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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-252146

 

Prospectus

7,500,000 Shares

 

LOGO

Apria, Inc.

Common Stock

This is the initial public offering of shares of common stock of Apria, Inc. No public market currently exists for our common stock. The selling stockholders are offering 7,500,000 shares of common stock. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders. The initial public offering price of our common stock is $20.00 per share. Our common stock has been approved for listing on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “APR.”

After the completion of this offering, affiliates of The Blackstone Group Inc. will continue to own a majority of the voting power of shares eligible to vote in the election of our directors. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of Nasdaq. See “Management—Controlled Company Exception” and “Principal and Selling Stockholders.”

 

 

Investing in shares of our common stock involves risks. See “Risk Factors” beginning on page 23 to read about factors you should consider before buying shares of our common stock.

 

     Per
Share
     Total  

Initial public offering price

   $ 20.00      $ 150,000,000  

Underwriting discounts and commissions(1)

   $ 1.40      $ 10,500,000  

Proceeds, before expenses, to selling stockholders

   $ 18.60      $ 139,500,000  

 

(1)

See “Underwriting” for additional information regarding underwriting compensation.

To the extent that the underwriters sell more than 7,500,000 shares of our common stock, the underwriters have the option to purchase up to an additional 1,125,000 shares of our common stock from the selling stockholders at the initial public offering price less the underwriting discounts and commissions, within 30 days from the date of this prospectus.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of our common stock against payment in New York, New York on or about February 16, 2021.

 

 

Joint Book-Running Managers

 

Citigroup   Goldman Sachs & Co. LLC

 

BofA Securities   J.P. Morgan

 

UBS Investment Bank

 

 

Co-Managers

 

Piper Sandler

 

Citizens Capital Markets   Fifth Third Securities   TD Securities

 

Academy Securities

 

  Blaylock Van, LLC   Penserra Securities LLC   Stern

The date of this prospectus is February 10, 2021.


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Neither we nor the selling stockholders, nor the underwriters have authorized anyone to provide you with information different from that contained in this prospectus, any amendment or supplement to this prospectus or any free writing prospectus prepared by us or on our behalf. Neither we nor the selling stockholders, nor the underwriters take any responsibility for, or can provide any assurance as to the reliability of, any information other than the information in this prospectus, any amendment or supplement to this prospectus or any free writing prospectus prepared by us or on our behalf. We, the selling stockholders and the underwriters are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

Through and including March 7, 2021 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

For investors outside the United States: Neither we nor the selling stockholders, nor the underwriters have done anything that would permit our initial public offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our common stock and the distribution of this prospectus outside of the United States.

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About This Prospectus

Financial Statement Presentation

This prospectus includes certain historical consolidated financial and other data for Apria Healthcare Group Inc. (“Apria Healthcare Group”) and its subsidiaries. We have undertaken certain reorganization transactions (the “pre-IPO reorganization transactions”) as of the date of this prospectus so that Apria, Inc. directly or indirectly owns all of the equity interests in Apria Healthcare Group and is the holding company of our business.

Apria, Inc. will be the financial reporting entity following this offering. Other than the balance sheets as of September 30, 2020, December 31, 2019 and December 31, 2018, financial information of Apria, Inc. has not been included in this prospectus as since its formation on March 22, 2018 it has not entered into any business transactions or activities, has no capitalization, and had no assets or liabilities during the periods presented in this prospectus.

Certain Definitions

As used in this prospectus, unless otherwise noted or the context requires otherwise:

 

   

“Apria,” the “Company,” “we,” “us” and “our” refer (1) prior to the consummation of this offering and the pre-IPO reorganization transactions, to Apria Healthcare Group, the existing holding company of our business, and its consolidated subsidiaries and (2) after the consummation of this offering and the pre-IPO reorganization transactions, to Apria, Inc. and its consolidated subsidiaries, including Apria Healthcare Group.

 

   

“Blackstone” or “Sponsor” refer to investment funds associated with, or managed or designated by, The Blackstone Group Inc., which funds are our current majority owners, and their permitted successors and assigns.

 

   

“CBP” and “DMEPOS CBP” refers to the DMEPOS competitive bidding program.

 

   

“CMS” refers to the Centers for Medicare and Medicaid Services.

 

   

“DMEPOS” refers to Medicare durable medical equipment, prosthetics, orthotics and supplies.

 

   

“GAAP” refers to generally accepted accounting principles in the United States of America.

 

   

“Medicare patients” refers to Medicare patients other than those participating in Medicare through the Medicare Advantage program.

 

   

“Payors” refers to third-party healthcare payors, including government and commercial payors.

 

   

“pre-IPO owners” refer to our Sponsor together with other owners of Apria Healthcare Group prior to this offering.

 

   

“The Joint Commission” refers to a nationally recognized, independent organization that develops standards for various healthcare industry segments and monitors compliance with those standards through voluntary surveys of participating providers.

 

 

Unless indicated otherwise, the information included in this prospectus assumes no exercise by the underwriters of their option to purchase up to an additional 1,125,000 shares of common stock from us and the selling stockholders.

 

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SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider before investing in shares of our common stock. You should read this entire prospectus carefully, including the section entitled “Risk Factors” and the financial statements and the related notes thereto included elsewhere in this prospectus, before you decide to invest in shares of our common stock.

Apria

We are a leading provider of integrated home healthcare equipment and related services in the United States. We offer a comprehensive range of products and services for in-home care and delivery across three core service lines: (1) home respiratory therapy (including home oxygen and non-invasive ventilation (“NIV”) services); (2) obstructive sleep apnea (“OSA”) treatment (including continuous positive airway pressure (“CPAP”) and bi-level positive airway pressure devices, and patient support services); and (3) negative pressure wound therapy (“NPWT”). Additionally, we supply 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. Our revenues are generated through fee-for-service and capitation arrangements with Payors for equipment, supplies, services and other items we rent or sell to patients. Through our offerings, we also provide patients with 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. We are focused on being the industry’s highest-quality provider of home healthcare equipment and related services, while maintaining our commitment to being a low-cost operator. We offer a compelling value proposition to patients, providers and Payors by allowing patients to receive necessary care and services in the comfort of their own home, while, at the same time, reducing the costs of treatment. We generated over $1 billion of net revenue in 2019, of which approximately 80% was from home respiratory therapy and OSA treatment, service categories in which we believe we have a leading market position.

We believe our integrated product and service offerings, combined with our national scale and strong reputation, provide us with a strategic advantage in being a preferred home healthcare provider for patients, providers and Payors. Our Payors include substantially all of the national and regional insurers, managed care organizations and government Payors in the United States. We benefit from long-standing relationships with a community of providers and referral sources for post-acute services across the acuity spectrum because of the consistency and reliability of our high quality clinical support, our national distribution footprint and our breadth of Payor relationships.

Our product and service offerings are distinguished by the complexity and sophistication required in their clinical delivery, logistical coordination and payment arrangements. We offer patients and providers differentiated clinical service, leveraging our protocols and expertise to improve outcomes across our service lines. With an expansive network of delivery technicians and therapists that is not readily replicated, we are able to provide home healthcare therapies that require high-touch service, providing a bridge from the acute care setting to the home. Our services include:

 

   

providing in-home delivery, set-up and maintenance of equipment and supplies;

 

   

educating patients and caregivers about health conditions or illnesses and providing instructions about home safety, self-care and the proper use of equipment;

 

   

therapy compliance monitoring and intervention to enhance compliance;

 

   

clinical monitoring of complex respiratory service patients’ individualized treatment plans;

 

   

reporting patient progress and status to the physician, national and regional insurers and/or managed care organizations; and

 

   

processing claims to Payors on behalf of patients.



 

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In 2019, we served nearly 2 million patients, made nearly 2.4 million deliveries and conducted over 744,000 clinician interactions with our patients. In addition, in 2019, we generated $1.1 billion of net revenue, $15.6 million in net income, $174.0 million of Adjusted EBITDA and $80.5 million of Adjusted EBITDA less Patient Equipment Capex. Through various strategic and operational initiatives, we have improved profitability despite reimbursement rate pressure, improving our Adjusted EBITDA margin by 110 basis points from 2017 through 2019 on a basis that excludes the impact of new accounting policies adopted in 2018 and 2019. For reconciliations of Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex to net income, the most directly comparable financial measure prepared in accordance with GAAP, see “—Summary Historical Financial and Other Data.”

Strong Industry Fundamentals Support Our Business Model

The U.S. home healthcare market comprises a broad range of products and services—including respiratory therapy, OSA therapy, negative pressure wound therapy, home medical equipment, infusion therapy, home healthcare nursing, orthotics and prosthetics, diabetic supplies and general medical supplies. CMS estimates that the total revenue of the U.S. home healthcare market was $108.9 billion in 2019, and forecasts this market to grow at a compound annual growth rate (“CAGR”) of approximately 7% between 2020 and 2028. We operate in the durable medical equipment sub-segment of the home healthcare industry. CMS forecasts the durable medical equipment sub-segment to grow at a CAGR of approximately 6% between 2019 and 2028. The broader U.S. markets for respiratory devices and OSA devices, which align with our home respiratory and OSA treatment product lines, two of our core product lines and which represent over 80% of 2019 net revenue, are expected by industry analysts to grow at CAGRs of approximately 6% and approximately 8%, respectively, between 2018 and 2025. In 2018, industry analysts estimated that the market size for respiratory devices and OSA devices was approximately $6.2 billion and approximately $2.2 billion, respectively, in North America. The U.S. market for negative pressure wound therapy devices is expected by industry analysts to grow at a CAGR of approximately 5% between 2018 to 2023, and in 2018, the global market size of negative pressure wound therapy devices was estimated by industry analysts to be approximately $2.1 billion. Our sub-segment of the U.S. home healthcare industry is highly fragmented. The five largest players in this sub-segment accounted for approximately 50% of this sub-segment’s revenues in 2019. The remaining market revenues are attributable to thousands of other companies that primarily operate in local markets or regions.

We expect to benefit from the following continuing trends within the home healthcare market:

 

   

aging population;

 

   

rising incidence of chronic diseases;

 

   

continued shift toward home healthcare driven by the compelling economic value proposition to key stakeholders and technological developments making remote monitoring more feasible;

 

   

increased prevalence of in-home treatments and preference for in-home care where available; and

 

   

consolidation of the highly fragmented market to the benefit of national players.

Our Value Proposition

We believe we offer a compelling value proposition for patients, providers and Payors.

Value Proposition for Patients: We are committed to improving the experience and clinical outcome for each patient we serve. We believe our patients prefer the convenience and typical cost advantages of home healthcare over institutional care and the greater independence, increased responsibility and improved responsiveness to treatment that comes with it. By providing in-home delivery and equipment set-up, patient and caregiver education, as well as patient monitoring and compliance services, we enable the patient to move from



 

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or avoid an acute care setting and remain in or return to the home, which is the lowest cost, and overwhelmingly the patient-preferred, setting.

Value Proposition for Providers: Physicians, hospital professionals and other providers refer patients to us because of the consistent, high quality and reliable services we offer them and their patients. We seek to be a trusted advocate and provider of patient clinical needs in patients’ homes, while fostering lasting doctor-patient relationships. Additionally, the reliability of our clinical support, quality equipment and data collection facilitate a clinically adept transition to a lower-cost setting, which we believe benefits healthcare professionals, and helps to put them at ease regarding their patients’ ongoing treatments. We believe our services improve patient compliance and clinical outcomes, reduce hospital re-admissions and enable hospital providers to have greater control over timely patient discharges.

Value Proposition for Payors: We offer Payors access to an extensive national footprint, national logistics systems, respiratory clinical expertise, competitive pricing, alternative payment arrangements, including fee-for-service and capitation for defined patient populations, and our ability to connect electronically with Payors’ systems. We seek to effectively manage the transition from the acute care setting to a low-cost home setting with a high reliability of clinical support, data collection and quality equipment to lower readmission rates.

Our Competitive Strengths

National Scale with Local Presence. Our platform combines local market presence with the advantages and efficiencies of national scale, clinical expertise and reputation. As one of the largest providers of home healthcare services in the United States, we enjoy long-tenured relationships with the majority of the major commercial Payors, who value an expansive geographic footprint that can service their entire patient populations, in addition to our reputation for reliable and quality care.

Expansive Offering with Exposure to Attractive Product Markets. We seek to offer high quality, clinically appropriate care across a broad spectrum of services and treatments amenable to the home setting. Our extensive offering helps make us an attractive and convenient choice for our patients, providers and Payors. With top two market positions in the United States in home respiratory therapy, OSA treatment and NPWT, we are aligned with large and growing addressable markets across our core service lines.

Strong Relationships with Payors and Referral Sources Developed with Differentiated Sales Model. We enjoy deep and long-standing relationships with national and regional insurers and managed care organizations, many of whom we have been contracted with for over 20 years. We believe Payors value the breadth of our entire platform, including our geographic reach and the range of conditions our service offerings cover through both our fee-for-service and capitation arrangements. Furthermore, we believe they value our flexibility in payment arrangements and competence in managing value as well as volume under capitation for defined patient populations.

Leveraging our broad market access to patients through our centralized Payor relationships, we cultivate individual relationships with thousands of local referral sources, including hospitals, outpatient facilities, physicians and sleep centers, through a field sales force of approximately 380 in-market sales representatives and approximately 200 front-line managers. We believe this differentiated approach of combining Company-wide Payor relationships with in-market referral relationships enhances the efficiency and productivity of our marketing efforts.

Leadership in Clinical Delivery. We specialize in certain complex home healthcare services and treatments that require deep technical and clinical expertise in addition to frequent patient interaction. We believe we are distinguished from e-commerce and logistics platforms by our ability to meet patient needs directly through our



 

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highly trained technicians and therapists who deliver and provide these services, as well as our ability to bill a patient’s insurance provider. We utilize differentiated clinical expertise and protocols to drive optimal outcomes across our core service lines and all of these operations are accredited by The Joint Commission.

Leading Revenue Cycle Management. We manage medical claims and patient collections on a single operating platform that allows for capitation and fee-for-service arrangements. We believe we lead the industry in (1) ease of use for our key referral sources, (2) regulatory compliance and (3) revenue cycle management and billing and collections efficiency. We offer several advantages to our key referral sources and Payors, which we believe improve our ability to win new business and capture share from our competitors.

Strong and Experienced Management Team. We are led by a team of talented industry veterans, comprising individuals with long tenures at Apria and deep knowledge of our history and operations, as well as individuals who joined us more recently and bring fresh perspectives, insights and best practices developed through experience in other industries and at other companies. With an average of over 20 years of industry experience and over ten years with Apria, our senior leadership team has expertise spanning nearly every segment of the healthcare industry.

Growth Strategy

Our goal is to be the market leader in the provision of high quality, cost-efficient home healthcare services, creating value for all stakeholders—patients, providers and Payors. We seek to achieve this goal through the following growth strategies:

Maintain leadership in markets with favorable industry dynamics. The broader U.S. markets for respiratory devices and OSA devices, which align with our home respiratory and OSA treatment product lines, two of our core product lines and which represent over 80% of 2019 net revenue, are expected by industry analysts to grow at CAGRs of approximately 6% and approximately 8%, respectively, between 2018 and 2025. With a national distribution platform that is difficult to replicate, deep and long-standing relationships with national and regional insurers and managed care organizations and a reputation for quality and reliability of service, we believe we are well positioned to maintain leadership in these attractive and growing markets. Industry groups suggest that approximately 80% of moderate and severe sleep-disordered breathing cases remain undiagnosed. We have been educating primary care physicians about the proper diagnosis and treatment of OSA. As the first line of care, these primary care physicians are more likely to encounter undiagnosed instances of OSA. In addition to traditional solutions, we coordinate an end-to-end virtual solution that includes home sleep testing (rather than testing at an offsite sleep clinic) which is convenient for the patient and safer, especially in the current pandemic environment. We believe that facilitating the diagnosis and treatment of this condition will lead to increased growth in OSA sales and increase revenue synergies as newly acquired OSA patients will have access to our other product and service lines when clinically indicated.

Enable the transition to value-based healthcare. Government and commercial Payors are increasingly seeking ways to shift from traditional fee-for-service to a value-based model. We believe the ability to transition patients from the acute care setting to the home, as well as to prevent unnecessary readmissions, represents a critical part of this effort. As a leading provider of home healthcare equipment and related services, we believe we will increasingly benefit from this ongoing paradigm shift in the industry. In addition, we believe our demonstrated expertise in non-traditional payment models, such as capitation arrangements, will position us well to take advantage of this trend.

Expand product and service offerings. We continue to focus on expanding into new product lines and services both organically and through strategic acquisition to continue to grow and diversify our revenue with a patient-centric view centered on the long term value of each patient. For example, we are pursuing products and services related to the treatment of diabetes and the provision of diabetic supplies. Technological advances in continuous glucose monitoring and insulin pump delivery (creating an “artificial pancreas”) have changed the



 

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diabetes treatment paradigm and enabled providers to better treat patients in the home healthcare setting. Moreover, diabetic patients often suffer from many co-morbidities, including OSA, respiratory ailments and heart disease, many of which we already treat through our sleep and respiratory product lines. We believe we are well positioned to leverage our national platform and scalable infrastructure to help diabetic patients benefit from new diabetes treatment technologies as well as treatments for co-morbidities.

Leverage patient interactions. Our business model provides for frequent interaction with our patients and a direct entry point into the home, allowing our technicians, therapists and customer service agents to assess whether the patients are in need of additional services, supplies or convenience items. Where appropriate, our technicians, therapists and customer service agents can assist our patients in obtaining these additional services, supplies or convenience items through Apria. In addition, existing patients and potential patients may utilize our e-commerce platform to access additional items that are not covered by Payors and are purchased directly by patients.

Grow e-commerce through a patient-centric approach. Our e-commerce platform is primarily focused on supplies, accessories and additional items that are not covered by Payors and are purchased directly by patients. E-commerce is a convenient way to provide products and services to our existing patients and also serves as an additional acquisition channel for new patients. Through direct-to-patient marketing focused on service and clinical support, we believe we can continue to grow volume through our e-commerce channel. For example, we frequently acquire patients to meet a single product need even though they typically have additional home healthcare needs. Through patient interaction and education, they can discover and access other products and services that we offer through e-commerce that can address their needs. In addition, we believe the broader home healthcare trends discussed below will also enable us to grow our revenue and product and service offerings through e-commerce. Given that the supplies and accessories that are its primary focus are less capital intensive, we believe growing our e-commerce channel represents an attractive opportunity to increase cash flows and profitability.

Grow with new home healthcare trends. Telemedicine and remote provider care have been gaining traction in recent years and have been significantly accelerated given the recent COVID-19 pandemic. We believe that these trends will help accelerate growth in home healthcare and we are well positioned to benefit from these trends given our national footprint and scalable infrastructure. Moreover, due to the impacts of the COVID-19 pandemic, we expect accelerated and sustainable demand for home healthcare solutions including respiratory and other medical conditions that we treat regularly. These trends in telemedicine and the emphasis on treating patients in the home, outside the traditional medical clinic and hospital, will enable us to grow our revenue and product and service offerings further.

Strategic acquisitions. We believe there is also opportunity to accelerate our growth rate, market share gains and expand into new product markets through strategic acquisitions. We will continue to evaluate such opportunities through a disciplined approach, seeking only acquisitions that will complement our existing operations and businesses and/or create synergies. The various markets we participate in remain highly fragmented and ripe for consolidation and we believe that our nationally integrated platform, scale and strong reputation position us well to be a consolidator in our industry. We have a relatively unburdened balance sheet with low debt levels and meaningful debt capacity for acquisitions. Moreover, as a public company, we will have greater access to capital markets and we will be able to use our stock as an acquisition currency or to raise additional capital for strategic acquisitions.

Continue to capture efficiencies through scale and operational improvement. Our existing distribution network of approximately 275 branch locations can reach more than 90% of the U.S. population across both high-density urban markets and rural markets. Coupled with scalable technology and centralized operations, including revenue cycle management, we believe we can continue to grow beyond our nearly 2 million patients



 

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served in 2019 without significant incremental capital investment in infrastructure. As we maintain our strong position in growing product markets, we believe the ability to scale our operations and leverage fixed costs represents a significant opportunity for growth in profitability. In addition, we believe we can continue to improve the cost-efficiency of our operations and support functions through new and recently completed technology initiatives, such as robotic desktop automation (“RDA”) to simplify agent workflow, robotic process automation technology (“RPA”) for certain repetitive and volume staff tasks and automating activities such as new employee onboarding and equipment provisioning, and enhanced workflow to improve ease of use and direct activity to the appropriately skilled staff. We have also invested in DMEhub, a cloud-based e-prescribing platform that allows providers to submit medical equipment orders more efficiently and accurately, which we believe drives ease of use, enables more efficient order processing and reduces administrative burden.

Continue to improve cash profile. We continually evaluate opportunities to enhance our cash flow and return on investment. We see opportunities in this regard both to increase our exposure to less capital intensive products and to benefit from recent investment in our longer-lived, complex equipment fleet. Patients on OSA therapy and NPWT require periodic replenishment of supplies and accessories in order to remain in compliance with their prescribed therapies. These supplies are less capital intensive and we believe represent a multi-billion dollar market with an attractive growth profile. The opportunity to increase our exposure to this market is enhanced by our growing e-commerce distribution channel, which is primarily focused on these supplies and accessories, offering patients speed and convenience and helping us to continue to grow our volume.

Our Strategic Transformations

Since we were acquired by Blackstone in 2008, the home healthcare industry has experienced a number of significant changes, including reimbursement, regulatory and technological changes. We have continually worked to adapt our business and organizational structure to best meet the current needs of patients, providers and Payors.

Our most recent business initiative, which we call Simplify, focused on retaining clear customer ownership at our local branch level with support from our scalable national platform to greatly improve the patient and referral source experience. With a goal of optimizing the end-to-end customer experience while enabling us to increase our growth rate at lower cost, we evaluated local, regional and centralized processes to foster local branch customer ownership, supported by regional shared services where scale, consistency and process expertise is needed, and our national platform where scale can be leveraged. This transformation has led to significant improvement in profitability and lower operating costs and has positioned us well for future growth. Our patient-centric growth plan begins with an improved customer experience, which we believe will support increased cross-sell opportunities and growth across product lines to the over 2 million unique patients we serve annually.

