| Summary of Significant Accounting Policies | (2) Summary of Significant Accounting Policies (a) Basis of Presentation The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). In the opinion of management, the consolidated financial statements include all necessary adjustments for a fair presentation of the financial position and results of operations for the periods presented. As discussed in Note 1, Nature of Business The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, (the Securities Act), as modified by the Jumpstart our Business Startups Act of 2012, (the JOBS Act), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and other exemptions. Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that an emerging growth company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, will adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s consolidated financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used. Certain prior year amounts have been reclassified to conform to the current year presentation. In the Company’s consolidated statements of operations, certain amounts are classified separately as other income, net, primarily related to the change in fair value of contingent consideration liabilities related to acquisitions, due to the fact that such amounts have increased in 2020. Additionally, the Company’s consolidated financial statements and corresponding disclosures for 2019 have been recast to reflect corrections for an error in the accounting for the contingent consideration common share liability, as discussed below. Correction of Previously Issued Consolidated Financial Statements and Unaudited Quarterly Condensed Consolidated Financial Information for Errors in the Accounting for Contingent Consideration Common Shares In connection with the preparation of the Company’s consolidated financial statements for the year ended December 31, 2020, the Company reevaluated the accounting treatment of the previously disclosed contingent consideration common shares to which the former owners of AdaptHealth Holdings are entitled in connection with the Business Combination (the Contingent Consideration Common Shares). Due to the fact that the issuance of the Contingent Consideration Common Shares would be accelerated on a change of control regardless of the transaction value, the Company determined to present the Contingent Consideration Common Shares as liability-classified, instead of equity-classified as previously presented. Accordingly, the fair value of the Contingent Consideration Common Shares is reflected as a liability and the change in the fair value of such liability in each period is recognized as a non-cash charge in the Company’s consolidated statements of operations. The Company has concluded that the impact of the error on its audited consolidated financial statements for the year ended December 31, 2019 included in its Form 10-K for such period is not material. The Company has revised its accompanying consolidated financial statements as of and for the year ended December 31, 2019 to reflect the impact of the correction of the accounting for the Contingent Consideration Common Shares. Refer to Note 20, Quarterly Financial Information (Unaudited) net revenues operating cash Year Ended December 31, 2019 As Reported As Revised Consolidated Statement of Operations: Change in fair value of contingent consideration common shares liability $ — $ 2,483 Income tax expense $ 1,156 $ 739 Net loss $ (12,885) $ (14,951) Net loss attributable to AdaptHealth Corp. $ (14,996) $ (17,062) Basic and diluted loss per share attributable to AdaptHealth Corp. $ (0.66) $ (0.76) December31, 2019 As Reported As Revised Consolidated Balance Sheet: Deferred tax assets $ 27,505 $ 27,922 Total Assets $ 546,121 $ 546,538 Contingent consideration common shares liability - current portion $ — $ 3,158 Long-term portion of contingent consideration common shares liability $ — $ 6,158 Total Liabilities $ 575,370 $ 584,686 Additional paid-in capital $ 11,252 $ 4,419 Accumulated deficit $ (27,210) $ (29,276) Total stockholders' deficit attributable to AdaptHealth Corp. $ (14,520) $ (23,419) Total stockholders' deficit $ (29,249) $ (38,148) The impacts of the revisions have been reflected throughout the consolidated financial statements, including the applicable footnotes, as appropriate. (b) Basis of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. (c) Accounting Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and reported amounts of revenues and expenses during the reporting period. Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable. Significant areas requiring the use of management estimates relate to revenue recognition and the valuation of accounts receivable (implicit price concession), income taxes, contingent consideration, equity-based compensation, interest rate swaps, and long-lived assets, including goodwill and identifiable intangible assets. Actual results could differ from those estimates. (d) Revenue Recognition The Company generates revenues for services and related products that the Company provides to patients for home medical equipment, related supplies, and other items. The Company’s revenues are recognized in the period in which services and related products are provided to customers and are recorded either at a point in time for the sale of supplies and disposables, or over the fixed monthly service period for equipment. Revenues are recognized when control of the promised good or service is transferred to customers, in an amount that reflects the consideration to which the Company expects to