DFB HEALTHCARE ACQUISITIONS CORP. The following discussion should be read in conjunction withAdaptHealth Corp.'s ("AdaptHealth" or the "Company") consolidated interim 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 "Risk Factors" in Part II, Item 1A of this report on Form 10-Q.AdaptHealth Corp. OverviewAdaptHealth is a national leader in providing patient-centered, healthcare-at-home solutions including home medical equipment, 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 ("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 ofJune 30, 2021 ,AdaptHealth serviced approximately 3.3 million patients annually in all 50 states through its network of 678 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 impactedAdaptHealth's business, as well as its patients, communities, and employees.AdaptHealth's priorities during the COVID-19 pandemic remain protecting the health and safety of its employees (including patient-facing employees providing respiratory and other services), maximizing the availability of its services and products to support patient health needs, and the operational and financial stability of its business. In response to the COVID-19 pandemic and the National Emergency Declaration, datedMarch 13, 2020 , 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 funds received by the acquired company prior to the date of acquisition for CMS recoupable advance payments. The recoupment of the advance payments by CMS has begun inApril 2021 and is being applied to services provided and revenue recognized during the period in which the recoupment occurs, and will impact the Company's cash receipts for services provided until such time all amounts have been recouped. During the three months endedJune 30, 2021 , CMS has recouped a total of$15.9 million . AtJune 30, 2021 , the Company has deferred a total of$33.6 million related to CMS recoupable advance payments, which is included in other current liabilities in the consolidated balance sheet as ofJune 30, 2021 . In addition, inApril 2020 ,AdaptHealth received distributions of the CARES Act PRF of$17.2 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 42 Table of Contents
condition to receiving distributions, providers must agree to certain terms and conditions, including, among other things, that the funds are being used for lost revenues and unreimbursed COVID-19 related expenses as defined by theU.S. Department of Health and Human Services ("HHS"). All recipients of PRF payments are required to comply with the reporting requirements described in the terms and conditions and as determined by HHS.AdaptHealth recognizes grant payments as income when there is reasonable assurance that it has complied with the conditions associated with the grant. During the year endedDecember 31, 2020 ,AdaptHealth recognized grant income of$14.3 million related to the PRF payments received. As ofJune 30, 2021 ,AdaptHealth has deferred$2.9 million of the PRF payments received inApril 2020 . In addition, in connection with certain acquisitions completed prior toJune 30, 2021 ,AdaptHealth assumed liabilities of$7.7 million relating to CARES Act provider relief fund payments received by the acquired companies prior to the dates of acquisition. AtJune 30, 2021 ,AdaptHealth has deferred a total of$10.6 million related to CARES Act provider relief funds, which is included in other current liabilities in the consolidated balance sheet as ofJune 30, 2021 . HHS has indicated that the CARES Act PRF are subject to ongoing reporting and changes to the terms and conditions, and there have been several updates to such reporting requirements and terms and conditions since they were issued by HHS. Such updates have related to changes to the guidance regarding utilization of the funds granted from the PRF and updates to the reporting requirements of such funds, among other updates. As a result of any future updated guidance from HHS,AdaptHealth could be required to reverse the recognition of the grant income recorded and return a portion of the funds recognized, which could be material toAdaptHealth .AdaptHealth is continuing to monitor the reporting requirements issued by HHS. To the extent that reporting requirements and terms and conditions are modified in the future, it may affectAdaptHealth's ability to comply and may require the return of funds. Furthermore, HHS has indicated that it will be closely monitoring and, along with theOffice of Inspector General (United States ) (OIG), auditing providers to ensure that recipients comply with the terms and conditions of relief programs and to prevent fraud and abuse. All providers will be subject to civil and criminal penalties for any deliberate omissions, misrepresentations or falsifications of any information given to HHS. Also, as permitted under the CARES Act,AdaptHealth has elected to defer certain portions of employer-paid FICA taxes otherwise payable fromMarch 27, 2020 toJanuary 1, 2021 , which will be paid in two equal installments onDecember 31, 2021 andDecember 31, 2022 .AdaptHealth has 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 sheet as ofJune 30, 2021 . While the impact of the COVID-19 pandemic, the National Emergency Declaration and the various state and local government imposed stay-at-home restrictions did not have a material impact onAdaptHealth's consolidated operating results for the three months endedMarch 31, 2020 ,AdaptHealth began to experience declines in net revenues in certain services associated with elective medical procedures (such as commencement of new CPAP services and medical equipment and orthopedic supply related to facility discharges) in the three months endedJune 30, 2020 , and such declines may continue during the duration of the COVID-19 pandemic. In response to these declines, as well as certain over staffing related to recent acquisitions,AdaptHealth conducted a workforce assessment and implemented a reduction in force inApril 2020 resulting in the elimination of approximately 6% of its workforce at that time. In connection with the workforce reductions,AdaptHealth incurred a one-time charge for severance and related expenses of approximately$1.6 million during the second quarter of 2020. 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, suspension of Medicare sequestration throughDecember 31, 2021 (resulting in an approximate 2% increase in Medicare payments to all providers), and regulatory guidance from CMS expanding telemedicine and reducing documentation requirements during the emergency period, have resulted in increased net revenues for certain products and services. The full extent of the impact of the COVID-19 pandemic onAdaptHealth's business, results of operations, and financial condition is highly uncertain and will depend on future developments and numerous evolving factors that it may not be able to accurately predict, and could be material toAdaptHealth's consolidated financial statements in future reporting periods. For additional information on risk factors that could impactAdaptHealth's results, please refer to "Risk Factors" in Part II, Item 1A of this report on Form 10-Q. 43
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Key Components of Operating Results
Net Revenue. Net revenue is recorded for services thatAdaptHealth provides to patients for home healthcare equipment, medical supplies to the home and related services.AdaptHealth's primary service lines are (i) sleep therapy equipment, supplies and related services (including CPAP and bi PAP services) to individuals suffering from OSA, (ii) medical devices and supplies to patients for the treatment of diabetes (including continuous glucose monitors and insulin pumps), (iii) home medical equipment to patients discharged from acute care and other facilities, (iv) oxygen and related chronic therapy services in the home, and (v) other HME medical devices and supplies on behalf of chronically ill patients with wound care, urological, incontinence, ostomy and nutritional supply needs. Revenues are recorded either (x) at a point in time for the sale of supplies and disposables, or (y) over the service period for equipment rental (including, but not limited to, CPAP machines, hospital beds, wheelchairs and other equipment), at amounts estimated to be received from patients or under reimbursement arrangements with Medicare, Medicaid and other third-party payors, including private insurers. Cost of Net Revenue. Cost of net revenue primarily includes the cost of non-capitalized medical equipment and supplies, distribution expenses, labor costs, facilities rental costs, third-party revenue cycle management costs and depreciation for capitalized patient equipment. Distribution expenses represent the cost incurred to coordinate and deliver products and services to the patients. Included in distribution expenses are leasing, maintenance, licensing and fuel costs for the vehicle fleet; salaries, benefits and other costs related to drivers and dispatch personnel; and amounts paid to couriers. General and Administrative Expenses. General and administrative expenses consist of corporate support costs including information technology, human resources, finance, contracting, legal, compliance leadership, equity-based compensation, transaction expenses and other administrative costs.