In addition to Simplify, we have also made other substantial changes to our business since our acquisition by Blackstone:

 

   

we brought on a management team of individuals with extensive expertise and experience in the workings of our industry and regulatory environment and others who specialize in designing and developing scalable business infrastructures and business transformation;

 

   

we improved our business and revenue mix by growing our relationships with commercial Payors;

 

   

we expanded our service offerings to include more complex respiratory services, including NIV therapy, and we shifted our focus to three core service lines including less capital intensive products and services which complement our core offerings;

 

   

we invested in patient monitoring and outcomes data collection to differentiate our service offerings and provide enhanced value to patients, providers and Payors;



 

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we improved sales productivity through changes in the sales force hiring profile and implementation of a new sales customer relationship management system;

 

   

we formed strategic relationships with our suppliers to help optimize equipment costs and provide state-of-the art patient equipment;

 

   

we streamlined our management structure and further optimized our branch network by reducing our locations open to the public from over 400 to approximately 275 without materially reducing the coverage of our service areas or the quality of our service;

 

   

we built a scalable infrastructure with data analytics and forecasting capabilities to more efficiently leverage the favorable trends of an aging population and the paradigm shift in healthcare from the acute setting to the home; and

 

   

we consolidated regional and branch level billing, collections and aspects of the customer service function, reorganized their work flows and adopted new technology and processes to help us improve productivity, monitor performance and more effectively manage important aspects of our business in real-time.

Our Sponsor

Blackstone (NYSE: BX) is one of the world’s leading investment firms. Blackstone’s asset management businesses include investment vehicles focused on real estate, private equity, public debt and equity, growth equity, opportunistic, non-investment grade credit, real assets and secondary funds, all on a global basis. Through its different businesses, Blackstone had total assets under management of approximately $584 billion as of September 30, 2020.

After the completion of this offering, our Sponsor will beneficially own approximately 72.0% of our common stock (or 68.8% if the underwriters exercise their option to purchase additional shares in full). As a result, we will be a “controlled company” within the meaning of the Nasdaq corporate governance standards. Under these corporate governance standards, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance standards, including the requirements (1) that a majority of our board of directors consist of independent directors, (2) that our board of directors have a compensation committee that is comprised entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities and (3) that our director nominations be made, or recommended to our full board of directors, by our independent directors or by a nominations committee that is comprised entirely of independent directors and that we adopt a written charter or board resolution addressing the nominations process. For at least some period following this offering, we intend to utilize these exemptions. As a result, immediately following this offering, we do not expect a majority of our directors will have been affirmatively determined to be independent or that our compensation committee or nominating and corporate governance committee of the board will be comprised entirely of directors who have been affirmatively determined to be independent. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of these corporate governance requirements. In the event that we cease to be a “controlled company” and our common stock continues to be listed on Nasdaq, we will be required to comply with these provisions within the applicable transition periods.



 

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Summary Risk Factors

An investment in shares of our common stock involves substantial risks and uncertainties that may adversely affect our business, financial condition and results of operations and cash flows. Some of the more significant challenges and risks relating to an investment in our Company include, among other things, the following:

 

   

the recent 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 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;

 

   

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;

 

   

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;



 

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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 and its affiliates control us and their interests may conflict with ours or yours in the future.

Please see “Risk Factors” for a discussion of these and other factors you should consider before making an investment in shares of our common stock.

Our Organizational Structure

Prior Organizational Structure

The following diagram depicts our organizational structure and equity ownership prior to the completion of this offering. Apria, Inc. is not pictured, as it was incorporated in connection with this offering and does not have any outstanding shares of capital stock. We currently conduct our business through Apria Healthcare Group and its subsidiaries. In connection with the completion of this offering, Apria, Inc. has become the holding company for Apria Healthcare Group. This diagram is provided for illustrative purposes only and does not show all of our legal entities.

 

LOGO

Organizational Structure Following This Offering

In connection with the completion of this offering, we have undertaken the pre-IPO reorganization transactions as of the date of this prospectus so that Apria, Inc., through a newly formed direct subsidiary of Apria, Inc. (“Intermediate Holdco”), owns all of the equity interests in Apria Healthcare Group and is the holding company of our business. More specifically, a newly formed direct subsidiary of Intermediate Holdco has merged with and into Apria Healthcare Group, with Apria Healthcare Group surviving. As a result, Apria



 

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Healthcare Group has become an indirect wholly owned subsidiary of Apria, Inc. Our pre-IPO owners, through their ownership of Apria Holdings LLC as the 100% direct owner of Apria Healthcare Group prior to such transaction, have received an aggregate of 35,210,915 shares of newly issued common stock of Apria, Inc.

In connection with this offering, the stock appreciation rights (“SARs”) that are issued by Apria Healthcare Group will remain outstanding and will continue to vest and settle pursuant to their original terms, but will be amended to track the shares of Apria, Inc. common stock rather than the shares of common stock of Apria Healthcare Group. Upon the completion of this pre-IPO reorganization, the number of SARs outstanding at Apria, Inc. will be 3,766,228.

In connection with the consummation of this offering, Apria Healthcare Group was converted into a Delaware limited liability company.

Apria Holdings LLC, an entity controlled by our Sponsor, was the direct and indirect 100% owner of Apria, Inc. and Apria Healthcare Group immediately prior to and immediately following the consummation of the merger. For this reason, the merger will be accounted for as a reorganization of entities under common control. As a result, the consolidated financial statements of Apria, Inc. will 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. Following the consummation of these transactions in accordance with a master reorganization agreement, the form of which has been filed as an exhibit to the registration statement of which this prospectus forms a part, the selling stockholders will complete the offer and sale of Apria, Inc.’s common stock to investors in this offering.

We believe there are financing benefits in having an organizational structure with a holding company issuer above the entities that are subject to debt covenants and such structures are frequently used by corporate issuers. We do not expect that there will be any material benefit or detriment to our stockholders from our organizational structure after giving effect to the pre-IPO reorganization transactions, as all stockholders, including our pre-IPO owners and public stockholders, will hold their respective interest in a single class of our common stock and will be entitled to the same relative benefits or detriments.

The following diagram depicts our organizational structure and equity ownership immediately following

the pre-IPO reorganization transactions and this offering. This diagram is provided for illustrative purposes only and does not show all of our legal entities or ownership percentages of such entities.



 

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LOGO

 

(1)

After the completion of this offering, our Sponsor will beneficially own 72.0% of our outstanding common stock (or 68.8% if the underwriters exercise their option to purchase additional shares in full), our other pre-IPO owners will beneficially own 6.7% of our outstanding common stock (or 6.7% if the underwriters exercise their option to purchase additional shares in full) and public stockholders will beneficially own 21.3% of our outstanding common stock (or 24.5% if the underwriters exercise their option to purchase additional shares in full). For additional information, see “Principal and Selling Stockholders.”

In connection with this offering we intend to enter into (i) a stockholders agreement which among other rights, will provide our Sponsor with the right to require us to nominate a number of individuals designated by our Sponsor for election as our directors for as long as it retains significant ownership of us and (ii) a registration rights agreement, which will provide our Sponsor an unlimited number of “demand” registration rights and customary “piggyback” registration rights. The stockholders agreement will require us to nominate a number of individuals designated by our Sponsor (the “Sponsor Directors”) based on the beneficial ownership of our pre-IPO owners and their affiliates of our common stock entitled to vote generally in the election of our directors. The number of such Sponsor Directors will be the lowest whole number that is greater than 50% of the total number of directors comprising our board of directors if our pre-IPO owners and their affiliates beneficially own at least 50% of the shares of our outstanding common stock (and any securities convertible into, or exchangeable or exercisable for, such shares) entitled to vote generally in the election of our directors as of the record date for such meeting and such number will generally decrease proportionally as the beneficial ownership of our pre-IPO owners and their affiliates decrease, except that our Sponsor will continue to have the right to nominate the lowest whole number of directors that is at least 10% of the total number of directors for so long as our pre-IPO owners and their affiliates own at least 5% of our outstanding common stock. Accordingly, our Sponsor will have the right to designate 10% of the board of directors even though the pre-IPO owners and their affiliates may own less than 10% of the outstanding common stock (so long as they own at least 5%). After the completion of this offering, we expect that our Sponsor will have the right, but be under no obligation, to designate five members of our nine member board of directors as their nominees for election at our first meeting of stockholders



 

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following this offering (or such greater or lesser number of directors that would constitute the lowest whole number of directors that is greater than 50% of the total number of directors then comprising the board). See “Certain Relationships and Related Person Transactions” for additional information.

 

 

Apria, Inc. was incorporated in Delaware on March 22, 2018. Our principal executive offices are located at 7353 Company Drive, Indianapolis, Indiana 46237 and our telephone number is (800) 990-9799.

Recent Developments

Preliminary Estimated Unaudited Financial Results of Operations for the Year Ended December 31, 2020

The data presented below reflects our preliminary estimated unaudited financial results for the year ended December 31, 2020 based upon information available to us as of the date of this prospectus. In preparing our preliminary estimated unaudited financial results, we have utilized accounting estimates in a manner consistent with the description in Note 1 in our unaudited condensed consolidated financial statements included elsewhere in this prospectus. However, this data is not a comprehensive statement of our financial results for the year ended December 31, 2020, and our actual results may differ materially from this preliminary estimated data, as our closing process and related audit have not been completed. During the preparation of our financial statements and related notes additional adjustments to the preliminary estimated financial information presented below may be identified. Any such adjustments may be material. Our independent registered public accounting firm, Deloitte & Touche LLP, has not audited, reviewed, compiled or performed any procedures with respect to this preliminary financial data and, accordingly, Deloitte & Touche LLP does not express an opinion or any other form of assurance with respect thereto.

Based upon such preliminary estimated financial results, we expect various key metrics for the year ended December 31, 2020, to be between the ranges set out in the following table, as compared to the year ended December 31, 2019:

 

     Year Ended December 31,  
     2020      2019  
     (Estimated)         
(in thousands)    Low      High         

Net revenues:

        

Home respiratory therapy

   $ 451,726      $ 453,826      $ 435,680  

OSA treatment

     452,407        454,407        438,572  

NPWT

     42,766        42,966        42,122  

Other equipment and services

     156,818        157,518        172,501  
  

 

 

    

 

 

    

 

 

 

Net revenues

   $ 1,103,717      $ 1,108,717      $ 1,088,875  

Net income

   $ 41,956      $ 44,156      $ 15,622  

EBITDA

   $ 183,378      $ 186,378      $ 138,991  

Adjusted EBITDA

   $ 223,858      $ 226,858      $ 173,972  

Adjusted EBITDA less Patient Equipment Capex

   $ 131,223      $ 134,223      $ 80,523  

As of December 31, 2020, we expect cash and cash equivalents to be approximately $195 million and approximately $401 million of debt to be outstanding under the Term Loan A Facility after giving effect to the Incremental Term Loans. This amount is not presented net of unamortized debt issuance costs.

Estimated net income for the year ended December 31, 2020 of $42.0 million to $44.2 million is significantly greater than our net income for the nine months ended September 30, 2020 of $20.3 million



 

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primarily due to incurrence of one-time costs in the first nine months of the year for (x) an estimated probable loss recorded in relation to a series of civil investigative demands and (y) a special recognition bonus for front-line and other non-leadership employees. These costs were recorded in selling, distribution and administrative expenses in the first nine months of 2020.

EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex are non-GAAP measures and should not be considered in isolation, or as a substitute for our results as reported under GAAP. See “—Summary Historical Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Information” for discussion on how we define and calculate EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex and why we believe these measures are important.

The following table reconciles net income, the most directly comparable GAAP measure, to EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex:

 

     Year Ended December 31,  
     2020      2019  
     (Estimated)         
(in thousands)    Low      High         

Net income

   $ 41,956      $ 44,156      $ 15,622  

Interest expense, net and other

     5,810        5,810        3,666  

Income tax expense

     20,382        21,182        8,127  

Depreciation and amortization

     115,230        115,230        111,576  
  

 

 

    

 

 

    

 

 

 

EBITDA

   $ 183,378      $ 186,378      $ 138,991  

Strategic transformation initiatives:

        

Simplify(a)

     1,159        1,159        11,775  

Financial system(b)

     1,846        1,846        —    

Other initiatives(c)

     465        465        834  

Stock-based compensation and other(d)

     4,839        4,839        9,024  

Legal settlement(e)

     28,891        28,891        12,200  

Offering costs(f)

     3,280        3,280        1,148  
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 223,858      $ 226,858      $ 173,972  
  

 

 

    

 

 

    

 

 

 

Patient Equipment Capex

     (92,635 )      (92,635      (93,449
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA less Patient Equipment Capex

   $ 131,223      $ 134,223      $ 80,523  
  

 

 

    

 

 

    

 

 

 

 

(a)

Simplify represents one-time advisory fees and implementation costs associated with a key 2019 business transformation initiative focused on shifting to a patient-centric platform and optimizing end-to-end customer service.

(b)

Costs associated with the implementation of a new financial system.

(c)

Other initiatives include one-time third-party logistics advisory costs associated with a 24-month initiative launched in January 2018 designed to modify the branch network in order to reduce branch operating costs while maintaining or improving patient service levels, one-time costs associated with customer service initiatives, and one-time costs associated with implementation of an electronic sales, service and rental agreement.

(d)

Stock-based compensation has historically been granted to certain of our employees in the form of profit interest units of our parent and stock appreciation rights (“SARs”). For time-based vesting awards, we recognize a non-cash compensation expense based on the fair value of the awards determined at the date of grant over the requisite service period. In 2019, all outstanding performance Class B units were modified to



 

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  accelerate vesting resulting in $7.0 million stock compensation expense. Other compensation includes long-term incentive compensation.
(e)

Represents the increase in the settlement amount in relation to a series of civil investigative demands from the United States Attorney’s Office for the Southern District of New York offset by a one-time unrelated $3.0 million recovery in 2020. See “Business—Legal Proceedings—Civil Investigative Demand Issued by the United States Attorney’s Office for the Southern District of New York” and Note 8 in our unaudited condensed consolidated financial statements included elsewhere in this prospectus for additional information.

(f)

Offering costs represent one-time costs relating to preparation for our initial public offering and accelerated implementation of new accounting standards.

Settlement with SDNY Office

On December 18, 2020, a federal judge approved a civil and administrative settlement Apria recently entered into with the United States and state Medicaid programs, in a complaint filed by three relators under the qui tam provisions of the False Claims Act (“FCA”), 31 U.S.C. § 3729 et seq., as well as comparable state false claims laws, in connection with the rental of non-invasive ventilators (“NIVs”). Apria also entered into separate settlements to resolve the relators’ claims brought on behalf of the States of California and Illinois related to NIV covered by private insurers. The matter had been pending since 2017.

The government had alleged that Apria violated the FCA by submitting false claims seeking reimbursement for NIVs which were not being used, or not being used sufficiently, by patients, for NIVs which were being used pursuant to physician orders on a device setting which was available from other less expensive devices, and for improperly waiving co-pays to induce beneficiaries to rent NIVs. To resolve any potential liability, Apria agreed to enter a civil settlement agreement and to pay $40 million to the federal government and the states. Apria also agreed with the California Department of Insurance to pay $500,000 to resolve claims asserted by the relators under the California Insurance Frauds Prevention Act, Cal. Ins. Code § 1871 et seq. Apria separately agreed with the relators to settle all remaining claims from their complaint, including: (1) claims for retaliation in violation of federal and state laws; (2) claims for attorneys’ fees and costs available under federal and state law; and (3) claims under the Illinois Insurance Claims Fraud Prevention Act, 740 Ill. Comp. Stat. 92/1 et seq. Apria did not admit that any of its conduct was illegal or otherwise improper.

As part of the federal and state Medicaid settlement, Apria also entered into a five-year corporate integrity agreement (the “Corporate Integrity Agreement” or “CIA”) with the Office of Inspector General of the U.S. Department of Health and Human Services (“HHS OIG”). The CIA requires Apria to maintain its ongoing corporate compliance program and obligates Apria to implement or continue, as applicable, a set of defined corporate integrity activities for a period of five years from the effective date of the CIA. Among other things, the CIA requires Apria to impose certain oversight obligations on Apria’s board of directors; provide certain management certifications; continue or implement, as applicable, certain compliance training and education; and engage an Independent Review Organization to perform certain reviews. The CIA also includes certain reporting, certification, record retention, and notification requirements. In the event of a breach of the CIA, Apria could become liable for payment of certain stipulated penalties or could be excluded from participation in federal healthcare programs.

Credit Facility Amendment and Dividend

On December 11, 2020, we entered into an amendment (the “Credit Facility Amendment”) to our credit agreement to incur $260.0 million of incremental term loans (the “Incremental Term Loans”). Net proceeds from the Incremental Term Loans were used to fund a $200.3 million dividend payment to our stockholders and a $9.7 million distribution to SARs holders declared and paid in December 2020, with the remaining proceeds used to pay fees and expenses in connection with the Credit Facility Amendment and for general corporate purposes.



 

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The Offering

 

Common stock offered by the selling stockholders

7,500,000 shares.

 

Option to purchase additional shares from the selling stockholders

The selling stockholders have granted the underwriters an option for a period of 30 days to purchase up to 1,125,000 additional shares of common stock from the selling stockholders.

 

Common stock outstanding after giving effect to this offering

35,210,915 shares.

 

Use of proceeds

We will not receive any proceeds from the sale of the shares of common stock offered by the selling stockholders (including any sales pursuant to the underwriters’ option to purchase additional shares from the selling stockholders).

 

Dividend policy

We have no current plans to pay dividends on our common stock following this offering. Any decision to declare and pay dividends in the future will be made at the sole discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our board of directors may deem relevant. Because we are a holding company and have no direct operations, we will only be able to pay dividends from funds we receive from our subsidiaries. In addition, our ability to pay dividends will be limited by covenants in our existing indebtedness and may be limited by the agreements governing any indebtedness we or our subsidiaries may incur in the future. See “Dividend Policy.”

 

Risk factors

See “Risk Factors” for a discussion of risks you should carefully consider before deciding to invest in our common stock.

 

Proposed trading symbol

“APR”

In this prospectus, unless otherwise indicated, the number of shares of common stock outstanding and the other information based thereon is based on 35,210,915 shares outstanding as of the date of this prospectus, after giving effect to the pre-IPO reorganization transactions and this offering, and does not reflect:

 

   

2,594,224 shares that would be issuable upon settlement of outstanding stock appreciation rights granted pursuant to the 2015 Plan (as defined herein) (“SARs”) if such SARs were vested and exercised at the time of this offering. At the time of this offering, there will be 3,766,228 SARs outstanding under the 2015 Plan with a weighted average strike price of $6.22. See “Executive Compensation—Long-Term Equity Incentive Compensation—Stock Appreciation Rights of Apria Healthcare Group”;

 

   

Awards granted under the 2019 LTIP (as defined herein) with a maximum value of $4.4 million (or 220,000 shares, which shares will be issued pursuant to the Apria, Inc. 2021 Omnibus Incentive Plan (the “Omnibus Incentive Plan”)). See “Executive Compensation—Long-Term Cash Incentive Compensation—2019 LTIP”; and



 

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3,912,324 shares of common stock that may be granted under the Omnibus Incentive Plan. See “Executive Compensation—Equity Incentive Plans—Omnibus Incentive Plan,” including:

 

   

The award described under “Executive Compensation—Long-Term Equity Incentive Compensation—Chief Financial Officer RSU Award” with a value of $3.2 million (or 159,977 shares).



 

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Summary Historical Financial and Other Data

We derived the summary statement of income data for the years ended December 31, 2019, 2018 and 2017 and the summary balance sheet data as of December 31, 2019 and 2018 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the summary balance sheet data as of December 31, 2017 from our audited consolidated financial statements that are not included in this prospectus. The summary statement of income data for the nine months ended September 30, 2020 and 2019 and the summary balance sheet data as of September 30, 2020 were derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The unaudited condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of our management, reflect all normal recurring adjustments necessary for the fair statement of our consolidated results for these periods. The results for any interim period are not necessarily indicative of the results that may be expected for the full year. Our historical results are not necessarily indicative of the results expected for any future period.

You should read the summary historical financial data below, together with the consolidated financial statements and related notes thereto appearing elsewhere in this prospectus, as well as “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the other financial information included elsewhere in this prospectus.

On January 1, 2019, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016-02, Leases (“Topic 842”), using the modified retrospective transition method. For lessor accounting, upon adoption the provision for doubtful accounts associated with rental revenue of $34.5 million for the year ended December 31, 2019 is now charged to net rental revenue instead of general and administrative expense. For lessee accounting, upon adoption total assets and total liabilities increased $74.4 million as of January 1, 2019.



 

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The comparative information for periods prior to adoption has not been restated and continues to be reported under the accounting standards in effect for those periods.

 

    Nine Months Ended
September 30,
    Year Ended December 31,  
(in thousands, except share and per share data)   2020     2019     2019     2018     2017  

Summary Statement of Income Data:

         

Net revenues:

         

Fee-for-service arrangements(1)(2)

  $ 646,630     $ 644,624     $ 870,344     $ 898,622     $ 866,397  

Capitation

    168,298       163,086       218,531       212,261       207,413  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

    814,928       807,710       1,088,875       1,110,883       1,073,810  

Costs and expenses:

         

Cost of net revenues

         

Product and supply costs

    141,563       154,591       206,067       218,099       200,621  

Patient equipment depreciation

    75,840       72,588       97,386       108,340       101,724  

Home respiratory therapists costs

    12,848       14,844       19,560       20,371       20,802  

Other

    13,669       13,043       17,701       13,276       9,398  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of net revenues

    243,920       255,066       340,714       360,086       332,545  

Provision for doubtful accounts(1)(2)

    —       —         —       31,719       42,672  

Selling, distribution and administrative

    534,110       537,546       720,746       698,681       672,442  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    778,030       792,612       1,061,460       1,090,486       1,047,659  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    36,898       15,098       27,415       20,397       26,151  

Interest expense

    4,047       3,345       5,112       1,338       1,246  

Interest income and other

    (451     (1,552     (1,446     (897     (486
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    33,302       13,305       23,749       19,956       25,391  

Income tax expense (benefit)

    13,034       3,465       8,127       6,829       (71,560
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income(3)(4)

  $ 20,268     $ 9,840     $ 15,622     $ 13,127     $ 96,951  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per share:

         

Net income per share

  $ 20.42     $ 9.91     $ 15.74     $ 13.22     $ 97.66  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding:

         

Basic and diluted

    992,719       992,719       992,719       992,719       992,719  

Pro Forma Earnings Per Share Information(5):

         

Pro forma basic earnings per share:

  $ 0.58       $ 0.44      

Pro forma diluted earnings per share

  $ 0.54       $ 0.42      

Pro forma basic weighted average shares outstanding

    35,210,915         35,210,915      

Pro forma diluted weighted average shares outstanding

    37,525,139         37,565,139      


 

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     September 30,      December 31,  
(in thousands)    2020      2019      2018      2017  

Summary Balance Sheet Data:

           

Total assets

   $ 645,051      $ 617,153      $ 576,222      $ 643,553  

Total liabilities(3)(6)

     488,812        482,637        290,970        298,049  

Total stockholders’ equity(7)

     156,239        134,516        285,252        345,504  

 

     Nine Months Ended
September 30,
     Year Ended December 31,  
(in thousands)    2020      2019      2019      2018      2017  

Operational and Other Data:

              

EBITDA(8)

   $ 123,813      $ 98,348      $ 138,991      $ 145,386      $ 145,448  

Adjusted EBITDA(8)

     162,765        118,963        173,972        155,727        153,340  

Adjusted EBITDA less Patient Equipment Capex(8)

     99,283        45,562        80,523        45,579        3,417  

 

(1)

The decrease in net revenue from fee-for-service arrangements for the year ended December 31, 2019 was primarily driven by the impact of adopting Topic 842. Upon adoption the provision for doubtful accounts associated with rental revenue of $34.5 million for the year ended December 31, 2019 is now charged to net rental revenue instead of general and administrative expense.

