DFB HEALTHCARE ACQUISITIONS CORP. The following discussion should be read in conjunction withAdaptHealth Corp.'s ("AdaptHealth" or the "Company") consolidated financial statements and the accompanying notes included in this report. All amounts presented are in accordance withU.S. generally accepted accounting principles ("U.S. GAAP"), except as noted. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management's expectations. Factors that could cause such differences include, but are not limited to, those discussed in Item 1A, "Risk Factors", in our 2021 Annual Report on Form 10-K filed with theSEC onMarch 1, 2022 .AdaptHealth Corp. OverviewAdaptHealth is a national leader in providing patient-centered, healthcare-at-home solutions including home medical equipment ("HME"), medical supplies, and related services. The Company focuses primarily on providing (i) sleep therapy equipment, supplies and related services (including CPAP and bi PAP services) to individuals suffering from obstructive sleep apnea ("OSA"), (ii) medical devices and supplies to patients for the treatment of diabetes (including continuous glucose monitors and insulin pumps), (iii) home medical equipment to patients discharged from acute care and other facilities, (iv) oxygen and related chronic therapy services in the home, and (v) other HME devices and supplies on behalf of chronically ill patients with wound care, urological, incontinence, ostomy and nutritional supply needs. The Company services beneficiaries of Medicare, Medicaid and commercial insurance payors. As ofJune 30, 2022 ,AdaptHealth serviced approximately 3.9 million patients annually in all 50 states through its network of 759 locations in 47 states. The Company's principal executive offices are located at220 West Germantown Pike , Suite 250,Plymouth Meeting, Pennsylvania 19462.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic has impactedAdaptHealth's business, as well as its patients, communities, and employees.AdaptHealth's priorities during the COVID-19 pandemic remain protecting the health and safety of its employees (including patient-facing employees providing respiratory and other services), maximizing the availability of its services and products to support patient health needs, and maintaining the operational and financial stability of its business. In response to the COVID-19 pandemic and the National Emergency Declaration, datedMarch 13, 2020 , in the first quarter of 2020,AdaptHealth activated certain business interruption protocols, including acquisition and distribution of personal protective equipment (PPE) to its patient-facing employees, accelerated capital expenditures of certain products and relocation of significant portions of its workforce to "work-from-home" status. Federal, state, and local authorities have taken several actions designed to assist healthcare providers in providing care to COVID-19 and other patients and to mitigate the adverse economic impact of the COVID-19 pandemic. Legislative actions taken by the federal government include the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which was signed into law onMarch 27, 2020 . Through the CARES Act, the federal government has authorized payments to be distributed to healthcare providers through thePublic Health and Social Services Emergency Fund ("Provider Relief Fund " or "PRF"). Additionally, the CARES Act revised the Medicare accelerated and advance payment program in an attempt to disburse payments to healthcare providers more quickly to mitigate the financial impact on healthcare providers.AdaptHealth increased its cash liquidity by, among other things, seeking recoupable advance payments of$45.8 million made available by CMS under the CARES Act legislation, which was received inApril 2020 . In addition, in connection with an acquisition completed inJuly 2020 ,AdaptHealth assumed a liability of$3.7 million relating to CMS recoupable advance payments received by the acquired company prior to the date of acquisition. The recoupment of the advance payments by CMS began inApril 2021 and is being applied to services provided and revenue recognized during the period in which the recoupment occurs, and will impactAdaptHealth's cash receipts for services provided until such time all amounts have been recouped. As ofJune 30, 2022 , the remaining amount of the CMS advance payments that had not yet been recouped was$3.7 million , which is included in other current liabilities in the consolidated balance sheets.AdaptHealth expects this amount to be fully recouped or repaid to CMS during the remainder of 2022. In 43
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addition, inApril 2020 ,AdaptHealth received distributions of the CARES Act PRF of$17.2 million . Subsequent toApril 2020 ,AdaptHealth completed several acquisitions in which the acquired companies received a total of$22.2 million of PRF payments prior to the applicable dates of acquisition. In connection with the accounting for these acquisitions,AdaptHealth recorded assumed liabilities of$7.7 million relating to the PRF payments received by the acquired companies. The PRF payments are targeted to offset lost revenue and expenditures incurred in connection with the COVID-19 pandemic. The PRF payments are subject to certain restrictions and are subject to recoupment if not used for designated purposes. As a condition to receiving distributions, providers were required to agree to certain terms and conditions, including, among other things, that the funds would be used for lost revenues and unreimbursed COVID-19 related expenses as defined by theU.S. Department of Health and Human Services ("HHS"). All recipients of PRF payments were required to comply with the reporting requirements described in the terms and conditions and as determined by HHS.AdaptHealth recognizes grant payments as income when there is reasonable assurance that it has complied with the conditions associated with the grant. As ofDecember 31, 2021 ,AdaptHealth had recognized all of the PRF payments it has received and the liabilities assumed for PRF payments received from acquired companies as grant income, as it was determined thatAdaptHealth has complied with the conditions associated with the grant. As such, there is no liability recorded inAdaptHealth's interim consolidated financial statements relating to the PRF payments as ofJune 30, 2022 . HHS has indicated that the CARES Act PRF are subject to ongoing reporting and changes to the terms and conditions, and there have been several updates to such reporting requirements and terms and conditions since they were issued by HHS. Such updates have related to changes to the guidance regarding utilization of the funds granted from the PRF and updates to the reporting requirements of such funds, among other updates. To the extent that there is any future updated guidance from HHS or modifications to the terms and conditions, it may affectAdaptHealth's ability to comply andAdaptHealth could be required to reverse the recognition of the grant income recorded and return a portion of the funds received, which could be material toAdaptHealth .AdaptHealth is continuing to monitor the terms and conditions issued by HHS. Furthermore, HHS has indicated that it will be closely monitoring and, along with theOffice of Inspector General (United States ) (OIG), auditing providers to ensure that recipients comply with the terms and conditions of relief programs and to prevent fraud and abuse. All providers will be subject to civil and criminal penalties for any deliberate omissions, misrepresentations or falsifications of any information given to HHS. Also, as permitted under the CARES Act,AdaptHealth elected to defer certain portions of employer-paid FICA taxes otherwise payable fromMarch 27, 2020 toJanuary 1, 2021 . In total,AdaptHealth deferred$8.6 million under this provision.AdaptHealth paid$4.3 million onJanuary 4, 2022 and the remaining balance of$4.3 million is expected to be paid shortly afterDecember 31, 2022 . As ofJune 30, 2022 ,$4.3 million is included in other current liabilities in the consolidated balance sheets. While the impact of the COVID-19 pandemic, the National Emergency Declaration and the various state and local government imposed stay-at-home restrictions did not have a material impact onAdaptHealth's consolidated operating results initially,AdaptHealth has experienced declines in net revenue 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), and such declines may continue during the duration of the COVID-19 pandemic. Offsetting these declines in net revenue,AdaptHealth has experienced 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, the suspension of Medicare sequestration (which had resulted in an approximate 2% increase in Medicare payments to all providers throughMarch 31, 2022 and a 1% increase fromApril 1, 2022 throughJune 30, 2022 ), and regulatory guidance from CMS expanding telemedicine and reducing documentation requirements during the emergency period, have resulted in increased net revenues for certain products and services. However, while the emergency period has been extended, Medicare sequestration has resumed afterJuly 1, 2022 and will result in a reduction of 2% applied to all Medicare Fee-for-Service claims.
