We may experience difficulties in integrating the operations of AeroCare into our business and in realizing the expected benefits
of the AeroCare Acquisition.
The success of the AeroCare Acquisition will depend in part on our ability to realize the anticipated business opportunities from
combining the operations of AeroCare with our business in an efficient and effective manner. The integration process could take longer than
anticipated and could result in the loss of key employees, the disruption of each company’s ongoing businesses, tax costs or inefficiencies, or
inconsistencies in standards, controls, information technology systems, procedures and policies, any of which could adversely affect our
ability to maintain relationships with customers, employees or other third parties, or our ability to achieve the anticipated benefits of the
AeroCare acquisition, and could harm our financial performance. If we are unable to successfully or timely integrate the operations of
AeroCare with our business, we may incur unanticipated liabilities and be unable to realize the revenue growth, synergies and other
anticipated benefits resulting from the AeroCare acquisition, and our business, results of operations and financial condition could be
materially and adversely affected.
We incurred significant costs in connection with the AeroCare acquisition. We may incur additional costs in the integration of
AeroCare’s business, and may not achieve cost synergies and other benefits sufficient to offset the incremental costs of the AeroCare
acquisition.
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Risks Related to Regulation
AdaptHealth’s revenue could be impacted by federal and state changes to reimbursement and other Medicaid and Medicare
policies.
AdaptHealth derived approximately 28% and 32% of its revenue for the years ended December 31, 2020 and 2019, respectively, from
Medicare and various state-based Medicaid programs. These programs are subject to statutory and regulatory changes affecting overall
spending, base rates or basis of payment, retroactive rate adjustments, annual caps that limit the amount that can be paid (including
deductible and coinsurance amounts) for rehabilitation therapy services rendered to Medicare beneficiaries, administrative or executive orders
and government funding restrictions, all of which may materially adversely affect the rates and frequency at which these programs reimburse
AdaptHealth. For example, the Medicaid Integrity Program is increasing the scrutiny placed on Medicaid payments and could result in
recoupments of alleged overpayments. Healthcare providers, suppliers, and payors are facing increasing pressure to reduce healthcare costs,
and recent budget proposals and legislation at both the federal and state levels have called for cuts in Medicare and Medicaid reimbursement
rates. Enactment and implementation of measures to reduce or delay reimbursement or overall Medicare or Medicaid spending could result in
substantial reductions in AdaptHealth’s revenue and profitability. Payors may disallow AdaptHealth’s requests for reimbursement based on
determinations that certain costs are not reimbursable or reasonable because either adequate or additional documentation was not provided or
because certain services were not covered or considered medically necessary. Revenue from third-party payors can be retroactively adjusted
after a new examination during the claims settlement process or as a result of post-payment audits. AdaptHealth may also be subject to pre-
payment review of certain service lines or equipment segments as a result of negative audit findings or other third-party payor determinations,
which can result in significant delays in claims processing and could materially impact its revenue.
As a result of the Public Health Emergency Declaration, National Emergency Declaration, and pursuant to the provisions of the
CARES Act, among other things, CMS has issued regulatory guidance indicating enforcement discretion and flexibility regarding the
provisions of items and services by Durable Medical Equipment, Prosthetics, Orthotics, & Supplies ("DMEPOS”) suppliers like AdaptHealth.
These provisions have been announced through blanket waivers under Section 1135 of the Social Security Act, two Interim Final Rules with
Requests for Comment on April 6, 2020 and May 8, 2020, respectively, and through numerous forms of subregulatory guidance. These
provisions include modifications of various requirements under CMS regulations and Medicare and Medicaid program rules that aim to
expand the capacity of healthcare providers and suppliers to deliver healthcare services while minimizing the risk of viral exposure. However,
many of the provisions regarding documentation, coverage and flexibilities remain subject to further guidance and interpretation by CMS and
Medicare Administrative Contractors ("MACs”), among others. Due to the speed with which this guidance was issued, neither CMS nor the
MACs have fully addressed the impact of this guidance on medical review of claims or audits. CMS and MACs continue to update guidance
regarding coverage criteria, documentation requirements, and in-person encounter requirements for Durable Medical Equipment ("DME”)
through their websites and other media. CMS’s changes include the exercise of enforcement discretion with respect to the clinical conditions
and face-to-face encounter requirements required under certain national and local coverage determinations applicable to certain items and
supplies AdaptHealth offers. However, because these waivers and flexibilities may not fully describe the precise scope of the waiver or
enforcement discretion, CMS, MACs and other Medicare or Medicaid auditors may challenge documentation for individual claims in pre-
payment or post-payment audits. Further, the CMS or MACs may continue to modify or clarify this guidance during the COVID-19 pandemic
in a way that affects AdaptHealth’s operations or cash flows. Because the guidance issued changes frequently, AdaptHealth may be required
to modify its compliance process and operations to remain in compliance with such guidance.
The CARES Act also provides for a temporary suspension of reduced rates for items and services provided by AdaptHealth. Under
existing regulations, CMS applies a blended payment rate for DME furnished in rural or noncontiguous non-competitive bidding areas.
Pursuant to provisions of the CARES Act, through December 31, 2020 or the end of the public health emergency, whichever occurs later, that
blended rate will be based on 50% of the adjusted fee schedule amount (adjusted based on competitively bid prices) and 50% of the
unadjusted DMEPOS fee schedule amount. Under prior law, DME furnished in non-rural or contiguous areas would not have been eligible for
this blended rate, and instead many DMEPOS suppliers would likely have experienced reduced payments reflecting competitively bid prices.
The CARES Act introduces a new blended rate for DME furnished in non-rural or contiguous non-competitive
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bidding areas that is based on 75% of the adjusted fee schedule amount and 25% of the unadjusted fee schedule amount. For non-rural or
contiguous non-competitive bidding areas, the blended rate will revert to 100% of the Medicare fee schedule at the end of the public health
emergency, if the emergency ends before December 31, 2020. On October 27, 2020, CMS proposed extending the transitional blended rate
through April 1, 2021 or the end of the public health emergency, whichever is later.
The October 27, 2020 CMS proposed rules also proposed different payment models for the period after April 1, 2020 or the end of the
public health emergency, whichever is later. The proposed rule provides for different blended rates based on a patient’s location. CMS
indicated it is considering extending the transitional adjustments to the fee schedule for product categories that were not awarded in the
DMEPOS Competitive Bidding Program. In the October 27 proposed rule, CMS has also proposed adding coverage under the DME benefit for
adjunctive or non - therapeutic continuous glucose monitors (i.e. continuous glucose monitors used by Medicare beneficiaries who must
verify their glucose levels with a blood glucose monitor). While AdaptHealth cannot predict what Medicare payment rates or coverage
determinations will be in effect in future years, changes to payment rates or benefit coverages may materially impact its financial condition and
results of operations.
The CARES Act temporarily suspends the 2% payment adjustment currently applied to all Medicare fee-for-service claims due to
sequestration. The suspension is effective for claims with dates of service from May 1, 2020 through March 31, 2021. However, CMS and
MACs may issue guidance or interpret the law in a manner that limits the scope of this provision in the CARES Act, which may adversely
affect AdaptHealth. Additionally, the impact of the temporary suspension of sequestration for Medicare Advantage may depend on specific
AdaptHealth individual contracts with Medicare Advantage Organizations.
AdaptHealth’s business may be adversely impacted by healthcare reform efforts, including repeal of or significant modifications
to the ACA.
In recent years, the U.S. Congress and certain state legislatures have considered and passed a number of laws that are intended to
result in significant changes to the healthcare industry. However, there is significant uncertainty regarding the future of the Patient Protection
and Affordable Care Act ("ACA”), the most prominent of these reform efforts. The law has been subject to legislative and regulatory changes
and court challenges, and the former presidential administration and certain members of Congress have stated their intent to repeal or make
additional significant changes to the ACA, its implementation or its interpretation. In 2017, the Tax Cuts and Jobs Acts was enacted, which,
effective January 1, 2019, among other things, removed penalties for not complying with ACA’s individual mandate to carry health insurance.
Because the penalty associated with the individual mandate was eliminated, a federal judge in Texas ruled in December 2018 that the entire
ACA was unconstitutional. On December 18, 2019, the Fifth Circuit U.S. Court of Appeals upheld the lower court’s finding that the individual
mandate is unconstitutional and remanded the case back to the lower court to reconsider its earlier invalidation of the full ACA. In November
2020, the United States Supreme Court heard oral argument in this case and in February 2021 the current presidential administration urged the
Court to uphold the ACA; however, it remains unclear when and how the Supreme Court will rule. These and other efforts to challenge, repeal
or replace the ACA may result in reduced funding for state Medicaid programs, lower numbers of insured individuals, and reduced coverage
for insured individuals. There is uncertainty regarding whether, when, and how the ACA will be further changed, what alternative provisions,
if any, will be enacted, and the impact of alternative provisions on providers and other healthcare industry participants. Government efforts to
repeal or change the ACA or to implement alternative reform measures could cause AdaptHealth’s revenues to decrease to the extent such
legislation reduces Medicaid and/or Medicare reimbursement rates.
If CMS requires prior authorization or implements changes in documentation necessary for AdaptHealth’s products,
AdaptHealth’s revenue, financial condition and results of operations could be negatively impacted.
CMS has established and maintains a Master List of Items Frequently Subject to Unnecessary Utilization of certain DMEPOS items
identified as being subject to unnecessary utilization. This list identifies items that CMS has determined could potentially be subject to Prior
Authorization as a condition of Medicare payment. Since 2012, CMS has also maintained a list of categories of DMEPOS items that require
face-to-face encounters with practitioners and written orders before the DMEPOS supplier may furnish the items to beneficiaries. In a final rule
issued in 2019, CMS
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combined and harmonized the two lists to create a single unified list (the "Master List”). CMS also reduced the financial threshold for
inclusion on the Master List. With certain exceptions for reductions in Payment Threshold, items remain on the Master List for ten years from
the date the item was added to the Master List. The presence of an item on the Master List does not automatically mean that prior
authorization is required. Under the 2019 final rule, CMS selects items from the Master List for inclusion on the "Required Prior Authorization
List.” The expanded Master List would increase the number of DMEPOS items potentially eligible to be selected for prior authorization, face-
to-face encounter and written order prior to delivery requirements as a condition of payment. CMS has added certain items that are part of
AdaptHealth’s product lines to the Master List and CMS may include the Company’s products on the Required Prior Authorization List. If
CMS adds additional products to the Master List, expands the list of items subject to prior authorization, or expands face-to-face encounter
requirements or provisions requiring a written order prior to deliver, these changes may adversely impact AdaptHealth’s revenue, financial
condition and results from operations.
Reimbursement claims are subject to audits by various governmental and private payor entities from time to time and such audits
may negatively affect AdaptHealth’s revenue, financial condition and results of operations.
AdaptHealth receives a substantial portion of its revenues from the Medicare program. Medicare reimbursement claims made by
healthcare providers, including HME providers, are subject to audit from time to time by governmental payors and their agents, such as MACs
that, among other things, process and pay Medicare claims, auditors contracted by CMS, and insurance carriers, as well as the Office of
Inspector General of the Department of Health and Human Services (the "OIG-HHS”), CMS and state Medicaid programs. These include
specific requirements imposed by the Durable Medical Equipment Medicare Administrative Contractor ("DME MAC”) Supplier Manuals,
Medicare DMEPOS enrollment requirements and Medicare DMEPOS Supplier Standards. To ensure compliance with Medicare, Medicaid and
other regulations, government agencies or their contractors, including MACs, Recovery Audit Contractors ("RACs”), Unified Program
Integrity Contractors ("UPICs”) and Zone Program Integrity Contractors ("ZPICs”), often conduct audits and request customer records and
other documents to support our claims submitted for payment of services rendered and compliance with government program claim
submission requirements. Some contractors are paid a percentage of the overpayments recovered. Negative audit findings or allegations of
fraud or abuse may subject AdaptHealth or its individual subsidiaries to liability, such as overpayment liability, refunds or recoupments of
previously paid claims, payment suspension, or the revocation of billing or payment privileges in governmental healthcare programs. If CMS
or a state Medicaid agency determines that certain actions of the Company or an affiliated subsidiary present an undue risk of fraud, waste, or
abuse, they may suspend the billing or payment privileges of the entity, deny the entity’s enrollment or revalidation for Medicare or Medicaid
participation, and potentially deny the re-enrollments of other commonly owned entities. Such actions, if imposed on the Company or its
subsidiaries, could materially and adversely impact the Company’s revenue, financial condition and results of operations.
In many instances, there are only limited publicly-available guidelines and methodologies for determining errors with certain audits.
As a result, there can be a significant lack of clarity regarding required documentation and audit methodology. The clarity and completeness
of each patient medical file, some of which is the work product of physicians not employed by AdaptHealth, is essential to successfully
challenging any payment denials. For example, certain provisions under CMS guidance manuals, local coverage determinations, and the DME
MAC Supplier Manuals provide that clinical information from the "patient’s medical record” is required to justify the initial and ongoing
medical necessity for the provision of DME. Some DME MACs, CMS staff and other government contractors have taken the position, that the
"patient’s medical record” refers not to documentation maintained by the DME supplier but instead to documentation maintained by the
patient’s physician, healthcare facility or other clinician, and that clinical information created by the DME supplier’s personnel and confirmed
by the patient’s physician is not sufficient to establish medical necessity. If treating physicians do not adequately document, among other
things, their diagnoses and plans of care, the risks that the Company will be subject to audits and payment denials are likely to increase.
Moreover, auditors’ interpretations of these policies are inconsistent and subject to individual interpretation, leading to significant increases
in individual supplier and industry-wide perceived error rates. High error rates could lead to further audit activity and regulatory burdens, and
could result in AdaptHealth making significant refunds and other payments to Medicare and other government programs. Accordingly,
AdaptHealth’s future revenues and cash flows from government healthcare programs may be reduced. Private payors also may conduct audits
and may take legal action to recover alleged overpayments. AdaptHealth could be adversely affected in some of the markets in which it
operates if the auditing payor alleges substantial overpayments were made to AdaptHealth due to coding errors or lack of documentation to
support
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medical necessity determinations. AdaptHealth cannot currently predict the adverse impact these measures might have on its financial
condition and results of operations, but such impact could be material.
Moreover, provisions of the ACA implemented by CMS require that overpayments be reported and returned within 60 days of the
date on which the overpayment is "identified.” Any overpayment retained after this deadline may be considered an "obligation” for purposes
of the False Claims Act, liability for which can result in the imposition of substantial fines and penalties. CMS currently requires a six-year
"lookback period,” for reporting and returning overpayments.
On June 26, 2020 and February 17, 2021, respectively, two acquired subsidiaries of AdaptHealth received notices of suspension of
Medicare payment privileges from the CMS UPIC for the western jurisdiction. Both notices stated that the suspension was based upon a
determination that such subsidiaries, each single supplier entities, had billed for services which were not rendered and/or were medically
unnecessary, and improperly solicited beneficiaries. The Company is in the process of responding to both suspensions. As previously noted,
the subsidiaries will not be paid for items provided to Medicare beneficiaries until the suspension is lifted, and there can be no assurance that
the Company will be successful in reinstating such payment privileges. The supplier entities represent less than two percent (2%) of the
Company’s annual revenue. The Company does not believe that these suspensions will have a material adverse effect on the Company.
AdaptHealth cannot currently predict the adverse impact, if any, that these audits, determinations, methodologies and interpretations
might have on its financial condition and results of operations.
Significant reimbursement reductions and/or exclusion from markets or product lines could adversely affect AdaptHealth.
All Medicare DMEPOS Competitive Bidding Program contracts expired on December 31, 2018, and, as a result, there is a temporary
gap in the entire DMEPOS Competitive Bidding Program that CMS stated would last until December 31, 2020, and be replaced by a single
round of competition named "Round 2021” which consolidated the competitive bidding areas ("CBAs”) included in the Round 1 2017 and
Round 2 Recompete DMEPOS Competitive Bidding Programs. Round 2021 contracts were scheduled to become effective on January 1, 2021,
and extend through December 31, 2023. CMS included 16 product categories in the Round 2021. On April 10, 2020, CMS announced that due
to the COVID-19 pandemic, it removed the non-invasive ventilators product category from the Round 2021 DMEPOS Competitive Bidding
Program.
On October 27, 2020, CMS announced that it would not award competitive bid contracts in 13 of the 15 remaining product categories
due to a failure to achieve expected savings, and that contract awards would only be made for off-the-shelf (OTS) knee and back braces. For
the year ended December 31, 2020, revenue generated with respect to providing OTS knee and back braces (excluding amounts generated in
non-rural and rural non-bid areas) were not material. AdaptHealth expects to obtain contracts for OTS knee and back braces, and does not
expect the single payment amounts imposed by CMS under such contracts to have a material impact on the Company.
The competitive bidding process (which is expected to be re-bid every three years) has historically put pressure on the amount
AdaptHealth is reimbursed in the markets in which it exists, as well as in areas that are not subject to the DMEPOS Competitive Bidding
Program. The rates required to win future competitive bids could continue to depress reimbursement rates. AdaptHealth will continue to
monitor developments regarding the DMEPOS Competitive Bidding Program. While AdaptHealth cannot predict the outcome of the DMEPOS
Competitive Bidding Program on its business in the future nor the Medicare payment rates that will be in effect in future years for the items
subjected to competitive bidding, the program may materially adversely affect its financial condition and results of operations.
Failure by AdaptHealth to successfully design, modify and implement technology-based and other process changes to maximize
productivity and ensure compliance could ultimately have a significant negative impact on AdaptHealth’s financial condition, reputation
and results of operations.
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AdaptHealth has identified a number of areas throughout its operations, including revenue cycle management and fulfilment
logistics, where it intends to centralize and/or modify current processes or systems in order to attain a higher level of productivity or ensure
compliance. Failure to achieve the cost savings or enhanced quality control expected from the successful design and implementation of such
initiatives may adversely impact AdaptHealth’s financial condition and results of operations. Additionally, Medicare and Medicaid often
change their documentation requirements with respect to claims submissions. The standards and rules for healthcare transactions, code sets
and unique identifiers also continue to evolve, such as ICD 10 and HIPAA 5010 and other data security requirements. Moreover, government
programs and/or commercial payors may have difficulties administering new standards and rules for healthcare transactions and this may
adversely affect timelines of payment or payment error rates. The DMEPOS Competitive Bidding Program also imposes new reporting
requirements on contracted providers. Failure by AdaptHealth to successfully design and implement system or process modifications could
have a significant impact on its operations and financial condition. From time to time, AdaptHealth’s outsourced contractors for certain
information systems functions, such as Brightree LLC and Parachute Health LLC, may make operational, leadership or other changes that
could impact AdaptHealth’s plans and cost-savings goals. The implementation of many of the new standards and rules will require
AdaptHealth to make substantial investments. Further, the implementation of these system or process changes could have a disruptive effect
on related transaction processing and operations. If AdaptHealth’s implementation efforts related to systems development are unsuccessful,
AdaptHealth may need to write off amounts that it has capitalized related to systems development projects. Additionally, if systems
development implementations do not occur, AdaptHealth may need to incur additional costs to support its existing systems.
AdaptHealth is subject, directly or indirectly, to United States federal and state healthcare fraud and abuse and false claims laws
and regulations. Prosecutions under such laws have increased in recent years and AdaptHealth may become subject to such litigation. If
AdaptHealth is unable to or has not fully complied with such laws, it could face substantial penalties.
AdaptHealth’s operations are subject to various state and federal fraud and abuse laws, including, without limitation, the federal
Anti-Kickback Statute, the federal Stark Law and the federal False Claims Act. These laws may impact, among other things, AdaptHealth’s
sales, marketing and education programs.
The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing
remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing or arranging for a good or
service, for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs. Several courts
have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce
referrals of federal healthcare covered business, the statute has been violated. In addition, a person or entity does not need to have actual
knowledge of the statute or specific intent to violate it in order to have committed a violation. The Anti-Kickback Statute is broad and, despite
a series of narrow safe harbors, prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry.
Penalties for violations of the federal Anti-Kickback Statute include criminal penalties and civil sanctions such as fines, imprisonment and
possible exclusion from Medicare, Medicaid and other federal healthcare programs. Many states have also adopted laws similar to the federal
Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only the
Medicare and Medicaid programs.
The federal Ethics in Patient Referrals Act of 1989, commonly known as the "Stark Law,” prohibits, subject to certain exceptions,
physician referrals of Medicare and, as applicable under state law, Medicaid patients to an entity providing certain "designated health
services” if the physician or an immediate family member has any financial relationship with the entity. The Stark Law also prohibits the entity
receiving the referral from billing any good or service furnished pursuant to an unlawful referral. Various states have corollary laws to the Stark
Law, including laws that require physicians to disclose any financial interest they may have with a healthcare provider to their patients when
referring patients to that provider. Both the scope and exceptions for such laws vary from state to state.The federal False Claims Act prohibits
persons from knowingly filing, or causing to be filed, a false claim to, or the knowing use of false statements to obtain payment from the
federal government. The False Claims Act defines "knowingly” to include actual knowledge, acting in deliberate ignorance of the truth or
falsity of information, or acting in deliberate disregard of the truth or falsity of information. False Claims Act liability includes liability for
reverse false claims for avoiding or
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decreasing an obligation to pay or transmit money to the government. This includes False Claims Act liability for failing to report and return
overpayments within 60 days of the date on which the overpayment is "identified.” Penalties under the False Claims Act can include exclusion
from the Medicare program. In addition, the government may assert that a claim including items or services resulting from a violation of the
federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act. Suits filed under the False Claims
Act, known as qui tam actions, can be brought by any individual on behalf of the government and such individuals, commonly known as
"whistleblowers,” may share in any amounts paid by the entity to the government in fines or settlement. The frequency of filing qui tam
actions has increased significantly in recent years, causing greater numbers of medical device, pharmaceutical and healthcare companies to
have to defend a False Claims Act action. When an entity is determined to have violated the federal False Claims Act, it may be required to
pay up to three times the actual damages sustained by the government, plus civil penalties for each separate false claim. Various states have
also enacted laws modeled after the federal False Claims Act.
For example, as previously disclosed, on July 25, 2017, AdaptHealth was served with a subpoena by the U.S. Attorney’s Office for
the United States District Court for the Eastern District of Pennsylvania ("EDPA”) pursuant to 18 U.S.C. §3486 (investigation of a federal
health care offense) to produce certain audit records and internal communications regarding ventilator billing. The investigation appears to be
focused on billing practices regarding one payor that contracted for bundled payments for certain ventilators. AdaptHealth has cooperated
with investigators and, through agreement with the EDPA, has submitted all information requested. An independent third party was retained
by AdaptHealth that identified overpayments and underpayments for ventilator billings related to the payor, and a remittance was sent to
reconcile that account. On October 3, 2019, AdaptHealth 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. AdaptHealth has responded to the
EDPA and supplemented its production as requested. On November 9, 2020, 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
AdaptHealth in 2017. The Company is compiling this information in coordination with the EDPA. While AdaptHealth 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.
Additionally, in March 2019, prior to its acquisition by AdaptHealth, AeroCare was served with a civil investigative demand ("CID”)
issued by the United States Attorney for the Western District of Kentucky ("WDKY”). The CID seeks to investigate allegations that
AeroCare 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. In September 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 AdaptHealth 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
AdaptHealth.
HIPAA, and its implementing regulations, also created additional federal criminal statutes that prohibit knowingly and willfully
executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses,
representations, or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program,
regardless of the payor (e.g., public or private) and knowingly and willfully falsifying, concealing or covering up by any trick or device a
material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits, items or services
relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the
statute or specific intent to violate it in order to have committed a violation.
From time to time, AdaptHealth has been and is involved in various governmental audits, investigations and reviews related to its
operations. Reviews and investigations can lead to government actions, resulting in the assessment of damages, civil or criminal fines or
penalties, or other sanctions, including restrictions or changes in the way
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AdaptHealth conducts business, loss of licensure or exclusion from participation in Medicare, Medicaid or other government programs.
Additionally, as a result of these investigations, healthcare providers and entities may face litigation or have to agree to settlements that can
include monetary penalties and onerous compliance and reporting requirements as part of a consent decree or corporate integrity agreement,
or Corporate Integrity Agreement ("CIA”). If AdaptHealth fails to comply with applicable laws, regulations and rules, its financial condition
and results of operations could be adversely affected. Furthermore, becoming subject to these governmental investigations, audits and
reviews may result in substantial costs and divert management’s attention from the business as AdaptHealth cooperates with the government
authorities, regardless of whether the particular investigation, audit or review leads to the identification of underlying issues.
AdaptHealth is unable to predict whether it could be subject to actions under any of these laws, or the impact of such actions. If
AdaptHealth is found to be in violation of any of the laws described above or other applicable state and federal fraud and abuse laws,
AdaptHealth may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from Medicare, Medicaid and other
government healthcare reimbursement programs and the curtailment or restructuring of its operations.
Failure by AdaptHealth to maintain required licenses and accreditation could impact its operations.
AdaptHealth is required to maintain a significant number of state and/or federal licenses for its operations and facilities. Certain
employees are required to maintain licenses in the states in which they practice. AdaptHealth manages the facility licensing function centrally.
In addition, individual clinical employees are responsible for obtaining, maintaining and renewing their professional licenses, and AdaptHealth
has processes in place designed to notify branch or pharmacy managers of renewal dates for the clinical employees under their supervision.
State and federal licensing requirements are complex and often open to subjective interpretation by various regulatory agencies. Accurate
licensure is also a critical threshold issue for the Medicare enrollment and the Medicare competitive bidding program. From time to time,
AdaptHealth may also become subject to new or different licensing requirements due to legislative or regulatory requirements developments
or changes in its business, and such developments may cause AdaptHealth to make further changes in its business, the results of which may
be material. Although AdaptHealth believes it has appropriate systems in place to monitor licensure, violations of licensing requirements may
occur and failure by AdaptHealth to acquire or maintain appropriate licensure for its operations, facilities and clinicians could result in
interruptions in its operations, refunds to state and/or federal payors, sanctions or fines or the inability to serve Medicare beneficiaries in
competitive bidding markets which could adversely impact AdaptHealth’s financial condition and results of operations.
Accreditation is required by most of AdaptHealth’s managed care payors and is a mandatory requirement for all Medicare DMEPOS
providers. If AdaptHealth or any of its branches lose accreditation, or if any of its new branches are unable to become accredited, such failure
to maintain accreditation or become accredited could adversely impact AdaptHealth’s financial condition and results of operations.
Actual or perceived failures to comply with applicable data protection, privacy and security, and consumer protection laws,
regulations, standards and other requirements could adversely affect our business, results of operations and financial condition.
Numerous federal and state laws and regulations addressing patient privacy and consumer privacy, including HIPAA and the
HITECH Act, govern the collection, dissemination, security, use and confidentiality of patient-identifiable health information or personal
information. Such laws and regulations relating to privacy, data protection, marketing and advertising, and consumer protection are evolving
and subject to potentially differing interpretations. These requirements may be interpreted and applied in a manner that varies from one
jurisdiction to another and/or may conflict with other laws or regulations. As a result, AdaptHealth’s practices may not have complied or may
not comply in the future with all such laws, regulations, requirements and obligations. Any failure, or perceived failure, by AdaptHealth or any
of its third-party partners or service providers to comply with privacy policies or federal or state privacy or consumer protection-related laws,
regulations, industry self-regulatory principles, industry standards or codes of conduct, regulatory guidance, orders to which they may be
subject, or other legal obligations relating to privacy or consumer protection, could adversely affect AdaptHealth’s reputation, brand and
business, and may result in claims, proceedings or actions against AdaptHealth by governmental entities, consumers, users, suppliers or
others. These
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proceedings may result in financial liabilities or may require AdaptHealth to change its operations, including ceasing the use or sharing of
certain data sets.
HIPAA and the HITECH Act, and their implementing regulations, require AdaptHealth to comply with standards for the use and
disclosure of health information within AdaptHealth and with third parties. HIPAA and the HITECH Act also include standards for common
healthcare electronic transactions and code sets, such as claims information, plan eligibility, payment information, and privacy and security of
individually identifiable health information.
HIPAA requires healthcare providers, including AdaptHealth, in addition to health plans and clearinghouses, to develop and
maintain policies and procedures with respect to protected health information that is used or disclosed. The HITECH Act included notification
requirement for breaches of patient-identifiable health information, restricts certain disclosures and sales of patient-identifiable health
information and provides a tiered system for civil monetary penalties for HIPAA violations. HIPAA also provides for criminal penalties.
In addition, various federal and state legislative and regulatory bodies, or self-regulatory organizations, may expand current laws or
regulations, enact new laws or regulations or issue revised rules or guidance regarding privacy, data protection and consumer protection. For
instance, the California Consumer Privacy Act ("CCPA”) became effective on January 1, 2020. The CCPA gives California residents expanded
rights to access and delete their personal information, opt out of certain personal information sharing and receive detailed information about
how their personal information is used by requiring covered companies to provide new disclosures to California consumers (as that term is
broadly defined) and provide such consumers new ways to opt-out of certain sales of personal information. The CCPA provides for civil
penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. Although there
are limited exemptions for protected health information and the CCPA’s implementation standards and enforcement practices are likely to
remain uncertain for the foreseeable future, the CCPA may increase AdaptHealth’s compliance costs and potential liability. Many similar
privacy laws have been proposed at the federal level and in other states.
Additionally, the FTC and many state attorneys general are interpreting existing federal and state consumer protection laws to
impose evolving standards for the online collection, use, dissemination and security of health-related and other personal information. Courts
may also adopt the standards for fair information practices promulgated by the FTC, which concern consumer notice, choice, security and
access. Consumer protection laws require AdaptHealth to publish statements that describe how it handles personal information and choices
individuals may have about the way AdaptHealth handles their personal information. If such information that AdaptHealth publishes is
considered untrue, it may be subject to government claims of unfair or deceptive trade practices, which could lead to significant liabilities and
consequences. Furthermore, according to the FTC, violating consumers’ privacy rights or failing to take appropriate steps to keep consumers’
personal information secure may constitute unfair acts or practices in or affecting commerce in violation of Section 5 of the FTC Act.
Under the Federal CAN-SPAM Act, the Telephone Consumer Protection Act of 1991 ("TCPA”) and the Telemarketing Sales Rule and
Medicare regulations, AdaptHealth is limited in the ways in which it can market and service its products and services by use of email, text or
telephone marketing. The actual or perceived improper sending of text messages may subject us to potential risks, including liabilities or claims
relating to consumer protection laws. Numerous class-action suits under federal and state laws have been filed in recent years against
companies who conduct SMS texting programs, with many resulting in multi-million-dollar settlements to the plaintiffs. Any future such
litigation against us could be costly and time-consuming to defend. For example, the TCPA, a federal statute that protects consumers from
unwanted telephone calls, faxes and text messages, restricts telemarketing and the use of automated SMS text messages without proper
consent. Additionally, state regulators may determine that telephone calls to patients of AdaptHealth are subject to state telemarketing
regulations. If AdaptHealth does not comply with existing or new laws and regulations related to telephone contacts or patient health
information, it could be subject to criminal or civil sanctions. New health information standards, whether implemented pursuant to HIPAA, the
HITECH Act, congressional action or otherwise, could have a significant effect on the manner in which AdaptHealth handles healthcare-
related data and communicates with payors, and the cost of complying with these standards could be significant. The scope and interpretation
of the laws that are or may be applicable to the delivery of consumer phone
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calls, emails and text messages are continuously evolving and developing. If we do not comply with these laws or regulations or if we become
liable under these laws or regulations, we could face direct liability, could be required to change some portions of our business model, could
face negative publicity and our business, financial condition and results of operations could be adversely affected. Even an unsuccessful
challenge of our phone, email or SMS text practices by our consumers, regulatory authorities or other third parties could result in negative
publicity and could require a costly response from and defense by us.
If AdaptHealth’s subsidiary fails to comply with the terms of its Corporate Integrity Agreement, it could be subjected to
substantial monetary penalties or suspension or termination from participation in the Medicare and Medicaid programs.
Braden Partners, L.P. ("BP”), d/b/a Pacific Pulmonary Services ("PPS”), which was acquired by AdaptHealth in May 2018, entered
into a five-year CIA with the OIG-HHS, effective March 31, 2017, concurrent with the execution of a settlement agreement with the United
States, acting through the DOJ and on behalf of the OIG-HHS. The CIA imposes certain compliance, auditing (including by an independent
review organization), self-reporting and training requirements with which BP must comply. If BP fails to comply with the terms of its CIA, it
could be subjected to substantial monetary penalties and/or suspension or exclusion from participation in federal healthcare programs. Any
such suspension, exclusion or termination would result in the revocation or termination of contracts and/or licenses and potentially have a
material adverse effect on the results of BP’s operations. The imposition of monetary penalties and/or termination of contracts with respect to
BP could adversely affect AdaptHealth’s profitability and financial condition. The CIA has a five-year term which is expected to expire by
April 1, 2022. In connection with the acquisition and integration of PPS by AdaptHealth, the OIG-HSS confirmed that the CIA’s risk
adjustment requirements and independent claims review would only apply to the operations of BP and therefore no operations of AdaptHealth
or any other affiliate are subject to these CIA requirements following the acquisition. On January 17, 2021, the OIG notified PPS that its report
for the period ended March 31, 2020 had been accepted and PPS had satisfied its obligations under the CIA as of such date.
Risks Related to Our Financial Condition
If AdaptHealth were required to write down all or part of its goodwill its net earnings and net worth could be materially
adversely affected.
Goodwill represents a significant portion of AdaptHealth’s assets. Goodwill represents the excess of cost over the fair market value
of net assets acquired in business combinations. For example, if our market capitalization drops significantly below the amount of net equity
recorded on our balance sheet, it might indicate a decline in our fair value and would require us to further evaluate whether our goodwill has
been impaired. If, as part of our annual review of goodwill, we are required to write down all or a significant part of AdaptHealth’s goodwill,
our net earnings and net worth could be materially adversely affected, which could affect our flexibility to obtain additional financing. In
addition, if our assumptions used in preparing our valuations for purposes of impairment testing differ materially from actual future results, we
may record impairment charges in the future and our financial results may be materially adversely affected. AdaptHealth had $998.8 million and
$266.8 million of goodwill recorded on its Consolidated Balance Sheets at December 31, 2020 and 2019, respectively. It is not possible at this
time to determine if there will be any future impairment charge, or if there is, whether such charges would be material.
AdaptHealth may not be able to generate sufficient cash flow to cover required payments or meet operating covenants under its
long-term debt and long-term operating leases.
Failure to generate sufficient cash flow to cover required payments or meet operating covenants under AdaptHealth’s long-term debt
and long-term operating leases could result in defaults under such agreements and cross-defaults under other debt or operating lease
arrangements, which could harm its operating subsidiaries. AdaptHealth may not generate sufficient cash flow from operations to cover
required interest, principal and lease payments. In addition, AdaptHealth’s current indebtedness contain restrictive covenants and require
AdaptHealth to maintain or satisfy specified coverage tests. These restrictions and operating covenants include, among other things,
requirements with respect to total leverage ratios and fixed charge coverage ratios. These restrictions, together with the restrictive
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covenants included in the BM Notes, may interfere with AdaptHealth’s ability to obtain additional advances under its existing credit facility or
to obtain new financing or to engage in other business activities, which may inhibit AdaptHealth’s ability to grow its business and increase
revenue. In addition, failure by AdaptHealth to comply with these restrictive covenants could result in an event of default which, if not cured
or waived, could result in the acceleration of its debt.
AdaptHealth may need additional capital to fund its operating subsidiaries and finance its growth, and AdaptHealth may not be
able to obtain it on acceptable terms, or at all, which may limit its ability to grow.
AdaptHealth’s ability to maintain and enhance its operating subsidiaries and equipment to meet regulatory standards, operate
efficiently and remain competitive in its markets requires AdaptHealth to commit substantial resources to continued investment in its affiliated
facilities and equipment. Additionally, the continued expansion of its business through the acquisition of existing facilities, expansion of
existing facilities and construction of new facilities may require additional capital, particularly if AdaptHealth were to accelerate its acquisition
and expansion plans. Financing may not be available or may be available only on terms that are not favorable. In addition, some of
AdaptHealth’s outstanding indebtedness restricts, among other things, its ability to incur additional debt. If AdaptHealth is unable to raise
additional funds or obtain additional funds on acceptable terms, it may have to delay or abandon some or all of its growth strategies. Further,
if additional funds are raised through the issuance of additional equity securities, the percentage ownership of our stockholders would be
diluted. Any newly issued equity securities may have rights, preferences or privileges senior to those of the Common Stock.
Changes in the method of determining the London Interbank Offered Rate ("LIBOR”), or the replacement of LIBOR with an
alternative reference rate, may adversely affect interest rates on AdaptHealth’s outstanding variable rate indebtedness.
Certain of AdaptHealth’s indebtedness, including LIBOR Rate Loans under its credit facility, bears interest at variable interest rates
that use LIBOR as a benchmark rate. LIBOR is the subject of recent proposals for reform and, on July 27, 2017, the U.K. Financial Conduct
Authority announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Federal Reserve
Bank of New York has begun publishing a Secured Overnight Funding Rate ("SOFR”), which is intended to replace U.S. dollar LIBOR, and
central banks in several other jurisdictions have also announced plans for alternative reference rates for other currencies. These reforms may
cause LIBOR to perform differently than in the past or to disappear entirely. The consequences of these developments with respect to LIBOR
cannot be entirely predicted but may result in an increase in the interest cost of AdaptHealth’s variable rate indebtedness. In the event that
LIBOR is no longer available as a reference rate or is replaced by SOFR in the future, AdaptHealth’s credit facility permits its lenders, in good
faith, to unilaterally suspend maintaining LIBOR Rate Loans under the credit facility and to adopt a new rate, such as SOFR. As a result,
AdaptHealth may need to renegotiate its outstanding indebtedness or incur other indebtedness, and the phase-out of LIBOR may negatively
impact the terms of such indebtedness. In addition, the overall financial market may be disrupted as a result of the phase-out or replacement of
LIBOR. Disruption in the financial market could have a material adverse effect on our business, financial condition and results of operations.
