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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

or

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

EXCHANGE ACT OF 1934

For the transition period from                      to

Commission File Number: 001-40052

Apria, Inc.

(Exact name of registrant as specified in its charter)

Delaware

82-4937641

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

7353 Company Drive

Indianapolis, IN 46237

(Address of Principal Executive Offices)

(800) 990-9799

(Registrant’s telephone number, including area code)

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

Title of each class

Trading symbol(s)

Name of exchange on which registered

Common Stock, $0.01 par value per share

APR

The Nasdaq

Global Select Market LLC

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 (§232.405 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 May 5, 2021, there were 35,253,200 of the registrant’s ordinary shares outstanding.

Table of Contents

TABLE OF CONTENTS

    

    

Page

Part I

Financial Information

Item 1.

Financial Statements

5

Condensed Consolidated Balance Sheets as of March 31, 2020 (Unaudited) and December 31, 2020

5

Condensed Consolidated Statements of Income for the three ended March 31, 2021 and 2020 (Unaudited)

6

Condensed Consolidated Statements of Shareholders’ (Deficit) Equity for the three months ended March 31, 2021 and 2020 (Unaudited)

7

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (Unaudited)

8

Notes to Condensed Consolidated Financial Statements (Unaudited)

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

35

Item 4.

Controls and Procedures

36

Part II

Other Information

Item 1.

Legal Proceedings

36

Item 1A.

Risk Factors

36

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

Item 3.

Defaults Upon Senior Securities

36

Item 4.

Mine Safety Disclosures

36

Item 5.

Other Information

37

Item 6.

Exhibits

39

Signatures

2

Table of Contents

Apria, Inc.

Quarterly Report on Form 10-Q

For the quarterly period ended March 31, 2021

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which involve certain known and unknown risks and uncertainties. Forward-looking statements include all statements that are not historical facts. In some cases, you can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “predicts,” “intends,” “trends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. Our actual results or outcomes may differ materially from those anticipated. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. We assume no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Our actual results may differ significantly from any results expressed or implied by any forward-looking statements. A summary of the principal risk factors that might cause our actual results to differ from our forward-looking statements is set forth below. The following is only a summary of the principal risks that may materially adversely affect our business, financial condition and results of operations. This summary should be read in conjunction with the more complete discussion of the risk factors we face, which are set forth under Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the “Form 10-K”). Such risks and uncertainties include, but are not limited to, the following:

the recent novel coronavirus (“COVID-19”) pandemic and the global attempt to contain it may harm our business, results of operations and ability to execute on our business plan;
our capitation arrangements may prove unprofitable if actual utilization rates exceed our assumptions;
our Payor (as defined below) contracts, including those with organizations that represent a significant portion of our business, are subject to renegotiation or termination which could result in a decrease in our revenue and profits;
we depend on reimbursements by Payors, which could lead to delays and uncertainties in the reimbursement process;
rising cost of raw materials, supplies, and labor, as well as shortage of drivers and clinicians could adversely impact our result of operations and cash flow and our ability to timely serve patients;
possible changes in the mix of patients and products and services provided, as well as Payor mix and payment methodologies, could have a material adverse effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity;
if we are unable to provide consistently high quality of care, our business will be adversely impacted;
our reliance on relatively few vendors for the majority of our patient equipment and supplies and excise taxes which are to be imposed on certain manufacturers of such items could adversely affect our ability to operate;

3

Table of Contents

the home healthcare industry is highly competitive and fragmented, with limited barriers to entry which may make it susceptible to vertical integration by manufacturers, Payors, providers (such as hospital systems) or disruptive new entrants;
we may be adversely affected by consolidation among health insurers and other industry participants;
there is an inherent risk of liability in the provision of healthcare services; damage to our reputation or our failure to adequately insure against losses, including from substantial claims and litigation, could have an adverse impact on our operations, financial condition, or prospects;
the current economic downturn, deepening of the economic downturn, continued deficit spending by the federal government or state budget pressures may result in a reduction in payments and covered services;
changes in home healthcare technology and/or product and therapy innovations may make the services we currently provide obsolete or less competitive;
reductions in Medicare, Medicaid and commercial Payor reimbursement rates could have a material adverse effect on our results of operations and financial condition;
if we fail to comply with applicable laws and regulations, we could suffer penalties or be required to make significant changes to our operations;
we have been, are and could become the subject of federal and state investigations and compliance reviews;
if we fail to maintain required licenses, certifications, or accreditation, or if we do not fully comply with requirements to provide notice to or obtain approval from regulatory authorities due to changes in our ownership structure or operation, it could adversely impact our operations;
a cyber-attack, a security breach, or the improper disclosure or use of protected health information could cause a loss of confidential data, give rise to remediation and other expenses, expose us to liability under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), consumer protection, common law or other legal theories, subject us to litigation and federal and state governmental inquiries, damage our reputation, and otherwise be disruptive to our business; and
our Sponsor (as defined below) and its affiliates control us and their interests may conflict with ours or yours in the future.

We urge you to carefully consider the foregoing summary together with the risks discussed in Part I, Item 1A. Risk Factors of the Form 10-K and Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations in this report.

WEBSITE AND SOCIAL MEDIA DISCLOSURE

We use our website (www.apria.com) and our corporate Facebook (www.facebook.com/ ApriaHealthcareCareers), LinkedIn (www.linkedin.com/company/Apria-Healthcare), Vimeo (www.vimeo.com/Apria, www.vimeo.com/ApriaCareers, and www.vimeo.com/ApriaMarketing) and YouTube (www.youtube.com/channel/ UCQSJ0Hrf1LJGT3_L6TlDEFQ/featured) accounts as channels of distribution of Company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, Securities and Exchange Commission filings and public conference calls and webcasts. The contents of our website and social media channels are not, however, a part of this report.