The full extent of the impact of the COVID-19 pandemic on
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may not be able to accurately predict, and could be material to
Key Components of Operating Results
Net Revenue. Net revenue is recorded for services thatAdaptHealth provides to patients for home healthcare equipment, medical supplies to the home and related services.AdaptHealth's primary service lines are (i) sleep therapy equipment, supplies and related services (including CPAP and bi PAP services) to individuals suffering from OSA, (ii) medical devices and supplies to patients for the treatment of diabetes (including continuous glucose monitors and insulin pumps), (iii) home medical equipment to patients discharged from acute care and other facilities, (iv) oxygen and related chronic therapy services in the home, and (v) other HME devices and supplies on behalf of chronically ill patients with wound care, urological, incontinence, ostomy and nutritional supply needs. Revenues are recorded either (x) at a point in time for the sale of supplies and disposables, or (y) over the service period for equipment rental (including, but not limited to, CPAP machines, hospital beds, wheelchairs and other equipment), at amounts estimated to be received from patients or under reimbursement arrangements with Medicare, Medicaid and other third-party payors, including private insurers. Cost of Net Revenue. Cost of net revenue primarily includes the cost of non-capitalized medical equipment and supplies, distribution expenses, labor costs, facilities rental costs, revenue cycle management costs and depreciation for capitalized patient equipment. Distribution expenses represent the cost incurred to coordinate and deliver products and services to the patients. Included in distribution expenses are leasing, maintenance, licensing and fuel costs for the vehicle fleet; salaries, benefits and other costs related to drivers and dispatch personnel; and amounts paid to couriers. General and Administrative Expenses. General and administrative expenses consist of corporate support costs including information technology, human resources, finance, contracting, legal, compliance leadership, equity-based compensation, transaction expenses and other administrative costs.
Depreciation and Amortization, Excluding Patient Equipment Depreciation. Depreciation expense includes depreciation charges for capital assets other than patient equipment (which is included as part of the cost of net revenue). Amortization expense includes amortization of identifiable intangible assets.
Factors Affecting AdaptHealth's Operating Results
Acquisitions
AdaptHealth accounts for its acquisitions in accordance withFinancial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, Business Combinations, and the operations of the acquired entities are included in the historical results ofAdaptHealth for the periods following the closing of the acquisition. Refer to Note 3, Acquisitions, included in our interim consolidated financial statements for the three and six months endedJune 30, 2022 included in this Quarterly Report on Form 10-Q for additional information regardingAdaptHealth's acquisitions.
Debt
InAugust 2021 ,AdaptHealth issued$600.0 million aggregate principal amount of 5.125% senior unsecured notes due 2030 (the "5.125% Senior Notes"). The 5.125% Senior Notes will mature onMarch 1, 2030 . Interest on the 5.125% Senior Notes is payable onMarch 1st andSeptember 1st of each year, beginning onMarch 1, 2022 . Refer to the section below, titled Liquidity and Capital Resources, for additional discussion related toAdaptHealth's senior unsecured notes. 45
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InJanuary 2021 ,AdaptHealth refinanced its debt borrowings and entered into a new credit agreement with its existing bank group, which was subsequently amended inApril 2021 (the "2021 Credit Agreement"). Refer to the section below, titled Liquidity and Capital Resources, for additional discussion related to the 2021 Credit Agreement. InMarch 2019 ,AdaptHealth entered into a Note and Unit Purchase Agreement with an investor. Pursuant to the agreement,AdaptHealth issued a promissory note with a principal amount of$100 million (the Promissory Note). InNovember 2019 , the Promissory Note was replaced with a new amended and restated promissory note with a principal amount of$100 million , and the investor converted certain of its equity 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. InJune 2021 ,AdaptHealth repaid$71.8 million of the outstanding principal balance under the New Promissory Note. InAugust 2021 ,AdaptHealth repaid the remaining outstanding principal balance of$71.7 million under the New Promissory Note. The outstanding principal balance under the New Promissory Note bore interest at 12%. SeasonalityAdaptHealth's business experiences some seasonality. Its patients are generally responsible for a greater percentage of the cost of their treatment or therapy during the early months of the year due to co-insurance, co-payments and deductibles, and therefore may defer treatment and services of certain therapies until meeting their annual deductibles. In addition, changes to employer insurance coverage often go into effect at the beginning of each calendar year which may impact eligibility requirements and delay or defer treatment. Also, net revenue generated by the Company's diabetes product line is typically higher in the fourth quarter compared to the earlier part of the year due to the timing of when patients meet their annual deductibles and their associated reordering patterns. These factors may lead to lower net revenue and cash flow in the early part of the year versus the latter half of the year. Additionally, the increased incidence of respiratory infections during the winter season may result in initiation of additional respiratory services such as oxygen therapy for certain patient populations.AdaptHealth's quarterly operating results may fluctuate significantly in the future depending on these and other factors.
Key Business Metrics
AdaptHealth focuses on net revenue, EBITDA and Adjusted EBITDA 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, oxygen concentrators, ventilators, hospital beds, wheelchairs and other equipment). Three Months Ended June 30, 2022 June 30, 2021 Net Revenue Revenue Revenue (dollars in thousands) Dollars Percentage Dollars Percentage (Unaudited) Net sales revenue: Sleep$ 194,693 26.8 %$ 163,331 26.5 % Diabetes 162,259 22.3 % 123,314 20.0 % Supplies to the home 43,881 6.0 % 42,675 6.9 % Respiratory 7,891 1.1 % 13,154 2.1 % HME 31,102 4.3 % 30,360 4.9 % Other 52,828 7.2 % 27,763 4.5 % Total net sales revenue$ 492,654 67.7 %$ 400,597 64.9 % Net revenue from fixed monthly equipment reimbursements: Sleep$ 65,661 9.0 %$ 66,335 10.8 % Diabetes 4,034 0.6 % 3,216 0.5 % Respiratory 128,865 17.7 % 111,528 18.1 % 46 Table of Contents HME 25,547 3.5 % 24,431 4.0 % Other 10,853 1.5 % 10,910 1.7 % Total net revenue from fixed monthly equipment reimbursements$ 234,960 32.3 %$ 216,420 35.1 % Total net revenue: Sleep$ 260,354 35.8 %$ 229,666 37.3 % Diabetes 166,293 22.9 % 126,530 20.5 % Supplies to the home 43,881 6.0 % 42,675 6.9 % Respiratory 136,756 18.8 % 124,682 20.2 % HME 56,649 7.8 % 54,791 8.9 % Other 63,681 8.7 % 38,673 6.2 % Total net revenue$ 727,614 100.0 %$ 617,017 100.0 % Six Months Ended June 30, 2022 June 30, 2021 Net Revenue Revenue Revenue (dollars in thousands) Dollars Percentage Dollars Percentage (Unaudited) Net sales revenue: Sleep$ 387,028 27.0 %$ 292,013 26.6 % Diabetes 313,618 21.9 % 218,331 19.9 % Supplies to the home 83,746 5.8 % 84,038 7.6 % Respiratory 16,036 1.1 % 18,775 1.7 % HME 61,953 4.3 % 54,516 5.0 % Other 106,228 7.5 % 50,189 4.6 % Total net sales revenue$ 968,609 67.6 %$ 717,862 65.4 % Net revenue from fixed monthly equipment reimbursements: Sleep$ 123,599 8.6 %$ 114,444 10.4 % Diabetes 7,980 0.6 % 6,069 0.6 % Respiratory 261,445 18.2 % 194,982 17.7 % HME 51,272 3.6 % 44,811 4.1 % Other 20,912 1.4 % 20,968 1.8 % Total net revenue from fixed monthly equipment reimbursements$ 465,208 32.4 %$ 381,274 34.6 % Total net revenue: Sleep$ 510,627 35.6 %$ 406,457 37.0 % Diabetes 321,598 22.5 % 224,400 20.5 % Supplies to the home 83,746 5.8 % 84,038 7.6 % Respiratory 277,481 19.3 % 213,757 19.4 % HME 113,225 7.9 % 99,327 9.1 % Other 127,140 8.9 % 71,157 6.4 % Total net revenue$ 1,433,817 100.0 %$ 1,099,136 100.0 % Results of Operations