AdaptHealth’s current insurance program may expose it to unexpected costs and negatively affect its business, financial
condition and results of operations, particularly if it incurs losses not covered by its insurance or if claims or losses differ from its
estimates.
There is an inherent risk of liability in the provision of healthcare services. As participants in the healthcare industry, AdaptHealth
may periodically be subject to lawsuits, some of which may involve large claims and significant costs to defend, such as mass tort or other
class actions. Although AdaptHealth’s insurance coverage reflects deductibles, self-insured retentions, limits of liability and similar
provisions that it believes are reasonable based on its operations, the coverage under its insurance programs may not be adequate to protect
it in all circumstances. AdaptHealth’s insurance policies contain exclusions and conditions that could have a materially adverse impact on
AdaptHealth’s ability to receive indemnification thereunder, as well as customary sub-limits for particular types of losses. Additionally,
insurance companies that currently insure companies in AdaptHealth’s industry may cease to do so, may change the coverage provided or
may substantially increase premiums in the future. The incurrence of losses and liabilities that exceed
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AdaptHealth’s available coverage, therefore, could have a material adverse effect on its business, financial condition and results of
operations.
AdaptHealth currently self-insures a significant portion of expected losses under its workers’ compensation, automobile liability and
employee health insurance programs and, to offset negative insurance market trends, AdaptHealth may elect to increase its self-insurance
coverage, accept higher deductibles or reduce the amount of coverage. Unanticipated changes in any applicable actuarial assumptions and
management estimates underlying its liabilities for these losses could result in materially different expenses than expected under these
programs, which could have a material adverse effect on AdaptHealth’s financial condition and results of operations. In addition, if
AdaptHealth experiences a greater number of these losses than it anticipates, it could have a material adverse effect on its business, financial
condition and results of operations.
Our only significant asset is our ownership of AdaptHealth Holdings, and such ownership may not be sufficient to generate the
funds necessary to meet our financial obligations or to pay any dividends on our Class A Common Stock.
We have no direct operations and no significant assets other than the ownership of AdaptHealth Holdings. We depend on
AdaptHealth Holdings and its subsidiaries for distributions, loans and other payments to generate the funds necessary to meet our financial
obligations or to pay any dividends with respect to our Class A Common Stock. Legal and contractual restrictions in agreements governing
the indebtedness of AdaptHealth Holdings and its subsidiaries may limit our ability to obtain cash from AdaptHealth Holdings. The earnings
from, or other available assets of, AdaptHealth Holdings and its subsidiaries may not be sufficient to enable us to satisfy our financial
obligations or pay any dividends on our Class A Common Stock. To the extent that we require funds and AdaptHealth Holdings or its
subsidiaries are restricted from making distributions under applicable law or regulation or under the terms of their financing arrangements, or
are otherwise unable to provide such funds, it could materially adversely affect our liquidity and financial condition, including our ability to
pay our income taxes when due.
Risks Related to Our Securities
Fluctuations in the price of our securities could contribute to the loss of all or part of your investment.
As an active market for our Class A Common Stock continues to develop, the trading price of our Class A Common Stock could be
volatile and subject to wide fluctuations in response to various factors, some of which are beyond our control. Any of the factors listed below
could have a material adverse effect on your investment in our Class A Common Stock and our Class A Common Stock may trade at prices
significantly below the price you paid for it. In such circumstances, the trading price of our Class A Common Stock may not recover and may
experience a further decline.
Factors affecting the trading price of our Class A Common Stock may include:
● the COVID-19 pandemic;
● actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be
similar to us;
● changes in the market’s expectations about our operating results;
● success of competitors;
● our operating results failing to meet the expectation of securities analysts or investors in a particular period;
● changes in financial estimates and recommendations by securities analysts concerning AdaptHealth or the home medical equipment
industry in general;
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● operating and stock price performance of other companies that investors deem comparable to us;
● our ability to market new and enhanced products on a timely basis;
● changes in laws and regulations affecting our business;
● our ability to meet compliance requirements;
● commencement of, or involvement in, litigation involving us;
● inability to quickly remediate material weaknesses or the continued identification of material weaknesses;
● changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;
● the volume of shares of our Class A Common Stock available for public sale;
● any major change in our board of directors or management;
● sales of substantial amounts of common stock by our directors, executive officers or significant stockholders or the perception that
such sales could occur; and
● general economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts
of war or terrorism.
Broad market and industry factors may materially harm the market price of our securities irrespective of our operating performance.
The stock market in general, and Nasdaq in particular, have experienced price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of
our Class A Common Stock, may not be predictable. A loss of investor confidence in the market for retail stocks or the stocks of other
companies which investors perceive to be similar to us could depress our stock price regardless of our business, prospects, financial
condition or results of operations. A decline in the market price of our Class A Common Stock also could adversely affect our ability to issue
additional securities and our ability to obtain additional financing in the future.
We may not be able to timely and effectively implement controls and procedures required by Section 404 of the Sarbanes-Oxley
Act that are applicable to us.
As a public company, we are required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act,
which require management to certify financial and other information in our quarterly and annual reports and provide an annual management
report on the effectiveness of internal control over financial reporting. To comply with the requirements of being a public company, we are
required to provide attestation on internal controls, and we may need to undertake various actions, such as implementing additional internal
controls and procedures and hiring additional accounting or internal audit staff. The standards required for a public company under Section
404 of the Sarbanes-Oxley Act are significantly more stringent than those that were required of AdaptHealth Holdings as a privately held
company. Management may not be able to effectively and timely implement controls and procedures that adequately respond to the increased
regulatory compliance and reporting requirements that became applicable to us after the Business Combination. If we are not able to implement
the additional requirements of Section 404 in a timely manner or with adequate compliance, we may not be able to assess whether our internal
controls over financial reporting are effective, which may subject us to adverse regulatory consequences and could harm investor confidence
and the market price of our Class A Common Stock. Further, as an emerging growth company, our independent registered public accounting
firm is not required to formally attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404 until the date
we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is
adverse in the event that it is not satisfied with the level at which our controls are documented, designed or operating.
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As described in "Item 9A. Controls and Procedures,” we concluded that our internal control over financial reporting was ineffective
as of December 31, 2020 because material weaknesses existed in our internal control over financial reporting. We have taken a number of
measures to remediate the material weaknesses described therein; however, if we are unable to remediate our material weaknesses in a timely
manner or we identify additional material weaknesses, we may be unable to provide required financial information in a timely and reliable
manner and we may incorrectly report financial information. For example, as described in Note 20, Quarterly Financial Information
(Unaudited), included in our consolidated financial statements for the year ended December 31, 2020 and notes thereto, as a result of the
corrections relating to the accounting for the Contingent Consideration Common Shares discussed therein, the Company has corrected
previously disclosed unaudited condensed consolidated financial information for 2020 quarterly periods. The existence of material weaknesses
or significant deficiencies in internal control over financial reporting could adversely affect our reputation or investor perceptions of us. In
addition, we have and will continue to incur additional costs to remediate material weaknesses in our internal control over financial reporting,
as described in Item 9A. "Controls and Procedures”.
Certain of our principal stockholders have significant influence over us.
As of January 1, 2021, Q Management Services (PTC) Ltd., as Trustee of Everest Trust, beneficially owned approximately 15.6% of
our Class A Common Stock, assuming the exercise of 665,628 private placement warrants held by Clifton Bay Offshore Investments L.P. and
41,473 private placement warrants held by Quadrant Management LLC. As of January 1, 2021, the OEP Purchaser beneficially owned
approximately 14.4% of our Class A Common Stock. As long as Q Management Services (PTC) Ltd., as Trustee of the Everest Trust, and/or
the OEP Purchaser own or control a significant percentage of our outstanding voting power, they will have the ability to significantly
influence all corporate actions requiring stockholder approval, including the election and removal of directors and the size of our board of
directors, any amendment to our Second Amended and Restated Certificate of Incorporation (our "Charter”) or Amended and Restated Bylaws
(our "Bylaws”), or the approval of any merger or other significant corporate transaction, including a sale of substantially all of our assets.
The interests of Q Management Services (PTC) Ltd., as Trustee of the Everest Trust, and/or the OEP Purchaser may not align with
the interests of our other stockholders. Each of Q Management Services (PTC) Ltd., as Trustee of the Everest Trust, and the OEP Purchaser is
in the business of making investments in companies and may acquire and hold interests in businesses that compete directly or indirectly with
us. Each of Q Management Services (PTC) Ltd., as Trustee of the Everest Trust, and the OEP Purchaser may also pursue acquisition
opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. Our
Charter provides that our stockholders and our directors, including any who were designated by any of our stockholders, other than any such
persons who are employees of us or any of our subsidiaries, do not have any obligation to offer to us any corporate opportunity of which he
or she may become aware prior to offering such opportunities to other entities with which they may be affiliated, subject to certain limited
exceptions.
We will continue to incur significant increased expenses and administrative burdens as a result of being a public company,
which could have a material adverse effect on our business, financial condition and results of operations.
We will continue to face increased legal, accounting, administrative and other costs and expenses as a public company that
AdaptHealth Holdings did not incur as a private company. The Sarbanes-Oxley Act, including the requirements of Section 404, as well as rules
and regulations subsequently implemented by the SEC, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and
regulations promulgated and to be promulgated thereunder, the Public Company Accounting Oversight Board and the securities exchanges,
impose additional reporting and other obligations on public companies. Compliance with public company requirements increases costs and
makes certain activities more time-consuming. A number of those requirements require us to carry out activities AdaptHealth had not
undertaken prior to the Business Combination. In addition, additional expenses associated with SEC reporting requirements will continue to be
incurred. We have and will continue to incur additional costs to remediate material weaknesses in our internal control over financial reporting,
as described in Item 9A. "Controls and Procedures”. It may also be more expensive to obtain director and officer liability insurance. Risks
associated with our status as a public company may make it more difficult to attract and retain qualified persons to serve on the board of
directors or as
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executive officers. The additional reporting and other obligations imposed by these rules and regulations will increase legal and financial
compliance costs and the costs of related legal, accounting and administrative activities. Furthermore, certain of the key personnel of
AdaptHealth may be unfamiliar with the requirements of operating a company regulated by the SEC, which could cause us to have to expend
time and resources helping them become familiar with such requirements. These increased costs will require us to divert a significant amount
of money that could otherwise be used to expand the business and achieve strategic objectives. Advocacy efforts by stockholders and third
parties may also prompt additional changes in governance and reporting requirements, which could further increase costs.
Certain of AdaptHealth’s management has limited experience in operating a public company.
Certain of AdaptHealth’s executive officers and certain directors have limited experience in the management of a publicly traded
company. AdaptHealth’s management team may not successfully or effectively manage its transition to a public company that is subject to
significant regulatory oversight and reporting obligations under federal securities laws. Their limited experience in dealing with the
increasingly complex laws pertaining to public companies could be a significant disadvantage in that it is likely that an increasing amount of
their time may be devoted to these activities which will result in less time being devoted to the management and growth of the company. It is
possible that we will be required to expand our employee base and hire additional employees to support our operations as a public company,
which will increase our operating costs in future periods.
Because we have no current plans to pay cash dividends on our Class A Common Stock for the foreseeable future, you may not
receive any return on investment unless you sell your Class A Common Stock for a price greater than that which you paid for it.
We may retain future earnings, if any, for future operations, expansion and debt repayment and have no current plans to pay any
cash dividends for the foreseeable future. Any decision to declare and pay dividends as a public company in the future will be made at the
discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements,
contractual restrictions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends may be
limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur. As a result, you may not receive any
return on an investment in our Class A Common Stock unless you sell our Class A Common Stock for a price greater than that which you paid
for it.
We are required to make payments under the Tax Receivable Agreement for certain tax benefits we may claim, and the amounts
of such payments could be significant.
The Tax Receivable Agreement, which we entered into at the Closing with certain pre-Business Combination owners of AdaptHealth
Units (collectively, the "TRA Holders”), generally provides for the payment by us of 85% of the net cash savings, if any, in U.S. federal, state
and local income tax that we actually realize (or are deemed to realize in certain circumstances) in periods after the Closing as a result of: (i)
certain tax attributes of Access Point Medical, Inc. existing prior to the Business Combination; (ii) certain increases in tax basis resulting from
exchanges of AdaptHealth Units; (iii) imputed interest deemed to be paid by us as a result of payments we make under the Tax Receivable
Agreement; and (iv) certain increases in tax basis resulting from payments we make under the Tax Receivable Agreement. We will retain the
benefit of the remaining 15% of these cash savings. The amount of the cash payments that we may be required to make under the Tax
Receivable Agreement could be significant and is dependent upon significant future events and assumptions, including the timing of the
exchanges of AdaptHealth Units, the price of our Class A Common Stock at the time of each exchange, the extent to which such exchanges are
taxable transactions and the amount of the exchanging TRA Holder’s tax basis in its AdaptHealth Units at the time of the relevant exchange.
The amount of such cash payments is also based on assumptions as to the amount and timing of taxable income we generate in the future, the
U.S. federal income tax rate then applicable and the portion of our payments under the Tax Receivable Agreement that constitute interest or
give rise to depreciable or amortizable tax basis. Moreover, payments under the Tax Receivable Agreement will be based on the tax reporting
positions that we determine, which tax reporting positions are subject to challenge by taxing authorities. We are dependent on distributions
from AdaptHealth Holdings to make payments under the Tax Receivable Agreement, and we cannot guarantee that such distributions will be
made in sufficient amounts or at the times needed to enable us to make our required payments under the Tax Receivable
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Agreement, or at all. Any payments made by us to the TRA Holders under the Tax Receivable Agreement will generally reduce the amount of
overall cash flow that might have otherwise been available to us. To the extent that we are unable to make timely payments under the Tax
Receivable Agreement for any reason, the unpaid amounts will be deferred and will accrue interest until paid by us. Nonpayment for a
specified period may constitute a breach of a material obligation under the Tax Receivable Agreement, and therefore, may accelerate payments
due under the Tax Receivable Agreement. The payments under the Tax Receivable Agreement are also not conditioned upon the TRA Holders
maintaining a continued ownership interest in AdaptHealth Holdings or us.
In certain cases, payments under the Tax Receivable Agreement may be accelerated and/or significantly exceed the actual
benefits, if any, we realize in respect of the tax attributes subject to the Tax Receivable Agreement.
The Tax Receivable Agreement provides that if we breach any of our material obligations under the Tax Receivable Agreement, if we
undergo a change of control or if, at any time, we elect an early termination of the Tax Receivable Agreement, then the Tax Receivable
Agreement will terminate and our obligations, or our successor’s obligations, to make payments under the Tax Receivable Agreement would
accelerate and become immediately due and payable. The amount due and payable in those circumstances is determined based on certain
assumptions, including an assumption that we would have sufficient taxable income to fully utilize all potential future tax benefits that are
subject to the Tax Receivable Agreement. We may need to incur debt to finance payments under the Tax Receivable Agreement to the extent
our cash resources are insufficient to meet our obligations under the Tax Receivable Agreement as a result of timing discrepancies or
otherwise.
As a result of the foregoing, (i) we could be required to make cash payments to the TRA Holders that are greater than the specified
percentage of the actual benefits we ultimately realize in respect of the tax benefits that are subject to the Tax Receivable Agreement, and (ii)
we would be required to make a cash payment equal to the present value of the anticipated future tax benefits that are the subject of the Tax
Receivable Agreement, which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits. In
these situations, our obligations under the Tax Receivable Agreement could have a substantial negative impact on our liquidity and could
have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combination, or other changes of
control due to the additional transaction costs a potential acquirer may attribute to satisfying such obligations. There can be no assurance
that we will be able to finance our obligations under the Tax Receivable Agreement.
We will not be reimbursed for any payments made to TRA Holders under the Tax Receivable Agreement in the event that any tax
benefits are disallowed.
We will not be reimbursed for any cash payments previously made to the TRA Holders pursuant to the Tax Receivable Agreement if
any tax benefits initially claimed by us are subsequently challenged by a taxing authority and are ultimately disallowed. Instead, any excess
cash payments made by us to a TRA Holder will be netted against any future cash payments that we might otherwise be required to make
under the terms of the Tax Receivable Agreement. However, a challenge to any tax benefits initially claimed by us may not arise for a number
of years following the initial time of such payment or, even if challenged early, such excess cash payment may be greater than the amount of
future cash payments that we might otherwise be required to make under the terms of the Tax Receivable Agreement and, as a result, there
might not be future cash payments from which to net against. The applicable U.S. federal income tax rules are complex and factual in nature,
and there can be no assurance that the Internal Revenue Service or a court will not disagree with our tax reporting positions. As a result, it is
possible that we could make cash payments under the Tax Receivable Agreement that are substantially greater than our actual cash tax
savings.
Certain of the TRA Holders have substantial control over us, and their interests, along with the interests of other TRA Holders, in
our business may conflict with the interests of our stockholders.
The TRA Holders may receive payments from us under the Tax Receivable Agreement upon any redemption or exchange of their
AdaptHealth Units, including the issuance of shares of our Class A Common Stock upon any such redemption or exchange. As a result, the
interests of the TRA Holders may conflict with the interests of holders of our Class A Common Stock. For example, the TRA Holders may have
different tax positions from us which could influence
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their decisions regarding whether and when to dispose of assets, whether and when to incur new or refinance existing indebtedness,
especially in light of the existence of the Tax Receivable Agreement, and whether and when we should terminate the Tax Receivable
Agreement and accelerate our obligations thereunder. In addition, the structuring of future transactions may take into consideration tax or
other considerations of TRA Holders even in situations where no similar considerations are relevant to us.
Our warrants may have an adverse effect on the market price of our Class A Common Stock.
Simultaneously with the closing of our IPO, we issued in a private placement an aggregate of 4,333,333 private placement warrants,
each exercisable to purchase one share of Class A Common Stock at $11.50 per share. As of December 31, 2020, there were 4,280,548 private
placement warrants outstanding. To the extent such warrants are exercised, additional shares of our Class A Common Stock will be issued,
which will result in dilution to our stockholders and increase the number of shares of Class A Common Stock eligible for resale in the public
market. Sales of substantial numbers of such shares in the public market or the fact that such warrants may be exercised could adversely affect
the market price of our Class A Common Stock.
The JOBS Act permits "emerging growth companies” like us to take advantage of certain exemptions from various reporting
requirements applicable to other public companies that are not emerging growth companies.
We currently qualify as an "emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the JOBS
Act. As such, we plan to take advantage of certain exemptions from various reporting requirements applicable to other public companies that
are not emerging growth companies for as long as we continue to be an emerging growth company, including (i) the exemption from the
auditor attestation requirements with respect to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, (ii) the
exemptions from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements and (iii) reduced disclosure obligations
regarding executive compensation in its periodic reports and proxy statements. We will remain an emerging growth company until the earliest
of (i) the last day of the fiscal year in which the market value of our Class A Common Stock that is held by non-affiliates exceeds $700 million
as of June 30 of that fiscal year, (ii) the last day of the fiscal year in which we have total annual gross revenue of $1.07 billion or more during
such fiscal year, (iii) the date on which we have issued more than $1.0 billion in non-convertible debt in the prior three-year period or (iv) the
last day of the fiscal year following the fifth anniversary of the date of the first sale of our common stock in the IPO, which would be December
31, 2023. AdaptHealth had revenues for the year ended December 31, 2020 of $1.06 billion. If we continue to expand our business through
acquisitions and/or continue to grow revenues organically, or if we continue to issue debt, including to fund such acquisitions, we may cease
to be an emerging growth company prior to December 31, 2023. For instance, we expect to exceed $1.07 billion in revenue for the year ended
December 31, 2021, meaning we would no longer be an emerging growth company as of December 31, 2021. In addition, we may no longer
qualify as an emerging growth company as of December 31, 2021 due to the market value of our Class A Common Stock that is held by non-
affiliates, assuming no material decline in the market price of our Class A Common Stock as of June 30, 2021.
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the exemption from
complying with new or revised accounting standards provided in Section 7(a)(2)(B) of the Securities Act as long as we are an emerging growth
company. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would
otherwise apply to private companies. We have elected to take advantage of such extended transition period, which means that when a
standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can
adopt the new or revised standard at the same time private companies are required to adopt the new or revised standard. Investors may find
our Class A Common Stock less attractive because we will rely on these exemptions, which may result in a less active trading market for our
Class A Common Stock and its stock price may be more volatile.
We are also currently a "smaller reporting company.” In the event that we are still considered a "smaller reporting company,” at such
time as we cease being an "emerging growth company,” the disclosure we will be required to provide in our SEC filings will increase, but will
still be less than it would be if we were not considered either an "emerging growth company” or a "smaller reporting company.” Specifically,
similar to "emerging growth companies,” "smaller reporting companies” are able to provide simplified executive compensation disclosures in
their filings; may be
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exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms provide
an attestation report on the effectiveness of internal control over financial reporting; and have certain other decreased disclosure obligations
in their SEC filings. Decreased disclosures in our SEC filings due to our status as an "emerging growth company” or "smaller reporting
company” may make it harder for investors to analyze our results of operations and financial prospects.
Our Charter requires that the Court of Chancery of the State of Delaware and, to the extent enforceable, the federal district
courts of the United States of America be the exclusive forums for substantially all disputes between us and our stockholders, which may
have the effect of discouraging lawsuits against our directors and officers.
Our Charter requires, to the fullest extent permitted by law, other than any claim to enforce a duty or liability created by the Exchange
Act or other claim for which federal courts have exclusive jurisdiction, that derivative actions brought in our name, actions against directors,
officers and employees for breach of fiduciary duty and other similar actions may be brought only in the Court of Chancery in the State of
Delaware and, if brought outside of the State of Delaware, the stockholder bringing such suit will be deemed to have consented to service of
process on such stockholder’s counsel. Our Charter further provides that the federal district courts of the United States of America are the
exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. These provisions may have the effect
of discouraging lawsuits against our directors and officers. If a court were to find either exclusive forum provision in our Charter to be
inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which
could seriously harm our business. Although the Delaware Supreme Court recently held that exclusive forum provisions of federal district
courts of the United States of America for resolving any complaint asserting a cause of action arising under the Securities Act are facially
valid, courts in other jurisdictions may find such provisions to be unenforceable.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease all of our offices and facilities. Our corporate headquarters currently consists of approximately 12,000 square feet in an
office building located at 220 Germantown Pike, Suite 250, Plymouth Meeting, Pennsylvania, 19462. In addition to our corporate headquarters,
we lease facilities for our operating locations, billing centers, and other warehouse and office space. All facilities are leased pursuant to
operating leases. We believe that our facilities are suitable and adequate for our planned needs.
Item 3. Legal Proceedings
See Item 1. "Business—Legal Proceedings.” and Item 1A. "Risk Factors”.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market Price of and Dividends on Registrant’s Common Equity and Related Stockholder Matters; Issuer Purchases of Equity
Securities
Market Information
Our Class A Common Stock is currently listed on Nasdaq under the symbol "AHCO.” Through November 8, 2019, our common stock
was quoted under the symbol "DFB.” As of March 12, 2021, there were 92 holders of record of
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shares of our Class A Common Stock and no holders of record of shares of our Class B Common Stock. Such numbers do not include
beneficial owners holding our securities through nominee names.
Dividend Policy
We have not paid any cash dividends on our Common Stock to date. The payment of cash dividends in the future will be dependent
upon our revenues and earnings, if any, capital requirements and general financial condition. The payment of any cash dividends will be
within the discretion of our board of directors at such time. In addition, our board of directors is not currently contemplating and does not
anticipate declaring any stock dividends in the foreseeable future. Further, our ability to declare dividends may be limited by restrictive
covenants contained in any of our existing or future indebtedness.
Securities Authorized for Issuance Under Equity Compensation Plans
See Part III, Item 12 of this Form 10-K for additional information required.
Recent Sales of Unregistered Securities
Other than as follows, we had no sales of unregistered equity securities during the period covered by this report that were not
previously reported in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.
Unit Exchanges
During the year ended December 31, 2020, the Company issued 16,659,739 shares of Class A Common Stock to certain holders of
AdaptHealth Units in exchange for an equal number of shares of Class B Common Stock and AdaptHealth Units pursuant to the Exchange
Agreement. The shares of Class A Common Stock were issued pursuant to the exemption from registration contained in Section 4(a)(2) of the
Securities Act.
Conversion of Preferred Stock
During the year ended December 31, 2020, the Company issued 25,454.55 shares of Series B-1 Preferred Stock upon the conversion of
35,000 shares of Series B-2 Preferred Stock, 2,887,709 shares of Class A Common Stock upon the conversion of 39,706 shares of Series A
Preferred Stock and 2,000,000 shares of Class A Common Stock upon the conversion of 20,000 shares of Series B-1 Preferred Stock. Such
shares were issued pursuant to the exemption from registration contained in Section 3(a)(9) of the Securities Act.
Issuer Purchases of Equity Securities
None.
Item 6. Selected Financial Data
The following table shows selected historical consolidated financial information for the periods and as of the dates indicated. The
selected historical consolidated financial information as of and for the years ended December 31, 2020 and 2019 was derived from the audited
historical consolidated financial statements included elsewhere in this report. The selected historical consolidated financial information as of
and for the years ended December 31, 2018 and 2017 was derived from the audited historical consolidated financial statements not included in
this report.
Historical results are not necessarily indicative of future operating results. The selected historical consolidated financial information
should be read in conjunction with "Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as
our historical consolidated financial statements and accompanying notes included elsewhere in this report.
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(in thousands)
Consolidated Statement of Operations Data:
Total net revenue
Operating income (1) (2)
Net (loss) income attributable to AdaptHealth Corp. (2)
(in thousands)
Consolidated Statement of Cash Flows Data:
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
(in thousands)
Balance Sheet Data:
Total assets (2)
Total long-term debt, including current portion
Total stockholders' equity (deficit) / members’ equity (deficit) (2)
Year Ended December 31,
2020
1,056,389
71,346
(64,481)
195,634
(815,703)
643,153
2020
1,813,472
784,714
394,750
$
$
$
$
$
$
$
$
$
2019
529,644
29,378
(17,062)
60,418
(84,870)
76,144
$
$
$
$
$
$
2018
345,278
31,091
23,260
68,427
(96,284)
48,769
December 31,
2019
546,538
396,833
(38,148)
$
$
$
2018
368,957
134,185
102,769
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2017
192,559
16,088
9,687
45,931
(15,077)
(30,263)
2017
111,984
20,312
(637)
(1) The year ended December 31, 2020 includes grant income of $14.3 million from the recognition of amounts received in connection
with the CARES Act provider relief funds. Income recognized under this program is reported in grant income in the accompanying
consolidated statements of operations. There was no grant income recognized during the years ended December 31, 2019, 2018 and
2017.
(2) The amounts in the 2019 column have been revised from the amounts reported in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2019. Refer to Note 2(a), Summary of Significant Accounting Policies – Basis of Presentation, included in
the accompanying notes to the consolidated financial statements for the year ended December 31, 2020 for additional discussion of
such revisions.
The following table sets forth EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex:
(in thousands)
EBITDA
Adjusted EBITDA
Adjusted EBITDA less Patient Equipment Capex
Year Ended December 31,
2020
2019
2018
2017
$
$
$
53,202
205,619
142,483
$
$
$
(unaudited)
$
$
$
87,659
123,021
75,600
77,569
84,447
45,083
$
$
$
43,580
45,035
19,186
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The following table reconciles net income (loss) attributable to AdaptHealth Corp., the most directly comparable GAAP measure, to
EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex:
(in thousands)
Net (loss) income attributable to AdaptHealth Corp.
Income attributable to noncontrolling interest
Interest expense excluding change in fair value of interest rate swaps
Interest expense (income) - change in fair value of interest rate swaps
Income tax (benefit) expense
Depreciation and amortization, including patient equipment depreciation
Loss from discontinued operations, net of tax
EBITDA
Loss on extinguishment of debt, net (a)
Equity-based compensation expense (b)
Transaction costs (c)
Severance (d)
Change in fair value of contingent consideration common shares liability
(e)
Other non-recurring (income) expense (f)
Adjusted EBITDA
Less: Patient equipment capex (g)
Adjusted EBITDA less Patient Equipment Capex
Year Ended December 31,
2020
2019
2018
2017
(unaudited)
$
$
$
$
(64,481)
5,763
41,430
—
(11,955)
82,445
—
53,202
5,316
18,670
26,573
5,596
(17,062)
2,111
27,878
11,426
739
62,567
—
87,659
2,121
11,070
15,984
2,301
23,260
1,077
8,000
(547)
(2,098)
47,877
—
77,569
1,399
884
2,514
1,920
98,717
(2,455)
205,619
(63,136)
142,483
2,483
1,403
123,021
(47,421)
75,600
$
$
$
—
161
84,447
(39,364)
45,083
$
9,687
580
5,041
—
249
27,816
207
43,580
324
49
—
826
—
256
45,035
(25,849)
19,186
(a)
(b)
(c)
(d)
(e)
(f)
(g)
Represents write offs of deferred financing costs related to refinancing of debt. The 2018 period also includes prepayment
penalty expense related to refinancing of debt offset by gain on debt extinguishment.
Represents equity-based compensation expense for awards granted to employees and non-employee directors, including
expense resulting from accelerated vesting and modification of certain awards.
Represents transaction costs related to acquisitions. The 2019 period also includes costs associated with the 2019
Recapitalization and the Business Combination.
Represents severance costs related to acquisition integration and internal AdaptHealth restructuring and workforce reduction
activities.
Represents a non-cash charge for the change in the estimated fair value of contingent consideration common shares issuable as
part of the Business Combination. Refer to Note 11, Stockholders’ Equity – Contingent Consideration Common Shares,
included in the accompanying notes to the consolidated financial statements for the year ended December 31, 2020 for additional
discussion of such non-cash charge.
The 2020 period includes $4.2 million of net reductions in the fair value of contingent consideration liabilities related to
acquisitions, a $0.6 million gain in connection with the sale of a cost method investment, offset by a $1.5 million expense
associated with the PCS Transition Services Agreement and $0.8 million of other non-recurring expenses.
Represents the value of patient equipment obtained during the respective period without regard to whether the equipment is
purchased or financed through lease transactions.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with AdaptHealth Corp.’s ("AdaptHealth” or the "Company”) consolidated
financial statements and the accompanying notes included in this report. All amounts presented are in accordance with U.S. generally
accepted accounting principles ("U.S. GAAP”), except as noted. In addition to historical information, this discussion contains forward-looking
statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s
expectations. Factors that could cause such differences include, but are not limited to, those discussed in Item 1A, "Risk Factors”, of this
report on Form 10-K.
AdaptHealth Corp. Overview
AdaptHealth is a national leader in providing patient-centric and technology-enabled chronic disease management solutions
including home healthcare equipment, medical supplies to the home and related services in the United States. The Company focuses primarily
on providing (i) sleep therapy equipment, supplies and related services (including CPAP and bi PAP services) to individuals suffering from
obstructive sleep apnea ("OSA”), (ii) medical devices and supplies to patients for the treatment of diabetes (including continuous glucose
monitors and insulin pumps), (iii) home medical equipment ("HME”) to patients discharged from acute care and other facilities, (iv) oxygen and
related chronic therapy services in the home, and (v) other HME medical devices and supplies on behalf of chronically ill patients with wound
care, urological, incontinence, ostomy and nutritional supply needs. The Company services beneficiaries of Medicare, Medicaid and
commercial insurance payors. As of December 31, 2020, AdaptHealth serviced over approximately 1.9 million patients annually in all 50 states
through its network of 283 locations in 42 states. Following its acquisition of AeroCare in February 2021, AdaptHealth services over
approximately 3.0 million patients annually in all 50 states through its network of over 500 locations across 46 states. The Company’s principal
executive offices are located at 220 West Germantown Pike, Suite 250, Plymouth Meeting, Pennsylvania 19462.
Impact of the COVID-19 Pandemic
During 2020, the COVID-19 pandemic impacted AdaptHealth’s business, as well as its patients, communities, and employees.
AdaptHealth’s priorities during the COVID-19 pandemic remain protecting the health and safety of its employees (including patient-facing
employees providing respiratory and other services), maximizing the availability of its services and products to support patient health needs,
and the operational and financial stability of its business.
In response to the COVID-19 pandemic and the National Emergency Declaration, dated March 13, 2020, AdaptHealth activated
certain business interruption protocols, including acquisition and distribution of personal protective equipment (PPE) to its patient-facing
employees, accelerated capital expenditures of certain products and relocation of significant portions of its workforce to "work-from-home”
status. Federal, state, and local authorities have taken several actions designed to assist healthcare providers in providing care to COVID-19
and other patients and to mitigate the adverse economic impact of the COVID-19 pandemic. Legislative actions taken by the federal
government include the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act”), which was signed into law on March 27,
2020. Through the CARES Act, the federal government has authorized payments to be distributed to healthcare providers through the Public
Health and Social Services Emergency Fund ("Provider Relief Fund” or "PRF”). Additionally, the CARES Act revised the Medicare accelerated
and advance payment program in an attempt to disburse payments to healthcare providers more quickly to mitigate the financial impact on
healthcare providers. AdaptHealth increased its cash liquidity by, among other things, seeking recoupable advance payments of
approximately $46 million made available by CMS under the CARES Act legislation, which was received in April 2020. The recoupment of such
amount by CMS will begin in April 2021 and will be applied to services provided and revenue recognized during the period in which the
recoupment occurs. The total of the recoupable advance payments has been deferred as of December 31, 2020. In addition, in April 2020,
AdaptHealth received distributions of the CARES Act PRF of approximately $17 million which are targeted to offset lost revenue and
expenditures incurred in connection with the COVID-19 pandemic. The PRF payments are subject to certain restrictions and are subject to
recoupment if not used for designated purposes. As a condition to receiving distributions, providers must agree to certain terms and
conditions, including, among other things, that the funds are being used for lost revenues and unreimbursed COVID-19 related expenses as
defined by the U.S. Department of Health and Human Services ("HHS”). All recipients of PRF payments are required to comply with
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the reporting requirements described in the terms and conditions and as determined by HHS. AdaptHealth recognizes grant payments as
income when there is reasonable assurance that it has complied with the conditions associated with the grant. During the year ended
December 31, 2020, AdaptHealth recognized grant income of $14.3 million related to the PRF payments received. AdaptHealth has deferred $2.7
million of the PRF payments as of December 31, 2020. As previously noted, HHS guidance related to PRF grant funds is still evolving and
subject to change. During September and October 2020, HHS issued updated reporting requirements significantly changing the previous
guidance regarding utilization of the funds granted from the PRF under the CARES Act, and in January 2021 HHS issued further guidance
updating the reporting requirements relating to PRF grant funds. As a result of the updated guidance from HHS, AdaptHealth could be
required to reverse the recognition of the grant income recorded and return a portion of the funds recognized, which could be material to
AdaptHealth. AdaptHealth is continuing to monitor the reporting requirements as they evolve. HHS has indicated that the CARES Act PRF
funds are subject to ongoing reporting and changes to the terms and conditions. To the extent that reporting requirements and terms and
conditions are modified in the future, it may affect AdaptHealth’s ability to comply and may require the return of funds. Furthermore, HHS has
indicated that it will be closely monitoring and, along with the Office of Inspector General (United States) (OIG), auditing providers to ensure
that recipients comply with the terms and conditions of relief programs and to prevent fraud and abuse. All providers will be subject to civil
and criminal penalties for any deliberate omissions, misrepresentations or falsifications of any information given to HHS.
While the impact of the COVID-19 pandemic, the National Emergency Declaration and the various state and local government
imposed stay-at-home restrictions did not have a material impact on AdaptHealth’s consolidated operating results for the three months ended
March 31, 2020, AdaptHealth began to experience declines in net revenues in certain services associated with elective medical procedures
(such as commencement of new CPAP services and medical equipment and orthopedic supply related to facility discharges) in the three
months ended June 30, 2020, and such declines may continue during the duration of the COVID-19 pandemic. In response to these declines, as
well as certain over staffing related to recent acquisitions, AdaptHealth conducted a workforce assessment and implemented a reduction in
force in April 2020 resulting in the elimination of approximately 6% of its workforce. In connection with the workforce reductions, AdaptHealth
incurred a one-time charge for severance and related expenses of approximately $1.6 million.
Offsetting these declines in net revenue, AdaptHealth is experiencing an increase in net revenue related to increased demand for
certain respiratory products (such as oxygen), increased sales in its resupply businesses (primarily as a result of the increased ability to
contact patients at home as a result of state and local government imposed stay-at-home orders) and the one-time sale of certain respiratory
equipment (primarily ventilators, bi-level PAP devices and oxygen concentrators) to hospitals and local health agencies. Additionally,
suspension of Medicare sequestration through March 31, 2021 (resulting in a 2% increase in Medicare payments to all providers), and
regulatory guidance from CMS expanding telemedicine and reducing documentation requirements during the emergency period, have resulted
in increased net revenues for certain products and services.
The full extent of the impact of the COVID-19 pandemic on AdaptHealth’s business, results of operations, and financial condition is
highly uncertain and will depend on future developments and numerous evolving factors that it may not be able to accurately predict, and
could be material to AdaptHealth’s consolidated financial statements in future reporting periods.
