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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

OR

        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-38399

AdaptHealth Corp.

(Exact name of registrant as specified in its charter)

Delaware

82-3677704

(State of Other Jurisdiction of incorporation or Organization)

(I.R.S. Employer Identification No.)

220 West Germantown Pike Suite 250, Plymouth Meeting, PA

19462

(Address of principal executive offices)

(Zip code)

Registrant’s telephone number, including area code: (610) 630-6357

Securities registered pursuant to Section 12(b) of the Act:

    

    

Name Of Each Exchange

Title of Each Class

Trading Symbol(s)

On Which Registered

Common Stock, par value $0.0001 per share

AHCO

The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.0405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐

Accelerated filer

Non-accelerated filer ☐

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of August 2, 2021, there were 130,910,675 shares of the Registrant’s Common Stock issued and outstanding.

ADAPTHEALTH CORP.

FORM 10-Q

TABLE OF CONTENTS

Page Number

PART I FINANCIAL INFORMATION

Item 1. Consolidated Interim Financial Statements (Unaudited)

Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020

4

Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020

5

Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2021 and 2020

6

Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the three and six months ended June 30, 2021 and 2020

7

Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020

9

Notes to Consolidated Interim Financial Statements

10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

42

Item 3. Quantitative and Qualitative Disclosures About Market Risk

61

Item 4. Controls and Procedures

61

PART II OTHER INFORMATION

62

Item 1. Legal Proceedings

62

Item 1A. Risk Factors

63

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

91

Item 3. Defaults upon Senior Securities

91

Item 4. Mine Safety Disclosure

91

Item 5. Other Information

91

Item 6. Exhibits

91

Signatures

93

1

CERTAIN DEFINED TERMS

Throughout this Quarterly Report on Form 10-Q, unless otherwise specified or the context so requires:

AdaptHealth Holdings” means AdaptHealth Holdings LLC, a Delaware limited liability company;

AdaptHealth Units” means units of AdaptHealth Holdings;

BM Notes” means, collectively, (i) the Amended and Restated Promissory Notes, dated as of November 8, 2019, issued by AdaptHealth Holdings in favor of affiliates of Assured Guaranty Ltd. (formerly BlueMountain Capital Management, LLC), which amended and restated the Promissory Notes, dated as of November 8, 2019, issued by AdaptHealth Holdings in favor of affiliates of Assured Guaranty Ltd., and (ii) the Second Amended and Restated Promissory Notes, dated as of March 20, 2019, issued by AdaptHealth Holdings in favor of affiliates of Assured Guaranty Ltd. (formerly BlueMountain Capital Management, LLC), which amended and restated the Amended and Restated Promissory Notes, dated as of March 20, 2019, issued by AdaptHealth Holdings in favor of affiliates of Assured Guaranty Ltd.;

Business Combination” means our business combination with AdaptHealth Holdings, which we completed on November 8, 2019;

“Charter” means our Third Amended and Restated Certificate of Incorporation, filed with the Secretary of State of the State of Delaware on July 28, 2021;

Class A Common Stock” means the Class A Common Stock, par value $0.0001 per share, created on the Closing, which, following the filing of the Charter, has been renamed to “Common Stock” (as defined below);

Class B Common Stock” means the Class B Common Stock, par value $0.0001 per share, created on the Closing, which following the filing of the Charter, no longer exists;

Closing” means the closing of the Business Combination;

Common Stock” means our Common Stock, par value $0.0001 per share;

Exchange Agreement” means the Exchange Agreement, dated as of November 8, 2019, by and among AdaptHealth, AdaptHealth Holdings, and holders of AdaptHealth Units;

OEP Purchaser” means OEP AHCO Investment Holdings, LLC, a Delaware limited liability company;

Series B-1 Preferred Stock” means the series of preferred stock of the Company designated as “Series B-1 Convertible Preferred Stock,” par value $0.0001 per share;

Sponsor” means Deerfield/RAB Ventures LLC;

Tax Receivable Agreement” means the Tax Receivable Agreement, dated as of November 8, 2019, by and among AdaptHealth, AdaptHealth Holdings, and holders of AdaptHealth Units; and

“Warrants” means, collectively, the warrants that were issued in our initial public offering (our “IPO”) pursuant to the registration statement declared effective on February 15, 2018 and which were redeemed on September 2, 2020 (the “public warrants”) and the warrants initially issued to our Sponsor in a private placement that occurred simultaneously with our IPO (the “private placement warrants”), which private placement warrants have been distributed from the Sponsor to its members.

