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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 September 30, 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: 001-40053

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, Indiana 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

Stock 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 November 1, 2021, there were 35,471,669 shares of the registrant’s common stock outstanding.

Table of Contents

Apria, Inc.

Quarterly Report on Form 10-Q

For the quarterly period ended September 30, 2021

TABLE OF CONTENTS

    

    

Page

Part I

Financial Information

Item 1.

Financial Statements

5

Condensed Consolidated Balance Sheets as of September 30, 2021 (Unaudited) and December 31, 2020

5

Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020 (Unaudited)

6

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the three and nine months ended September 30, 2021 and 2020 (Unaudited)

7

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 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

29

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

42

Item 4.

Controls and Procedures

42

Part II

Other Information

Item 1.

Legal Proceedings

43

Item 1A.

Risk Factors

43

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43

Item 3.

Defaults Upon Senior Securities

43

Item 4.

Mine Safety Disclosures

43

Item 5.

Other Information

43

Item 6.

Exhibits

44

Signatures

2

Table of Contents

Apria, Inc.

Quarterly Report on Form 10-Q

For the quarterly period ended September 30, 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 “2020 Form 10-K”) and Part II, Item 1A. “Risk Factors” in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2021. Such risks and uncertainties include, but are not limited to, the following:

the novel coronavirus (“COVID-19”) pandemic, including the emergence of variant strains of the virus, 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 contracts with third-party healthcare payors, including government and commercial payors (“Payors”), 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 and constraints in the supply of materials, equipment, and labor, as well as shortage of drivers and clinicians could adversely impact our results 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;
recalls of any of our products, or the discovery of serious safety issues with our products could have a significant adverse impact on our business;
if we are unable to provide consistently high quality of care, our business will be adversely impacted;

3

Table of Contents

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;
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 uncertainty, deepening of any 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, 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
affiliates of Blackstone Inc. (our “Sponsor”) are our current majority owners 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 2020 Form 10-K, Part II, Item 1A. “Risk Factors” in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2021, and Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of 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)

September 30, 

December 31, 

    

2021

    

2020

ASSETS

(unaudited)

 

  

CURRENT ASSETS

  

 

  

Cash and cash equivalents

$

216,497

$

195,197

Accounts receivable

 

75,510

 

74,774

Inventories

 

8,066

 

6,680

Prepaid expenses and other current assets

 

24,033

 

24,003

TOTAL CURRENT ASSETS

 

324,106

 

300,654

PATIENT EQUIPMENT, less accumulated depreciation of $366,772 and $356,888 as of September 30, 2021 and December 31, 2020, respectively

 

216,756

 

223,972

PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET

 

21,133

 

25,419

INTANGIBLE ASSETS, NET

 

66,391

 

61,497

OPERATING LEASE RIGHT-OF-USE ASSETS

 

61,652

 

57,869

GOODWILL

15,580

EQUITY METHOD INVESTMENT

3,600

DEFERRED INCOME TAXES, NET

 

835

 

18,258

NOTE RECEIVABLE, RELATED PARTY

811

OTHER ASSETS

 

18,254

 

17,315

TOTAL ASSETS

$

729,118

$

704,984

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

  

 

  

CURRENT LIABILITIES

 

  

 

  

Accounts payable

$

108,653

$

116,886

Accrued payroll and related taxes and benefits

 

53,713

 

55,628

Other accrued liabilities

 

32,218

 

33,513

Deferred revenue

 

26,886

 

25,821

Current portion of operating lease liabilities

 

21,552

 

23,977

Current portion of long-term debt

 

31,250

 

20,833

TOTAL CURRENT LIABILITIES

 

274,272

 

276,658

LONG-TERM DEBT, less current portion

 

351,142

 

376,389

OPERATING LEASE LIABILITIES, less current portion

 

40,189

 

35,358

OTHER NONCURRENT LIABILITIES

 

40,384

 

42,924

TOTAL LIABILITIES

 

705,987

 

731,329

COMMITMENTS AND CONTINGENCIES (Note 8)

 

  

 

  

STOCKHOLDERS’ EQUITY (DEFICIT)