Key Components of Operating Results
Net Revenue. Net revenue is recorded for services that AdaptHealth provides to patients for home healthcare equipment, medical
supplies to the home and related services. AdaptHealth’s primary service lines are (i) sleep therapy equipment, supplies and related services
(including CPAP and bi PAP services) to individuals suffering from OSA, (ii) medical devices and supplies to patients for the treatment of
diabetes (including continuous glucose monitors and insulin pumps), (iii) home medical equipment to patients discharged from acute care and
other facilities, (iv) oxygen and related chronic therapy services in the home, and (v) other HME medical devices and supplies on behalf of
chronically ill patients with wound care, urological, incontinence, ostomy and nutritional supply needs. Revenues are recorded either (x) at a
point in time for the sale of supplies and disposables, or (y) over the service period for equipment rental (including, but not limited to, CPAP
machines, hospital beds, wheelchairs and other equipment), at amounts estimated to
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be received from patients or under reimbursement arrangements with Medicare, Medicaid and other third-party payors, including private
insurers.
Cost of Net Revenue. Cost of net revenue primarily includes the cost of non-capitalized medical equipment and supplies, distribution
expenses, labor costs, facilities rental costs, third-party revenue cycle management costs and depreciation for capitalized patient equipment.
Distribution expenses represent the cost incurred to coordinate and deliver products and services to the patients. Included in distribution
expenses are leasing, maintenance, licensing and fuel costs for the vehicle fleet; salaries, benefits and other costs related to drivers and
dispatch personnel; and amounts paid to couriers.
General and Administrative Expenses. General and administrative expenses consist of corporate support costs including
information technology, human resources, finance, contracting, legal, compliance leadership, equity-based compensation, transaction
expenses and other administrative costs.
Depreciation and Amortization, Excluding Patient Equipment Depreciation. Depreciation expense includes depreciation charges
for capital assets other than patient equipment (which is included as part of the cost of net revenue). Amortization expense includes
amortization of identifiable intangible assets.
Factors Affecting AdaptHealth’s Operating Results
AdaptHealth’s operating results and financial performance are influenced by certain unique events during the periods discussed
herein, including the following:
Acquisitions
AdaptHealth accounts for its acquisitions in accordance with Financial 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 of
AdaptHealth for the periods following the closing of the acquisition. The most significant of these acquisitions impacting the comparability of
AdaptHealth’s operating results in 2020 compared to 2019 were SleepMed Therapies, Inc. ("SleepMed”) acquired in July 2019, Choice Medical
Healthcare, Inc. ("Choice”) acquired in October 2019, the Patient Care Solutions business ("PCS”) acquired from McKesson Corporation in
January 2020, Healthline Medical Equipment, LLC ("Healthline”) acquired in February 2020, Advanced Home Care, Inc. ("Advanced”) acquired
in March 2020, Solara Medical Supplies, LLC ("Solara”) acquired in July 2020, ActivStyle, Inc. ("ActivStyle”) acquired in July 2020, Family
Medical Supply, Inc. ("Family”) acquired in August 2020 and Pinnacle Medical Solutions, Inc. ("Pinnacle”) acquired in October 2020. Refer to
Note 3, Acquisitions, included in our consolidated financial statements for the year ended December 31, 2020 included in this report for
additional information regarding AdaptHealth’s acquisitions.
Debt and Recapitalization
In July 2020, AdaptHealth refinanced its debt borrowings and entered into a new credit agreement with a new bank group (the "2020
Credit Agreement”). The 2020 Credit Agreement consisted of a $250 million term loan (the "2020 Term Loan”) and $200 million in commitments
for revolving credit loans with a $15 million letter of credit sublimit, both with maturities in July 2025. The amount borrowed under the 2020
Term Loan bore interest quarterly at variable rates based upon the sum of (a) the Adjusted LIBOR Rate (subject to a floor) equal to the LIBOR
(as defined in the 2020 Credit Agreement) for the applicable interest period, plus (b) an applicable margin ranging from 2.50% to 3.75% per
annum based on the Consolidated Total Leverage Ratio (as defined in the 2020 Credit Agreement). In January 2021, the Company refinanced
its borrowings under the 2020 Credit Agreement in connection with the acquisition of AeroCare Holdings, Inc. Refer to the section Liquidity
and Capital Resources below for additional discussion regarding such refinancing.
In July 2020, AdaptHealth LLC ("AdaptHealth LLC”), a wholly owned subsidiary of AdaptHealth, issued $350.0 million aggregate
principal amount of 6.125% senior unsecured notes due 2028 (the "6.125% Senior Notes”).
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The 6.125% Senior Notes will mature on August 1, 2028. Interest on the 6.125% Senior Notes is payable on February 1st and August 1st of
each year, beginning on February 1, 2021.
In March 2019, AdaptHealth restructured its then existing debt borrowings which consisted of $425 million in credit facilities,
including a $300 million initial term loan, $50 million delayed draw term loan, and $75 million revolving credit facility. Outstanding amounts
borrowed under such credit facility were repaid in full in connection with the July 2020 refinancing transaction discussed above.
In March 2019, AdaptHealth entered into a promissory note agreement with an investor with a principal amount of $100 million (the
"Promissory Note”). The transactions consummated with respect to the March 2019 debt restructuring discussed above and the Promissory
Note are hereinafter referred to as the "2019 Recapitalization.” In November 2019, the Company repaid $50 million under the initial term loan. In
connection with the closing of the Business Combination, the Promissory Note was replaced with a new amended and restated promissory
note with a principal amount of $100.0 million, and the investor converted certain of its members’ equity interests to a $43.5 million promissory
note. The new $100.0 million promissory note, together with the $43.5 million promissory note, are collectively referred to herein as the "New
Promissory Note”. The outstanding principal balance under the New Promissory Note is due on November 8, 2029, and bears interest at the
following rates (a) for the period starting on the closing date and ending on the seventh anniversary, a rate of 12% per annum, and (b) for the
period starting on the day after the seventh anniversary of the closing date and ending on the maturity date, a rate equal to the greater of (i)
15% per annum or (ii) the twelve-month LIBOR plus 12% per annum.
Seasonality
AdaptHealth’s business experiences some seasonality. Its patients are generally responsible for a greater percentage of the cost of
their treatment or therapy during the early months of the year due to co-insurance, co-payments and deductibles, and therefore may defer
treatment and services of certain therapies until meeting their annual deductibles. In addition, changes to employer insurance coverage often
go into effect at the beginning of each calendar year which may impact eligibility requirements and delay or defer treatment. These factors may
lead to lower net revenue and cash flow in the early part of the year versus the latter half of the year. Additionally, the increased incidence of
respiratory infections during the winter season may result in initiation of additional respiratory services such as oxygen therapy for certain
patient populations. AdaptHealth’s quarterly operating results may fluctuate significantly in the future depending on these and other factors.
Key Business Metrics
AdaptHealth focuses on net revenue, EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex as it reviews
its performance. Total net revenue is comprised of net sales revenue and net revenue from fixed monthly equipment reimbursements less
implicit price concessions. Net sales revenue consists of revenue recognized at a point in time for the sale of supplies and disposables. Net
revenue from fixed monthly equipment reimbursements consists of revenue recognized over the service period for equipment (including, but
not limited to, CPAP machines, hospital beds, wheelchairs and other equipment).
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Net Revenue
(dollars in thousands)
Net sales revenue:
Sleep
Diabetes
Supplies to the home
Respiratory
HME
Other
Total net sales revenue
Net revenue from fixed monthly
equipment reimbursements:
Sleep
Diabetes
Respiratory
HME
Other
Total net revenue from fixed
monthly equipment
reimbursements
Total net revenue:
Sleep
Diabetes
Supplies to the home
Respiratory
HME
Other
Total net revenue
Net Revenue
(dollars in thousands)
Net sales revenue:
Sleep
Supplies to the home
Respiratory
HME
Other
Total net sales revenue
Net revenue from fixed monthly
equipment reimbursements:
Sleep
Respiratory
HME
Other
Total net revenue from fixed
monthly equipment
reimbursements
Total net revenue:
Sleep
Supplies to the home
Respiratory
HME
Other
Total net revenue
March 31, 2020
June 30, 2020
September 30, 2020
Revenue
Dollars Percentage
Revenue
Dollars Percentage
Dollars
Revenue
Percentage
December 31, 2020
Revenue
Percentage
Dollars
Total
Revenue
Percentage
Three Months Ended December 31,
$ 68,894
5,307
28,032
2,768
11,579
12,393
$ 128,973
$ 22,669
—
25,007
12,177
2,613
36.0 %
2.8 %
14.6 %
1.4 %
6.0 %
6.5 %
67.3 %
$ 84,421
6,372
27,868
18,114
12,727
11,463
$ 160,965
36.4 %
2.7 %
12.0 %
7.8 %
5.5 %
4.9 %
69.3 %
$ 74,655
52,887
44,579
5,152
14,998
14,869
$ 207,140
26.2 %
18.6 %
15.7 %
1.8 %
5.3 %
5.2 %
72.8 %
$ 84,890
94,924
45,145
2,571
18,725
15,964
$ 262,219
24.4 %$
27.2 %
13.0 %
0.7 %
5.4 %
4.6 %
75.3 %$
312,860
159,490
145,624
28,605
58,029
54,689
759,297
11.8 %
— %
13.1 %
6.4 %
1.4 %
$ 22,644
—
30,856
13,262
4,389
9.8 %
— %
13.3 %
5.7 %
1.9 %
$ 24,971
946
32,269
14,256
4,823
8.8 %
0.3 %
11.3 %
5.0 %
1.8 %
$ 28,077
1,521
35,728
16,152
4,732
8.1 %$
0.4 %
10.3 %
4.6 %
1.3 %
98,361
2,467
123,860
55,847
16,557
29.6 %
15.1 %
13.8 %
2.7 %
5.5 %
5.2 %
71.9 %
9.3 %
0.2 %
11.7 %
5.3 %
1.6 %
$ 62,466
32.7 %
$ 71,151
30.7 %
$ 77,265
27.2 %
$ 86,210
24.7 %$
297,092
28.1 %
$ 91,563
5,307
28,032
27,775
23,756
15,006
$ 191,439
47.8 %
2.8 %
14.6 %
14.5 %
12.4 %
7.9 %
100.0 %
$ 107,065
6,372
27,868
48,970
25,989
15,852
$ 232,116
46.2 %
2.7 %
12.0 %
21.1 %
11.2 %
6.8 %
100.0 %
$ 99,626
53,833
44,579
37,421
29,254
19,692
$ 284,405
35.0 %
18.9 %
15.7 %
13.1 %
10.3 %
7.0 %
100.0 %
$ 112,967
96,445
45,145
38,299
34,877
20,696
$ 348,429
32.5 %$
27.6 %
13.0 %
11.0 %
10.0 %
5.9 %
411,221
161,957
145,624
152,465
113,876
71,246
100.0 %$ 1,056,389
38.9 %
15.3 %
13.8 %
14.4 %
10.8 %
6.8 %
100.0 %
March 31, 2019
June 30, 2019
September 30, 2019
Revenue
Dollars Percentage
Revenue
Dollars Percentage
Dollars
Revenue
Percentage
December 31, 2019
Revenue
Percentage
Dollars
Total
Revenue
Percentage
Three Months Ended December 31,
(Unaudited)
$ 47,127
2,029
1,279
10,489
8,032
$ 68,956
39.4 %
1.7 %
1.1 %
8.8 %
6.7 %
57.7 %
$ 50,433
1,915
1,445
10,236
8,967
$ 72,996
40.6 %
1.6 %
1.2 %
8.2 %
7.2 %
58.8 %
$ 59,117
1,966
1,397
10,873
9,711
$ 83,064
43.3 %
1.4 %
1.0 %
8.0 %
7.1 %
60.8 %
$ 67,865
1,850
1,659
10,889
9,172
$ 91,435
45.4 %$ 224,542
7,760
1.2 %
1.1 %
5,780
7.3 % 42,487
6.2 % 35,882
61.2 %$ 316,451
$ 18,057
20,429
10,243
1,813
15.1 %
17.1 %
8.6 %
1.5 %
$ 18,944
20,009
10,202
2,003
15.3 %
16.1 %
8.2 %
1.6 %
$ 20,761
19,646
11,088
1,892
15.2 %
14.4 %
8.1 %
1.5 %
$ 23,084
21,334
11,436
2,252
15.4 %$ 80,846
14.3 % 81,418
7.6 % 42,969
7,960
1.5 %
42.4 %
1.5 %
1.1 %
8.0 %
6.7 %
59.7 %
15.3 %
15.4 %
8.1 %
1.5 %
$ 50,542
42.3 %
$ 51,158
41.2 %
$ 53,387
39.2 %
$ 58,106
38.8 %$ 213,193
40.3 %
$ 65,184
2,029
21,708
20,732
9,845
$ 119,498
54.5 %
1.7 %
18.2 %
17.4 %
8.2 %
100.0 %
$ 69,377
1,915
21,454
20,438
10,970
$ 124,154
55.9 %
1.6 %
17.3 %
16.4 %
8.8 %
100.0 %
$ 79,878
1,966
21,043
21,961
11,603
$ 136,451
58.5 %
1.4 %
15.4 %
16.1 %
8.6 %
100.0 %
$ 90,949
1,850
22,993
22,325
11,424
$ 149,541
60.8 %$ 305,388
1.2 %
7,760
15.4 % 87,198
14.9 % 85,456
7.7 % 43,842
100.0 %$ 529,644
57.7 %
1.5 %
16.5 %
16.1 %
8.2 %
100.0 %
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Results of Operations
Comparison of Year Ended December 31, 2020 and Year Ended December 31, 2019.
The following table summarizes AdaptHealth’s consolidated results of operations for the years ended December 31, 2020 and 2019:
(in thousands, except percentages)
Net revenue
Grant income
Costs and expenses:
Cost of net revenue
General and administrative expenses
Depreciation and amortization, excluding
patient equipment depreciation
Total costs and expenses
Operating income
Interest expense, net
Loss on extinguishment of debt
Change in fair value of contingent
consideration common shares liability
Other income, net
Loss before income taxes
Income tax (benefit) expense
Net loss
Income attributable to noncontrolling interests
Net loss attributable to AdaptHealth Corp.
$
Year Ended December 31,
2020
2019
Dollars
Revenue
Percentage
Dollars
Revenue
Percentage
Increase/(Decrease)
Dollars
Percentage
$ 1,056,389
14,277
(unaudited)
100.0 % $ 529,644
—
1.4 %
100.0 % $ 526,745
— %
14,277
898,601
89,346
11,373
999,320
71,346
41,430
5,316
98,717
(3,444)
(70,673)
(11,955)
(58,718)
5,763
(64,481)
85.1 %
8.5 %
440,705
56,493
83.2 %
10.7 %
457,896
32,853
1.1 %
94.7 %
5.3 %
3.9 %
0.5 %
3,068
500,266
29,378
39,304
2,121
2,483
9.3 %
(318)
(0.3)%
(14,212)
(8.1)%
739
(1.1)%
(14,951)
(7.0)%
2,111
0.5 %
(7.5)% $ (17,062)
0.6 %
94.5 %
5.5 %
7.4 %
0.4 %
8,305
499,054
41,968
2,126
3,195
96,234
0.5 %
(3,126)
(0.1)%
(56,461)
(2.7)%
(12,694)
0.1 %
(43,767)
(2.8)%
3,652
0.4 %
(3.2)% $ (47,419)
99.5 %
NM %
103.9 %
58.2 %
270.7 %
99.8 %
142.9 %
5.4 %
NM %
NM %
NM %
397.3 %
NM
292.7 %
173.0 %
277.9 %
Net Revenue. Net revenue for the year ended December 31, 2020 was $1.06 billion compared to $529.6 million for the year ended
December 31, 2019, an increase of $526.7 million or 99.5%. The increase in net revenue was driven primarily by (i) acquisitions completed
during 2020, which contributed net revenue of $450.2 million during the year, (ii) organic growth resulting from stronger CPAP resupply sales
and demographic growth in core markets, and (iii) net revenue of $36.5 million from referral partners and healthcare facilities in support of their
urgent needs for ventilation and oxygen equipment for COVID-19 patients. These increases were partially offset by reduced demand for
certain products that are related to elective medical services which is attributable to the coronavirus pandemic, such as CPAP new starts,
orthotics, and certain other HME products, and this trend is expected to remain while the coronavirus crisis continues. However, the
Company’s CPAP resupply and other supplies business remains healthy, as most patients for that business are in their homes and can be
easily contacted to refresh their supplies. Additionally, the coronavirus pandemic has led to an increased demand for respiratory equipment
including ventilators and oxygen concentrators.
For the year ended December 31, 2020, net sales revenue (recognized at a point in time) comprised 72% of total net revenue, compared
to 60% of total net revenue for the year ended December 31, 2019. The increase in the proportion of net sales revenue compared to total net
revenue was driven primarily by the PCS, Solara, ActivStyle and Pinnacle acquisitions, which are direct to consumer supplies businesses, as
well as the SleepMed and Choice acquisitions, which are primarily CPAP resupply businesses. For the year ended December 31, 2020, net
revenue from fixed monthly equipment reimbursements comprised 28% of total net revenue, compared to 40% of total net revenue for the year
ended December 31, 2019.
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Grant income. Grant income for the year ended December 31, 2020 was $14.3 million and related to the recognition of amounts
received under the CARES Act provider relief funds. There was no grant income recognized during the year ended December 31, 2019.
Cost of Net Revenue.
The following table summarizes cost of net revenue for the years ended December 31, 2020 and 2019:
(in thousands, except percentages)
Costs of net revenue:
Cost of products and supplies
Salaries, labor and benefits
Patient equipment depreciation
Rent and occupancy
Other operating expenses
Equity-based compensation
Severance
Transaction costs
Other non-recurring expenses
Total cost of net revenue
Year Ended December 31,
2020
2019
Dollars
Revenue
Percentage
Dollars
Revenue
Percentage
Increase/(Decrease)
Dollars
Percentage
(unaudited)
$
441,931
257,898
71,072
22,344
91,659
7,845
4,457
1,147
248
$ 898,601
41.8 % $
24.4 %
6.7 %
2.1 %
8.7 %
0.8 %
0.4 %
0.1 %
— %
156,430
153,173
59,498
13,407
57,150
—
858
—
189
85.0 % $ 440,705
29.5 % $
28.9 %
11.2 %
2.5 %
10.8 %
— %
0.2 %
— %
— %
285,501
104,725
11,574
8,937
34,509
7,845
3,599
1,147
59
83.1 % $ 457,896
182.5 %
68.4 %
19.5 %
66.7 %
60.4 %
NM %
419.5 %
NM %
NM %
103.9 %
Cost of net revenue for the year ended December 31, 2020 was $898.6 million compared to $440.7 million for the year ended December
31, 2019, an increase of $457.9 million or 103.9%, which is primarily related to acquisition growth. Costs of products and supplies increased by
$285.5 million primarily as a result of acquisition growth, increased CPAP resupply sales, and expenses associated with the coronavirus
pandemic, including increased personal protective equipment purchases. Salaries, labor and benefits increased by $104.7 million primarily
related to acquisition growth and increased headcount, primarily from the PCS, Solara, ActivStyle and Pinnacle acquisitions. The increase in
rent and occupancy and other operating expenses is related to acquisition growth, primarily from the aforementioned acquisitions.
Cost of net revenue was 85.0% of net revenue for the year ended December 31, 2020 compared to 83.1% for the year ended December
31, 2019. The cost of products and supplies was 41.8% of net revenue in 2020 compared to 29.5% in 2019, while patient equipment depreciation
was 6.7% of net revenue in 2020 compared to 11.2% in 2019. These changes are the result of a change in product mix as sales revenue was
higher in 2020 compared to 2019, primarily from the PCS, Solara, ActivStyle and Pinnacle acquisitions.
General and Administrative Expenses. General and administrative expenses for the year ended December 31, 2020 were $89.3 million
compared to $56.5 million for the year ended December 31, 2019, an increase of $32.8 million or 58.2%. This increase is primarily due to (1)
higher labor costs associated with increased headcount, (2) higher professional fees including legal, accounting and consulting, (3) increased
transaction costs related to acquisition growth, (4) higher information technology related expenses, and (5) incremental costs associated with
operating as a public company. General and administrative expenses as a percentage of net revenue was 8.5% in 2020, compared to 10.7% in
2019. General and administrative expenses in 2020 included $10.8 million in equity-based compensation expense, $25.4 million in transaction
costs, $1.1 million in severance expense and $0.6 million in other non-recurring expenses. General and administrative expenses in 2019 included
$11.1 million in equity-based compensation expense, $15.6 million in transaction costs, $1.4 million in severance expense and $0.5 million in
other non-recurring expenses. Excluding the impact of these charges, general and administrative expenses as a percentage of net revenue was
4.9% and 5.3% in 2020 and 2019, respectively.
Depreciation and amortization, excluding patient equipment depreciation. Depreciation and amortization, excluding patient
equipment depreciation, for the year ended December 31, 2020 was $11.4 million compared to $3.1 million for the year ended December 31, 2019,
an increase of $8.3 million. The increase was primarily related to
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amortization expense of $6.0 million related to identifiable intangible assets recognized during 2020. There was no amortization expense of
intangible assets recognized during 2019.
Interest Expense. Interest expense for the year ended December 31, 2020 was $41.4 million compared to $39.3 million for the year
ended December 31, 2019. Interest expense related to long-term debt during 2020 increased by $13.5 million compared to 2019 as a result of
higher long-term debt borrowings outstanding during that year. Interest expense during 2019 included non-cash interest expense of $11.4
million representing the change in fair value of the Company’s interest rate swap agreements; such amount would only be paid out if the
interest rate swap agreements were terminated. On August 22, 2019, AdaptHealth designated its swaps as effective cash flow hedges.
Accordingly, subsequent to August 22, 2019, changes in the fair value of its interest rate swaps are recorded as a component of other
comprehensive income (loss) in equity rather than interest expense. As such, there was no non-cash interest expense related to changes in the
fair value of the Company’s interest rate swap agreements during 2020.
Loss on Extinguishment of Debt. Loss on extinguishment of debt for the year ended December 31, 2020 was $5.3 million which was a
result of the write-off of deferred financing costs related to AdaptHealth refinancing its credit facility in July 2020. Loss on extinguishment of
debt for the year ended December 31, 2019 was $2.1 million which was a result of the write-off of deferred financing costs related to the 2019
Recapitalization.
Change in Fair Value of Contingent Consideration Common Shares Liability. In connection with the Business Combination,
certain former owners of AdaptHealth Holdings are entitled to contingent consideration common shares. These shares are liability-classified,
and the change in fair value of the contingent consideration common shares liability represents a non-cash charge for the change in the
estimated fair value of such liability during the period.
Other Income, net. Other income, net for the year ended December 31, 2020 consisted of $4.2 million of net reductions in the fair value
of contingent consideration liabilities related to acquisitions, a gain of $0.6 million related to the sale of an investment, offset by a $1.5 million
expense related to the PCS Transition Services Agreement and $0.1 million of equity income related to equity method investments. Other
income, net for the year ended December 31, 2019 consisted of $0.2 million of net reductions in the fair value of contingent consideration
liabilities related to acquisitions and $0.1 million of equity income related to an equity method investment.
Income Tax (Benefit) Expense. Income tax benefit for the year ended December 31, 2020 was $12.0 million compared to income tax
expense of $0.7 million for the year ended December 31, 2019. The change in income tax benefit/expense was primarily related to decreased pre-
tax income associated with the tax paying entities.
EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex
AdaptHealth uses EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex, which are financial measures
that are not prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, to analyze its financial
results and believes that they are useful to investors, as a supplement to U.S. GAAP measures. In addition, AdaptHealth’s ability to incur
additional indebtedness and make investments under its existing credit agreement is governed, in part, by its ability to satisfy tests based on a
variation of Adjusted EBITDA less Patient Equipment Capex.
AdaptHealth defines EBITDA as net income (loss) attributable to AdaptHealth Corp., plus net income (loss) attributable to
noncontrolling interests, interest expense (income), 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, severance, change in fair value of contingent consideration common shares liability, and non-
recurring items of expense (income).
AdaptHealth defines Adjusted EBITDA less Patient Equipment Capex as Adjusted EBITDA (as defined above) less patient
equipment acquired during the period without regard to whether the equipment was purchased or financed through lease transactions.
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AdaptHealth believes Adjusted EBITDA less Patient Equipment Capex is useful to investors in evaluating AdaptHealth’s financial
performance. AdaptHealth’s business requires significant investment in equipment purchases to maintain its patient equipment inventory.
Some equipment title transfers to patients’ ownership after a prescribed number of fixed monthly payments. Equipment that does not transfer
wears out or oftentimes is not recovered after a patient’s use of the equipment terminates. AdaptHealth uses this metric as the profitability
measure in its incentive compensation plans that have a profitability component and to evaluate acquisition opportunities, where it is most
often used for purposes of contingent consideration arrangements. In addition, AdaptHealth’s debt agreements contain covenants that use a
variation of Adjusted EBITDA less Patient Equipment Capex for purposes of determining debt covenant compliance. For purposes of this
metric, patient equipment capital expenditure is measured as the value of the patient equipment received during the accounting period without
regard to whether the equipment is purchased or financed through lease transactions.
EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex should not be considered as measures of financial
performance under U.S. GAAP, and the items excluded from EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex
are significant components in understanding and assessing financial performance. Accordingly, these key business metrics have limitations
as an analytical tool. They should not be considered as an alternative to net income or any other performance measures derived in accordance
with U.S. GAAP or as an alternative to cash flows from operating activities as a measure of AdaptHealth’s liquidity.
The following unaudited table presents the reconciliation of net income (loss) attributable to AdaptHealth, to EBITDA, Adjusted
EBITDA and Adjusted EBITDA less Patient Equipment Capex for the years ended December 31, 2020 and 2019:
(in thousands)
Net loss attributable to AdaptHealth Corp.
Income attributable to noncontrolling interests
Interest expense excluding change in fair value of interest rate swaps
Interest expense - change in fair value of interest rate swaps
Income tax (benefit) expense
Depreciation and amortization, including patient equipment depreciation
EBITDA
Loss on extinguishment of debt (a)
Equity-based compensation expense (b)
Transaction costs (c)
Severance (d)
Change in fair value of contingent consideration common shares liability (e)
Other non-recurring (income) expense (f)
Adjusted EBITDA
Less: Patient equipment capex (g)
Adjusted EBITDA less Patient Equipment Capex
Year Ended December 31,
2020
2019
(Unaudited)
$
$
(64,481)
5,763
41,430
—
(11,955)
82,445
53,202
5,316
18,670
26,573
5,596
98,717
(2,455)
205,619
(63,136)
$ 142,483
$
(17,062)
2,111
27,878
11,426
739
62,567
87,659
2,121
11,070
15,984
2,301
2,483
1,403
123,021
(47,421)
75,600
(a) Represents write offs of deferred financing costs related to refinancing of debt.
(b) Represents equity-based compensation expense for awards granted to employees and non-employee directors. The higher expense in
2020 is due to a full year of expense for awards granted in late 2019, and overall increased equity-compensation grant activity in 2020.
The 2019 period includes expense resulting from accelerated vesting and modification of certain awards in that period.
(c) Represents transaction costs related to acquisitions. The 2019 period also includes costs associated with the 2019 Recapitalization
and the Business Combination.
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(d) Represents severance costs related to acquisition integration and internal AdaptHealth restructuring and workforce reduction
activities.
(e) Represents a non-cash charge for the change in the estimated fair value of contingent consideration common shares issuable as part
of the Business Combination. Refer to Note 11, Stockholders’ Equity – Contingent Consideration Common Shares, included in the
accompanying notes to the consolidated financial statements for the year ended December 31, 2020 for additional discussion of such
non-cash charge.
(f) The 2020 period includes $4.2 million of net reductions in the fair value of contingent consideration liabilities related to acquisitions, a
$0.6 million gain in connection with the sale of a cost method investment, offset by a $1.5 million expense associated with the PCS
Transition Services Agreement and $0.8 million of other non-recurring expenses.
(g) Represents the value of patient equipment obtained during the respective period without regard to whether the equipment is
purchased or financed through lease transactions.
Liquidity and Capital Resources
AdaptHealth’s principal sources of liquidity are its operating cash flows, borrowings under its credit agreements and other debt
arrangements, and proceeds from equity issuances. AdaptHealth has used these funds to meet its capital requirements, which primarily
consist of salaries, labor, benefits and other employee-related costs, product and supply costs, third-party customer service, billing and
collections and logistics costs, capital expenditures including patient equipment, acquisitions and debt service. AdaptHealth’s future capital
expenditure requirements will depend on many factors, including its patient volume and revenue growth rates.
AdaptHealth’s capital expenditures are made in advance of patients beginning service. Certain operating costs are incurred at the
beginning of the equipment service period and during initial patient set up.
AdaptHealth believes that its expected operating cash flows, together with its existing cash, cash equivalents, and amounts available
under its existing credit agreement, will continue to be sufficient to fund its operations and growth strategies for at least the next twelve
months.
AdaptHealth intends to seek additional equity or debt financing in connection with the growth of its business, primarily acquisitions.
In addition, the COVID-19 pandemic has caused disruption in the capital markets, which could make financing more difficult and/or expensive.
In the event that additional financing is required from outside sources, AdaptHealth may not be able to raise it on acceptable terms or at all. If
additional capital is unavailable when desired, AdaptHealth’s business, results of operations, and financial condition would be materially and
adversely affected.
As of December 31, 2020, AdaptHealth had approximately $100 million of cash and cash equivalents. To supplement its cash liquidity,
in April 2020, AdaptHealth received recoupable advance payments of approximately $46 million which were made available by CMS under the
CARES Act. The recoupment of such amount by CMS will begin in April 2021 and will be applied to services provided and revenue recognized
during the period in which the recoupment occurs. The total of the recoupable advance payments has been deferred as of December 31, 2020.
In addition, in April 2020, AdaptHealth received distributions of the CARES Act provider relief funds of approximately $17 million which are
targeted to offset lost revenue and expenditures incurred in connection with the COVID-19 pandemic. The provider relief funds are subject to
certain restrictions and are subject to recoupment if not used for designated purposes. As a condition to receiving distributions, providers
must agree to certain terms and conditions, including, among other things, that the funds are being used for lost revenues and unreimbursed
COVID-19 related expenses as defined by HHS. During the year ended December 31, 2020, AdaptHealth recognized grant income of $14.3
million related to the provider relief fund payments received. AdaptHealth has deferred $2.7 million of the provider relief fund payments as of
December 31, 2020. As previously noted, HHS guidance related to provider relief funds is still evolving and subject to change. During
September and October 2020, HHS issued updated reporting requirements significantly changing the previous guidance regarding utilization
of the funds granted from the provider relief funds under the CARES Act, and in January 2021 HHS issued further guidance updating the
reporting requirements relating to
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provider relief grant funds. As a result of the updated guidance from HHS, AdaptHealth could be required to reverse the recognition of the
grant income recorded and return a portion of the funds recognized, which could be material to AdaptHealth. AdaptHealth is continuing to
monitor the reporting requirements as they evolve. HHS has indicated that the CARES Act provider relief funds are subject to ongoing
reporting and changes to the terms and conditions. To the extent that reporting requirements and terms and conditions are modified in the
future, it may affect AdaptHealth’s ability to comply and may require the return of funds. Furthermore, HHS has indicated that it will be closely
monitoring and, along with the Office of Inspector General (United States) (OIG), auditing providers to ensure that recipients comply with the
terms and conditions of relief programs and to prevent fraud and abuse. All providers will be subject to civil and criminal penalties for any
deliberate omissions, misrepresentations or falsifications of any information given to HHS. In addition, in connection with certain acquisitions
completed during the year ended December 31, 2020, AdaptHealth assumed liabilities of $3.7 million and $1.9 million relating to funds
previously received by the acquired companies for CMS recoupable advance payments and the CARES Act provider relief funds,
respectively, which are deferred at December 31, 2020. In March 2020, AdaptHealth borrowed $20.0 million under its then existing credit facility
as a precaution in light of the COVID-19 pandemic and such amount was repaid in April 2020. Also, as permitted under the CARES Act,
AdaptHealth has elected to defer certain portions of employer-paid FICA taxes otherwise payable from March 27, 2020 to January 1, 2021,
which will be paid in two equal installments on December 31, 2021 and December 31, 2022. During the year ended December 31, 2020,
AdaptHealth deferred a total of $8.6 million pursuant to this provision, of which $4.3 million is included in other current liabilities and $4.3
million is included in other long-term liabilities in the consolidated balance sheets as of December 31, 2020.
On January 8, 2021, AdaptHealth issued 8.45 million shares of Class A Common Stock at a price of $33.00 per share pursuant to an
underwritten public offering (the "2021 Stock Offering”) for gross proceeds of $278.9 million. In connection with this transaction, the Company
received proceeds of $265.6 million which is net of the underwriting discount. A portion of the proceeds from the 2021 Stock Offering were
used to partially finance the cash portion of the purchase price for the acquisition of AeroCare Holdings, Inc. on February 1, 2021, and to pay
related fees and expenses.
At December 31, 2020, AdaptHealth had $303.4 million outstanding under its then existing credit facility. In July 2020, AdaptHealth
refinanced its debt borrowings and entered into a new credit agreement with a new bank group (the "2020 Credit Agreement”). On January 20,
2021, AdaptHealth refinanced its debt borrowings under the 2020 Credit Agreement and entered into a new credit agreement (the "2021 Credit
Agreement”). The 2021 Credit Agreement consists of a $700 million term loan (the 2021 Term Loan) and $250 million in commitments for
revolving credit loans with a $55 million letter of credit sublimit (the "2021 Revolver”), both with maturities in January 2026. The borrowing
under the 2021 Term Loan requires quarterly principal repayments of $4.375 million beginning June 30, 2021 through March 31, 2023, increasing
to $8.75 million beginning June 30, 2023 through December 31, 2025, and the unpaid principal balance is due at maturity in January 2026.
Borrowings under the 2021 Term Loan were used in part to partially finance the cash portion of the purchase price for the acquisition of
AeroCare Holdings, Inc. on February 1, 2021, to repay existing amounts outstanding under the 2020 Credit Agreement, and to pay related fees
and expenses. No amounts were borrowed under the 2021 Revolver as of December 31, 2020. Borrowings under the 2021 Revolver may be used
for working capital and other general corporate purposes, including for capital expenditures and acquisitions permitted under the 2021 Credit
Agreement. Amounts borrowed under the 2021 Credit Agreement bear interest quarterly at variable rates based upon the sum of (a) the
Adjusted LIBOR Rate (subject to a floor) equal to the LIBOR (as defined) for the applicable interest period multiplied by the statutory reserve
rate, plus (b) an applicable margin (as defined) ranging from 1.50% to 3.25% per annum based on the Consolidated Senior Secured Leverage
Ratio (as defined). The 2021 Revolver carries a commitment fee during the term of the 2021 Credit Agreement ranging from 0.25% to 0.50% per
annum of the actual daily undrawn portion of the 2021 Revolver based on the Consolidated Senior Secured Leverage Ratio.
Under the 2021 Credit Agreement, AdaptHealth is subject to a number of restrictive covenants that, among other things, impose
operating and financial restrictions on AdaptHealth. 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
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breakage costs, and any amounts repaid under the 2021 Revolver may be reborrowed. Mandatory prepayments are required under the 2021
Revolver when borrowings and letter of credit usage exceed the total commitments for revolving credit loans. Mandatory prepayments are also
required in connection with the disposition of assets to the extent not reinvested, unpermitted debt transactions, and excess cash flow, as
defined, if certain leverage tests are not met.
In July 2020, AdaptHealth LLC issued $350.0 million aggregate principal amount of 6.125% senior unsecured notes due 2028 (the
”6.125% Senior Notes”). The 6.125% Senior Notes will mature on August 1, 2028. Interest on the 6.125% Senior Notes is payable on February
1st and August 1st of each year, beginning on February 1, 2021. The 6.125% Senior Notes will be redeemable at AdaptHealth LLC’s option, in
whole or in part, at any time on or after August 1, 2023, and the redemption price for the 6.125% Senior Notes if redeemed during the 12 months
beginning (i) August 1, 2023 is 103.063%, (ii) August 1, 2024 is 102.042%, (iii) August 1, 2025 is 101.021% and (iv) August 1, 2026 and
thereafter is 100.000%, in each case together with accrued and unpaid interest. AdaptHealth LLC may also redeem some or all of the 6.125%
Senior Notes before August 1, 2023 at a redemption price of 100% of the principal amount of the 6.125% Senior Notes, plus a "make-whole”
premium, together with accrued and unpaid interest. In addition, AdaptHealth LLC may redeem up to 40% of the original aggregate principal
amount of the 6.125% Senior Notes before August 1, 2023 with the proceeds from certain equity offerings at a redemption price equal to
106.125% of the principal amount of the 6.125% Senior Notes , together with accrued and unpaid interest. Furthermore, AdaptHealth LLC may
be required to make an offer to purchase the 6.125% Senior Notes upon the sale of certain assets or upon specific kinds of changes of control.