receive from patients or under reimbursement arrangements with Medicare, Medicaid and third-party payors, in exchange for those goods and service. The Company determines the transaction price based on contractually agreed-upon amounts or rates, adjusted for estimates of variable consideration, such as implicit price concessions. The Company utilizes the expected value method to determine the amount of variable consideration that should be included to arrive at the transaction price, using contractual agreements and historical reimbursement experience within each payor type. The Company applies constraint to the transaction price, such that net revenue is recorded only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in the future. If actual amounts of consideration ultimately received differ from the Company’s estimates, the Company adjusts these estimates, which would affect net revenue in the period such adjustments become known. During the year ended December 31, 2020, the Company decreased net revenue by approximately $11 million due to the consideration ultimately received compared with the amounts previously estimated, which has been treated as a change in estimate. Sales revenue is recognized upon transfer of control of products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Revenues for the sale of durable medical equipment and related supplies, including oxygen equipment, ventilators, wheelchairs, hospital beds and infusion pumps, are recognized when control of the promised good or service is transferred to customers, which is generally upon shipment for direct to consumer supplies and upon delivery to the home for durable medical equipment. The Company provides certain equipment to patients which is reimbursed periodically in fixed monthly payments for as long as the patient is using the equipment and medical necessity continues (in certain cases, the fixed monthly payments are capped at a certain amount). The equipment provided to the patient is based upon medical necessity as documented by prescriptions and other documentation received from the patient’s physician. The patient generally does not negotiate or have input with respect to the manufacturer or model of the equipment prescribed by their physician and delivered by the Company. Once initial delivery of this equipment is made to the patient for initial setup, a monthly billing process is established based on the initial setup service date. The Company recognizes the fixed monthly revenue ratably over the service period as earned, less estimated adjustments, and defers revenue for the portion of the monthly bill that is unearned. No separate revenue is earned from the initial setup process. Included in fixed monthly revenue are unbilled amounts for which the revenue recognition criteria had been met as of period-end but were not yet billed to the payor. The estimate of net unbilled fixed monthly revenue recognized is based on historical trends and estimates of future collectability. The Company’s billing system contains payor-specific price tables that reflect the fee schedule amounts in effect or contractually agreed upon by various government and commercial payors for each item of equipment or supply provided to a customer. Revenues are recorded based on the applicable fee schedule. The Company has established a contractual allowance to account for adjustments that result from differences between the payment amount received and the expected realizable amount. If the payment amount received differs from the net realizable amount, an adjustment is recorded to revenues in the period that these payment differences are determined. The Company reports revenues in its consolidated financial statements net of such adjustments. The Company’s business experiences some seasonality. Its patients are generally responsible for a greater percentage of the cost of their treatment or therapy during the early months of the year due to co-insurance, co-payments and deductibles, and therefore may defer treatment and services of certain therapies until meeting their annual deductibles. In addition, changes to employer insurance coverage often go into effect at the beginning of each calendar year which may impact eligibility requirements and delay or defer treatment. These factors may lead to lower net revenue and cash flow in the early part of the year versus the latter half of the year. Additionally, the increased incidence of respiratory infections during the winter season may result in initiation of additional respiratory services such as oxygen therapy for certain patient populations. The Company’s net revenue and quarterly operating results may fluctuate significantly in the future depending on these and other factors. The Company recognizes revenue in the consolidated statements of operations and contract assets on the consolidated balance sheets only when services have been provided. Since the Company has performed its obligation under the contract, it has unconditional rights to the consideration recorded as contract assets and therefore classifies those billed and unbilled contract assets as accounts receivable. Fixed monthly payments that the Company receives from customers in advance of providing services represent contract liabilities. Such payments primarily relate to patients who are billed monthly in advance and are recognized over the period as earned. Disaggregation of net revenue The Company disaggregates net revenue from contracts with customers by payor type and by core service lines. The Company believes that disaggregation of net revenue into these