Depreciation and Amortization, Excluding Patient Equipment Depreciation. Depreciation expense includes depreciation charges for capital assets other than patient equipment (which is included as part of the cost of net revenue). Amortization expense includes amortization of identifiable intangible assets.
Factors Affecting AdaptHealth's Operating Results
Acquisitions
AdaptHealth accounts for its acquisitions in accordance withFinancial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, Business Combinations, and the operations of the acquired entities are included in the historical results ofAdaptHealth for the periods following the closing of the acquisition. The most significant of these acquisitions impacting the comparability ofAdaptHealth's operating results in the three and six months endedJune 30, 2021 compared to the three and six months endedJune 30, 2020 were as follows:
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Refer to Note 3, Acquisitions, included in our consolidated interim financial statements for the three and six months endedJune 30, 2021 included in this report for additional information regardingAdaptHealth's acquisitions.
Debt and Recapitalization
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). 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 borrowings 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. 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. InJanuary 2021 ,AdaptHealth 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 . InJuly 2020 ,AdaptHealth 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 . InJuly 2020 ,AdaptHealth refinanced its then current debt borrowings and entered into a new credit agreement with a new bank group (the "2020 Credit Agreement"). The 2020 Credit Agreement consisted of a$250 million term loan (the "2020 Term Loan") and$200 million in commitments for revolving credit loans, both with maturities inJuly 2025 . The amount borrowed under the 2020 Term Loan bore interest quarterly at variable rates based upon the sum of (a) the Adjusted LIBOR Rate (subject to a floor) equal to the LIBOR (as defined in the 2020 Credit Agreement) for the applicable interest period, plus (b) an applicable margin ranging from 2.50% to 3.75% per annum based on the Consolidated Total Leverage Ratio (as defined in the 2020 Credit Agreement). Outstanding amounts borrowed under the 2020 Credit Agreement were repaid in full in connection with theJanuary 2021 refinancing transaction discussed above. InMarch 2019 ,AdaptHealth restructured its then existing debt borrowings which consisted of$425 million in credit facilities, including a$300 million initial term loan,$50 million delayed draw term loan, and$75 million revolving credit facility. InNovember 2019 , the Company repaid$50 million under the initial term loan. Outstanding amounts borrowed under such credit facility were repaid in full in connection with theJuly 2020 refinancing transaction discussed above. InMarch 2019 ,AdaptHealth signed 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). 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. InJune 2021 , 45
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AdaptHealth agreed with the holders of the New Promissory Note to repay$71.8 million of the outstanding principal amount under the New Promissory Note, and wrote off$1.4 million of unamortized deferred financing costs relating to such principal amount, which is included in loss on extinguishment of debt in the accompanying consolidated statements of operations during the three and six months endedJune 30, 2021 . In addition, in connection with the prepayment of such principal amount,AdaptHealth paid a debt prepayment penalty of$8.5 million , reflecting the previously disclosed 10% prepayment penalty plus an incremental amount negotiated as part of theJune 2021 agreement, which is included in loss on extinguishment of debt in the accompanying consolidated statements of operations during the three and six months endedJune 30, 2021 . The outstanding principal balance under the New Promissory Note currently bears interest at 12% and is required to be paid in cash.
Seasonality
AdaptHealth's business experiences some seasonality. Its patients are generally responsible for a greater percentage of the cost of their treatment or therapy during the early months of the year due to co-insurance, co-payments and deductibles, and therefore may defer treatment and services of certain therapies until meeting their annual deductibles. In addition, changes to employer insurance coverage often go into effect at the beginning of each calendar year which may impact eligibility requirements and delay or defer treatment. Also, net revenue generated by the Company's diabetes product line is typically higher in the fourth quarter compared to the earlier part of the year due to the timing of when patients meet their annual deductibles and their associated reordering patterns. These factors may lead to lower net revenue and cash flow in the early part of the year versus the latter half of the year. Additionally, the increased incidence of respiratory infections during the winter season may result in initiation of additional respiratory services such as oxygen therapy for certain patient populations.AdaptHealth's quarterly operating results may fluctuate significantly in the future depending on these and other factors.