On January 4, 2021, AdaptHealth LLC issued $500.0 million aggregate principal amount of 4.625% senior unsecured notes due 2029
(the ”4.625% Senior Notes”). The 4.625% Senior Notes will mature on August 1, 2029. Interest on the 4.625% Senior Notes is payable on
February 1st and August 1st of each year, beginning on August 1, 2021. The 4.625% Senior Notes will be redeemable at AdaptHealth’s option,
in whole or in part, at any time on or after February 1, 2024, and the redemption price for the 4.625% Senior Notes if redeemed during the 12
months beginning (i) February 1, 2024 is 102.313%, (ii) February 1, 2025 is 101.156%, and (iii) February 1, 2026 and thereafter is 100.000%, in
each case together with accrued and unpaid interest. AdaptHealth LLC may also redeem some or all of the 4.625% Senior Notes before
February 1, 2024 at a redemption price of 100% of the principal amount of the 4.625% Senior Notes, plus a "make-whole” premium, together
with accrued and unpaid interest. In addition, AdaptHealth LLC may redeem up to 40% of the original aggregate principal amount of the
4.625% Senior Notes before February 1, 2024 with the proceeds from certain equity offerings at a redemption price equal to 104.625% of the
principal amount of the 4.625% Senior Notes, together with accrued and unpaid interest. Furthermore, AdaptHealth LLC may be required to
make an offer to purchase the 4.625% Senior Notes upon the sale of certain assets or upon specific kinds of changes of control. The proceeds
from the issuance of the 4.625% Senior Notes were used to partially finance the cash portion of the purchase price for the acquisition of
AeroCare Holdings, Inc. on February 1, 2021, and to pay related fees and expenses.
In March 2019, AdaptHealth entered into a promissory note agreement with an investor with a principal amount of $100 million (the
"Promissory Note”). In November 2019, in connection with the transactions completed as part of the Business Combination, the Promissory
Note was replaced with a new amended and restated promissory note with a principal amount of $100.0 million, and the investor converted
certain of its members’ equity interests to a $43.5 million promissory note. The new $100.0 million promissory note, together with the $43.5
million promissory note, are collectively referred to herein as the "New Promissory Note”. The outstanding principal balance under the New
Promissory Note is due on November 8, 2029, and bears interest at the following rates (a) for the period starting on the closing date and
ending on the seventh anniversary, a rate of 12% per annum, and (b) for the period starting on the day after the seventh anniversary of the
closing date and ending on the maturity date, a rate equal to the greater of (i) 15% per annum or (ii) the twelve-month LIBOR plus 12% per
annum. The interest under the New Promissory Note is required to be paid in cash. At any time following September 20, 2021, AdaptHealth
may prepay, in whole (but not in part), the outstanding principal amount, together with all accrued and unpaid interest thereon. If AdaptHealth
elects to prepay the New Promissory Note prior to September 21, 2023, then the amount due and payable shall be subject to a make-whole
premium equal to a percentage of the total amount of outstanding principal and accrued interest through the date of such prepayment. The
make-whole premium percentage during the period from September 21, 2021 through September 20, 2022 is 10%, and from September 21, 2022
through September 20, 2023 is 5%. In addition, if
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AdaptHealth desires to consummate any Qualified Acquisition (as defined in the New Promissory Note) without the consent of the investor,
AdaptHealth may proceed with such acquisition if the New Promissory Note is prepaid at the closing of such acquisition. If such acquisition
occurs prior to September 21, 2023, then the amount due and payable shall be subject to a make-whole premium equal to a percentage of the
total amount of outstanding principal and accrued interest through the date of such prepayment. The make-whole premium percentage during
the period from September 21, 2020 through September 20, 2021 is 15%, from September 21, 2021 through September 20, 2022 is 10%, and from
September 21, 2022 through September 20, 2023 is 5%. Further, if a Sale of the Company (as defined in the New Promissory Note) occurs prior
to the maturity date, then, effective immediately prior to and contingent upon the consummation of such transaction, the outstanding
principal, together with all accrued and unpaid interest, shall be due and payable. If such transaction occurs prior to September 21, 2023, then
the amount due and payable shall be subject to a make-whole premium equal to a percentage of the total amount of outstanding principal and
accrued interest through the date of such prepayment. The make-whole premium percentage during the period from November 8, 2019 through
September 20, 2022 is 10%, and from September 21, 2022 through September 20, 2023 is 5%.
At December 31, 2020 and 2019, AdaptHealth had a working capital deficit of $58.8 million and working capital of $27.4 million,
respectively. A significant portion of AdaptHealth’s assets consists of accounts receivable from third-party payors that are responsible for
payment for the equipment and the services that AdaptHealth provides.
Cash Flow. The following table presents selected data from AdaptHealth’s consolidated statement of cash flows for the years ended
December 31, 2020 and 2019:
(in thousands)
Year Ended December 31,
2020
2019
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
$
$
(unaudited)
195,634
(815,703)
643,153
23,084
76,878
99,962
$
$
60,418
(84,870)
76,144
51,692
25,186
76,878
Net cash provided by operating activities for the year ended December 31, 2020 was $195.6 million compared to $60.4 million for the
year ended December 31, 2019, an increase of $135.2 million. The increase was the result of (1) a $43.8 million increase in net loss, (2) a net
increase of $107.8 million in non-cash charges, primarily from a non-cash charge relating to the change in the estimated fair value of contingent
consideration common shares, depreciation, amortization, non-cash interest expense relating to the Company’s interest rate swaps, equity-
based compensation expense, write-off of deferred financing costs, and changes in fair value of contingent consideration, (3) a $1.0 million
payment of contingent consideration, (4) receipt of approximately $46 million of recoupable advanced payments from CMS in connection with
the CARES Act, (5) receipt of approximately $17 million pursuant to the CARES Act provider relief funds, (6) a $21.6 million change in deferred
income taxes, and (7) a net $30.8 million increase in cash resulting from the change in operating assets and liabilities, primarily resulting from
the change in accounts receivable and accounts payable and accrued expenses for the period.
Net cash used in investing activities for the year ended December 31, 2020 was $815.7 million compared to $84.9 million for the year
ended December 31, 2019. The use of funds in the year ended December 31, 2020 consisted of $769.3 million for business acquisitions,
primarily from the Solara, ActivStyle, Advanced and Pinnacle acquisitions, $39.8 million for equipment and other fixed asset purchases, $8.6
million for the purchase of equity and cost-method investments, offset by $2.0 million of cash proceeds from the sale of an investment. The
use of funds in the year ended December 31, 2019 consisted of $63.5 million for acquisitions, primarily from the Gould’s, SleepMed and Choice
acquisitions, and $21.4 million for equipment and other fixed asset purchases.
Net cash provided by financing activities for the year ended December 31, 2020 was $643.2 million compared to net cash provided by
financing activities of $76.1 million for the year ended December 31, 2019. Net cash provided
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by financing activities for the year ended December 31, 2020 consisted of proceeds of $591.3 million from borrowings on long-term debt and
lines of credit, proceeds of $350.0 million from the issuance of senior unsecured notes, proceeds of $225.0 million from the sale of shares of
Class A Common Stock and Preferred Stock in connection with private placement transactions, proceeds of $142.6 million from the issuance of
shares of Class A Common Stock in connection with a public underwritten offering, proceeds of $24.5 million from the exercise of warrants,
and proceeds of $0.1 million in connection with the employee stock purchase plan, offset by total repayments of $586.5 million on long-term
debt and capital lease obligations, payments of $11.7 million for equity issuance costs, payments of $13.1 million for debt issuance costs,
payments of $44.3 million in connection with the exchange of shares of Class B Common Stock for cash, payment of $29.9 million in connection
with the Put/Call Agreement, distributions to noncontrolling interests of $0.8 million, a $0.7 million payment of deferred purchase price in
connection with an acquisition, payments of $3.2 million of contingent consideration related to acquisitions, and net payments of $0.1 million
relating to tax withholdings associated with equity-based compensation activity. Net cash provided by financing activities for the year ended
December 31, 2019 was primarily related to the 2019 Recapitalization and the Business Combination, and consisted of $360.5 million of
borrowings from long-term debt and lines of credit, $20.0 million of proceeds from the sale of members’ interests, net proceeds of $148.9 million
from the transactions completed in connection with the Business Combination, and proceeds of $100.0 million from a preferred debt issuance,
offset by total repayments of $274.9 million on long-term debt and capital lease obligations, payments of $9.0 million for financing costs,
payments of $0.8 million for equity issuance costs, payment of $3.7 million for the redemption of members’ interests, payment of $13.0 million
for earnout liabilities in connection with the Verus Acquisition and the HMEI Acquisition, distributions to members of $250.0 million,
distributions to noncontrolling interests of $1.3 million, and net payments of $0.6 million relating to tax withholdings associated with equity-
based compensation activity.
Critical Accounting Policies and Significant Estimates
The discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s
consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of the Company’s consolidated
financial statements requires its management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue
and expenses and related disclosures of contingent assets and liabilities. The Company’s management bases its estimates, assumptions and
judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Different assumptions and judgments would change the estimates used in the preparation of the Company’s consolidated financial statements
which, in turn, could change the results from those reported. In addition, actual results may differ from these estimates and such differences
could be material to the Company’s financial position and results of operations.
Critical accounting policies and significant estimates are those that the Company’s management considers the most important to the
portrayal of the Company’s financial condition and results of operations because they require management’s most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company’s
critical accounting policies and significant estimates in relation to its consolidated financial statements include those related to revenue
recognition, accounts receivable, business combinations, and goodwill valuation.
Revenue Recognition
The Company generates revenues for services and related products that the Company provides to patients for home medical
equipment, related supplies, and other items. The Company’s revenues are recognized in the period in which services and related products are
provided to customers and are recorded either at a point in time for the sale of supplies and disposables, or over the fixed monthly service
period for equipment.
Revenues are recognized when control of the promised good or service is transferred to customers, in an amount that reflects the
consideration to which the Company expects to receive from patients or under reimbursement arrangements with Medicare, Medicaid and
third-party payors, in exchange for those goods and services.
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Performance obligations are determined based on the nature of the services provided. The majority of the Company’s services and
related products represent a bundle of services that are not capable of being distinct and as such, are treated as a single performance
obligation satisfied over time as services are rendered.
The Company determines the transaction price based on contractually agreed-upon amounts or rates, adjusted for estimates of
variable consideration, such as implicit price concessions. The Company utilizes the expected value method to determine the amount of
variable consideration that should be included to arrive at the transaction price, using contractual agreements and historical reimbursement
experience within each payor type. The Company applies constraint to the transaction price, such that net revenue is recorded only to the
extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in the future. If actual
amounts of consideration ultimately received differ from the Company’s estimates, the Company adjusts these estimates, which would affect
net revenue in the period such adjustments become known.
Sales revenue is recognized upon transfer of control of products or services to customers in an amount that reflects the consideration
the Company expects to receive in exchange for those products or services. Revenues for the sale of durable medical equipment and related
supplies, including oxygen equipment, ventilators, wheelchairs, hospital beds and infusion pumps, are recognized when control of the
promised good or service is transferred to customers, which is generally upon shipment for direct to consumer supplies and upon delivery to
the home for durable medical equipment.
The Company provides certain equipment to patients which is reimbursed periodically in fixed monthly payments for as long as the
patient is using the equipment and medical necessity continues (in certain cases, the fixed monthly payments are capped at a certain amount).
The equipment provided to the patient is based upon medical necessity as documented by prescriptions and other documentation received
from the patient’s physician. The patient generally does not negotiate or have input with respect to the manufacturer or model of the
equipment prescribed by their physician and delivered by the Company. Once initial delivery of this equipment is made to the patient for initial
setup, a monthly billing process is established based on the initial setup service date. The Company recognizes the fixed monthly revenue
ratably over the service period as earned, less estimated adjustments, and defers revenue for the portion of the monthly bill that is unearned.
No separate revenue is earned from the initial setup process. Included in fixed monthly revenue are unbilled amounts for which the revenue
recognition criteria had been met as of period-end but were not yet billed to the payor. The estimate of net unbilled fixed monthly revenue
recognized is based on historical trends and estimates of future collectability.
The Company’s billing system contains payor-specific price tables that reflect the fee schedule amounts in effect or contractually
agreed upon by various government and commercial payors for each item of equipment or supply provided to a customer. Revenues are
recorded based on the applicable fee schedule. The Company has established a contractual allowance to account for adjustments that result
from differences between the payment amount received and the expected realizable amount. If the payment amount received differs from the
net realizable amount, an adjustment is recorded to revenues in the period that these payment differences are determined. The Company
reports revenues in its consolidated financial statements net of such adjustments.
Accounts Receivable
Due to the continuing changes in the healthcare industry and third-party reimbursement environment, certain estimates are required
to record accounts receivable at their net realizable values. Inherent in these estimates is the risk that they will have to be revised or updated
as additional information becomes available. The complexity of third-party billing arrangements and laws and regulations governing Medicare
and Medicaid may result in adjustments to amounts originally recorded.
The Company performs a periodic analysis to review the valuation of accounts receivable and collectability of outstanding balances.
Management’s evaluation takes into consideration such factors as historical bad debt experience, business and economic conditions, trends
in healthcare coverage, other collection indicators and information about specific receivables. The Company’s evaluation also considers the
age and composition of the outstanding amounts in determining their estimated net realizable value.
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Receivables are considered past due when not collected by established due dates. Specific patient balances are written off after
collection efforts have been followed and the account has been determined to be uncollectible. Revisions in reserve estimates are recorded as
an adjustment to net revenue in the period of revision.
Included in accounts receivable are earned but unbilled accounts receivables. Billing delays, ranging from several days to several
weeks, can occur due to the Company’s policy of compiling required payor specific documentation prior to billing for its services rendered. In
the event that a third-party payor does not accept the claim, the customer is ultimately responsible for payment for the products or services.
The Company recognizes revenue in the statements of operations and contract assets on the consolidated balance sheets only when services
have been provided. Since the Company has performed its obligation under the contract, it has unconditional rights to the consideration
recorded as contract assets and therefore classifies those billed and unbilled contract assets as accounts receivable.
Business Combinations
The Company applies the acquisition method of accounting for business acquisitions. The results of operations of the businesses
acquired by the Company are included as of the respective acquisition date. The acquisition-date fair value of the consideration transferred,
including the fair value of any contingent consideration, is allocated to the underlying assets acquired and liabilities assumed based upon
their estimated fair values at the date of acquisition. To the extent the acquisition-date fair value of the consideration transferred exceeds the
fair value of the identifiable tangible and intangible assets acquired and liabilities assumed, such excess is allocated to goodwill. Patient
relationships, medical records and patient lists are not reported as separate intangible assets due to the regulatory requirements and lack of
contractual agreements but are part of goodwill. Customer related relationships are not reported as separate intangible assets but are part of
goodwill as authorizing physicians are under no obligation to refer the Company’s services to their patients, who are free to change
physicians and service providers at any time. The Company may adjust the preliminary purchase price allocation, as necessary, as it obtains
more information regarding asset valuations and liabilities assumed that existed but were not available at the acquisition date, which is
generally up to one year after the acquisition closing date. Acquisition related expenses are recognized separately from the business
combination and are expensed as incurred.
Valuation of Goodwill and Long-Lived Assets
The Company has a significant amount of goodwill on its balance sheet that resulted from the business acquisitions the Company
has made in recent years. Goodwill is not amortized and is tested for impairment annually and upon the occurrence of a triggering event or
change in circumstances indicating a possible impairment. Such changes in circumstance can include, among others, changes in the legal
environment, reimbursement environment, operating performance, and/or future prospects. The Company performs its annual impairment
review of goodwill during the fourth quarter of each year. The impairment testing can be performed on either a quantitative or qualitative basis.
The Company first assesses qualitative factors to determine whether it is necessary to perform quantitative goodwill impairment testing. If
determined necessary, the Company applies the quantitative impairment test to identify and measure the amount of impairment, if any.
The Company’s long-lived assets, such as equipment and other fixed assets and definite-lived intangible assets, are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment
charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Definite-lived intangible assets consist of payor contracts, developed technology and tradenames. These assets are amortized using
the straight-line method over their estimated useful lives, which reflects the pattern in which the economic benefits of the assets are expected
to be consumed. These assets are tested for impairment consistent with the Company’s long-lived assets. The following table summarizes the
useful lives of the intangible assets acquired:
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Payor contracts
Developed technology
Tradenames
Recent Accounting Pronouncements
10
5
years
years
5 to 10 years
Recently issued accounting pronouncements that may be relevant to the Company’s operations but have not yet been adopted are
outlined in Note 2 (dd), Recently Issued Accounting Pronouncements, to its consolidated financial statements included elsewhere in this
report.
Off-Balance Sheet Arrangements
As of December 31, 2020, the Company did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation
S-K.
Commitments and Contingencies
In the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of
its business that cover a wide range of matters. In accordance with the Financial Accounting Standards Board Accounting Standards
Codification Topic 450, Accounting for Contingencies, the Company records accruals for such loss contingencies when it is probable that a
liability has been incurred and the amount of loss can be reasonably estimated. The Company’s management believes any liability that may
ultimately result from its resolution will not have a material adverse effect on the Company’s financial conditions or results of operations.
Other contingencies arising in the normal course of business relate to acquisitions and the related contingent purchase prices and
deferred payments.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
This item is not applicable to smaller reporting companies.
Item 8. Financial Statements and Supplementary Data
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Table of Contents
Consolidated Financial Statements—AdaptHealth Corp. and Subsidiaries
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets—December 31, 2020 and 2019
Consolidated Statements of Operations—For the years ended December 31, 2020 and 2019
Consolidated Statements of Comprehensive Loss—For the years ended December 31, 2020 and 2019
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) / Members’ Equity (Deficit)—For the years ended
December 31, 2020 and 2019
Consolidated Statements of Cash Flows—For the years ended December 31, 2020 and 2019
Notes to Consolidated Financial Statements
Page
Number(s)
65
66
67
68
69
71
72
64
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
AdaptHealth Corp:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of AdaptHealth Corp. and subsidiaries (the Company) as of December 31,
2020 and 2019, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity (deficit) / members’
equity (deficit), and cash flows for each of the years then ended, and the related notes (collectively, the consolidated financial statements). In
our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December
31, 2020 and 2019, and the results of its operations and its cash flows for each of the years then ended, in conformity with U.S. generally
accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or
fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part
of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2015.
Philadelphia, Pennsylvania
March 16, 2021
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share and per share data)
Assets
December 31,
2020
December 31,
2019
Current assets:
Cash and cash equivalents
Accounts receivable
Inventory
Prepaid and other current assets
Total current assets
Equipment and other fixed assets, net
Goodwill
Identifiable intangible assets, net
Other assets
Deferred tax assets
Total Assets
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable and accrued expenses
Current portion of capital lease obligations
Current portion of long-term debt
Contract liabilities
Other liabilities
Contingent consideration common shares liability
Total current liabilities
Long-term debt, less current portion
Other long-term liabilities
Long-term portion of contingent consideration common shares liability
Total Liabilities
Commitments and contingencies (note 17)
Stockholders’ Equity (Deficit)
$
$
$
Class A Common Stock, par value of $0.0001 per share, 210,000,000 shares authorized; 76,457,439
and 40,816,292 shares issued and outstanding as of December 31, 2020 and December 31, 2019,
respectively
Class B Common Stock, par value of $0.0001 per share, 35,000,000 shares authorized; 13,218,758 and
31,563,799 shares issued and outstanding as of December 31, 2020 and December 31, 2019,
respectively
Preferred Stock, par value of $0.0001 per share, 5,000,000 shares authorized; 163,560 and 0 shares
issued and outstanding as of December 31, 2020 and December 31, 2019, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive (loss) income
Total stockholders' equity (deficit) attributable to AdaptHealth Corp.
Noncontrolling interests in subsidiaries
Total stockholders' equity (deficit)
Total Liabilities and Stockholders' Equity (Deficit)
$
See accompanying notes to consolidated financial statements.
66
$
$
$
99,962
171,065
58,783
33,441
363,251
110,468
998,810
116,061
16,483
208,399
1,813,472
254,212
22,282
8,146
11,043
89,524
36,846
422,053
776,568
186,470
33,631
1,418,722
8
1
1
513,807
(91,063)
(4,411)
418,343
(23,593)
394,750
1,813,472
$
76,878
78,619
13,239
12,679
181,415
63,559
266,791
—
6,851
27,922
546,538
102,728
19,750
1,721
9,556
17,139
3,158
154,052
395,112
29,364
6,158
584,686
4
3
—
4,419
(29,276)
1,431
(23,419)
(14,729)
(38,148)
546,538
Table of Contents
ADAPTHEALTH CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share data)
Net revenue
Grant income (note 2(f))
Costs and expenses:
Cost of net revenue
General and administrative expenses
Depreciation and amortization, excluding patient equipment depreciation
Total costs and expenses
Operating income
Interest expense, net
Loss on extinguishment of debt
Change in fair value of contingent consideration common shares liability (note 11)
Other income, net
Loss before income taxes
Income tax (benefit) expense
Net loss
Income attributable to noncontrolling interests
Net loss attributable to AdaptHealth Corp.
Weighted average common shares outstanding - basic and diluted
Basic and diluted loss per share
$
$
$
See accompanying notes to consolidated financial statements.
67
Year Ended December 31,
2020
2019
1,056,389
14,277
$
529,644
—
898,601
89,346
11,373
999,320
71,346
41,430
5,316
98,717
(3,444)
(70,673)
(11,955)
(58,718)
5,763
(64,481)
52,488
$
(1.23)
$
440,705
56,493
3,068
500,266
29,378
39,304
2,121
2,483
(318)
(14,212)
739
(14,951)
2,111
(17,062)
22,557
(0.76)
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Loss
(in thousands)
Net loss
Other comprehensive income (loss):
Interest rate swap agreements, inclusive of reclassification adjustment
Comprehensive loss
Income attributable to noncontrolling interests
Comprehensive loss attributable to AdaptHealth Corp.
Year Ended December 31,
2019
2020
(58,718)
$
(14,951)
(10,667)
(69,385)
5,763
(75,148)
$
2,537
(12,414)
2,111
(14,525)
$
$
See accompanying notes to consolidated financial statements.
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) / Members’ Equity (Deficit)
(in thousands)
Balance, December 31, 2018
Activity prior to the Business
Combination:
Issuance of members' interest,
net of offering costs of $837
Redemption of members'
interest
Distributions to members
Distributions to
noncontrolling interest
Equity-based compensation
Net income (loss)
Effects of the Business
Combination:
Recapitalization
Proceeds from sale of Class A
Common Stock
Redemption of Class B
Common Stock
Conversion of equity to
long-term debt
Forgiveness of employee
loan
Activity subsequent to the
Business Combination:
Equity-based compensation
Shares withheld to pay
withholding taxes
Exchange of Class B
Common Stock to Class A
Common Stock
Net income (loss)
Equity activity resulting
from Tax Receivable
Agreement
Change in fair value of interest
rate swaps, net of
reclassification adjustment
Contingent consideration
common share liability
adjustment (Note 2(a))
Balance, December 31, 2019
Issuance of Class A Common
Stock for acquisitions
Exchange of Class B Common
Stock for Class A Common
Stock
Exchange of Class B Common
Stock for cash
Forfeiture of Class B Common
Stock
Exercise of warrants
Equity-based compensation
Exchange of Class A Common
Stock for Series B-1 Preferred
Stock
Sale of Class A Common Stock
and Series A Preferred Stock,
net of offering costs of $1,639
Issuance of Class A Common
Stock, net of offering costs of
$10,086
Class A Common Stock Class B Common Stock Preferred Stock
Shares
Amount Shares
—
— $
— $
Amount Shares Amount capital
—
— $ — $
paid-in Members' members' Accumulated comprehensive
income (loss)
deficit
interest deficit
— $ 113,274 $ (13,371) $
— $
— $
2,865 $ 102,768
Noncontrolling
interests in
subsidiaries
Total
Additional
Controlling
interest
Accumulated
other
—
—
—
—
—
—
27,796
12,500
—
—
—
—
(30)
550
—
—
—
—
40,816
$
5,927
16,660
—
—
4,105
635
—
—
—
—
—
—
3
1
—
—
—
—
—
—
—
—
—
—
4
1
2
—
—
1
—
—
—
—
—
—
—
34,114
—
(2,000)
—
—
—
—
(550)
—
—
—
—
31,564
$
—
(16,660)
(1,508)
(177)
—
—
—
—
—
—
—
—
3
—
—
—
—
—
—
—
—
—
—
—
3
—
(2)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 19,163
—
— (2,113)
—
(1,601)
— (250,000)
—
—
—
—
6,915
—
—
— (16,315)
—
—
—
—
—
—
— (137,239)
281,287
(63,289)
—
—
—
—
4,155
(284)
(820)
—
8,201
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
69,561
(11,130)
(24,208)
537
—
—
—
(747)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 19,163
— (3,714)
— (250,000)
(1,338)
—
1,532
(1,338)
6,915
(14,783)
(47,996)
32,769
55,437
124,999
(8,870)
(20,000)
(19,292)
(43,500)
428
965
—
—
820
579
4,155
(284)
—
(168)
—
8,201
1,431
1,106
2,537
—
— $ — $
— (6,833)
4,419 $
—
—
—
—
—
—
— 123,886
— (35,271)
—
—
—
—
— 24,494
— 18,670
—
— $
—
— $
—
(29,276) $
—
1,431
$
— (6,833)
(14,729) $ (38,148)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 123,887
35,271
—
(44,273)
(44,273)
—
—
— 24,495
— 18,670
—
—
— 223,361
— 132,514
(15,810)
(2)
10,930
9,200
1
1
—
—
—
— 158
1
1
—
—
75
—
— 223,360
— 132,513
69
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) / Members’ Equity (Deficit) (Continued)
(in thousands)
Class A Common Stock Class B Common Stock Preferred Stock
Shares Amount
Shares Amount
Shares Amount capital
Additional
Controlling
interest
Accumulated
other
paid-in Members' members' Accumulated comprehensive
income (loss)
interest deficit
deficit
Conversion of Series B-2
Preferred Stock to Series B-1
Preferred Stock
Conversion of Series A
Preferred Stock to Class A
Common Stock
Conversion of Series B-1
Preferred Stock to Class A
Common Stock
Class A Common Stock issued
in connection with Employee
Stock Purchase Plan
Issuance of Class A Common
Stock in connection with
Contingent Consideration
Shares
Net income (loss)
Equity activity resulting from
the Tax Receivable Agreement
Equity activity resulting from
other increases in AdaptHealth
Corp.'s ownership in
AdaptHealth Holdings
Distributions to
noncontrolling interests
Equity impact resulting from
the Put/Call Agreement
Change in fair value of interest
rate swaps, inclusive of
reclassification adjustment
Balance, December 31, 2020
—
2,888
2,000
6
1,000
—
—
—
—
(1,899)
—
76,458
$
—
—
—
—
—
—
—
—
—
—
—
8
—
—
—
—
—
—
—
—
—
—
—
13,219
$
—
(9)
— (40)
— (20)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
101
— 37,556
—
—
— 24,787
— (8,088)
—
—
— (32,621)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(64,481)
—
—
—
2,694
—
—
—
—
—
—
—
—
—
—
Noncontrolling
interests in
subsidiaries
Total
—
—
—
—
—
—
—
101
— 37,556
(58,718)
5,763
— 24,787
— (8,088)
(800)
(800)
— (29,927)
—
164 $
—
1 $ 513,807 $
—
—
— $
—
— $
—
(91,063) $
(5,842)
(4,411)
$
(4,825)
(10,667)
(23,593) $394,750
See accompanying notes to consolidated financial statements.
70
Table of Contents
ADAPTHEALTH CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (in thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, including patient equipment depreciation
Equity-based compensation
Change in fair value of contingent consideration common shares liability
Deferred income tax (benefit) expense
Change in fair value of interest rate swaps, net of reclassification adjustment
Change in fair value of contingent consideration
Payment of contingent consideration in connection with an acquisition
Amortization of intangible assets
Amortization of deferred financing costs
Imputed interest expense
Write-off of deferred financing costs
Gain on sale of investment
Forgiveness of employee loan
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable
Inventory
Prepaid and other assets
Accounts payable and accrued expenses and other current liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Payments for business acquisitions, net of cash acquired
Purchases of equipment and other fixed assets
Payments for investments in equity and cost method companies
Proceeds from sale of investment
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from borrowings on long-term debt and lines of credit
Repayments on long-term debt and lines of credit
Proceeds from the sale of Class A Common Stock and Series A Preferred Stock
Proceeds from the issuance of Class A Common Stock
Proceeds from the issuance of senior unsecured notes
Proceeds from exercise of warrants
Payments on capital leases
Payments for equity issuance costs
Payments of deferred financing costs
Exchange of Class B Common Stock for cash
Exercise of call option relating to the Put/Call Agreement
Proceeds received in connection with Employee Stock Purchase Plan
Payments for tax withholdings from equity-based compensation activity, net
Distributions to noncontrolling interests
Payment of contingent consideration in connection with acquisitions
Payment of deferred purchase price in connection with an acquisition
Proceeds from issuance of promissory note payable
Increase in cash from the Business Combination
Proceeds from the sale of Class A Common Stock
Proceeds from issuance of members' interests
Payments for redemptions of Class B Common Stock
Distributions to members
Payments for redemption of members' interests
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures:
Cash paid for interest
Cash paid for income taxes
Noncash investing and financing activities:
Equipment acquired under capital lease obligations
Unpaid equipment and other fixed asset purchases at end of period
Equity consideration issued in connection with acquisitions
Contingent purchase price in connection with acquisitions
Deferred purchase price in connection with acquisitions
Seller note issued in connection with an acquisition
Conversion of equity to debt
See accompanying notes to consolidated financial statements.
71
Year Ended December 31,
2020
2019
$
(58,718)
$
(14,951)
76,406
18,670
98,717
(21,101)
(2,845)
(4,176)
(1,000)
6,039
1,876
131
5,316
(591)
—
(29,517)
(19,434)
(10,767)
136,628
195,634
(769,337)
(39,755)
(8,657)
2,046
(815,703)
591,275
(547,480)
225,000
142,600
350,000
24,495
(39,051)
(11,725)
(13,049)
(44,273)
(29,927)
101
(59)
(800)
(3,204)
(750)
—
—
—
—
—
—
—
643,153
23,084
76,878
99,962
35,771
7,480
40,012
7,869
123,887
27,064
33
—
—
$
$
$
62,567
11,070
2,483
478
11,426
(150)
—
—
1,312
—
2,121
—
966
(20,198)
(1,305)
(9,558)
14,157
60,418
(63,538)
(21,332)
—
—
(84,870)
360,500
(237,572)
—
—
—
—
(37,272)
(837)
(9,028)
—
—
—
(508)
(1,338)
(13,000)
—
100,000
43,912
125,000
20,000
(20,000)
(250,000)
(3,713)
76,144
51,692
25,186
76,878
23,075
1,318
36,268
8,514
—
12,625
1,573
2,000
43,500
$
$
$
Table of Contents
(1) Nature of Business
ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
AdaptHealth Corp. and subsidiaries (AdaptHealth or the Company), f/k/a DFB Healthcare Acquisitions Corp. (DFB), a Delaware
corporation, was originally formed in November 2017 as a publicly traded special purpose acquisition company for the purpose of effecting a
merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business combination involving one or more
businesses.
On July 8, 2019, AdaptHealth Holdings LLC (AdaptHealth Holdings) entered into an Agreement and Plan of Merger (the Merger
Agreement), as amended on October 15, 2019, with DFB, pursuant to which AdaptHealth Holdings combined with DFB (the Business
Combination). The merger was approved by DFB’s stockholders, and the Business Combination closed on November 8, 2019. AdaptHealth
Holdings was the accounting acquirer in the merger, which was treated as a reverse recapitalization. Accordingly, for accounting purposes,
the merger was treated as the equivalent of AdaptHealth Holdings issuing stock for the net assets of DFB, accompanied by a recapitalization.
The net assets of DFB were stated at historical costs in the Company’s consolidated financial statements, with no goodwill or intangible
assets recorded. In connection with the Business Combination, the name of the combined company was changed to AdaptHealth Corp.
Pursuant to the Merger Agreement, on the closing date, the Company contributed cash to AdaptHealth Holdings in exchange for
AdaptHealth Holdings common unit interests equal to the number of shares of the Company’s Class A Common Stock outstanding on the
closing date. In connection with the Business Combination, the Company also issued and sold in a private placement an aggregate of
12,500,000 shares of Class A Common Stock for aggregate consideration of $125,000,000. In addition, the Company (1) issued 17,386,201
shares of Class A Common Stock to certain members of AdaptHealth Holdings in exchange for their interests in AdaptHealth Holdings, and
(2) issued 32,113,799 shares of Class B Common Stock to certain members of AdaptHealth Holdings who retained their common unit interests
in AdaptHealth Holdings.
The number of shares issued and outstanding of the Company immediately following the closing of the Business Combination is
summarized in the table below (in thousands):
Total shares outstanding prior to the Business Combination
Less: redemption of public shares
Add: shares issued in private placement
Add: shares issued in connection with the Business Combination
Total shares outstanding at the closing date of the Business Combination
Class A Common
Stock
Class B Common
Stock
31,250
(20,840)
12,500
17,386
40,296
—
—
—
32,114
32,114
Following the completion of the Business Combination, substantially all of the Company’s assets and operations are held and
conducted by AdaptHealth Holdings and its subsidiaries, and the Company’s only assets are equity interests which represented a 56%
controlling ownership of AdaptHealth Holdings as of November 8, 2019.
Following the completion of the Business Combination, certain members of AdaptHealth Holdings who retained their common unit
interests in AdaptHealth Holdings, held the remaining 44% noncontrolling ownership as of November 8, 2019. These members hold common
unit interests of AdaptHealth Holdings and a corresponding number of non-economic Class B Common stock, which enables the holder to
one vote per share. Subsequent to the Business Combination, the cumulative amount of exchanges of common unit interests of AdaptHealth
Holdings and a corresponding number of shares of Class B Common Stock for shares of Class A Common Stock through December 31, 2020
have resulted in the holders of the common unit interests in AdaptHealth Holdings owning an approximate 12% direct noncontrolling
economic interest in AdaptHealth Holdings as of such date.
72
Table of Contents
ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Unless the context otherwise requires, "the Company”, "we,” "us,” and "our” refer, for periods prior to the completion of the
Business Combination, to AdaptHealth Holdings and its subsidiaries and, for periods upon or after the completion of the Business
Combination, to AdaptHealth Corp. and its subsidiaries, including AdaptHealth Holdings and its subsidiaries.
AdaptHealth is a national leader in providing patient-centric and technology-enabled chronic disease management solutions
including home healthcare equipment, medical supplies to the home and related services in the United States. AdaptHealth focuses primarily
on providing (i) sleep therapy equipment, supplies and related services (including CPAP and bi PAP services) to individuals suffering from
obstructive sleep apnea (OSA), (ii) medical devices and supplies to patients for the treatment of diabetes (including continuous glucose
monitors (CGM) and insulin pumps), (iii) home medical equipment (HME) to patients discharged from acute care and other facilities, (iv)
oxygen and related chronic therapy services in the home, and (v) other HME medical devices and supplies on behalf of chronically ill patients
with wound care, urological, incontinence, ostomy and nutritional supply needs. AdaptHealth services beneficiaries of Medicare, Medicaid
and commercial payors.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally
accepted in the United States of America (U.S. GAAP). In the opinion of management, the consolidated financial statements include all
necessary adjustments for a fair presentation of the financial position and results of operations for the periods presented.
As discussed in Note 1, Nature of Business, the Business Combination was accounted for as a reverse recapitalization, with DFB
treated as the acquired company and AdaptHealth Holdings as the acquirer, for financial reporting purposes. Therefore, the equity structure
has been restated to that of the Company.
The Company is an "emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, (the Securities
Act), as modified by the Jumpstart our Business Startups Act of 2012, (the JOBS Act), and it may take advantage of certain exemptions from
various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not
limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure
obligations regarding executive compensation in its periodic reports and proxy statements, and other exemptions.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised
financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared
effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial
accounting standards. The JOBS Act provides that an emerging growth company can elect to opt out of the extended transition period and
comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. The Company
has elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different
application dates for public or private companies, the Company, as an emerging growth company, will adopt the new or revised standard at the
time private companies adopt the new or revised standard. This may make comparison of the Company’s consolidated financial statements
with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using
the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Certain prior year amounts have been reclassified to conform to the current year presentation. In the Company’s consolidated
statements of operations, certain amounts are classified separately as other income, net, primarily related to
73
Table of Contents
ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
the change in fair value of contingent consideration liabilities related to acquisitions, due to the fact that such amounts have increased in 2020.
Additionally, the Company’s consolidated financial statements and corresponding disclosures for 2019 have been recast to reflect corrections
for an error in the accounting for the contingent consideration common share liability, as discussed below.
Correction of Previously Issued Consolidated Financial Statements and Unaudited Quarterly Condensed Consolidated Financial
Information for Errors in the Accounting for Contingent Consideration Common Shares
In connection with the preparation of the Company’s consolidated financial statements for the year ended December 31, 2020, the
Company reevaluated the accounting treatment of the previously disclosed contingent consideration common shares to which the former
owners of AdaptHealth Holdings are entitled in connection with the Business Combination (the Contingent Consideration Common Shares).