categories depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The payment terms and conditions within the Company’s revenue-generating contracts vary by payor type and payor source The composition of net revenue by payor type for the years ended December 31, 2020 and 2019 are as follows (in thousands): Year Ended December 31, 2020 2019 Insurance $ 657,033 $ 300,361 Government 295,657 168,686 Patient pay 103,699 60,597 Net revenue $ 1,056,389 $ 529,644 The composition of net revenue by core service lines for the years ended December 31, 2020 and 2019 are as follows (in thousands): Year Ended December 31, 2020 2019 Net sales revenue: Sleep $ 312,860 $ 224,542 Diabetes 159,490 — Supplies to the home 145,624 7,760 Respiratory 28,605 5,780 HME 58,029 42,487 Other 54,689 35,882 Total net sales revenue $ 759,297 $ 316,451 Net revenue from fixed monthly equipment reimbursements: Sleep $ 98,361 $ 80,846 Diabetes 2,467 — Respiratory 123,860 81,418 HME 55,847 42,969 Other 16,557 7,960 Total net revenue from fixed monthly equipment reimbursements $ 297,092 $ 213,193 Total net revenue: Sleep $ 411,221 $ 305,388 Diabetes 161,957 — Supplies to the home 145,624 7,760 Respiratory 152,465 87,198 HME 113,876 85,456 Other 71,246 43,842 Total net revenue $ 1,056,389 $ 529,644 (e) Accounts Receivable Due to the continuing changes in the healthcare industry and third-party reimbursement environment, certain estimates are required to record accounts receivable at their net realizable values. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. The complexity of third-party billing arrangements and laws and regulations governing Medicare and Medicaid may result in adjustments to amounts originally recorded. The Company performs a periodic analysis to review the valuation of accounts receivable and collectability of outstanding balances. Management’s evaluation takes into consideration such factors as historical bad debt experience, business and economic conditions, trends in healthcare coverage, other collection indicators and information about specific receivables. The Company’s evaluation also considers the age and composition of the outstanding amounts in determining their estimated net realizable value. Receivables are considered past due when not collected by established due dates. Specific patient balances are written off after collection efforts have been followed and the account has been determined to be uncollectible. Revisions in reserve estimates are recorded as an adjustment to net revenue in the period of revision. Included in accounts receivable are earned but unbilled accounts receivables. Billing delays, ranging from several days to several weeks, can occur due to the Company’s policy of compiling required payor specific documentation prior to billing for its services rendered. The Company recorded unbilled revenue of $20.2 million and $8.6 million as of December 31, 2020 and 2019, respectively. (f) COVID-19 Pandemic During 2020, the COVID-19 pandemic impacted the Company’s business, as well as its patients, communities, and employees. The Company’s priorities during the COVID-19 pandemic remain protecting the health and safety of its employees (including patient-facing employees providing respiratory and other services), maximizing the availability of its services and products to support patient health needs, and the operational and financial stability of its business. Federal, state, and local authorities have taken several actions designed to assist healthcare providers in providing care to COVID-19 and other patients and to mitigate the adverse economic impact of the COVID-19 pandemic. Legislative actions taken by the federal government include the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), which was signed into law on March 27, 2020. Through the CARES Act, the federal government has authorized payments to be distributed to healthcare providers through the Public Health and Social Services Emergency Fund (Provider Relief Fund or PRF). Additionally, the CARES Act revised the Medicare accelerated and advance payment program in an attempt to disburse payments to healthcare providers more quickly to mitigate the financial impact on healthcare providers. The Company’s participation in these programs and related accounting policies are summarized below. Grant Income Medicare Accelerated Payment Program accelerated or advance payment pursuant to the Medicare accelerated payment program. The CARES Act revised the Medicare accelerated payment program in an attempt to disburse payments to healthcare providers more quickly. In April 2020, the Company received recoupable advance payments of approximately $46 million made available by CMS under the CARES Act. The recoupment of such amount by CMS will begin in April 2021 and will be applied to services provided and revenue recognized during the period in which the recoupment occurs. The total of the recoupable advance payments is included in other current liabilities in the accompanying consolidated balance sheets as of December 31, 2020. Deferral of Employment Tax Payments The full extent of the impact of the COVID-19 pandemic on the Company’s business, results of operations, and financial condition is highly uncertain and will depend on future developments and numerous evolving factors that it may not be able to accurately predict, and could be material to the Company’s consolidated financial statements in future reporting periods. (g) Fair Value Accounting Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures Level inputs, as defined by ASC 820, are as follows: Level input