 

  

 

  

Preferred stock, $0.01 par value: 100,000,000 authorized; no shares issued as of September 30, 2021 and February 10, 2021 (Note 1)

Common stock, $0.01 par value: 1,000,000,000 authorized; 35,400,884 and 35,210,915 shares issued and outstanding as of September 30, 2021 and February 10, 2021, respectively (Note 1)

354

Additional paid-in capital

 

955,283

 

954,087

Accumulated deficit

 

(932,506)

 

(980,432)

TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)

 

23,131

 

(26,345)

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

$

729,118

$

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

Nine Months Ended

    

September 30, 

September 30, 

2021

    

2020

    

2021

    

2020

Net revenues:

 

  

 

  

  

 

  

Fee-for-service arrangements

$

229,293

$

220,446

$

676,814

$

646,630

Capitation

 

57,904

 

56,314

 

171,936

 

168,298

TOTAL NET REVENUES

 

287,197

 

276,760

 

848,750

 

814,928

Costs and expenses:

 

  

 

  

 

  

 

  

Cost of net revenues:

 

  

 

  

 

  

 

  

Product and supply costs

 

48,809

 

45,192

 

152,723

 

141,563

Patient equipment depreciation

 

24,746

 

25,104

 

75,631

 

75,840

Home respiratory therapists costs

 

4,023

 

3,986

 

12,345

 

12,848

Other

 

4,284

 

4,417

 

12,829

 

13,669

TOTAL COST OF NET REVENUES

 

81,862

 

78,699

 

253,528

 

243,920

Selling, distribution and administrative

 

176,372

 

184,674

 

522,935

 

534,110

TOTAL COSTS AND EXPENSES

 

258,234

 

263,373

 

776,463

 

778,030

OPERATING INCOME

 

28,963

 

13,387

 

72,287

 

36,898

Interest expense

 

2,938

 

1,117

 

8,882

 

4,047

Interest income

 

(51)

 

(74)

 

(142)

 

(451)

Gain from derecognition of nonfinancial asset

(3,994)

(3,994)

INCOME BEFORE INCOME TAXES

 

30,070

 

12,344

 

67,541

 

33,302

Income tax expense

 

7,264

 

6,644

 

19,615

 

13,034

NET INCOME

$

22,806

$

5,700

$

47,926

$

20,268

Three

February 10, 2021

Months Ended

through

September 30, 2021

September 30, 2021

Basic and diluted earnings per share:

Net income attributable to common stockholders

$

22,806

$

46,387

Weighted average common shares outstanding:

Basic

35,314,445

35,262,700

Diluted

38,210,958

38,077,019

Net income per common share:

 

  

 

  

 

  

 

  

Basic

$

0.65

$

1.32

 

Diluted

$

0.60

$

1.22

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

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APRIA, INC.

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(In thousands, except share data)

(Unaudited)

Three Months Ended

    

    

Additional 

    

    

Total 

Preferred Stock

Common Stock

Paid-In 

Accumulated 

Stockholders’ 

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Deficit

    

Equity

Balance as of June 30, 2021

$

 

35,256,256

$

353

$

956,632

$

(955,312)

$

1,673

Distributions

(96)

(96)

Stock-based compensation

 

 

 

 

1,529

 

 

1,529

Common stock issued upon exercise of stock appreciation rights, net of shares withheld for tax

144,628

1

(2,782)

(2,781)

Net income

 

 

 

 

 

22,806

 

22,806

Balance as of September 30, 2021

$

 

35,400,884

$

354

$

955,283

$

(932,506)

$

23,131

Nine Months Ended

    

    

Additional 

    

    

Total 

Preferred Stock

Common Stock

Paid-In 

Accumulated 

Stockholders’ 

Shares

Amount

Shares

Amount

Capital

Deficit

Equity (Deficit)

Balance as of December 31, 2020

$

 

$

$

954,087

$

(980,432)

$

(26,345)

IPO Transactions (Note 1)

35,210,915

352

(352)

Distributions

(589)

(589)

Stock-based compensation

 

 

 

 

6,030

 