Due to the fact that the issuance of the Contingent Consideration Common Shares would be accelerated on a change of control regardless of
the transaction value, the Company determined to present the Contingent Consideration Common Shares as liability-classified, instead of
equity-classified as previously presented. Accordingly, the fair value of the Contingent Consideration Common Shares is reflected as a
liability and the change in the fair value of such liability in each period is recognized as a non-cash charge in the Company’s consolidated
statements of operations. The Company has concluded that the impact of the error on its audited consolidated financial statements for the
year ended December 31, 2019 included in its Form 10-K for such period is not material. The Company has revised its accompanying
consolidated financial statements as of and for the year ended December 31, 2019 to reflect the impact of the correction of the accounting for
the Contingent Consideration Common Shares. Refer to Note 20, Quarterly Financial Information (Unaudited), for details of the impacts of
the corrections to the Company’s previously disclosed unaudited condensed consolidated statements of operations for the three months
ended March 31, 2020, and the three month and year-to-date periods ended June 30, 2020 and September 30, 2020, and the unaudited
condensed consolidated balance sheets as of March 31, 2020, June 30, 2020 and September 30, 2020, which were determined to be material to
such periods (with the exception of the unaudited condensed consolidated statement of operations for the three months ended June 30, 2020
for which the impact was not material). The change in fair value of the Contingent Consideration Common Shares liability in each period is a
non-cash charge and has no impact on the Company’s current or historical reported net revenues, operating income, or cash flows from
operating activities, investing activities, and financing activities for any period. The liability recorded on the Company’s balance sheet at each
reporting date does not constitute indebtedness of the Company, and the liability will only be satisfied, if earned, by the Company through the
issuance of shares of Class A Common Stock. The impact of the corrections to the Company’s audited consolidated statement of operations
for the year ended December 31, 2019 and its consolidated balance sheet as of December 31, 2019 is as follows (in thousands, except per share
data):
Consolidated Statement of Operations:
Change in fair value of contingent consideration common shares liability
Income tax expense
Net loss
Net loss attributable to AdaptHealth Corp.
Basic and diluted loss per share attributable to AdaptHealth Corp.
74
Year Ended December 31, 2019
As Reported
As Revised
$
$
$
$
$
—
1,156
(12,885)
(14,996)
(0.66)
$
$
$
$
$
2,483
739
(14,951)
(17,062)
(0.76)
Table of Contents
ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Consolidated Balance Sheet:
Deferred tax assets
Total Assets
Contingent consideration common shares liability - current portion
Long-term portion of contingent consideration common shares liability
Total Liabilities
Additional paid-in capital
Accumulated deficit
Total stockholders' deficit attributable to AdaptHealth Corp.
Total stockholders' deficit
$
$
$
$
$
$
$
$
$
December31, 2019
As Reported
As Revised
27,505
546,121
$
$
— $
— $
$
$
$
$
$
575,370
11,252
(27,210)
(14,520)
(29,249)
27,922
546,538
3,158
6,158
584,686
4,419
(29,276)
(23,419)
(38,148)
The impacts of the revisions have been reflected throughout the consolidated financial statements, including the applicable
footnotes, as appropriate.
(b) Basis of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All
intercompany balances and transactions have been eliminated in consolidation.
(c) Accounting Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements, and reported amounts of revenues and expenses during the reporting period. Management bases these
estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements and
other factors that management believes to be reasonable. Significant areas requiring the use of management estimates relate to revenue
recognition and the valuation of accounts receivable (implicit price concession), income taxes, contingent consideration, equity-based
compensation, interest rate swaps, and long-lived assets, including goodwill and identifiable intangible assets. Actual results could differ from
those estimates.
(d) 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 service.
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
75
Table of Contents
ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
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. During the year ended December 31, 2020, the Company decreased net revenue by approximately $11 million due to the
consideration ultimately received compared with the amounts previously estimated, which has been treated as a change in estimate.
Sales revenue is recognized upon transfer of control of products or services to customers in an amount that reflects the consideration
the Company expects to receive in exchange for those products or services. Revenues for the sale of durable medical equipment and related
supplies, including oxygen equipment, ventilators, wheelchairs, hospital beds and infusion pumps, are recognized when control of the
promised good or service is transferred to customers, which is generally upon shipment for direct to consumer supplies and upon delivery to
the home for durable medical equipment.
The Company provides certain equipment to patients which is reimbursed periodically in fixed monthly payments for as long as the
patient is using the equipment and medical necessity continues (in certain cases, the fixed monthly payments are capped at a certain amount).
The equipment provided to the patient is based upon medical necessity as documented by prescriptions and other documentation received
from the patient’s physician. The patient generally does not negotiate or have input with respect to the manufacturer or model of the
equipment prescribed by their physician and delivered by the Company. Once initial delivery of this equipment is made to the patient for initial
setup, a monthly billing process is established based on the initial setup service date. The Company recognizes the fixed monthly revenue
ratably over the service period as earned, less estimated adjustments, and defers revenue for the portion of the monthly bill that is unearned.
No separate revenue is earned from the initial setup process. Included in fixed monthly revenue are unbilled amounts for which the revenue
recognition criteria had been met as of period-end but were not yet billed to the payor. The estimate of net unbilled fixed monthly revenue
recognized is based on historical trends and estimates of future collectability.
The Company’s billing system contains payor-specific price tables that reflect the fee schedule amounts in effect or contractually
agreed upon by various government and commercial payors for each item of equipment or supply provided to a customer. Revenues are
recorded based on the applicable fee schedule. The Company has established a contractual allowance to account for adjustments that result
from differences between the payment amount received and the expected realizable amount. If the payment amount received differs from the
net realizable amount, an adjustment is recorded to revenues in the period that these payment differences are determined. The Company
reports revenues in its consolidated financial statements net of such adjustments.
The Company’s business experiences some seasonality. Its patients are generally responsible for a greater percentage of the cost of
their treatment or therapy during the early months of the year due to co-insurance, co-payments and deductibles, and therefore may defer
treatment and services of certain therapies until meeting their annual deductibles. In addition, changes to employer insurance coverage often
go into effect at the beginning of each calendar year which may impact eligibility requirements and delay or defer treatment. These factors may
lead to lower net revenue and cash flow in the early part of the year versus the latter half of the year. Additionally, the increased incidence of
respiratory infections during the winter season may result in initiation of additional respiratory services such as oxygen therapy for certain
patient populations. The Company’s net revenue and quarterly operating results may fluctuate significantly in the future depending on these
and other factors.
The Company recognizes revenue in the consolidated statements of operations and contract assets on the consolidated balance
sheets only when services have been provided. Since the Company has performed its obligation under the contract, it has unconditional
rights to the consideration recorded as contract assets and therefore classifies those billed and unbilled contract assets as accounts
receivable.
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Fixed monthly payments that the Company receives from customers in advance of providing services represent contract liabilities.
Such payments primarily relate to patients who are billed monthly in advance and are recognized over the period as earned.
Disaggregation of net revenue
The Company disaggregates net revenue from contracts with customers by payor type and by core service lines. The Company
believes that disaggregation of net revenue into these categories depicts how the nature, amount, timing and uncertainty of revenue and cash
flows are affected by economic factors. The payment terms and conditions within the Company’s revenue-generating contracts vary by payor
type and payor source
The composition of net revenue by payor type for the years ended December 31, 2020 and 2019 are as follows (in thousands):
Insurance
Government
Patient pay
Net revenue
Year Ended December 31,
2020
2019
$
$
657,033
295,657
103,699
1,056,389
$
$
300,361
168,686
60,597
529,644
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
The composition of net revenue by core service lines for the years ended December 31, 2020 and 2019 are as follows (in thousands):
Net sales revenue:
Sleep
Diabetes
Supplies to the home
Respiratory
HME
Other
Total net sales revenue
Net revenue from fixed monthly equipment reimbursements:
Sleep
Diabetes
Respiratory
HME
Other
Total net revenue from fixed monthly equipment reimbursements
Total net revenue:
Sleep
Diabetes
Supplies to the home
Respiratory
HME
Other
Total net revenue
(e) Accounts Receivable
Year Ended December 31,
2020
2019
$
$
$
$
$
$
312,860
159,490
145,624
28,605
58,029
54,689
759,297
98,361
2,467
123,860
55,847
16,557
297,092
411,221
161,957
145,624
152,465
113,876
71,246
1,056,389
$
$
$
$
$
$
224,542
—
7,760
5,780
42,487
35,882
316,451
80,846
—
81,418
42,969
7,960
213,193
305,388
—
7,760
87,198
85,456
43,842
529,644
Due to the continuing changes in the healthcare industry and third-party reimbursement environment, certain estimates are required
to record accounts receivable at their net realizable values. Inherent in these estimates is the risk that they will have to be revised or updated
as additional information becomes available. The complexity of third-party billing arrangements and laws and regulations governing Medicare
and Medicaid may result in adjustments to amounts originally recorded.
The Company performs a periodic analysis to review the valuation of accounts receivable and collectability of outstanding balances.
Management’s evaluation takes into consideration such factors as historical bad debt experience, business and economic conditions, trends
in healthcare coverage, other collection indicators and information about specific receivables. The Company’s evaluation also considers the
age and composition of the outstanding amounts in determining their estimated net realizable value.
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.
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
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.
The Company recorded unbilled revenue of $20.2 million and $8.6 million as of December 31, 2020 and 2019, respectively.
(f) COVID-19 Pandemic
During 2020, the COVID-19 pandemic impacted the Company’s business, as well as its patients, communities, and employees. The
Company’s priorities during the COVID-19 pandemic remain protecting the health and safety of its employees (including patient-facing
employees providing respiratory and other services), maximizing the availability of its services and products to support patient health needs,
and the operational and financial stability of its business.
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 on March 27, 2020.
Through the CARES Act, the federal government has authorized payments to be distributed to healthcare providers through the Public 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. The Company’s participation in these programs and related accounting policies are summarized below.
Grant Income. In April 2020, the Company received distributions of the CARES Act PRF of approximately $17 million targeted to
offset lost revenue and expenditures incurred in connection with the COVID-19 pandemic. The PRF payments are subject to certain
restrictions and are subject to recoupment if not used for designated purposes. As a condition to receiving distributions, providers must agree
to certain terms and conditions, including, among other things, that the funds are being used for lost revenues and unreimbursed COVID-19
related expenses as defined by the U.S. Department of Health and Human Services (HHS). All recipients of PRF payments are required to
comply with the reporting requirements described in the terms and conditions and as determined by HHS. The Company recognizes grant
payments as income when there is reasonable assurance that it has complied with the conditions associated with the grant. Grant income
recognized by the Company is presented in grant income in the accompanying consolidated statements of operations. During the year ended
December 31, 2020, the Company recognized grant income of $14.3 million related to the PRF payments received. The Company has deferred
$2.7 million of the PRF payments, which is included in other current liabilities in the accompanying consolidated balance sheets at December
31, 2020. As previously noted, HHS guidance related to PRF grant funds is still evolving and subject to change. During September and
October 2020, HHS issued updated reporting requirements significantly changing the previous guidance regarding utilization of the funds
granted from the PRF under the CARES Act, and in January 2021 HHS issued further guidance updating the reporting requirements relating to
PRF grant funds. As a result of the updated guidance from HHS, the Company could be required to reverse the recognition of the grant
income recorded and return a portion of the funds recognized, which could be material to the Company. The Company is continuing to monitor
the reporting requirements as they evolve. HHS has indicated that the CARES Act PRF funds are subject to ongoing reporting and changes to
the terms and conditions. To the extent that reporting requirements and terms and conditions are modified in the future, it may affect the
Company’s ability to comply and may require the return of funds. Furthermore, HHS has indicated that it will be closely monitoring and, along
with the Office 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.
Medicare Accelerated Payment Program. In certain circumstances, when a healthcare provider is experiencing financial difficulty
due to delays in receiving payment for the Medicare services it provided, it may be eligible for an
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Notes to Consolidated Financial Statements
December 31, 2020 and 2019
accelerated or advance payment pursuant to the Medicare accelerated payment program. The CARES Act revised the Medicare accelerated
payment program in an attempt to disburse payments to healthcare providers more quickly. In April 2020, the Company received recoupable
advance payments of approximately $46 million made available by CMS under the CARES Act. The recoupment of such amount by CMS will
begin in April 2021 and will be applied to services provided and revenue recognized during the period in which the recoupment occurs. The
total of the recoupable advance payments is included in other current liabilities in the accompanying consolidated balance sheets as of
December 31, 2020.
Deferral of Employment Tax Payments. As permitted under the CARES Act, the Company has elected to defer certain portions of
employer-paid FICA taxes otherwise payable from March 27, 2020 to January 1, 2021, which will be paid in two equal installments on December
31, 2021 and December 31, 2022. During the year ended December 31, 2020, the Company deferred a total of $8.6 million pursuant to this
provision, of which $4.3 million is included in other current liabilities and $4.3 million is included in other long-term liabilities in the
accompanying consolidated balance sheets as of December 31, 2020.
The full extent of the impact of the COVID-19 pandemic on the Company’s business, results of operations, and financial condition is
highly uncertain and will depend on future developments and numerous evolving factors that it may not be able to accurately predict, and
could be material to the Company’s consolidated financial statements in future reporting periods.
(g) Fair Value Accounting
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and
Disclosures (ASC 820), creates a single definition of fair value, establishes a framework for measuring fair value in U.S. GAAP and expands
disclosures about fair value measurements. ASC 820 emphasizes that fair value is a market-based measurement, not an entity specific
measurement, and states that a fair value measurement is to estimate the price at which an orderly transaction to sell an asset or to transfer the
liability would take place between market participants at the measurement date under current market conditions. Assets and liabilities adjusted
to fair value in the balance sheet are categorized based upon the level of judgment associated with the inputs used to measure their fair value.
Level inputs, as defined by ASC 820, are as follows:
Level input
Level 1
Level 2
Level 3
Input definition
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement
date.
Inputs, other than quoted prices included in Level 1 that are observable for the asset or liability through
corroboration with market data at the measurement date.
Unobservable inputs that reflect management’s best estimate of what market participants would use in
pricing the asset or liability at the measurement date.
Refer to Note 6, Fair Value of Assets and Liabilities, for additional information.
(h) Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, prepaid and other current assets,
accounts payable and accrued expenses. The carrying values of the Company’s financial instruments approximate their fair value based on
their short-term nature.
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Notes to Consolidated Financial Statements
December 31, 2020 and 2019
The table below shows the carrying amounts and estimated fair values, net of unamortized deferred financing costs, of the
Company’s primary long-term debt arrangements (in thousands):
Term loan and revolver
Senior unsecured notes
Note payable
December 31, 2020
Carrying Value
Fair Value
$
$
301,998
342,022
140,361
784,381
$
$
301,998
370,022
154,711
826,731
The borrowings under the Company’s term loan and revolver, which were entered into in July 2020, bear interest at the variable rates
described in Note 10, Debt, which management believes approximates fair value. The fair value of the Company’s senior unsecured notes is
based upon current market prices. The fair value of the Company’s notes payable is estimated based on the earliest call price associated with
the debt, which is based on a call price that is less than one year from the balance sheet date, which management believes approximates the
exit price notion of fair value measurement.
(i) Cash and Cash Equivalents
The Company considers all short-term highly liquid investments with a maturity of three months or less to be cash equivalents. Cash
represents cash on hand and deposits held at banks. The Company maintains cash in demand deposit accounts with federally insured banks.
At times, the balances in these accounts may be in excess of federally insured limits. Cash and cash equivalents consist of the following (in
thousands):
(in thousands)
Cash
Money market accounts
Total
(j) Inventory
December 31,
2020
2019
$
$
94,360
5,602
99,962
$
$
22,863
54,015
76,878
Inventory consists of equipment and medical supplies to be sold to customers and is stated at the lower of cost or market value. Cost
is determined by the first-in-first-out method. These finished goods are charged to cost of net revenue in the period in which products and
related services are provided to customers.
(k) Equipment and Other Fixed Assets
Equipment and other fixed assets are stated at cost less accumulated depreciation or, when acquired as part of a business
combination, fair value at date of acquisition. Depreciation is computed using the straight-line method over the estimated useful lives of the
related assets. The useful lives for patient medical equipment correlate with the medical reimbursement periods. Computer equipment, vehicles
and other assets are depreciated over the estimated useful lives of the assets. Major expenditures for property acquisitions and those
expenditures that substantially increase useful lives are capitalized. Expenditures for maintenance, repairs and minor replacements are
expensed as incurred.
The useful lives of property and equipment for purposes of computing depreciation are:
Patient medical equipment
Vehicles
Other
13 months - 5 years
5 years
2 - 7 years
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
(l) Impairment of Long-Lived Assets
The Company’s long-lived assets, such as equipment and other fixed assets and definite-lived intangible assets, are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment
charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Definite-lived intangible assets consist of payor contracts, developed technology and tradenames. These assets are amortized using
the straight-line method over their estimated useful lives, which reflects the pattern in which the economic benefits of the assets are expected
to be consumed. These assets are tested for impairment consistent with the Company’s long-lived assets. The following table summarizes the
useful lives of the intangible assets acquired:
Payor contracts
Developed technology
Tradenames
10
5
5 to 10
years
years
years
The Company did not incur any impairment charges on long-lived assets for the years ended December 31, 2020 and 2019. In addition
to consideration of impairment upon the events or changes in circumstances described above, management regularly evaluates the remaining
lives of its long-lived assets.
(m) Valuation of Goodwill
The Company has a significant amount of goodwill on its balance sheet that resulted from the business acquisitions the Company
has made in recent years. Goodwill is not amortized and is tested for impairment annually and upon the occurrence of a triggering event or
change in circumstances indicating a possible impairment. Such changes in circumstance can include, among others, changes in the legal
environment, reimbursement environment, operating performance, and/or future prospects. The Company performs its annual impairment
review of goodwill during the fourth quarter of each year. The impairment testing can be performed on either a quantitative or qualitative basis.
The Company first assesses qualitative factors to determine whether it is necessary to perform quantitative goodwill impairment testing. If
determined necessary, the Company applies the quantitative impairment test to identify and measure the amount of impairment, if any.
(n) Business Combinations
The Company applies the acquisition method of accounting for business acquisitions. The results of operations of the businesses
acquired by the Company are included as of the respective acquisition date. The acquisition-date fair value of the consideration transferred,
including the fair value of any contingent consideration, is allocated to the underlying assets acquired and liabilities assumed based upon
their estimated fair values at the date of acquisition. To the extent the acquisition-date fair value of the consideration transferred exceeds the
fair value of the identifiable tangible and intangible assets acquired and liabilities assumed, such excess is allocated to goodwill. Patient
relationships, medical records and patient lists are not reported as separate intangible assets due to the regulatory requirements and lack of
contractual agreements but are part of goodwill. Customer related relationships are not reported as separate intangible assets but are part of
goodwill as authorizing physicians are under no obligation to refer the Company’s services to their patients, who are free to change
physicians and service providers at any time. The Company may adjust the preliminary purchase price allocation, as necessary, as it obtains
more information regarding asset valuations and liabilities assumed that existed but were not available at the acquisition date, which is
generally up to one year after the acquisition closing date. Acquisition related expenses are recognized separately from the business
combination and are expensed as incurred.
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(o) Deferred Financing Costs
ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Costs incurred in connection with the Company’s borrowings, referred to as deferred financing costs, are capitalized and included on
the accompanying consolidated balance sheets in other assets for costs associated with revolving credit facilities, and as a debt reduction for
costs associated with term loans. Deferred financing costs are amortized to interest expense using the effective interest method over the term
of the related financing agreement. Refer to Note 8, Deferred Financing Costs, for additional information.
(p) Deferred Rent
The Company’s operating leases for its office and warehouse leases include scheduled rent increases. The Company has accounted
for the leases to provide straight-line charges to operations over the life of the leases. Deferred rent is recorded and amortized to the extent the
total minimum rental payments allocated to the current period and expensed on a straight-line basis exceed or are less than the cash payments
required. Deferred rent is included in accounts payable and accrued expenses and other long-term liabilities on the accompanying
consolidated balance sheets based on when the payments will be made. See Note 14, Lease Commitments, for additional information.
(q) 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 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 judgement is required to determine both probability and the estimated amount. The Company reviews 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.
(r) Advertising Costs
Advertising costs are charged to expense as incurred. The Company’s advertising costs for the years ended December 31, 2020 and
2019 were $5.3 million and $2.1 million, respectively, and are primarily included in cost of net revenue in the accompanying consolidated
statements of operations.
(s) Equity-based Compensation
The Company accounts for its equity-based compensation in accordance with FASB ASC Topic 718, Compensation-Stock
Compensation, which establishes accounting for share-based awards exchanged for employee services and requires companies to expense
the estimated fair value of these awards over the requisite employee service period. Equity-based compensation expense related to these
grants is included within cost of net revenue and general and administrative expenses in the accompanying consolidated statements of
operations. The Company measures and recognizes equity-based compensation expense for such awards granted to employees based on their
estimated fair values on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense
over the requisite service period in the Company’s consolidated financial statements. Equity-based compensation expense is recognized on a
straight-line basis over the requisite service period. For awards with performance conditions, equity-based compensation expense is
recognized on a straight-line basis over the employees’ requisite service period subject to management’s estimation of the probability of
vesting of such awards. See Note 11, Stockholders’ Equity, for additional information regarding the Company’s equity-based compensation
expense.
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(t) Cost of Net Revenue
ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Cost of net revenue includes the cost of products and supplies sold to patients, patient equipment depreciation and other operating
expenses. The Company also includes in cost of net revenue the salaries, labor and benefits costs incurred at the Company’s operating
facilities for service personnel, offshore labor expenses, occupancy costs (rent, utilities, property taxes, etc.), and other expenses (software
expenses, billing fees, IT related costs, general business supplies, etc.) incurred to operate the businesses. Cost of net revenue for the years
ended December 31, 2020 and 2019 consisted of the following (in thousands):
Cost of products and supplies
Salaries, labor and benefits
Patient equipment depreciation
Rent and occupancy
Other operating expenses
Equity-based compensation
Severance
Transaction costs
Other non-recurring expenses
Total
(u) General and Administrative Expenses
Year Ended December 31,
2019
2020
$
$
441,931
257,898
71,072
22,344
91,659
7,845
4,457
1,147
248
898,601
$
$
156,430
153,173
59,498
13,407
57,150
—
858
—
189
440,705
General and administrative expenses (G&A) primarily include expenses related to corporate salaries and benefits, legal, equity-based
compensation, transaction costs and other business support functions. Included in G&A during the years ended December 31, 2020 and 2019
are salaries, labor and benefits expenses (including equity-based compensation and severance) of $35.8 million and $31.7 million, respectively.
(v) Business Segment
The Company’s chief operating decision-makers are its Chief Executive Officer and President, who make resource allocation decisions
and assess performance based on financial information presented on an aggregate basis. There are no segment managers who are held
accountable by the chief operating decision-makers, or anyone else, for any planning, strategy and key decision-making regarding operations.
The corporate office is responsible for contract negotiation with vendors and payors, corporate compliance with healthcare laws and
regulations, and revenue cycle management. Accordingly, the Company has a single reportable segment and operating segment structure.
(w) Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade
accounts receivable. The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash
equivalents. As of December 31, 2020, and 2019, less than 10% of the Company’s net accounts receivable are from patients under co-pay or
private plan arrangements. Credit evaluations, account monitoring procedures and a third party collection agent are utilized to minimize the risk
of loss. Collateral is not required.
Cost-containment efforts of governmental organizations, primarily Medicare, could have a material adverse effect on the Company’s
sales and profitability. Medicare typically awards contracts on a category-by-category basis through a competitive bidding process. Bids are
generally solicited from multiple distributors with intention of driving
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
down pricing. The Company was previously in a protected three year window which expired in 2016. The Company was able to maintain
protection for the round 2 recompete contracts that became effective on July 1, 2016, however, all Medicare Durable Medical Equipment,
Prosthetics, Orthotics, & Supplies (DMEPOS) Competitive Bidding Program contracts expired on December 31, 2018. As a result, there is a
temporary gap in the entire DMEPOS Competitive Bidding Program that CMS stated would last until December 31, 2020, and be replaced by a
single round of competition named "Round 2021” which consolidated the competitive bidding areas ("CBAs”) included in the Round 1 2017
and Round 2 Recompete DMEPOS Competitive Bidding Programs. Round 2021 contracts were scheduled to become effective on January 1,
2021, and extend through December 31, 2023. CMS included 16 product categories in the Round 2021. On April 10, 2020, CMS announced that
due to the COVID-19 pandemic, it removed the non-invasive ventilators product category from the Round 2021 DMEPOS Competitive Bidding
Program.
On October 27, 2020, CMS announced that it would not award competitive bid contracts in 13 of the 15 remaining product categories
due to a failure to achieve expected savings, and that contract awards would only be made for off-the-shelf (OTS) knee and back braces. For
the years ended December 31, 2020 and 2019, revenue generated with respect to providing OTS knee and back braces (excluding amounts
generated in non-rural and rural non-bid areas) were not material. AdaptHealth expects to obtain contracts for OTS knee and back braces, and
does not expect the single payment amounts imposed by CMS under such contracts to have a material impact on the Company.
The competitive bidding process (which is expected to be re-bid every three years) has historically put pressure on the amount
AdaptHealth is reimbursed in the markets in which it exists, as well as in areas that are not subject to the DMEPOS Competitive Bidding
Program. The rates required to win future competitive bids could continue to depress reimbursement rates. AdaptHealth will continue to
monitor developments regarding the DMEPOS Competitive Bidding Program. While AdaptHealth cannot predict the outcome of the DMEPOS
Competitive Bidding Program on its business in the future nor the Medicare payment rates that will be in effect in future years for the items
subjected to competitive bidding, the program may materially adversely affect its financial condition and results of operations.
(x) Concentration of Customers
The Company provides and distributes medical equipment and health care services, including home oxygen, respiratory medications
and sleep therapy equipment and services, to both commercial organizations and directly to end users. This results in a customer
concentration relating to Medicare’s service reimbursement programs. During the years ended December 31, 2020 and 2019, the Company
derived approximately 28% and 32% of its net revenue from government healthcare programs, including Medicare and Medicaid, respectively.
Concentration of credit risk with respect to other payors is limited due to the large number of such payors and varied geographical locations.
(y) Self-Insurance Risk
The Company is subject to workers’ compensation, auto liability and employee medical claims, which are primarily self-insured;
however, the Company maintains certain stop-loss and other insurance coverage which it believes to be appropriate. Provisions for estimated
settlements relating to the workers’ compensation and medical plans are provided in the period of the related claim on a case-by-case basis
plus an amount for incurred but not reported claims. Differences between the amounts accrued and subsequent settlements are recorded in
operations in the period of settlement.
(z) Derivative Instruments
The Company recognizes all derivative instruments as either assets or liabilities in the accompanying consolidated balance sheets at
fair value. Derivative instruments consist of interest rate swap agreements. The interest rate swap agreements are used to manage interest rate
risk associated with the Company’s variable rate debt. The Company utilizes the interest rate swap agreements to modify the Company’s
exposure to interest rate risk by converting
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
a portion of its variable rate borrowings to a fixed rate. See Note 7, Derivative Instruments and Hedging Activities, for additional information.
(aa) Income Taxes
Prior to the completion of the Business Combination, AdaptHealth Holdings was a limited liability company and was treated as a
partnership for federal and state income tax purposes. As such, income and loss from operations of AdaptHealth Holdings were allocated to
the members for inclusion in their tax returns. In addition, there were regular C-corporations included in AdaptHealth Holdings’ structure
where taxes were paid at the entity level. The C-corporations used the asset and liability method of accounting for income taxes as described
below.
Following the Business Combination, the Company uses the asset and liability method of accounting for income taxes, under which
deferred tax assets and liabilities are recognized for the future tax consequences of (i) temporary differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities and (ii) operating loss and tax credit carryforwards. Deferred income tax
assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be
recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period the rate
change is enacted. A valuation allowance is provided for deferred tax assets when it is more likely than not the deferred tax assets will not be
realized. The Company’s deferred tax calculations and valuation allowance requires management to make certain estimates about future
operations. Changes in state or federal tax laws, as well as changes in the Company’s financial condition or the carrying value of existing
assets and liabilities, could affect those estimates. The effect of a change in tax rates is recognized as income or expense in the period that the
rate is enacted.
FASB ASC 740, Income Taxes, prescribes a recognition threshold and a measurement attribute for the financial statement recognition
and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related
to unrecognized tax benefits as income tax expense. There was no material amount of expense for interest and penalty related to unrecognized
tax benefits for the years ended December 31, 2020 and 2019.
(bb) Earnings (Loss) Per Share
Earnings (loss) per share is based upon the weighted average number of common shares outstanding during the respective periods.
The Company follows the provisions of the authoritative guidance for determining whether instruments granted in equity-based
compensation transactions are participating securities for purposes of calculating earnings (loss) per share. See Note 12, Earnings (Loss) Per
Share.
(cc) Recently Adopted Accounting Pronouncements
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (ASC Topic 350): Simplifying the Test for
Goodwill Impairment, which will eliminate the requirement to calculate the implied fair value of goodwill, commonly referred to as "Step 2” in
the current goodwill impairment test. An entity will still have the option to perform the qualitative assessment for a reporting unit to determine
if the quantitative impairment test is necessary. The Company adopted this standard on January 1, 2020, which did not have any impact on the
Company’s consolidated financial statements.
In December 2019, the FASB issued Accounting Standards Update (ASU) 2019-12, Simplifying the Accounting for Income Taxes.
This guidance aims to simplify accounting for income taxes, changes the accounting for certain income tax transactions, and makes minor
improvements to the codification. The guidance is effective for fiscal years beginning after December 15, 2020 and for interim periods within
those fiscal years, with early adoption permitted.
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Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Specific amendments in the guidance should be applied on retrospective or modified retrospective basis while other amendments should be
applied on a prospective basis. The Company early adopted this standard in 2020, which did not have a material impact on the Company’s
consolidated financial statements.
(dd) Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize leases on its-balance
sheet and disclose key information about leasing arrangements. Under the new guidance, lessees are required to recognize a lease liability,
which represents the discounted obligation to make future minimum lease payments, and a corresponding right-of-use (ROU) asset on the
balance sheet for most leases. Leases will be classified as finance or operating, with classification affecting the pattern and classification of
expense recognition in the income statement. The Company expects to elect the ‘package of practical expedients’ under the new standard,
which, among other things, permits lease agreements that are twelve months or less to be excluded from the balance sheet, and permits the
Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs.
The Company will adopt the new standard during the year ended December 31, 2021. The Company expects to adopt this guidance using a
modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application, and will
recognize a cumulative-effect adjustment to the opening balance of accumulated deficit in the period of adoption. The Company expects that
this standard will have a material effect on its consolidated financial statements. While the Company continues to assess all of the effects of
adoption, it currently believes the most significant effects relate to the recognition of new material ROU assets and lease liabilities on its
consolidated balance sheet for its real estate operating leases, and providing significant new disclosures about its leasing activities.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial
Instruments, which is intended to improve financial reporting by requiring earlier recognition of credit losses on certain financial assets. The
standard replaces the current incurred loss impairment model that recognizes losses when a probable threshold is met with a requirement to
recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. Further, the FASB issued ASU 2019-04
and ASU 2019-05 to provide additional guidance on the credit losses standard. The standard is effective for fiscal years beginning after
December 15, 2022, for smaller reporting companies, including interim periods within those annual periods, with early adoption permitted. The
Company is currently evaluating the effect that this standard will have on its consolidated financial statements and related disclosures.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848), which provides optional guidance to ease
the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. Specifically, the guidance
permits an entity, when certain criteria are met, to consider amendments to contracts made to comply with reference rate reform to meet the
definition of a modification under GAAP. It further allows hedge accounting to be maintained and a one-time transfer or sale of qualifying
held-to-maturity securities. The expedients and exceptions provided by the amendments are permitted to be adopted any time through
December 31, 2022 and do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31,
2022, except for certain optional expedients elected for certain hedging relationships existing as of December 31, 2022. The Company is
currently evaluating the effect that this standard will have on its consolidated financial statements and related disclosures.
(3) Acquisitions
During the years ended December 31, 2020 and 2019, the Company completed several acquisitions to strengthen its current market
share in existing markets or to expand into new markets. Each of the Company’s acquisitions was accounted for using the acquisition method
pursuant to the requirements of FASB ASC Topic 805, Business Combinations, and are included in the accompanying consolidated financial
statements since the respective acquisition date. The goodwill generated from these acquisitions is attributable to expected growth and cost
synergies
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Notes to Consolidated Financial Statements
December 31, 2020 and 2019
and the expected contribution of each acquisition to the Company’s overall strategy. The majority of the goodwill recorded during the year
ended December 31, 2020 is expected to be deductible for tax purposes. The estimated fair values of the net assets of acquired businesses as
described below are subject to change resulting from such items as working capital adjustments post-acquisition. As a result, the acquisition
accounting for certain acquired businesses could change in subsequent periods resulting in adjustments to goodwill once finalized. Also, see
subsection, "Pro-forma information” of this Note 3 for pro-forma information on net revenue and operating income.
Year ended December 31, 2020
On January 2, 2020, the Company purchased 100% of the equity interests of the Patient Care Solutions business (PCS), a subsidiary
of McKesson Corporation. PCS is a home medical equipment supplies business. The Company allocated the consideration paid to the
estimated fair values of the net assets acquired, including $14.9 million to accounts receivable, $0.5 million to equipment and other fixed assets,
$1.0 million to goodwill, $2.0 million to accounts payable and accrued expenses, and $0.4 million of net liabilities to other working capital
accounts.
On March 2, 2020, the Company purchased certain assets of the durable medical equipment business of Advanced Home Care, Inc.
(Advanced). The Company allocated the consideration paid to the estimated fair values of the net assets acquired, including $19.8 million to
equipment and other fixed assets, $2.7 million to inventory, $0.6 million to identifiable intangible assets (consisting of tradenames), $41.7
million to goodwill, and $1.3 million of net liabilities to other working capital accounts. The acquisition of Advanced also includes a potential
contingent payment of up to $9.0 million based on certain conditions after closing, which was determined to have an acquisition date fair value
of $5.0 million which was recorded as a contingent liability in connection with the Company’s acquisition accounting for Advanced. The fair
value of the estimated contingent liability of $5.0 million at December 31, 2020 is included in other current liabilities in the accompanying
consolidated balance sheets based on the expected payment date.
On July 1, 2020, the Company acquired 100% of the equity interests of Solara Medical Supplies, LLC (Solara). Solara is an
independent distributor of continuous glucose monitors (CGM) in the United States and offers a comprehensive suite of direct-to-patient
diabetes management supplies to patients throughout the country, including CGMs, insulin pumps and other diabetic supplies. The Company
allocated the consideration paid to the estimated fair values of the net assets acquired on a provisional basis, including $12.1 million to cash,
$17.4 million to accounts receivable, $14.4 million to inventory, $3.5 million to equipment and other fixed assets, $85.7 million to identifiable
intangible assets (consisting of $60.0 million of payor contracts and $25.7 million of tradenames), $347.7 million to goodwill, $22.5 million to
accounts payable and accrued expenses, and $2.9 million of net liabilities to other working capital accounts. The acquisition of Solara also
included a contingent payment based on certain conditions after closing, which was determined to have an acquisition date fair value of $1.3
million which was recorded as a contingent liability in connection with the Company’s acquisition accounting for Solara. Based on the
outcome of such conditions, the Company paid $1.4 million during the year ended December 31, 2020 to satisfy such contingent liability.
On July 1, 2020, the Company acquired 100% of the equity interests of ActivStyle, Inc. (ActivStyle). ActivStyle is a leading direct-to-
consumer supply company that provides incontinence and urology products to patients throughout the United States. The Company
allocated the consideration paid to the estimated fair values of the net assets acquired on a provisional basis, including $5.0 million to cash,
$5.2 million to accounts receivable, $0.5 million to inventory, $1.0 million to equipment and other fixed assets, $9.4 million to identifiable
intangible assets (consisting of $6.3 million of developed technology and $3.1 million of tradenames), $49.6 million to goodwill, $7.2 million to
accounts payable and accrued expenses, and $2.0 million of other net assets primarily to other working capital accounts.
On October 1, 2020, the Company acquired 100% of the equity interests of Pinnacle Medical Solutions, Inc. (Pinnacle). Pinnacle is a
distributor of insulin pumps, insulin pump supplies, continuous glucose monitoring systems and diabetes test strips in the United States. The
Company allocated the consideration paid to the estimated fair values of the net assets acquired on a provisional basis, including $1.2 million
to cash, $4.2 million to accounts receivable, $15.2
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
million to identifiable intangible assets (consisting of $14.0 million of payor contracts and $1.2 million of tradenames), $107.7 million to
goodwill, $5.8 million to accounts payable and accrued expenses, and $0.4 million of net assets to other working capital accounts. The
acquisition of Pinnacle also included a potential contingent payments of up to $15.0 million based on certain conditions after closing, which
were determined to have an acquisition date fair value of $14.3 million, which was recorded as a contingent liability in connection with the
Company’s acquisition accounting for Pinnacle. The fair value of the potential contingent payments of $14.7 million as of December 31, 2020 is
included in other current liabilities in the accompanying consolidated balance sheets based on the expected payment date.
In addition, during 2020, the Company acquired two providers of home medical equipment and two distributors of diabetes
management products and supplies. The Company allocated the consideration paid for these acquisitions to the estimated fair values of the
net assets acquired on a provisional basis, including $0.3 million to cash, $13.7 million to accounts receivable, $4.6 million to inventory, $14.3
million to equipment and other fixed assets, $10.6 million to identifiable intangible assets (consisting of $8.0 million of payor contracts and $2.6
million of tradenames), $121.2 million to goodwill, $14.1 million to accounts payable and accrued expenses, $2.0 million to capital lease
obligations, and $0.9 million of net liabilities to other working capital accounts. These acquisitions also included potential contingent
payments of up to $3.0 million based on certain conditions after closing, which were determined to have an acquisition date fair value of $2.8
million, which was recorded as a contingent liability in connection with the Company’s acquisition accounting for such acquisitions. The fair
value of the potential contingent payments of $2.8 million as of December 31, 2020 is included in other long-term liabilities in the
accompanying consolidated balance sheets based on the expected payment dates.
In addition, during 2020, the Company completed certain other acquisitions which individually had a consideration paid of less than
$20 million.