Input definition Level 1 Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date. Level 2 Inputs, other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date. Level 3 Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Refer to Note 6, Fair Value of Assets and Liabilities (h) Fair Value of Financial Instruments The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, prepaid and other current assets, accounts payable and accrued expenses. The carrying values of the Company’s financial instruments approximate their fair value based on their short-term nature. The table below shows the carrying amounts and estimated fair values, net of unamortized deferred financing costs, of the Company’s primary long-term debt arrangements (in thousands): December 31, 2020 Carrying Value Fair Value Term loan and revolver $ 301,998 $ 301,998 Senior unsecured notes 342,022 370,022 Note payable 140,361 154,711 $ 784,381 $ 826,731 The borrowings under the Company’s term loan and revolver, which were entered into in July 2020, bear interest at the variable rates described in Note 10, Debt (i) Cash and Cash Equivalents The Company considers all short-term highly liquid investments with a maturity of three months or less to be cash equivalents. Cash represents cash on hand and deposits held at banks. The Company maintains cash in demand deposit accounts with federally insured banks. At times, the balances in these accounts may be in excess of federally insured limits. Cash and cash equivalents consist of the following (in thousands): December 31, (in thousands) 2020 2019 Cash $ 94,360 $ 22,863 Money market accounts 5,602 54,015 Total $ 99,962 $ 76,878 (j) Inventory Inventory consists of equipment and medical supplies to be sold to customers and is stated at the lower of cost or market value. Cost is determined by the first-in-first-out method. These finished goods are charged to cost of net revenue in the period in which products and related services are provided to customers. (k) Equipment and Other Fixed Assets Equipment and other fixed assets are stated at cost less accumulated depreciation or, when acquired as part of a business combination, fair value at date of acquisition. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. The useful lives for patient medical equipment correlate with the medical reimbursement periods. Computer equipment, vehicles and other assets are depreciated over the estimated useful lives of the assets. Major expenditures for property acquisitions and those expenditures that substantially increase useful lives are capitalized. Expenditures for maintenance, repairs and minor replacements are expensed as incurred. The useful lives of property and equipment for purposes of computing depreciation are: Patient medical equipment 13 months ‑ 5 years Vehicles 5 years Other 2 ‑ 7 years (l) Impairment of Long-Lived Assets The Company’s long-lived assets, such as equipment and other fixed assets and definite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Definite-lived intangible assets consist of payor contracts, developed technology and tradenames. These assets are amortized using the straight-line method over their estimated useful lives, which reflects the pattern in which the economic benefits of the assets are expected to be consumed. These assets are tested for impairment consistent with the Company’s long-lived assets. The following table summarizes the useful lives of the intangible assets acquired: Payor contracts 10 years Developed technology 5 years Tradenames 5 to 10 years The Company did not incur any impairment charges on long-lived assets for the years ended December 31, 2020 2019 (m) Valuation of Goodwill The Company has a significant amount of goodwill on its balance sheet that resulted from the business acquisitions the Company has made in recent years. Goodwill is not amortized and is tested for impairment annually and upon the occurrence of a triggering event or change in circumstances indicating a possible impairment. Such changes in circumstance can include, among others, changes in the legal environment, reimbursement environment, operating performance, and/or future prospects. The Company performs its annual impairment review of goodwill during the fourth quarter of each year. The impairment testing can be performed on either a quantitative or qualitative basis. The Company first assesses qualitative factors to determine whether it is necessary to perform quantitative goodwill impairment testing. If determined necessary, the Company applies the quantitative impairment test to identify and measure the amount of impairment, if any. (n) Business Combinations The Company applies the acquisition method of accounting for business acquisitions. The results of operations of the businesses acquired by the Company are included as of the respective acquisition date. The acquisition-date fair value of the consideration transferred, including the fair value of any contingent consideration, is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. To the extent the acquisition-date fair value of the consideration transferred exceeds the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed, such excess is allocated to goodwill. Patient relationships, medical records and patient lists are not reported as separate intangible assets due to the regulatory requirements and lack of contractual agreements but are part of goodwill. Customer related relationships are not reported as separate intangible assets but are part of goodwill as authorizing physicians are under no obligation to refer the Company’s services