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PART I —FINANCIAL INFORMATION

Item 1. Financial Statements

APRIA, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

March 31, 

December 31, 

    

2021

    

2020

ASSETS

(unaudited)

 

  

CURRENT ASSETS

  

 

  

Cash and cash equivalents

$

170,829

$

195,197

Accounts receivable

 

78,762

 

74,774

Inventories

 

6,194

 

6,680

Prepaid expenses and other current assets

 

31,441

 

24,003

TOTAL CURRENT ASSETS

 

287,226

 

300,654

PATIENT EQUIPMENT, less accumulated depreciation of $358,879 and $356,888 as of March 31, 2021 and December 31, 2020, respectively

 

221,777

 

223,972

PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET

 

24,880

 

25,419

INTANGIBLE ASSETS, NET

 

61,353

 

61,497

OPERATING LEASE RIGHT-OF-USE ASSETS

 

56,579

 

57,869

DEFERRED INCOME TAXES, NET

 

13,409

 

18,258

OTHER ASSETS

 

19,191

 

17,315

TOTAL ASSETS

$

684,415

$

704,984

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

  

 

  

CURRENT LIABILITIES

 

  

 

  

Accounts payable

$

103,580

$

116,886

Accrued payroll and related taxes and benefits

 

44,088

 

55,628

Other accrued liabilities

 

37,768

 

33,513

Deferred revenue

 

25,401

 

25,821

Current portion of operating lease liabilities

 

23,341

 

23,977

Current portion of long-term debt

 

20,833

 

20,833

TOTAL CURRENT LIABILITIES

 

255,011

 

276,658

LONG-TERM DEBT, less current portion

 

371,426

 

376,389

OPERATING LEASE LIABILITIES, less current portion

 

34,660

 

35,358

OTHER NONCURRENT LIABILITIES

 

42,287

 

42,924

TOTAL LIABILITIES

 

703,384

 

731,329

COMMITMENTS AND CONTINGENCIES (Note 7)

 

  

 

  

STOCKHOLDERS’ DEFICIT

 

  

 

  

Preferred stock, $0.01 par value: 100,000,000 authorized; no shares issued as of March 31, 2021 and February 10, 2021 (Note 1)

Common stock, $0.01 par value: 1,000,000,000 authorized; 35,210,915 shares issued and outstanding as of March 31, 2021 and February 10, 2021 (Note 1)

352

Additional paid-in capital

 

956,567

 

954,087

Accumulated deficit

 

(975,888)

 

(980,432)

TOTAL STOCKHOLDERS’ DEFICIT

 

(18,969)

 

(26,345)

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

$

684,415

$

704,984

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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APRIA, INC.

Condensed Consolidated Statements of Income

(In thousands, except share and per share data)

(Unaudited)

Three Months Ended

March 31, 

    

2021

    

2020

Net revenues:

  

 

  

Fee-for-service arrangements

$

218,354

$

213,362

Capitation

 

56,920

 

55,864

TOTAL NET REVENUES

 

275,274

 

269,226

Costs and expenses:

 

  

 

  

Cost of net revenues:

 

  

 

  

Product and supply costs

 

53,315

 

49,064

Patient equipment depreciation

 

25,726

 

25,081

Home respiratory therapists costs

 

4,058

 

5,082

Other

 

3,819

 

5,127

TOTAL COST OF NET REVENUES

 

86,918

 

84,354

Selling, distribution and administrative

 

177,288

 

174,643

TOTAL COSTS AND EXPENSES

 

264,206

 

258,997

OPERATING INCOME

 

11,068

 

10,229

Interest expense

 

3,016

 

1,687

Interest income

 

(55)

 

(291)

INCOME BEFORE INCOME TAXES

 

8,107

 

8,833

Income tax expense

 

3,563

 

2,394

NET INCOME

$

4,544

$

6,439

February 10, 2021

through

March 31, 2021

Basic and diluted earnings per share:

Net income attributable to common stockholders

$

3,005

Weighted average common shares outstanding:

Basic

35,210,915

Diluted

37,732,994

Net income per common share:

 

  

 

  

Basic

$

0.09

 

Diluted

$

0.08

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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APRIA, INC.

Condensed Consolidated Statements of Shareholders’ (Deficit) Equity

(In thousands, except share data)

    

    

Additional 

    

    

Total 

Preferred Stock

Common Stock

Paid In 

Accumulated 

Stockholders’ 

Shares

Amount

Shares

Amount

Capital

Deficit

Deficit

Balance as of December 31, 2020

$

 

$

$

954,087

$

(980,432)

$

(26,345)

IPO Transactions (Note 1)

35,210,915

352

(352)

Distributions

(212)

(212)

Stock-based compensation

 

 

 

 

3,044

 

 

3,044

Net income

 

 

 

 

 

4,544

 

4,544

Balance as of March 31, 2021 (unaudited)

$

 

35,210,915

$

352

$

956,567

$

(975,888)

$

(18,969)

    

    

Additional 

    

    

Total 

Preferred Stock

Common Stock

Paid In 

Accumulated 

Stockholders’ 

Shares

Amount

Shares

Amount

Capital

Deficit

Equity

Balance as of December 31, 2019

$

 

$

$

1,161,087

$

(1,026,571)

$

134,516

Stock-based compensation

 

 

479

 

 

479

Net income

 

 

 

6,439

 

6,439

Balance as of March 31, 2020 (unaudited)

$

 

$

$

1,161,566

$

(1,020,132)

$

141,434

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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APRIA, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

    

Three Months Ended

    

March 31, 

    

2021

    

2020

OPERATING ACTIVITIES

 

  

 

  

Net income

$

4,544

$

6,439

Items included in net income not requiring cash:

 

  

 

  

Depreciation

 

28,819

28,503

Amortization of intangible assets

 

794

144

Non-cash lease expense

 

6,886

6,904

Deferred income taxes

 

4,849

2,625

Stock-based compensation

 

3,044

479

Amortization of deferred debt issuance costs

 

271

123

Loss on sale of patient equipment and other

 

1,684

1,217

Changes in operating assets and liabilities:

 

Accounts receivable

 

(3,988)

(3,041)

Inventories

 

486

(967)

Prepaid expenses and other assets

 

(9,313)

(4,626)

Accounts payable

 

(6,424)

(14,582)

Accrued payroll and related taxes and benefits

 

(11,540)

(14,730)

Operating lease liabilities

(6,929)

(7,438)

Deferred revenue

 

(420)

1,351

Legal reserve

1,250

2,000

Accrued expenses

 

1,036

1,103

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

15,049

 

5,504

INVESTING ACTIVITIES

 

  

 

  

Purchases of patient equipment and property, equipment and improvements

 

(34,790)

(25,164)

Proceeds from sale of patient equipment and other

 

3,814

4,852

Cash paid for acquisition

 

(390)

 

NET CASH USED IN INVESTING ACTIVITIES

 

(31,366)

 

(20,312)

FINANCING ACTIVITIES

Payments on asset financing

(2,843)

(7,563)

Payments on debt

(5,208)

NET CASH USED IN FINANCING ACTIVITIES

 

(8,051)

 

(7,563)

NET DECREASE IN CASH AND CASH EQUIVALENTS

(24,368)

(22,371)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

195,197

74,691

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

170,829

$

52,320

SUPPLEMENTAL DISCLOSURES—See Note 3 – Debt and Note 5 – Income Taxes for a discussion of cash paid for interest and income taxes, respectively.