2

CAUTIONARY STATEMENT

In this Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I Item 2, and the documents incorporated by reference herein, we make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for our business. These statements may be preceded by, followed by or include the words “may,” “might,” “will,” “will likely result,” “should,” “estimate,” “plan,” “project,” “forecast,” “intend,” “expect,” “anticipate,” “believe,” “seek,” “continue,” “target” or similar expressions.

These forward-looking statements are based on information available to us as of the date they were made, and involve a number of risks and uncertainties which may cause them to turn out to be wrong. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward- looking statements. Some factors that could cause actual results to differ include:

competition and the ability of our business to grow and manage growth profitably;
changes in applicable laws or regulations;
fluctuations in the U.S. and/or global stock markets;
the possibility that we may be adversely affected by other economic, business, and/or competitive factors;
the impact of the coronavirus (COVID-19) pandemic and our response to it;
failure to consummate or realize the expected benefits of acquisitions, including the failure to realize the expected benefits of the acquisition of AeroCare Holdings, Inc. (“AeroCare”); and
other risks and uncertainties set forth in this Form 10-Q, as well as the documents incorporated by reference herein.

3

PART I – FINANCIAL INFORMATION

Item 1. Consolidated Interim Financial Statements

ADAPTHEALTH CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

June 30, 

December 31,

2021

2020

Assets

Current assets:

  

  

Cash and cash equivalents

$

178,189

$

99,962

Accounts receivable

 

302,127

 

171,065

Inventory

 

81,507

 

58,783

Prepaid and other current assets

 

29,046

 

33,441

Total current assets

 

590,869

 

363,251

Equipment and other fixed assets, net

 

309,071

 

110,468

Goodwill

 

3,231,200

 

998,810

Identifiable intangible assets, net

233,630

116,061

Other assets

 

19,344

 

16,483

Deferred tax assets

 

303,551

 

208,399

Total Assets

$

4,687,665

$

1,813,472

Liabilities and Stockholders' Equity

 

 

Current liabilities:

 

 

Accounts payable and accrued expenses

$

350,714

$

254,212

Current portion of capital lease obligations

 

23,919

 

22,282

Current portion of long-term debt

 

96,750

 

8,146

Contract liabilities

 

24,872

 

11,043

Other liabilities

 

83,861

 

89,524

Contingent consideration common shares liability

25,758

36,846

Total current liabilities

 

605,874

 

422,053

Long-term debt, less current portion

 

1,776,326

 

776,568

Other long-term liabilities

 

317,464

 

186,470

Long-term portion of contingent consideration common shares liability

20,675

33,631

Warrant liability

73,283

113,905

Total Liabilities

 

2,793,622

 

1,532,627

Commitments and contingencies (note 14)

 

 

Stockholders' Equity

 

 

Class A Common Stock, par value of $0.0001 per share, 210,000,000 shares authorized; 130,064,838 and 76,457,439 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively

13

8

Class B Common Stock, par value of $0.0001 per share, 35,000,000 shares authorized; 0 and 13,218,758 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively

1

Preferred Stock, par value of $0.0001 per share, 5,000,000 shares authorized; 124,060 and 163,560 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively

1

1

Additional paid-in capital

2,015,875

558,486

Accumulated deficit

(124,055)

(199,196)

Accumulated other comprehensive loss

 

(1,871)

 

(4,411)

Total stockholders' equity attributable to AdaptHealth Corp.

 

1,889,963

 

354,889

Noncontrolling interests in subsidiaries

 

4,080

 

(74,044)

Total stockholders' equity

 

1,894,043

 

280,845

Total Liabilities and Stockholders' Equity

$

4,687,665

$

1,813,472

See accompanying notes to unaudited consolidated interim financial statements.