 

6,030

Common stock issued upon exercise of stock appreciation rights, net of shares withheld for tax

189,969

2

(3,893)

(3,891)

Net income

 

 

 

 

 

47,926

 

47,926

Balance as of September 30, 2021

$

 

35,400,884

$

354

$

955,283

$

(932,506)

$

23,131

Three Months Ended

    

    

Additional 

    

    

Total 

Preferred Stock

Common Stock

Paid-In 

Accumulated 

Stockholders’ 

Shares

Amount

Shares

Amount

Capital

Deficit

Equity

Balance as of June 30, 2020

$

 

$

$

1,162,031

$

(1,012,003)

$

150,028

Stock-based compensation

 

 

511

 

 

511

Net income

 

 

 

5,700

 

5,700

Balance as of September 30, 2020

$

 

$

$

1,162,542

$

(1,006,303)

$

156,239

Nine Months Ended

    

    

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

 

 

1,455

 

 

1,455

Net income

 

 

 

20,268

 

20,268

Balance as of September 30, 2020

$

 

$

$

1,162,542

$

(1,006,303)

$

156,239

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)

    

Nine Months Ended

    

September 30, 

    

2021

    

2020

OPERATING ACTIVITIES

 

  

 

  

Net income

$

47,926

$

20,268

Adjustments to reconcile net income to net cash provided by operating activities:

 

  

 

  

Depreciation

 

85,400

86,484

Amortization of intangible assets

 

1,081

431

Non-cash lease expense

 

20,170

20,416

Deferred income taxes

 

17,423

12,149

Stock-based compensation

 

6,030

1,455

Amortization of deferred debt issuance costs

 

778

370

Loss on sale and dispositions of patient equipment and other

 

5,040

3,318

Gain from derecognition of nonfinancial asset

(3,994)

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

 

Accounts receivable

 

(736)

12,294

Inventories

 

(491)

432

Prepaid expenses and other assets

 

(790)

(7,567)

Accounts payable

 

(2,765)

(17,711)

Accrued payroll and related taxes and benefits

 

(1,915)

616

Operating lease liabilities

(21,547)

(19,300)

Deferred revenue

 

1,065

1,317

Legal reserve

1,250

32,525

Accrued expenses and other

 

(5,103)

11,442

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

148,822

 

158,939

INVESTING ACTIVITIES

 

  

 

  

Purchases of patient equipment and property, equipment and improvements

 

(87,509)

(85,847)

Proceeds from sale of patient equipment and other

 

12,508

13,315

Preferred distribution from equity method investment

3,000

Issuance of note receivable, related party

(811)

Cash paid for acquisitions

 

(25,305)

 

NET CASH USED IN INVESTING ACTIVITIES

 

(98,117)

 

(72,532)

FINANCING ACTIVITIES

Payments on asset financing

(9,590)

(17,223)

Payments on debt

(15,625)

(3,750)

Distribution payments

(400)

Payments for tax withholdings from equity-based compensation activity

(3,790)

NET CASH USED IN FINANCING ACTIVITIES

 

(29,405)

 

(20,973)

NET INCREASE IN CASH AND CASH EQUIVALENTS

21,300

65,434

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

195,197

74,691

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

216,497

$

140,125

SUPPLEMENTAL DISCLOSURES—See Note 4 – Debt and Note 6 – Income Taxes for a discussion of cash paid for interest and income taxes, respectively.

NON-CASH 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 $49.0 million and $55.1 million as of September 30, 2021 and December 31, 2020, respectively. Unpaid purchases include $13.5 million and $15.7 million of patient equipment and property, equipment and improvements acquired under extended payment terms as of September 30, 2021 and December 31, 2020, respectively. See Note 7 - Leases for a discussion of right-of-use assets obtained in exchange for new operating lease liabilities. The Company made a non-cash contribution of software and other intellectual property (“IP”) to a joint venture with a fair value of $9.0 million as of September 30, 2021. See Note 1 – Summary of Significant Accounting Policies for a discussion of the equity method investment. See Note 2 - Acquisitions for a discussion of unpaid contingent consideration in connections with an acquisition.