NONCASH INVESTING AND FINANCING TRANSACTIONS—Purchases of patient equipment and property, equipment and improvements exclude purchases that remain unpaid at the end of the respective period. Such amounts are included in the following period’s purchases. Unpaid purchases were $49.1 million and $55.1 million as of March 31, 2021 and December 31, 2020, respectively. Unpaid purchases include $16.9 million and $15.7 million of patient equipment and property, equipment and improvements acquired under extended payment terms as of March 31, 2021 and December 31, 2020, respectively. See Note 6 for a discussion of right-of-use assets obtained in exchange for new operating lease liabilities.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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APRIA, INC.

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, unless otherwise stated)

(Unaudited)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation—The accompanying unaudited condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America and are presented in U.S. dollars. These unaudited condensed consolidated financial statements include the accounts of Apria, Inc. (the “Company”) and its subsidiaries. The Company had no items of other comprehensive income; as such, its comprehensive income is the same as the net income for all periods presented. Intercompany transactions and accounts have been eliminated in consolidation. The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all normal recurring adjustments necessary for the fair statement of the consolidated results for these periods. Interim period results are not necessarily indicative of the results that may be expected for the full fiscal year.

In connection with the completion of Apria, Inc.’s (the “Company”) initial public offering (the “IPO” or “offering”), the Company underwent a reorganization transaction (see Initial Public Offering) and Apria Healthcare Group Inc. (Apria Healthcare Group) became an indirect wholly owned subsidiary of the Company on February 10, 2021. As a result of the reorganization transaction, the Company directly or indirectly owns all of the equity interests in Apria Healthcare Group and is the holding company of our business. The merger was accounted for as a reorganization of entities under common control. As a result, the consolidated financial statements of the Company recognize the assets and liabilities received in the merger at their historical carrying amounts as reflected in the historical consolidated financial statements of Apria Healthcare Group, the accounting predecessor. Furthermore, prior to the offering, our business was conducted through Apria Healthcare Group which did not have a common capital structure with Apria, Inc. and therefore, we have not presented the historical capital structure of Apria Healthcare Group within the financial statements. As such, we computed EPS for the period the Company’s common stock was outstanding during 2021, referred to as the Post-IPO period. We have defined the Post-IPO period as February 10, 2021, the effective date of the pre-IPO reorganization and the completion of the offering, through March 31, 2021. See below for a discussion of the reorganization transaction and earnings per share calculations.

Company Background—Apria, Inc., a Delaware corporation formed on March 22, 2018, is the financial reporting entity following our IPO in February 2021.

The Company operates in the home health care segment of the health care industry, providing a variety of high-quality clinical patient care management programs, related products and supplies as prescribed by a physician and/or authorized by a case manager as part of a care plan. Essentially all products and services offered by the Company are provided through the Company’s network of approximately 300 branch, distribution and other locations, which are located throughout the United States. The Company provides services and products in one operating segment: home respiratory therapy/home medical equipment. The Company provides patients in their homes with products and services which are primarily paid for by a third-party payor, such as Medicare, Medicaid, a managed care plan or another third-party insurer. Sales are primarily derived from referral sources such as hospital discharge planners, medical groups or independent physicians.

Initial public offering— In February 2021, the Company completed an underwritten offering (in which entities associated with The Blackstone Group Inc. (the “selling stockholders”) sold an aggregate of 8,625,000 shares of common stock, including 1,125,000 shares sold pursuant to the full exercise of the underwriters’ option to purchase additional shares. The Company did not receive any proceeds from the shares sold by the selling stockholders and the Company incurred offering related expenses of approximately $6.0 million, which were incurred and paid on the Company’s behalf prior to the offering by Apria Healthcare Group.

In connection with the completion of the offering, the Company underwent a reorganization transaction. On February 10, 2021, a newly formed indirect subsidiary of the Company merged with and into Apria Healthcare Group,

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with Apria Healthcare Group surviving. As a result, Apria Healthcare Group became an indirect wholly owned subsidiary of the Company. Our shareholders who previously held their ownership interest prior to the IPO through Apria Holdings LLC (“Holdings”) (as the 100% direct owner of Apria Healthcare Group) received an aggregate of 35,210,915 shares of newly issued common stock of the Company with a par value of $0.01 per share.

In connection with the IPO, the Company’s certificate of incorporation (the “Charter”) and bylaws were each amended and restated, effective on February 10, 2021. The Charter authorizes 1,000,000,000 shares of common stock with a par value of $0.01 per share. Each share of common stock is entitled to one vote per share on all matters on which stockholders are entitled to vote generally, including the election or removal of directors. The Charter also authorizes 100,000,000 shares of preferred stock, par value $0.01 per share, of which there were no shares of preferred stock issued or outstanding immediately after the IPO.

Use of Accounting Estimates—The preparation of the unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Among the significant estimates affecting the unaudited condensed consolidated financial statements are those related to revenue recognition and the resulting accounts receivable, self-insurance reserves, long-lived assets, stock-based compensation, legal reserves and income taxes.

Fee-for-Service Net Revenues—Revenues are recognized under fee-for-service arrangements for equipment the Company rents to patients and sales of equipment, supplies and other items the Company sells to patients.

Rental and sale net revenues under fee-for-service arrangements disaggregated by each core service line item were:

Three Months Ended March 31, 

2021

2020

Total Fee- 

Total Fee- 

For- 

For- 

(dollars in thousands)

    

Rental

    

Sale

    

Service

    

Rental

    

Sale

    

Service

Home respiratory therapy

$

99,812

540

$

100,352

$

97,107

739

$

97,846

Obstructive sleep apnea treatment

 

20,466

70,471

 

90,937

 

20,603

65,093

 

85,696

Negative pressure wound therapy

 

7,306

485

 

7,791

 

7,262

672

 

7,934

Other equipment and services

 

9,419

9,855

 

19,274

 

10,248

11,638

 

21,886

Total

$

137,003

81,351

$

218,354

$

135,220

78,142

$

213,362

 

62.7

%  

 

37.3

%  

 

100.0

%  

 

63.4

%  

 

36.6

%  

 

100.0

%  

Rental revenues—Revenue generated from equipment that the Company rents to patients is recognized over the noncancelable rental period, typically one month, and commences on delivery of the equipment to the patients. The Company evaluates the portfolio of lease contracts at lease commencement and the start of each monthly renewal period to determine if it is reasonably certain that the monthly renewal or purchase options would be exercised. The exercise of monthly renewal or purchase options by a patient has historically not been reasonably certain to occur at lease commencement or subsequent monthly renewal.