4

ADAPTHEALTH CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

Three Months Ended June 30, 

Six Months Ended June 30, 

2021

    

2020

    

2021

    

2020

Net revenue

$

617,017

$

232,116

$

1,099,136

$

423,555

Costs and expenses:

 

  

 

  

 

 

Cost of net revenue

 

490,720

 

198,418

 

887,418

 

366,048

General and administrative expenses

 

42,946

 

17,092

 

99,578

 

31,439

Depreciation and amortization, excluding patient equipment depreciation

 

17,944

 

1,036

 

31,324

 

2,278

Total costs and expenses

 

551,610

 

216,546

 

1,018,320

 

399,765

Operating income

 

65,407

 

15,570

 

80,816

 

23,790

Interest expense, net

 

23,147

 

7,482

 

45,332

 

15,420

Loss on extinguishment of debt

 

7,736

 

 

11,949

 

Change in fair value of contingent consideration common shares liability (note 10)

(22,079)

(42)

(24,044)

16,325

Change in fair value of warrant liability (note 10)

(37,454)

(654)

(40,622)

35,446

Other loss (income), net

1,669

(900)

1,150

(1,991)

Income (loss) before income taxes

 

92,388

 

9,684

 

87,051

 

(41,410)

Income tax expense

 

12,330

 

1,826

 

10,635

 

185

Net income (loss)

80,058

7,858

76,416

(41,595)

Income (loss) attributable to noncontrolling interests

 

951

 

3,388

 

1,275

 

(11,514)

Net income (loss) attributable to AdaptHealth Corp.

$

79,107

$

4,470

$

75,141

$

(30,081)

Weighted average common shares outstanding - basic

129,664

44,508

120,438

43,242

Weighted average common shares outstanding - diluted

136,582

47,834

127,720

43,242

Basic net income (loss) per share (1)

$

0.56

$

0.10

$

0.56

$

(0.70)

Diluted net income (loss) per share (1)

$

0.12

$

0.08

$

0.06

$

(0.70)

(1) See Note 11, Earnings Per Share, to the unaudited consolidated interim financial statements for the calculations of basic and diluted net income (loss) per share.

See accompanying notes to unaudited consolidated interim financial statements.

5

ADAPTHEALTH CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(IN THOUSANDS)

(UNAUDITED)

Three Months Ended June 30, 

Six Months Ended June 30, 

2021

2020

    

2021

2020

Net income (loss)

$

80,058

$

7,858

$

76,416

$

(41,595)

Other comprehensive income (loss):

 

  

 

  

 

 

Interest rate swap agreements, inclusive of reclassification adjustment

 

664

 

(1,066)

 

2,540

 

(12,483)

Comprehensive income (loss)

 

80,722

 

6,792

 

78,956

 

(54,078)

Income (loss) attributable to noncontrolling interests

 

951

 

3,388

 

1,275

 

(11,514)

Comprehensive income (loss) attributable to AdaptHealth Corp.

$

79,771

$

3,404

$

77,681

$

(42,564)

See accompanying notes to unaudited consolidated interim financial statements.

6

ADAPTHEALTH CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

(IN THOUSANDS)

(UNAUDITED)

Accumulated

Additional

other

Noncontrolling

Class A Common Stock

Class B Common Stock

Preferred Stock

paid-in

Accumulated

comprehensive

interests in

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

  

capital

deficit

  

income (loss)

  

subsidiaries

  

Total

Balance, December 31, 2020

76,458

$

8

13,219

$

1

164

$

1

$

558,486

$

(199,196)

$

(4,411)

$

(74,044)

$

280,845

Issuance of Class A Common Stock for acquisitions

14,092

2

564,986

564,988

Issuance of Series C Preferred Stock for an acquisition

130

523,856

523,856

Issuance of stock options for an acquisition

134,683

134,683

Exchange of Class B Common Stock for Class A Common Stock

13,219

1

(13,219)

(1)

(77,919)

77,919

Equity-based compensation

172

8,582

8,582

Cashless exercise of stock options

9

Issuance of Class A Common Stock, net of offering costs of $13,832

8,450

1

265,017

265,018

Conversion of Series B-1 Preferred Stock to Class A Common Stock

3,950

(40)

Conversion of Series C-1 Preferred Stock to Class A Common Stock

13,047

1

(130)

(1)