(2)

On January 1, 2018, we adopted Topic 606, using the modified retrospective method. Upon adoption, patient co-pay and deductible amounts that were previously included in the provision for doubtful accounts related to implicit price concessions, which were $9.5 million for the year ended December 31, 2018, are now presented as an offsetting adjustment to the related fee-for-service sale net revenues. The comparative information for periods prior to adoption has not been restated and continues to be reported under the accounting standards in effect for those periods.

(3)

For the nine months ended September 30, 2020 and year ended December 31, 2019, net income reflects an expense of $32.5 million and $12.2 million, respectively, representing the estimated probable loss in relation to a series of civil investigative demands from the United States Attorney’s Office for the Southern District of New York. See “Business—Legal Proceedings—Civil Investigative Demand Issued by the United States Attorney’s Office for the Southern District of New York” and Note 8 in our unaudited condensed consolidated financial statements included elsewhere in this prospectus for additional information.

(4)

For the year ended December 31, 2017, net income reflects the net valuation allowance release of $105.1 million on the basis of our reassessment of the amount of deferred tax assets that are more likely than not to be realized, offset by a charge to tax expense of $24.2 million due to the re-measurement of deferred tax assets and liabilities resulting from the decrease in federal corporate tax rate as a result of the enactment of the Tax Cuts and Jobs Act in December 2017.

(5)

Unaudited basic pro forma earnings per share is computed using historical net income for the period divided by the pro forma weighted average number of common shares outstanding during the period after giving effect to the pre-IPO reorganization transactions. Pro forma diluted earnings per share is computed using the weighted average number of common shares and the effect of dilutive equity awards after giving effect to the pre-IPO reorganization transactions.

(6)

On June 21, 2019, we 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” and together with the TLA and the Credit Facility Amendment, the “Credit Facility”) of $100.0 million. Proceeds from the TLA were used to fund the dividend payment to common stockholders and SARs holders in June 2019.

(7)

In June 2019, we declared and paid a $175.0 million dividend to common stockholders and SARs holders. In June 2018, we declared $75.0 million in dividends paid to common stockholders on July 5, 2018.



 

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(8)

EBITDA is a non-GAAP measure that represents net income for the period before the impact of interest income, interest expense, income taxes, and depreciation and amortization. EBITDA is widely used by securities analysts, investors and other interested parties to evaluate the profitability of companies. EBITDA eliminates potential differences in performance caused by variations in capital structures, tax positions, the cost and age of tangible assets and the extent to which intangible assets are identifiable. Adjusted EBITDA is a non-GAAP measure that represents EBITDA before certain items that impact comparison of the performance of our businesses either period-over-period or with other businesses. We use Adjusted EBITDA as a key profitability measure to assess the performance of our businesses. We believe that Adjusted EBITDA should, therefore, be made available to securities analysts, investors and other interested parties to assist in their assessment of the performance of our businesses. Adjusted EBITDA less Patient Equipment Capex is a non-GAAP measure that represents Adjusted EBITDA less purchases of patient equipment net of dispositions (“Patient Equipment Capex”). For purposes of this metric, Patient Equipment Capex is measured as the value of the patient equipment received less the net book value of dispositions of patient equipment during the accounting period. This metric is useful in evaluating the financial performance of the Company as the business requires significant capital expenditures to maintain its patient equipment fleet due to asset replacement and contractual commitments. We believe that Adjusted EBITDA less Patient Equipment Capex should, therefore, be made available to securities analysts, investors, and other interested parties to assist in their assessment of the performance of our businesses.

Below, we have provided a reconciliation of EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex to our net income, the most directly comparable financial measure calculated and presented in accordance with GAAP. EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex should not be considered alternatives to net income or any other measure of financial performance calculated and presented in accordance with GAAP. Our EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex may not be comparable to similarly titled measures of other organizations because other organizations may not calculate EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex in the same manner as we calculate these measures.

Our uses of EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

although depreciation and amortization are noncash charges, the assets being depreciated and amortized may have to be replaced in the future, EBITDA and Adjusted EBITDA do not reflect capital expenditure requirements for such replacements or other contractual commitments;

 

   

EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex do not reflect changes in, or cash requirements for, our working capital needs;

 

   

EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex do not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness; and

 

   

other companies, including companies in our industry, may calculate EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex measures differently, which reduces their usefulness as a comparative measure.

EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex exclude items that can have a significant effect on our profit or loss and should, therefore, be used in conjunction with, not as substitutes for, profit or loss for the period. We compensate for these limitations by separately monitoring net income from continuing operations for the period.



 

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The following table reconciles net income, the most directly comparable GAAP measure, to EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex:

 

     Nine Months Ended
September 30,
    Year Ended December 31,  
(in thousands)    2020     2019     2019     2018     2017  

Net income

   $ 20,268     $ 9,840     $ 15,622     $ 13,127     $ 96,951  

Interest expense, net and other

     3,596       1,793       3,666       441       760  

Income tax expense (benefit)

     13,034       3,465       8,127       6,829       (71,560

Depreciation and amortization

     86,915       83,250       111,576       124,989       119,297  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 123,813     $ 98,348     $ 138,991     $ 145,386     $ 145,448  

Strategic transformation initiatives:

          

Branch network optimization(a)

   $  —     $ 566     $ 570     $ 1,367     $ —  

Customer service optimization(b)

     99       238       264       789       —  

E-commerce platform(c)

     —       —         —       342       432  

Simplify(d)

     1,159       10,926       11,775       —       —  

Financial systems(e)

     1,414       —         —       —       —  

eImpact(f)

     —       —         —       —       3,742  

Technology investments(g)

     —       —         —       —       1,997  

Stock-based compensation and other(h)

     1,929       8,057       9,024       1,621       1,721  

Legal expense(i)

     32,525       —         12,200       —       —  

Offering costs(j)

     1,826       828       1,148       6,222       —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 162,765     $ 118,963     $ 173,972     $ 155,727     $ 153,340  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Patient Equipment Capex

     (63,482     (73,401     (93,449     (110,148     (149,923
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA less Patient Equipment Capex

   $ 99,283     $ 45,562     $ 80,523     $ 45,579     $ 3,417  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a)

Branch network optimization represents one-time, third-party logistics advisory costs associated with a 24-month initiative launched in January 2018 designed to modify the branch network in order to reduce branch operating costs while maintaining or improving patient service levels.

  (b)

Customer service optimization primarily represents one-time costs associated with customer service initiatives, as well as evaluating a strategic partnership expansion for certain aspects of customer service.

  (c)

E-commerce platform primarily represents one-time costs associated with developing and launching our e-commerce platform.

  (d)

Simplify represents one-time advisory fees and implementation costs associated with a key 2019 business transformation initiative focused on shifting to a patient-centric platform and optimizing end-to-end customer service.

  (e)

Costs associated with the implementation of a new financial system.

  (f)

eImpact represents one-time advisory and implementation fees incurred in 2016 and 2017 as part of a 24-month cost saving initiative focused on identifying opportunities to improve branch operational and sales effectiveness, optimize training, reduce corporate overhead and eliminate unnecessary expenses.

  (g)

Technology investments represent various one-time costs associated with order-to-cash process improvements, patient monitoring, implementation of driver productivity and safety tools, and offshoring of certain revenue management capabilities.

  (h)

Stock-based compensation has historically been granted to certain of our employees in the form of profit interest units of our parent and stock appreciation rights (“SARs”). For time-based vesting awards, we recognize a non-cash compensation expense based on the fair value of the awards



 

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  determined at the date of grant over the requisite service period. In June 2019, all outstanding performance Class B units were modified to accelerate vesting resulting in $7.0 million stock compensation expense. Other compensation includes long-term incentive compensation.
  (i)

Legal expense represents an accrual of the estimated probable loss in relation to a series of civil investigative demands from the United States Attorney’s Office for the Southern District of New York. See “Business—Legal Proceedings—Civil Investigative Demand Issued by the United States Attorney’s Office for the Southern District of New York” and Note 8 in our unaudited condensed consolidated financial statements included elsewhere in this prospectus for additional information.

  (j)

Offering costs represent one-time costs relating to preparation for our initial public offering and accelerated implementation of new accounting standards.



 

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RISK FACTORS

An investment in shares of our common stock involves risks. You should carefully consider the following information about these risks, together with the other information contained in this prospectus, before investing in shares of our common stock.

Risks Related to Our Business and Operations

The recent 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.

The global spread of the novel strain of coronavirus (“COVID-19”) and the various efforts to contain it have created significant volatility, uncertainty, and economic disruption. In response to government mandates, healthcare advisories, and in order to respond to employee, customer, and supplier concerns, we have altered certain aspects of our operations, including acquisition and distribution of personal protective equipment (PPE) to our patient-facing employees, accelerated capital expenditures of certain products and relocation of significant portions of our workforce to “work-from-home” status. Our workforce has had to spend a significant amount of time working from home, which impacts their productivity. While many of our operations can be performed remotely, there is no guarantee that we have been (or will be) as effective given that our team is dispersed, many employees may have additional personal needs to attend to (such as looking after children as a result of school closures or family who become sick), and employees may become sick themselves and unable to work. While the impact of the COVID-19 pandemic did not have a material adverse impact on our consolidated operating results for the nine months ended September 30, 2020, we have experienced declines in net revenues in certain services associated with elective medical procedures and the disruption in physician practices (such as commencement of new CPAP services, ventilation therapy and negative pressure wound therapy), and such declines may continue during the duration of the COVID-19 pandemic. These declines were offset by an increase in net revenue related to increased demand for certain respiratory products (such as oxygen), increased sales in our resupply businesses and the one-time sale of certain respiratory equipment to hospitals. There is no guarantee that these offsetting increases in revenue will continue during the duration of the COVID-19 pandemic. In response, we have instituted temporary cost mitigation measures such as reduced hours and furloughs for a small subset of our impacted workforce. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Impact of COVID-19 Pandemic.” Similarly, our suppliers and vendors have had their operations altered. COVID-19 has impacted manufacturing in the regions where some of our vendors manufacture their products. While the global closures and limitations on movement related to COVID-19 pandemic are expected to be temporary, and while such closures, limitations, and related impacts have not materially disrupted our supply chain to date, such supply chain disruption remains possible and the financial impact of any such disruption cannot be estimated at this time. Should such closures and limitations on movement continue for an extended period of time, the impact on our supply chain could materially and adversely affect our business and results of operations. To the extent the resulting economic disruption is severe, we could see some of our suppliers and vendors go out of business, resulting in supply and/or service constraints as well as increased costs or delays in meeting the needs of our patients. We may also see a slowdown in cash collections if our customers are unable to pay their medical bills as a result of worsening economic conditions.

The full extent to which the COVID-19 pandemic and the various responses to it impact our business, operations and financial results will depend on numerous other evolving factors that we are not able to predict, including:

 

   

the duration and scope of the pandemic;

 

   

governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic;

 

   

the availability of, and cost to access, the capital markets;

 

   

our ability to pursue, conduct diligence regarding, finance and integrate acquisitions;

 

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our ability to comply with financial and operating covenants in our debt and operating lease agreements;

 

   

potential for intangible asset impairment charges;

 

   

the increased cost of and loss of efficiency associated with additional precautions and personal protective equipment required to engage in in-person interactions with and provide care to patients infected or potentially infected with COVID-19;

 

   

the effect on our patients and physician/facility referral sources, and the demand for and ability to pay for healthcare services;

 

   

disruptions or restrictions on our employees’ ability to travel and to work, including as a result of their health and well-being;

 

   

availability of third-party providers to whom we outsource portions of our internal business functions, including billing, collections, administrative and information systems and other services; and

 

   

increased cybersecurity risks as a result of remote working conditions.

During the COVID-19 pandemic, we may not be able to provide the same level of service and products that our patients and physicians/facility referral sources are used to, which could negatively impact their perception of our products and/or services. Furthermore, given increased government expenditures associated with its response to the COVID-19 pandemic, we could see increased government obligations which could negatively impact reimbursement rates, and accordingly, our results of operations.

We will continue to actively monitor the issues raised by the COVID-19 pandemic and may take further actions that alter our business operations, as may be required by federal, state, or local authorities, or that we determine are in the best interests of our patients, employees, customers, and stockholders. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our customers, suppliers or vendors, or on our financial results.

The potential effects of the COVID-19 pandemic could also heighten the risks disclosed in many of our risk factors described below, including as a result of, but not limited to, the factors described above. Because the COVID-19 pandemic is unprecedented and continuously evolving, the other potential impacts to our risk factors that are further described below are uncertain.

Our capitation arrangements may prove unprofitable if actual utilization rates exceed our assumptions.

From time to time, we enter into capitation arrangements with commercial Payors pursuant to which they agree to pay us a set amount (on a per member per month basis for a defined patient population) without regard to the actual services provided. Capitation revenues represented approximately 20% of our total net revenues for 2019. We negotiate the contractual rates in these arrangements with Payors based on assumptions regarding average expected utilization of services. If actual utilization rates exceed our assumptions, the profitability of such arrangements may be diminished. Moreover, we may be obligated to perform under such capitation arrangements even if the contractual reimbursement rates are insufficient to cover our costs based on actual levels of utilization.

Our Payor 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.

From time to time, our Payor contracts are amended (sometimes through unilateral action by Payors regarding payment policy), renegotiated, subjected to a bidding process with our competitors, or terminated altogether. Sometimes in the renegotiation process, certain lines of business may not be renewed or a Payor may enlarge its provider network or otherwise adversely change the way it conducts its business with us. In other cases, a Payor may reduce its provider network in exchange for lower payment rates. Our revenue from a Payor

 

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may also be adversely affected if the Payor alters its utilization management expectations and/or administrative procedures for payments and audits, changes its order of preference among the providers to which it refers business or imposes a third-party administrator, network manager or other intermediary. Any reduction in our projected revenues as a result of these or other factors could also lead to impairment of the value of our intangible assets which would result in a decrease in these assets on our balance sheet. We cannot assure you that our Payor contracts will not be terminated or altered in ways that are unfavorable to us as a result of renegotiation or such administrative changes. Terminations or alterations of contracts, particularly those that are concentrated with organizations that represent a significant portion of our business, such as Kaiser Foundation Health Plan, Inc., which represented approximately 23% of our revenues for the year ended December 31, 2019, could have a material effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity. Payors may also decide to refer business to their owned provider subsidiaries. Some Payors have developed or acquired, or may in the future develop or acquire, an ownership interest in our competitors or administrative intermediaries. These activities could materially reduce our revenue from these Payors.

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.

Our revenues are determined by a number of factors, including our mix of patients, the rates of payment among Payors and the mix of our products and services provided. A shift towards Payors with lower prices, or from higher gross margin products to lower gross margin products, would reduce our gross margins. Changes in the mix of our patients, products and services provided, payment methodologies or the Payor mix among Medicare, Medicaid and commercial Payors could have a material adverse effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity.

We depend on reimbursements by Payors, which could lead to delays and uncertainties in the reimbursement process.

We receive a substantial portion of our payments for our products and services from Payors, including Medicare and Medicaid, national and regional insurers and managed care organizations. For the year ended December 31, 2019, approximately 19% and 1% of our net revenues were reimbursed by the Medicare and state Medicaid programs, respectively.

The reimbursement process is complex and can involve lengthy delays. Payors continue their efforts to control expenditures for healthcare products and services, including proposals to revise reimbursement policies. While we generally recognize revenue on the date of delivery of equipment to the patient, or as a result of entering into a contract in the case of capitation revenue without regard to the actual services provided, there can be delays before we receive actual payment for these products and services. In addition, Payors may disallow, in whole or in part, requests for reimbursement based on determinations that certain amounts are not reimbursable under plan coverage, that products or services provided were not medically necessary, or that additional supporting documentation is necessary, for one or more reasons, such as retroactive membership status change. Recoupments and retroactive adjustments may change amounts realized from Payors. Certain Payors have filing deadlines and will not pay claims submitted after such deadlines. We are subject to audits of our reimbursement claims under Medicare, Medicaid, and other governmental programs and may be required to repay these agencies if found that we were incorrectly reimbursed. Delays and uncertainties in the reimbursement process may adversely affect our financial position or results and increase the overall costs of our collection efforts.

Risks associated with collecting reimbursement from Payors and the inability to monitor and manage accounts receivable successfully, including estimating the collectability of certain accounts receivable, could have a material adverse effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity.

 

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If we are unable to provide consistently high quality of care, our business will be adversely impacted.

Providing quality patient care is the cornerstone of our business. We believe that hospitals, physicians and other referral sources refer patients to us in large part because of our reputation for delivering quality care. Clinical quality is becoming increasingly important within our industry. Medicare imposes a financial penalty upon hospitals that have excessive rates of patient readmissions within 30 days from hospital discharge. We believe this provides a competitive advantage to home healthcare providers who can differentiate themselves based upon quality, particularly by achieving low patient acute care hospitalization readmission rates and by implementing disease management programs designed to be responsive to the needs of patients served by referring hospitals. We are focused on improving our patient outcomes. If we should fail to attain our goals regarding patient acute care hospitalization readmission rates and other quality metrics, we expect our ability to generate referrals would be adversely impacted, which could have a material adverse effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity.

Further, we may need to increase costs, including for clinical labor, to provide our services at appropriate quality levels, which could lead to lower margins.

Our failure to establish and maintain relationships with hospital and physician referral sources may cause our revenue to decline.

We do not have contracts or exclusive arrangements with most hospitals or physicians. Instead, we attempt to work closely with hospitals and physicians to accept discharges and referrals of their patients who require our services. Therefore, our success is significantly dependent on referrals from hospital and physician sources. If we are unable to successfully establish new referral sources and maintain strong relationships with our current referral sources, or if efforts to increase the skill level and effectiveness of our sales force fail, our revenues may decline. In addition, our relationships with referral sources are subject to federal and state healthcare laws such as the federal Anti-Kickback Statute (“AKS”) and the Stark Law, and compliance with these laws limits the scope of our relationships with our referral sources.

Our failure to successfully design, modify and implement technology and other process changes to maximize productivity and ensure compliance could ultimately have a significant negative impact on our results of operations and financial condition.

We have identified a number of areas throughout our operations where we have modified or intend to modify the current processes or systems in order to attain a higher level of productivity or ensure compliance. The ultimate cost savings expected from the successful design and implementation of such initiatives will be necessary to help offset the impact of Medicare and Medicaid reimbursement reductions and continued downward pressure on pricing. Additionally, Medicare and Medicaid often change their documentation requirements. CMS has taken steps to support electronic data interchange processes, as well as to implement electronic clinical templates and suggested clinical data elements for documenting face-to-face encounters, detailed written orders and written orders prior to delivery, and laboratory test results for certain DMEPOS items. The standards and rules for healthcare transactions, code sets and unique identifiers also continue to evolve, such as ICD-10 and HIPAA 5010 and other data security requirements. Moreover, government programs and/or commercial Payors may have difficulty administering new standards and rules for healthcare transactions and this may adversely affect timelines of payment or payment error rates. Our failure to successfully design and implement system or process modifications could have a significant impact on our business, results of operations and financial condition. The implementation of new standards and rules may require us to make substantial investments. Further, the implementation of these system or process changes could have a disruptive effect on related transaction processing and operations. If our implementation efforts related to systems development are unsuccessful, we may need to write off amounts that we have capitalized related to systems development projects. Additionally, if systems development implementations do not occur, we may need to incur additional costs to support our existing systems.

 

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Our failure to maintain controls and processes over billing and collections, including impacts from the outsourcing or offshoring of parts of our billing and collections activities, estimating the collectability of our accounts receivable or the deterioration of the financial condition of our Payors, could have a significant negative impact on our results of operations and financial condition.

The collection of accounts receivable is one of our most significant challenges and requires constant focus and involvement by management and ongoing enhancements to information systems and billing center operating procedures. Further, some of our patients and Payors may experience financial difficulties, or may otherwise not pay accounts receivable when due, resulting in increased write-offs. The COVID-19 pandemic may exacerbate many of these conditions. See “—The recent 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.” There can be no assurance that we will be able to maintain our current levels of collectability in future periods or accurately estimate the collectability of accounts receivable. If we are unable to properly bill and collect our accounts receivable, our results will be adversely affected. From time to time, we are involved in disputes with various parties, including Payors and their intermediaries regarding their performance of various contractual or regulatory obligations. These disputes may lead to legal and other proceedings and may cause us to incur costs or experience delays in collections, increases in accounts receivable or loss of revenue. In addition, in the event such disputes are not resolved in our favor and/or result in the termination of our relationships with such parties, there may be an adverse impact on our financial condition and results of operations.

In addition, we have an outsourcing strategy in place with respect to certain billing, collection, administrative and information systems and other services. When permitted, we currently have several offshore and domestic business process outsourcing and services firms to assist with implementing this strategy. There is intense competition around the world for skilled technical professionals and we expect that competition to increase, which could result in our outsourcing strategy not achieving its intended benefits. Operations in other parts of the world involve certain regional geopolitical risks that are different as compared to operating in the United States, including the possibility of civil unrest, terrorism, and substantial regulation by the individual governments. These factors may cause disruptions in our business processes, which could have a material adverse effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity. We also may experience negative reactions from some patients, providers and Payors, as a result of the actual or perceived disruption caused by the outsourcing of portions of our business operations.