Key Business Metrics
AdaptHealth focuses on net revenue, EBITDA, Adjusted EBITDA and 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). 46 Table of Contents Three Months Ended June 30, 2021 June 30, 2020 Net Revenue Revenue Revenue (in thousands) Dollars Percentage Dollars Percentage (Unaudited) Net sales revenue - Point in time Sleep$ 163,331 26.5 %$ 84,421 36.4 % Diabetes 123,314 20.0 % 6,372 2.7 % Supplies to the home 42,675 6.9 % 27,868 12.0 % Respiratory 13,154 2.1 % 18,114 7.8 % HME 30,360 4.9 % 12,727 5.5 % Other 27,763 4.5 % 11,463 4.9 % Total Net sales revenue$ 400,597 64.9 %$ 160,965 69.3 % Net revenue from fixed monthly equipment reimbursements Sleep$ 66,335 10.8 %$ 22,644 9.8 % Diabetes 3,216 0.5 % - - % Respiratory 111,528 18.1 % 30,856 13.3 % HME 24,431 4.0 % 13,262 5.7 % Other 10,910 1.7 % 4,389 1.9 % Total Net revenue from fixed monthly equipment reimbursements$ 216,420 35.1 %$ 71,151 30.7 % Total net revenue Sleep$ 229,666 37.3 %$ 107,065 46.2 % Diabetes 126,530 20.5 % 6,372 2.7 % Supplies to the home 42,675 6.9 % 27,868 12.0 % Respiratory 124,682 20.2 % 48,970 21.1 % HME 54,791 8.9 % 25,989 11.2 % Other 38,673 6.2 15,852 6.8 % Total net revenue$ 617,017 100.0 %$ 232,116 100.0 % 47 Table of Contents Six Months Ended June 30, 2021 June 30, 2020 Net Revenue Revenue Revenue (in thousands) Dollars Percentage Dollars Percentage (Unaudited) Net sales revenue - Point in time Sleep$ 292,013 26.6 %$ 153,315 36.2 % Diabetes 218,331 19.9 % 11,679 2.8 % Supplies to the home 84,038 7.6 % 55,900 13.2 % Respiratory 18,775 1.7 % 20,882 4.9 % HME 54,516 5.0 % 24,306 5.7 % Other 50,189 4.6 % 23,856 5.6 % Total Net sales revenue$ 717,862 65.4 %$ 289,938 68.4 % Net revenue from fixed monthly equipment reimbursements Sleep$ 114,444 10.4 %$ 45,313 10.7 % Diabetes 6,069 0.6 % - - % Respiratory 194,982 17.7 % 55,863 13.2 % HME 44,811 4.1 % 25,439 6.0 % Other 20,968 1.8 % 7,002 1.7 % Total Net revenue from fixed monthly equipment reimbursements$ 381,274 34.6 %$ 133,617 31.6 % Total net revenue Sleep$ 406,457 37.0 %$ 198,628 46.9 % Diabetes 224,400 20.5 % 11,679 2.8 % Supplies to the home 84,038 7.6 % 55,900 13.2 % Respiratory 213,757 19.4 % 76,745 18.1 % HME 99,327 9.1 % 49,745 11.7 % Other 71,157 6.4 30,858 7.3 % Total net revenue$ 1,099,136 100.0 %$ 423,555 100.0 % Results of Operations
Comparison of Three Months Ended
The following table summarizes
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Three Months Ended June 30,
2021 2020
Revenue Revenue Increase/(Decrease)
(in thousands, except
percentages) Dollars Percentage Dollars Percentage Dollars Percentage
(unaudited)
Net revenue $ 617,017 100.0 % $ 232,116 100.0 % $ 384,901 165.8 %
Costs and expenses:
Cost of net revenue 490,720 79.5 % 198,418 85.5 % 292,302 147.3 %
General and administrative
expenses 42,946 7.0 % 17,092 7.4 % 25,854 151.3 %
Depreciation and
amortization, excluding
patient equipment
depreciation 17,944 2.9 % 1,036 0.4 % 16,908 NM %
Total costs and expenses 551,610 89.4 % 216,546 93.3 % 335,064 154.7 %
Operating income 65,407 10.6 % 15,570 6.7 % 49,837 320.1 %
Interest expense, net 23,147 3.8 % 7,482 3.2 % 15,665 209.4 %
Loss on extinguishment of
debt 7,736 1.3 % - - % 7,736 NM %
Change in fair value of
contingent consideration
common shares liability (22,079) (3.6) % (42) - % (22,037) NM %
Change in fair value of
warrant liability (37,454) (6.1) % (654) (0.3) % (36,800) NM %
Other income, net 1,669 0.3 % (900) (0.4) % 2,569 NM %
Income (loss) before income
taxes 92,388 14.9 % 9,684 4.2 % 82,704 854.0 %
Income tax expense 12,330 2.0 % 1,826 0.8 % 10,504 NM %
Net income (loss) 80,058 12.9 % 7,858 3.4 % 72,200 918.8 %
Income attributable to
noncontrolling interests 951 0.2 % 3,388 1.5 % (2,437) (71.9) %
Net income attributable to
AdaptHealth Corp. $ 79,107 12.7 % $ 4,470 1.9 % $ 74,637 1,669.7 %
Net Revenue. Net revenue for the three months ended June 30, 2021 was $617.0
million compared to $232.1 million for the three months ended June 30, 2020 , an
increase of $384.9 million or 165.8%. Net revenue for the 2021 and 2020 periods
included $8.6 million and $28.4 million , respectively, from referral partners
and healthcare facilities in support of their urgent needs as the coronavirus
pandemic has led to an increased demand for respiratory equipment including
ventilators and oxygen concentrators. Excluding this revenue, net revenue was
$608.4 million and $203.7 million for the three months ended June 30, 2021 and
2020, respectively, an increase of $404.7 million . The increase in net revenue
was driven primarily by acquisitions completed after April 1, 2020 , which
increased net revenue by $405.3 million . This increase in net revenue was
partially offset by planned declines in revenue from the Company's Patient Care
Solutions (PCS) supplies business (which was acquired in January 2020 ) in
connection with the Company's turnaround efforts of that business executed
subsequent to the acquisition. As previously disclosed by the Company, these
turnaround efforts at PCS reduced net revenues for the three months ended June
30, 2021 as a result of the Company's exit from poor performing payor contracts
and products, and resulted in improved profitability for PCS. Net revenue
generated by PCS for the three months ended June 30, 2021 and 2020 was $27.2
million and $33.0 million , respectively.
For the three months ended June 30, 2021 , net sales revenue (recognized at a
point in time) comprised 65% of total net revenue, compared to 69% of total net
revenue for the three months ended June 30, 2020 . For the three months ended
June 30, 2021 , net revenue from fixed monthly equipment reimbursements comprised
35% of total net revenue, compared to 31% of total net revenue for the three
months ended June 30, 2020 .
Cost of Net Revenue.
The following table summarizes cost of net revenue for the three months ended
June 30, 2021 and 2020:
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Three Months Ended June 30,
2021 2020
Revenue Revenue Increase/(Decrease)
(in thousands, except
percentages) Dollars Percentage Dollars Percentage Dollars Percentage
(unaudited)
Costs of net revenue:
Cost of products and
supplies $ 235,550 38.2 % $ 94,103 40.5 % $ 141,447 150.3 %
Salaries, labor and
benefits 147,606 23.9 % 58,465 25.2 % 89,141 152.5 %
Patient equipment
depreciation 45,864 7.4 % 17,338 7.5 % 28,526 164.5 %
Rent and occupancy 11,938 1.9 % 5,119 2.2 % 6,819 133.2 %
Other operating expenses 48,072 7.8 % 20,069 8.7 % 28,003 139.5 %
Equity-based compensation 1,696 0.3 % 1,652 0.7 % 44 2.7 %
Severance (6) - % 1,672 0.7 % (1,678) (100.4) %
Total cost of net revenue $ 490,720 79.5 % $ 198,418 85.5 % $ 292,302 147.3 %
Cost of net revenue for the three months ended June 30, 2021 was $490.7 million
compared to $198.4 million for the three months ended June 30, 2020 , an increase
of $292.3 million or 147.3%, which is primarily related to acquisition growth.