Class A Common Stock issued in connection with Employee Stock Purchase Plan

8

314

314

Net loss

(3,966)

324

(3,642)

Equity activity resulting from the Tax Receivable Agreement

16,768

16,768

Change in fair value of interest rate swaps, inclusive of reclassification adjustment

1,876

1,876

Other

(19)

(810)

(810)

Balance, March 31, 2021

129,386

$

13

$

124

$

1

$

1,993,962

(203,162)

$

(2,535)

$

4,199

$

1,792,478

Issuance of Class A Common Stock for acquisitions

441

12,166

12,166

Equity-based compensation

37

7,447

7,447

Exercise of stock options

200

2,300

2,300

Distribution to non-controlling interest

(1,070)

(1,070)

Net income

79,107

951

80,058

Change in fair value of interest rate swaps, inclusive of reclassification adjustment

664

664

Balance, June 30, 2021

130,064

$

13

$

124

$

1

$

2,015,875

(124,055)

$

(1,871)

$

4,080

$

1,894,043

7

ADAPTHEALTH CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

(IN THOUSANDS)

(UNAUDITED) (Continued)

Accumulated

Additional

other

Noncontrolling

Class A Common Stock

Class B Common Stock

Preferred Stock

paid-in

Accumulated

comprehensive

interests in

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

  

capital

deficit

  

income (loss)

  

subsidiaries

  

Total

Balance, December 31, 2019

40,816

$

4

31,564

$

3

$

$

$

(40,258)

$

1,431

$

(26,963)

$

(65,783)

Issuance of Class A Common Stock for an acquisition

387

6,248

6,248

Exchange of Class B Common Stock for Class A Common Stock

1,000

(1,000)

(361)

361

Exercise of warrants

1,092

15,273

15,273

Equity-based compensation

59

2,223

2,223

Net loss

(34,551)

(14,902)

(49,453)

Equity activity resulting from Tax Receivable Agreement

2,483

2,483

Change in fair value of interest rate swaps, inclusive of reclassification adjustment

(6,570)

(4,847)

(11,417)

Balance, March 31, 2020

43,354

$

4

30,564

$

3

$

$

25,866

$

(74,809)

$

(5,139)

$

(46,351)

$

(100,426)

Exchange of Class B Common Stock for Class A Common Stock

2,055

(2,055)

(1,580)

1,580

Exercise of warrants

1,034

1

17,627

17,628

Equity-based compensation

32

3,244

3,244

Exchange of Class A Common Stock for Series B-1 Preferred Stock

(15,810)

(2)

158

1

1

Distribution to non-controlling interest

(800)

(800)

Net income

4,470

3,388

7,858

Equity activity resulting from the Put/Call Agreement

(29,927)

(29,927)

Equity activity resulting from the Tax Receivable Agreement

2,223

2,223

Change in fair value of interest rate swaps, inclusive of reclassification adjustment

(656)

(410)

(1,066)

Balance, June 30, 2020

30,665

$

3

28,509

$

3

158

$

1

$

17,454

$

(70,339)

$

(5,795)

$

(42,593)

$

(101,266)

See accompanying notes to unaudited consolidated interim financial statements.

8

ADAPTHEALTH CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

Six Months Ended June 30, 

2021

2020

Cash flows from operating activities:

Net income (loss)

$

76,416

$

(41,595)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

Depreciation, including patient equipment depreciation

 

86,768

 

35,114

Equity-based compensation

 

16,029

 

5,467

Change in fair value of contingent consideration common shares liability

(24,044)

16,325

Change in fair value of warrant liability

(40,622)

35,446

Deferred income tax expense (income)

 

6,544

 

(1,613)

Change in fair value of interest rate swaps, net of reclassification adjustment

(1,443)

(1,415)

Change in fair value of contingent consideration

255

(2,900)

Payment of contingent consideration in connection with an acquisition

(1,000)

Amortization of intangible assets

24,231

Amortization of deferred financing costs

 

2,306

 

783

Imputed interest expense

173

Write-off of deferred financing costs

 

3,495

 

Loss on extinguishment of debt from prepayment penalty

8,454

Gain on sale of investment

(591)

Changes in operating assets and liabilities, net of effects from acquisitions:

 

 

Accounts receivable

 