Revenues are recorded at amounts estimated to be received under reimbursement arrangements with third-party payors, including private insurers, prepaid health plans, Medicare, Medicaid and patients. Rental revenue, less estimated adjustments, is recognized as earned on a straight-line basis over the non-cancellable lease term. Rental of patient equipment is billed on a monthly basis beginning on the date the equipment is delivered. Since deliveries can occur on any day during a month, the amount of billings that apply to the next month are deferred.

The Company’s lease agreements generally contain lease and non-lease components. Non-lease components primarily relate to supplies. The Company allocates the transaction price to the separate lease and non-lease components that qualify as performance obligations using the stand-alone selling price.

Sale revenues—Revenue related to sales of equipment and supplies is recognized on the date of delivery as this is when control of the promised goods is transferred to patients and is presented net of applicable sales taxes. Revenues are recorded only to the extent it is probable that a significant reversal will not occur in the future as amounts may include implicit price concessions under reimbursement arrangements with third-party payors, including private insurers, prepaid

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health plans, Medicare, Medicaid and patients. The Company determines the sales transaction price based on contractually agreed-upon rates, adjusted for estimates of variable consideration. The Company uses the expected value method in determining the variable consideration as part of determining the sales transaction price using historical reimbursement experience, historical sales returns, and other operating trends. Payment terms and conditions vary by contract. The timing of revenue recognition, billing, and cash collection generally results in billed and unbilled accounts receivable.

Capitation Revenues—Revenues are recognized under capitation arrangements with third-party payors for services and equipment for which the Company stands ready to provide to the members of these payors without regard to the actual services provided. The stand-ready obligation generally extends beyond one year. Revenue is recognized over the month that the members are entitled to health care services using the contractual rate for each covered member. The actual number of covered members may vary each month. As a practical expedient, no disclosures have been made related to the amount of variable consideration expected to be recognized in future periods under these capitation arrangements. Capitation payments are typically received in the month members are entitled to health care services. Contracts with a single national payor constituted 86% of the total capitation revenues in each of the three months ended March31, 2021 and 2020.

Concentration of Credit Risk—Revenues reimbursed under arrangements with Medicare and Medicaid were approximately 21% and 1%, respectively, of total net revenues for the three months ended March 31, 2021. Revenues reimbursed under arrangements with Medicare and Medicaid were approximately 20% and 1%, respectively, of total net revenues for the three months ended March 31, 2020. Contracts with two national payors each constituted 24% and 11%, of total net revenues for the three months ended March 31, 2021 and each constituted 24% and 10% of total net revenues for the three months ended March 31, 2020. No other payors represented more than 10% of the Company’s total net revenues in each of the three months ended March 31, 2021 and March 31, 2020. As of March 31, 2021 and December 31, 2020, Medicare represented greater than 10% of net accounts receivable.

Cash and Cash Equivalents—Cash is maintained with various financial institutions located throughout the United States. Cash account balances may be more than the amounts insured by the Federal Deposit Insurance Corporation; however, management believes the risk of loss to be minimal based on the credit standing of these institutions and has not experienced any losses on its cash and cash equivalents to date. Management considers all highly liquid instruments purchased with an original maturity of less than three months to be cash equivalents.

Accounts Receivable—Included in accounts receivable are earned but unbilled receivables of $13.8 million and $13.1 million as of March 31, 2021 and December 31, 2020, respectively. Delays ranging from a day up to several weeks between the date of service and billing can occur due to delays in obtaining certain required payor-specific documentation from internal and external sources. Earned but unbilled receivables are aged from date of service and are considered in the analysis of historical performance and collectability.

Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required to record total net revenues and 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. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application, claim denial or account review.

Management performs periodic analyses to evaluate accounts receivable balances to ensure that recorded amounts reflect estimated net realizable value. Specifically, management considers historical realization data, accounts receivable aging trends, other operating trends, and the extent of contracted business and business combinations. Also considered are relevant business conditions such as governmental and managed care payor claims processing procedures and system changes.

Additionally, focused reviews of certain large and/or problematic payors are performed. Due to continuing changes in the health care industry and third-party reimbursement, it is possible that management’s estimates could change in the near term, which could have an impact on operations and cash flows.

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The Company records a reserve for expected credit losses as part of net rental revenue adjustments in order to report rental revenue at an expected collectable amount based on the total portfolio of operating lease receivables for which collectability has been deemed probable.

Inventories—Inventories are stated at the lower of cost (approximate costs determined on the first-in, first-out basis) or net realizable value and consist primarily of respiratory supplies and items used in conjunction with patient equipment.

Patient Equipment—Patient equipment is stated at cost less depreciation and reserves for non-recoverable and obsolete patient equipment. Patient equipment consists of medical equipment rented to patients on a month-to-month basis. Depreciation is provided using the straight-line method over the estimated useful lives of the equipment, which range from 1 to 10 years. Patient equipment depreciation is classified in the Company’s unaudited condensed consolidated statements of income within costs of net revenues as the equipment is rented to patients as part of the Company’s primary operations. Depreciation expense for patient equipment was $25.7 million and $25.1 million for the periods ended March 31, 2021 and 2020, respectively. The reserves for non-recoverable and obsolete patient equipment were $4.0 million and $3.1 million as of March 31, 2021 and December 31, 2020, respectively.

Patient equipment is generally placed for rent; however, it could also be sold to customers. Once returned to the Company, patient equipment is assessed and repaired as necessary. Patient equipment is typically leased to subsequent patients if its condition is suitable. Upon a sale, the Company records the proceeds of the sale within net revenues and the costs related to the carrying net book value as other costs within cost of net revenues in the Company’s unaudited condensed consolidated statements of income.

Given rental income is generated from such products, purchases of patient equipment are considered an investing activity when paid soon before or after purchase, while other payments made are considered a financing activity within the unaudited condensed consolidated statements of cash flows. Certain unpaid purchases are secured by a security interest in $3.8 million and $5.1 million of patient equipment as of March 31, 2021 and December 31, 2020, respectively. The net loss from the sale of patient equipment is reported as an adjustment to net income within cash provided by operating activities in the unaudited condensed consolidated statements of cash flows.

Property, Equipment and Improvements—Property, equipment and improvements are stated at cost less depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which range from 1 to 15 years or, for leasehold improvements, the shorter of the useful life of the asset or the remaining life of the related lease.