Costs of products and supplies increased by $141.4 million primarily as a result
of acquisition growth, primarily from the acquisition of AeroCare , and increased
net sales revenue. Salaries, labor and benefits increased by $89.1 million ,
primarily related to acquisition growth and increased headcount, primarily from
the acquisition of AeroCare . The increase in rent and occupancy and other
operating expenses is related to acquisition growth.
Cost of net revenue was 79.5% of net revenue for the three months ended June 30,
2021 compared to 85.5% for the three months ended June 30, 2020 . The cost of
products and supplies was 38.2% of net revenue in the 2021 period compared to
40.5% in the 2020 period, while salaries, labor and benefits was 23.9% of net
revenue in the 2021 period compared to 25.2% in the 2020 period, and patient
equipment depreciation was 7.4% of net revenue in the 2021 period compared to
7.5% in the 2020 period. These percentages are consistent as a result of the
consistent mix of net revenue between sales and fixed monthly equipment
reimbursements between the periods.
General and Administrative Expenses. General and administrative expenses for the
three months ended June 30, 2021 were $42.9 million compared to $17.1 million
for the three months ended June 30, 2020 , an increase of $25.8 million or
151.3%. This increase is primarily due to (1) increased transaction costs
related to acquisition growth, (2) higher professional fees including legal,
accounting and consulting, including costs for Sarbanes Oxley compliance, (3)
higher labor costs associated with increased headcount, (4) higher equity-based
compensation expense as a result of the accelerated vesting of certain awards,
including $2.4 million in connection with the acceleration of vesting of certain
stock options and restricted stock in connection with the separation of the
Company's former Co-CEO, and (5) higher information technology related expenses.
General and administrative expenses as a percentage of net revenue was 7.0% in
the 2021 period, compared to 7.4% in the 2020 period. General and administrative
expenses in the 2021 period included $8.0 million in transaction costs, $5.8
million in equity-based compensation expense, and $0.6 million in severance
expense. General and administrative expenses in the 2020 period included $3.3
million in transaction costs, $1.6 million in equity-based compensation expense,
and $0.2 million in severance expense. Excluding the impact of these charges,
general and administrative expenses as a percentage of net revenue was 4.6% and
5.1% in the 2021 period and the 2020 period, respectively.
Depreciation and amortization, excluding patient equipment depreciation.
Depreciation and amortization, excluding patient equipment depreciation, for the
three months ended June 30, 2021 was $17.9 million compared to $1.0 million for
the three months ended June 30, 2020 , an increase of $16.9 million . The increase
was primarily related to amortization expense of $13.9 million related to
identifiable intangible assets recognized during the 2021 period. There was no
amortization expense of identifiable intangible assets recognized during the
2020 period.
Interest Expense. Interest expense for the three months ended June 30, 2021 was
$23.1 million compared to $7.5 million for the three months ended June 30, 2020 .
Interest expense related to long-term debt was higher in the 2021
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period compared to the 2020 period as a result of higher long-term debt borrowings outstanding during that period. Such borrowings were largely used to fund acquisitions.
Loss on Extinguishment of Debt. Loss on extinguishment of debt for the three months endedJune 30, 2021 was a result of the write-off of unamortized deferred financing costs related toAdaptHealth refinancing its credit facility inJanuary 2021 and amending such agreement inApril 2021 , and also includes the write-off of unamortized deferred financing costs and debt prepayment penalties in connection with the early repayment of a portion ofAdaptHealth's note payable. In addition, during the second quarter of 2021, the Company corrected an error that was identified relating to the accounting for the write off of unamortized deferred financing costs recorded during the three months endedMarch 31, 2021 . As a result of this correction, the Company reversed$2.1 million of the write off that was recorded in the three months endedMarch 31, 2021 , which was reflected as a reduction to the loss on extinguishment of debt recognized during the three months endedJune 30, 2021 . The impact of such correction was not considered material to the Company's unaudited consolidated financial statements for the three months endedMarch 31, 2021 and the three months endedJune 30, 2021 . There were no such transactions in the three months endedJune 30, 2020 . Change in Fair Value of Contingent Consideration Common Shares Liability. In connection with the Business Combination, certain former owners ofAdaptHealth Holdings are entitled to contingent consideration common shares, as discussed in Note 10, Stockholders' Equity - Contingent Consideration Common Shares, to the accompanying interim consolidated financial statements. These shares are liability-classified, and the change in fair value of the contingent consideration common shares liability represents a non-cash gain for the change in the estimated fair value of such liability during the period. Change in Fair Value of Warrant Liability.AdaptHealth has outstanding warrants to purchase shares of Common Stock, as discussed in Note 10, Stockholders' Equity - Warrants, to the accompanying interim consolidated financial statements. These warrants are liability-classified, and the change in fair value of the warrant liability represents a non-cash gain for the change in the estimated fair value of such liability during the period. Other Income, net. Other income, net for the three months endedJune 30, 2021 consisted of$0.3 million of equity income related to equity method investments, offset by$0.9 million of expenses associated with legal settlements for employee and other matters,$1.0 million of expenses associated with lease terminations, and a$0.1 million charge for the increase in the fair value of a contingent consideration liability related to an acquisition. Other income, net for the three months endedJune 30, 2020 consisted of a$0.9 million reduction in the fair value of a contingent consideration liability related to an acquisition. Income Tax Benefit/Expense. Income tax expense for the three months endedJune 30, 2021 was$12.3 million compared to income tax expense of$1.8 million for the three months endedJune 30, 2020 . The expense recorded in the 2021 period compared to the 2020 period was primarily related to increased pre-tax income andAdaptHealth Holding's change inU.S. federal income tax classification as a result of the Tax Restructuring, as discussed in note 13 to the accompanying interim consolidated financial statements.