The following table summarizes the consideration paid for all acquisitions during the year ended December 31, 2020 (in thousands):
Cash consideration
Equity consideration (shares of Class A Common Stock)
Contingent consideration
Deferred payments
Total
$
$
790,564
123,887
27,064
33
941,548
The Company allocated the consideration paid to the net assets acquired based on their estimated acquisition date fair values. The
Company is still evaluating the fair value of certain assets and liabilities for which provisional amounts were recorded and expects to finalize
such evaluation during the first half of 2021. Based upon management’s evaluation, which is preliminary and subject to completion of working
capital and other adjustments, the consideration paid for all acquisitions during 2020 was allocated as follows during the year ended December
31, 2020 (in thousands):
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Table of Contents
Cash
Accounts receivable
Inventory
Prepaid and other current assets
Equipment and other fixed assets
Goodwill
Identifiable intangible assets
Other assets
Deferred income taxes
Accounts payable and accrued expenses
Contract liabilities
Other current liabilities
Other long-term liabilities
Capital lease obligations
Net assets acquired
Year ended December 31, 2019
$
$
21,227
62,940
26,111
9,560
45,669
732,019
122,100
2,921
1,132
(61,196)
(3,344)
(11,278)
(4,107)
(2,206)
941,548
On January 2, 2019, the Company purchased 100% of the equity of Gould’s Discount Medical, LLC (Goulds). Goulds is a home
medical equipment and supplies business. In 2019, the Company allocated the consideration paid to the estimated fair values of the net assets
acquired on a provisional basis, including $4.0 million to accounts receivable, $2.5 million to inventory, $3.4 million to equipment and other
fixed assets, $17.9 million to goodwill, $3.0 million to accounts payable and accrued expenses and $0.5 million of net liabilities to other working
capital accounts. The total consideration paid included potential contingent payments in an aggregate amount of up to $1.5 million based on
certain conditions after closing, which was recorded as a contingent liability in connection with the Company’s acquisition accounting for
Goulds.
On July 5, 2019, the Company purchased certain assets relating to the durable medical equipment business of SleepMed Therapies,
Inc. (SleepMed). SleepMed provides positive airway pressure devices and related supplies to customers in their homes or other alternative
site care facilities. In 2019, the Company allocated the consideration paid to the estimated fair values of the net assets acquired on a
provisional basis, including $0.2 million to inventory, $1.4 million to equipment and other fixed assets, $14.1 million to goodwill, and $0.3 million
of net liabilities to other working capital accounts. The total consideration paid included potential contingent payments in an aggregate
amount of up to $4.0 million based on certain conditions after closing, which was recorded as a contingent liability in connection with the
Company’s acquisition accounting for SleepMed.
On October 31, 2019, the Company purchased 100% of the stock of Choice Medical Healthcare, Inc. (Choice). Choice is a provider of
continuous positive airway pressure devices and related supplies. In 2019, the Company allocated the consideration paid to the estimated fair
values of the net assets acquired on a provisional basis, including $0.8 million to accounts receivable, $0.1 million to equipment and other fixed
assets, $18.9 million to goodwill, $1.2 million to accounts payable and accrued expenses and $0.1 million of net assets to other working capital
accounts. The total consideration paid included potential contingent payments in an aggregate amount of up to $12.5 million based on certain
conditions after closing, which were determined to have an acquisition date fair value of $6.2 million, which was recorded as a contingent
liability in connection with the Company’s acquisition accounting for Choice.
In addition, during 2019, the Company completed certain other acquisitions which individually had a consideration paid of less than
$10 million.
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
The following table summarizes the consideration paid for all acquisitions during the year ended December 31, 2019 (in thousands):
Cash consideration
Seller note
Contingent consideration
Deferred payments
Total
$
$
63,295
2,000
12,625
1,573
79,493
The Company allocated the consideration paid to the net assets acquired based on their estimated acquisition date fair values. Based
upon management’s evaluation, which was preliminary and subject to completion of working capital and other adjustments, the consideration
paid for all acquisitions during 2019 was allocated as follows during the year ended December 31, 2019 (in thousands):
Cash
Accounts receivable
Inventory
Prepaid and other current assets
Equipment and other fixed assets
Goodwill
Contract liabilities
Accounts payable and accrued expenses
Net assets acquired
Total
92
5,405
4,262
121
10,968
65,270
(1,709)
(4,916)
79,493
$
$
During 2019, the Company paid $0.8 million to the sellers in connection with an acquisition completed on December 31, 2018 relating
to working capital and other purchase price adjustments. In addition, in connection with an acquisition completed in July 2018, the Company
made an escrow payment of $1.0 million that would either be due to the sellers or paid back to the Company within one year subject to certain
conditions after closing. Based on the outcome of such conditions, the Company received $0.5 million of the escrow funds during 2019.
Pro-Forma Information (unaudited)
The unaudited pro-forma financial information presented below has been prepared by adjusting the historical results of the Company
to include the historical results of the significant acquisitions described above. The unaudited pro-forma financial information is presented for
illustrative purposes only and may not be indicative of the results of operations that would have actually occurred. In addition, future results
may vary significantly from the results reflected in the pro-forma information. The unaudited pro-forma financial information does not reflect
the impact of future events that may occur after the acquisitions, such as the impact of cost savings or other synergies that may result from
these acquisitions, and does not include interest expense associated with debt incurred to fund the acquisitions.
(in thousands)
Net revenue
Operating income
$
$
91
Year Ended December 31,
2020
1,312,320
108,543
2019
1,168,045
64,998
$
$
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Results of Businesses Acquired
The following table presents the amount of net revenue and operating income in the year of acquisition since the respective
acquisition dates for the significant acquisitions described above that is included in the Company’s consolidated statements of operations for
the years ended December 31, 2020 and 2019:
(in thousands)
Net revenue
Operating income
Year Ended December 31,
2020
2019
$
$
427,352
17,673
$
$
52,711
7,856
(4) Equipment and Other Fixed Assets
Equipment and other fixed assets as of December 31, 2020 and 2019 are as follows:
Patient medical equipment
Delivery vehicles
Other
Less accumulated depreciation
December 31,
2020
December 31,
2019
$
$
158,108 $
8,211
26,098
192,417
(81,949)
110,468
$
112,071
4,461
15,474
132,006
(68,447)
63,559
For the years ended December 31, 2020 and 2019, the Company recorded depreciation expense of $76.4 million and $62.6 million,
respectively. During the years ended December 31, 2020 and 2019, the Company wrote off $62.6 million and $72.8 million of fully depreciated
patient medical equipment, respectively.
(5) Goodwill and Intangible Assets
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are
not individually identified and separately recognized. The change in the carrying amount of goodwill for the years ended December 31, 2020
and 2019 was as follows (in thousands):
Balance at December 31, 2018
Goodwill from acquisitions
Receipt of prior escrow payment
Decrease
Balance at December 31, 2019
Goodwill from acquisitions
Balance at December 31, 2020
Gross carrying
amount
$
$
$
202,436
65,270
(504)
(411)
266,791
732,019
998,810
As a result of the Company’s assessment of qualitative factors, the Company did not record any goodwill impairment charges during
the years ended December 31, 2020 and 2019.
As discussed in Note 3, Acquisitions, in connection with an acquisition in July 2018, the Company made an escrow payment of $1.0
million that would either be due to the sellers or paid back to the Company within one year subject to certain conditions after closing. Based
on the outcome of such conditions, the Company received $0.5 million
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
of the escrow funds during 2019 which was recorded as a reduction of goodwill. The other decreases in the table above during 2019 primarily
relates to working capital and other measurement period adjustments relating to businesses that were acquired by the Company during 2018.
Identifiable intangible assets that are separable and have determinable useful lives are valued separately and amortized over the
period which reflects the pattern in which the economic benefits of the assets are expected to be consumed. There were no identifiable
intangible assets recorded at December 31, 2019. Identifiable intangible assets consisted of the following at December 31, 2020 (in thousands):
Payor contracts, net of accumulated amortization of $3,616
Tradenames, net of accumulated amortization of $1,793
Developed technology, net of accumulated amortization of $630
Identifiable intangible assets, net
Weighted-Average
Remaining Life (Years)
9.6
8.8
4.5
$
$
78,384
32,007
5,670
116,061
Amortization expense related to identifiable intangible assets, which is included in depreciation and amortization, excluding patient
equipment depreciation, in the accompanying statements of operations, was $6.0 million for the year ended December 31, 2020.
Future amortization expense related to identifiable intangible assets is estimated to be as follows (in thousands):
Twelve months ending December 31,
2021
2022
2023
2024
2025
Thereafter
Total
$
$
13,336
13,336
13,336
13,336
12,388
50,329
116,061
The Company recorded no impairment charges related to identifiable intangible assets during the year ended December 31, 2020.
(6) Fair Value of Assets and Liabilities
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the exit price) in an orderly
transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches,
including quoted market prices and discounted cash flows. A hierarchy for inputs is used in measuring fair value that maximizes the use of
observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.
Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from
independent sources. Unobservable inputs are inputs that reflect a company’s judgment concerning the assumptions that market participants
would use in pricing the asset or liability developed based on the best information available under the circumstances. The fair value hierarchy
is broken down into three levels based on the reliability of inputs.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of
fair value requires more judgment. Accordingly, the Company’s degree of judgment exercised in determining fair value is greatest for
instruments categorized in Level 3. In certain cases, the inputs used to measure fair
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
value may fall into different levels of the fair value hierarchy. In such cases an asset or liability is classified in its entirety based on the lowest
level of input that is significant to the measurement of fair value.
Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability
rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions
are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices
and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the
observability of prices and inputs may be reduced for many instruments. This condition in the future may cause the Company’s financial
instruments to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3. During the years ended December 31, 2020 and 2019, the
Company did not have any reclassifications in levels.
The following table presents the valuation of the Company’s financial assets and liabilities as of December 31, 2020 and 2019
measured at fair value on a recurring basis. The fair value estimates presented herein are based on information available to management as of
December 31, 2020 and 2019. These estimates are not necessarily indicative of the amounts the Company could ultimately realize.
(in thousands)
December 31, 2020
Assets
Money market accounts
Total assets measured at fair value
Liabilities
Acquisition-related contingent consideration-short term
Acquisition-related contingent consideration-long term
Interest rate swap agreements-short term
Interest rate swap agreements-long term
Contingent consideration common shares liability-short term
Contingent consideration common shares liability-long term
Total liabilities measured at fair value
(in thousands)
December 31, 2019
Assets
Money market accounts
Total assets measured at fair value
Liabilities
Acquisition-related contingent consideration-short term
Acquisition-related contingent consideration-long term
Interest rate swap agreements-short term
Interest rate swap agreements-long term
Contingent consideration common shares liability-short term
Contingent consideration common shares liability-long term
Total liabilities measured at fair value
94
Level 1
Level 2
Level 3
5,602
5,602
$
$
— $
—
—
—
—
—
— $
— $
— $
— $
—
5,941
10,220
—
—
16,161
$
—
—
23,941
9,599
—
—
36,846
33,631
104,017
Level 1
Level 2
Level 3
54,015
54,015
$
$
— $
—
—
—
—
—
— $
— $
— $
— $
—
2,157
6,182
—
—
8,339
$
—
—
4,825
9,900
—
—
3,158
6,158
24,041
$
$
$
$
$
$
$
$
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Interest Rate Swaps
ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
The Company uses interest rate swap agreements to manage interest rate risk by converting a portion of its variable rate borrowings
to a fixed rate and recognizes these derivative instruments as either assets or liabilities in the accompanying consolidated balance sheets at
fair value. The valuation of these derivative instruments is determined using widely accepted valuation techniques, including discounted cash
flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the
period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of the
Company’s interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments
and the discounted expected variable cash payments receipts. The variable cash receipts are based on an expectation of future interest rates
(forward curves) derived from observable market interest rate curves. To comply with the provisions of FASB ASC Topic 820, Fair Value
Measurement, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the
respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the
effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral
postings, thresholds, mutual puts and guarantees.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value
hierarchy, the credit valuation adjustments associated with the Company’s derivatives utilize Level 3 inputs, such as estimates of current
credit spreads to evaluate the likelihood of default by the Company and the respective counterparties. The Company has determined that the
significance of the impact of the credit valuation adjustments made to its derivative contracts, which determination was based on the fair value
of each individual contract, was not significant to the overall valuation. As a result, all of the Company’s derivatives held as of December 31,
2020 and 2019 were classified as Level 2 of the fair value hierarchy. Refer to Note 7, Derivative Instruments and Hedging Activities, for
additional information regarding the Company’s derivative instruments.
Acquisition-Related Contingent Consideration
The Company estimates the fair value of acquisition-related contingent consideration liabilities by applying the income approach
using a probability-weighted discounted cash flow model. This fair value measurement is based on significant inputs not observed in the
market and thus represents a Level 3 measurement. Level 3 instruments are valued based on unobservable inputs that are supported by little
or no market activity and reflect the Company’s own assumptions in measuring fair value. Each period, the Company evaluates the fair value
of acquisition-related contingent consideration obligations and records any changes in the fair value of such liabilities in other income in the
Company’s consolidated statements of operations. At December 31, 2020, contingent consideration liabilities of $23.9 million and $9.6. million
were included in other current liabilities and other long-term liabilities, respectively, in the accompanying consolidated balance sheets. At
December 31, 2019, contingent consideration liabilities of $4.8 million and $9.9 million were included in other current liabilities and other long-
term liabilities, respectively, in the accompanying consolidated balance sheets.
A reconciliation of the Company’s contingent consideration liabilities related to acquisitions is as follows (in thousands):
Year Ended December 31, 2020
Contingent consideration - Level
3 liabilities
Year Ended December 31, 2019
Contingent consideration - Level
3 liabilities
Beginning Balance Additions Payments Change in Fair Value Other activity Ending Balance
$
14,725
$
27,064
$
(4,204)
$
(4,176)
$
131
$
33,540
Beginning Balance Additions Payments Change in Fair Value Other activity Ending Balance
$
15,250
$
12,625
$
(13,000)
$
(150) $
— $
14,725
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Contingent Consideration Common Shares Liability
The Company estimates the fair value of the contingent consideration common shares liability using a monte-carlo simulation
analysis. A monte-carlo simulation is a tool used to project asset prices based on a widely accepted drift calculation, the volatility of the asset,
incremental time-steps and a random component known as a Weiner process that introduces the dynamic behavior in the asset price. In this
framework, asset prices follow a log-normal distribution as they fluctuate through time, which the simulation process captures. A specific
model can be developed around the projected stock price to capture the effects of any market performance conditions on value. Price path
specific conditions can be captured in this type of open form model. The monte-carlo process expresses potential future scenarios that when
simulated thousands of times can be viewed statistically to ascertain fair value. The contingent consideration common shares contain market
conditions to determine whether the shares are earned based on the Company’s common stock price during specified measurement periods.
Given the path dependent nature of the requirement in which the shares are earned, a monte-carlo simulation was used to estimate the fair
value of the liability. The Company’s common stock price was simulated to each measurement period based on the above described
methodology. In each iteration, the simulated stock price was compared to the conditions under which the shares are earned. In iterations
where the stock price corresponded to shares being earned, the future value of the earned shares was discounted back to present value. The
fair value of the liability was estimated based on the average of all iterations of the simulation. Refer to Note 11, Stockholders’ Equity, for
additional discussion of the contingent consideration common shares.
The following table presents the Company’s hierarchy for non-financial assets measured at fair value on a non-recurring basis (in
thousands):
Assets:
Goodwill (Level 3)
Identifiable intangible assets, net (Level 3)
December 31,
2020
December 31,
2019
$
998,810
116,061
$
266,791
—
The fair value allocation related to the Company’s acquisitions are determined using a discounted cash flow approach, or a
replacement cost approach, which are based on significant unobservable inputs (Level 3). The Company estimates the fair value using the
income approach (which is a discounted cash flow technique) or the cost approach. These valuation methods required management to make
various assumptions, including, but not limited to, future profitability, cash flows, replacement costs, and discount rates. The Company’s
estimates are based upon historical trends, management’s knowledge and experience and overall economic factors, including projections of
future earnings potential.
Developing discounted future cash flows in applying the income approach requires the Company to evaluate its intermediate to
longer-term strategies, including, but not limited to, estimates of revenue growth, operating margins, capital requirements, inflation and
working capital management. The development of appropriate rates to discount the estimated future cash flows requires the selection of risk
premiums, which can materially impact the present value of future cash flows.
The Company estimated the fair value of acquired intangible assets using discounted cash flow techniques that included an estimate
of future cash flows, consistent with overall cash flow projections used to determine the purchase price paid to acquire the business,
discounted at a rate of return that reflects the relative risk of the cash flows. The Company estimated the fair value of certain acquired
intangible assets based on the cost approach using estimated costs consistent with historical experience. The Company believes the estimates
and assumptions used in the valuation methods are reasonable.
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Notes to Consolidated Financial Statements
December 31, 2020 and 2019
(7) Derivative Instruments and Hedging Activities
FASB ASC Topic 815, Derivatives and Hedging (ASC 815), provides the disclosure requirements for derivatives and hedging
activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses
derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments
and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are
required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of
and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As discussed in Note 6, Fair Value of Assets and Liabilities, and as required by ASC 815, the Company records all derivatives on its
consolidated balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the
derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the
hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the
exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge
accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the
earnings effect of the hedged forecasted transactions in a cash flow hedge.
The Company is exposed to certain risk arising from economic conditions. The Company principally manages its exposures to interest
rate risk through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage
differences in the amount, timing and duration of the Company’s known or expected cash payments principally related to the Company’s
variable rate borrowings.
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to
interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk
management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in
exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in
accumulated other comprehensive income and subsequently reclassified into interest expense in the same period during which the hedged
transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to
interest expense as interest payments are made on the Company’s variable-rate debt. In the twelve months subsequent to December 31, 2020,
the Company estimates that an additional $0.1 million will be reclassified as a reduction to interest expense.
As of December 31, 2020 and 2019, the Company had outstanding interest rate derivatives with third parties in which the Company
pays a fixed interest rate and receives a rate equal to the one-month LIBOR. The notional associated with the swap agreements was $250
million of December 31, 2020 and 2019, and have maturity dates at certain dates through March 2024. Prior to August 22, 2019, the interest rate
swap agreements were not designated as cash flow hedging instruments for accounting purposes and accordingly changes in fair value of the
interest rate swap agreements were recorded in earning. On August 22, 2019, the Company designated its swaps as effective cash flow hedges
of interest rate risk. Accordingly, subsequent to August 22, 2019, changes in the fair value of the interest rate swaps are recorded as a
component of accumulated other comprehensive income (loss) within stockholders’ equity and subsequently reclassified into interest expense
in the same period during which the hedged transaction affects earnings.
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Notes to Consolidated Financial Statements
December 31, 2020 and 2019
The table below presents the fair value of the Company’s derivatives designated as hedging instruments as well as their
classification in the consolidated balance sheets at December 31, 2020 and 2019 (in thousands):
Interest rate swap agreements
Interest rate swap agreements
Total
Balance Sheet Location
Other current liabilities
Other long-term liabilities
$
$
December 31, 2020 December 31, 2019
Asset (Liability)
(5,941)
(10,220)
(16,161)
(2,157)
(6,182)
(8,339)
$
$
During the year ended December 31, 2020, as a result of the effect of cash flow hedge accounting, the Company recognized a loss of
$7.8 million in other comprehensive income (loss). In addition, during the year ended December 31, 2020, $2.8 million was reclassified from
other comprehensive income (loss) and recognized as a reduction to interest expense, net, in the accompanying consolidated statements of
operations. During the year ended December 31, 2019, as a result of the effect of cash flow hedge accounting, the Company recognized income
of $3.5 million in other comprehensive income (loss). In addition, during the year ended December 31, 2019, $0.9 million was reclassified from
other comprehensive income (loss) and recognized as a reduction to interest expense, net, in the accompanying consolidated statements of
operations. During the year ended December 31, 2019, as a result of the effect of the Company’s derivative financial instruments that were not
designated as hedging instruments, the Company recognized $12.4 million in interest expense, net in the accompanying consolidated
statements of operations.
(8) Deferred Financing Costs
The change in the carrying amount of deferred financing costs for the years ended December 31, 2020 and 2019 was as follows:
Balance at beginning of period
Capitalized fees
Amortization
Write-off due to debt refinancing
Balance at end of period
Year Ended December 31,
2020
2019
$
$
7,853
13,049
(1,876)
(5,316)
13,710
$
$
2,258
9,028
(1,312)
(2,121)
7,853
Amortization expense relating to deferred financing costs was $1.9 million and $1.3 million during the years ended December 31, 2020
and 2019, respectively, and is included in interest expense, net in the accompanying consolidated statements of operations. The write-off of
deferred financing costs is included in loss on extinguishment of debt in the accompanying consolidated statements of operations for the
years ended December 31, 2020 and 2019.
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Notes to Consolidated Financial Statements
December 31, 2020 and 2019
The December 31, 2020 balance of deferred financing costs of $13.7 million is estimated to be recorded to amortization expense as
follows, which is affected for the January 2021 debt refinancing (see Note 21, Subsequent Events):
(in thousands)
2021
2022
2023
2024
2025
Thereafter
$
$
4,243
1,650
1,650
1,650
1,650
2,867
13,710
(9) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses as of December 31, 2020 and 2019 consisted of the following (in thousands):
Accounts payable
Employee related accruals
Accrued interest
Other
Total
(10) Debt
The following is a summary of long-term debt as of December 31, 2020 and 2019 (in thousands):
December 31,
2020
December 31,
2019
$
$
191,038 $
26,705
11,062
25,407
254,212
$
79,237
12,320
4,022
7,149
102,728
Secured term loans
Revolving credit facility
Senior unsecured notes
Note payable
Other
Unamortized deferred financing fees
Current portion
Long-term portion
December 31,
2020
December 31,
2019
$
$
248,438 $
55,000
350,000
143,500
333
(12,557)
784,714
(8,146)
776,568
$
246,250
12,000
—
143,500
1,725
(6,642)
396,833
(1,721)
395,112
Interest expense related to long-term debt agreements, including amortization of deferred financing costs and payments made under
the Company’s interest rate swap agreements, for the years ended December 31, 2020 and 2019 was $42.0 million and $27.8 million,
respectively.
In July 2020, the Company refinanced its then existing debt borrowings and entered into a new credit agreement with a new bank
group (the 2020 Credit Agreement). The 2020 Credit Agreement consisted of a $250 million term loan (the 2020 Term Loan) and $200 million in
commitments for revolving credit loans with a $15 million letter of
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Notes to Consolidated Financial Statements
December 31, 2020 and 2019
credit sublimit (the 2020 Revolver), both with maturities in July 2025. The amount borrowed under the 2020 Term Loan bore interest quarterly at
variable rates based upon the sum of (a) the Adjusted LIBOR Rate (subject to a floor) equal to the LIBOR (as defined in the 2020 Credit
Agreement) for the applicable interest period, plus (b) an applicable margin ranging from 2.50% to 3.75% per annum based on the Consolidated
Total Leverage Ratio (as defined in the 2020 Credit Agreement). The 2020 Revolver carried a commitment fee during the term of the 2020 Credit
Agreement ranging from 0.25% to 0.50% per annum of the average daily undrawn portion of the 2020 Revolver based on the Consolidated
Total Leverage Ratio. In connection with the 2020 Credit Agreement, the Company paid deferred financing costs of $2.7 million; such costs
were being amortized over the term of the related debt, which is included in interest expense, net in the accompanying consolidated statements
of operations. In January 2021, the Company refinanced its debt borrowings under the 2020 Credit Agreement. A portion of the net proceeds
from such refinancing was used to repay existing amounts outstanding under the 2020 Credit Agreement. See Note 21, Subsequent Events, for
additional disclosures regarding the January 2021 debt refinancing.
Under the 2020 Credit Agreement, the Company was subject to several restrictive covenants that, among other things, imposed
operating and financial restrictions on the Company. Financial covenants included a Consolidated Total Leverage Ratio and a Consolidated
Fixed Charge Coverage Ratio, as defined in the 2020 Credit Agreement. The 2020 Credit Agreement also contained certain customary events of
default, including, among other things, failure to make payments when due thereunder, failure to observe or perform certain covenants, and
non-compliance with healthcare laws.
In March 2019, the Company entered into several agreements, amendments and new credit facilities (herein after referred to as the
March 2019 Recapitalization Transactions). The March 2019 Recapitalization Transactions included $425 million in new credit facilities, which
consisted of a $300 million Initial Term Loan, $50 million Delayed Draw Term Loan, and $75 million Revolving Credit Facility, collectively
referred to herein as the 2019 Credit Facility. Amounts borrowed under the 2019 Credit Facility bore interest quarterly at variable rates based
upon the sum of (a) the LIBOR Rate for such interest period, plus (b) an applicable margin based upon the Company’s Consolidated Total
Leverage Ratio (as defined in the 2019 Credit Facility). In November 2019, the Company repaid $50 million under the Initial Term Loan using the
proceeds received from the transactions completed as part of the Business Combination. In July 2020, the Company amended the 2019 Credit
Facility and borrowed $216.3 million; such proceeds were used to partially fund an acquisition. In connection with this amendment, the
Company paid deferred financing costs of $1.9 million. The Company used a portion of the net proceeds from the borrowings under the 2020
Term Loan and the issuance of the 2020 Senior Unsecured Notes (see discussion below) to fully repay the outstanding principal balances
under the 2019 Credit Facility totaling $523.9 million, and to pay the related accrued interest, fees and expenses. Further, in connection with
executing the 2020 Credit Agreement, the Company wrote off unamortized deferred financing costs of $5.3 million related to the 2019 Credit
Facility, which is included in loss on extinguishment of debt in the accompanying consolidated statements of operations for the year ended
December 31, 2020.
The proceeds from the March 2019 Recapitalization Transactions were used to (1) repay existing amounts outstanding under the
Company’s then existing credit facility of $151.9 million, (2) pay transaction costs, fees and expenses related to the consummation of the
transactions contemplated under the agreement (see Note and Unit Purchase Agreement discussed below), (3) pay a $250 million distribution
to AdaptHealth Holdings’ members, and (4) redeem certain members’ interests, including the cumulative preferred dividends, for $3.7 million.
In addition, the Company paid deferred financing costs of $9.0 million. Further, the Company wrote off unamortized deferred financing costs of
$2.1 million, which is included in loss on extinguishment of debt in the accompanying consolidated statements of operations for the year
ended December 31, 2019.
Secured Term Loans
The borrowing under the 2020 Term Loan required quarterly principal repayments of $1.6 million beginning September 30, 2020
through June 30, 2022, increasing to $3.1 million beginning September 30, 2022 through June 30,
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Notes to Consolidated Financial Statements
December 31, 2020 and 2019
2025, and the unpaid principal balance was due at maturity in July 2025. At December 31, 2020, there was $248.4 million outstanding under the
2020 Term Loan. The interest rate under the 2020 Term Loan was 3.44% at December 31, 2020. In January 2021, the Company refinanced its
debt borrowings under the 2020 Credit Agreement. A portion of the net proceeds from such refinancing was used to repay existing amounts
outstanding under the 2020 Term Loan of $246.9 million plus accrued interest. See Note 21, Subsequent Events, for additional disclosures
regarding the January 2021 debt refinancing.
Revolving Credit Facility
During 2020, the Company borrowed $55.0 million under the 2020 Revolver which was outstanding at December 31, 2020. Borrowings
under the 2020 Revolver could be used for working capital and other general corporate purposes, including for capital expenditures and
acquisitions permitted under the 2020 Credit Agreement. The interest rate under the 2020 Revolver was 3.44% at December 31, 2020. After
consideration of stand-by letters of credit outstanding of $4.3 million, the remaining maximum borrowings available pursuant to the 2020
Revolver were $140.7 million at December 31, 2020. In January 2021, the Company refinanced its debt borrowings under the 2020 Credit
Agreement. A portion of the net proceeds from such refinancing was used to repay existing amounts outstanding under the 2020 Revolver of
$55.0 million plus accrued interest. See Note 21, Subsequent Events, for additional disclosures regarding the January 2021 debt refinancing.
Senior Unsecured Notes
In July 2020, the Company issued $350.0 million aggregate principal amount of 6.125% senior unsecured notes due 2028 (the 6.125%
Senior Notes). The 6.125% Senior Notes will mature on August 1, 2028. Interest on the 6.125% Senior Notes is payable on February 1st and
August 1st of each year, beginning on February 1, 2021. The 6.125% Senior Notes will be redeemable at the Company’s option, in whole or in
part, at any time on or after August 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. The Company may also redeem some or all of the 6.125% Senior Notes
before August 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, the Company may redeem up to 40% of the original aggregate principal amount of the
6.125% Senior Notes before August 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, the Company 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. In connection with
the 6.125% Senior Notes, the Company paid deferred financing costs of $8.4 million; such costs are being amortized over the term of the
related debt and is included in interest expense, net in the accompanying consolidated statements of operations.
Note Payable
In connection with the March 2019 Recapitalization Transactions, the Company signed a Note and Unit Purchase Agreement with an
investor. Pursuant to the agreement, the Company issued a promissory note with a principal amount of $100 million (the Promissory Note) and
the Company also received proceeds of $20 million for the purchase of members’ interests. In connection with the transactions completed as
part of the Business Combination, the Promissory Note was replaced with a new amended and restated promissory note with a principal
amount of $100 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 as the New Promissory Note. The
outstanding principal balance under the New Promissory Note is due on November 8, 2029, and bears interest at the following rates (a) for the
period starting on the closing date and ending on the seventh anniversary, a rate of 12% per annum, and (b) for the period starting on the day
after the seventh anniversary of the closing date and
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Notes to Consolidated Financial Statements
December 31, 2020 and 2019
ending on the maturity date, a rate equal to the greater of (i) 15% per annum or (ii) the twelve-month LIBOR plus 12% per annum. Under the
New Promissory Note, the Company had the option to pay 6% of the interest in cash and 6% Payment in Kind (PIK). The Company elected to
pay the PIK interest in cash during all periods. At any time following September 20, 2021, the Company may prepay, in whole (but not in part),
the outstanding principal amount, together with all accrued and unpaid interest thereon. If the Company elects to prepay the New Promissory
Note prior to September 21, 2023, then the amount due and payable shall be subject to a make-whole premium equal to a percentage of the total
amount of outstanding principal and accrued interest through the date of such prepayment. The make-whole premium percentage during the
period from September 21, 2021 through September 20, 2022 is 10%, and from September 21, 2022 through September 20, 2023 is 5%. In
addition, if the Company desires to consummate any Qualified Acquisition (as defined in the New Promissory Note) without the consent of
the investor, the Company may proceed with such acquisition if the New Promissory Note is prepaid at the closing of such acquisition. If such
acquisition occurs prior to September 21, 2023, then the amount due and payable shall be subject to a make-whole premium equal to a
percentage of the total amount of outstanding principal and accrued interest through the date of such prepayment. The make-whole premium
percentage during the period from September 21, 2020 through September 20, 2021 is 15%, from September 21, 2021 through September 20, 2022
is 10%, and from September 21, 2022 through September 20, 2023 is 5%. Further, if a Sale of the Company (as defined in the New Promissory
Note) occurs prior to the maturity date, then, effective immediately prior to and contingent upon the consummation of such transaction, the
outstanding principal, together with all accrued and unpaid interest, shall be due and payable. If such transaction occurs prior to September
21, 2023, then the amount due and payable shall be subject to a make-whole premium equal to a percentage of the total amount of outstanding
principal and accrued interest through the date of such prepayment. The make-whole premium percentage during the period from November 8,
2019 through September 20, 2022 is 10%, and from September 21, 2022 through September 20, 2023 is 5%.
In connection with the Business Combination, the investor generated taxable income and a current federal and state income tax
liability of $5.9 million on the exchange of its members’ interests. Under the terms of the Merger Agreement, all investors indemnified the
Company for all taxes attributable to periods prior to or on the closing date of the Business Combination. Accordingly, the Company recorded
an indemnification asset of such amount, included in Prepaid and other current assets, and a corresponding current liability included in Other
liabilities, in the accompanying consolidated balance sheets as of and December 31, 2019. This amount is no longer outstanding as of
December 31, 2020.
In May 2020, the Company and the investor entered into a Put/Call Option and Consent Agreement (the Put/Call Agreement),
pursuant to which certain put and call rights were granted to the parties with respect to shares of Class A Common Stock, shares of Class B
Common Stock, and common units of AdaptHealth Holdings (each such common unit, together with one share of Class B Common Stock, a
Consideration Unit) held by the investor. Pursuant to the Put/Call Agreement, during the period from the closing of the Company’s acquisition
of Solara to October 31, 2020, which was subsequently extended to December 31, 2020 pursuant to an amendment to the Put/Call Agreement
executed by the parties in October 2020 (the Option Period), the investor could require the Company to purchase up to 1,898,967 shares of
Class A Common Stock and/or Consideration Units held by the investor (such shares of Class A Common Stock and Consideration Units,
collectively, Interests) at a price per share of Class A Common Stock or per Consideration Unit equal to the greater of (x) $14.50 and (y) 85% of
the 30-day volume-weighted average price per share of the Company’s Class A Common Stock on the date the exercise notice is delivered.
During the Option Period, the Company could also require the investor to sell up to 1,898,967 of the Interests held by the investor to the
Company at a price per share of Class A Common Stock or per Consideration Unit of $15.76. In addition, under the Put/Call Agreement, the
investor waived certain consent rights under the New Promissory Note, and the Company irrevocably agreed to pay all PIK interest payable
under the New Promissory Note following the closing of the acquisition of Solara in cash rather than through an increase in the principal
amount of the notes. In connection with the Put/Call Agreement, during the year ended December 31, 2020, the Company recorded a decrease
to additional paid-in capital and accumulated deficit of $2.7 million, representing the estimated net fair value of the related call and put option.
In December 2020, the Company exercised its call option and purchased 1,898,967 shares of Class A Common Stock from
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Notes to Consolidated Financial Statements
December 31, 2020 and 2019
the investor for $29.9 million, which was recorded as a decrease to additional paid-in capital during the year ended December 31, 2020.
The future maturity of total debt, excluding unamortized deferred financing fees, at December 31, 2020 is as follows, which reflects the
provisions of the January 2021 completed debt refinancing (in thousands). See Note 21, Subsequent Events, for additional disclosures
regarding the January 2021 debt refinancing.
Twelve months ended December 31,
2021
2022
2023
2024
2025
Thereafter
Total debt maturity
(11) Stockholders' Equity
$
$
303,771
—
—
—
—
493,500
797,271
The completion of the Business Combination (the Closing) occurred on November 8, 2019, refer to Note 1, Nature of Business, for
additional details regarding the Business Combination.
Upon the Closing of the Business Combination, the former owners of AdaptHealth Holdings held approximately 49% of the economic
interest in AdaptHealth Corp. and the former stockholders of DFB held the remaining approximate 51% of the economic interests in
AdaptHealth Corp., both in the form of shares of the Company’s Class A Common Stock. In addition, AdaptHealth Corp. owned approximately
56% of the combined company with the remaining 44% owned by the former owners of AdaptHealth Holdings in the form of common units
representing limited liability company interests in AdaptHealth Holdings from and after the Closing (New AdaptHealth Units).
Following the Closing of the Business Combination, the combined results of DFB and AdaptHealth Holdings are consolidated, and
the holders of Class A Common Stock owned an approximate 56% direct controlling interest and the holders of New AdaptHealth Units owned
an approximate 44% direct noncontrolling economic interest shown as noncontrolling interest in the consolidated financial statements of the
combined entity. The direct noncontrolling economic interest in AdaptHealth Holdings held by the owners of AdaptHealth Holdings is in the
form of New AdaptHealth Units (and a corresponding number of non-economic shares of Class B Common Stock) and are exchangeable on a
one-to-one basis for shares of Class A Common Stock. Following the Closing, 17,209,739 New AdaptHealth Units and a corresponding
number of shares of Class B Common Stock were exchanged for shares of Class A Common Stock, of which 16,659,739 and 550,000 of the
exchanges occurred during the years ended December 31, 2020 and 2019, respectively. In addition, during the year ended December 31, 2020,
certain members of the Company’s management exchanged 1,507,808 New AdaptHealth Units and a corresponding number of shares of Class
B Common Stock for cash of $44.3 million in order to provide for the payment of capital gains tax obligations resulting from such exchange.
The cumulative amount of exchanges of New AdaptHealth Units and the corresponding number of shares of Class B Common Stock through
December 31, 2020 have resulted in the holders of New AdaptHealth Units owning approximately 12% direct noncontrolling economic interest
in AdaptHealth Holdings as of such date. The approximately 12% direct noncontrolling economic interest will continue to decrease as New
AdaptHealth Units are exchanged for shares of Class A Common Stock. See Note 21, Subsequent Events, for additional disclosures regarding
additional exchanges of New AdaptHealth Units and shares of Class B Common Stock which occurred subsequent to December 31, 2020.
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Notes to Consolidated Financial Statements
December 31, 2020 and 2019
The following table sets forth the net assets of DFB at the Closing (in thousands):
Cash and cash equivalents
Current assets
Current liabilities
Net assets of DFB
$
$
43,912
71
(11,215)
32,768
The following table sets forth the sources and uses of cash in connection with the Business Combination (in thousands):
Sources
DFB's cash and cash equivalents on hand
Private placement (1)
Total Sources
Uses
Cash to balance sheet (2)
Legacy AdaptHealth Holdings LLC redemptions (3)
Debt repayment (4)
Transaction expenses (5)
Total Uses
$
$
$
$
43,912
125,000
168,912
52,845
20,000
81,500
14,567
168,912
(1) Represents the issuance and sale, in a private placement consummated concurrently with the Closing, of 12,500,000 shares of Class A
Common Stock.
(2) Represents remaining cash used to fund operations and working capital needs of the Company after the Closing of the Business
Combination.