Comparison of Three Months Ended
The following table summarizes
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Three Months Ended June 30,
2022 2021
Revenue Revenue Increase/(Decrease)
(in thousands, except
percentages) Dollars Percentage Dollars Percentage Dollars Percentage
(unaudited)
Net revenue $ 727,614 100.0 % $ 617,017 100.0 % $ 110,597 17.9 %
Costs and expenses:
Cost of net revenue 610,011 83.8 % 490,720 79.5 % 119,291 24.3 %
General andadministrative expenses 42,548 5.8 % 42,946 7.0 % (398) (0.9) % Depreciation and amortization, excluding patient equipment depreciation 15,877 2.2 % 17,944 2.9 % (2,067) (11.5) % Total costs and expenses 668,436 91.8 % 551,610 89.4 % 116,826 21.2 % Operating income 59,178 8.2 % 65,407 10.6 % (6,229) (9.5) % Interest expense, net 25,608 3.5 % 23,147 3.8 % 2,461 10.6 %
Change in fair value of warrant liability 8,208 1.1 % (37,454) (6.1) % 45,662 NM % Change in fair value of contingent consideration common shares liability - - % (22,079) (3.6) % 22,079 NM % Loss on extinguishment of debt - - % 7,736 1.3 % (7,736) NM % Other loss, net 1,262 0.2 % 1,669 0.3 % (407) NM % Income before income taxes 24,100 3.4 % 92,388 14.9 % (68,288) (73.9) % Income tax expense 8,853 1.2 % 12,330 2.0 % (3,477) NM % Net income 15,247 2.2 % 80,058 12.9 % (64,811) (81.0) % Income attributable to noncontrolling interest 1,215 0.2 % 951 0.2 % 264 NM % Net income attributable to AdaptHealth Corp.$ 14,032 2.0 %$ 79,107
12.7 %
Net Revenue. Net revenue for the three months endedJune 30, 2022 and 2021 was$727.6 million and$617.0 million , respectively, an increase of$110.6 million or 17.9%. Net revenue for the 2022 and 2021 periods included$0.1 million and$8.6 million , respectively, from referral partners and healthcare facilities in support of their urgent needs as the coronavirus pandemic led to an increased demand for respiratory equipment including ventilators and oxygen concentrators. Excluding this revenue, net revenue was$727.5 million and$608.4 million for the three months endedJune 30, 2022 and 2021, respectively, an increase of$119.1 million . The increase in net revenue was driven primarily by acquisitions completed afterApril 1, 2021 , which increased net revenue by$119.5 million . Additionally, net revenue during the three months endedJune 30, 2022 was impacted by a recall of certain ventilator, BiPAP, and CPAP devices supplied toAdaptHealth byPhilips Respironics (Philips). OnJune 14, 2021 ,AdaptHealth received notice from Philips that these devices would be included in a Philips voluntary recall due to potential health risks to patients. Currently, it is not possible to purchase these products from Philips, which has led to shortages in the supply chain, and other suppliers are unable to meet the strong patient demand for these products, which has materially affectedAdaptHealth's ability to service patient demand for these devices during the three months endedJune 30, 2022 . For the three months endedJune 30, 2022 , net sales revenue (recognized at a point in time) comprised 68% of total net revenue, compared to 65% of total net revenue for the three months endedJune 30, 2021 . For the three months endedJune 30, 2022 , net revenue from fixed monthly equipment reimbursements comprised 32% of total net revenue, compared to 35% of total net revenue for the three months endedJune 30, 2021 . 48 Table of Contents Cost of Net Revenue. The following table summarizes cost of net revenue for the three months endedJune 30, 2022 and 2021: Three Months Ended June 30, 2022 2021 Revenue Revenue Increase/(Decrease) (in thousands, except percentages) Dollars Percentage Dollars
Percentage Dollars Percentage
(unaudited)
Cost of products and
supplies $ 288,947 39.7 % $ 235,550 38.2 % $ 53,397 22.7 %
Salaries, labor and
benefits 183,334 25.2 % 147,600 23.9 % 35,734 24.2 %
Patient equipment
depreciation 63,597 8.7 % 45,864 7.4 % 17,733 38.7 %
Other operating
expenses 56,521 7.8 % 48,072 7.8 % 8,449 17.6 %
Rent and occupancy 15,833 2.2 % 11,938 1.9 % 3,895 32.6 %
Equity-based
compensation 1,779 0.2 % 1,696 0.3 % 83 4.9 %
Total cost of net
revenue $ 610,011 83.8 % $ 490,720 79.5 % $ 119,291 24.3 %
Cost of net revenue for the three months ended June 30, 2022 and 2021 was $610.0
million and $490.7 million , respectively, an increase of $119.3 million or
24.3%, which is primarily related to acquisition growth. Costs of products and
supplies increased by $53.4 million primarily as a result of acquisition growth,
increased product costs, and increased net sales revenue. Salaries, labor and
benefits increased by $35.7 million , primarily related to acquisition growth,
increased headcount, higher commissions and overtime and wage increases. The
increase in rent and occupancy and other operating expenses is primarily related
to acquisition growth and increased fuel costs.
Cost of net revenue was 83.8% of net revenue for the three months ended June 30,
2022 compared to 79.5% for the three months ended June 30, 2021 . The cost of
products and supplies was 39.7% of net revenue in the 2022 period compared to
38.2% in the 2021 period. Salaries, labor and benefits was 25.2% of net revenue
in the 2022 period compared to 23.9% in the 2021 period. Patient equipment
depreciation was 8.7% of net revenue in the 2022 period compared to 7.4% in the
2021 period, primarily as a result of a change in product mix.
General and Administrative Expenses. General and administrative expenses for the
three months ended June 30, 2022 and 2021 were $42.5 million and $42.9 million ,
respectively, an decrease of $0.4 million or 0.9%. This decrease is primarily
due to (1) lower transaction costs as there was less acquisition activity in the
second quarter of 2022, and (2) lower equity-based compensation expense as there
was less equity-based compensation grant activity in the second quarter of 2022,
offset by (3) higher professional fees including legal, accounting,
information-technology, and consulting, including costs for Sarbanes Oxley
compliance, and (4) higher labor costs associated with increased headcount and
higher wages. General and administrative expenses as a percentage of net revenue
was 5.8% in the 2022 period, compared to 7.0% in the 2021 period. General and
administrative expenses in the 2022 period included $1.8 million of transaction
costs, $3.9 million of equity-based compensation expense, and other
non-recurring expenses of $3.1 million . General and administrative expenses in
the 2021 period included $8.0 million of transaction costs, $5.8 million of
equity-based compensation expense, and other non-recurring expenses of $0.6
million . Excluding the impact of these charges, general and administrative
expenses as a percentage of net revenue was 4.6% and 4.6% in the 2022 period and
the 2021 period, respectively.
Depreciation and amortization, excluding patient equipment depreciation.
Depreciation and amortization, excluding patient equipment depreciation, for the
three months ended June 30, 2022 and 2021 was $15.9 million and $17.9 million ,
respectively, a decrease of $2.0 million . The decrease was primarily related to
lower amortization of intangible assets, offset by higher depreciation expense
associated with fixed assets excluding patient equipment.
Interest Expense. Interest expense for the three months ended June 30, 2022 and
2021 was $25.6 million and $23.1 million , respectively. Interest expense related
to long-term debt was higher in the 2022 period compared to the 2021 period as a
result of higher long-term debt borrowings outstanding during that period and
higher interest rates. Such borrowings were primarily used to fund acquisitions.
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Change in Fair Value of Warrant Liability. AdaptHealth has outstanding warrants
to purchase shares of Common Stock, as discussed in Note 10, Stockholders'
Equity, to the accompanying June 30, 2022 interim consolidated financial
statements. These warrants are liability-classified, and the change in fair
value of the warrant liability represents a non-cash charge in the 2022 period
and a non-cash gain in the 2021 period for the change in the estimated fair
value of such liability during the respective periods.