Comparison of Six Months Ended
The following table summarizes
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Six Months Ended June 30,
2021 2020
Revenue Revenue Increase/(Decrease)
(in thousands, except
percentages) Dollars Percentage Dollars Percentage Dollars Percentage
(unaudited)
Net revenue $ 1,099,136 100.0 % $ 423,555 100.0 % $ 675,581 159.5 %
Costs and expenses:
Cost of net revenue 887,418 80.7 % 366,048 86.4 % 521,370 142.4 %
General and
administrative expenses 99,578 9.1 % 31,439 7.4 % 68,139 216.7 %
Depreciation and
amortization, excluding
patient equipment
depreciation 31,324 2.8 % 2,278 0.5 % 29,046 NM %
Total costs and expenses 1,018,320 92.6 % 399,765 94.3 % 618,555 154.7 %
Operating income 80,816 7.4 % 23,790 5.7 % 57,026 239.7 %
Interest expense, net 45,332 4.1 % 15,420 3.6 % 29,912 194.0 %
Loss on extinguishment of
debt 11,949 1.1 % - - % 11,949 NM %
Change in fair value of
contingent consideration
common shares liability (24,044) (2.2) % 16,325 3.9 % (40,369) NM %
Change in fair value of
warrant liability (40,622) (3.7) % 35,446 8.4 % (76,068) NM %
Other income, net 1,150 0.1 % (1,991) (0.5) % 3,141 NM %
Income (loss) before
income taxes 87,051 8.0 % (41,410) (9.7) % 128,461 (310.2) %
Income tax expense 10,635 1.0 % 185 - % 10,450 NM %
Net income (loss) 76,416 7.0 % (41,595) (9.7) % 118,011 (283.7) %
Income (loss)
attributable to
noncontrolling interests 1,275 0.1 % (11,514) (2.7) % 12,789 (111.1) %
Net income (loss)
attributable to
AdaptHealth Corp. $ 75,141 6.9 % $ (30,081) (7.0) % $ 105,222 (349.8) %
Net Revenue. Net revenue for the six months ended June 30, 2021 was $1,099.1
million compared to $423.6 million for the six months ended June 30, 2020 , an
increase of $675.5 million or 159.5%. Net revenue for the 2021 and 2020 periods
included $9.9 million and $29.6 million , respectively, from referral partners
and healthcare facilities in support of their urgent needs as the coronavirus
pandemic has led to an increased demand for respiratory equipment including
ventilators and oxygen concentrators. Excluding this revenue, net revenue was
$1,089.2 million and $394.0 million for the six months ended June 30, 2021 and
2020, respectively, an increase of $695.2 million . The increase in net revenue
was driven primarily by acquisitions completed after January 1, 2020 , which
increased net revenue by $711.2 million . This increase in net revenue was
partially offset by planned declines in revenue from the Company's Patient Care
Solutions (PCS) supplies business (which was acquired in January 2020 ) in
connection with the Company's turnaround efforts of that business executed
subsequent to the acquisition. As previously disclosed by the Company, these
turnaround efforts at PCS reduced net revenues for the six months ended June 30,
2021 as a result of the Company's exit from poor performing payor contracts and
products, and resulted in improved profitability for PCS. Net revenue generated
by PCS for the six months ended June 30, 2021 and 2020 was $55.9 million and
$66.9 million , respectively.
For the six months ended June 30, 2021 , net sales revenue (recognized at a point
in time) comprised 65% of total net revenue, compared to 68% of total net
revenue for the six months ended June 30, 2020 . For the six months ended June
30, 2021 , net revenue from fixed monthly equipment reimbursements comprised 35%
of total net revenue, compared to 32% of total net revenue for the six months
ended June 30, 2020 .
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Cost of Net Revenue.
The following table summarizes cost of net revenue for the six months ended June
30, 2021 and 2020:
Six Months Ended June 30,
2021 2020
Revenue Revenue Increase/(Decrease)
(in thousands, except
percentages) Dollars Percentage Dollars Percentage Dollars Percentage
(unaudited)
Costs of net revenue:
Cost of products and
supplies $ 420,568 38.3 % $ 166,106 39.2 % $ 254,462 153.2 %
Salaries, labor and
benefits 266,305 24.2 % 113,116 26.7 % 153,189 135.4 %
Patient equipment
depreciation 79,703 7.3 % 32,836 7.8 % 46,867 142.7 %
Rent and occupancy 22,449 2.0 % 9,719 2.3 % 12,730 131.0 %Other operating expenses 93,064 8.5 % 40,031 9.5 % 53,033 132.5 % Equity-based compensation 4,932 0.4 % 2,203 0.5 % 2,729 123.9 % Severance 397 - % 2,037 0.4 % (1,640) (80.5) % Total cost of net revenue$ 887,418 80.7 %$ 366,048
86.4 %$ 521,370 142.4 % Cost of net revenue for the six months endedJune 30, 2021 was$887.4 million compared to$366.0 million for the six months endedJune 30, 2020 , an increase of$521.4 million or 142.4%, which is primarily related to acquisition growth. Costs of products and supplies increased by$254.5 million primarily as a result of acquisition growth, primarily from the acquisition ofAeroCare , and increased net sales revenue. Salaries, labor and benefits increased by$153.2 million , primarily related to acquisition growth and increased headcount, primarily from the acquisition ofAeroCare . The increase in rent and occupancy and other operating expenses is related to acquisition growth. Cost of net revenue was 80.7% of net revenue for the six months endedJune 30, 2021 compared to 86.4% for the six months endedJune 30, 2020 . The cost of products and supplies was 38.3% of net revenue in the 2021 period compared to 39.2% in the 2020 period, while salaries, labor and benefits was 24.2% of net revenue in the 2021 period compared to 26.7% in the 2020 period, and patient equipment depreciation was 7.3 of net revenue in the 2021 period compared to 7.8% in the 2020 period. These percentages are consistent as a result of the consistent mix of net revenue between sales and fixed monthly equipment reimbursements between the periods. General and Administrative Expenses. General and administrative expenses for the six months endedJune 30, 2021 were$99.6 million compared to$31.4 million for the six months endedJune 30, 2020 , an increase of 68.2 million or 216.7%. This increase is primarily due to (1) increased transaction costs related to acquisition growth, primarily for from the acquisition ofAeroCare , (2) higher professional fees including legal, accounting and consulting, including costs for Sarbanes Oxley compliance, (3) higher labor costs associated with increased headcount, (4) higher equity-based compensation expense as a result of the accelerated vesting of certain awards, including$2.4 million in connection with the acceleration of vesting of certain stock options and restricted stock in connection with the separation of the Company's former Co-CEO, and (5) higher information technology related expenses. General and administrative expenses as a percentage of net revenue was 9.1% in the 2021 period, compared to 7.4% in the 2020 period. General and administrative expenses in the 2021 period included$39.3 million in transaction costs,$11.1 million in equity-based compensation expense, and$1.1 million in severance expense. General and administrative expenses in the 2020 period included$5.5 million in transaction costs,$3.3 million in equity-based compensation expense, and$0.3 million in severance expense. Excluding the impact of these charges, general and administrative expenses as a percentage of net revenue was 4.4% and 5.3% in the 2021 period and the 2020 period, respectively. Depreciation and amortization, excluding patient equipment depreciation. Depreciation and amortization, excluding patient equipment depreciation, for the six months endedJune 30, 2021 was$31.3 million compared to$2.3 million for the six months endedJune 30, 2020 , an increase of$29.0 million . The increase was primarily related to amortization expense of$24.2 million related to identifiable intangible assets recognized during the 2021 period. There was no amortization expense of identifiable intangible assets recognized during the 2020 period. 