Capitalized Software—Capitalized software costs related to internally developed and purchased software are included in property, equipment and improvements in the unaudited condensed consolidated balance sheets and are amortized using the straight-line method over the estimated useful lives of the assets, which range from three to five years. Capitalized costs include direct costs of materials and services incurred in developing or obtaining internal-use software and payroll and benefit costs for employees directly involved in the development of internal-use software. Capitalization of such costs ceases when the project is substantially complete and ready for its intended purpose. Costs incurred during the preliminary and post-implementation stages, as well as software maintenance and training costs, are expensed in the period in which they are incurred. Additions to capitalized internally developed software totaled $1.4 million and $0.7 million for the three months ended March 31, 2021 and 2020, respectively. Amortization expense for internally developed software was $1.2 million and $1.5 million for the three months ended March 31, 2021 and 2020, respectively.

Indefinite-Lived Intangible Assets and Long-Lived Assets—Indefinite-lived intangible assets are not amortized but instead tested at least annually for impairment or more frequently when events or changes in circumstances indicate that the assets might be impaired. The Company performs the annual test for impairment for indefinite-lived intangible assets as of the first day of the fourth quarter.

The Company will first assess qualitative factors to determine whether it is more likely than not that the fair value is less than its carrying amount. If, based on a review of qualitative factors, it is more likely than not that the fair value is

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less than its carrying amount, the Company will use a quantitative approach, and calculate the fair value and compare it to its carrying amount. If the fair value exceeds the carrying amount, there is no indication of impairment. If the carrying amount exceeds the fair value, an impairment loss is recorded equal to the difference.

Long-lived assets, including property and equipment and purchased definite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Significant judgment is required in determining whether a potential indicator of impairment of long-lived assets exists and in estimating future cash flows for any necessary impairment tests. Recoverability of assets to be held and used is measured by the comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such an asset is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

The Company did not record any impairment charges related to indefinite-lived intangible assets or long-lived assets for the three months ended March 31, 2021 and 2020.

Fair Value of Financial Instruments—Management is required to disclose the estimated fair value of certain assets and liabilities of financial instruments. Financial instruments are generally defined as cash, evidence of ownership interest in an entity or a contractual obligation that both conveys to one entity a right to receive cash or other financial instruments from another entity and imposes on the other entity the obligation to deliver cash or other financial instruments to the first entity. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value due to their short maturity. The carrying amounts of the Company’s long-term debt, including the Term Loan A Facility and Revolving Credit Facility, as of March 31, 2021, approximate fair value due to the variable rate nature of the agreements. All debt classifications represent Level 2 fair value measurements.

Leases—The Company determines if an arrangement is a lease at commencement and performs an evaluation to determine whether the lease should be classified as an operating or finance lease. Operating leases are included in operating lease right-of-use (ROU) assets, current portion of operating lease liabilities and operating lease liabilities, less current portion, on the unaudited condensed consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and the related liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate (IBR) based on the information available at the lease commencement date in determining the present value of future lease payments. The Company uses market rates from recent secured financing to determine the IBR.

The operating lease ROU asset also includes any lease payments made to the lessor at or before the commencement date and is adjusted by any lease incentives received. Variable lease payments are not included in the operating lease liability as they cannot be reasonably estimated and are recognized in the period in which the obligation for those payments is incurred. Lease terms may include options to extend or terminate the lease and are included only when it is reasonably certain that the Company will exercise that option. For all asset classes, leases with a lease term of twelve months or less at the lease commencement date are not recorded on the unaudited condensed consolidated balance sheets, as permitted by the short-term lease exception. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company does not have any material subleases. The Company does not have any leases classified as a finance leasing arrangement. As such, all leases are classified as operating leases. See further discussion at Note 6 – Leases.

Product and Supply Costs—Product and supply costs presented within total cost of net revenues are comprised primarily of the cost of supplies, equipment and accessories provided to patients.

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Contract Costs—The Company pays sales commissions on fee-for-service arrangements in an effort to increase the volume of serviced patients. The Company elected to use the practical expedient to expense sales commissions as incurred since the amortization period would otherwise be less than one year. These costs are included in selling, distribution and administrative expense in the unaudited condensed consolidated statements of income.

Home Respiratory Therapists Costs—Home respiratory therapists costs presented within total cost of net revenues are comprised primarily of employee salary and benefit costs or contract fees paid to respiratory therapists and other related professionals who are deployed to service a patient. Home respiratory therapy personnel are also engaged in a number of administrative and marketing tasks and, accordingly, these costs are classified within selling, distribution and administrative expenses and were $3.5 million and $4.0 million for the three months ended March 31, 2021 and 2020, respectively.

Distribution Expenses—Distribution expenses totaled $31.4 million and $31.2 million for the three months ended March 31, 2021 and 2020, respectively. Such expense represents 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 and other costs related to drivers and dispatch personnel; and amounts paid to courier and other outside shipping vendors. Such expenses fall within the definition of “shipping and handling” costs and are classified within selling, distribution and administrative expenses and may not be comparable to other companies.

Self-Insurance—Coverage for certain employee medical claims and benefits, as well as workers’ compensation, professional and general liability, and vehicle liability are self-insured. Amounts accrued for costs of workers’ compensation, medical, professional and general liability, and vehicle liability are classified as current or long-term liabilities based upon an estimate of when the liability will ultimately be paid. Amounts are recorded gross of any estimated recoverable amounts from insurance providers. The estimated recoverable amounts from insurance providers are recorded within prepaids and other current assets and other assets on the condensed consolidated balance sheets based upon an estimate of when they will be received.

Amounts accrued as current liabilities within other accrued liabilities are as follows:

March 31, 

December 31, 

(in thousands)

    

2021

    

2020

Workers’ compensation

    

$

4,811

    

$

4,780

Professional and general liability/vehicle

 

3,977

 

3,929

Medical insurance

 

2,274

 

2,169

Amounts accrued as long-term liabilities within other noncurrent liabilities are as follows:

March 31, 

December 31, 

(in thousands)

2021

2020

Workers’ compensation

    

$

17,596

    

$

17,691

Professional and general liability/vehicle

 

6,579

 

6,554

Stock-Based Compensation—The Company accounts for its stock-based awards in accordance with provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) No. 718, Compensation—Stock Compensation. Subsequent to the IPO, the Company has three types of equity-based compensation awards outstanding, stock appreciation rights (“SARs”), restricted stock units (“RSUs”) and stock-settled long-term incentive plan (“LTIP”) awards.