(3) Represents cash that was used to fund redemptions made by legacy AdaptHealth Holdings investors.
(4) Represents the amount of debt that the combined company paid down upon closing of the Business Combination.
(5) Represents the amount of transaction expenses paid in connection with the Closing of the Business Combination, including costs
incurred by the Company and accrued costs incurred by DFB prior to the Closing of the Business Combination, that were paid upon
closing.
In connection with the Business Combination, the Company filed its Second Amended and Restated Certificate of Incorporation to
increase the total number of shares of all classes of capital stock which the Company is authorized to issue to 250,000,000 shares, consisting of
210,000,000 shares of Class A Common Stock with a par value of $0.0001 per share, 35,000,000 shares of Class B Common Stock with a par
value of $0.0001 per share, and 5,000,000 shares of Preferred Stock with a par value of $0.0001 per share. Holders of common stock are entitled
to one vote for each share. The shares of Preferred Stock shall be issued with such designations, voting and other rights and preferences as
may be determined from time to time by the Company’s board of directors.
In July 2020, the Company received gross proceeds of $190.0 million in connection with the sale of 10,930,471 shares of Class A
Common Stock and 39,706 shares of Series A Preferred Stock pursuant to a private placement
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Notes to Consolidated Financial Statements
December 31, 2020 and 2019
transaction. In addition, in July 2020, the Company received gross proceeds of $35.0 million in connection with the sale of 35,000 shares of
Series B-2 Preferred Stock pursuant to a private placement transaction. The proceeds from these transactions were used to partially fund an
acquisition. In connection with these transactions, the Company paid offering costs of $1.6 million. In September 2020, the 39,706 shares of
Series A Preferred Stock were converted into 2,887,709 shares of Class A Common Stock. In addition, in September 2020, the 35,000 shares of
Series B-2 Preferred Stock were converted into 25,454.55 shares of Series B-1 Preferred Stock (see below for a discussion of the Company’s
outstanding Series B-1 Preferred Stock).
In July 2020, the Company issued 9,200,000 shares of Class A Common Stock at a price of $15.50 per share pursuant to an
underwritten public offering and received gross proceeds of $142.6 million. In connection with this transaction, the Company paid offering
costs, inclusive of the underwriting discount, of $10.1 million.
Preferred Stock
In June 2020, the Company entered into an exchange agreement (the Exchange Agreement) with an investor pursuant to which the
investor exchanged 15,810,547 shares of the Company’s Class A Common Stock for 158,105.47 shares of Series B-1 Preferred Stock, par value
$0.0001 per share. The Series B-1 Preferred Stock liquidation preference is limited to its par value of $0.0001 per share. The Series B-1 Preferred
Stock will participate equally and ratably on an as-converted basis with the holders of Class A Common Stock in all cash dividends paid on
the Class A Common Stock. The Series B-1 Preferred Stock is non-voting. The holder may convert each share of Series B-1 Preferred Stock
into 100 shares of Class A Common Stock (subject to certain anti-dilution adjustments) at its election, except to the extent that following such
conversion, the number of shares of Class A Common Stock held by such holder and its affiliates exceed 4.9% of the outstanding Class A
Common Stock of the Company. In December 2020, 20,000 shares of Series B-1 Preferred Stock were converted into 2,000,000 shares of Class A
Common Stock.
March 2019 Recapitalization Transactions
As discussed in Note 10, Debt. in March 2019, the Company entered into several agreements, amendments and new financing
facilities as part of the March 2019 Recapitalization Transactions. In addition to the debt proceeds received as part of these transactions, the
Company also received proceeds of $20.0 million for the purchase of members’ interests pursuant to the Note and Unit Purchase Agreement.
Warrants
At the Closing of the Business Combination, the Company had 12,666,666 warrants outstanding. Each warrant is exercisable into one
share of Class A Common Stock at a price of $11.50 per share. The exercise price and number of shares of Class A Common Stock issuable
upon exercise of the warrants may be adjusted in certain circumstances including in the event of a share dividend, or recapitalization,
reorganization, merger or consolidation. However, the warrants will not be adjusted for the issuance of common stock at a price below its
exercise price. During the year ended December 31, 2020, 6,254,803 warrants were exercised in cashless transactions resulting in the issuance
of 1,973,707 shares of Class A Common Stock, which included the redemption of Public Warrants (see below). In addition, during the year
ended December 31, 2020, 2,131,315 warrants were exercised for cash proceeds of $24.5 million, resulting in the issuance of 2,131,315 shares of
Class A Common Stock. As of December 31, 2020, the Company had 4,280,548 warrants outstanding, which have an expiration date of
November 20, 2024.
Redemption of Public Warrants
On August 4, 2020, the Company announced its intention to redeem all of its outstanding public warrants (the Public Warrants) to
purchase shares of the Company’s Class A Common Stock, that were issued under the Warrant Agreement, dated February 15, 2018 (the
Warrant Agreement), by and between the Company and Continental Stock
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Transfer & Trust Company, as warrant agent (the Warrant Agent), as part of the units sold in the Company’s initial public offering (the IPO),
for a redemption price of $0.01 per Public Warrant (the Redemption Price), that remained outstanding on September 2, 2020 (the Redemption
Date). Warrants to purchase common stock that were issued under the Warrant Agreement in a private placement simultaneously with the IPO
and still held by the initial holders thereof or their permitted transferees were not subject to this redemption.
Under the terms of the Warrant Agreement, the Company was entitled to redeem all of the outstanding Public Warrants if the last
sales price of the Company’s Class A Common Stock was at least $18.00 per share on each of twenty trading days within any thirty-day
trading period ending on the third trading day prior to the date on which a notice of redemption is given. At the direction of the Company, the
Warrant Agent delivered a notice of redemption to each of the registered holders of the outstanding Public Warrants.
In addition, in accordance with the Warrant Agreement, the Company elected to require that, upon delivery of the notice of
redemption, all Public Warrants were to be exercised only on a "cashless basis.” Accordingly, holders were no longer able to exercise Public
Warrants and receive common stock in exchange for payment in cash of the $11.50 per warrant exercise price. Instead, a holder exercising a
Public Warrant was deemed to pay the $11.50 per warrant exercise price by the surrender of 0.6144 of a share of common stock (such fraction
determined as described below) that such holder would have been entitled to receive upon a cash exercise of a Public Warrant. Accordingly,
by virtue of the cashless exercise of the Public Warrants, exercising warrant holders received 0.3856 of a share of common Stock for each
Public Warrant surrendered for exercise. Any Public Warrants that remained unexercised on the Redemption Date were voided and no longer
exercisable, and the holders will have no rights with respect to those Public Warrants, except to receive the Redemption Price.
The number of shares of Class A Common Stock that each exercising warrant holder received by virtue of the cashless exercise
(instead of paying the $11.50 per Public Warrant cash exercise price) was calculated in accordance with the terms of the Warrant Agreement
and was equal to the quotient obtained by dividing (x) the product of the number of shares underlying the Public Warrants held by such
warrant holder, multiplied by the difference between $18.7175, the average last sale price of the Company’s Class A Common Stock for the ten
trading days ending on July 29, 2020, the third trading day prior to the date of the redemption notice (the Fair Market Value) and $11.50, by (y)
the Fair Market Value. If any holder of Public Warrants would, after taking into account all of such holder’s Public Warrants exercised at one
time, be entitled to receive a fractional interest in a share of common stock, the number of shares the holder was entitled to receive was
rounded down to the nearest whole number of shares. During the year ended December 31, 2020, 2,285,410 Public Warrants were redeemed
resulting in the issuance of 881,239 shares of Class A Common Stock. As a result of these transactions, there are no Public Warrants
outstanding.
Contingent Consideration Common Shares
Pursuant to the Merger Agreement, the former owners of AdaptHealth Holdings who received Class A Common Stock and Class B
Common Stock in connection with the Business Combination are entitled to receive earn-out consideration to be paid in the form of Class A
Common Stock, if the average price of the Company’s Class A Common Stock for the month of December prior to each measurement date
equals or exceeds certain hurdles set forth in the Merger Agreement (Contingent Consideration Common Shares). The former owners of
AdaptHealth Holdings are entitled to receive up to an additional 1,000,000 shares of Class A Common Stock on each of December 31, 2020,
2021 and 2022 (each a measurement date) and such average stock price hurdles are $15, $18 and $22 at each measurement date, respectively.
The Contingent Consideration Common Shares would be issued immediately in the event of a change of control as defined in the Merger
Agreement. The estimated fair value of the Contingent Consideration Common Shares is recorded as a liability in the Company’s consolidated
balance sheet, with such fair value reclassed to stockholders’ equity upon the issuance of any shares that are earned. Prior to issuance, the
change in the estimated fair value of such shares each period is recognized as a non-cash charge in the Company’s consolidated statements of
operations. The average stock price of the Company’s Class A Common Stock was greater than $15 per share for the
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
applicable measurement period as of the December 31, 2020 measurement date, which triggered the issuance of 1,000,000 Contingent
Consideration Common Shares at such date.
A reconciliation of the changes in the contingent consideration common share liability related to the Contingent Consideration
Common Shares during the year ended December 31, 2020 was as follows (in thousands):
Estimated fair value of contingent consideration common shares liability at December 31, 2019
Change in estimated fair value of the contingent consideration common shares liability
Reclassification of contingent consideration common shares liability to equity
Estimated fair value of contingent consideration common shares liability at December 31, 2020
$
$
9,316
98,717
(37,556)
70,477
The total estimated fair value of the contingent consideration common shares liability at December 31, 2020 is classified as a current
liability ($36.9 million) and long-term liability ($33.6 million) in the Company’s consolidated balance sheet as of such date based on the
estimated issuance dates of such shares.
The increase in the estimated fair value of the contingent consideration common shares liability of $98.7 million during the year ended
December 31, 2020 was recorded as a non-cash charge in the Company’s consolidated statements of operations during such period. As
discussed above, during the year ended December 31, 2020, 1,000,000 shares of Class A Common Stock were issued in connection with a
portion of the Contingent Consideration Common Shares which were earned. As a result, the estimated fair value related to such shares of
$37.6 million at December 31, 2020 was reclassified to stockholders’ equity, resulting in the shares being reflected as issued and outstanding
Class A Common Stock at a par value of $0.0001 per share, and the incremental fair value amount was recorded as an increase to additional
paid-in capital.
Refer to Note 20, Quarterly Financial Information (Unaudited), for additional discussion of the correction of certain of the
Company’s previously issued unaudited quarterly condensed consolidated financial information related to the accounting for the Contingent
Consideration Common Shares.
Equity-based Compensation
On November 7, 2019, the stockholders of the Company approved the AdaptHealth Corp. 2019 Stock Incentive Plan (the 2019 Plan),
effective upon closing of the Business Combination. In connection with the 2019 Plan, the Company provides equity-based compensation to
attract and retain employees while also aligning employees’ interest with the interests of its stockholders. The 2019 Plan permits the grant of
various equity-based awards to selected employees and directors. The 2019 Plan permits the grant of up to 8,000,000 shares of Class A
Common Stock, subject to certain adjustments and limitations.
The following awards were granted in connection with the 2019 Plan during the years ended December 31, 2020 and 2019.
Stock Options
In November 2019, the Company granted 3,416,666 options to purchase shares of Class A Common Stock of the Company to certain
senior management employees that have an exercise price of $11.50 per share and a contractual exercise period of ten years from the date of
grant. The grant-date fair value of the awards, using a Black-Scholes option pricing model, was $7.2 million. In April 2020, the Company
granted 47,335 options to purchase shares of Class A Common Stock of the Company to an employee that have an exercise price of $16.25 per
share. The grant-date fair value of the awards, using a Black-Scholes option pricing model, was $0.3 million. The vesting conditions relating to
the total 3,464,001 options included a defined performance condition with a measurement period during the year ended December 31, 2020, and
also a service condition. The performance condition was satisfied, resulting in 1,154,667
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
options vesting on December 31, 2020. The remaining unvested options are eligible to vest based on the satisfaction of a service condition,
with 1,154,667 eligible to vest on each of December 31, 2021 and 2022, subject to the employees’ continuous employment through the
applicable vesting date. The Company has no other options outstanding as of December 31, 2020.
The assumptions used to determine the grant-date fair value of the stock options granted during the years ended December 31, 2020
and 2019 were as follows:
Expected volatility
Risk-free interest rate
Expected term
Dividend yield
Restricted Stock
Year Ended December 31,
2020
40.7 %
0.4 %
6.0 years
N/A
2019
35.9 %
1.7 %
6.0 years
N/A
During the year ended December 31, 2020, the Company granted the following shares of restricted stock:
● 969,583 shares to various employees and non-employee directors, which primarily vest ratably over the three and four-year
periods following the grant dates, subject to the employees’ continuous employment through the applicable vesting date. The
grant-date fair value of these awards was $18.3 million.
● 850,219 shares to various employees which vest based on certain performance conditions, subject to the employees’ continuous
employment through the applicable vesting dates. The grant-date fair value of these awards was $16.3 million.
● 300,000 shares to an employee in conjunction with an acquisition. Of the total shares granted, 250,000 were eligible to vest based
on certain performance conditions, subject to the employee's continuous employment through the applicable vesting date. The
remaining 50,000 shares were scheduled to vest 25% annually on December 31, 2020 through 2023, subject to the employee's
continuous employment through the applicable vesting date. The grant-date fair value of the award was $4.9 million. During
2020, the employee terminated from the Company, and at the termination date 125,000 shares vested pursuant to the terms of the
original grant agreement and the Company accelerated the vesting of an additional 50,000 shares, and the remaining 125,000
shares were forfeited. The Company recorded equity-compensation expense of $3.9 million during the year ended December 31,
2020 in connection with the vested shares, including the shares in which vesting was accelerated.
During the year ended December 31, 2019, the Company granted the following shares of restricted stock:
● 410,000 shares to certain executive officers, with one-third of the shares eligible to vest on each of December 31, 2020, 2021 and
2022 based on a certain market condition, subject to the employee’s continuous employment with the Company through such
vesting date. The grant-date fair value of the awards, using a Monte Carlo simulation analysis, was $1.2 million. Based on the
outcome of the market condition as of the December 31, 2020 measurement date, 136,667 shares vested on such date.
● 491,250 shares to various employees and non-employee directors, which primarily vest ratably over the four-year period
following the grant date, subject to the employee’s continuous employment through the applicable vesting date. The grant-date
fair value of these awards was $4.0 million.
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Activity related to the Company’s non-vested restricted stock grants for the years ended December 31, 2020 and 2019 is presented
below (in thousands, except per share data):
Non-vested balance at December 31, 2018
Granted
Non-vested balance at December 31, 2019
Granted
Vested
Forfeited
Non-vested balance at December 31, 2020
Incentive Units
Number of Shares of
Restricted Stock
Weighted-Average Grant Date
Fair Value per Share
—
901
$
901 $
$
$
$
$
2,120
(541)
(232)
2,248
—
5.83
5.83
18.60
10.78
15.97
15.60
AdaptHealth Holdings granted Incentive Units in June 2019 (the 2019 Incentive Units) and in April 2018 (the 2018 Incentive Units) to
certain members of management. The Incentive Units were intended to constitute profits interests and were granted for purposes of enabling
such individuals to participate in the long-term growth and financial success of the Company and were issued in exchange for services to be
performed. With respect to the 2019 Incentive Units, 50% of the awards were scheduled to vest in equal annual installments on each of the
first four anniversaries of the Vesting Commencement Date as defined in the agreements (May 20, 2019). The first 25% of this portion of the
2019 Incentive Units vested in May 2020, and in January 2021, the vesting of the remaining unvested units associated with this portion of the
2019 Incentive Units was accelerated. The remaining 50% had vesting terms based upon a performance condition. In connection with the
Business Combination, the vesting condition for this portion of the 2019 Incentive Units was changed to vest quarterly during the one-year
period subsequent to the Closing of the Business Combination, and as such all of units associated with this portion of the 2019 Incentive
Units vested as of December 31, 2020. The grant date fair value of the 2019 Incentive Units and the 2018 Incentive Units, as calculated under
an Option Pricing Method, was $4.5 million and $5.3 million, respectively. In conjunction with the March 2019 Recapitalization Transactions,
the vesting of certain of the 2018 Incentive Units was accelerated and all holders of the 2018 Incentive Units received an advance for future
distribution, which was treated as a modification of the awards for accounting purposes. In conjunction with the Business Combination, the
vesting of the remaining unvested 2018 Incentive Units was accelerated. The 2019 Incentive Units and the 2018 Incentive Units were
converted into members’ interests prior to the Closing of the Business Combination.
The assumptions used to determine the grant-date fair value of the 2019 Incentive Units was as follows:
Expected volatility (1)
Risk-free interest rate (2)
Expected term (3)
Discount for lack of marketability (4)
40.0 %
2.0 %
1.5 years
25.0 %
(1)
(2)
(3)
(4)
The expected volatility is derived from the asset volatilities of comparable public companies.
The risk-free interest rate is obtained from Standard and Poor’s Capital IQ, and represents the yield on a treasury note as of the
valuation date with the maturity matching the expected term.
The expected term is based on management’s estimate.
The discount for lack of marketability is based on put option analyses using similar timing inputs.
In connection with the Business Combination, certain members of management were awarded shares of the Company’s Class A
Common Stock for services performed. The fair value of these immediately vested shares was $3.2
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
million and was recognized as equity-based compensation expense on the grant date during the year ended December 31, 2019.
During the years ended December 31, 2020 and 2019, the Company granted 57,069 and 36,480 fully vested shares of Class A Common
Stock to various employees of the Company. These shares had a grant-date fair value of $1.1 million and $0.3 million, respectively, which was
recognized as equity-based compensation expense during the years ended December 31, 2020 and 2019, respectively.
The Company recorded equity-based compensation expense of $18.7 million during the year ended December 31, 2020, of which $10.8
million and $7.9 million is included in general and administrative expenses and cost of net revenue, respectively, in the accompanying
consolidated statements of operations. The Company recognized a $2.1 million reduction to income tax expense for the year ended December
31, 2020 as a result of excess tax benefits associated with equity-based compensation; there were no such amounts recognized during the year
ended December 31, 2019. The Company recorded equity-based compensation expense of $11.1 million during the year ended December 31,
2019, which is included in general and administrative expenses in the accompanying consolidated statements of operations. The expense
during the year ended December 31, 2019 included $2.7 million in connection with the acceleration of vesting of the 2018 Incentive Units and
$2.2 million for the modification of the awards relating to the cash distributions discussed above. At December 31, 2020, there was $29.1 million
of unrecognized compensation expense related to equity-based compensation awards, which is expected to be recognized over a weighted-
average term of 2.8 years. At December 31, 2020, approximately 1.7 million shares of the Company’s Class A Common Stock are available for
issuance under the 2019 Plan.
(12) Earnings (Loss) Per Share
The Business Combination was accounted for as a reverse recapitalization by which AdaptHealth Holdings issued stock for the net
assets of the Company accompanied by a recapitalization. Earnings per share (EPS) has been recast for all historical periods to reflect the
Company’s capital structure for all comparative periods.
EPS is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period on
a basic and diluted basis. The Company calculates diluted earnings per share using the more dilutive of the treasury stock method and the
two-class method after giving effect to all potential dilutive common stock.
The Company’s potentially dilutive securities include potential common shares related to outstanding warrants, contingent
consideration shares, unvested restricted stock, outstanding stock options and outstanding preferred stock. Refer to Note 11, Stockholders’
Equity, for additional discussion of these potential dilutive securities.
Diluted EPS considers the impact of potentially dilutive securities except when the potential common shares have an antidilutive
effect. The Company’s outstanding preferred stock are considered participating securities, thus requiring the two-class method of computing
EPS. Calculation of EPS under the two-class method excludes from the numerator any dividends paid or owed on participating securities and
any undistributed earnings considered to be attributable to participating securities. The related participating securities are similarly excluded
from the denominator.
Computations of basic and diluted EPS were as follows based on the weighted average number of common shares outstanding for
the period subsequent to the transactions that occurred in connection with the Business Combination (in thousands, except per share data):
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Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Numerator
Net loss attributable to AdaptHealth Corp.
Less: Earnings allocated to participating securities (1)
Basic and diluted earnings - Net loss attributable to AdaptHealth Corp. after allocation to participating
securities
Denominator (1), (2)
Basic and diluted weighted-average common shares outstanding
Basic and diluted loss per share
Year Ended December 31,
2020
2019
(64,481)
—
(64,481)
$
$
(17,062)
—
(17,062)
52,488
22,557
(1.23)
$
(0.76)
$
$
$
(1) The Company's preferred stock are considered participating securities. Calculation of EPS under the two-class method excludes from
the numerator any dividends paid or owed on participating securities and any undistributed earnings considered to be attributable to
participating securities. The related participating securities are similarly excluded from the denominator. There were participating
securities outstanding for the year ended December 31, 2020. There were no participating securities outstanding for the year ended
December 31, 2019. There was no amount allocated to the participating securities during the year ended December 31, 2020 due to the
net loss recorded in that period.
(2) The number of shares in the diluted loss per share calculation for the years ended December 31, 2020 and 2019 are the same as the
number of shares used in the basic loss per share calculation and therefore exclude the effect of potential dilutive securities as their
inclusion would have been anti-dilutive due to the net loss recorded in those periods.
.
(13) Capital Lease Obligations
The Company has acquired patient medical equipment and supplies, and office equipment through multiple capital leases. The capital
lease obligations represent the present value of minimum lease payments under the respective agreement, payable monthly at various interest
rates. Interest expense related to capital leases was $0.1 million and $0.2 million for the years ended December 31, 2020 and 20219, respectively.
As of December 31, 2020, future annual minimum payments required under lease obligations are as follows (in thousands):
Twelve months ending December 31,
2021
2022
2023
Total
Less amount representing interest
Current portion
Long-term portion
$
$
22,390
797
144
23,331
(182)
23,149
(22,282)
867
At December 31, 2020 and 2019, equipment under capital leases consisted of patient equipment with a cost basis of approximately
$43.3 million and $39.1 million, respectively, and accumulated depreciation of approximately $13.0 million and $11.7 million, respectively.
Depreciation expense for equipment purchased under capital leases is primarily included in cost of net revenue in the accompanying
consolidated statements of operations.
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(14) Lease Commitments
ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
The Company leases its office facilities and office equipment under noncancelable lease agreements which expire at various dates
through March 2033. Some of these lease agreements include an option to renew at the end of the term. The Company also leases certain
patient medical equipment with such leases set to expire at various dates through May 2022. The Company also leases certain office facilities
on a month to month basis. In some instances, the Company is also required to pay its pro rata share of real estate taxes and utility costs in
connection with the premises. Some of the leases contain fixed annual increases of minimum rent. Accordingly, the Company recognizes rent
expense on a straight-line basis and records the difference between the recognized rent expense and the amount payable under the lease as
deferred rent. The deferred rent recorded in accounts payable and accrued expenses on the accompanying consolidated balance sheets at
December 31, 2020 and 2019 was $1.4 million and $1.1 million, respectively. The Company recorded rent expense of $16.8 million and $10.3
million for the years ended December 31, 2020 and 2019, respectively. These amounts are primarily included in cost of net revenue in the
accompanying consolidated statements of operations.
The minimum annual lease commitments under noncancelable leases with initial or remaining terms in excess of one year as of
December 31, 2020 are as follows (in thousands):
Twelve months ending December 31,
2021
2022
2023
2024
2025
Thereafter
Total minimum payments required (a)
$
$
18,403
14,893
11,788
9,055
5,960
15,646
75,745
(a) Minimum payments have not been reduced by minimum sublease rentals of $1.9 million due in the future under noncancelable
subleases.
.
(15) Retirement Plans
At December 31, 2020 and 2019, the Company has a single consolidated retirement plan (the AdaptHealth Plan) which includes its
subsidiaries’ 401(k) plans with one exception: the Royal Homestar 401(k) plan is administered by a noncontrolling interest. The AdaptHealth
Plan allows employees to contribute up to the annual limitation imposed by the Internal Revenue Code. Beginning on January 1, 2020, the
Company makes matching contributions to the AdaptHealth Plan. The Company, at its discretion, may make matching contributions to the
Royal Homestar 401(k) plan. During the year ended December 31, 2020, the Company recorded matching contribution expense of $1.5 million
related to the AdaptHealth Plan. The Company recorded an immaterial amount of matching contribution expense for the Royal Homestar 401(k)
plan during the years ended December 31, 2020 and 2019.
(16) Self-Insured Plans
The Company was self-insured for its employees’ medical, auto and workers’ compensation claims during 2020 and 2019. The
Company purchased medical stop loss insurance that covers the excess of each specific loss over $175,000 in 2020 and 2019, and aggregate
losses that exceed the greater of the calculated aggregate stop loss threshold or the minimum aggregate stop loss threshold. In 2020 and 2019,
the Company purchased workers’ compensation stop loss insurance which has occurrence-based limits that vary by state based on statutory
rules. The Company is subject to an aggregate annual limit. Self-insurance reserves include estimates of both known claims filed and estimates
of claims incurred but not reported (IBNR). The Company uses historical paid claims information to estimate its claims liability.
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
The liability for IBNR was $3.5 million and $1.2 million as of December 31, 2020 and 2019, respectively. This liability is included within accounts
payable and accrued expenses in the accompanying consolidated balance sheets.
(17) 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. 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 judgement is required to determine both probability and the
estimated amount. The Company reviews 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 accrual related to lawsuits, claims, investigations and
proceedings.
In connection with the Company’s acquisition of PPS HME Holdings LLC (PPS), in May 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 the Office of Inspector General of the U.S. Department of Health and Human Services (OIG). The CIA has a five-year term which expires in
April 2022. In connection with the acquisition and integration of PPS by AdaptHealth, 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 other AdaptHealth affiliate are subject to the
requirements of the CIA following the acquisition. On January 17, 2021, the OIG notified PPS that its report for the period ended March 31,
2020 had been accepted and PPS had satisfied its obligations under the CIA as of such date.
(18) Related Party Transactions
The Company has an outstanding note payable with a principal balance of $143.5 million with an investor who also has equity
ownership in the Company (see Note 10, Debt).
The Company and two of its executive officers and shareholders own an equity interest in a vendor of the Company that provides
automated order intake software. Each individual’s equity ownership is less than 1%. The expense related to this vendor was $2.6 million and
$2.0 million for the years ended December 31, 2020 and 2019, respectively. The Company accounts for this investment under the cost method
of accounting based on its level of equity ownership.
On December 31, 2014, an executive of AdaptHealth Holdings borrowed approximately $1.0 million to acquire membership interests in
AdaptHealth Holdings, which was recorded as a reduction to members’ equity at that time. The principal was due in full at maturity on
December 31, 2021. Monthly payments were due of interest only at a rate of 1.9% per annum starting in February 2015. As part of the
transactions completed in connection with the Business Combination, the loan was forgiven, resulting in an expense of approximately $1.0
million, which is included in general and administrative expenses in the accompanying statements of operations during the year ended
December 31, 2019.
(19) Income Taxes
On January 2, 2021, the Company completed a corporate restructuring to simplify its tax structure (the Tax Restructuring). In
connection with the Tax Restructuring, on January, 1, 2021, all remaining outstanding shares of Class B Common Stock, together with a
corresponding number of New AdaptHealth Units, were exchanged for shares of Class A Common Stock. After these exchanges, AdaptHealth
Holdings filed an entity classification election with the Internal Revenue Service, electing to be treated as a taxable corporation for U.S. federal
income tax purposes effective January 2, 2021. See Note 21, Subsequent Events, for additional disclosures regarding the Tax Restructuring.
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
As a result of the Business Combination and prior to the Tax Restructuring, the Company was subject to U.S. federal, state, and local
income taxes with respect to its allocable share of any taxable income or loss of AdaptHealth Holdings. AdaptHealth Holdings was treated as
a partnership for U.S. income tax purposes and generally did not pay income taxes in most jurisdictions. Instead, AdaptHealth Holdings’
taxable income or loss was passed through to its members, including the Company. Additionally, the Company was subject to U.S. federal,
state, and local income taxes on the taxable income or loss of the underlying C-corporations in the AdaptHealth group where taxes are paid at
the entity level. As a result of the Tax Restructuring, the Company is subject to U.S. federal, state, and local income taxes on materially all of its
earnings.
The current and deferred income tax expense (benefit) for the years ended December 31, 2020 and 2019 is as follows (in thousands):
Current:
Federal
State
Deferred:
Federal
State
Total income tax (benefit) expense
Year Ended December 31,
2020
2019
$
$
5,608 $
3,538
9,146
(16,587)
(4,514)
(21,101)
(11,955) $
(961)
1,222
261
371
107
478
739
A reconciliation of the effective income tax rate with the applicable statutory federal income tax rate for the years ended December 31,
2020 and 2019 is as follows:
Federal tax at statutory rate
Non-taxable income
State income taxes, net of federal benefit
Change in valuation allowance
Change in fair value of contingent consideration
Deferred adjustments
Other
Effective income tax rate
114
Year Ended December 31,
2020
2019
21.0 %
(0.1)%
4.0 %
(1.2)%
(12.9)%
5.0 %
1.0 %
16.8 %
21.0 %
(36.9)%
(7.4)%
5.1 %
(1.6)%
14.4 %
0.2 %
(5.2)%
Table of Contents
ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Deferred income tax assets and liabilities are comprised of the following at December 31, 2020 and 2019 (in thousands):
December 31,
2020
2019
Deferred income tax assets:
Accounts receivable
Goodwill and intangible assets
Investment in partnership
Inventory
Accruals
Net operating losses and credits
Charitable contribution
Start-up / organizational costs
AMT credit
Contract liabilities
Equity-based compensation
Excess business interest expense
Contingent consideration
Capital losses
Total deferred income tax assets
Valuation allowance
Net deferred income tax assets
Deferred income tax liabilities:
Equipment and other fixed assets
Total deferred income tax liabilities
Noncurrent net deferred income tax assets
$
$
$
$
$
4,276
3,920
178,978
24
693
12,454
—
475
—
255
558
563
9,978
813
212,987
(1,536)
211,451
$
$
(3,052)
(3,052)
208,399
$
3,189
4,805
41,745
61
250
3,495
17
509
208
—
—
—
417
—
54,696
(22,503)
32,193
(4,271)
(4,271)
27,922
Deferred income taxes are determined based on the temporary differences between the financial statement book basis and the tax
basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. In assessing the
realizability of deferred income tax assets, management considers whether it is more likely than not that all, or some portion, of the deferred
income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred
income tax liabilities and projected future taxable income in making this assessment. Management evaluates the need for valuation allowances
on the deferred income tax assets according to the provisions of FASB ASC 740, Income Taxes. In making this determination, management
assesses all available evidence, both positive and negative, available at the time balance sheet date. This includes, but is not limited to, recent
earnings, internally prepared income projections, and historical financial performance. A history of cumulative losses is a significant piece of
negative evidence used in the assessment. As of December 31, 2020, and 2019, the Company had a valuation allowance recorded against net
deferred tax assets of $1.5 million, and $22.5 million, respectively.
As of December 31, 2020, and 2019, the Company had federal net operating losses (NOLs) carryforwards of $49.6 million and $10.3
million, respectively. As of December 31, 2020, and 2019, the Company had state NOLs of $29.4 million. and $21.9 million respectively. Federal
NOLs generated after December 31, 2017 do not expire and the state rules vary by state. Of the Company’s total federal NOLs, $3.9 million were
acquired as part of the acquisition of Pinnacle and begin expiring in 2031. Due to NOL limitation rules, the Company believes that
approximately $3.4 million of these NOLs will expire before utilization and has recorded a valuation allowance accordingly. The remaining
federal NOLs of $45.7 million were generated after December 31, 2017 and are not subject to expiration. As of December 31, 2020, the Company
had capital loss carryforwards of $3.1 million that are subject to expiration in 2026.
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
The Company does not anticipate utilizing these carryforwards prior to expiration and has recorded a valuation allowance accordingly.
The Company will recognize a tax benefit in the financial statements for an uncertain tax position only if management’s assessment is
that the position is "more likely than not” (i.e., a likelihood greater than 50 percent) to be allowed by the tax jurisdiction based solely on the
technical merits of the position. The term "tax position” refers to a position in a previously filed tax return or a position expected to be taken in
a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for financial reporting purposes.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the year ended December 31, 2020 is as follows
(in thousands). There was no activity related to unrecognized tax benefits during the year ended December 31, 2019.
Balance, December 31, 2019
Additions for tax positions taken in 2020
Additions for tax positions in prior periods
Additions for tax positions acquired
Reductions for tax positions in prior periods
Reductions due to settlements
Reductions due to lapse of statute of limitations
Balance, December 31, 2020
$
$
—
—
—
1,947
—
—
—
1,947
The unrecognized tax benefit of $1.9 million at December 31, 2020 relates to a tax position taken in a pre-closing tax period of a
company acquired in 2020, for which the Company received a tax indemnification against any losses. As such, the Company recognized a
corresponding asset on its balance sheet and no amount of the Company’s uncertain tax positions, if recognized, would impact the effective
tax rate of the Company. As of December 31, 2020, the Company’s accrued liability for interest and penalties is $0.9 million; there was no such
accrual at December 31, 2019.
The Company files income tax returns in the U.S. federal jurisdiction and in various state jurisdictions. The Company generally is no
longer subject to U.S. or state examinations by tax authorities for taxable years prior to 2016, based on the U.S. statute of limitations. However,
net operating losses utilized from prior years in subsequent years’ tax returns are subject to examination until three years after the filing of
subsequent years’ tax returns.
Tax Receivable Agreement
Prior to the Tax Restructuring, the owners of AdaptHealth Holdings had the right to exchange their New AdaptHealth Units for
shares of Class A Common Stock of the Company. As a result of such exchanges, the Company’s membership interest in AdaptHealth
Holdings increased and its purchase price was reflected in its share of the tax basis of AdaptHealth Holdings’ tangible and intangible assets.
Any resulting increases in tax basis were likely to increase tax depreciation and amortization deductions and, therefore, reduce the amount of
income tax the Company would otherwise be required to pay in the future. Any such increase also decreased gain (or increased loss) on future
dispositions of the affected assets. At the closing of the Business Combination, there were exchanges of 3,480,466 New AdaptHealth Units
resulting in approximately $33.6 million of amortizable IRC Section 754 tax basis step-up in the tax-deductible goodwill of AdaptHealth
Holdings. Subsequent to the Business Combination and through December 31, 2020, there were an additional 18,717,547 exchanges of New
AdaptHealth Units that increased the amortizable IRC Section 754 tax basis step-up of tax-deductible goodwill by approximately $491.7 million,
of which $485.7 million and $6.0 million was recorded during the years ended December 31, 2020 and 2019, respectively. Of these exchanges,
18,167,547 and 550,000 occurred during the years ended December 31, 2020 and 2019, respectively.
116
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
At the closing of the Business Combination, the Company and AdaptHealth Holdings entered into a Tax Receivable Agreement
(TRA) with certain sellers and AdaptHealth Holdings members. The TRA will generally provide for the payment by the Company to the
corresponding sellers and AdaptHealth Holdings members of 85% of the net cash savings, if any, in U.S. federal, state and local income tax
that the Company actually realizes (or is deemed to realize in certain circumstances) in periods after the closing of the Business Combination
as a result of: (i) certain tax attributes of the corresponding sellers existing prior to the Business Combination; (ii) certain increases in tax basis
resulting from exchanges of New AdaptHealth Units and shares of Class B Common Stock; (iii) imputed interest deemed to be paid by the
Company as a result of payments it makes under the TRA; and (iv) certain increases in tax basis resulting from payments the Company makes
under the TRA. Under the TRA, the benefits deemed realized by the Company as a result of the increase in tax basis attributable to the
AdaptHealth Holdings members generally will be computed by comparing the actual income tax liability of the Company to the amount of such
taxes that the Company would have been required to pay had there been no so increase in tax basis.
Estimating the amount of payments that may be made under the TRA depends on a variety of factors. The actual increase in tax basis
and deductions, as well as the amount and timing of any payments under the TRA, will vary depending upon several factors, including:
● The timing of such exchanges – for instance, the increase in any tax deductions will vary depending on the fair value of the
depreciable or amortizable assets of AdaptHealth Holdings at the time of each exchange, which fair value may fluctuate over time;
● The price of the Company’s Class A Common Stock at the time of the exchange – the increase in any tax deductions, and the tax
basis increase in other assets of AdaptHealth Holdings is directly proportional to the price of the Company’s Class A Common Stock
at the time of the exchange;
● The amount and timing of the Company’s income – the Company is required to pay 85% of the deemed benefits as and when deemed
realized. If AdaptHealth Holdings does not have taxable income, the Company is generally not required (absent a change in control
or circumstances requiring an early termination payment) to make payments under the TRA for that taxable year because no benefit
will have been realized. However, any tax benefits that do not result in realized benefits in a given tax year likely will generate tax
attributes that may be utilized to generate benefits in previous or future tax years. The utilization of such tax attributes will result in
payments under the TRA; and
● Future tax rates of jurisdictions in which the Company has tax liability.
The TRA also provides that upon certain mergers, asset sales, other forms of business combinations or other changes of control,
AdaptHealth Holdings’ (or its successor’s) obligations under the TRA would be based on certain assumptions defined in the TRA. As a
result of these assumptions, AdaptHealth could be required to make payments under the TRA that are greater or less than the specified
percentage of the actual benefits realized by the Company that are subject to the TRA. In addition, if AdaptHealth Holdings elects to terminate
the TRA early, it would be required to make an early termination payment, which upfront payment may be made significantly in advance of the
anticipated future tax benefits.