Our reliance on relatively few vendors for the majority of our patient equipment and supplies and which are to be imposed on certain manufacturers of such items could adversely affect our ability to operate.

We currently rely on a relatively small number of vendors to provide us with the majority of our patient equipment and supplies, with five of our vendors providing approximately 81% of our total service equipment and supply purchases in the year ended December 31, 2019. From time to time, we also enter into certain exclusive arrangements with a given vendor for the provision of patient equipment and supplies. Further, some of our supply agreements contain pricing scales that depend on meeting certain order volumes. Our inability to procure certain equipment and supplies, including as a result of failure to maintain and renew certain agreements and access arrangements, could have a materially adverse effect on our results of operations. We often use vendors selectively for quality and cost reasons. Significant price increases, or disruptions in the ability to obtain such equipment and supplies from existing vendors, may force us to increase our prices (which we may be unable to do) or reduce our margins and could force us to use alternative vendors. In response to the declaration of a public health emergency due to the COVID-19 pandemic, CMS temporarily suspended all accreditation and reaccreditation activities for DMEPOS suppliers. However, as of July 6, 2020, CMS resumed all accreditation and reaccreditation activities, including surveys, which may be conducted on-site, virtually or a combination of both depending on each state’s reopening plan. Similarly, CMS-approved accreditation organizations, such as The Joint Commission, temporarily suspended survey and review activities, but resumed such activities in June 2020.

 

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Any change in the existing vendors we use could cause delays in the delivery of products and possible losses in revenue, which could adversely affect our results of operations. In addition, alternative vendors may not be available, or may not provide their products and services at similar or favorable prices. If we cannot obtain the patient equipment and supplies we currently use, or alternatives at similar or favorable prices, our ability to provide such products may be severely impacted, which could have an adverse effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity.

We rely on third parties for certain technology, software, information systems and products.

For certain of our technology, software, information systems and product needs, we rely upon third-party contractors to assist us. If we are unable to utilize such technology, software, information systems or products, we could incur unanticipated expenses, suffer disruptions in service, experience regulatory issues and lose revenue from the operation of such business. Further, some of our technology, software, information systems and products contain components that are developed by third parties. We may not be able to replace the functions provided by these third-party components or products if they become obsolete, defective or incompatible with future versions of our products or with our services and solutions, or if they are not adequately maintained or updated.

We believe we have all the necessary licenses from third parties to use technology, software and intellectual property assets that we do not own. A third party could, however, allege that we are infringing its rights, which may deter our ability to obtain licenses on commercially reasonable terms from the third party, if at all, or cause the third party to commence litigation against us. In addition, we may find it necessary to initiate litigation against a third party to protect our trade secrets, to enforce our intellectual property rights and to determine the scope and validity of any proprietary rights of others. Any such litigation, or the failure to obtain any necessary licenses or other rights, could materially and adversely affect our business. Alternate sources for the technology, software, information systems and products currently provided by third parties to us may not be available to us in a timely manner, and may not provide us with the same functions as currently provided to us or may be more expensive than products we currently use or sell.

Further, the risk of intellectual property infringement claims against us may increase as we expand our business to include more third-party systems and products and continue to incorporate third-party components, software and/or other intellectual property into the products we sell. Also, individuals and firms have purchased intellectual property assets in order to assert claims of infringement against technology providers and customers that use such technology. Any infringement action brought against us or our providers could be costly to defend or lead to an expensive settlement or judgment against us.

Changes or disruption in supplies provided by third parties could adversely affect our business.

As a medical device distributor, we rely on device manufacturers and suppliers to maintain compliance with all applicable regulatory requirements and to deliver products on schedule or in accordance with our expectations. There is a risk that a supplier or manufacturer fails to comply with applicable regulations, including the FDA pre- or post-approval inspections and current Good Manufacturing Practice (“cGMP”) requirements (e.g., violations that could render a product adulterated or misbranded), which could result in the FDA taking administrative or other legal action, as described above. An unfavorable resolution or outcome of any administrative or legal action against a manufacturer or supplier or any other matter that may arise out of any FDA inspection of their facilities could significantly and adversely affect our business. In March 2020, the FDA temporarily paused on-site routine surveillance inspections due to the COVID-19 pandemic. In a guidance issued in August 2020, the FDA explained that it resumed prioritized domestic inspections, such as pre-approval and surveillance inspections and that, for the foreseeable future, such prioritized domestic inspections would be pre-announced. The FDA has continued, on a case-by case basis, to conduct “mission-critical” inspections based on its evaluation of a number of factors related to the public health benefit of U.S. patients having access to the product subject to inspection (e.g., whether the product may have received breakthrough therapy designation or is

 

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used to diagnose, treat, or prevent a serious disease or medical condition for which there is no other appropriate substitute). Failure by any such supplier to meet its contractual obligations or to comply with applicable laws or regulations could delay or prevent the manufacture, commercialization, or distribution of our products, and could also result in non-compliance or reputational harm.

Our reliance on outside manufacturers and suppliers also subjects us to risks that could harm our business, including: a risk that we may not be able to obtain adequate supply in a timely manner or on commercially reasonable terms; a risk that we may have difficulty timely locating and qualifying alternative suppliers or manufacturers; a risk that there may be fluctuations in demand for products that affect our manufacturers’ or suppliers’ ability to deliver products in a timely manner; a risk that the manufacturers or suppliers with which we contract may fail to comply with regulatory requirements, be subject to lengthy compliance, validation or qualification periods, or make errors in manufacturing products or components that could negatively impact our product; and a risk that the manufacturers or suppliers with which we contract may encounter financial hardships unrelated to our demand for products or components, which could inhibit their ability to fulfill our orders and meet our requirements. In addition, given the rapid and evolving nature of the pandemic, COVID-19 could negatively affect our suppliers or manufacturers by interrupting, slowing, or rendering our supply chains inoperable. The COVID-19 pandemic also could result in a requirement to utilize alternative, and potentially more expensive, sources of materials or products, or an inability to find such alternative sources of materials or products. It is uncertain how the COVID-19 pandemic will affect our operations generally if these impacts persist or exacerbate over an extended period of time. These impacts could have a material adverse effect on our business and operations.

Identifying and qualifying additional or replacement suppliers, if required, may not be accomplished quickly and could involve significant additional costs. Any interruption or delay in the supply of products, or our inability to obtain products from alternate sources at acceptable prices in a timely manner, could impair our ability to meet the demands of our customers and cause providers to refer patients to our competitors and could therefore have a material adverse effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity.

Our operations involve the storage, transportation and provision of compressed and liquid oxygen, which carries an inherent risk of rupture or other accidents with the potential to cause substantial loss.

Our operations are subject to the many hazards inherent in the storage, transportation and provision of medical gas products and compressed and liquid oxygen, including ruptures, leaks and fires. These risks could result in substantial losses due to personal injury or loss of life, severe damage to and destruction of property and equipment and pollution or other environmental damage and may result in curtailment or suspension of our related operations. If a significant accident or event occurs, it could adversely affect our business, financial position and results of operations. Additionally, corrective action plans, fines or other sanctions may be levied by government regulators who oversee the storage, transportation and provision of hazardous materials such as compressed or liquid oxygen.

Our business operations are labor intensive. Difficulty in hiring enough additional management and other employees, increasing costs of compensation or employee benefits, and the potential impact of unionization and organizing activities could have an adverse effect on our costs and results of operations.

The success of our business depends upon our ability to attract and retain highly motivated, well-qualified management and other employees. The payment of salaries and benefits to our approximately 6,500 employees is one of our most significant expenses. In addition, we face significant competition in the recruitment of qualified employees, which has in the past resulted in salary and wage increases for certain employee groups. If we are unable to recruit or retain a sufficient number of qualified employees, or if the costs of compensation or employee benefits increase substantially, our ability to deliver services effectively could suffer and our profitability would likely be adversely affected. In addition, union organizing activities have occurred in the past

 

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and may occur in the future, and the adverse impact of unionization and organizing activities on our costs and operating results could be substantial.

We are highly dependent upon senior management; our failure to attract and retain key members of senior management could have a material adverse effect on us.

We are highly dependent on the performance and continued efforts of our senior management team. Our future success is dependent on our ability to continue to attract and retain qualified executive officers and senior management. Any inability to manage our operations effectively could have a material adverse effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity.

We may be required to take significant write downs in connection with impairment of our intangible or other long-lived assets.

Intangible and other long-lived assets comprise a significant portion of our total assets. Intangible assets include trade names, capitated relationships, Payor relationships and accreditations with commissions. An impairment review of indefinite-lived intangible assets is conducted at least once a year in connection with the annual audit and if events or changes in circumstances indicate that their carrying value may not be recoverable. Intangible assets with a finite life and other long-lived assets are tested for recoverability whenever changes in circumstances indicate that their carrying value may not be fully recoverable.

Depending on the future business performance of our reporting unit and other events, we may be required to recognize increased levels of future intangible amortization, or incur further charges to recognize the impairment of our assets. Such charges may be significant and may be further adversely impacted by the COVID-19 pandemic. See “—The recent 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.”

Limitations on the availability of capital or other financing sources on reasonable terms, as well as losses due to existing bad or uncollectible debts, could have an adverse impact on our operations, financial condition, or prospects.

Our business requires significant liquidity to fund labor costs, including salaries, bonuses, benefits and travel-related expenses, product and supply costs, third-party customer service, billing and collections and logistics costs and patient equipment capital expenditures. Limitations on the availability of capital or other financing sources, including deferred payment arrangements with key suppliers, could have an adverse impact on our business. In addition, we may be required to seek new or additional equity or debt financing sources. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. Furthermore, as we shift our Payor mix toward commercial Payor plans that tend to have higher deductibles, there is a subsequent increase in patient co-pay responsibility and deductible volume which may cause us to be unable to collect on certain debts that individual patients incur. If we are unable to collect on these debts, raise additional capital or access other financing sources on reasonable terms, our operations, financial condition or prospects may be materially and adversely affected.

We are subject to risks associated with our incurrence of debt.

On June 21, 2019, we entered into the Credit Facility, including the TLA of $150.0 million and Revolver of $100.0 million. Net proceeds from the TLA, together with cash on hand, were used to fund the $175.0 million dividend payment to our stockholders and SARs holders declared and paid in June 2019. Accordingly, we did not retain any of the proceeds from the TLA. The TLA matures on June 21, 2024 and we were required to make quarterly principal payments on the TLA beginning June 30, 2020. On December 11, 2020, we entered into the Credit Facility Amendment to incur $260.0 million of Incremental Term Loans. Net proceeds from the Incremental Term Loans were used to fund the $200.3 million dividend payment to our stockholders and

 

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$9.7 million distribution to SARs holders declared and paid in December 2020, with the remaining proceeds used to pay fees and expenses in connection with the Credit Facility Amendment and for general corporate purposes. We expect to refinance, renew or replace the Credit Facility prior to its maturity in June 2024 or to repay it with cash from operations. An inability to refinance our Credit Facility prior to its maturity could have a material adverse effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Liquidity and Capital Resources—Long-Term Debt” for more information on our Credit Facility.

Although we currently believe that we will be able to obtain any necessary amendment or refinancing of our Credit Facility at a reasonable cost, there can be no assurance that we will succeed in obtaining such amendment or refinancing on favorable terms, if at all, which could significantly increase our future interest expense and adversely impact our liquidity and results of operations.

Further, an increase to our level of indebtedness could:

 

   

require us to dedicate a portion of our cash flow from operations to payments on our indebtedness, which could reduce the availability of cash flow to fund acquisitions, start-ups, working capital, capital expenditures and other general corporate purposes;

 

   

limit our ability to borrow money or sell stock for working capital, capital expenditures, debt service requirements and other purposes;

 

   

limit our flexibility in planning for, and reacting to, changes in our industry or business;

 

   

make us more vulnerable to unfavorable economic or business conditions; and

 

   

limit our ability to make acquisitions or take advantage of other business opportunities.

In the event we incur additional indebtedness, the risks described above could increase.

Risks Related to Our Industry and Competition

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.

The home healthcare industry is intensely competitive and highly fragmented, as are each of the service line markets in which we compete. There are a large number of providers, some of which are national providers, but most of which are either regional or local providers, including hospital systems, physician specialists and sleep labs. Furthermore, other types of healthcare providers, including industrial gas manufacturers, home healthcare agencies and health maintenance organizations, have entered and may continue to enter the market to compete with our various service lines. Some of our competitors may now or in the future have greater financial or marketing resources than we do, which may increase pricing pressure and limit our ability to maintain or increase our market share. In addition, in certain markets, competitors may have more effective sales and marketing activities or other products and services that are or perceived to be superior to our own. For example, in the NPWT market, the leading provider who directly competes with our services, we believe, maintains the majority of the market share in the United States. There are relatively few barriers to entry in local home healthcare markets. Hospitals and health systems are routinely looking to provide coverage and better control of post-acute healthcare services, including home healthcare services of the types we provide. Hospitals and/or physician groups who accept capitation amounts that include payment for our services could seek reduced payment arrangements as compared to Payors.

These trends may continue as new payment models evolve, including bundled payment models, shared savings programs, value-based reimbursement and other payment systems.

 

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Further, certain manufacturers or Payors may choose to compete with us in the future, including by integrating vertically with companies in our industry, which could generate new synergies and put us at a competitive disadvantage. A number of manufacturers of home respiratory equipment currently provide equipment directly to patients on a limited basis. Such manufacturers have the ability to provide their equipment at prices below those charged by us, and there can be no assurance that such direct-to-patient sales efforts will not increase in the future or that such manufacturers will not seek reimbursement contracts directly with our commercial Payors, who could seek to provide equipment directly to patients from the manufacturer. In addition, pharmacy benefit managers, including CVS Health Corporation and the OptumRx business of UnitedHealth Group Incorporated, could enter the home healthcare market and compete with us. Large technology companies, such as Amazon.com, Inc. and Alphabet Inc., have disrupted other supply businesses and entered the healthcare market, in the case of Amazon.com, Inc. and their new pharmacy offerings, or publicly stated their interest in doing so. In the event such companies enter the home healthcare market, we may experience a loss of referrals or revenue. Similarly, disruptive entrants may adopt a more efficient business model and cause further price reduction, or significant e-commerce competitors could limit our ability to expand our e-commerce business.

We cannot assure you that these and other industry changes and the competitive nature of the home healthcare environment will not adversely affect our business, financial condition, results of operations, cash flow, capital resources, liquidity, or prospects.

We may be adversely affected by consolidation among health insurers and other industry participants.

In recent years, a number of health insurers have merged or increased efforts to consolidate with other non-governmental Payors. Insurers are also increasingly pursuing alignment initiatives with healthcare providers. Consolidation within the health insurance industry may result in insurers having increased negotiating leverage and competitive advantages, such as greater access to performance and pricing data. Our ability to negotiate prices and favorable terms with health insurers in certain markets could be affected negatively as a result of this consolidation. In addition, the shift toward value-based payment models could be accelerated if larger insurers, including those engaging in consolidation activities, find these models to be financially beneficial. There can be no assurance that we will be able to negotiate favorable terms with Payors and otherwise respond effectively to the impact of increased consolidation in the Payor industry or vertical integration efforts.

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.

There is an inherent risk of liability in the provision of healthcare services. As participants in the healthcare industry, we are and expect to be periodically subject to lawsuits, some of which may involve large claims and significant costs to defend, such as mass tort or other class actions. In that case, the coverage under our insurance programs may not be adequate to protect us. Our insurance policies are subject to annual renewal and our insurance premiums could be subject to material increases in the future. We cannot be assured that we will be able to maintain this insurance on acceptable terms in the future, or at all. A successful claim in excess of, or not covered by, our insurance policies could have a material adverse effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity. Even where our insurance is adequate to cover claims against us, damage to our reputation in the event of a judgment against us, or continued increases in our insurance costs, could have an adverse effect on our business, financial condition, results of operations, cash flow, capital resources, liquidity, or prospects.

Any economic downturn, deepening of an economic downturn, continued deficit spending by the federal government or state budget pressures may result in a reduction in payments and covered services.

Adverse economic or political developments in the United States, including a slowdown of economic growth, disruptions in financial markets, economic downturns, inflation, elevated unemployment levels, sluggish

 

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or uneven economic recovery, government deficit reduction, natural and other disasters and public health crises, could lead to a reduction in federal government expenditures, including governmentally funded programs in which we participate, such as Medicare and Medicaid. In addition, if at any time the federal government is not able to meet its debt payments unless the federal debt ceiling is raised, and legislation increasing the debt ceiling is not enacted, the federal government may stop or delay making payments on its obligations, including funding for government programs in which we participate, such as Medicare and Medicaid. Failure of the government to make payments under these programs could have a material adverse effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity. The COVID-19 pandemic may exacerbate many of these conditions. See “—The recent 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.” Further, any failure by Congress to complete the federal budget process and fund government operations may result in a federal government shutdown, potentially causing us to incur substantial costs without reimbursement under the Medicare program, which could have a material adverse effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity. For example, the failure of the 2011 Joint Select Committee to meet its deficit reduction goal resulted in an automatic across-the-board reduction in Medicare payments of 2% beginning April 1, 2013. The 2% reduction in Medicare payments has been extended several times by Congress, although in response to COVID-19 the reduction was suspended through December 31, 2020. As part of the recent COVID-19 relief package, Congress extended the payment reduction suspension through March 31, 2021.

In addition, sustained unfavorable economic conditions may affect the number of patients enrolled in managed care programs and the profitability of managed care companies, which could result in reduced payment rates and could have a material adverse effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity.

Turmoil in the financial markets, including in the capital and credit markets, and any uncertainty over its breadth, depth and duration may put pressure on the global economy and could have a negative effect on our business. Further, historical worldwide financial and credit turmoil could reduce the availability of liquidity and credit to fund the continuation and expansion of business operations worldwide. The shortage of liquidity and credit combined with substantial losses in worldwide equity markets could cause an economic recession in the United States or worldwide. If financial markets in the United States, Europe and Asia experience extreme disruption, including, among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others, governments may take unprecedented actions intended to address extreme market conditions that may include severely restricted credit and declines in real estate values.

Changes in home healthcare technology and/or product and therapy innovations may make the equipment and services we currently provide obsolete or less competitive.

We evaluate changes in home healthcare technology and product innovation on an ongoing basis, for purposes of determining the feasibility of replacing or supplementing items currently included in the equipment and services that we offer to our patients. We consider a variety of factors, including overall quality, functional reliability, availability of supply, Payor reimbursement policies, product features, labor costs associated with the technology, acquisition, repair and ownership costs and overall patient and referral source demand, as well as patient therapeutic and lifestyle benefits. Manufacturers continue to invest in research and development to introduce new products to the marketplace. It is possible that major changes in available technology, Payor benefit or coverage policies related to those changes, or the preferences of patients and referral sources, may cause our current product offerings to become less competitive or obsolete, and it will be necessary for us to adapt to those changes. It is also possible that product innovation may reduce clinical support requirements, thereby reducing our clinical value for some portion of the patient population. Furthermore, if the reimbursement model for certain of our therapies should change, certain products may be offered in alternative channels such as pharmacy, retail, or e-commerce, increasing competitive pressures. Such unanticipated changes could cause us to

 

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incur increased capital expenditures and accelerated write-offs, and could force us to alter our sales, operations, and marketing strategies.

Expansion of group purchasing organizations (“GPO”) or provider networks and the multi-tiered costing structure may place us at a competitive disadvantage.

The medical products industry is subject to a multi-tiered costing structure, which can vary by manufacturer and/or product. Under this structure, certain institutions can obtain more favorable prices for medical products than we are able to obtain. The multi-tiered costing structure continues to expand as many large integrated healthcare providers and others with significant purchasing power, such as GPOs, demand more favorable pricing terms. Additionally, the formation of provider networks and GPOs may shift purchasing decisions to entities or persons with whom we do not have a historical relationship. This may threaten our ability to compete effectively, which could in turn negatively impact our financial results. Although we are seeking to obtain similar terms from manufacturers to obtain access to lower prices demanded by GPO contracts or other contracts, and to develop relationships with provider networks and new GPOs, we cannot assure you that such terms will be obtained or contracts will be executed.

Risks Related to Regulation and Litigation

Our failure to comply with regulatory requirements or receive regulatory clearances or approvals for the Company’s products or operations in the United States could adversely affect our business.

The medical gas products we manufacture and distribute and certain other products we distribute are subject to extensive regulation by the Food and Drug Administration (“FDA”) and other federal and state governing authorities. Compliance with FDA, state, and other requirements regarding production, safety, quality, and good manufacturing regulations is costly and time-consuming, and while we seek to be in full compliance, instances of non-compliance could arise from time to time. We cannot be assured that any of our medical gases will be certified by the FDA. We have applied for, and received, designated gas certifications for our medical gas products. We may not be successful in receiving certification in the future. Other potential product manufacturing-related risks include difficulties or delays in product manufacturing, sales, or marketing, which could affect future results through regulatory actions, shutdowns, approval delays, withdrawals, recalls, penalties, supply disruptions or shortages, reputational harm, product liability, and/or unanticipated costs.

Failure to comply with applicable regulatory requirements could result in administrative enforcement action by the FDA or state agencies, which may include any of the following: adverse publicity; warning or untitled letters; fines; injunctions; consent decrees; civil money penalties; recalls; termination of distribution or seizure of our products; operating restrictions or partial suspension or total shutdown of production; delays in the introduction of products into the market; withdrawals or suspensions of current medical gas certifications or drug approvals, resulting in prohibitions on sales of our products; and criminal prosecution. There is also a risk that we may not adequately implement sustainable processes and procedures to maintain regulatory compliance and to address future regulatory agency findings, should they occur. The FDA may change its policies, adopt additional regulations or revise existing regulations, each of which could prevent or delay certification of our medical gases, or could impact our ability to market a device that was previously certified or cleared by the FDA. Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and have a material adverse effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity.

Reductions in Medicare, Medicaid and commercial Payor reimbursement rates and/or exclusion from markets or product lines, including due to the DMEPOS CBP, could have a material adverse effect on our results of operations and financial condition.

We have faced, and expect to continue to face, pricing pressures due to reductions in provider reimbursement for our products and services. For the year ended December 31, 2019, we derived approximately

 

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20% of our net revenues from Medicare and Medicaid reimbursements. There are increasing pressures on Medicare, and state Medicaid programs, to control healthcare costs and to reduce or limit reimbursement rates for home medical equipment and other products. Consistently, legislation enacted by Congress has included provisions that directly impact reimbursement for the products and services we provide, as well as the cost of providing those services, including legislation that requires the DMEPOS CBP to award contracts based on price and capacity to fulfill service requirements. These legislative provisions have had and may continue to have a material adverse effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity. See “Business—Government Regulation.”