The Company recognizes compensation expense in respect of SARs based on the fair value of the awards as measured on the grant date. Fair value is not subsequently remeasured unless the conditions on which the award was granted are modified. The determination of fair value at grant date requires the use of estimates, which are based on management’s judgment. Generally, compensation expense for each separately vesting portion of the awards is recognized on a straight-line basis over the vesting period for that portion of the award subject to continued service.

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As the RSUs can be settled in either cash or shares of common stock at the election of the holder they are recorded as liability awards. The fair value is measured at the grant date and remeasured each reporting period until settlement. Compensation expense is recognized over the requisite service period subject to continued employment and adjusted each reporting period for changes in the fair value pro-rated for the portion of the requisite service period rendered.

The IPO triggered a pre-existing provision under the Company’s 2019 LTIP pursuant to which the incentive awards will be settled in shares of the Company’s common stock. The modification of the award did not result in incremental compensation expense as the fair-value of the award was the same immediately prior to and immediately after the modification. Compensation expense is recognized on a straight-line basis over the requisite service period for each award.

Legal Reserves—The Company is involved in various legal proceedings, claims, and litigation that arise in the ordinary course of business. The Company investigates these matters as they arise and reserves for potential loss in accordance with ASC No. 450, Contingencies. Significant judgment is required in the determination of both the probability of loss and whether the amount of the loss can be reasonably estimated. Estimates are subjective and are made in consultation with internal and external legal counsel. See further discussion at Note 7 – Commitments and Contingencies.

Income Taxes—The Company’s provision for income taxes is based on expected income, permanent book/tax differences and statutory tax rates in the various jurisdictions in which the Company operates. Significant management estimates and judgments are required in determining the provision for income taxes.

Deferred income tax assets and liabilities are computed for differences between the carrying amounts of assets and liabilities for financial statement and tax purposes. Deferred income tax assets are required to be reduced by a valuation allowance when it is determined that it is more likely than not that all or a portion of a deferred tax asset will not be realized.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted and signed into U.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 public health emergency. The CARES Act includes, among other things, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits refunds, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. As permitted under the CARES Act, the Company has elected to defer certain portions of employer-paid FICA taxes otherwise payable from March 27, 2020 to January 1, 2021, to be paid in two equal installments on December 31, 2021 and December 31, 2022. As of March 31, 2021 and December 31, 2020, $14.8 million of FICA tax payments was deferred, of which $7.4 million is included in accrued payroll and related taxes and $7.4 million is included in other noncurrent liabilities on the unaudited condensed consolidated balance sheets.

Business Segments—The Company has evaluated segment reporting in accordance with FASB ASC No. 280, Segment Reporting. The Company’s chief executive officer is its chief operating decision maker. The chief operating decision maker reviews financial information about the business at the enterprise-wide consolidated level when allocating the resources of the Company and assessing business performance. Accordingly, the Company has determined that its business activities comprise a single operating and reporting segment, the home respiratory therapy/home medical equipment segment. Through its single segment, the Company focuses on three core service lines: home respiratory therapy (including home oxygen and non-invasive ventilation services), obstructive sleep apnea treatment (including continuous positive airway pressure and bi-level positive airway pressure devices, and patient support services) and negative pressure wound therapy. Additionally, the Company supplies a wide range of home medical equipment and other products and services to help improve the quality of life for patients with home care needs.

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Net revenues for each core service line were:

Three Months Ended

March 31, 

    

2021

    

2020

(in thousands)

Home respiratory therapy

$

114,323

    

$

109,751

Obstructive sleep apnea treatment

 

114,185

 

109,335

Negative pressure wound therapy

 

10,111

 

10,159

Other equipment and services

 

36,655

 

39,981

Net revenues

$

275,274

$

269,226

Earnings per share—Prior to the IPO, our business was conducted through Apria Healthcare Group which did not have a common capital structure with Apria, Inc. In connection with the completion of the offering, the Company underwent a reorganization transaction in which Apria Healthcare Group Inc. became an LLC and a newly formed indirect subsidiary of the Company merged with and into Apria Healthcare Group, with Apria Healthcare Group surviving. As a result, Apria Healthcare Group became an indirect wholly owned subsidiary of the Company. As part of the merger Apria Healthcare Group SAR units were converted to Apria, Inc. SARs and our shareholders who previously held their ownership interest prior to the IPO through Holdings (as the 100% direct owner of Apria Healthcare Group) received newly issued common shares. The conversion ratios for SARs and the three different classes of profit interest units, which each had different preference rights as detailed in Note 4—Stock Based Compensation, were determined based on the unit value implied by the per share price of common stock sold in the IPO. See further discussion at Note 1—Summary of Significant Accounting Policies – Initial Public Offering. Based on the complex nature of the reorganization transaction, we computed EPS only on a prospective basis for the period the Company’s common stock was outstanding during 2021, referred to as the Post-IPO period. We have defined the Post-IPO period as February 10, 2021, the effective date of the pre-IPO reorganization and the completion of the offering, through March 31, 2021. Basic net income per common share represents net income attributable to common shareholders for the Post-IPO period divided by the weighted-average number of common shares outstanding during the Post-IPO period. Diluted net income per common share is similar to calculating basic net income per common share, except the denominator is increased to include the dilutive effects of SARs, RSUs and LTIP except when doing so would be antidilutive.

The computation of net income per common share is presented below:

February 10, 2021

through

    

March 31, 2021

(in thousands, except share and per share data)

Net income attributable to common shareholders

$

3,005

Basic weighted average number of common shares outstanding

35,210,915

Dilutive effect of stock-based awards

 

2,522,079

Diluted weighted average number of common shares outstanding

 

37,732,994

Basic net income per common share

$

0.09

Diluted net income per common share

$

0.08

The 79,988 RSUs outstanding during the Post-IPO period were not included in the calculation of diluted EPS as they were antidilutive. The 193,350 outstanding equity awards under the LTIP plan were not included in the calculation of dilutive EPS as the financial performance condition has not been met as of March 31, 2021.

Apria Healthcare Group had 992,719 basic and diluted weighted average common shares outstanding for the period of January 1, 2021 through February 10, 2021 and the three months ended March 31, 2020.