(4,608)

 

(20,506)

Inventory

 

15,841

 

(6,792)

Prepaid and other assets

 

8,678

 

3,603

Accounts payable and accrued expenses and other current liabilities

 

(30,849)

 

90,682

Net cash provided by operating activities

 

147,624

 

111,008

Cash flows from investing activities:

 

 

Payments for business acquisitions, net of cash acquired

 

(1,292,631)

 

(107,463)

Purchases of equipment and other fixed assets

 

(79,396)

 

(10,915)

Payments for investments in cost method companies

(1,000)

Proceeds from sale of investment

2,046

Net cash used in investing activities

 

(1,372,027)

 

(117,332)

Cash flows from financing activities:

 

 

Proceeds from borrowings on long-term debt and lines of credit

 

1,070,000

 

70,000

Repayments on long-term debt and lines of credit

 

(470,521)

 

(21,641)

Proceeds from the issuance of Class A Common Stock

278,850

Proceeds from the issuance of senior unsecured notes

500,000

Proceeds from exercise of warrants

11,883

Proceeds from exercise of stock options

2,300

Payments on capital leases

 

(19,767)

 

(19,409)

Payments for equity issuance costs

 

(13,832)

 

Payments of deferred financing costs

 

(18,039)

 

Proceeds received in connection with Employee Stock Purchase Plan

314

Payments for tax withholdings from equity-based compensation activity

 

(810)

 

Distributions to noncontrolling interests

 

(1,070)

 

(800)

Payment of contingent consideration in connection with acquisitions

 

(13,396)

 

Payment of deferred purchase price in connection with acquisitions

(2,945)

Payments for debt prepayment penalties

 

(8,454)

 

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

$

178,189

$

110,587

Supplemental disclosures:

 

 

Cash paid for interest

$

30,382

$

15,488

Cash paid for income taxes

13,756

2,155

Noncash investing and financing activities:

Equipment acquired under capital lease obligations

$

18,644

$

20,632

Unpaid equipment and other fixed asset purchases at end of period

20,114

6,990

Equity consideration issued in connection with acquisitions

1,235,693

6,248

Contingent purchase price in connection with acquisitions

1,000

Deferred purchase price in connection with acquisitions

983

33

See accompanying notes to unaudited consolidated interim financial statements.

9

Table of Contents

ADAPTHEALTH CORP. AND SUBSIDIARIES

Notes to Consolidated Interim Financial Statements (Unaudited)

(1)          General Information

AdaptHealth Corp. and subsidiaries (AdaptHealth or the Company), f/k/a DFB Healthcare Acquisitions Corp. (DFB), is a national leader in providing patient-centered, healthcare-at-home solutions including home medical equipment, medical supplies, and related services. AdaptHealth focuses primarily on providing (i) sleep therapy equipment, supplies and related services (including CPAP and bi PAP services) to individuals suffering from obstructive sleep apnea (OSA), (ii) medical devices and supplies to patients for the treatment of diabetes (including continuous glucose monitors (CGM) and insulin pumps), (iii) home medical equipment (HME) to patients discharged from acute care and other facilities, (iv) oxygen and related chronic therapy services in the home, and (v) other HME medical devices and supplies on behalf of chronically ill patients with wound care, urological, incontinence, ostomy and nutritional supply needs. AdaptHealth services beneficiaries of Medicare, Medicaid and commercial payors.

On July 8, 2019, AdaptHealth Holdings LLC (AdaptHealth Holdings) entered into an Agreement and Plan of Merger (the Merger Agreement), as amended on October 15, 2019, with DFB, pursuant to which AdaptHealth Holdings combined with DFB (the Business Combination). The Business Combination closed on November 8, 2019.

Unless the context otherwise requires, “the Company”, “we,” “us,” and “our” refer, for periods prior to the closing of the Business Combination, to AdaptHealth Holdings and its subsidiaries and, for periods upon or after the closing of the Business Combination, to AdaptHealth Corp. and its subsidiaries, including AdaptHealth Holdings and its subsidiaries.

The consolidated interim financial statements are unaudited, but reflect all normal recurring adjustments that are, in the opinion of management, necessary to fairly present the information set forth herein. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2020. Interim results are not necessarily indicative of the results for a full year.