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 (“GAAP”) and are presented in U.S. dollars. These unaudited condensed consolidated financial statements include the accounts of Apria, Inc. (the “Company” or “Apria”) 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 the Company’s initial public offering (the “IPO” or “offering”), the Company underwent a reorganization transaction (see Company Background—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 the Company’s 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, the Company’s business was conducted through Apria Healthcare Group, which did not have a common capital structure with Apria, Inc. and therefore, the Company has not presented the historical capital structure of Apria Healthcare Group within the financial statements. As such, the Company computed earnings per share (“EPS”) for the period the Company’s common stock was outstanding during 2021, referred to as the Post-IPO period. The Company has defined the Post-IPO period as February 10, 2021, the effective date of the pre-IPO reorganization and the completion of the offering, through September 30, 2021. See below for a discussion of the reorganization transaction and EPS calculations.

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

The Company operates in the home healthcare segment of the healthcare industry, providing a variety of clinical and administrative support services and related products and supplies, most of which are prescribed by a physician 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 an entity associated with Blackstone Inc. (the “selling stockholder”) 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 stockholder 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.

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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, with Apria Healthcare Group surviving. As a result, Apria Healthcare Group became an indirect wholly-owned subsidiary of the Company. The Company’s stockholders 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 or as of September 30, 2021.

Equity Method Investment— On August 16, 2021, the Company and a group of investors that includes the American Association for Homecare, VGM Group, Inc., AdaptHealth, LLC., Lincare Inc. and Rotech Healthcare Inc. entered into a joint venture agreement to form DMEscripts LLC, (“JV”) an independent e-prescribe company dedicated to improving the patient, prescriber and provider experience by eliminating inefficiencies and reducing paperwork. The Company contributed IP in exchange for a 40% membership interest in the JV, 50% of which is a nonvoting interest. The Company accounted for the contribution of the IP in accordance with Accounting Standards Codification (“ASC”) No. 610- 20, Gains and Losses from the Derecognition of Nonfinancial Assets. The Company’s ownership interest in the JV is a non-managing interest. The Company determined that the JV was a variable interest entity, but does not consolidate the JV because the Company was not the primary beneficiary. The Company accounts for its unconsolidated membership interest in the JV in accordance with the equity method of accounting because it exerts significant influence over but does not control the JV. Under the equity method of accounting, contributions of non-financial assets to unconsolidated joint ventures are recorded at fair value and adjusted for cash contributions, distributions received, allocations of income or loss, and other adjustments, as appropriate. There is no difference between the carrying amount of the investment and the underlying equity interest in net assets. All capital contributions and distributions of earnings from the JV are made on a pro rata basis in proportion to each member’s equity interest percentage. The Company commenced recording its allocated portion of profit or losses beginning as of September 1, 2021, with respect to its 40% membership interest in the JV. The Company received a preferred distribution of $3.0 million and has the potential to receive an additional $3.0 million if certain performance metrics are achieved within two years (“Breakeven Performance”).

In connection with the formation of the JV, the Company entered into a promissory note that evidences a line of credit (“LOC”) pursuant to a loan and security agreement (“JV Loan Agreement”), to which the Company has agreed to provide up to $3.0 million in debt funding to the JV. In accordance with the JV Loan Agreement, the LOC bears interest at the rate of 7.5% per annum. The LOC calls for monthly interest only payments until the sooner of August 16, 2025 or the borrower achieving Breakeven Performance, at which time the remaining outstanding principal amount is amortized in equal monthly installments over five years. Amounts due under the LOC may be prepaid at any time. As of September 30, 2021, the outstanding balance was $0.8 million under the LOC which was recorded as a note receivable, related party on the unaudited condensed consolidated balance sheet.

Business Combinations—The Company's acquisitions have been accounted for using the purchase method of accounting under ASC 805, Business Combinations (“ASC 805”). The Company accounts for all transactions and events in which it obtains control over a business under ASC 805 by establishing the acquisition date and recognizing the fair value of all assets acquired and liabilities assumed. The Company’s acquisitions have historically been made at prices above the fair value of identifiable net assets, resulting in goodwill.