The competitive bidding process has historically put downward pressure on the amounts we are reimbursed in the markets in which we operate, as well as in areas that are not subject to the DMEPOS CBP. We continue to monitor developments regarding the DMEPOS CBP. In March 2019, CMS announced plans to consolidate the competitive bidding areas (“CBAs”) included in the Round 1 2017 and Round 2 Recompete DMEPOS CBPs into a single round of competition, referred to by CMS as “Round 2021.” Round 2021 contracts are scheduled to become effective on January 1, 2021, and to extend through December 31, 2023. The bid window for Round 2021 closed on September 18, 2019.

On April 9, 2020, CMS announced that, due to the COVID-19 pandemic, CMS removed the NIV product category from Round 2021 of the DMEPOS CBP. CMS noted that the reasons for this change included not only the agency’s ongoing concerns regarding the COVID-19 pandemic, but also the President’s exercise of the Defense Production Act for the production of ventilators, public concern regarding access to ventilators, and the fact that the NIV product category would be new to the DMEPOS CBP. A NIV is a ventilator used with a non-invasive interface (e.g., mask) in contrast to an invasive interface (e.g., tracheostomy tube). Because NIVs have been removed from Round 2021 of the DMEPOS CBP, any Medicare-enrolled DMEPOS supplier can furnish NIV under the Medicare program.

On October 27, 2020, CMS announced further revisions to Round 2021 of the DMEPOS CBP. Namely, only two out of the original 16 product categories, off-the-shelf (“OTS”) back braces and OTS knee braces, will be included in Round 2021 of the DMEPOS CBP. All other product categories were removed from Round 2021, at least in part because “the payment amounts did not achieve expected savings.” Accordingly, there are no longer any products in our product lines included on the list of products subject to Round 2021 of the DMEPOS CBP.

Following the expiration of all previous DMEPOS CBP contracts on December 31, 2018, CMS implemented new DMEPOS payment policies during the temporary gap in the DMEPOS CBP for DMEPOS items that are paid based on information from the DMEPOS CBP. From January 1, 2019 through December 31, 2020, CMS established separate fee schedule adjustment methodologies for such DMEPOS items for three geographic areas: (1) other non-CBAs (those that are not defined as rural or non-contiguous), (2) rural/non-contiguous areas, and (3) former CBAs. For other non-CBAs, the payment amounts for such DMEPOS items have been adjusted based on regional averages of the single payment amounts (“SPAs”) that apply to the DMEPOS CBP (referred to as the “Adjusted Fee Schedule”). Because the SPAs generated from the DMEPOS CBP competitions expired on January 1, 2019, the Adjusted Fee Schedule amount was increased by 1.6% on January 1, 2020, which is the percentage change in the Consumer Price Index for all Urban Consumers (“CPI-U”) for the 12-month period ending June 30, 2020 and will be increased again by 0.6% on January 1, 2021. For rural/non-contiguous areas, the payment amounts for such DMEPOS items were based on a blended rate of 50% of the non-Adjusted Fee Schedule amount and 50% of the Adjusted Fee Schedule amount. The Adjusted Fee Schedule amount of the blended rate was increased by the percentage change in the CPI-U (1.6%) on January 1, 2020, and will be increased again by 0.6% on January 1, 2021. For former CBAs, the payment amounts for such DMEPOS items are based on the lower of the supplier’s charge for the item or fee schedule amounts that are based on the SPAs that were in effect in the CBA before the CBP contract ended, increased by the projected percentage change in the CPI-U. Accordingly, for 2019, the fee schedule amounts were based on the SPAs in effect on December 31, 2018 for each specific CBA, increased by 2.5% (the projected percentage change in the

 

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CPI-U for the 12-month period ending January 1, 2019), and for 2020, the fee schedule amounts increased by 2.4% (the projected percentage change in the CPI-U for the 12-month period ending January 1, 2020). For 2021, the fee schedule amounts will be increased by 0.6% (the projected percentage change in the CPI-U for the 12-month period ending January 1, 2021).

The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act introduced a new blended rate for such DMEPOS items furnished in other non-CBAs (those that are not defined as rural or non-contiguous) that is based on 25% of the non-Adjusted Fee Schedule amount and 75% of the Adjusted Fee Schedule amount, effective March 6, 2020 through the end of the COVID-19 pandemic. For rural and non-contiguous areas, the payment amount for such DMEPOS items will continue to be based on a blended rate of 50% of the non-Adjusted Fee Schedule amount and 50% of the Adjusted Fee Schedule amount until December 31, 2020 or the end of the COVID-19 pandemic, whichever is later.

On November 4, 2020, CMS issued a proposed rule establishing the methodologies for adjusting the fee schedule payment amounts for such DMEPOS items furnished in non-CBAs on or after April 1, 2021 or the date immediately following the duration of the public health emergency period (which has recently been extended through April 20, 2021), whichever is later. CMS proposes to pay 100% of the Adjusted Fee Schedule amount in other non-CBAs. Under the proposal, CMS would continue paying suppliers higher rates (e.g., at the 50/50 blended rate) for furnishing such DMEPOS items in rural and non-contiguous areas as compared to in other non-CBAs, informed by stakeholder input indicating higher costs in these areas, greater travel distances and costs in certain non-CBAs compared to CBAs, the unique logistical challenges and costs of furnishing items to beneficiaries in the non-contiguous areas, significantly lower volume of items furnished in these areas versus CBAs, and concerns about financial incentives for suppliers in surrounding urban areas to continue including outlying rural areas in their service areas. For such DMEPOS items that originally were included in Round 2021 but for which contracts were not awarded, CMS is considering whether to simply extend application of the current fee schedule adjustment rules for non-CBAs, CBAs, and former CBAs until new SPAs are calculated for the items in a future round of the DMEPOS CBP. We believe that this proposal does not include NIVs, since they were not included in previous rounds of the DMEPOS CBP and therefore would continue to be paid based on the Medicare DMEPOS fee schedule.

National and regional insurers and managed care organizations also regularly attempt to seek reductions in the prices at which we provide products and services to them and their members, including through direct contracts with healthcare providers, increased oversight and greater enrollment of patients in managed care programs and preferred provider organizations. These commercial Payors are increasingly demanding discounted fee structures, including setting reimbursement rates based on Medicare fee schedules or requiring healthcare providers or suppliers to assume a greater degree of financial risk related to patient care. We have a large number of contractual arrangements with commercial Payors (which includes all Payors other than government Payors) through various national and regional insurers and managed care organizations, which represented approximately 80% of our net revenue in 2019. Most of our commercial Payor contracts have two to five-year terms with an automatic extension unless it otherwise terminates. Most of our contracts are based on price–we generally do not have contracted volume guarantees. We expect that we will continue to maintain our contracts with commercial Payors and enter into more of these contractual arrangements as market conditions evolve. However, there can be no assurance that we will retain or obtain these contracts, or that such plans will not attempt to further reduce the rates they pay to providers. Reimbursement rates under such contracts may not remain at current levels and may not be sufficient to cover the costs of caring for patients enrolled in such programs, which would have a negative impact on our pricing flexibility, changes in Payor mix and growth in operating expenses. Contracts with commercial Payors that generated approximately 42% of our net revenue in 2019 are scheduled to expire in 2021. Increased pricing pressure from commercial Payors could result in us lowering our prices, which could adversely impact our financial condition and results of operations.

We cannot predict the full extent to which reimbursement for our products and cost of operations may be affected by federal and/or state legislative efforts or by initiatives, including future rounds of the CBP, to reduce

 

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costs for national and regional insurers and managed care organizations. If we are unable to successfully reduce our costs or increase our volumes, our results would be adversely affected. For example, we may be unable to continue to provide services directly to patients of certain Payors or through contractual arrangements with Payors. This would have a material adverse effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity.

For further information, see “Business—Government Regulation—Medicare and Medicaid Revenues” and “Business—Government Regulation—Medicare Reimbursement.”

If we fail to comply with applicable laws and regulations, we could suffer penalties or be required to make significant changes to our operations.

The healthcare sector is heavily regulated, and we are required to comply with extensive and complex laws and regulations at the federal, state and local government levels relating to, among other things:

 

   

billing and coding for services, including documentation of care, appropriate treatment of overpayments and credit balances, and the submission of false statements or claims;

 

   

relationships and arrangements with physicians, hospitals, vendors, and other referral sources and referral recipients, including self-referral restrictions, prohibitions on kickbacks and other non-permitted forms of remuneration, and prohibitions on the payment of inducements to Medicare and Medicaid beneficiaries in order to influence their selection of a provider;

 

   

the necessity, appropriateness, and adequacy of medical care, equipment, and personnel and conditions of coverage and payment for products and services;

 

   

licensure, certification, and enrollment in government programs, including requirements affecting the operation, establishment, and addition of products and services;

 

   

anti-competitive conduct; and

 

   

confidentiality, privacy, data breaches, identity theft, and security issues associated with the maintenance of health-related and other personal information and medical records.

These federal, state and local laws and regulations are stringent and frequently changing, requiring compliance with burdensome and complex billing and payment, substantiation, and record-keeping requirements. For example, the Durable Medical Equipment Medicare Administrative Contractor (“DME MAC”) Supplier Manuals provide that clinical information from the “patient’s medical record” is required to justify the medical necessity for the provision of Medicare DMEPOS items. Although we have implemented policies and procedures that are designed to meet Medicare’s documentation requirements, an auditor for at least one of the DME MACs has taken the position that, among other things, the “patient’s medical record” refers not to documentation maintained by the DMEPOS supplier but instead to documentation maintained by the patient’s physician, healthcare facility or other clinician, and that clinical information created by the DMEPOS supplier’s personnel and confirmed by the patient’s physician is not sufficient to establish medical necessity. It may be difficult, and sometimes impossible, for us to obtain documentation from other healthcare providers. While we have taken this position into account in refining our policies and procedures, if these or related positions adopted by auditors or regulatory authorities are broadly adopted in administering the Medicare program, it could result in our making refunds and other payments to Medicare and our future revenues from Medicare may be reduced.

In addition, if we fail to comply with applicable laws and regulations, we could suffer civil or criminal penalties, including fines, damages, recoupment of overpayments, loss of licenses needed to operate, loss of enrollment and approvals necessary to participate in Medicare, Medicaid and other government and third-party healthcare programs, and exclusion from participation in Medicare, Medicaid and other government healthcare programs. Investors, officers, and managing employees associated with entities found to have committed healthcare fraud also may be excluded from participation in government healthcare programs. Enforcement

 

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officials have numerous mechanisms to combat fraud and abuse. Many of these laws and regulations are complex, broad in scope, and have few or narrowly structured exceptions and safe harbors. Further, these laws and regulations are subject to continuing and evolving interpretation by regulatory agencies and courts. New interpretations of existing requirements, new laws or regulations or the enforcement of existing or new laws and regulations, could subject our current practices to allegations of impropriety or illegality or require us to make changes in our operations, facilities, equipment, personnel, services, capital expenditure programs, or operating expenses to comply with evolving requirements. We cannot assure you that we will make any such changes quickly enough or in a cost-efficient manner. Furthermore, suits filed under the federal False Claims Act (“FCA”), some of which are known as qui tam actions, can be brought by any individual on behalf of the government and such individuals, commonly known as “whistleblowers,” may share in any amounts ultimately paid by the entity to the government in the form of fines or settlements. The frequency of filing qui tam actions has increased significantly in recent years, causing greater numbers of medical device, pharmaceutical and healthcare companies to have to defend FCA actions. When an entity is determined to have violated the federal FCA, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties for each separate false claim. Various states have also enacted laws modeled after the federal FCA, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, that apply regardless of Payor.

Any enforcement action against us, even if we successfully defend against it, could cause our reputation to suffer, or cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. To avoid sanctions and resolve expensive enforcement actions, we may be required to enter into settlement agreements with the government. Typically, such settlement agreements require substantial payments to the government in exchange for the government’s release of its claims and may also require us to enter into a corporate integrity agreement that imposes extensive ongoing compliance obligations.

We cannot assure you that current or future legislative initiatives, government regulation or judicial or regulatory interpretations thereof will not have a material adverse effect on us. We cannot assure you that a review of our business by judicial, regulatory or accreditation authorities will not subject us to fines or penalties, require us to expend significant amounts, reduce the demand for our services or otherwise adversely affect our operations.

For further information, see “—We have been, are and could become the subject of federal and state investigations and compliance reviews” below. In addition, see “Business—Government Regulation” for a description of the extensive government regulation to which we are subject, including numerous laws directed at regulating reimbursement of our products and services under various government programs and preventing fraud and abuse.

We have been, are and could become the subject of federal and state investigations and compliance reviews.

Our operations, including our billing practices and our arrangements with healthcare providers, are subject to extensive federal and state laws and audits, inquiries, and investigations from government agencies. For example, in August 2017, we entered into a settlement agreement resolving an investigation conducted by the Commonwealth of Massachusetts regarding our billing practices for services provided to MassHealth (Massachusetts Medicaid) members. Among other things, we were required to develop a compliance and monitoring program to oversee design and implementation of written policies and procedures focused on compliance with certain MassHealth billing practices and to institute and complete training for all of our employees who have any involvement with billing MassHealth members. Violation of the terms of the settlement agreement could result in the imposition of penalties and sanctions, including disqualification from MassHealth programs. We have actively monitored the billing practices at issue in this matter, submitted periodic reports to the Massachusetts Attorney General’s office, and conducted training as required by the settlement agreement. This matter was closed in August 2020.

 

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Additionally, in connection with the settlement agreements resolving the investigation conducted by the SDNY Office regarding CIDs, we were required to enter into a five-year Corporate Integrity Agreement. The CIA provides that Apria will, among other things, impose certain oversight obligations on its board of directors, provide certain management certifications, and continue or implement, as applicable certain compliance training and education. The CIA also requires Apria to engage independent third parties to review compliance with the CIA, as well as certain reporting, certification, record retention and notification requirements. Failure to comply with the obligations under the CIA could have material consequences for Apria including monetary penalties or exclusion from participation in federal healthcare programs. See “Summary—Recent Developments—Settlement with SDNY Office.” Applicable laws may be directed at payments for the products and services we provide, conduct of our operations, preventing fraud and abuse, and billing and reimbursement from government programs such as Medicare and Medicaid and from commercial Payors. These laws may have related rules and regulations that are subject to interpretation and may not provide definitive guidance as to their application to our operations, including our arrangements with hospitals, physicians, and other healthcare providers.

Federal and state governments have contracted with private entities to audit and recover revenue resulting from payments made in excess of those permitted by federal and state benefit program rules. These entities include, but are not limited to, Recovery Audit Contractors that are responsible for auditing Medicare claims, Unified Program Integrity Contractors that are responsible for the identification of suspected fraud through medical record review and Medicaid Integrity Contractors, that are responsible for auditing Medicaid claims. We believe audits, inquiries, and investigations from these contractors and others will occur from time to time in the ordinary course of our business. We also may be subject to increased audits from commercial Payors and pursuant to federal, civil, and criminal statutes that relate to our billings to commercial Payors. Our efforts to be responsive to these audits, inquiries, and investigations may result in substantial costs and divert management’s time and attention away from the operation of our business. Moreover, an adverse outcome with respect to any audit, inquiry or investigation may result in damage to our reputation, or in fines, penalties or other sanctions imposed on us. Such pending or future audits, inquiries, or investigations, or the public disclosure of such matters, could have a material adverse effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity.

Federal and state laws are broadly worded and may be interpreted or applied by prosecutorial, regulatory, or judicial authorities in ways that we cannot predict. Additionally, in many instances, there are only limited publicly-available guidelines and methodologies for determining errors with certain audits. As a result, there can be a significant lack of clarity regarding required documentation and audit methodology. The clarity and completeness of each patient medical file, some of which is the work product of physicians not employed by us, is essential to successfully challenging any payment denials. For example, certain provisions under CMS guidance manuals, local coverage determinations, and the DME MAC Supplier Manuals provide that clinical information from the “patient’s medical record” is required to justify the initial and ongoing medical necessity for the provision of DMEPOS. Some DME MACs, CMS staff and other government contractors have taken the position, that the “patient’s medical record” refers not to documentation maintained by the DMEPOS supplier but instead to documentation maintained by the patient’s physician, healthcare facility or other clinician, and that clinical information created by the DMEPOS supplier’s personnel and confirmed by the patient’s physician is not sufficient to establish medical necessity. If treating physicians do not adequately document, among other things, their diagnoses and plans of care, the risks that the Company will be subject to audits and payment denials are likely to increase. Moreover, auditors’ interpretations of these policies are inconsistent and subject to individual

interpretation, leading to significant increases in individual supplier and industry-wide perceived error rates. High error rates could lead to further audit activity and regulatory burdens, and could result in our making significant refunds and other payments to Medicare and other government programs. Accordingly, our future revenues and cash flows from government healthcare programs may be reduced. Commercial Payors also may conduct audits and may take legal action to recover alleged overpayments. We could be adversely affected in some of the markets in which we operate if the auditing Payor alleges substantial overpayments were made to us due to coding errors or lack of documentation to support medical necessity determinations. We cannot currently

 

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predict the adverse impact these measures might have on our financial condition and results of operations, but such impact could be material.

Moreover, provisions of the Patient Protection and Affordable Care Act of 2010 (the “PPACA”) implemented by CMS require that overpayments be reported and returned within 60 days of the date on which the overpayment is “identified.” Any overpayment retained after this deadline may be considered an “obligation” for purposes of the False Claims Act, liability for which can result in the imposition of substantial fines and penalties. CMS currently requires a six-year “lookback period,” for reporting and returning overpayments.

Accordingly, our arrangements and business practices may be the subject of government scrutiny or be found to violate applicable laws. If federal or state government officials challenge our operations or arrangements with third parties that we have structured based upon our interpretation of these laws, rules, and regulations, such a challenge could potentially disrupt our business operations and we may incur substantial defense costs, even if we successfully defend our interpretation of these laws, rules, and regulations. If the government or third parties successfully challenge our interpretation, such a challenge may have a material adverse effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity.

Ongoing federal and state health reform initiatives could adversely affect our operations and business condition.

Economic, political, and regulatory influences at both the federal and state level are continuously causing fundamental changes in the U.S. healthcare industry. In 2010, Congress enacted significant reforms to the U.S. healthcare system. These reforms, contained primarily in the PPACA and its companion act, the Health Care Education and Reconciliation Act of 2010 (collectively, the “Health Reform Laws”), significantly altered the U.S. healthcare system. Since their passage in 2010, the Health Reform Laws have faced various and ongoing legal challenges to repeal or modify those laws or delay the implementation of certain aspects of those laws.

Consequently, the core tenets of the Health Reform Laws currently remain in effect, but with several exceptions. The individual mandate penalty was reduced to zero through the Tax Cuts and Jobs Act of 2017, signed into law in December 2017 and effective January 1, 2019. In addition, the Bipartisan Budget Act of 2018, enacted in February 2018, eliminated the Independent Payment Advisory Board, which was a 15-member panel of healthcare experts created by the Health Reform Laws and tasked with making annual cost-cutting recommendations for the Medicare program if Medicare spending exceeded a specified growth rate. In December of 2019, Congress passed the Further Consolidated Appropriations Act, 2020 (Pub. Law 116-94) that repealed several provisions included in the Health Reforms Laws to pay for increased federal spending associated with those laws. Specifically, Congress: (i) repealed the Medical Device Excise Tax, which imposed a 2.3% excise tax on manufacturers, producers and importers of certain medical devices, effective in 2020; (ii) repealed the so-called “Cadillac Tax,” which imposed an excise tax of 40% on premiums of employer-sponsored insurance for individuals and families that exceeded a certain minimum threshold, effective in 2020; and (iii) repealed the health insurance tax, which applies to most fully insured plans, effective in 2021.

The Health Reform Laws also are the subject of ongoing litigation. In particular, a collection of 20 state governors and state attorneys general (subsequently two states have dropped out) filed a lawsuit against the federal government in the Northern District of Texas seeking to enjoin the entire Health Reform Laws following the elimination of the individual mandate penalty in 2019. The District Court ruled that without the penalty the individual mandate was unconstitutional and that all other provisions of the Health Reform Laws should be overturned as well. The U.S. Court of Appeals for the 5th Circuit affirmed the trial court’s decision; however, instead of deciding whether the rest of the PPACA must be struck down, the 5th Circuit sent the case back to the trial court for additional analysis. In March of 2020, the United States Supreme Court granted cert in the case, and on November 10, 2020 heard oral arguments. We are unable to predict the ultimate outcome of the lawsuit but note its potential impact on the Health Reform Laws moving forward.

 

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We anticipate that federal and state governments will continue to review and assess alternative healthcare delivery systems and payment methodologies, and that public debate regarding these issues will continue in the future. Changes in the law or new interpretations of existing laws can have a substantial effect on permissible activities, the relative costs associated with doing business in the healthcare industry, and the amount of reimbursement available from government and other Payors. If the Health Reform Laws are repealed or modified, or if implementation of certain aspects of the Health Reform Laws continues to be delayed, such repeal, modification, or delay may have a material and adverse impact on our business, financial condition, results of operations, cash flow, capital resources and liquidity.

We may be adversely affected by Congress’ elimination of the PPACA’s individual mandate penalty.

The provisions of the PPACA that penalized Americans if they failed to maintain a basic level of health insurance coverage, commonly referred to as the law’s “individual mandate penalty,” were effectively repealed through the Tax Cuts and Jobs Act of 2017, when Congress reduced the penalty to zero dollars. The elimination of the individual mandate penalty may have the ongoing effect of increasing instability and financial disruption in the market for health insurance in 2021 and beyond, as a population of patients who may previously have obtained coverage because they were required to under the PPACA may choose now to enroll in less expensive and less robust insurance products or to drop their coverage altogether. The repeal became effective January 1, 2019 but such choices may continue to materialize as more patients are made aware of the elimination of the individual mandate penalty. At the same time as a result of a changing administration and changes in Congress, it is possible that the individual mandate could be reinstated. These and other risks and uncertainties resulting from the elimination of the individual mandate penalty may have a material adverse effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity.

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.