Change in Fair Value of Contingent Consideration Common Shares Liability. In
connection with the Business Combination, certain former owners of AdaptHealth
Holdings are entitled to contingent consideration common shares, as discussed in
Note 10, Stockholders' Equity, to the accompanying June 30, 2022 interim
consolidated financial statements. These shares were liability-classified
through December 31, 2021 , and the change in fair value of the contingent
consideration common shares liability represents a non-cash gain in the 2021
period for the change in the estimated fair value of such liability during the
period.
Loss on Extinguishment of Debt. Loss on extinguishment of debt for the three
months ended June 30, 2021 consisted of the write-off of unamortized deferred
financing costs and other expenses related to AdaptHealth refinancing its credit
facility in January 2021 and amending such agreement in April 2021 , and also
includes the write-off of unamortized deferred financing costs and debt
prepayment penalties in connection with the prepayment of a portion of
AdaptHealth's note payable. During the second quarter of 2021, AdaptHealth
corrected an error that was identified relating to the accounting for the write
off of unamortized deferred financing costs recognized during the first quarter
of 2021. As a result of this correction, AdaptHealth reversed $2.1 million of
the write off that was recognized during the first quarter of 2021, which was
reflected as a reduction to the loss on extinguishment of debt recognized during
the second quarter of 2021. The impact of such correction was not considered
material to AdaptHealth's unaudited interim consolidated financial statements
for the three months ended March 31, 2021 and the three months ended June 30,
2021 .
Other Loss, net. Other loss, net for the three months ended June 30, 2022
consisted of $1.0 million of expenses associated with legal settlements, $0.2
million of expenses associated with lease terminations, and $0.1 million of
other charges. Other loss, net for the three months ended June 30, 2021
consisted of $0.9 million of expenses associated with legal settlements, $1.0
million of expenses associated with lease terminations, offset by $0.2 million
of net other income.
Income Tax Expense. Income tax expense for the three months ended
Comparison of Six Months Ended
The following table summarizes
Six Months Ended June 30,
2022 2021
Revenue Revenue Increase/(Decrease)
(in thousands, except
percentages) Dollars Percentage Dollars Percentage Dollars Percentage
(unaudited)
Net revenue $ 1,433,817 100.0 % $ 1,099,136 100.0 % $ 334,681 30.4 %
Costs and expenses:
Cost of net revenue 1,207,133 84.2 % 887,418 80.7 % 319,715 36.0 %
General and
administrative
expenses 83,992 5.9 % 99,578 9.1 % (15,586) (15.7) %
Depreciation and
amortization,
excluding patient
equipment
depreciation 31,962 2.2 % 31,324 2.8 % 638 2.0 %
Total costs and
expenses 1,323,087 92.3 % 1,018,320 92.6 % 304,767 29.9 %
Operating income 110,730 7.7 % 80,816 7.4 % 29,914 37.0 %
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Interest expense,
net 50,384 3.5 % 45,332 4.1 % 5,052 11.1 %
Change in fair
value of warrant
liability (18,509) (1.3) % (40,622) (3.7) % 22,113 NM %
Change in fair
value of contingent
consideration
common shares
liability - - % (24,044) (2.2) % 24,044 NM %
Loss on
extinguishment of
debt - - % 11,949 1.1 % (11,949) NM %
Other loss, net 6,922 0.5 % 1,150 0.1 % 5,772 NM %
Income before
income taxes 71,933 5.0 % 87,051 8.0 % (15,118) (17.4) %
Income tax expense 14,456 1.0 % 10,635 1.0 % 3,821 NM %
Net income 57,477 4.0 % 76,416 7.0 % (18,939) (24.8) %
Income attributable
to noncontrolling
interest 1,695 0.1 % 1,275 0.1 % 420 NM %
Net income
attributable to
AdaptHealth Corp. $ 55,782 3.9 % $ 75,141 6.9 % $ (19,359) (25.8) %
Net Revenue. Net revenue for the six months ended June 30, 2022 and 2021 was
$1,433.8 million and $1,099.1 million , respectively, an increase of $334.7
million or 30.4%. Net revenue for the 2022 and 2021 periods included $0.4
million and $9.9 million , respectively, from referral partners and healthcare
facilities in support of their urgent needs as the coronavirus pandemic led to
an increased demand for respiratory equipment including ventilators and oxygen
concentrators. Excluding this revenue, net revenue was $1,433.4 million and
$1,089.2 million for the six months ended June 30, 2022 and 2021, respectively,
an increase of $344.2 million . The increase in net revenue was driven primarily
by acquisitions completed after January 1, 2021 , which increased net revenue by
$332.9 million . Additionally, net revenue during the six months ended June 30,
2022 was impacted by a recall of certain ventilator, BiPAP, and CPAP devices
supplied to AdaptHealth by Philips Respironics (Philips). On June 14, 2021 ,
AdaptHealth received notice from Philips that these devices would be included in
a Philips voluntary recall due to potential health risks to patients. Currently,
it is not possible to purchase these products from Philips, which has led to
shortages in the supply chain, and other suppliers are unable to meet the strong
patient demand for these products, which has materially affected AdaptHealth's
ability to service patient demand for these devices during the six months ended
June 30, 2022 .
For the six months ended June 30, 2022 , net sales revenue (recognized at a point
in time) comprised 68% of total net revenue, compared to 65% of total net
revenue for the six months ended June 30, 2021 . For the six months ended June
30, 2022 , net revenue from fixed monthly equipment reimbursements comprised 32%
of total net revenue, compared to 35% of total net revenue for the six months
ended June 30, 2021 .
Cost of Net Revenue.
The following table summarizes cost of net revenue for the six months ended June
30, 2022 and 2021:
Six Months Ended June 30,
2022 2021
Revenue Revenue Increase/(Decrease)
(in thousands, except
percentages) Dollars Percentage Dollars Percentage Dollars Percentage
(unaudited)
Cost of products and
supplies $ 571,540 39.9 % $ 420,568 38.3 % $ 150,972 35.9 %
Salaries, labor and
benefits 362,229 25.3 % 266,702 24.3 % 95,527 35.8 %
Patient equipment
depreciation 124,542 8.7 % 79,675 7.2 % 44,867 56.3 %
Other operating
expenses 114,939 8.0 % 93,064 8.5 % 21,875 23.5 %
Rent and occupancy 30,189 2.1 % 22,477 2.0 % 7,712 34.3 %
Equity-based
compensation 3,694 0.2 % 4,932 0.4 % (1,238) (25.1) %
Total cost of net
revenue $ 1,207,133 84.2 % $ 887,418 80.7 % $ 319,715 36.0 %
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Cost of net revenue for the six months ended June 30, 2022 and 2021 was $1,207.1
million and $887.4 million , respectively, an increase of $319.7 million or
36.0%, which is primarily related to acquisition growth. Costs of products and
supplies increased by $151.0 million primarily as a result of acquisition
growth, increased product costs, and increased net sales revenue. Salaries,
labor and benefits increased by $95.5 million , primarily related to acquisition
growth, increased headcount, higher commissions and overtime and wage increases.
The increase in rent and occupancy and other operating expenses is primarily
related to acquisition growth and increased fuel costs.
Cost of net revenue was 84.2% of net revenue for the six months ended June 30,
2022 compared to 80.7% for the six months ended June 30, 2021 . The cost of
products and supplies was 39.9% of net revenue in the 2022 period compared to
38.3% in the 2021 period. Salaries, labor and benefits was 25.3% of net revenue
in the 2022 period compared to 24.3% in the 2021 period. Patient equipment
depreciation was 8.7% of net revenue in the 2022 period compared to 7.2% in the
2021 period, primarily as a result of a change in product mix.