There have been no material changes in the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2020.

(a)          Basis of Presentation

The consolidated interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). In the opinion of management, the consolidated interim financial statements include all necessary adjustments for a fair presentation of the financial position and results of operations for the periods presented.

The Business Combination was accounted for as a reverse recapitalization, with DFB treated as the acquired company and AdaptHealth Holdings as the acquirer, for financial reporting purposes. Therefore, the equity structure has been restated to that of the Company.

As of June 30, 2021, the Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, (the Securities Act), as modified by the Jumpstart our Business Startups Act of 2012, (the JOBS Act), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and other exemptions. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the market value of our Common Stock that is held by non-affiliates exceeds $700 million as of June 30 of that fiscal

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Notes to Consolidated Interim Financial Statements (Unaudited) (Continued)

year, (ii) the last day of the fiscal year in which we have total annual gross revenue of $1.07 billion or more during such fiscal year, (iii) the date on which we have issued more than $1.0 billion in non-convertible debt in the prior three-year period or (iv) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common stock in the IPO, which would be December 31, 2023. The Company will no longer qualify as an emerging growth company as of December 31, 2021 due to the market value of its Common Stock that was held by non-affiliates as of June 30, 2021.

(b)         Basis of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

(c)          Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.

(d)          Accounting Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and reported amounts of revenues and expenses during the reporting period. Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable. Significant areas requiring the use of management estimates relate to revenue recognition and the valuation of accounts receivable (implicit price concession), income taxes, contingent consideration, equity-based compensation, interest rate swaps, warrant liability and long-lived assets, including goodwill and identifiable intangible assets. Actual results could differ from those estimates.

(e)          Valuation of Goodwill

The Company has a significant amount of goodwill on its balance sheet that resulted from the business acquisitions the Company has made in recent years. Goodwill is not amortized and is tested for impairment annually and upon the occurrence of a triggering event or change in circumstances indicating a possible impairment. Such changes in circumstance can include, among others, changes in the legal environment, reimbursement environment, operating performance, and/or future prospects. The Company performs its annual impairment review of goodwill during the fourth quarter of each year. The impairment testing can be performed on either a quantitative or qualitative basis. The Company first assesses qualitative factors to determine whether it is necessary to perform quantitative goodwill impairment testing. If determined necessary, the Company applies the quantitative impairment test to identify and measure the amount of impairment, if any.

(f) Impairment of Long Lived Assets

The Company’s long lived assets, such as equipment and other fixed assets and definite-lived identifiable intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the

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carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Definite-lived identifiable intangible assets consist of tradenames, payor contracts, contractual rental agreements and developed technology. These assets are amortized using the straight-line method over their estimated useful lives, which reflects the pattern in which the economic benefits of the assets are expected to be consumed. These assets are tested for impairment consistent with the Company’s long-lived assets. The following table summarizes the useful lives of the identifiable intangible assets acquired:

Tradenames

5 to 10

years

Payor contracts

10

years

Contractual rental agreements

2

years

Developed technology

5

years

The Company did not incur any impairment charges on long-lived assets for the three and six months ended June 30, 2021 and 2020. In addition to consideration of impairment upon the events or changes in circumstances described above, management regularly evaluates the remaining useful lives of its long lived assets.

(g)          Business Segment

The Company’s chief operating decision-makers are its Chief Executive Officer and President, who make resource allocation decisions and assess performance based on financial information presented on an aggregate basis. There are no segment managers who are held accountable by the chief operating decision-makers, or anyone else, for any planning, strategy and key decision-making regarding operations. The corporate office is responsible for contract negotiation with vendors and payors, corporate compliance with healthcare laws and regulations, and revenue cycle management, among other corporate supporting functions. Accordingly, the Company has a single reportable segment and operating segment structure.