We are required to maintain state and/or federal licenses and certifications for our operations and facilities. In addition, certain employees, primarily those with clinical expertise in pharmacy, respiratory therapy, and nutrition, are required to maintain licenses in the states in which they practice. From time to time, we may become subject to new or different licensing requirements due to legislative or regulatory requirements or the development of or changes to our business. Accurate licensure is also a critical threshold issue for Medicare enrollment and for participation in the Medicare DMEPOS CBP. We are subject to periodic inspection by governmental and other authorities to assure continued compliance with the various standards necessary for licensing and certifications, some of which are complex and may be unclear or subject to varying interpretation. In response to the declaration of a public health emergency due to the COVID-19 pandemic, CMS instituted flexibilities related to the DMEPOS supplier standards and temporarily suspended all DMEPOS provider enrollment site visits in order to ease provider burden during the COVID-19 pandemic. However, as of July 6, 2020, CMS has resumed all DMEPOS provider enrollment site visits, and is no longer waiving certain DMEPOS supplier standards. Although we believe we have the right systems in place to monitor licensure and certification, our failure, or the failure of one or more of our clinicians, to maintain appropriate licensure or certification for our operations, facilities, and clinicians could result in interruptions in our operations and our ability to service patients, refunds to state and/or federal Payors, and the imposition of sanctions or fines, which could have an adverse and material impact on our business, financial condition, results of operations, cash flow, capital resources and liquidity.

Accreditation is required by most major commercial Payors and is a mandatory requirement for all Medicare DMEPOS suppliers. In response to the declaration of a public health emergency due to the COVID-19 pandemic, CMS temporarily suspended all accreditation and reaccreditation activities for DMEPOS suppliers. However, as of July 6, 2020, CMS resumed all accreditation and reaccreditation activities, including surveys, which may be conducted on-site, virtually or a combination of both depending on each state’s reopening plan.

 

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We and all of our branch locations are currently accredited by The Joint Commission. If we or any of our branch locations should lose accreditation, or if any of our new branch locations are unable to become accredited, our failure to maintain our accreditation or become accredited could have a material adverse effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity.

The requirements for licensure and certification may include notification or approval in the event of a transfer or change of ownership or certain other changes. Agencies or commercial Payors with which we have contracts may have similar requirements and some of those processes may be complex. Failure to provide required notifications or obtain the requisite approvals could result in the delay or inability to complete an acquisition or transfer, loss of licensure, lapses in reimbursement or other penalties. While we make reasonable efforts to substantially comply with these requirements, if we are found to have failed to comply in some material respect, it could have an adverse or material impact on our business and our financial conditions.

A recall of any of our products, either voluntarily or at the direction of the FDA or another governmental authority, or the discovery of serious safety issues with our products that leads to corrective actions being taken, could have a significant adverse impact on our business.

The FDA has authority to request the recall of medical gas products or medical devices in the event a product presents a risk of illness or injury or gross consumer deception, such as due to a material deficiency or defect in design, labeling or manufacture of a product, and a cessation of distribution and/or recall is necessary to protect the public health and welfare. If after providing the Company or the manufacturer with an opportunity to consult with the agency, the FDA finds that there is a reasonable probability that a device intended for human use would cause serious, adverse health consequences or death, the FDA has the power to mandate a recall of medical devices. Manufacturers may also, under their own initiative, recall a product if any material deficiency in a drug is identified or withdraw a product for other reasons. Any major recall would divert management attention and financial resources from the operation of our business, could cause the price of our stock to decline and expose us to product liability or other claims and harm our reputation with customers. If we do not adequately address problems associated with our drugs or devices, we may face additional regulatory enforcement action, FDA warning letters, product seizure, injunctions, administrative penalties, civil money penalties or criminal fines. We may also be required to bear other costs or take other actions that may have a negative impact on our sales, or significant adverse publicity of regulatory consequences, which could harm our business.

We may be subject to fines, penalties, or injunctions if we are determined to be promoting the use of our products for unapproved or “off-label” uses, resulting in damage to our reputation and our business.

Our promotional materials and training methods must comply with the FDA and other applicable laws and regulations, including the prohibition of the promotion of a medical gas or medical device for a use that has not been cleared or approved by the FDA. If the FDA determines that our promotional materials or training constitutes promotion of an off-label use that is either false or misleading, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, which could have a material adverse effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity.

Corporate officers may be subject to a misdemeanor penalty (and possible subsequent felony) under the Federal Food, Drug and Cosmetic Act (“FFDCA”) for alleged violations of the Act.

The Park Doctrine, as established by the U.S. Supreme Court, provides that a responsible corporate official can be held liable for a first time misdemeanor (and possible subsequent felony) for a company’s alleged violations of the FFDCA without proof that the corporate official participated in, had intent or negligence, or was even aware of the violations. In pursuing such a charge, the government need only demonstrate that the official was in a position of authority to prevent or correct the alleged violation. Under Section 303(f)(1) of the FFDCA, a person who violates a requirement relating to a device can be liable for a civil penalty for all violations

 

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adjudicated in a single proceeding, except for those relating to cGMPs and medical device reporting violations that do not constitute a significant or knowing departure from requirements or a risk to public health; filth violations in devices that are not otherwise defective; and minor violations relating to device tracking and correction and removal reporting requirements if the person shows substantial compliance with such provisions. The FDA may use misdemeanor prosecution as an enforcement tool and will refer the prosecutions to the Department of Justice (“DOJ”). Once a person has been convicted of a misdemeanor under the FFDCA, any subsequent violation is a felony, even without proof that the responsible corporate official acted with the intent to defraud or mislead. In some cases, a misdemeanor conviction of an individual may serve as the basis for debarment by the FDA. The maximum civil money penalty amounts are periodically adjusted for inflation. If the DOJ were to pursue such a misdemeanor or felony prosecution against a responsible corporate official of the Company, it could have a material adverse effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity.

Our medical gas facilities and operations are subject to extensive regulation by federal and state authorities and there can be no assurance that our medical gas facilities will achieve and maintain compliance with such regulations.

We have a number of medical gas facilities in several states. These facilities are subject to federal and state regulatory requirements. Our medical gas facilities and operations are subject to extensive regulation by the FDA and other federal and state authorities. The FDA regulates medical gases, including medical oxygen, pursuant to its authority under the FFDCA. Among other requirements, the FDA’s cGMP regulations impose certain quality control, documentation, and recordkeeping requirements on the receipt, processing, and distribution of medical gas. Further, in each state where we operate medical gas facilities, we are subject to regulation under state health and safety laws, which vary from state to state. The FDA and state authorities conduct periodic, unannounced inspections at medical gas facilities to assess compliance with the cGMP and other regulations. For further information, see “—Risks Related to Our Business and Operation—Changes or disruption in supplies provided by third parties could adversely affect our business” above.

We expend significant time, money, and resources in an effort to achieve substantial compliance with the cGMP regulations and other federal and state law requirements at each of our medical gas facilities. There can be no assurance, however, that these efforts will be successful and that our medical gas facilities will achieve and maintain compliance with federal and state laws and regulations. Our failure to achieve and maintain regulatory compliance at our medical gas facilities could result in enforcement action, including warning letters, fines, product recalls or seizures, temporary or permanent injunctions, or suspensions in operations at one or more locations, as well as civil or criminal penalties, all of which could materially harm our business, financial condition, results of operations, cash flow, capital resources, and liquidity.

A cyber-attack, a security breach or the improper disclosure of protected health information (“PHI”) could cause a loss of confidential data, give rise to remediation and other expenses, expose us to liability under HIPAA and HITECH, 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.

We rely extensively on our information technology (“IT”) systems to bill patients and Payors, to manage clinical and financial data, to communicate with our consumers, Payors, vendors and other third parties, and to summarize and analyze our operating results. Although we have implemented various policies, procedures and other security measures to protect our IT systems and data and face ongoing cyber-attacks and threats, there can be no assurance that we will not be subject to a cyber-attack, a security breach or the improper disclosure or use of PHI in the future. Such attacks or breaches could result in loss of protected patient medical data or other information subject to privacy laws or disrupt our information technology systems or business, potentially exposing us to regulatory action, litigation and liability.

 

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The healthcare industry has been and continues to be a target for cyber-attacks and the number of threats has only increased during the COVID-19 pandemic. Numerous federal agencies that monitor and regulate internet and cyber-crime have issued guidance, alerts and directives warning of software vulnerabilities that require immediate patching, malicious actors targeting healthcare related systems and nation state sponsored hacking designed to steal valuable information, including COVID-19 vaccine and treatment research.

As required by HIPAA, the U.S. Department of Health and Human Services (“HHS”) has issued privacy and security regulations that extensively regulate the disclosure and use of PHI and require covered entities, including healthcare providers and health plans, and vendors known as “business associates,” to implement administrative, physical and technical safeguards to protect the security of PHI. Covered entities and/or their business associates must report breaches of unsecured PHI without unreasonable delay to the HHS Office for Civil Rights (“OCR”), under certain circumstances to affected individuals and, in the case of larger breaches, the media. Violations of the HIPAA privacy and security regulations may result in significant criminal and civil penalties. The HIPAA privacy, security, and breach notification regulations have imposed, and will continue to impose, significant compliance costs on our operations.

HHS’s goal, as directed by The Health Information Technology for Economic and Clinical Health Act of 2009 (“HITECH”), was to improve the nation’s healthcare system by enabling health information to follow the patient wherever and whenever it is needed. The HHS Office of the National Coordinator for Health Information Technology (“ONC”) and OCR worked together on a number of projects to ensure that this electronic exchange of health information was built on a foundation of privacy and security. OCR introduced revised HIPAA regulations to expand individuals’ rights to access their information and restrict certain disclosures of PHI to health plans, extend the applicability of certain of the Privacy and Security Rules’ requirements to the business associates of covered entities, establish new limitations on the use and disclosure of PHI for marketing and fundraising purposes, and prohibit the sale of PHI without patient authorization. In addition, the rules were designed to strengthen and expand OCR’s ability to enforce HIPAA’s Privacy and Security provisions and to strengthen the privacy and security of health information, and were integral in broadening the use of health IT in healthcare today.

Furthermore, under the administrative simplification provisions in HIPAA and the PPACA, CMS set national standards that require the use of uniform electronic transactions, establish code sets, and define unique identifiers to standardize business practices to simplify communications with insurers for healthcare claims and simplify payment transactions submitted or received electronically. CMS administers the Compliance Review Program to ensure compliance among covered entities with HIPAA Administrative Simplification rules for electronic healthcare transactions that include imposing civil money penalties on covered entities that violate any HIPAA Administrative Simplification requirements.

The 21st Century Cures Act gave broad authority to the ONC to require that all electronic health information be accessible without special effort by the user. The regulations that were finalized in June 2020 require the use of open or standardized Application Programming Interfaces (“APIs”) so that individuals can access their health information securely and easily through apps on their phones and other devices. The ONC Rules also prohibit “information blocking,” defined as a practice that is likely to interfere with access, exchange, or use of electronic health information. The ONC rules apply to healthcare providers and may impact our operations and IT interfaces and systems as interoperability continues to evolve and as the definition of information blocking is more clearly defined through HHS OIG rulemaking, oversight, and enforcement. In December 2020, the ONC issued Proposed Modifications to the HIPAA Privacy Rule to Support, and Remove Barriers to, Coordinated Care and Individual Engagement (this proposed rule was published in the Federal Register on January 21, 2021). These proposed HIPAA modifications are meant to streamline patient access and improve information sharing through standardized APIs and the use of third-party mobile applications. In order to do so, OCR has proposed modifications to the individuals’ right of access to their protected health information, putting patients in charge of their health records and giving patients and their families more control over their healthcare choices. While these HIPAA Privacy Rule modifications are still in the proposed phase of

 

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rulemaking, in order to remain HIPAA compliant when the new rules are finalized and implemented, healthcare providers may need to modernize their information technology capabilities and update internal policies and procedures, as well as business associate agreements.

In addition, various federal and state legislative and regulatory bodies, or self-regulatory organizations, may expand current laws or regulations, enact new laws or regulations or issue revised rules or guidance regarding privacy, data protection and consumer protection. For instance, the California Consumer Privacy Act (“CCPA”) became effective on January 1, 2020 and on June 1, 2020, the California Attorney General’s office released the third set of CCPA proposed regulations. The CCPA gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used by requiring covered businesses to provide new disclosures to California consumers (as that term is broadly defined) and provide such consumers new ways to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. Despite its broad scope, the CCPA does create certain exemptions designed around HIPAA. For example, CCPA does not apply to medical information as defined in the California Confidentiality of Medical Information Act (“CCMIA”) or PHI as defined by HIPAA, which is collected by a covered entity or business associate. In addition, in November 2020, Californians approved Proposition 24, that was also known as the California Privacy Rights Act (the “CPRA”). The CPRA modifies and expands the CCPA and established a new California Privacy Protection Agency. While the CPRA extended the current CCPA exemption of employment and business-to-business data until January 1, 2023, it also established January 1, 2023 as the new compliance date for most of the other substantive provisions that companies doing business in California must be prepared to meet. In addition to applying to businesses that buy and sell personal information the CPRA applies to businesses that buy, sell or share personal information and sets forth a new category of “sensitive personal information” that includes, genetic data; biometric or health information; and sex life or sexual orientation information. In addition to the modifications that enhance individuals’ rights under the CCPA, the CPRA added five more rights, including the authority for the State to regulate the requirement for businesses to conduct risk assessments and cybersecurity audits. There is still a significant amount of uncertainty with respect to the CPRA’s three-year compliance roll-out that may increase our compliance costs and potential liability. Other states, such as New York, Massachusetts, North Dakota, Hawaii, and Maryland have all considered laws that would give citizens increased control over their personal data. With respect to data safeguards laws, there are a number of states that have passed legislation, most notably New York’s Stop Hacks and Improve Electronic Data Security Act (the “SHIELD Act”), signed into law in July 2019, that requires any person or business owning or licensing computerized data that includes the private information of a resident of New York to implement and maintain reasonable safeguards to protect the security, confidentiality, and integrity of the private information. While entities subject to HIPAA are deemed to be in compliance with the security provisions of the SHIELD Act, the SHIELD Act does require such entities to provide notice to the New York Attorney General in the event of a breach of personal information.

There are other similar state privacy laws and data safeguards laws and there have been many efforts to propose similar comprehensive privacy laws at the federal level. Despite the increased interest in data protection, the legal paradigms governing the security and privacy of personal data are complex and technical, and lack uniformity at the federal level. There remains no single federal law that comprehensively regulates the collection and use of personal data.

In the absence of comprehensive federal legislation, there remains a patchwork of numerous laws and legislative and regulatory initiatives at the federal and state levels addressing privacy and security concerns. These laws vary and may impose additional obligations or penalties. For example, various state laws and regulations may require us to notify affected individuals in the event of a data breach involving individually identifiable information (even if no health-related information is involved). The Federal Trade Commission (“FTC”) and many state attorneys general are interpreting existing federal and state consumer protection laws to impose evolving standards for the online collection, use, dissemination and security of health-related and other personal information. Courts may also adopt the standards for fair information practices promulgated by the

 

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FTC, which concern consumer notice, choice, security and access. Consumer protection laws require us to publish statements that describe how we handle personal information and choices individuals may have about the way we handle their personal information. If such information that we publish is considered untrue, it may be subject to government claims of unfair or deceptive trade practices, which could lead to significant liabilities and consequences. Furthermore, according to the FTC, violating consumers’ privacy rights or failing to take appropriate steps to keep consumers’ personal information secure may constitute unfair acts or practices in or affecting commerce in violation of Section 5 of the FTC Act.

Under the Federal CAN-SPAM Act, the Telephone Consumer Protection Act of 1991 (“TCPA”) and the Telemarketing Sales Rule and Medicare regulations, we are limited in the ways in which we can market our products and services by use of email, text or telephone marketing. The CAN-SPAM Act also prohibits and protects consumers against all auto-dialed or pre-recorded calls or text messages to an individual’s cell phone. The actual or perceived improper making of telephone calls or sending of text messages may subject us to potential risks, including liabilities or claims relating to consumer protection laws. Numerous class-action suits under federal and state laws have been filed in recent years against companies that conduct SMS texting programs, with many resulting in multi-million-dollar settlements to the plaintiffs. Any future such litigation against us could be costly and time-consuming to defend. For example, the TCPA, a federal statute that protects consumers from unwanted telephone calls, faxes and text messages, restricts telemarketing and the use of automated SMS text messages without proper consent. Additionally state regulators may determine that telephone calls to our patients are subject to state telemarketing regulations. If we do not comply with existing or new laws and regulations related to telephone contacts or patient health information, we could be subject to criminal or civil sanctions. New health information standards, whether implemented pursuant to HIPAA, HITECH, the PPACA, congressional action or otherwise, could have a significant effect on the manner in which we handle healthcare-related data and communications with Payors, and the cost of complying with these standards could be significant. The scope and interpretation of the laws that are or may be applicable to the delivery of consumer phone calls, emails and text messages are continuously evolving and developing. If we do not comply with these laws or regulations or if we become liable under these laws or regulations, we could face direct liability, could be required to change some portions of our business model, and could face negative publicity and our business, financial condition and results of operations could be adversely affected. Even an unsuccessful challenge of our phone, email or SMS text practices by consumers, regulatory authorities or other third parties could result in negative publicity and could require a costly response from and defense by us.

Compliance with changes in privacy and information security laws and with rapidly evolving industry standards may result in our incurring significant expense due to increased investment in technology and the development of new operational processes. Further, to the extent we fail to comply with one or more federal and/or state privacy and security requirements or if we are found to be responsible for the non-compliance of our vendors, we could be subject to substantial fines or penalties, damage to our reputation, as well as third-party claims which could have a material adverse effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity.

Risks Related to this Offering and Ownership of our Common Stock

Our Sponsor and its affiliates control us and their interests may conflict with ours or yours in the future.

Immediately following this offering, our Sponsor and its affiliates will beneficially own approximately 72.0% of our common stock (or 68.8% if the underwriters exercise their option to purchase additional shares in full). For additional information see “Principal and Selling Stockholders.” Moreover, under our amended and restated bylaws and the stockholders’ agreement with our Sponsor and its affiliates that will be in effect by the completion of this offering, for so long as our pre-IPO owners and their affiliates retain significant ownership of us, we will agree to nominate to our board individuals designated by our Sponsor, whom we refer to as the “Sponsor Directors.” Even when our Sponsor and its affiliates cease to own shares of our stock representing a majority of the total voting power, for so long as our Sponsor continues to own a significant percentage of our

 

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stock, our Sponsor will still be able to significantly influence the composition of our board of directors and the approval of actions requiring stockholder approval through their voting power. Accordingly, for such period of time, our Sponsor will have significant influence with respect to our management, business plans and policies, including the appointment and removal of our officers. In particular, for so long as our Sponsor continues to own a significant percentage of our stock, our Sponsor will be able to cause or prevent a change of control of our company or a change in the composition of our board of directors and could preclude any unsolicited acquisition of our company. The concentration of ownership could deprive you of an opportunity to receive a premium for your shares of common stock as part of a sale of our company and ultimately might affect the market price of our common stock. Additionally, our Sponsor may assign its rights under the stockholders’ agreement to a third party without our consent, for example, in connection with a privately negotiated sale of all or a portion of our Sponsor’s holdings of our common stock to a third party. Such third party would then have the right to designate individuals to be nominated to our board, as well as other rights under the stockholders’ agreement. The interests of our Sponsor or any such third party with respect to such rights may conflict with our interests or your interests in the future.

Our Sponsor and its affiliates engage in a broad spectrum of activities, including investments in the healthcare services industry. In the ordinary course of their business activities, our Sponsor and its affiliates may engage in activities where their interests conflict with our interests or those of our stockholders. Our amended and restated certificate of incorporation will provide that none of our Sponsor, any of its affiliates or any director who is not employed by us (including any non-employee director who serves as one of our officers in both his or her director and officer capacities) or his or her affiliates, will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. Our Sponsor also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. In addition, our Sponsor may have an interest in our pursuing acquisitions, divestitures and other transactions that, in its judgment, could enhance its investment, even though such transactions might involve risks to us and our stockholders.

We are a holding company with no operations of our own and we are accordingly dependent upon distributions from our subsidiaries to pay taxes and pay dividends.

We are a holding company and our operations are conducted entirely through our subsidiaries. Our ability to generate cash to pay applicable taxes at assumed tax rates and pay cash dividends we declare, if any, is dependent on the earnings and the receipt of funds from Apria Healthcare Group and its subsidiaries via dividends or intercompany loans. Deterioration in the financial condition, earnings or cash flow of Apria Healthcare Group and its subsidiaries for any reason could limit or impair their ability to pay such distributions. Additionally, to the extent that we need funds and our subsidiaries are restricted from making such distributions under applicable law or regulation or under the terms of our financing arrangements, or are otherwise unable to provide such funds, it could materially adversely affect our liquidity and financial condition.

Upon the listing of our shares on Nasdaq, we will be a “controlled company” within the meaning of the rules of Nasdaq and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

After completion of this offering, our Sponsor will continue to control a majority of the combined voting power of all classes of our stock entitled to vote generally in the election of directors. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of Nasdaq. Under these rules, a company of which more than 50% of the voting power in the election of directors is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements. For example, controlled companies, within one year of the date of the listing of their common stock:

 

   

are not required to have a board that is composed of a majority of “independent directors,” as defined under the Nasdaq rules;

 

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are not required to have a compensation committee that is composed entirely of independent directors or have a written charter addressing the committee’s purpose and responsibilities; and

 

   

are not required to have director nominations be made, or recommended to the full board of directors, by its independent directors or by a nominations committee that is composed entirely of independent directors, and to adopt a written charter or a board resolution addressing the nominations process.

For at least some period following this offering, we intend to utilize these exemptions. As a result, immediately following this offering, we do not expect a majority of our directors will have been affirmatively determined to be independent or that our compensation committee or nominating and corporate governance committee of the board will be comprised entirely of directors who have been determined to be independent. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of Nasdaq.

Our internal controls over financial reporting currently do not meet all of the standards contemplated by Section 404 of the Sarbanes-Oxley Act, and failure to achieve and maintain effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and the market price of the common stock.

As a public company, we will have significant requirements for enhanced financial reporting and internal controls. The process of designing and implementing effective internal controls is a continuous effort that will require us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. If we are unable to establish or maintain appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations on a timely basis, result in material misstatements in our consolidated financial statements and harm our operating results. Our internal controls over financial reporting currently do not meet all of the standards contemplated by Section 404 of the Sarbanes-Oxley Act that eventually we will be required to meet. Because currently we do not have comprehensive documentation of our internal controls and have not yet tested our internal controls in accordance with Section 404, we cannot conclude in accordance with Section 404 that we do not have a material weakness in our internal controls or a combination of significant deficiencies that could result in the conclusion that we have a material weakness in our internal controls. Beginning with our second annual report on Form 10-K, our independent registered public accounting firm will be required to attest to the effectiveness of our internal controls over financial reporting on an annual basis. If we are not able to complete our initial assessment of our internal controls and otherwise implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent registered public accounting firm may not be able to certify as to the adequacy of our internal controls over financial reporting.

Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC or violations of applicable stock exchange listing rules, which may result in a breach of the covenants under existing or future financing arrangements. There also could be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements also could suffer if we or our independent registered public accounting firm were to report a material weakness in our internal controls over financial reporting. This could materially adversely affect us and lead to a decline in the market price of our common stock.

Because we have no current plans to pay dividends on our common stock following this offering, you may not receive any return on your investment unless you sell your common stock for a price greater than that which you paid for it.

Although we paid dividends to our pre-IPO owners prior to this offering, we have no current plans to pay dividends on our common stock following this offering. The declaration, amount and payment of any future

 

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dividends on shares of common stock will be at the sole discretion of our board of directors. Our board of directors may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us and such other factors as our board of directors may deem relevant. In addition, our ability to pay dividends is limited by our existing indebtedness and may be limited by covenants of other indebtedness we or our subsidiaries incur in the future. As a result, you may not receive any return on an investment in our common stock unless you sell your common stock for a price greater than that which you paid for them.

You may be diluted by the future issuance of additional common stock in connection with our incentive plans, acquisitions or otherwise.

After this offering we will have approximately 964.8 million shares of common stock authorized but unissued. Our amended and restated certificate of incorporation will authorize us to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. Additionally:

 

   

2,594,224 shares will be issuable upon settlement of outstanding SARs granted pursuant to the 2015 Plan if such SARs were vested and exercised at the time of this offering. At the time of this offering, there will be 3,766,228 SARs outstanding under the 2015 Plan with a weighted average strike price of $6.22. See “Executive Compensation—Long-Term Equity Incentive Compensation—Stock Appreciation Rights of Apria Healthcare Group”;

 

   

awards have been granted under the 2019 LTIP (as defined herein) with a maximum value of $4.4 million (or 220,000 shares, which shares will be issued pursuant to Omnibus Incentive Plan). See “Executive Compensation—Long-Term Cash Incentive Compensation—2019 LTIP”; and

 

   

we have reserved 3,912,324 shares for issuance under our Omnibus Incentive Plan. See “Executive Compensation—Equity Incentive Plans—Omnibus Incentive Plan.”

Any common stock that we issue, including under our Omnibus Incentive Plan, the 2015 Plan, the 2019 LTIP or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by the investors who purchase common stock in this offering.

If we or our pre-IPO owners sell additional shares of our common stock after this offering or are perceived by the public markets as intending to sell them, the market price of our common stock could decline.

The sale of substantial amounts of shares of our common stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of our common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for you to sell your common stock in the future at a time and at a price that you deem appropriate, if at all. Upon completion of this offering, we will have a total of 35,210,915 shares of our common stock outstanding. Of the outstanding shares, the 7,500,000 shares sold in this offering (or 8,625,000 shares of our common stock if the underwriters exercise their option to purchase additional shares in full) will be freely tradable without restriction or further registration under the Securities Act of 1933 (the “Securities Act”), except that any shares held by our affiliates, as that term is defined under Rule 144 of the Securities Act, may be sold only in compliance with the limitations described in “Shares Eligible for Future Sale.”

The remaining outstanding 27,710,915 shares of common stock held by our pre-IPO owners and management after this offering will be subject to certain restrictions on resale. We, our officers, directors, director nominee and certain holders (including the selling stockholders) of our outstanding shares of common stock immediately prior to this offering, including our Sponsor, that collectively will own 26,540,051 shares

 

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following this offering, will sign lock-up agreements with the underwriters that will, subject to certain customary exceptions, restrict the sale of the shares of our common stock held by them for 180 days following the date of this prospectus. Citigroup Global Markets Inc. and Goldman Sachs & Co. LLC may, in their sole discretion, release all or any portion of the shares of common stock subject to lock-up agreements. See “Underwriting” for a description of these lock-up agreements. See “Principal and Selling Stockholders” and “Shares Eligible for Future Sale—Lock-Up Arrangements.”

Upon the expiration of the lock-up agreements described above, all of such shares will be eligible for resale in the public market, subject, in the case of shares held by our affiliates, to volume, manner of sale and other limitations under Rule 144. We expect that our Sponsor will continue to be considered an affiliate following the expiration of the lock-up period based on its expected share ownership and its board nomination rights. Certain other of our stockholders may also be considered affiliates at that time. However, subject to the expiration or waiver of the 180-day lock-up period, the holders of these shares of common stock will have the right, subject to certain exceptions and conditions, to require us to register their shares of common stock under the Securities Act, and they will have the right to participate in future registrations of securities by us. Registration of any of these outstanding shares of common stock would result in such shares becoming freely tradable without compliance with Rule 144 upon effectiveness of the registration statement. See “Shares Eligible for Future Sale.”

We intend to file one or more registration statements on Form S-8 under the Securities Act to register 7,698,552 shares of our common stock or securities convertible into or exchangeable for shares of our common stock issued pursuant to our Omnibus Incentive Plan and the 2015 Plan. Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market.

As restrictions on resale end, the market price of our shares of common stock could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our shares of common stock or other securities or to use our shares of common stock as consideration for acquisitions of other businesses, investments or other corporate purposes.

Anti-takeover provisions in our organizational documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.

Our amended and restated certificate of incorporation and amended and restated bylaws that will become effective immediately prior to the consummation of this offering will contain provisions that may make the merger or acquisition of our company more difficult without the approval of our board of directors. Among other things, these provisions:

 

   

provide that our board of directors will be divided into three classes, as nearly equal in size as possible with terms of the directors of only one class expiring in any given year;

 

   

provide for the removal of directors (other than directors elected by a separate vote of the holders of any preferred stock) only for cause and only upon the affirmative vote of the holders of at least 66 2/3% in voting power of the outstanding shares of our capital stock entitled to vote at any time our Sponsor beneficially owns less than 30% of the total voting power of all then outstanding shares of our capital stock entitled to vote generally in the election of directors and provide that specified directors designated pursuant to the stockholders agreement may not be removed without cause without the consent of the specified designating party;

 

   

provide that, subject to the rights of the holders of any preferred stock and the rights granted pursuant to the stockholders agreement, vacancies and newly created directorships may be filled only by the remaining directors at any time our Sponsor beneficially owns less than 30% of the total voting power of all then outstanding shares of our capital stock entitled to vote generally in the election of directors;

 

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would allow us to authorize the issuance of one or more series of preferred stock in connection with a stockholder rights plan or otherwise, the terms of which may be established by our board and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights, powers or preferences superior to the rights of the holders of common stock;

 

   

prohibit stockholder action by written consent at any time our Sponsor beneficially owns less than 30% of the total voting power of all then outstanding shares of our capital stock entitled to vote generally in the election of directors, and require that, at any time our Sponsor beneficially own at least 30% of the total voting power of all then outstanding shares of our capital stock entitled to vote generally in the election of directors, any action by consent of stockholders in lieu of a meeting may only be taken with the consent of the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote were presented and voted and the consent of the stockholder designated pursuant to our stockholders agreement;

 

   

provide for certain limitations on convening special stockholder meetings;

 

   

provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws and that our stockholders may only amend our bylaws with the approval of 66 2/3% or more of all of the outstanding shares of our capital stock entitled to vote at any time our Sponsor beneficially owns less than 30% of the total voting power of all then outstanding shares of our capital stock entitled to vote generally in the election of directors;

 

   

provide that certain provisions of our amended and restated certificate of incorporation may be amended only by the affirmative vote of the holders of at least 66 2/3% in voting power of the outstanding shares of our capital stock entitled to vote thereon at any time our Sponsor beneficially owns less than 30% of the total voting power of all then outstanding shares of our capital stock entitled to vote generally in the election of directors;

 

   

establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings; and

 

   

provide that, subject to the rights of holders of preferred stock and the terms of our stockholders agreement, the total numbers of directors shall be determined exclusively by resolution adopted by the Board.

We have opted out of Section 203 of the General Corporation Law of the State of Delaware (the “DGCL”); however, our amended and restated certificate of incorporation contains similar provisions providing that we may not engage in certain “business combinations” with any “interested stockholder” for a three-year period following the time that the stockholder became an interested stockholder, unless the transaction fits within an enumerated exception, such as board approval of the business combination or the transaction that resulted in a person becoming an interested stockholder prior to the time such person became an interested stockholder. Our amended and restated certificate of incorporation provides that our Sponsor and its affiliates, and any of their respective direct or indirect transferees, and any group as to which such persons are a party, do not constitute “interested stockholders” for purposes of this provision. See “Description of Capital Stock—Business Combinations.” These anti-takeover provisions and other provisions under our amended and restated certificate of incorporation, amended and restated by laws or Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, including actions that our stockholders may deem advantageous, or negatively affect the trading price of our common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.

 

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Our amended and restated certificate of incorporation will designate the Court of Chancery of the State of Delaware and the federal district courts of the United States of America as the sole and exclusive forums for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with the Company or the Company’s directors, officers or other employees.

Our amended and restated certificate of incorporation will provide that, unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall, to the fullest extent permitted by law, be the sole and exclusive forum for any (1) derivative action or proceeding brought on behalf of our Company, (2) action asserting a claim of breach of a fiduciary duty owed by any current or former director, officer, employee or stockholder of our Company to the Company or the Company’s stockholders, (3) action asserting a claim against the Company or any current or former director or officer of the Company arising pursuant to any provision of the DGCL or our amended and restated certificate of incorporation or our amended and restated bylaws, or (4) action asserting a claim against us or any director or officer of the Company governed by the internal affairs doctrine. Our amended and restated certificate of incorporation further provides that, unless we consent in writing to the selection of an alternative forum, to the fullest extent permitted by law, the federal district courts of the United States of America will be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the federal securities laws of the United States of America. Our amended and restated certificate of incorporation will provide that, to the fullest extent permitted by law, any person or entity purchasing or otherwise acquiring any interest in any shares of our capital stock shall be deemed to have notice of and to have provided consent to the forum provisions in our amended and restated certificate of incorporation. These choice-of-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable or convenient for disputes with the Company or the Company’s directors, officers, other employees or stockholders, which may discourage such lawsuits. Alternatively, if a court were to find these provisions of our amended and restated certificate of incorporation inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could materially and adversely affect our business, financial condition and results of operations and result in a diversion of the time and resources of our management and board of directors.

General Risk Factors

Natural disasters or other catastrophic events could materially disrupt and have a negative effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity.

Natural disasters, such as hurricanes or earthquakes, could disrupt our ability to do business. For example, such events could result in physical damage to one or more of our properties, the temporary closure of one or more of our locations, the temporary inability to process payroll or process claims, a negative effect in our ability to comply with certain licensing requirements, and/or a delay in the delivery of products and the provision of our service offerings. These events could also reduce demand for our products and service offerings, or make it difficult or impossible to receive products from suppliers. We may be required to suspend operations in some of our branch locations, which could have a material adverse effect on our business, financial condition, results of operations, cash flow, capital resources and liquidity.

Future acquisitions or growth initiatives may be unsuccessful and could expose us to unforeseen liabilities.

Our strategic growth plan may involve acquisition of other companies. Any such acquisitions would involve a number of risks and uncertainties, including: difficulties related to combining previously separate businesses into a single unit, including patient transitions, product and service offerings, distribution and operational capabilities and business cultures; loss of patients, providers and Payors and other general business disruption; assumption of liabilities of an acquired business, including unforeseen or contingent liabilities or liabilities in excess of the amounts estimated; and obtaining necessary regulatory licenses and Payor-specific approvals, which may impact the timing of when we are able to bill and collect for services rendered.

 

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The failure to effectively integrate an acquired business in a cost-effective manner could have a material adverse effect on our business, financial condition, results of operations, cash flow, capital resources, liquidity or prospects. In addition, we may not be able to realize the potential cost savings, synergies and revenue enhancements that we anticipate from any acquisitions, either in the amount or within the time frame that we expect, and the costs of achieving these benefits may be higher than, and the timing may differ from, what we expect. If we fail to realize anticipated cost savings, synergies or revenue enhancements, our financial results will be adversely affected.

We will incur increased costs and become subject to additional regulations and requirements as a result of becoming a public company, which could lower our profits, make it more difficult to run our business or divert management’s attention from our business.

As a public company, we will be required to commit significant resources and management time and attention to the requirements of being a public company, which will cause us to incur significant legal, accounting and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also will incur costs associated with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and related rules implemented by the SEC and Nasdaq, and compliance with these requirements will place significant demands on our legal, accounting and finance staff and on our accounting, financial and information systems. In addition, we might not be successful in implementing these requirements. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

If securities or industry analysts do not publish research or reports about our business, or if they downgrade their recommendations regarding our common stock, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If any of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, our common stock price may decline. If analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our common stock price or trading volume to decline and our common stock to be less liquid.

There may not be an active trading market for shares of our common stock, which may cause shares of our common stock to trade at a discount from their initial offering price and make it difficult to sell the shares of common stock you purchase.

Prior to this offering, there has not been a public trading market for shares of our common stock. It is possible that after this offering an active trading market will not develop or continue or, if developed, that any market will be sustained which would make it difficult for you to sell your shares of common stock at an attractive price or at all. The initial public offering price per share of common stock will be determined by agreement among us, the selling stockholders and the representatives of the underwriters, and may not be indicative of the price at which shares of our common stock will trade in the public market after this offering.

 

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The market price of shares of our common stock may be volatile or may decline regardless of our operating performance, which could cause the value of your investment to decline.

Even if a trading market develops, the market price of our common stock may be highly volatile and could be subject to wide fluctuations. Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of shares of our common stock regardless of our operating performance. In addition, our operating results could be below the expectations of public market analysts and investors due to a number of potential factors, including variations in our quarterly operating results or dividends, if any, to stockholders, additions or departures of key management personnel, failure to meet analysts’ earnings estimates, publication of research reports about our industry, litigation and government investigations, changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business, adverse market reaction to any indebtedness we may incur or securities we may issue in the future, changes in market valuations of similar companies or speculation in the press or investment community, announcements by our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments, adverse publicity about the industries we participate in or individual scandals, and in response the market price of shares of our common stock could decrease significantly. You may be unable to resell your shares of common stock at or above the initial public offering price.

Stock markets have recently experienced extreme price and volume fluctuations. In the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that reflect our current views with respect to, among other things, our operations and financial performance. 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. These factors include but are not limited to those described under “Risk Factors.” These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

MARKET AND INDUSTRY DATA

This prospectus includes market and industry data and forecasts that we have derived from independent consultant reports, publicly available information, various industry publications, other published industry sources and our internal data and estimates. Independent consultant reports, industry publications and other published industry sources generally indicate that the information contained therein was obtained from sources believed to be reliable.

Although we believe that these third-party sources are reliable, we do not guarantee the accuracy or completeness of this information, and neither we nor the underwriters have independently verified this information. Some market data and statistical information are also based on our good faith estimates, which are derived from management’s knowledge of our industry and such independent sources referred to above. Certain market, ranking and industry data included elsewhere in this prospectus, including the size of certain markets and our size or position and the positions of our competitors within these markets, including our services relative to our competitors, are based on estimates of our management. These estimates have been derived from our management’s knowledge and experience in the markets in which we operate, as well as information obtained from surveys, reports by market research firms, our customers, distributors, suppliers, trade and business organizations and other contacts in the markets in which we operate and have not been verified by independent sources. Unless otherwise noted, all of our market share and market position information presented in this prospectus is an approximation. Our market share and market position in each of our lines of business, unless otherwise noted, is based on our sales relative to the estimated sales in the markets we served. References herein to our being a leader in a market or product category refer to our belief that we have a leading market share position in each specified market, unless the context otherwise requires. As there are no publicly available sources supporting this belief, it is based solely on our internal analysis of our sales as compared to our estimates of sales of our competitors. In addition, the discussion herein regarding our various end markets is based on how we define the end markets for our products, which products may be either part of larger overall end markets or end markets that include other types of products and services.

Our internal data and estimates are based upon information obtained from trade and business organizations and other contacts in the markets in which we operate and our management’s understanding of industry conditions. Although we believe that such information is reliable, we have not had this information verified by any independent sources.

 

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TRADEMARKS, SERVICE MARKS AND TRADE NAMES

We own or have rights to trademarks, service marks or trade names that we use in connection with the operation of our business. In addition, our names, logos and website domain names and addresses are our service marks or trademarks. We do not intend our use or display of other companies’ trademarks, service marks, copyrights or trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies. The trademarks we own or have the right to use include, among others, Apria. We also own or have the rights to copyrights that protect the content of our literature, be it in print or electronic form.

Solely for convenience, certain trademarks, service marks and trade names referred to in this prospectus are used without the or ® symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and trade names. All trademarks, service marks and trade names appearing in this prospectus are the property of their respective owners.

 

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USE OF PROCEEDS

We will not receive any proceeds from the sale of the shares of common stock offered by the selling stockholders (including any sales pursuant to the underwriters’ option to purchase additional shares from the selling stockholders).

 

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DIVIDEND POLICY

We have no current plans to pay dividends on our common stock following this offering. Any decision to declare and pay dividends in the future will be made at the sole discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our board of directors may deem relevant. Because we are a holding company and have no direct operations, we will only be able to pay dividends from funds we receive from our subsidiaries. In addition, our ability to pay dividends will be limited by covenants in our existing indebtedness and may be limited by the agreements governing any indebtedness we or our subsidiaries may incur in the future.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2020:

 

   

on a historical basis; and

 

   

on an as adjusted basis to reflect (x) the Credit Facility Amendment and cash dividend and distribution to SARs holders effected on December 15, 2020 and (y) the pre-IPO reorganization transactions described under “Summary—Our Organizational Structure.”

The information below is illustrative only and our capitalization following this offering will be adjusted based on the actual terms of this offering. Cash and cash equivalents are not components of our total capitalization. You should read this table together with the other information contained in this prospectus, including “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and related notes thereto included elsewhere in this prospectus.

 

    September 30, 2020  
           Actual                   As Adjusted         
    (In thousands, except share and per
share amounts)
 

Cash and cash equivalents(1)(2)

  $ 140,125     $ 186,774
 

 

 

   

 

 

 

Term Loan A(3)

  $ 146,250     $ 406,250

Apria, Inc. preferred stock, par value $0.01 per share, 100,000,000 shares authorized, zero shares issued and outstanding on an as adjusted basis

    —         —    

Apria, Inc. common stock, par value $0.01 per share, 1,000,000,000 shares authorized, and 35,210,915 outstanding on an as adjusted basis

    —         352  

Additional paid-in capital(4)(5)

    1,162,542       954,390  

Accumulated deficit

    (1,006,303     (1,006,303
 

 

 

   

 

 

 

Total stockholders’ equity

    156,239       (51,561
 

 

 

   

 

 

 

Total capitalization

  $ 302,489     $ 354,689  
 

 

 

   

 

 

 

 

(1)

Cash and cash equivalents on as adjusted basis reflects the proceeds from the Incremental Term Loans, the $200.3 million distribution to our stockholders and the $9.7 million distribution to SARs holders declared and paid in December 2020, along with payments for accrued transaction costs through September 30, 2020 and the cash settlement of the Tranche I RSUs (as defined herein).

(2)

Cash and cash equivalents on an as adjusted basis reflects the payment of approximately $1.6 million in respect of the Tranche I RSUs (as defined herein). In 2018, our Board of Directors determined it was appropriate to enter into a letter agreement with our chief financial officer (“CFO”) that provides for an additional long-term equity incentive award in the form of restricted stock units (“RSUs”), which will become granted by the Company pursuant to the Omnibus Incentive Plan upon the occurrence of this offering. The total value of RSUs granted to the CFO will be equal to 0.4% of the amount by which the equity value of the Company exceeds negative $36.181 million upon the occurrence of this offering. The total value to the CFO with respect to the RSUs is $3.2 million. The RSUs vest in tranches, with Tranche I RSUs vesting immediately upon the closing of the transaction and the remaining RSUs vesting in two equal tranches upon the six month and first year anniversary following the transaction, 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. It is our expectation that the Tranche I RSUs will be settled in cash and paid upon the closing of this offering. The RSUs will be accounted for as liability classified stock-based compensation. For further description of the RSUs, see “Executive and Director Compensation—Long-Term Cash Incentive Compensation”.

 

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(3)

Reflects the principal amount of outstanding debt under the Term Loan A Facility after giving effect to the Incremental Term Loans and is not presented net of unamortized debt issuance costs.

(4)

Additional paid-in capital on as adjusted basis is reduced by the $200.3 million dividend payment to our stockholders and a $9.7 million distribution to SARs holders declared and paid in December 2020. Given our accumulated deficit, the Company accounted for the dividend and distribution through additional paid-in capital by analogy to SAB Topic 3-C (codified in FASB ASC Topic 480).

(5)

Additional paid-in capital on as adjusted basis reflects the reclassification of the 2019 LTIP (as defined herein) from a liability to equity classified award. In connection with this offering, pursuant to the terms of the 2019 LTIP, the 2019 LTIP will be settled according to the existing vesting schedule in shares of our common stock with the number of shares determined by dividing the actual amount of each participant’s earned award by the volume-weighted average price of a share of our common stock over the 20 trading days following this offering, beginning on the first trading date after the date of this offering. For further description of the 2019 LTIP, see “Executive and Director Compensation—Long-Term Cash Incentive Compensation.”

 

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DILUTION

If you invest in shares of our common stock in this offering, your investment will be immediately diluted to the extent of the difference between the initial public offering price per share of common stock and the as adjusted net tangible book value per share of common stock after this offering. Dilution results from the fact that the per share offering price of the shares of common stock is substantially in excess of the as adjusted net tangible book value per share attributable to our pre-IPO owners.

Our net tangible book value as of September 30, 2020 was approximately $94.6 million, or $2.69 per share of common stock. Net tangible book value represents the amount of total tangible assets less total liabilities, and net tangible book value per share of common stock represents net tangible book value divided by the number of shares of common stock outstanding upon consummation of the pre-IPO reorganization transactions.