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2.    INTANGIBLE ASSETS

Intangible assets consist of the following:

    

March 31, 2021

    

December 31, 2020

Average  

Gross 

Gross 

Life in

Carrying 

Accumulated 

Net Book 

Carrying 

Accumulated 

Net Book 

(dollars in thousands)

    

Years

    

Amount

    

Amortization

    

Value

    

Amount

    

Amortization

    

Value

Intangible assets subject to amortization:

  

  

  

  

  

  

Capitated relationships

20.0

$

4,400

$

(2,929)

$

1,471

$

4,400

$

(2,880)

$

1,520

Payor relationships

 

20.0

 

7,600

 

(4,718)

 

2,882

 

7,600

 

(4,623)

 

2,977

Subtotal

 

12,000

 

(7,647)

 

4,353

 

12,000

 

(7,503)

 

4,497

Intangible assets not subject to amortization:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Trade names

 

 

50,000

 

 

50,000

 

50,000

 

 

50,000

Accreditations with commissions

 

 

7,000

 

 

7,000

 

7,000

 

 

7,000

Subtotal

 

57,000

 

 

57,000

 

57,000

 

 

57,000

Total

$

69,000

$

(7,647)

$

61,353

$

69,000

$

(7,503)

$

61,497

Amortization expense was $0.8 million and $0.1 million for the three months ended March 31, 2021 and 2020, respectively.

Estimated amortization expense for each of the fiscal years ending December 31 is presented below:

(in thousands)

    

    

2021 (remainder)

$

431

2022

 

574

2023

 

574

2024

 

574

2025

 

574

Thereafter

 

1,626

3.    DEBT

Long-term debt consists of the following:

    

March 31, 

December 31, 

(in thousands)

    

2021

    

2020

Term Loan A

$

395,833

$

401,042

Less: Current portion

 

(20,833)

 

(20,833)

Less: Unamortized debt issuance costs

 

(3,574)

 

(3,820)

Total long-term debt

$

371,426

$

376,389

On June 21, 2019, Apria entered into a credit agreement with Citizens Bank and a syndicate of lenders for both a Term Loan A Facility (the “TLA”) of $150.0 million and a Revolving Credit Facility (the “Revolver”) of $100.0 million. The Revolver replaced the prior asset-based revolving credit facility (the “ABL Facility”) which provided for revolving credit financing of up to $125.0 million. Proceeds from the TLA were used to fund the $175.0 million 2019 dividend payment to common stockholders and distribution to SARs holders.

On December 11, 2020, the Company entered into a Credit Facility Amendment to obtain $260.0 million of Incremental Term Loans. Net proceeds from the Incremental Term Loans were used to fund a $200.3 million dividend payment to common stockholders and a $9.7 million distribution to SARs holders declared and paid in December 2020,

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with the remaining proceeds used to pay fees and expenses in connection with the Credit Facility Amendment and for general corporate purposes.

The credit agreement permits the interest rate to be selected at the Company’s option at either Adjusted LIBOR or Alternative Base Rate plus their respective applicable margin. Adjusted LIBOR is the rate for Eurodollar deposits for the applicable interest period while the Alternate Base Rate is the highest of (i) the Administrative Agent’s “Prime Rate”, (ii) the Federal Funds Effective Rate plus 0.50%, and (iii) one-month Adjusted LIBOR plus 1.00%. Furthermore, Adjusted LIBOR is subject to a 0.50% per annum floor and the Alternative Base Rate is subject to a 1.50% per annum floor. Additionally, the margin applied to both the TLA and Revolver is determined based on total net leverage ratio. Total net leverage ratio is defined as net debt, which represents indebtedness minus up to $25.0 million in cash and cash equivalents over consolidated EBITDA as defined under the credit agreement. The following is a summary of the additional margin and commitment fees payable on both the TLA and available Revolver:

    

    

Applicable

    

Applicable

    

 

Margin for

Margin for

 

Adjusted

Alternative

 

LIBOR

Base Rate

Commitment

 

Level

    

Total Net Leverage Ratio

    

Loans

    

Loans

    

Fee

 

I

 

Greater than or equal to 3.00x

 

2.75

%  

1.75

%  

0.35

%

II

 

Greater than or equal to 2.50x but less than 3.00x

 

2.50

%  

1.50

%  

0.30

%

III

 

Greater than or equal to 1.50x but less than 2.50x

 

2.25

%  

1.25

%  

0.25

%

IV

 

Less than 1.50x

 

2.00

%  

1.00

%  

0.20

%

The TLA matures on June 21, 2024 and the Company is required to make quarterly principal payments on the TLA beginning June 30, 2020. Upon entering into the Credit Facility Amendment, the amount of those quarterly principal payments was adjusted to account for the Incremental Term Loans. The table below is a summary of the expected timing of remaining principal repayments each fiscal year:

(in thousands)

    

    

2021 (remainder)

$

15,625

2022

 

36,458

2023

 

41,667

2024

 

302,083

The credit agreement encompassing the TLA and Revolver permits the Company, subject to certain exceptions, to increase its TLA or its Revolver, as well as incur additional indebtedness, as long as it does not exceed the total net leverage ratio of 3.00x. The credit agreement requires mandatory prepayments upon the occurrence of certain events, such as dispositions and casualty events, subject to certain exceptions. The TLA or Revolver may be voluntarily prepaid by the Company at any time without any premium or penalty.

The assets of the Company and equity interest of all present and future wholly owned direct domestic subsidiaries, with certain exceptions, are pledged as collateral for the TLA and Revolver. The credit agreement contains a financial covenant requiring the Company to maintain a total net leverage ratio less than 3.50x. The credit agreement also contains negative covenants that, among other things, restrict, subject to certain exceptions, the ability of Apria Healthcare Group and its restricted subsidiaries to incur additional indebtedness and guarantee indebtedness, create or incur liens, engage in mergers or consolidations, dispose of assets, pay dividends and distributions or repurchase capital stock, repay certain indebtedness, make investments and engage in certain transactions with affiliates.

As of March 31, 2021, there were $17.8 million outstanding letters of credit, and additional availability under the Revolver net of letters of credit outstanding was $82.2 million. The Company was in compliance with all debt covenants set forth in the TLA and Revolver as of March 31, 2021.

In accordance with ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, the Company records origination and other expenses related to certain debt issuance cost as a

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direct deduction from the carrying amount of the debt liability. These expenses are deferred and amortized using the straight-line method over the stated life, which approximates the effective interest rate method. Amortization of deferred debt issuance costs are classified within interest expense in the Company’s unaudited condensed consolidated statements of income and was $0.3 million and $0.1 million for the three months ended March 31, 2021 and 2020, respectively.

Interest expense, excluding deferred debt issuance costs discussed above, was $2.7 million and $1.6 million for the three months ended March 31, 2021 and 2020, respectively. The interest rate was 2.50% as of each of March 31, 2021 and December 31, 2020.

Interest paid on debt totaled $2.7 million and $1.6 million for the three months ended March 31, 2021 and 2020, respectively.