General and Administrative Expenses. General and administrative expenses for the
six months ended June 30, 2022 and 2021 were $84.0 million and $99.6 million ,
respectively, a decrease of $15.6 million or 15.6%. This decrease is primarily
due to (1) lower transaction costs as there was less acquisition activity in the
first half of 2022, (2) lower equity-based compensation expense as there was
less equity-based compensation grant activity in the first half of 2022, offset
by (3) higher professional fees including legal, accounting,
information-technology, and consulting, including costs for Sarbanes Oxley
compliance, and (4) higher labor costs associated with increased headcount and
higher wages. General and administrative expenses as a percentage of net revenue
was 5.9% in the 2022 period, compared to 9.1% in the 2021 period. General and
administrative expenses in the 2022 period included $4.7 million of transaction
costs, $7.5 million of equity-based compensation expense, and other
non-recurring expenses of $3.5 million . General and administrative expenses in
the 2021 period included $39.3 million of transaction costs, $11.1 million of
equity-based compensation expense, and other non-recurring expenses of $1.1
million . Excluding the impact of these charges, general and administrative
expenses as a percentage of net revenue was 4.8% and 4.4% in the 2022 period and
the 2021 period, respectively.
Depreciation and amortization, excluding patient equipment depreciation.
Depreciation and amortization, excluding patient equipment depreciation, for the
six months ended June 30, 2022 and 2021 was $32.0 million and $31.3 million ,
respectively, an increase of $0.7 million . The increase was primarily related to
higher depreciation expense associated with fixed assets excluding patient
equipment, offset by lower amortization of intangible assets.
Interest Expense. Interest expense for the six months ended June 30, 2022 and
2021 was $50.4 million and $45.3 million , respectively. Interest expense related
to long-term debt was higher in 2022 compared to 2021 as a result of higher
long-term debt borrowings outstanding during that period and higher interest
rates. Such borrowings were primarily used to fund acquisitions.
Change in Fair Value of Warrant Liability. AdaptHealth has outstanding warrants
to purchase shares of Common Stock, as discussed in Note 10, Stockholders'
Equity, to the accompanying June 30, 2022 interim consolidated financial
statements. These warrants are liability-classified, and the change in fair
value of the warrant liability represents a non-cash gain in the 2022 and 2021
periods for the change in the estimated fair value of such liability during the
respective periods.
Change in Fair Value of Contingent Consideration Common Shares Liability. In
connection with the Business Combination, certain former owners of AdaptHealth
Holdings are entitled to contingent consideration common shares, as discussed in
Note 10, Stockholders' Equity, to the accompanying June 30, 2022 interim
consolidated financial statements. These shares were liability-classified
through December 31, 2021 , and the change in fair value of the contingent
consideration common shares liability represents a non-cash gain in the 2021
period for the change in the estimated fair value of such liability during the
period.
Loss on Extinguishment of Debt. Loss on extinguishment of debt for the six
months ended June 30, 2021 consisted of the write-off of unamortized deferred
financing costs and other expenses related to AdaptHealth refinancing its credit
facility in January 2021 and amending such agreement in April 2021 , and also
includes the write-off of
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unamortized deferred financing costs and debt prepayment penalties in connection
with the prepayment of a portion of
Other Loss, net. Other loss, net for the six months endedJune 30, 2022 consisted of a$4.5 million expense related to changes inAdaptHealth's estimated TRA liability,$1.0 million of expenses associated with legal settlements,$0.8 million loss related to the write-off of an investment, and$0.6 million of expenses associated with lease terminations. Other loss, net for the six months endedJune 30, 2021 consisted of$0.9 million of expenses associated with legal settlements,$1.0 million of expenses associated with lease terminations, and$0.7 million of net other income.
Income Tax Expense. Income tax expense for the six months ended
EBITDA and Adjusted EBITDA
AdaptHealth uses EBITDA and Adjusted EBITDA, which are financial measures that are not prepared in accordance with generally accepted accounting principles inthe United States , orU.S. GAAP, to analyze its financial results and believes that they are useful to investors, as a supplement toU.S. GAAP measures. In addition,AdaptHealth's ability to incur additional indebtedness and make investments under its existing credit agreement is governed, in part, by its ability to satisfy tests based on a variation of Adjusted EBITDA.
AdaptHealth defines Adjusted EBITDA as EBITDA (as defined above), plus loss on extinguishment of debt, equitybased compensation expense, transaction costs, change in fair value of the contingent consideration common shares liability, change in fair value of the warrant liability, and other non-recurring items of expense or income.
EBITDA and Adjusted EBITDA should not be considered as measures of financial performance underU.S. GAAP, and the items excluded from EBITDA and Adjusted EBITDA are significant components in understanding and assessing financial performance. Accordingly, these key business metrics have limitations as an analytical tool. They should not be considered as an alternative to net income or any other performance measures derived in accordance withU.S. GAAP or as an alternative to cash flows from operating activities as a measure ofAdaptHealth's liquidity.
The following unaudited table presents the reconciliation of net income
attributable to
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Three Months Ended June 30, Six Months Ended June 30,
(in thousands) 2022 2021 2022 2021
(Unaudited)
Net income attributable to
AdaptHealth Corp. $ 14,032 $ 79,107 $ 55,782 $ 75,141
Income attributable to
noncontrolling interest 1,215 951
1,695 1,275
Interest expense, net 25,608 23,147 50,384 45,332
Income tax expense 8,853 12,330 14,456 10,635
Depreciation and amortization,
including patient equipment
depreciation 79,474 63,793 156,504 110,999
EBITDA 129,182 179,328 278,821 243,382
Loss on extinguishment of debt (a) - 7,736 - 11,949
Equity-based compensation expense
(b) 5,720 7,447 11,222 16,029
Transaction costs (c) 2,205 8,100 5,313 39,954
Change in fair value of warrant
liability (d) 8,208 (37,454) (18,509) (40,622)
Change in fair value of contingent
consideration common shares
liability (e) - (22,079) - (24,044)
Other non-recurring expense, net
(f) 4,692 4,313 10,804 4,918
Adjusted EBITDA $ 150,007 $ 147,391 $ 287,651 $ 251,566 Represents the write-off of unamortized deferred financing costs and other
(a) expenses related to refinancing of debt and pre-payment penalties for early
debt payoff.
(b) Represents equity-based compensation expense for awards granted to employees
and non-employee directors.
(c) Represents transaction costs and expenses related to integration efforts
related to acquisitions.
Represents a non-cash charge or gain for the change in the estimated fair
value of the warrant liability. Refer to Note 10, Stockholders' Equity,
(d) included in the accompanying notes to the interim consolidated financial
statements for the three and six months ended
discussion of such non-cash charge or gain.
Represents a non-cash gain for the change in the estimated fair value of the
contingent consideration common shares liability. Refer to Note 10,
(e) Stockholders' Equity, included in the accompanying notes to the interim
consolidated financial statements for the three and six months ended
2022 for additional discussion of such non-cash gain.