Payments generally are due under the TRA within a specified period following the filing of AdaptHealth Holdings’ U.S. federal and
state income tax returns for the taxable year with respect to which the payment obligation arises. Payments under the TRA generally will be
based on the tax reporting positions that AdaptHealth Holdings will determine. Although AdaptHealth Holdings does not expect the Internal
Revenue Service (IRS) to challenge the Company’s tax reporting positions, AdaptHealth Holdings will not be reimbursed for any
overpayments previously made under the TRA, but instead the overpayments will reduce future payments. As a result, in certain
circumstances, payments could be made under the TRA in excess of the benefits that AdaptHealth Holdings realizes in respect of the tax
attributes subject to the TRA.
117
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
The term of the TRA generally will continue until all applicable tax benefits have been utilized or expired, unless the Company
exercises its right to terminate the TRA and make an early termination payment.
In certain circumstances (such as certain changes in control, the election of the Company to exercise its right to terminate the
agreement and make an early termination payment or an IRS challenge to a tax basis increase) it is possible that cash payments under the TRA
may exceed actual cash savings.
During the year ended December 31, 2020, the Company increased its TRA liability through an aggregate $140.4 million reduction in
additional-paid-in capital resulting from additional exchanges of New AdaptHealth Units and shares of Class B Common Stock.
Correspondingly, during the year ended December 31, 2020, the Company increased its deferred tax asset by $165.2 million through an increase
in additional-paid-in-capital resulting from these exchanges.
At December 31, 2020 and 2019, the Company recorded a liability relating to the TRA of approximately $152.0 million and $10.8 million,
respectively, which is included in other long-term liabilities in the accompanying consolidated balance sheets.
(20) Quarterly Financial Information (Unaudited)
Correction of Previously Issued Unaudited Quarterly Condensed Consolidated Financial Information for Errors in the Accounting
for Contingent Consideration Common Shares
As a result of the corrections relating to the accounting for the Contingent Consideration Common Shares discussed in Note 2 (a),
Basis of Presentation, the Company has corrected its previously disclosed unaudited condensed consolidated statements of operations for
the three months ended March 31, 2020, and the three month and year-to-date periods ended June 30, 2020 and September 30, 2020, and the
unaudited condensed consolidated balance sheets as of March 31, 2020, June 30, 2020 and September 30, 2020. Specifically, the Company
reevaluated the accounting treatment of the previously disclosed Contingent Consideration Common Shares issuable in connection with the
Business Combination. Due to the fact that the issuance of the Contingent Consideration Common Shares would be accelerated on a change
of control regardless of the transaction value, the Company has corrected the previously identified unaudited condensed consolidated
statements of operations and unaudited condensed consolidated balance sheets in order to account for such shares as liability-classified,
instead of equity-classified as previously presented. Accordingly, the previously identified unaudited condensed consolidated balance sheets
have been restated to reflect the fair value of the Contingent Consideration Common Shares as a liability and to reflect the related deferred tax
asset impact, and the Company’s unaudited condensed consolidated statements of operations have been restated to include a non-cash
charge for the change in the fair value of such liability and to reflect the related deferred tax expense impact. The Company has assessed the
applicable guidance issued by the SEC and the FASB and concluded that these errors in the aforementioned 2020 quarterly and year-to-date
periods were material to the Company’s previously issued unaudited interim condensed consolidated financial information for the applicable
interim periods included in the Company’s Quarterly Reports on Form 10-Q and as such are described as restated, with the exception of the
Company’s unaudited condensed consolidated statement of operations for the three months ended June 30, 2020 for which the impact was not
material. The restatement of the Company’s aforementioned 2020 quarterly unaudited condensed consolidated financial information described
above had no impact on the Company’s historical reported net revenues, operating income, or cash flows from operating activities, investing
activities, and financing activities for any period.
The restatement of the Company’s previously issued unaudited condensed consolidated financial information for the three months
ended March 31, 2020, six months ended June 30, 2020, and the three and nine months ended September 30, 2020, will be affected in
connection with the Company’s quarterly filings for the quarters ending March 31, June 30, and September 30, 2021, respectively.
118
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
The impacts of these corrections to the aforementioned 2020 quarterly and year-to-date periods are as follows (in thousands, except
per share data):
March 31, 2020
June 30, 2020
As Reported As Restated As Reported As Restated As Reported As Restated
September 30, 2020
Consolidated Balance Sheets:
Deferred tax assets
Total Assets
Contingent consideration common shares liability - current portion
Long-term portion of contingent consideration common shares
liability
Total Liabilities
Additional paid-in capital
Accumulated deficit
Total stockholders' equity (deficit) attributable to AdaptHealth Corp.
Total stockholders' equity (deficit)
$
$
$
$
$
$
$
$
$
33,519 $
661,839 $
— $
36,684 $
665,004 $
10,293 $
42,304 $
739,309 $
— $
— $
691,285 $
21,845 $
(27,368) $
(10,655) $
(29,446) $
15,390 $
716,968 $
15,012 $
(43,053) $
(33,173) $
(51,964) $
— $
746,103 $
37,614 $
(23,335) $
8,491 $
(6,794) $
51,114 $
45,462 $
58,557
742,467 $ 1,548,826 $ 1,556,269
21,465
10,604 $
— $
— $
15,037 $
29,701
771,744 $ 1,109,111 $ 1,160,277
470,028
30,781 $
(38,985) $
(60,020)
404,907
(13,992) $
395,992
(29,277) $
476,861 $
(23,130) $
448,630 $
439,715 $
Three Months Ended March 31, 2020
As Reported
As Restated
Three Months Ended June 30, 2020
As Revised
As Reported
Six Months Ended June 30, 2020
As Restated
As Reported
Consolidated Statements of
Operations:
Change in fair value of contingent
consideration common shares liability $
$
Income tax expense (benefit)
Net income (loss)
$
Net income (loss) attributable to
AdaptHealth Corp.
Basic earnings (loss) per share
attributable to AdaptHealth Corp.
Diluted earnings (loss) per share
attributable to AdaptHealth Corp.
$
$
$
— $
$
$
1,107
266
16,367 $
(1,641) $
(13,353) $
(158)
$
(13,777) $
— $
— $
(0.33) $
(0.33) $
— $
$
$
1,819
7,169
4,033
0.09
0.08
$
$
$
(42) $
1,826 $
7,204 $
4,068 $
0.09 $
0.08 $
— $
$
$
2,926
7,435
3,875
0.09
0.08
$
$
$
16,325
185
(6,149)
(9,709)
(0.22)
(0.22)
Three Months Ended September 30, 2020
Nine Months Ended September 30, 2020
As Reported
As Restated
As Reported
As Restated
Consolidated Statements of Operations:
Change in fair value of contingent consideration common shares
$
liability
$
Income tax expense (benefit)
$
Net income (loss)
$
Net income (loss) attributable to AdaptHealth Corp.
Basic earnings (loss) per share attributable to AdaptHealth Corp.
$
Diluted earnings (loss) per share attributable to AdaptHealth Corp. $
(21) Subsequent Events
Tax Restructuring
— $
$
$
$
$
$
(636)
(3,827)
(2,489)
(0.04)
(0.04)
25,525 $
(4,921) $
(25,067) $
(23,729) $
(0.41) $
(0.41) $
— $
$
$
$
$
$
2,290
3,608
1,386
0.03
0.02
41,850
(4,736)
(31,216)
(33,438)
(0.70)
(0.70)
As discussed in Note 19, Income Taxes, on January 2, 2021, the Company completed the Tax Restructuring in order to simplify its tax
structure. In connection with the Tax Restructuring, on January 1, 2021, the remaining outstanding 13.2 million shares of Class B Common
Stock were exchanged for shares of Class A Common Stock. After
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
these exchanges, AdaptHealth Holdings filed an entity classification election with the Internal Revenue Service, electing to be treated as a
taxable corporation for U.S. federal income tax purposes effective January 2, 2021.
Senior Unsecured Note Offering
On January 4, 2021, the Company issued $500.0 million aggregate principal amount of 4.625% senior unsecured notes due 2029 (the
4.625% Senior Notes). The 4.625% Senior Notes will mature on August 1, 2029. Interest on the 4.625% Senior Notes is payable on February 1st
and August 1st of each year, beginning on August 1, 2021. The 4.625% Senior Notes will be redeemable at the Company’s option, in whole or
in part, at any time on or after February 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%, (iii) February 1, 2026 and thereafter is 100.000%, in each case
together with accrued and unpaid interest. The Company may also redeem some or all of the 4.625% Senior Notes before February 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, the Company may redeem up to 40% of the original aggregate principal amount of the 4.625% Senior Notes before
February 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, the Company 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. Borrowings under the 4.625% Senior Notes were
used to partially finance the cash portion of the purchase price for the acquisition of AeroCare Holdings, Inc. (see discussion below), and to
pay related fees and expenses.
Underwritten Public Offering
On January 8, 2021, the Company issued 8,450,000 shares of Class A Common Stock at a price of $33.00 per share pursuant to an
underwritten public offering (the 2021 Stock Offering) for gross proceeds of $278.9 million. In connection with this transaction, the Company
received proceeds of $265.6 million which is net of the underwriting discount. A portion of the proceeds from the 2021 Stock Offering were
used to partially finance the cash portion of the purchase price for the acquisition of AeroCare Holdings, Inc. (see discussion below), and to
pay related fees and expenses.
Debt Refinancing
On January 20, 2021, the Company refinanced its debt borrowings under the 2020 Credit Agreement and entered into a new credit
agreement (the 2021 Credit Agreement). The 2021 Credit Agreement consists of a $700 million term loan (the 2021 Term Loan) and $250 million
in commitments for revolving credit loans with a $55 million letter of credit sublimit (the 2021 Revolver), both with maturities in January 2026.
The borrowing under the 2021 Term Loan requires quarterly principal repayments of $4.375 million beginning June 30, 2021 through March 31,
2023, increasing to $8.75 million beginning June 30, 2023 through December 31, 2025, and the unpaid principal balance is due at maturity in
January 2026. Borrowings under the 2021 Term Loan were used in part to partially finance the cash portion of the purchase price for the
acquisition of AeroCare Holdings, Inc. (see discussion below) and to repay existing amounts outstanding under the 2020 Credit Agreement,
and to pay related fees and expenses. Borrowings under the 2021 Revolver may be used for working capital and other general corporate
purposes, including for capital expenditures and acquisitions permitted under the 2021 Credit Agreement. Amounts borrowed under the 2021
Credit Agreement bear interest quarterly at variable rates based upon the sum of (a) the Adjusted LIBOR Rate (subject to a floor) equal to the
LIBOR (as defined) for the applicable interest period multiplied by the statutory reserve rate, plus (b) an applicable margin (as defined) ranging
from 1.50% to 3.25% per annum based on the Consolidated Senior Secured Leverage Ratio (as defined). The 2021 Revolver carries a
commitment fee during the term of the 2021 Credit Agreement ranging from 0.25% to 0.50% per annum of the average daily undrawn portion of
the 2021 Revolver based on the Consolidated Senior Secured Leverage Ratio.
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ADAPTHEALTH CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Under the 2021 Credit Agreement, the Company is subject to a number of restrictive covenants that, among other things, impose
operating and financial restrictions on the Company. 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.
AeroCare Holdings, Inc. Acquisition
On February 1, 2021, the Company acquired 100% of the equity interests of AeroCare Holdings, Inc. (AeroCare). AeroCare is a
leading national technology-enabled respiratory and home medical equipment distribution platform in the United States and offers a
comprehensive suite of direct-to-patient equipment and services including CPAP and BiPAP machines, oxygen concentrators, home
ventilators, and other durable medical equipment products. The total consideration consisted of (i) a cash payment of approximately $1.1
billion at closing, (ii) the issuance of 13,992,615 shares of the Company’s Class A Common Stock at closing, (iii) the issuance of 130,474.73
shares of the Company’s Series C Convertible Preferred Stock at closing, and (iv) the issuance of 3,959,912 options to purchase shares of the
Company’s Class A Common Stock in the future, which have a weighted-average exercise price of $6.24 per share and a weighted-average
exercise period of approximately 7 years from the date of closing. The cash paid at closing included $17.0 million withheld in escrow to fund
certain potential indemnification matters. The Series C Convertible Preferred Stock liquidation preference is limited to its par value of $0.0001
per share. The Series C Convertible Preferred Stock will participate equally and ratably on an as-converted basis with the holders of Class A
Common Stock in all cash dividends paid on the Class A Common Stock. The Series C Convertible Preferred Stock is non-voting. On March 3,
2021, the Company’s stockholders approved, for purposes of complying with Nasdaq Listing Rule 5635, the issuance of shares of the
Company’s Class A Common Stock, representing equal to or greater than 20% of the outstanding common stock or voting power of the
Company issuable upon conversion of the Series C Convertible Preferred Stock issued to the former equityholders of AeroCare, by removal of
the conversion restriction that prohibits such conversion of Series C Convertible Preferred Stock. Following the receipt of the approval of the
Company’s stockholders, the holders may elect to convert, and the Company may elect to effect a mandatory conversion of, each share of
Series C Convertible Preferred Stock into 100 shares of Class A Common Stock (subject to certain anti-dilution adjustments). The Company
has elected to effect a mandatory conversion of the Series C Convertible Preferred Stock, and the conversion of such shares of Series C
Convertible Preferred Stock to shares of Class A Common Stock is expected to occur on March 19, 2021. As of the date the consolidated
financial statements were available to be issued, the Company was in the process of determining the allocation of the fair value of the
consideration paid to the fair value of the net assets acquired.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officers and principal financial
officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-
15(e) under the Exchange Act) as of the end of the fiscal quarter ended December 31, 2020. Based on this evaluation, our Co-Chief Executive
Officers and Chief Financial Officer have concluded that, during the period covered by this Annual Report, our disclosure controls and
procedures were not effective. As previously disclosed in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2019 (our "2019 Annual Report”), management identified a material weakness in internal control over financial reporting, as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, relating to the timeliness of our review controls over non-routine
transactions (the "Non-routine Transaction Material Weakness”). Additionally, in connection with the preparation of the Company’s
consolidated financial statements for the fiscal year ended December 31, 2020, as it relates to the Non-routine Transaction Material Weakness,
we further identified that, specifically we lacked a sufficient number of professionals with an appropriate level of accounting knowledge,
training, and experience to appropriately analyze, record and disclose accounting matters timely and accurately.
As previously disclosed in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020, management identified a
material weakness in internal control over financial reporting relating to the design and maintenance of certain information technology ("IT”)
general controls for certain information systems and applications that are relevant to the preparation of the financial statements (the "IT
Material Weakness”).
In connection with the preparation of the Company’s consolidated financial statements for the fiscal year ended December 31, 2020,
we identified a material weakness in our internal control over financial reporting relating to the accounts payable process, specifically relating
to the maintenance and approvals of vendors and the invoice approval process (the "Accounts Payable Material Weakness”). The Company
has not identified any fraud or loss relating to such material weakness.
Notwithstanding the identified material weaknesses, management, including our principal executive officers and principal financial
officer, believes the consolidated financial statements included in this Annual Report on Form 10-K fairly represent in all material respects our
financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.
Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act
reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to our management, including our principal executive officers and principal financial officer or
persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Material Weakness Remediation
With respect to the Non-routine Transaction Material Weakness, management continues to be actively engaged to take steps to
remediate such material weakness, including (1) implementing processes to improve overall efficiency and accuracy of accounting and (2)
hiring and continuing to actively seek to hire dedicated and experienced technical resources (including the hiring of a new Chief Accounting
Officer and engaging a third-party consultant to assist management) to strengthen its corporate oversight over financial reporting and
controls associated with non-routine and complex accounting matters. While we have made significant progress, this material weakness
cannot be considered remediated until the enhanced controls have operated effectively for a sufficient period of time.
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With respect to the Accounts Payable Material Weakness, management has actively engaged to take steps to remediate such
material weakness, including (1) implementing new controls with respect to vendor masterfile data review and approval, (2) creating and
communicating new and enhanced policies related to accounts payable processing including formalizing a delegation of authority, and (3)
engaging a third-party consulting firm to assist with the implementation of an enterprise accounts payable system and to assist with the
Company’s invoice processing and payment functions . While we have made significant progress, this material weakness cannot be
considered remediated until the enhanced controls have operated effectively for a sufficient period of time.
Remediation of Previously Reported Material Weaknesses in Internal Control Over Financing Reporting
With respect to the IT Material Weakness, specifically, we did not maintain user access controls to ensure appropriate segregation of
duties that adequately restrict user and privileged access to financial applications, programs, and data to appropriate Company personnel. As
a result, process-level controls that are dependent upon information derived from these IT applications, programs, and data were also
determined to be ineffective. We have remediated this material weakness by hiring dedicated and experienced information technology
technical resources, modifying system access rights to re-assign privileged access rights to non-business user IT personnel and limiting the
use of generic IDs, particularly in instances where those IDs possess privileged access rights, and implementing routine reviews of user
system access and user re-certifications. The Company completed its testing of the effectiveness of the implemented controls and found them
to be operating effectively as of December 31, 2020 and for a sufficient period of time through the period end. As a result, management
concluded that the IT Material Weakness was remediated as of December 31, 2020.
Management’s Report on Internal Control Over Financial Reporting
Management, including our principal executive officers and principal financial officer, is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company. The Company’s internal control system was designed to provide
reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published
financial statements. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s
management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company assets that could have a material effect on the financial statements. Management has assessed the effectiveness
of the Company’s internal control over financial reporting as of December 31, 2020 based on the criteria set forth in 2013 by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. As described above, based on its
assessment, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2020.
Changes in Internal Control over Financial Reporting
Except with respect to the changes in connection with the implementation of the initiatives to remediate the material weaknesses
noted above, there were no changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended
December 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that many of our
employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our
internal controls to minimize the impact on their design and operating effectiveness.
Item 9B. Other Information
None.
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Item 10. Directors, Executive Officers, and Corporate Governance
PART III
The information required by this item will be set forth in our definitive proxy statement with respect to our 2021 annual meeting of the
stockholders to be filed on or before April 30, 2021 and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item will be set forth in our definitive proxy statement with respect to our 2021 annual meeting of the
stockholders to be filed on or before April 30, 2021 and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be set forth in our definitive proxy statement with respect to our 2021 annual meeting of the
stockholders to be filed on or before April 30, 2021 and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be set forth in our definitive proxy statement with respect to our 2021 annual meeting of the
stockholders to be filed on or before April 30, 2021 and is incorporated herein by reference.
Item 14. Principal Accountant’s Fees and Services
The information required by this item will be set forth in our definitive proxy statement with respect to our 2021 annual meeting of the
stockholders to be filed on or before April 30, 2021 and is incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules
(a) Consolidated Financial Statements and Supplementary Data:
PART IV
Financial Statements. The following is a list of the Consolidated Financial Statements of AdaptHealth Corp. and its subsidiaries
included in Item 8 of Part II of this report.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets—December 31, 2020 and 2019
Consolidated Statements of Operations—For the years ended December 31, 2020 and 2019
Consolidated Statements of Comprehensive Loss—For the years ended December 31, 2020 and 2019
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) / Members’ Equity (Deficit)—For the years
ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows—For the years ended December 31, 2020 and 2019
Notes to Consolidated Financial Statements
Page
Number(s)
65
66
67
68
69
71
72
(b) Exhibits. The exhibits filed as a part of this report as required by Item 601 of Regulation S-K are listed in the Index to Exhibits located on
page 126 of this report.
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Item 16. Form 10-K Summary
None
125
Table of Contents
Exhibit
Number
2.1
2.2
3.1
3.2
3.3
3.4
3.5
3.6
3.7
4.1
4.2
4.3
4.4
4.5
4.6
4.7
EXHIBIT INDEX
Description
Merger Agreement, dated as of July 8, 2019, by and among the Company, Merger Sub, AdaptHealth Holdings, the Blocker
Companies, the AdaptHealth Holdings Unitholders’ Representative and, solely for the purposes specified therein, the
Blocker Sellers (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K, filed with the SEC on
November 14, 2019).
Amendment No. 1 to Merger Agreement, dated as of October 15, 2019, by and among the Company, Merger Sub,
AdaptHealth Holdings, the Blocker Companies, the AdaptHealth Holdings Unitholders’ Representative and, solely for the
purposes specified therein, the Blocker Sellers (incorporated by reference to Exhibit 2.2 of the Company’s Current Report on
Form 8-K, filed with the SEC on November 14, 2019).
Second Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s
Current Report on Form 8-K, filed with the SEC on November 14, 2019).
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K, filed
with the SEC on November 14, 2019).
Certificate of Correction to Second Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit
3.3 of the Company’s Annual Report on Form 10-K filed with the SEC on March 6, 2020).
Certificate of Designations of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (incorporated by
reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 2, 2020).
Certificate of Designations of Preferences, Rights and Limitations of Series B-1 Convertible Preferred Stock (incorporated by
reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 26, 2020).
Certificate of Designations of Preferences, Rights and Limitations of Series B-2 Convertible Preferred Stock (incorporated by
reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 2, 2020).
Certificate of Designation, Preferences and Rights of Series C Convertible Preferred Stock, par value $0.0001 per share, of the
Company (incorporated by reference to Annex B to the Schedule 14A filed with the SEC on January 20, 2021)
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.2 of the Company’s Registration Statement on
Form S-1, filed with the SEC on February 13, 2018).
Specimen Warrant Certificate (incorporated by reference to Exhibit 4.3 of the Company’s Registration Statement on Form S-
1, filed with the SEC on February 13, 2018).
Warrant Agreement, dated as of February 15, 2018, by and between the Company and Continental Stock Transfer & Trust
Company (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K, filed with the SEC on
February 22, 2018).
Description of Common Stock (incorporated by reference to Exhibit 4.5 of the Company’s Annual Report on Form 10-K filed
with the SEC on March 6, 2020).
Amended and Restated Registration Rights Agreement, dated as of July 1, 2020, by and among the Company, OEP AHCO
Investment Holdings, LLC, Deerfield Partners, L.P., Deerfield Private Design Fund IV, L.P. and the other persons listed on
the signature pages thereto (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed
with the SEC on July 2, 2020).
Amendment to Amended and Restated Registration Rights Agreement, dated as of December 1, 2020, by and among the
Company, AdaptHealth Holdings LLC and the other persons listed on the signature pages thereto (incorporated by
reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K, filed with the SEC on December 7, 2020).
Indenture, dated as of July 29, 2020, by and among AdaptHealth LLC, the guarantors party thereto and The Bank of New
York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on
Form 8-K filed with the SEC on August 4, 2020).
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4.8
10.1
10.2
10.3
10.4†
10.5
10.6
10.7†
10.8†
Indenture, dated as of January 4, 2021, by and among AdaptHealth LLC, the guarantors party thereto and The Bank of New
York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on
Form 8-K filed with the SEC on January 8, 2021).
Exchange Agreement, dated November 8, 2019, by and among AdaptHealth Holdings, the Company and the other persons
listed therein (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed with the SEC on
November 14, 2019).
Tax Receivable Agreement, dated November 8, 2019, by and among AdaptHealth Holdings, the Company and the Non-
Blocker AdaptHealth Members and the Blocker Sellers (incorporated by reference to Exhibit 10.2 of the Company’s Current
Report on Form 8-K, filed with the SEC on November 14, 2019).
Fifth Amended and Restated Limited Liability Company Agreement of AdaptHealth Holdings, dated as of November 8, 2019,
by and between the Company and the Members named therein (incorporated by reference to Exhibit 10.3 of the Company’s
Current Report on Form 8-K, filed with the SEC on November 14, 2019).
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-
K, filed with the SEC on November 14, 2019).
Board Designee Rights Letter Agreement, dated as of November 8, 2019, by and between the Company, AdaptHealth
Holdings, BM AH Holdings, LLC, BlueMountain Foinaven Master Fund L.P., BMSB L.P., BlueMountain Fursan Fund L.P.
and BlueMountain Summit Opportunities Fund II (US) L.P. (incorporated by reference to Exhibit 10.5 of the Company’s
Current Report on Form 8-K, filed with the SEC on November 14, 2019).
Credit Agreement, dated January 20, 2021, by and between AdaptHealth LLC, the lenders party thereto and Regions Bank,
as administrative agent (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with
the SEC on February 2, 2021).
Employment Agreement, dated as of March 20, 2019, by and between AdaptHealth Holdings and Luke McGee (incorporated
by reference to Exhibit 10.9 of the Company’s Current Report on Form 8-K, filed with the SEC on November 14, 2019).
Employment Agreement, dated as of March 20, 2019, by and between AdaptHealth Holdings and Joshua Parnes
(incorporated by reference to Exhibit 10.10 of the Company’s Current Report on Form 8-K, filed with the SEC on November
14, 2019).
10.9†
Employment Agreement, dated as of November 10, 2014, by and between AdaptHealth Holdings and Gregg Holst
10.10†
10.11†
10.12†
10.13†
10.14†
10.15†
10.16
(incorporated by reference to Exhibit 10.11 of the Company’s Current Report on Form 8-K, filed with the SEC on November
14, 2019).
Transition, Separation and Release Agreement, dated August 10, 2020, by and between the Company and Gregg Holst
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 21,
2020).
Employment Agreement, dated as of May 1, 2020, by and between the Company and Jason Clemens (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 22, 2020).
Employment Agreement, dated February 2, 2021, by and between Stephen Griggs and AdaptHealth Corp. (incorporated by
reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the SEC on February 2, 2021).
AdaptHealth Corp. 2019 Stock Incentive Plan (incorporated by reference to Exhibit 10.12 of the Company’s Current Report
on Form 8-K, filed with the SEC on November 14, 2019).
Form of Restricted Stock Grant Notice and Agreement under the AdaptHealth Corp. 2019 Stock Incentive Plan (incorporated
by reference to Exhibit 10.13 of the Company’s Current Report on Form 8-K, filed with the SEC on November 14, 2019).
Form of Option Grant Notice and Agreement under the AdaptHealth Corp. 2019 Stock Incentive Plan (incorporated by
reference to Exhibit 10.14 of the Company’s Current Report on Form 8-K, filed with the SEC on November 14, 2019).
Letter Agreement, dated as of February 15, 2018, among the Company, Deerfield/RAB Ventures, LLC, Richard Barasch,
Christopher Wolfe, Steven Hochberg, Dr. Mohit Kaushal, Dr. Gregory Sorensen and Dr. Susan Weaver (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 22, 2018).
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10.17
Warrant Purchase Agreement, dated February 15, 2018, between the Registrant and Deerfield/RAB Ventures, LLC
(incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on February 22,
2018).
AdaptHealth Corp. 2019 Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.7 to the Company’s
Registration Statement on Form S-8 filed with the SEC on January 22, 2020).
Securities Purchase Agreement, dated as of November 21, 2019, by and among AdaptHealth LLC, McKesson Medical-
10.18†
10.19+
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
21.1*
23.1*
24.1*
31.1*
31.2*
31.3*
32**
Surgical, Inc., NRE Holding Corporation and McKesson Patient Care Solutions, Inc. (incorporated by reference to Exhibit
10.18 to the Company’s Form 10-K filed with the SEC on March 6, 2020).
Investment Agreement, dated as of May 25, 2020, by and among the Company, OEP AHCO Investment Holdings, LLC and,
solely for purposes of Section 3.10, One Equity Partners VII, L.P. (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed with the SEC on May 29, 2020).
Put/Call Option and Consent Agreement, dated as of May 25, 2020, by and among the Company, AdaptHealth Holdings
LLC, BlueMountain Foinaven Master Fund L.P., BMSB L.P., BlueMountain Fursan Fund L.P. and BlueMountain Summit
Opportunities Fund II (US) L.P (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed
with the SEC on May 29, 2020).
Amendment to the Put/Call Option and Consent Agreement, dated as of October 16, 2020, by and among the Company,
AdaptHealth Holdings LLC, BlueMountain Foinaven Master Fund L.P., BMSB L.P., BlueMountain Fursan Fund L.P. and
BlueMountain Summit Opportunities Fund II (US) L.P. (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed with the SEC on October 22, 2020).
Stock Purchase Agreement and Plan of Merger, dated May 25, 2020, by and among AdaptHealth Corp., AdaptHealth LLC,
Eleanor Merger Sub, LLC, Solara Holdings, LLC and LCP Solara Blocker, LLC, in its capacity as Blocker Seller and the
Representative (incorporated by reference to Exhibit 10.23 of the Company’s Registration Statement on Form S-1 filed with
the SEC on June 29, 2020).
Amendment No. 1 to Stock Purchase Agreement and Agreement and Plan of Merger, dated as of June 24, 2020, by and
among AdaptHealth LLC and LCP Solara Blocker Seller, LLC (incorporated by reference to Exhibit 10.24 of the Company’s
Registration Statement on Form S-1 filed with the SEC on June 29, 2020).
Exchange Agreement, dated as of June 24, 2020, by and between AdaptHealth Corp. and Deerfield Private Design Fund IV,
L.P. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 26,
2020).
Investment Agreement, dated as of June 24, 2020, by and between AdaptHealth Corp. and Deerfield Partners, L.P.
(incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on June 26,
2020).
Agreement and Plan of Merger, dated as of December 1, 2020, by and among the Company, AeroCare Holdings, Inc., AH
Apollo Merger Sub Inc., AH Apollo Merger Sub II Inc. and Peloton Equity I, L.P., solely in its capacity as the
representative, agent and attorney-in-fact of the AeroCare equityholders (incorporated by reference to Exhibit 4.1 of the
Company’s Current Report on Form 8-K, filed with the SEC on December 7, 2020)
Subsidiaries of the Company.
Consent of Independent Registered Public Accounting Firm.
Powers of Attorney (included on the signature page hereof).
Certification of Co-Chief Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Co-Chief Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Co-Chief Executive Officers and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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101.INS***
101.SCH***
101.CAL***
101.DEF***
101.LAB***
101.PRE***
Exhibit 104
***
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are
embedded within the Inline XBRL document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because
its XBRL tags are embedded within the Inline XBRL document
* Filed herewith.
** Furnished herewith.
*** XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus
for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of
1934, as amended, and otherwise is not subject to liability under these sections.
† Management contract or compensatory plan or arrangement.
+ Portions of this exhibit have been omitted in accordance with Item 601(b)(10)(iv) of Regulation S-K.
129
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized, on March 16, 2021.
SIGNATURES
AdaptHealth Corp.
By:
/s/ Luke McGee
Luke McGee
Co-Chief Executive Officer and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Luke
McGee and Christopher Joyce, jointly and severally, his attorney-in-fact, each with the full power of substitution, for such person, in any and
all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might do or could do in person hereby ratifying and confirming all that each of said attorneys-in-fact and agents,
or his substitute, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 16, 2021 by the
following persons on behalf of the registrant and in the capacities indicated:
Signature
Title
By:
By:
By:
By:
By:
By:
By:
By:
By:
/s/ Luke McGee
Luke McGee
/s/ Stephen P. Griggs
Stephen P. Griggs
/s/ Jason Clemens
Jason Clemens
/s/ Frank J. Mullen
Frank J. Mullen
/s/ Richard Barasch
Richard Barasch
/s/ Joshua Parnes
Joshua Parnes
/s/ Alan Quasha
Alan Quasha
/s/ Terence Connors
Terence Connors
/s/ Dr. Susan Weaver
Dr. Susan Weaver
Co-Chief Executive Officer and Director
(Principal Executive Officer)
Co-Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Chief Accounting Officer
(Principal Accounting Officer)
Chairman of the Board
President and Director
Director
Director
Director
130
Table of Contents
By:
By:
By:
By:
/s/ Dale Wolf
Dale Wolf
/s/ Bradley Coppens
Bradley Coppens
/s/ David S. Williams III
David S. Williams III
/s/ Theodore Lundberg
Theodore S. Lundberg
Director
Director
Director
Director
131
The Company’s principal subsidiaries as of December 31, 2020 are listed below. All other subsidiaries of the Company, if considered in the aggregate as a
single affiliate, would not constitute a significant subsidiary of the Company.
Exhibit 21.1
Subsidiaries (Alphabetically)
ActivStyle Holding Company
ActivStyle, LLC
AdaptHealth Missouri LLC
AdaptHealth Holdings LLC
AdaptHealth Intermediate Holdco LLC
AdaptHealth LLC
AdaptHealth New England LLC
AdaptHealth Patient Care Solutions LLC
Advocate Medical Services, LLC
AirCare Home Respiratory, LLC
All American Home Aid, LLC
American Ancillaries, Inc.
Americoast Maryland LLC
Bennett Medical Services LLC
Braden Partners, L.P.
Champlain Valley Brace and Limb, LLC
Choice Medical Health Care, LLC
Clearview Medical Incorporated
Diabetes Management & Supplies LLC
Diabetes Medical Supply Center of the Midlands
DSCM Holdco Inc.
Family Home Medical Supply LLC
Family Medical Supply LLC
Florida Home Medical Supply, LLC
Gould’s Discount Medical, LLC
Halprin, Incorporated
Healthline Medical Equipment, LLC
Home Medical Express, Inc.
Home MediService, LLC
Huey’s Home Medical, LLC
J.M.R. Medical, LLC
LCP Solara Blocker Corp.
Legacy Home Medical, LLC
M.A.R.Y. Medical, LLC
Med Star Surgical & Breathing Equipment Inc.
Med Way Medical, Inc.
Medbridge Home Medical LLC
Med-Equip, Inc.
Meddix, LLC
Medstar Holdings LLC
New England Home Medical Equipment LLC
NRE Holding Corporation
Ocean Home Health Supply LLC
Ogles Oxygen, LLC
Pal-Med, LLC
Palmetto Oxygen, LLC
Pinnacle Medical Solutions LLC
Pinnacle Medical Solutions, Inc.
PPS HME Holdings LLC
PPS HME LLC
Rely Medical Supply, LLC
Respiratory Services of Western New York Inc.
Roberts Home Medical, LLC
Royal Homestar LLC
State of Inc.
DELAWARE
MINNESOTA
MISSOURI
DELAWARE
DELAWARE
DELAWARE
DELAWARE
PENNSYLVANIA
FLORIDA
CALIFORNIA
MASSACHUSETTS
NEVADA
DELAWARE
NEVADA
CALIFORNIA
NEW YORK
ILLINOIS
TEXAS
LOUISIANA
NEBRASKA
NEBRASKA
PENNSYLVANIA
NORTH CAROLINA
FLORIDA
KENTUCKY
NEW YORK
TEXAS
ILLINOIS
MARYLAND
DELAWARE
DELAWARE
DELAWARE
UTAH
CALIFORNIA
NEW YORK
UTAH
DELAWARE
PENNSYLVANIA
MISSOURI
DELAWARE
MASSACHUSETTS
DELAWARE
NEW JERSEY
SOUTH CAROLINA
SOUTH CAROLINA
SOUTH CAROLINA
MISSISSIPPI
DELAWARE
DELAWARE
DELAWARE
COLORADO
NEW YORK
MARYLAND
DELAWARE
Subsidiaries (Alphabetically)
Royal Medical Supply, Inc.
Senior Care Service, LLC
Skoro Enterprises LLC
Sleep Therapy LLC
Solara Holdings, LLC
Solara Intermediate, LLC
Solara Medical Supplies, LLC
Sound Oxygen Service LLC
Total Respiratory, LLC
TriCounty Medical Equipment and Supply, LLC
Verus Healthcare, Inc.
Verus Healthcare, LLC
State of Inc.
PENNSYLVANIA
COLORADO
TEXAS
MINNESOTA
DELAWARE
DELAWARE
CALIFORNIA
WASHINGTON
DELAWARE
PENNSYLVANIA
DELAWARE
DELAWARE
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
AdaptHealth Corp.:
We consent to the incorporation by reference in the registration statement (No. 333-236012) on Form S-8 and registration statement (No. 333-
251452) on Form S-3 of AdaptHealth Corp. of our report dated March 16, 2021, with respect to the consolidated balance sheets of AdaptHealth
Corp. as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, changes in stockholders’
equity (deficit) / members’ equity (deficit), and cash flows for each of the years then ended, and the related notes (collectively, the consolidated
financial statements), which report appears in the December 31, 2020 annual report on Form 10-K of AdaptHealth Corp.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 16, 2021
Exhibit 31.1
CERTIFICATION
PURSUANT TO RULES 13A-14 AND 15D-14
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Luke McGee, certify that:
1. I have reviewed this Annual Report on Form 10-K of AdaptHealth Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present, in all material respects, the
financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements
for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
March 16, 2021
/s/ Luke McGee
Luke McGee
Co-Chief Executive Officer and Director
(Principal Executive Officer)
CERTIFICATION
PURSUANT TO RULES 13A-14 AND 15D-14
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Exhibit 31.2
I, Stephen P. Griggs, certify that:
1. I have reviewed this Annual Report on Form 10-K of AdaptHealth Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present, in all material respects, the
financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements
for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
March 16, 2021
/s/ Stephen P. Griggs
Stephen P. Griggs
Co-Chief Executive Officer and Director
(Principal Executive Officer)
CERTIFICATION
PURSUANT TO RULES 13A-14 AND 15D-14
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Exhibit 31.3
I, Jason Clemens, certify that:
1. I have reviewed this Annual Report on Form 10-K of AdaptHealth Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present, in all material respects, the
financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements
for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
March 16, 2021
/s/ Jason Clemens
Jason Clemens
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS REQUIRED BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32
In connection with the Annual Report of AdaptHealth Corp. (the "Company”) on Form 10-K for the period ending December 31, 2020, as filed with the
Securities and Exchange Commission on the date hereof (the "Report”), the undersigned hereby certify that to the best of our knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
March 16, 2021
March 16, 2021
March 16, 2021
/s/ Luke McGee
Luke McGee
/s/ Stephen P. Griggs
Stephen P. Griggs
/s/ Jason Clemens
Jason Clemens
Co-Chief Executive Officer and Director
(Principal Executive Officer)
Co-Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)