(h)        Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize leases on its-balance sheet and disclose key information about leasing arrangements. Under the new guidance, lessees are required to recognize a lease liability, which represents the discounted obligation to make future minimum lease payments, and a corresponding right-of-use (ROU) asset on the balance sheet for most leases. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The Company expects to elect the “package of practical expedients” under the new standard, which, among other things, permits lease agreements that are twelve months or less to be excluded from the balance sheet, and permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company will adopt the new standard during the year ended December 31, 2021. The Company expects to adopt this guidance using a modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application, and will recognize a cumulative-effect adjustment to the opening balance of accumulated deficit in the period of adoption. The Company expects that this standard will have a material effect on its consolidated financial statements. While the Company continues to assess all of the effects of the adoption, it currently estimates that upon adoption it will record approximately $88 million to $98 million of operating lease liabilities on its consolidated balance sheet, with a corresponding ROU asset, based on the present value of the remaining minimum rental payments under the current leasing standard for existing operating leases. This amount is estimated as of the date of initial application (January 1, 2021), and will be impacted by changes to the existing operating leases during 2021 for new leases, lease amendments, lease terminations and acquisitions. The Company does not expect the adoption will have an impact on its accounting for existing capital leases. The adoption will also require significant new disclosures about the Company’s leasing activities.

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Additionally, the Company estimates that it will record approximately $55 million to $65 million of operating lease liabilities on its consolidated balance sheet, with a corresponding ROU asset, based on the present value of the remaining minimum rental payments under the current leasing standard for operating leases acquired by the Company in connection with the acquisition of AeroCare Holdings, Inc. (AeroCare) on February 1, 2021 (note 3).

The Company is implementing a lease management system to track and record the lease liabilities and ROU asset for all leases with a term of greater than 12 months. The Company is also in the process of completing additional process changes and updating internal controls to ensure the new reporting and disclosure requirements are met upon adoption.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which is intended to improve financial reporting by requiring earlier recognition of credit losses on certain financial assets. The standard replaces the current incurred loss impairment model that recognizes losses when a probable threshold is met with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. Further, the FASB issued ASU 2019-04 and ASU 2019-05 to provide additional guidance on the credit losses standard. The standard is effective for fiscal years beginning after December 15, 2022, for smaller reporting companies, including interim periods within those annual periods, with early adoption permitted. The Company will adopt the new standard during the year ended December 31, 2021. The Company is currently evaluating the effect that this standard will have on its consolidated financial statements and related disclosures but currently does not expect the impact will be material.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848), which provides optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. Specifically, the guidance permits an entity, when certain criteria are met, to consider amendments to contracts made to comply with reference rate reform to meet the definition of a modification under GAAP. It further allows hedge accounting to be maintained and a one-time transfer or sale of qualifying held-to-maturity securities. The expedients and exceptions provided by the amendments are permitted to be adopted any time through December 31, 2022 and do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for certain optional expedients elected for certain hedging relationships existing as of December 31, 2022. The Company is currently evaluating the effect that this standard will have on its consolidated financial statements and related disclosures.

(i)        Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

(2)         Revenue Recognition and Accounts Receivable

Revenue Recognition

The Company generates revenues for services and related products that the Company provides to patients for home medical equipment, related supplies, and other items. The Company’s revenues are recognized in the period in which services and related products are provided to customers and are recorded either at a point in time for the sale of supplies and disposables, or over the fixed monthly service period for equipment.

Revenues are recognized when control of the promised good or service is transferred to customers, in an amount that reflects the consideration to which the Company expects to receive from patients or under reimbursement arrangements with Medicare, Medicaid and third-party payors, in exchange for those goods and services.

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The Company determines the transaction price based on contractually agreed-upon amounts or rates, adjusted for estimates of variable consideration, such as implicit price concessions. The Company utilizes the expected value method to determine the amount of variable consideration that should be included to arrive at the transaction price, using contractual agreements and historical reimbursement experience within each payor type. The Company applies constraint to the transaction price, such that net revenue is recorded only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in the future. If actual amounts of consideration ultimately received differ from the Company’s estimates, the Company adjusts these estimates, which would affect net revenue in the period such adjustments become known.

Sales revenue is recognized upon transfer of control of products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Revenues for the sale of durable medical equipment and related supplies, including oxygen equipment, ventilators, wheelchairs, hospital beds and infusion pumps, are recognized when control of the promised good or service is transferred to customers, which is generally upon shipment for direct to consumer supplies and upon delivery to the home for durable medical equipment.