The 2022 year-to-date period consists of a
changes in
associated with litigation claims,
lease terminations, a
(f) investment, and
year-to-date period consists of
other costs associated with the separation of the Company's former Co-CEO,
other matters,
and
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, and to fund share repurchases.AdaptHealth's future capital expenditure requirements will depend on many factors, including its patient volume and revenue growth rates. 54
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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 may seek additional equity or debt financing in connection with the growth of its business, primarily for acquisitions. In addition, the COVID-19 pandemic may cause disruption in the capital markets, which could make financing more difficult and/or expensive. In the event that additional financing is required from outside sources,AdaptHealth may not be able to raise it on acceptable terms or at all. If additional capital is unavailable when desired,AdaptHealth's business, results of operations, and financial condition would be materially and adversely affected. As ofJune 30, 2022 ,AdaptHealth had approximately$118.8 million of cash and cash equivalents. To supplement its cash liquidity, inApril 2020 ,AdaptHealth received recoupable advance payments of$45.8 million , which were made available by CMS under the CARES Act. In addition, in connection with an acquisition completed inJuly 2020 ,AdaptHealth assumed a liability of$3.7 million relating to CMS recoupable advance payments received by the acquired company prior to the date of acquisition. The recoupment of the advance payments by CMS began inApril 2021 and is being applied to services provided and revenue recognized during the period in which the recoupment occurs, and will impactAdaptHealth's cash receipts for services provided until such time all amounts have been recouped. As ofJune 30, 2022 , the remaining amount of the CMS advance payments that had not yet been recouped was$3.7 million , which is included in other current liabilities in the consolidated balance sheets.AdaptHealth expects this amount to be fully recouped or repaid to CMS during the remainder of 2022. In addition, inApril 2020 ,AdaptHealth received distributions of the CARES Act PRF of$17.2 million . Subsequent toApril 2020 ,AdaptHealth completed several acquisitions in which the acquired companies received a total of$22.2 million of PRF payments prior to the applicable dates of acquisition. In connection with the accounting for these acquisitions,AdaptHealth recorded assumed liabilities of$7.7 million relating to the PRF payments received by the acquired companies. The PRF payments are targeted to offset lost revenue and expenditures incurred in connection with the COVID-19 pandemic. The PRF payments are subject to certain restrictions and are subject to recoupment if not used for designated purposes. As a condition to receiving distributions, providers were required to agree to certain terms and conditions, including, among other things, that the funds would be used for lost revenues and unreimbursed COVID-19 related expenses as defined by theU.S. Department of Health and Human Services ("HHS"). All recipients of PRF payments were required to comply with the reporting requirements described in the terms and conditions and as determined by HHS.AdaptHealth recognizes grant payments as income when there is reasonable assurance that it has complied with the conditions associated with the grant. As ofDecember 31, 2021 ,AdaptHealth has recognized all of the PRF payments it has received and the liabilities assumed for PRF payments received from acquired companies as grant income, as it was determined thatAdaptHealth has complied with the conditions associated with the grant. As such, there is no liability recorded inAdaptHealth's interim consolidated financial statements relating to the PRF payments as ofJune 30, 2022 . HHS has indicated that the CARES Act PRF are subject to ongoing reporting and changes to the terms and conditions, and there have been several updates to such reporting requirements and terms and conditions since they were issued by HHS. Such updates have related to changes to the guidance regarding utilization of the funds granted from the PRF and updates to the reporting requirements of such funds, among other updates. To the extent that there is any future updated guidance from HHS or modifications to the terms and conditions, it may affectAdaptHealth's ability to comply andAdaptHealth could be required to reverse the recognition of the grant income recorded and return a portion of the funds received, which could be material toAdaptHealth .AdaptHealth is continuing to monitor the terms and conditions issued by HHS. Furthermore, HHS has indicated that it will be closely monitoring and, along with theOffice of Inspector General (United States ) (OIG), auditing providers to ensure that recipients comply with the terms and conditions of relief programs and to prevent fraud and abuse. All providers will be subject to civil and criminal penalties for any deliberate omissions, misrepresentations or falsifications of any information given to HHS. Also, as permitted under the CARES Act,AdaptHealth elected to defer certain portions of employer-paid FICA taxes otherwise payable fromMarch 27, 2020 toJanuary 1, 2021 . In total,AdaptHealth deferred$8.6 million under this 55
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provision.AdaptHealth paid$4.3 million onJanuary 4, 2022 and the remaining balance of$4.3 million is expected to be paid shortly afterDecember 31, 2022 . As ofJune 30, 2022 ,$4.3 million is included in other current liabilities in the consolidated balance sheets. AtJune 30, 2022 ,AdaptHealth had$775.0 million outstanding under its existing credit facility. InJanuary 2021 ,AdaptHealth refinanced its debt borrowings and entered into a new credit agreement, which was subsequently amended inApril 2021 (the "2021 Credit Agreement"). The 2021 Credit Agreement consists of a$800 million term loan (the "2021 Term Loan") and$450 million in commitments for revolving credit loans with a$55 million letter of credit sublimit (the "2021 Revolver"), both with maturities inJanuary 2026 . The borrowing under the 2021 Term Loan requires quarterly principal repayments of$5.0 million beginningJune 30, 2021 throughMarch 31, 2023 , increasing to$10.0 million beginningJune 30, 2023 throughDecember 31, 2025 , and the unpaid principal balance is due at maturity inJanuary 2026 . Borrowings under the 2021 Revolver may be used for working capital and other general corporate purposes, including for capital expenditures and acquisitions permitted under the 2021 Credit Agreement. As ofJune 30, 2022 , and the date of this filing, there were no outstanding borrowings under the 2021 Revolver. Amounts borrowed under the 2021 Credit Agreement bear interest quarterly at variable rates based upon the sum of (a) the Adjusted LIBOR Rate (subject to a zero percent floor) equal to the LIBOR (as defined) for the applicable interest period multiplied by the statutory reserve rate, plus (b) an applicable margin (as defined) ranging from 1.50% to 3.25% per annum based on the Consolidated Senior Secured Leverage Ratio (as defined). The 2021 Revolver carries a commitment fee during the term of the 2021 Credit Agreement ranging from 0.25% to 0.50% per annum of the actual daily undrawn portion of the 2021 Revolver based on the Consolidated Senior Secured Leverage Ratio. Under the 2021 Credit Agreement,AdaptHealth is subject to a number of restrictive covenants that, among other things, impose operating and financial restrictions onAdaptHealth . Financial covenants include a Consolidated Total Leverage Ratio and a Consolidated Interest Coverage Ratio, both as defined in the 2021 Credit Agreement. The 2021 Credit Agreement also contains certain customary events of default, including, among other things, failure to make payments when due thereunder, failure to observe or perform certain covenants, cross-defaults, bankruptcy and insolvency-related events, and non-compliance with healthcare laws. Any borrowing under the 2021 Credit Agreement may be repaid, in whole or in part, at any time and from time to time without premium or penalty, other than customary breakage costs, and any amounts repaid under the 2021 Revolver may be reborrowed. Mandatory prepayments are required under the 2021 Revolver when borrowings and letter of credit usage exceed the total commitments for revolving credit loans. Mandatory prepayments are also required in connection with the disposition of assets to the extent not reinvested, unpermitted debt transactions, and excess cash flow, as defined, if certain leverage tests are not met.AdaptHealth was in compliance with all debt covenants as ofJune 30, 2022 . InAugust 2021 ,AdaptHealth LLC issued$600.0 million aggregate principal amount of 5.125% senior unsecured notes due 2030 (the "5.125% Senior Notes"). The 5.125% Senior Notes will mature onMarch 1, 2030 . Interest on the 5.125% Senior Notes is payable onMarch 1st andSeptember 1st of each year, beginning onMarch 1, 2022 . The 5.125% Senior Notes will be redeemable atAdaptHealth's option, in whole or in part, at any time on or afterMarch 1, 2025 , and the redemption price for the 5.125% Senior Notes if redeemed during the 12 months beginning (i)March 1, 2025 is 102.563%, (ii)March 1, 2026 is 101.281%, (iii)March 1, 2027 and thereafter is 100.000%, in