to their patients, who are free to change physicians and service providers at any time. The Company may adjust the preliminary purchase price allocation, as necessary, as it obtains more information regarding asset valuations and liabilities assumed that existed but were not available at the acquisition date, which is generally up to one year after the acquisition closing date. Acquisition related expenses are recognized separately from the business combination and are expensed as incurred. (o) Deferred Financing Costs Costs incurred in connection with the Company’s borrowings, referred to as deferred financing costs, are capitalized and included on the accompanying consolidated balance sheets in other assets for costs associated with revolving credit facilities, and as a debt reduction for costs associated with term loans. Deferred financing costs are amortized to interest expense using the effective interest method over the term of the related financing agreement. Refer to Note 8, Deferred Financing Costs (p) Deferred Rent The Company’s operating leases for its office and warehouse leases include scheduled rent increases. The Company has accounted for the leases to provide straight-line charges to operations over the life of the leases. Deferred rent is recorded and amortized to the extent the total minimum rental payments allocated to the current period and expensed on a straight-line basis exceed or are less than the cash payments required. Deferred rent is included in accounts payable and accrued expenses and other long-term liabilities on the accompanying consolidated balance sheets based on when the payments will be made. See Note 14, Lease Commitments (q) Commitments and Contingencies In the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of its business that cover a wide range of matters. In accordance with FASB ASC Topic 450, Accounting for Contingencies (r) Advertising Costs Advertising costs are charged to expense as incurred. The Company’s advertising costs for the years ended December 31, 2020 and 2019 were $5.3 million and $2.1 million, respectively, and are primarily included in cost of net revenue in the accompanying consolidated statements of operations. (s) Equity-based Compensation The Company accounts for its equity-based compensation in accordance with FASB ASC Topic 718, Compensation-Stock Compensation Stockholders’ Equity (t) Cost of Net Revenue Cost of net revenue includes the cost of products and supplies sold to patients, patient equipment depreciation and other operating expenses. The Company also includes in cost of net revenue the salaries, labor and benefits costs incurred at the Company’s operating facilities for service personnel, offshore labor expenses, occupancy costs (rent, utilities, property taxes, etc.), and other expenses (software expenses, billing fees, IT related costs, general business supplies, etc.) incurred to operate the businesses. Cost of net revenue for the years ended December 31, 2020 and 2019 consisted of the following (in thousands): Year Ended December 31, 2020 2019 Cost of products and supplies $ 441,931 $ 156,430 Salaries, labor and benefits 257,898 153,173 Patient equipment depreciation 71,072 59,498 Rent and occupancy 22,344 13,407 Other operating expenses 91,659 57,150 Equity-based compensation 7,845 — Severance 4,457 858 Transaction costs 1,147 — Other non-recurring expenses 248 189 Total $ 898,601 $ 440,705 (u) General and Administrative Expenses General and administrative expenses (G&A) primarily include expenses related to corporate salaries and benefits, legal, equity-based compensation, transaction costs and other business support functions. Included in G&A during the years ended December 31, 2020 and 2019 are salaries, labor and benefits expenses (including equity-based compensation and severance) of $35.8 million and $31.7 million, respectively. (v) Business Segment The Company’s chief operating decision-makers are its Chief Executive Officer and President, who make resource allocation decisions and assess performance based on financial information presented on an aggregate basis. There are no segment managers who are held accountable by the chief operating decision-makers, or anyone else, for any planning, strategy and key decision-making regarding operations. The corporate office is responsible for contract negotiation with vendors and payors, corporate compliance with healthcare laws and regulations, and revenue cycle management. Accordingly, the Company has a single reportable segment and operating segment structure. (w) Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. As of December 31, 2020, and 2019, less than 10% of the Company’s net accounts receivable are from patients under co-pay or private plan arrangements. Credit evaluations, account monitoring procedures and a third party collection agent are utilized to minimize the risk of loss. Collateral is not required. Cost-containment efforts of governmental organizations, primarily Medicare, could have a material adverse effect on the Company’s sales and profitability. Medicare typically awards contracts on a category-by-category basis through a competitive bidding process. Bids are generally solicited from multiple distributors with intention of driving down pricing. The Company was previously in a protected three year window which expired in 2016. The Company was able to maintain protection for the round 2 recompete contracts that became effective on July 1, 2016, however, all Medicare Durable Medical Equipment, Prosthetics, Orthotics, & Supplies (DMEPOS) Competitive Bidding Program contr |