While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the business acquisition date, the estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the purchase price allocation period, which is generally one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. For changes in the valuation of intangible assets between the

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preliminary and final purchase price allocation, the related amortization is adjusted in the period it occurs. Subsequent to the purchase price allocation period, any adjustment to assets acquired or liabilities assumed is included in operating results in the period in which the adjustment is determined.

Use of Accounting Estimates—The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP 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, valuation of acquired intangible assets and goodwill, 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 September 30, 

2021

2020

Total Fee- 

Total Fee- 

For- 

For- 

(dollars in thousands)

    

Rental

    

Sale

    

Service

    

Rental

    

Sale

    

Service

Home respiratory therapy

$

104,262

$

703

$

104,965

$

100,231

$

573

$

100,804

Obstructive sleep apnea treatment

 

24,347

 

70,292

 

94,639

 

21,558

 

68,831

 

90,389

Negative pressure wound therapy

 

6,833

 

834

 

7,667

 

7,702

 

416

 

8,118

Other equipment and services

 

10,437

 

11,585

 

22,022

 

10,366

 

10,769

 

21,135

Total

$

145,879

$

83,414

$

229,293

$

139,857

$

80,589

$

220,446

 

63.6

%  

 

36.4

%  

 

100.0

%  

 

63.4

%  

 

36.6

%  

 

100.0

%  

Nine Months Ended September 30, 

2021

2020

Total Fee- 

Total Fee- 

For- 

For- 

(dollars in thousands)

    

Rental

    

Sale

    

Service

    

Rental

    

Sale

    

Service

Home respiratory therapy

$

306,321

$

2,037

$

308,358

$

294,874

$

2,654

$

297,528

Obstructive sleep apnea treatment

 

68,132

 

214,247

 

282,379

 

63,285

 

199,564

 

262,849

Negative pressure wound therapy

 

20,650

 

2,989

 

23,639

 

21,324

 

1,605

 

22,929

Other equipment and services

 

29,751

 

32,687

 

62,438

 

30,530

 

32,794

 

63,324

Total

$

424,854

$

251,960

$

676,814

$

410,013

$

236,617

$

646,630

 

62.8

%  

 

37.2

%  

 

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 noncancellable 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.

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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 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 healthcare 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 healthcare services. Contracts with a single national payor constituted 86% of total capitation revenues in the three and nine months ended September 30, 2021 and 2020.

Concentration of Credit Risk—Revenues reimbursed under arrangements with Medicare and Medicaid were approximately 22% and 1%, respectively, of total net revenues for the three months ended September 30, 2021 and 21% and 1%, respectively, of total net revenues for the nine months ended September 30, 2021. Revenues reimbursed under arrangements with Medicare and Medicaid were approximately 21% and 1%, respectively, of total net revenues for the three and nine months ended September 30, 2020. Contracts with two national payors each constituted 23% and 12%, of total net revenues for the three months ended September 30, 2021 and 23% and 11% of total net revenues for the nine months ended September 30, 2021. Contracts with two national payors each constituted 23% and 11% of total net revenues for the three and nine months ended September 30, 2020. No other payors represented more than 10% of the Company’s total net revenues in each of the three and nine months ended September 30, 2021 and September 30, 2020. As of September 30, 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 $15.9 million and $13.1 million as of September 30, 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

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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 healthcare 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.

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 cost of net revenues as the equipment is rented to patients as part of the Company’s primary operations. Depreciation expense for patient equipment was $24.7 million and $25.1 million for the three months ended September 30, 2021 and 2020, respectively, and $75.6 million and $75.8 million for the nine months ended September 30, 2021 and 2020, respectively. The reserves for non-recoverable and obsolete patient equipment were $3.8 million and $3.1 million as of September 30, 2021 and December 31, 2020, respectively.

Patient equipment is generally placed for rent; however, it could also be sold to customers. Once the rented equipment is 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 $1.8 million and $5.1 million of patient equipment as of September 30, 2021 and December 31, 2020, respectively. The net loss from the sale and disposition 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.