The Company provides certain equipment to patients which is reimbursed periodically in fixed monthly payments for as long as the patient is using the equipment and medical necessity continues (in certain cases, the fixed monthly payments are capped at a certain amount). The equipment provided to the patient is based upon medical necessity as documented by prescriptions and other documentation received from the patient’s physician. The patient generally does not negotiate or have input with respect to the manufacturer or model of the equipment prescribed by their physician and delivered by the Company. Once initial delivery of this equipment is made to the patient for initial setup, a monthly billing process is established based on the initial setup service date. The Company recognizes the fixed monthly revenue ratably over the service period as earned, less estimated adjustments, and defers revenue for the portion of the monthly bill that is unearned. No separate revenue is earned from the initial setup process. Included in fixed monthly revenue are unbilled amounts for which the revenue recognition criteria had been met as of period-end but were not yet billed to the payor. The estimate of net unbilled fixed monthly revenue recognized is based on historical trends and estimates of future collectability.

The Company’s billing system contains payor-specific price tables that reflect the fee schedule amounts in effect or contractually agreed upon by various government and commercial payors for each item of equipment or supply provided to a customer. Revenues are recorded based on the applicable fee schedule. The Company has established a contractual allowance to account for adjustments that result from differences between the payment amount received and the expected realizable amount. If the payment amount received differs from the net realizable amount, an adjustment is recorded to revenues in the period that these payment differences are determined. The Company reports revenues in its consolidated financial statements net of such adjustments.

The Company’s business experiences some seasonality. Its patients are generally responsible for a greater percentage of the cost of their treatment or therapy during the early months of the calendar year due to co-insurance, co-payments and deductibles, and therefore may defer treatment and services of certain therapies until meeting their annual deductibles. In addition, changes to employer insurance coverage often go into effect at the beginning of each calendar year which may impact eligibility requirements and delay or defer treatment. These factors may lead to lower net revenue and cash flow in the early part of the year versus the latter half of the year. Additionally, the increased incidence of respiratory infections during the winter season may result in initiation of additional respiratory services such as oxygen therapy for certain patient populations. The Company’s net revenue and quarterly operating results may fluctuate significantly in the future depending on these and other factors.

The Company recognizes revenue in the consolidated statements of operations and contract assets on the consolidated balance sheets only when services have been provided. Since the Company has performed its obligation under the contract, it has unconditional rights to the consideration recorded as contract assets and therefore classifies those billed and unbilled contract assets as accounts receivable.

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Notes to Consolidated Interim Financial Statements (Unaudited) (Continued)

Fixed monthly payments that the Company receives from customers in advance of providing services represent contract liabilities. Such payments primarily relate to patients who are billed monthly in advance and are recognized over the period as earned.

The Company disaggregates net revenue from contracts with customers by payor type and by core service lines. The Company believes that disaggregation of net revenue into these categories depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The payment terms and conditions within the Company’s revenue-generating contracts vary by payor type and payor source.

The composition of net revenue by payor type for the three and six months ended June 30, 2021 and 2020 are as follows (in thousands):

Three Months Ended June 30, 

Six Months Ended June 30, 

2021

    

2020

    

2021

2020

Insurance

$

371,869

$

148,165

$

661,879

$

262,616

Government

177,323

60,513

311,053

111,758

Patient pay

 

67,825

 

23,438

 

126,204

 

49,181

Net revenue

$

617,017

$

232,116

$

1,099,136

$

423,555

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Notes to Consolidated Interim Financial Statements (Unaudited) (Continued)

The composition of net revenue by core service lines for the three and six months ended June 30, 2021 and 2020 are as follows (in thousands):

Three Months Ended June 30, 

Six Months Ended June 30, 

2021

    

2020

    

2021

2020

Net sales revenue:

Sleep

$

163,331

$

84,421

$

292,013

$

153,315

Diabetes

123,314

6,372

218,331

11,679

Supplies to the home

42,675

27,868

84,038

55,900

Respiratory

 

13,154

 

18,114

 

18,775

 

20,882

HME

30,360

12,727

54,516

24,306

Other

27,763

11,463

50,189

23,856

Total net sales revenue

$

400,597

$

160,965

$

717,862

$

289,938

Net revenue from fixed monthly equipment reimbursements:

Sleep

$

66,335