53 Table of Contents Interest Expense. Interest expense for the six months endedJune 30, 2021 was$45.3 million compared to$15.4 million for the six months endedJune 30, 2020 . Interest expense related to long-term debt was higher in the 2021 period compared to the 2020 period as a result of higher long-term debt borrowings outstanding during that period. Such borrowings were largely used to fund acquisitions. Loss on Extinguishment of Debt. Loss on extinguishment of debt for the six months endedJune 30, 2021 was a result of the write-off of unamortized deferred financing costs related toAdaptHealth refinancing its credit facility inJanuary 2021 and amending such agreement inApril 2021 , and also includes the write-off of unamortized deferred financing costs and debt prepayment penalties in connection with the early repayment of a portion ofAdaptHealth's note payable. There were no such transactions in the six months endedJune 30, 2020 . Change in Fair Value of Contingent Consideration Common Shares Liability. In connection with the Business Combination, certain former owners ofAdaptHealth Holdings are entitled to contingent consideration common shares, as discussed in Note 10, Stockholders' Equity - Contingent Consideration Common Shares, to the accompanying interim consolidated financial statements. These shares are liability-classified, and the change in fair value of the contingent consideration common shares liability represents a non-cash gain in the 2021 period and a non-cash charge in the 2020 period for the change in the estimated fair value of such liability during the respective periods. Change in Fair Value of Warrant Liability.AdaptHealth has outstanding warrants to purchase shares of Common Stock, as discussed in Note 10, Stockholders' Equity - Warrants, to the accompanying 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 2021 period and a non-cash charge in the 2020 period for the change in the estimated fair value of such liability during the respective periods. Other Income, net. Other income, net for the six months endedJune 30, 2021 consisted of$0.5 million of equity income related to equity method investments, and a gain of$0.5 million for the receipt of earnout proceeds in connection with an investment that was sold in 2020, offset by$0.9 million of expenses associated with legal settlements for employee and other matters,$1.0 million of expenses associated with lease terminations, and a$0.3 million charge for the increase in the fair value of a contingent consideration liability related to an acquisition. Other income, net for the six months endedJune 30, 2020 consisted of a$2.9 million reduction in the fair value of a contingent consideration liability related to an acquisition, a gain of$0.6 million related to the sale of an investment, offset by a$1.5 million expense related to a transition services agreement executed in connection with an acquisition completed in 2020. Income Tax Benefit/Expense. Income tax expense for the six months endedJune 30, 2021 was$10.6 million compared to income tax expense of$0.2 million for the six months endedJune 30, 2020 . The increase in income tax expense was primarily related to increased pre-tax income andAdaptHealth Holding's change inU.S. federal income tax classification as a result of the Tax Restructuring, as discussed in note 13 to the accompanying interim consolidated financial statements.
EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex
AdaptHealth uses EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex, which are financial measures that are not prepared in accordance with generally accepted accounting principles inthe United States , orU.S. GAAP, to analyze its financial results and believes that they are useful to investors, as a supplement toU.S. GAAP measures. In addition,AdaptHealth's ability to incur additional indebtedness and make investments under its existing credit agreement is governed, in part, by its ability to satisfy tests based on a variation of Adjusted EBITDA.
AdaptHealth defines Adjusted EBITDA as EBITDA (as defined above), plus loss on extinguishment of debt, equitybased compensation expense, transaction costs, severance, change in fair value of the contingent consideration common shares liability, change in fair value of the warrant liability, and non-recurring
items of expense (income).
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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.
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. 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 loss
attributable to AdaptHealth , to EBITDA, Adjusted EBITDA and Adjusted EBITDA less
Patient Equipment Capex for the three and six months ended June 30, 2021 and
2020:
Three Months Ended June 30, Six Months Ended June 30,
(in thousands) 2021 2020 2021 2020
(Unaudited)
Net income (loss) attributable to
AdaptHealth Corp. $ 79,107 $ 4,470 $ 75,141 $ (30,081)
Income (loss) attributable to
noncontrolling interests 951 3,388
1,275 (11,514)
Interest expense, net 23,147 7,482 45,332 15,420
Income tax expense 12,330 1,826 10,635 185
Depreciation and amortization,
including patient equipment
depreciation 63,793 18,374 110,999 35,114
EBITDA 179,328 35,540 243,382 9,124
Loss on extinguishment of debt (a) 7,736 - 11,949 -
Equity-based compensation expense
(b) 7,447 3,244 16,029 5,467
Transaction costs (c) 8,100 3,541 39,954 6,399
Severance (d) 594 1,905 1,533 2,324
Change in fair value of contingent
consideration common shares
liability (e) (22,079) (42) (24,044) 16,325
Change in fair value of warrant
liability (f) (37,454) (654) (40,622) 35,446
Other non-recurring expense
(income) (g) 3,719 (900) 3,385 (1,991)
Adjusted EBITDA 147,391 42,634 251,566 73,094
Less: Patient equipment capex (h) (48,525) (12,068) (90,783) (25,035)
Adjusted EBITDA less Patient
Equipment Capex $ 98,866 $ 30,566 (a) Represents write offs of deferred financing costs related to refinancing of
debt and pre-payment penalties for early debt payoff.
Represents equity-based compensation expense for awards granted to employees
and non-employee directors. The higher expense in the 2021 period is due to
(b) overall increased equity compensation grant activity in that period, as well
as expense resulting from accelerated vesting of certain awards in that
period, including accelerated vesting of certain awards in connection with
the separation of the Company's former Co-CEO.