4.    STOCK-BASED COMPENSATION

Profit Interest Units— On October 28, 2008, Apria Healthcare Group was acquired by a wholly owned affiliate of BP Healthcare Holdings LLC (“Buyer” or “BP Healthcare”). The Buyer was controlled by private investment funds affiliated with The Blackstone Group Inc. BP Healthcare and its subsidiary, Holdings, granted equity units to certain employees, Board members and a member of a subsidiary’s Board of Directors for purposes of retaining them and enabling such individuals to participate in the long-term growth and financial success of the Company. These equity awards were issued in exchange for services to be performed.

Profit interest units are composed of Class B and Class C units related to Holdings. Holdings also has 3,575,000 outstanding in Class A-2 units, which are senior in liquidation rights to Class B units, whereas Class B units are senior in liquidation rights to Class C units. Profit interest units are measured at the grant date, based on the calculated fair value of the award, and are recognized as an expense over the employee’s requisite service period. There are no stated contractual lives for the units. The Company uses the income approach and the guideline approach to estimate enterprise value, which is utilized to assess the fair value of each instrument.

Prior to the IPO, a portion of the Class B units vested over a specified period of time, generally five years, and a portion of the outstanding performance Class B units vested as a result of a modification, which accelerated vesting. Also, prior to the IPO, all outstanding performance Class C units vested as all performance conditions were met.

In connection with the IPO, all outstanding profit interest units were converted into shares of Apria, Inc. common shares based on the value of the units implied by the per share price of common stock sold in the IPO.

Expense related to profit interest units held by holders continuing to perform services for the Company is recorded within selling, distribution and administrative expenses in the unaudited condensed consolidated statements of income and was $0.0 million for the three months ended March 31, 2021 and 2020.

The following table summarizes activity for all profit interest units for the period from December 31, 2020 to February 10, 2021, the date at which they were all converted into shares of Apria, Inc. common stock:

    

    

Weighted-

    

    

Weighted- 

 Average 

Average 

Exercise 

Class C 

Exercise 

    

Class B Units

    

Price

    

Units

    

Price

Outstanding as of December 31, 2020

 

88,008,850

$

0.01

 

2,849,092

 

Converted

 

(88,008,850)

 

(0.01)

 

(2,849,092)

 

Outstanding as of February 10, 2021

 

$

 

No units were granted in 2021 or 2020, as profit interest units are no longer granted.

Stock Appreciation Rights—In 2015, the Company’s Board of Directors approved the Apria, Inc 2015 Stock Plan that provided for the grant of stock appreciation rights to directors, officers, employees, consultants and advisers (and

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prospective directors, officers, employees, consultants, and advisers) of the Company and its affiliates. These equity awards were issued in exchange for services to be performed.

The plan mandated a maximum award term of 10 years and that SARs be granted with a strike price not less than the fair market value determined as of the date of grant. SARs are measured at the grant date, based on the calculated fair value of the award and are recognized as an expense over the employee’s requisite service period. SARs granted under the plan generally vest over 60 months from the date of grant based on continued service. The contractual lives for the units are 10 years. All unvested SARs are forfeited upon employee termination. The Company accounts for forfeitures when they occur, and ultimately stock-based compensation is only recognized for awards that vest. In the event of a change in capital structure or similar event, SARs may be modified.

In connection with the IPO, Apria Healthcare Group SAR units were converted to Apria, Inc. SARs at a conversion ratio based on the value of the units implied by the per share price of common stock sold in the IPO. Further, a pre-existing provision in the SARs was triggered, under which the SARs became exercisable by the holders.

Expense related to SARs held by holders continuing to perform services for the Company is recorded within selling, distribution and administrative expenses in the unaudited condensed consolidated statements of income and was $0.5 million for the three months ended March 31, 2021 and 2020. As of March 31, 2021, total unrecognized compensation cost related to unvested SARs was $4.5 million, which is expected to be expensed over a weighted-average period of 3.3 years.

The following table summarizes activity for all SARs for the period from December 31, 2020 to March 31, 2021:

    

    

    

Weighted- 

Weighted- 

Average 

Stock 

Average 

Remaining 

Appreciation 

Exercise 

Contractual 

    

Rights

    

Price

    

Term

Outstanding as of December 31, 2020

 

106,113

$

220.42

 

7.0

Converted

 

3,660,115

 

 

  

Outstanding as of March 31, 2021

 

3,766,228

$

6.22

 

6.7

Vested units as of March 31, 2021

 

2,260,605

 

  

 

  

The following table summarizes the activity for unvested shares for the period from December 31, 2020 to March 31, 2021:

    

    

Weighted- 

Stock 

Average 

Appreciation 

Grant-Date 

    

Rights

    

Fair Value

Unvested as of December 31, 2020

 

45,266

$

119.46

Converted

 

1,561,343

 

Vested

 

(100,976)

 

3.60

Unvested as of March 31, 2021

 

1,505,633

$

3.35

There were no SARs granted in the three months ended March 31, 2020. As of March 31, 2021, there were no SARs available for future grants under the plan as no new equity-based awards will be granted under the Apria, Inc. 2015 Stock Plan.

Restricted Stock Units—The offering resulted in the grant of restricted stock units to the Company’s Chief Financial Officer (“CFO”). The RSUs vest in tranches, with the first tranche vesting immediately upon the completion of the offering and the remaining RSUs vesting in two equal tranches upon the six month and one-year anniversary following the offering, subject to the CFO’s continued employment. Each tranche of RSUs can be settled in either cash or shares of our common stock at the election of the CFO.

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The first tranche of RSUs vested upon completion of the IPO and was settled in cash. The remaining RSUs are settleable in cash or shares at the CFO’s election, which is outside of the control of the Company. As such, the remaining RSUs were treated as liability classified awards. The fair value was measured at the grant date and will be remeasured each reporting period until settlement. Compensation expense is recognized over the requisite service period subject to continued employment and adjusted each reporting period for changes in the fair value pro-rated for the portion of the requisite service period rendered. Expense related to RSUs is recorded within selling, distribution and administrative expenses in the unaudited condensed consolidated statement of income and was $1.9 million for the three months ended March 31, 2021. As of March 31, 2021, $0.3 million was recorded within other accrued liabilities in the unaudited condensed consolidated balance sheet. Total unrecognized compensation cost related to RSUs was $1.9 million as of March 31, 2021.

The following table summarizes activity for all RSUs for the period from December 31, 2020 to March 31, 2021:

    

Restricted

    

Weighted- 

Stock

Average 

Units

Fair Value

Balance as of December 31, 2020