each case together with accrued and unpaid interest.AdaptHealth may also redeem some or all of the 5.125% Senior Notes beforeMarch 1, 2025 at a redemption price of 100% of the principal amount of the 5.125% Senior Notes, plus a "make-whole" premium, together with accrued and unpaid interest. In addition,AdaptHealth may redeem up to 40% of the original aggregate principal amount of the 5.125% Senior Notes beforeMarch 1, 2025 with the proceeds from certain equity offerings at a redemption price equal to 105.125% of the principal amount of the 5.125% Senior Notes, together with accrued and unpaid interest. Furthermore,AdaptHealth may be required to make an offer to purchase the 5.125% Senior Notes upon the sale of certain assets or upon specific kinds of changes of control. InJanuary 2021 ,AdaptHealth LLC issued$500.0 million aggregate principal amount of 4.625% senior unsecured notes due 2029 (the "4.625% Senior Notes"). The 4.625% Senior Notes will mature onAugust 1, 2029 . Interest on the 4.625% Senior Notes is payable onFebruary 1st andAugust 1st of each year, beginning onAugust 1, 2021 . The 4.625% Senior Notes will be redeemable atAdaptHealth's option, in whole or in part, at any time on or afterFebruary 1, 2024 , and the redemption price for the 4.625% Senior Notes if redeemed during the 12 months beginning (i)February 1, 2024 is 102.313%, (ii)February 1, 2025 is 101.156%, and (iii)February 1, 2026 and thereafter is 100.000%, 56
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in each case together with accrued and unpaid interest.AdaptHealth may also redeem some or all of the 4.625% Senior Notes beforeFebruary 1, 2024 at a redemption price of 100% of the principal amount of the 4.625% Senior Notes, plus a "make-whole" premium, together with accrued and unpaid interest. In addition,AdaptHealth may redeem up to 40% of the original aggregate principal amount of the 4.625% Senior Notes beforeFebruary 1, 2024 with the proceeds from certain equity offerings at a redemption price equal to 104.625% of the principal amount of the 4.625% Senior Notes, together with accrued and unpaid interest. Furthermore,AdaptHealth may be required to make an offer to purchase the 4.625% Senior Notes upon the sale of certain assets or upon specific kinds of changes of control. InJuly 2020 ,AdaptHealth LLC issued$350.0 million aggregate principal amount of 6.125% senior unsecured notes due 2028 (the "6.125% Senior Notes"). The 6.125% Senior Notes will mature onAugust 1, 2028 . Interest on the 6.125% Senior Notes is payable onFebruary 1st andAugust 1st of each year, beginning onFebruary 1, 2021 . The 6.125% Senior Notes will be redeemable atAdaptHealth's option, in whole or in part, at any time on or afterAugust 1, 2023 , and the redemption price for the 6.125% Senior Notes if redeemed during the 12 months beginning (i)August 1, 2023 is 103.063%, (ii)August 1, 2024 is 102.042%, (iii)August 1, 2025 is 101.021% and (iv)August 1, 2026 and thereafter is 100.000%, in each case together with accrued and unpaid interest.AdaptHealth may also redeem some or all of the 6.125% Senior Notes beforeAugust 1, 2023 at a redemption price of 100% of the principal amount of the 6.125% Senior Notes, plus a "make-whole" premium, together with accrued and unpaid interest. In addition,AdaptHealth may redeem up to 40% of the original aggregate principal amount of the 6.125% Senior Notes beforeAugust 1, 2023 with the proceeds from certain equity offerings at a redemption price equal to 106.125% of the principal amount of the 6.125% Senior Notes, together with accrued and unpaid interest. Furthermore,AdaptHealth may be required to make an offer to purchase the 6.125% Senior Notes upon the sale of certain assets or upon specific kinds of changes of control. As ofJune 30, 2022 andDecember 31, 2021 ,AdaptHealth had working capital of$169.7 million and$170.2 million , respectively. A significant portion ofAdaptHealth's assets consists of accounts receivable from third-party payors that are responsible for payment for the products and services thatAdaptHealth provides. Cash Flow. The following table presents selected data fromAdaptHealth's consolidated statements of cash flows for six months endedJune 30, 2022 and 2021: Six Months Ended June 30, (in thousands) 2022 2021 (unaudited)
Net cash provided by operating activities$ 169,924 $ 147,624 Net cash used in investing activities (170,031)
(1,372,027)
Net cash (used in) provided by financing activities (30,711)
1,302,630
Net (decrease) increase in cash and cash equivalents (30,818)
78,227
Cash and cash equivalents at beginning of period 149,627
99,962
Cash and cash equivalents at end of period$ 118,809
Net cash provided by operating activities for the six months endedJune 30, 2022 and 2021 was$169.9 million and$147.6 million , respectively, an increase of$22.3 million . The increase was the result of (1) a$18.9 million reduction in net income, (2) a net increase of$74.6 million in non-cash charges, primarily from depreciation and amortization, the change in the estimated fair value of the warrant liability and contingent consideration common shares liability, equity-based compensation expense, and loss on extinguishment of debt, (3) payments of$2.5 million for contingent consideration related to acquisitions, and (4) a net$30.9 million decrease resulting from the change in operating assets and liabilities, primarily from the change in accounts receivable, inventory and accounts payable and accrued expenses. Net cash used in investing activities for the six months endedJune 30, 2022 and 2021 was$170.0 million and$1,372.0 million , respectively. The use of funds in the 2022 period consisted of$15.3 million for business acquisitions,$154.3 million for equipment and other fixed asset purchases and$0.4 million for other investments, which has increased compared to the 2021 period due to acquisitions and partly to inflationary cost increases. The use of funds in 57
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the 2021 period consisted of
Net cash used in financing activities for the six months endedJune 30, 2022 was$30.7 million compared to net cash provided by financing activities of$1,302.6 million for the six months endedJune 30, 2021 . Net cash used in financing activities for the 2022 period consisted of repayments of$22.5 million on long-term debt and finance lease obligations, payments of$2.4 million for contingent consideration and deferred purchase price in connection with acquisitions, a payment of$3.4 million for Common Stock purchases under a share repurchase program, a payment of$2.0 million for a distribution to noncontrolling interests, and payments of$1.9 million for tax withholdings associated with equity-based compensation and stock option exercises, offset by proceeds of$0.8 million in connection with the employee stock purchase plan and proceeds of$0.7 million relating to stock option exercises. Net cash provided by financing activities for the six months endedJune 30, 2021 consisted of proceeds of$1,070.0 million from borrowings on long-term debt and lines of credit, proceeds of$500.0 million from the issuance of senior unsecured notes, proceeds of$278.9 million from the issuance of shares of Common Stock in connection with a public underwritten offering, proceeds of$2.3 million from the exercise of options, and proceeds of$0.3 million in connection with the employee stock purchase plan, offset by total repayments of$490.3 million on long-term debt and capital lease obligations, payments of$13.8 million for equity issuance costs, payments of$18.1 million for debt issuance costs, payments of$16.3 million for contingent consideration and deferred purchase price related to acquisitions, payments of$8.5 million for debt prepayment penalties, payments of$1.1 million for distributions to noncontrolling interests, and payments of$0.8 million relating to tax withholdings associated with equity-based compensation activity.
Critical Accounting Estimates
The discussion and analysis of the Company's financial condition and results of operations is based upon the Company's consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of the Company's consolidated financial statements requires its management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. The Company's management bases its estimates, assumptions and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Different assumptions and judgments would change the estimates used in the preparation of the Company's consolidated financial statements which, in turn, could change the results from those reported. In addition, actual results may differ from these estimates and such differences could be material to the Company's financial position and results of operations. Critical accounting 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 estimates in relation to its consolidated financial statements include those related to revenue recognition, accounts receivable, business combinations, and valuation of goodwill and long-lived assets. There have been no material changes in the Company's critical accounting estimates as compared to the critical accounting estimates described in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Recent Accounting Pronouncements
Recently issued accounting pronouncements that may be relevant to the Company's operations but have not yet been adopted are outlined in Note 1 (i), Recently Issued Accounting Pronouncements, to its interim consolidated financial statements included elsewhere in this report.