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(c) Represents transaction costs related to acquisitions.
(d) Represents severance costs related to acquisition integration and internal
Represents a non-cash charge or gain for the change in the estimated fair
value of contingent consideration common shares issuable as part of the
(e) Business Combination. Refer to Note 10, Stockholders' Equity - Contingent
Consideration Common Shares, included in the accompanying notes to the
consolidated interim financial statements for the three and six months ended
Represents a non-cash charge or gain for the change in the estimated fair
value of
(f) Warrants, included in the accompanying notes to the consolidated interim
financial statements for the three and six months ended June 30, 2021 for
additional discussion of such non-cash charge or gain.
The 2021 year-to-date period includes $1.5 million of expenses related tolegal and other costs associated with the separation of the Company's former
Co-CEO,
employee and other matters,
terminations, a
contingent consideration liability related to an acquisition, and
(g) million of other non-recurring charges, offset by a gain of
the receipt of earnout proceeds in connection with the sale of an investment.
The 2020 year-to-date period includes
value of contingent consideration liabilities related to acquisitions, a
million gain related to the sale of an investment, offset by a
expense related to a transition services agreement executed in connection
with an acquisition completed in 2020.
Represents the value of the patient equipment obtained during the respective
(h) 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. As ofJune 30, 2021 ,AdaptHealth had approximately$178.2 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 funds received by the acquired company prior to the date of acquisition for CMS recoupable advance payments. The recoupment of the advance payments by CMS has begun inApril 2021 and is being applied to services provided and revenue recognized during the period in which the recoupment occurs, and will impact the Company's cash receipts for services provided until such time all amounts have been recouped. During the three months endedJune 30, 2021 , CMS has recouped a total of$15.9 million . AtJune 30, 2021 , the Company has deferred a total of$33.6 million related to CMS recoupable advance payments, which is 56
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included in other current liabilities in the consolidated balance sheet as ofJune 30, 2021 . In addition, inApril 2020 ,AdaptHealth received distributions of the CARES Act provider relief funds of$17.2 million which are targeted to offset lost revenue and expenditures incurred in connection with the COVID-19 pandemic. The provider relief funds are subject to certain restrictions and are subject to recoupment if not used for designated purposes. As a condition to receiving distributions, providers must agree to certain terms and conditions, including, among other things, that the funds are being used for lost revenues and unreimbursed COVID-19 related expenses as defined by HHS. During the year endedDecember 31, 2020 ,AdaptHealth recognized grant income of$14.3 million related to the provider relief fund payments received. As ofJune 30, 2021 ,AdaptHealth has deferred$2.9 million of the PRF payments received inApril 2020 . In addition, in connection with certain acquisitions completed prior toJune 30, 2021 ,AdaptHealth assumed liabilities of$7.7 million relating to CARES Act provider relief fund payments received by the acquired companies prior to the dates of acquisition. AtJune 30, 2021 ,AdaptHealth has deferred a total of$10.6 million related to CARES Act provider relief funds, which is included in other current liabilities in the consolidated balance sheet as ofJune 30, 2021 . HHS has indicated that the CARES Act PRF are subject to ongoing reporting and changes to the terms and conditions, and there have been several updates to such reporting requirements and terms and conditions since they were issued by HHS. Such updates have related to changes to the guidance regarding utilization of the funds granted from the PRF and updates to the reporting requirements of such funds, among other updates. As a result of any future updated guidance from HHS,AdaptHealth could be required to reverse the recognition of the grant income recorded and return a portion of the funds recognized, which could be material toAdaptHealth .AdaptHealth is continuing to monitor the reporting requirements issued by HHS. To the extent that reporting requirements and terms and conditions are modified in the future, it may affectAdaptHealth's ability to comply and may require the return of funds. Furthermore, HHS has indicated that it will be closely monitoring and, along with theOffice of Inspector General (United States ) (OIG), auditing providers to ensure that recipients comply with the terms and conditions of relief programs and to prevent fraud and abuse. All providers will be subject to civil and criminal penalties for any deliberate omissions, misrepresentations or falsifications of any information given to HHS. Also, as permitted under the CARES Act,AdaptHealth has elected to defer certain portions of employer-paid FICA taxes otherwise payable fromMarch 27, 2020 toJanuary 1, 2021 , which will be paid in two equal installments onDecember 31, 2021 andDecember 31, 2022 .AdaptHealth has 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 sheet as ofJune 30, 2021 . AtJune 30, 2021 ,AdaptHealth had$975.0 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 of the date of this filing,$215.0 million was outstanding 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 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 57
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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, 2021 . 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%, in each case together with accrued and unpaid interest.AdaptHealth LLC may also redeem some or all of the 4.625% Senior Notes beforeFebruary 1, 2024 at a redemption price of 100% of the principal amount of the 4.625% Senior Notes, plus a "make-whole" premium, together with accrued and unpaid interest. In addition,AdaptHealth LLC may redeem up to 40% of the original aggregate principal amount of the 4.625% Senior Notes beforeFebruary 1, 2024 with the proceeds from certain equity offerings at a redemption price equal to 104.625% of the principal amount of the 4.625% Senior Notes, together with accrued and unpaid interest. Furthermore,AdaptHealth LLC may be required to make an offer to purchase the 4.625% Senior Notes upon the sale of certain assets or upon specific kinds of changes of control. InJuly 2020 ,AdaptHealth LLC issued$350.0 million aggregate principal amount of 6.125% senior unsecured notes due 2028 (the "6.125% Senior Notes"). The 6.125% Senior Notes will mature onAugust 1, 2028 . Interest on the 6.125% Senior Notes is payable onFebruary 1st andAugust 1st of each year, beginning onFebruary 1, 2021 . The 6.125% Senior Notes will be redeemable atAdaptHealth LLC's option, in whole or in part, at any time on or afterAugust 1, 2023 , and the redemption price for the 6.125% Senior Notes if redeemed during the 12 months beginning (i)August 1, 2023 is 103.063%, (ii)August 1, 2024 is 102.042%, (iii)August 1, 2025 is 101.021% and (iv)August 1, 2026 and thereafter is 100.000%, in each case together with accrued and unpaid interest.AdaptHealth LLC may also redeem some or all of the 6.125% Senior Notes beforeAugust 1, 2023 at a redemption price of 100% of the principal amount of the 6.125% Senior Notes, plus a "make-whole" premium, together with accrued and unpaid interest. In addition,AdaptHealth LLC may redeem up to 40% of the original aggregate principal amount of the 6.125% Senior Notes beforeAugust 1, 2023 with the proceeds from certain equity offerings at a redemption price equal to 106.125% of the principal amount of the 6.125% Senior Notes , together with accrued and unpaid interest. Furthermore,AdaptHealth LLC may be required to make an offer to purchase the 6.125% Senior Notes upon the sale of certain assets or upon specific kinds of changes of control. InMarch 2019 ,AdaptHealth signed 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). 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. InJune 2021 ,AdaptHealth agreed with the holders of the New Promissory Note to repay$71.8 million of the outstanding principal amount under the New Promissory Note. Further, the Company has agreed to repay the remaining principal balance of$71.8 million plus accrued interest bySeptember 30, 2021 . The Company will also pay a debt prepayment penalty of$7.2 million in connection with that prepayment. The Company expects to repay the remaining outstanding principal bySeptember 30, 2021 using cash on hand and borrowings under the 2021 Revolver, and therefore such amount is included in current portion of long-term debt in the accompanying consolidated balance sheets as ofJune 30, 2021 . The outstanding principal balance under the New Promissory Note currently bears interest at 12% and is required to be paid in cash. The Company agreed that if the remaining outstanding principal is not repaid byOctober 31, 2021 , the New Promissory Note will be amended to provide that the outstanding principal amount will bear interest at the greater of (i) 15% per annum or (ii) the twelve-month LIBOR plus 12% per annum and will have a maturity date ofNovember 8, 2029 . 58
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As ofJune 30, 2021 andDecember 31, 2020 ,AdaptHealth had a working capital deficit of$15.0 million and$55.8 million , respectively. A significant portion ofAdaptHealth's assets consists of accounts receivable from third-party payors that are responsible for payment for the equipment and the services thatAdaptHealth provides. Cash Flow. The following table presents selected data fromAdaptHealth's consolidated statements of cash flows for the six months endedJune 30, 2021 and 2020: Six Months Ended June 30, (in thousands) 2021 2020 (unaudited)
Net cash provided by operating activities
(1,372,027) (117,332)
Net cash provided by financing activities 1,302,630
40,033
Net increase in cash and cash equivalents 78,227
33,709
Cash and cash equivalents at beginning of period 99,962
76,878
Cash and cash equivalents at end of period
Net cash provided by operating activities for the six months endedJune 30, 2021 was$147.6 million compared to$111.0 million for the six months endedJune 30, 2020 , an increase of$36.6 million . The increase was the result of (1) a$118.0 million improvement in net income, (2) a net decrease of$12.6 million in non-cash charges, primarily from a non-cash charge or gain relating to the change in the estimated fair value of contingent consideration common shares, a non-cash charge or gain relating to the change in the estimated fair value of the warrant liability, amortization, equity-based compensation expense, write-off of deferred financing costs, loss on extinguishment of debt, and changes in fair value of contingent consideration, (3) an$8.2 million change in deferred income taxes, (4) a net$15.0 million decrease in cash resulting from the change in operating assets and liabilities, primarily from the change in accounts receivable, inventory and accounts payable and accrued expenses (excluding the impact of cash received in the 2020 period in connection with the CARES Act discussed below), (5) the payment of$1.0 million in the 2020 period relating to contingent consideration for an acquisition, which was offset by (6) the receipt of$45.8 million of recoupable advanced payments from CMS and the receipt of$17.2 million of provider relief funds in connection with the CARES Act in the 2020 period. Net cash used in investing activities for the six months endedJune 30, 2021 was$1,372.0 million compared to$117.3 million for the six months endedJune 30, 2020 . The use of funds in the six months endedJune 30, 2021 consisted of$1,292.6 million for business acquisitions, primarily from theAeroCare acquisition, and$79.4 million for equipment and other fixed asset purchases. The use of funds in the six months endedJune 30, 2020 consisted of$107.4 million for business acquisitions, primarily from the Advanced andHealthline acquisitions,$10.9 million for equipment and other fixed asset purchases, payments of$1.0 million for investments in cost method investments, offset by$2.0 million of cash proceeds from the sale of an investment. Net cash provided by financing activities for the six months endedJune 30, 2021 was$1,302.6 million compared to net cash provided by financing activities of$40.0 million for the six months endedJune 30, 2020 . 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$13.4 million for contingent consideration related to acquisitions, payments of$2.9 million for deferred purchase price in connection with 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. Net cash provided by financing activities for the six months endedJune 30, 2020 consisted of proceeds of$70.0 million from borrowings on long-term debt and lines of credit, and proceeds of$11.8 million from the exercise of warrants, offset by total repayments of$41.0 million on long-term debt and capital lease obligations and a payment of$0.8 million for distributions to non-controlling interests. 59
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Critical Accounting Policies and Significant Estimates
The discussion and analysis of the Company's financial condition and results of operations is based upon the Company's consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of the Company's consolidated financial statements requires its management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. The Company's management bases its estimates, assumptions and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Different assumptions and judgments would change the estimates used in the preparation of the Company's consolidated financial statements which, in turn, could change the results from those reported. In addition, actual results may differ from these estimates and such differences could be material to the Company's financial position and results of operations. Critical accounting policies and significant estimates are those that the Company's management considers the most important to the portrayal of the Company's financial condition and results of operations because they require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company's critical accounting policies and significant estimates in relation to its consolidated financial statements include those related to revenue recognition, accounts receivable, business combinations, and valuation of goodwill and long-lived assets. There have been no material changes in the Company's critical accounting policies as compared to the critical accounting policies described in the Company's Annual Report on Form 10-K/A for the year endedDecember 31, 2020 .
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 (h), Recently Issued Accounting Pronouncements, to its consolidated interim financial statements included elsewhere in this report.
Off-Balance Sheet Arrangements
As of
Commitments and Contingencies
In the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of its business that cover a wide range of matters. In accordance with the Financial Accounting Standards Board Accounting Standards Codification Topic 450, Accounting for Contingencies, the Company records accruals for such loss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. 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.
Other contingencies arising in the normal course of business relate to acquisitions and the related contingent purchase prices and deferred payments.
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the Company and certain of its 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. The Company intends to vigorously defend against the allegations contained in the Complaint, but there can be no assurance that the defense will be successful.
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