Commitments and Contingencies
In the normal course of business, the Company is subject to loss contingencies,
such as legal proceedings and claims arising out of its business that cover a
wide range of matters. In accordance with FASB ASC Topic 450,
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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 judgment is required to determine both probability and the estimated amount. The Company reviews its accruals at least quarterly and adjusts accordingly to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information. At this time, the Company has no material accruals related to lawsuits, claims, investigations and proceedings. While there can be no assurance, based on the Company's evaluation of information currently available, the Company's management believes any liability that may ultimately result from resolution of such loss contingencies will not have a material adverse effect on the Company's financial conditions or results of operations. However, the Company's assessment may be affected by limited information. Accordingly, the Company's assessment may change in the future based upon availability of new information and further developments in the proceedings of such matters. The results of legal proceedings are inherently uncertain, and material adverse outcomes are possible. In connection with the Company's acquisition ofPPS HME Holdings LLC (PPS), inMay 2018 , the Company assumed a Corporate Integrity Agreement (CIA) at one of PPS' subsidiaries,Braden Partners L.P. d/b/a Pacific Pulmonary Services (BP). The CIA was entered into with theOffice of Inspector General of the U.S. Department of Health and Human Services (OIG). The CIA has a five-year term which expires as ofApril 2022 . In connection with the acquisition and integration of PPS byAdaptHealth , the OIG confirmed that the requirements of the CIA imposed upon BP would only apply to the operations of BP and therefore no operations of any otherAdaptHealth affiliate are subject to the requirements of the CIA following the acquisition. OnDecember 16, 2021 , the OIG-HHS notified PPS that its report for the period endedMarch 31, 2021 had been accepted and PPS had satisfied its obligations under the CIA as of such date. OnMay 24, 2022 , the Company submitted its report for the period endedMarch 31, 2022 . OnJuly 25, 2017 ,AdaptHealth Holdings LLC , aDelaware limited liability company (AdaptHealth Holdings ), was served with a subpoena by theU.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 focused on billing practices regarding one payor that contracted for bundled payments for certain ventilators.AdaptHealth Holdings has cooperated with investigators and, through agreement with the EDPA, has submitted all information requested in the Company's possession. An independent third party was retained byAdaptHealth Holdings that identified overpayments and underpayments for ventilator billings related to the payor, and a remittance was sent to reconcile that account. OnOctober 3, 2019 , the Company received a follow-up civil investigative demand from the EDPA regarding a document previously produced to the EDPA and patients included in the review by the independent third party. The Company has responded to the EDPA and supplemented its production as requested with any relevant documents in the Company's possession. During subsequent communications, the EDPA indicated to the Company that the investigation remained ongoing. The EDPA also requested additional information regarding certain patient services and claims refunds processed by the Company in 2017. The Company produced this information in coordination with the EDPA. The EDPA has also raised questions regarding other aspects of ventilator billing. While the Company cannot provide any assurance as to whether the EDPA will seek additional information or pursue this matter further, it does not believe that the investigation will have a material adverse effect on the Company. InMarch 2019 , prior to its acquisition by the Company,AeroCare was served with a civil investigative demand (CID) issued bythe United States Attorney for theWestern District ofKentucky (WDKY). The CID seeks to investigate allegations thatAeroCare improperly billed, or caused others to improperly bill, for oxygen tank contents that were not delivered to beneficiaries. The WDKY has requested documents related to such oxygen tank content billing as well as other categories of information.AeroCare has cooperated with the WDKY and has produced documents and provided explanations of its billing practices. InSeptember 2020 , the WDKY indicated the investigation includes alleged violations of the federal False Claims Act and as well as alleged violations of state Medicaid false claims acts in ten states.AeroCare has cooperated fully with the investigation and has indicated to the WDKY that concerns raised do not accurately identify Medicare coverage criteria and that state Medicaid coverage requirements generally do not provide for separate reimbursement for portable gaseous oxygen contents in the circumstances at issue. While the Company cannot provide any assurance as to whether the WDKY will seek additional information or pursue this matter further, it does not believe that the investigation will have a material adverse effect on the Company. 59
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OnJuly 29, 2021 ,Robert Charles Faille Jr ., a purported shareholder of the Company, filed a purported class action complaint against the Company and certain of its current and former officers in theUnited States District Court for the Eastern District of Pennsylvania (the "Complaint"). The Complaint purports to be asserted on behalf of a class of persons who purchased the Company's stock betweenNovember 11, 2019 andJuly 16, 2021 . The Complaint generally alleges that the Company and certain of its current and former officers violated federal securities laws by making allegedly false and misleading statements and/or failing to disclose material information regarding the Company's organic growth trajectory. The Complaint seeks unspecified damages. OnOctober 14, 2021 , the Delaware County Employees Retirement System and the Bucks County Employees Retirement System were named Lead Plaintiffs. Pursuant to the scheduling order, Lead Plaintiffs filed a consolidated complaint onNovember 22, 2021 (the "Consolidated Complaint"), which asserts substantially the same claim, but adds a number of current and former directors of the Company as additional defendants and a new theory of recovery based on the Company's alleged failure to disclose information concerning the Company's former Co-CEO's alleged tax fraud arising from certain past private activity (the "Consolidated Class Action"). OnJanuary 20, 2022 , the defendants filed a motion to dismiss the Consolidated Complaint. Lead Plaintiffs' opposition to defendants' motion was filed onMarch 21, 2022 , and defendants' reply was filedApril 15, 2022 . OnJune 9, 2022 , the court issued an opinion and order denying the defendants' motion to dismiss the Consolidated Complaint. OnJuly 15, 2022 , the court entered a scheduling order providing for, inter alia, a schedule for completing class certification discovery, as well as setting a briefing schedule for motions for class certification. Pursuant to the scheduling order, Lead Plaintiffs filed their motion for class certification onJuly 28, 2022 . The defendants' opposition to Lead Plaintiffs' motion for class certification is due to be filed onJanuary 20, 2023 ; and Lead Plaintiffs' reply is due to be filed onMarch 10, 2023 . The Company intends to vigorously defend against the allegations contained in the Consolidated Complaint, but there can be no assurance that the defense will be successful. OnDecember 6, 2021 , a putative shareholder of the Company,Carol Hessler , filed a shareholder derivative complaint against certain current and former directors and officers of the Company in theUnited States District Court for the Eastern District of Pennsylvania (the "Derivative Complaint"). The Derivative Complaint generally alleges that the defendants breached their fiduciary duties owed to the Company by allegedly causing or allowing misrepresentations and/or omissions regarding the Company's organic growth and the Company's former Co-CEO's alleged criminal activity, failing to maintain an adequate system of oversight, disclosure controls and procedures, and internal controls over financial reporting and due diligence into the Company's management team, and engaging in insider trading. The Derivative Complaint also alleges claims for waste of corporate assets and unjust enrichment. Finally, the Derivative Complaint alleges that certain of the individual defendants violated Section 14(a) of the Securities Exchange Act by allegedly negligently issuing, causing to be issued, and participating in the issuance of materially misleading statements to stockholders in the Company's Proxy Statements on Schedule DEF 14A in connection with a Special Meeting of Stockholders, held onMarch 3, 2021 , and the 2021 Annual Meeting of Stockholders, held onJuly 27, 2021 . The Derivative Complaint seeks, among other things, an award of money damages.
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The Company intends to vigorously defend against the allegations contained in the Derivative Complaint, but there can be no assurance that the defense will be successful. OnMay 2, 2022 , theU.S. Attorney's Office for the Southern District of New York issued a civil investigative demand toCommunity Surgical Supply Inc. (CSS), a subsidiary of the Company, pursuant to the False Claims Act, 31 U.S.C. § 3733 (FCA) surrounding whether CSS submitted false claims in violation of theFCA related to CSS's billing of, and reimbursements from, federal health care programs for ventilators provided to patients fromJanuary 1, 2015 to the present. The Company is fully cooperating with the investigation. Given the investigation is in the early stages, it is not possible to determine whether it will have a material adverse effect on the Company.
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