We will not receive any proceeds from the sale of common stock by the selling stockholders in this offering. Consequently, this offering will not result in any change to our net tangible book value per share, prior to giving effect to the payment of estimated fees and expenses in connection with this offering. Purchasing shares of common stock in this offering will result in net tangible book value dilution to new investors of $17.31 per share. The following table illustrates this per share dilution to new investors:

 

 

Initial public offering price per share of common stock

                           $ 20.00  

Net tangible book value per share of common stock as of September 30, 2020

      $ 2.69  
     

 

 

 

As adjusted net tangible book value per share of common stock after the offering

      $ 2.69  
     

 

 

 

Dilution per share of common stock to investors in this offering

      $ 17.31  
     

 

 

 

The following table summarizes, as of September 30, 2020, the average price per share paid by pre-IPO owners and by investors in this offering. As the table shows, new investors purchasing shares in this offering will pay an average price per share lower than our pre-IPO owners paid. The table below excludes underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares of
Common
Stock Purchased
     Total
Consideration
    Average
Price Per
Share of
Common Stock
 
     Number      Percent      Amount     Percent  
    

(In thousands)

 

Pre-IPO owners

     27,710,915        78.7%      $ 676,908 (1)     81.9   $ 24.43

Investors in this offering

     7,500,000        21.3%      $ 150,000       18.1   $ 20.00  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

     35,210,915        100.0%      $ 826,908       100.0   $ 23.48  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(1)

New investors purchasing shares in this offering will pay an average price per share lower than the price paid by our pre-IPO owners. The total consideration paid by our pre-IPO owners has not been adjusted for returns on such consideration arising from distributions.

If the underwriters were to exercise in full their option to purchase 1,125,000 additional shares of our common stock from the selling stockholders, the percentage of shares of our common stock held by pre-IPO owners as of September 30, 2020 would be 75.5% and the percentage of shares of our common stock held by new investors in this offering would be 24.5%.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

We derived the selected statement of income data for the years ended December 31, 2019, 2018 and 2017 and the selected balance sheet data as of December 31, 2019 and 2018 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the selected statement of income data for the years ended December 31, 2016 and 2015 and balance sheet data as of December 31, 2017, 2016 and 2015, from our consolidated financial statements that are not included in this prospectus. The selected statement of income data for the nine months ended September 30, 2020 and 2019 and the selected balance sheet data as of September 30, 2020 were derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The unaudited condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of our management, reflect all normal recurring adjustments necessary for the fair statement of our consolidated results for these periods. The results for any interim period are not necessarily indicative of the results that may be expected for the full year. Our historical results are not necessarily indicative of the results expected for any future period.

You should read the selected historical financial data below, together with the consolidated financial statements and related notes thereto appearing elsewhere in this prospectus, as well as “Summary—Summary Historical Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the other financial information included elsewhere in this prospectus.

On January 1, 2019, we adopted FASB ASU No. 2016-02, Leases (“Topic 842”), using the modified

retrospective transition method. For lessor accounting, upon adoption the provision for doubtful accounts

associated with rental revenue of $34.5 million for the year ended December 31, 2019 is now charged to net rental revenue instead of general and administrative expense. For lessee accounting, upon adoption total assets and total liabilities increased $74.4 million as of January 1, 2019.

The comparative information for periods prior to adoption has not been restated and continues to be reported under the accounting standards in effect for those periods.

 

    Nine Months Ended
September 30,
    Year Ended December 31,  
(in thousands, except per share
data)
  2020     2019     2019     2018     2017     2016     2015  

Statement of Income Data:

             

Total net revenues(1)(2)

  $ 814,928     $ 807,710     $ 1,088,875     $ 1,110,883     $ 1,073,810     $ 1,061,258     $ 1,094,434  

Operating income(1)

    36,898       15,098       27,415       20,397       26,151       7,500       21,870  

Net income(3)(4)(5)

    20,268       9,840       15,622       13,127       96,951       9,731       20,001  

Basic and diluted earnings per share

  $ 20.42     $ 9.91     $ 15.74     $ 13.22     $ 97.66     $ 9.80     $ 20.92  

Pro Forma Earnings Per Share Information:(6)

             

Pro forma basic earnings per share

  $ 0.58       $ 0.44          

Pro forma diluted earnings per share

  $ 0.54       $ 0.42          

Pro forma basic weighted average shares outstanding

    35,210,915         35,210,915          

Pro forma diluted weighted average shares outstanding

    37,525,139         37,565,139          

 

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    September 30,      December 31,  
    2020      2019     2018     2017     2016     2015  

Balance Sheet Data:

            

Total assets(2)

  $ 645,051      $ 617,153     $ 576,222     $ 643,553     $ 535,675     $ 525,797  

Total liabilities(2)(3)(7)

    488,812        482,637       290,970       298,049       288,843       290,078  

Total stockholders’ equity(8)

    156,239        134,516       285,252       345,504       246,832       235,719  

 

(1)

On January 1, 2018, we adopted Topic 606, using the modified retrospective method. Upon adoption, patient co-pay and deductible amounts that were previously included in the provision for doubtful accounts related to implicit price concessions, which were $9.5 million for the year ended December 31, 2018, are now presented as an offsetting adjustment to the related fee-for-service sale net revenues. The comparative information for periods prior to adoption has not been restated and continues to be reported under the accounting standards in effect for those periods.

(2)

On January 1, 2019, we adopted Topic 842, using the modified retrospective transition method. For lessor accounting, upon adoption the provision for doubtful accounts associated with rental revenue of $34.5 million for the year ended December 31, 2019 is now charged to net rental revenue instead of general and administrative expense. For lessee accounting, upon adoption total assets and total liabilities increased $74.4 million as of January 1, 2019. The comparative information for periods prior to adoption has not been restated and continues to be reported under the accounting standards in effect for those periods.

(3)

For the nine months ended September 30, 2020 and year ended December 31, 2019, net income reflects an expense of $32.5 million and $12.2 million, respectively, representing the estimated probable loss in relation to a series of civil investigative demands from the United States Attorney’s Office for the Southern District of New York. See “Business—Legal Proceedings—Civil Investigative Demand Issued by the United States Attorney’s Office for the Southern District of New York” and Note 8 in our unaudited condensed consolidated financial statements included elsewhere in this prospectus for additional information.

(4)

For the year ended December 31, 2017, net income reflects the net valuation allowance release of $105.1 million on the basis of our reassessment of the amount of deferred tax assets that are more likely than not to be realized, offset by a charge to tax expense of $24.2 million due to the re-measurement of deferred tax assets and liabilities resulting from the decrease in federal corporate tax rate as a result of the enactment of the Tax Cuts and Jobs Act in December 2017.

(5)

For the year ended December 31, 2015, $20.0 million relates to income from continuing operations, which excludes $0.8 million of income from operations of discontinued component Home Infusion Segment included in net income.

(6)

Unaudited basic pro forma earnings per share is computed using historical net income for the period divided by the pro forma weighted average number of common shares outstanding during the period after giving effect to the pre-IPO reorganization transactions. Pro forma diluted earnings per share is computed using the weighted average number of common shares and the effect of dilutive equity awards after giving effect to the pre-IPO reorganization transactions.

(7)

On June 21, 2019, we entered the Credit Facility. Proceeds from the TLA were used to fund the dividend payment to common stockholders and SARs holders.

(8)

In June 2019, we declared and paid a $175.0 million dividend to common stockholders and SARs holders. In June 2018, we declared $75.0 million in dividends paid to common stockholders on July 5, 2018.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the “Selected Historical Consolidated Financial Data” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in “Forward-Looking Statements” and “Risk Factors.”

Our Company

We are a leading provider of integrated home healthcare equipment and related services in the United States. We offer a comprehensive range of products and services for in-home care and delivery across three core service lines: (1) home respiratory therapy (including home oxygen and NIV services); (2) OSA treatment (including CPAP and bi-level positive airway pressure devices, and patient support services); and (3) NPWT. Additionally, we supply 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. Our revenues are generated through fee-for-service and capitation arrangements with Payors for equipment, supplies, services and other items we rent or sell to patients. Through our offerings, we also provide patients with 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. We are focused on being the industry’s highest-quality provider of home healthcare equipment and related services, while maintaining our commitment to being a low-cost operator. We offer a compelling value proposition to patients, providers and Payors by allowing patients to receive necessary care and services in the comfort of their own home, while, at the same time, reducing the costs of treatment. We generated over $1 billion of net revenue in 2019, of which approximately 80% was from home respiratory therapy and OSA treatment, service categories in which we believe we have a leading market position.

We believe our integrated product and service offerings, combined with our national scale and strong reputation, provide us with a strategic advantage in being a preferred home healthcare provider for patients, providers and Payors. Our Payors include substantially all of the national and regional insurers, managed care organizations and government Payors in the United States. We benefit from long-standing relationships with a community of providers and referral sources for post-acute services across the acuity spectrum because of the consistency and reliability of our high quality clinical support, our national distribution footprint and our breadth of Payor relationships.

Our product and service offerings are distinguished by the complexity and sophistication required in their clinical delivery, logistical coordination and payment arrangements. We offer patients and providers differentiated clinical service, leveraging our protocols and expertise to improve outcomes across our service lines. With an expansive network of delivery technicians and therapists that is not readily replicated, we are able to provide home healthcare therapies that require high-touch service, providing a bridge from the acute care setting to the home. In 2019, we served nearly 2 million patients, made over 2.4 million deliveries and conducted over 744,000 clinician interactions with our patients.

The healthcare sector is heavily regulated, and our business is accordingly subject to extensive government regulation, including numerous laws directed at regulating reimbursement of our products and services under various government programs and preventing fraud and abuse. For additional information, see “Business—Government Regulation.”

 

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Trends and Factors Affecting our Future Performance

Significant trends and factors that we believe may affect our future performance include:

 

   

Growing addressable markets. We are aligned with large and growing addressable markets across our core service lines. The broader U.S. markets for respiratory devices and OSA devices, which align with our home respiratory and OSA treatment product lines, two of our core product lines and which represent over 80% of 2019 net revenue, are expected by industry analysts to grow at CAGRs of approximately 6% and approximately 8%, respectively, between 2018 and 2025.

 

   

Aging population. As the baby boomer population ages and life expectancy increases, the elderly—who comprise a large portion of our patients—will represent a higher percentage of the overall population. The CMS Office of the Actuary projects that the number of Medicare beneficiaries will grow, on average, by 2.5% annually over the period from 2020 to 2028 and the U.S. Census Bureau projects that the United States population aged 65 and over will grow substantially from 15.2% of the population in 2016 to 20.6% of the population by 2030. This demographic trend has resulted in patient volume growth in the United States and is expected to continue to drive volume growth.

 

   

Rising incidence of chronic diseases. Increasing obesity rates, the clinical consequences of the high prevalence of smoking from earlier decades, the current under-diagnosis of certain health conditions and higher diagnosis rates for a number of chronic health conditions, such as chronic obstructive pulmonary disease, OSA, diabetes and others, have collectively driven growth in the industry. We believe that in the United States 1 in 15 adults has moderate to severe obstructive sleep apnea, while 1 in 10 adults has diabetes, with asthma similarly prevalent among adults. We believe that patients with these chronic conditions will increasingly be treated in their homes instead of in the hospital setting and utilize the services that we provide.

 

   

Transition to value-based healthcare. Government and commercial Payors are increasingly seeking ways to shift from traditional fee-for-service to a value-based model. We believe that the ability to transition patients from the acute care setting to the home represents a critical part of this effort. As a leading provider of home healthcare services, we believe that we will increasingly benefit from this paradigm shift in the industry. In addition, we believe our demonstrated expertise in non-traditional payment models, such as capitation arrangements, will position us well to take advantage of this trend.

 

   

Increased prevalence of and preference for in-home treatments. Improved technology has resulted in a wider variety of treatments being administered in patient homes, and medical advancements have also made medical equipment more simple, adaptable and cost-effective for use in the home. According to CMS estimates, between 2020 and 2028, U.S. home healthcare spending is projected to increase to $201.3 billion, growing at a CAGR of approximately 7%.

 

   

Consolidation of the highly fragmented market to the benefit of national players. Between 2012 and 2018, the overall number of DMEPOS suppliers that bill Medicare more than $10 million annually fell from 73 to 57, and between 2013 and 2020, the total number of DMEPOS suppliers that bill Medicare fell from 8,837 to 6,152, a decline of approximately 30%. We attribute this decline to the inability of smaller regional players to make the significant capital investment and achieve the scale required to effectively compete in the economic environment that followed the implementation of the CBP. We believe that the home healthcare market will continue to favor larger, financially stable, national players with consistent, scalable, high quality service.

 

   

Decreasing price and reimbursement levels. We expect to continue to face pricing pressures from Medicare and Medicaid, as a result of programs such as the DMEPOS CBP or government sequestrations, as well as from our managed care Payors as they seek to lower costs by obtaining more favorable pricing from providers such as us. In addition to the pricing reductions, such changes could cause us to provide reduced levels of certain products and services in the future, resulting in corresponding reductions in revenue.

 

   

Cost containment efforts of Payors. The consolidation of our managed care Payors into larger purchasing groups, such as group purchasing organizations and integrated delivery networks, has

 

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increased their negotiating and purchasing power. This trend, in turn, has resulted in increasing pricing pressure on us due to the consolidation of healthcare facilities, purchasing groups and U.S.-based insurance Payors, pricing concessions and other cost containment efforts, such as the CBP. Contracts with Payors that generated approximately 42% of our revenue in 2019 will expire in 2021.

Certain additional items may impact the comparability of the historical results presented below with our future performance, such as:

 

   

Cost of being a public company. To operate as a public company, we will be required to continue to implement changes in certain aspects of our business and develop, manage, and train management level and other employees to comply with ongoing public company requirements. We will also incur new expenses as a public company, including public reporting obligations, proxy statements, stockholder meetings, stock exchange fees, transfer agent fees, SEC and Financial Industry Regulatory Authority filing fees and offering expenses.

 

   

Investment in longer-lived respiratory equipment. We have made significant capital investments in ventilation products with longer useful lives than traditional home oxygen equipment. We expect this legacy investment will continue to generate revenue in future periods without the need for significant incremental capital, enhancing our cash flows.

Impact of COVID-19 Pandemic

Our priorities during the COVID-19 pandemic are protecting the health and safety of our employees (including patient-facing employees providing respiratory and other services), maximizing the availability of our services and products to support patient health needs, and the operational and financial stability of our business.

In response to the COVID-19 pandemic and the National Emergency Declaration, dated March 13, 2020, we activated certain business interruption protocols, including acquisition and distribution of personal protective equipment (PPE) to our patient-facing employees, accelerated capital expenditures of certain products and relocation of significant portions of our workforce to “work-from-home” status.

While the impact of the COVID-19 pandemic, the National Emergency Declaration and the various state and local government imposed stay-at-home restrictions did not have a material adverse impact on our consolidated operating results for the nine months ended September 30, 2020, we have experienced declines in net revenues in certain services associated with elective medical procedures and the disruption in physician practices (such as commencement of new CPAP services, ventilation therapy and negative pressure wound therapy) and such declines may continue during the duration of the COVID-19 pandemic. Offsetting these declines in net revenue, we have experienced an increase in net revenue related to increased demand for certain respiratory products (such as oxygen), particularly in the fourth quarter of 2020, increased sales in our resupply businesses (primarily as a result of the increased ability to contact patients at home as a result of state and local government imposed stay-at-home orders) and the one-time sale of certain respiratory equipment (primarily ventilators) to hospitals. In response, we have instituted temporary cost mitigation measures such as reduced hours and furloughs for a small subset of our impacted workforce. In addition, as part of the CARES Act (discussed in more detail in the Medicare Reimbursement section below), we experienced an increase in Medicare reimbursement rates which will last through the later of April 20, 2021 or the end of the public health emergency and a suspension of Medicare sequestration through December 31, 2020 (resulting in a 2% increase in Medicare payments to all providers) resulting in a temporary increase in net revenues for certain products and services. The Consolidated Appropriations Act, 2021, signed into law on December 27, 2020, extends the suspension of Medicare sequestration through March 31, 2021. Recent regulatory guidance from CMS expanding telemedicine and reducing documentation requirements during the emergency period is also expected to result in increased net revenues for certain products and services. We have not experienced a significant slowdown in cash collections, and as a result our cash flow from operations has not been materially adversely impacted to date.

 

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We are closely monitoring the impact of COVID-19 pandemic on our business. It is difficult to predict the future impact of COVID-19 may have on our business, results of operations, financial position and cash flows. For additional information on risk factors that could impact our results, please refer to “Risk Factors” in this prospectus.

Components of Operating Results

Net Revenues. Revenues are recognized under fee-for-service and capitation arrangements for equipment, supplies, services and other items we rent or sell to patients. Fee-for-service is a payment model where we are paid for our service to provide equipment, supplies and other items. Capitation is a payment arrangement where a set amount is paid per member per month for a defined patient population, based on a negotiated contractual rate derived using average expected utilization of services.

Revenue generated from equipment that we rent to patients is recognized over the noncancelable rental period and commences on delivery of the equipment to the patients. Revenue related to sales of equipment and supplies is recognized on the date of delivery to the patients. Capitation revenue is recognized as a result of entering into a contract with a third party to stand ready to provide its members certain services without regard to the actual services provided; therefore, revenue is recognized over the period that the beneficiaries are entitled to healthcare services. Due to the nature of our industry and the reimbursement environment in which we operate, certain estimates are required to record total net revenues.

Cost of Net Revenues and Gross Margin.

Cost of Net Revenues. We incur product and supply costs, depreciation of patient equipment, home respiratory therapists costs and other costs in connection with providing our services:

 

   

Product and supply costs are comprised primarily of the cost of supplies, equipment and accessories provided to patients.

 

   

Patient equipment 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 our consolidated statements of income within costs of net revenues as the equipment is rented to patients as part of our primary operations. Patient equipment is generally placed for rent; however, it could also be sold to customers. Upon a sale, we record the proceeds of the sale within net revenue and the cost related to the carrying net book value as other costs within cost of net revenues in our consolidated statements of income.

 

   

Home respiratory therapists costs 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.

Gross Margin. Gross margin is gross profit expressed as a percentage of net revenues. Our gross margin is impacted by Payor and product mix, fluctuations in pricing of supplies, equipment and accessories, as well as changes in reimbursement rates.

Provision for Doubtful Accounts. Prior to the adoption of Topic 842, the provision for doubtful accounts is based on our estimate of the net realizable value of accounts receivable. Significant estimates and judgments are required in determining the provision for doubtful accounts. Upon adoption of Topic 842, we have elected to record 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.

Selling, Distribution and Administrative. Selling, distribution and administrative expenses are comprised of expenses incurred in support of our operations and administrative functions and includes labor costs, such as

 

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salaries, bonuses, commissions, benefits and travel-related expenses for our employees, facilities rental costs, third-party revenue cycle management costs and corporate support costs including finance, information technology, legal, human resources, procurement, and other administrative costs. Distribution expenses 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, benefits and other costs related to drivers and dispatch personnel; and amounts paid to couriers and other third-party logistics and shipping vendors.

Income Tax Expense (Benefit). Our provision for income taxes is based on expected income, permanent book/tax differences and statutory tax rates in the various jurisdictions in which we operate. Significant estimates and judgments are required in determining the provision for income taxes.

Seasonality

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

Key Performance Metrics

We regularly review key performance metrics to evaluate our business, measure our performance, identify trends in our business, prepare financial projections and make strategic decisions.

EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex. We use the non-GAAP financial information of EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex as key profitability measures to evaluate the business. Refer to the “Non-GAAP financial information” section for further detail, including a table reconciling each of such measures to net income, the most directly comparable GAAP measure. The below table sets forth net income, EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex for each of the nine months ended September 30, 2020 and 2019 and for the years ended December 31, 2019, 2018 and 2017:

 

     Nine Months Ended
September 30,
     Year Ended December 31,  
(in thousands)        2020              2019          2019      2018      2017  

Net income

   $ 20,268      $ 9,840      $ 15,622      $ 13,127      $ 96,951  

EBITDA

   $ 123,813      $ 98,348      $ 138,991      $ 145,386      $ 145,448  

Adjusted EBITDA

   $ 162,765      $ 118,963      $ 173,972      $ 155,727      $ 153,340  

Adjusted EBITDA less Patient Equipment Capex

   $ 99,283      $ 45,562      $ 80,523      $ 45,579      $ 3,417  

 

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Results of Operations

Comparison of Nine Months Ended September 30, 2020 and Nine Months Ended September 30, 2019.

The following table summarizes our consolidated results of operations:

 

     Nine Months Ended September 30,              
(dollar amounts in thousands)          2020                 2019           Change $     Change %  

Net revenues

   $ 814,928     $ 807,710     $ 7,218       0.9

Cost of net revenues, including related depreciation

     243,920       255,066       (11,146     (4.4 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     571,008       552,644       18,364       3.3

Selling, distribution and administrative

     534,110       537,546       (3,436     (0.6 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     778,030       792,612       (14,582     (1.8 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     36,898       15,098       21,800       144.4

Interest expense

     4,047       3,345       702       21.0

Interest income and other

     (451     (1,552     (1,101     (70.9 )% 

Income tax expense

     13,034       3,465       9,569       NM * 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 20,268     $ 9,840     $ 10,428       106.0
  

 

 

   

 

 

   

 

 

   

 

 

 

 

*

NM     Not meaningful

Net Revenues. Net revenues for the nine months ended September 30, 2020 were $814.9 million compared to $807.7 million for the nine months ended September 30, 2019, an increase of $7.2 million or 0.9%. The increase in net revenues for the nine months ended September 30, 2020 was primarily due to higher reimbursement levels driven by revenue cycle management improvements and growth in OSA treatment and ventilation therapy. The increase was partially offset by a decrease in net revenues from enteral nutrition as part of our strategic deemphasis of the product, a decrease in oxygen volume, and reduced demand for certain products and services associated with elective medical procedures and the disruption in physician practices (such as commencement of new CPAP services, ventilation therapy and negative pressure wound therapy) during the COVID-19 pandemic. The increase in net revenues was also due to increased Medicare reimbursement rates from the CARES Act and the temporary suspension of Medicare sequestration, partially offset by reductions in commercial Payor reimbursement rates. Our core services comprise total net revenues as follows:

 

     Nine Months Ended September 30,               
(dollar amounts in thousands)          2020                  2019            Change $     Change %  

Home respiratory therapy

   $ 335,277      $ 325,422      $ 9,855       3.0

OSA treatment

     330,966        319,971        10,995       3.4

NPWT

     30,751        30,345        406       1.3

Other equipment and services

     117,934        131,972        (14,038     (10.6 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Net revenues

   $ 814,928      $ 807,710      $ 7,218       0.9
  

 

 

    

 

 

    

 

 

   

 

 

 

Net revenues for the nine months ended September 30, 2020 increased primarily due to the following:

 

   

Home respiratory therapy. Net revenues increased 3.0% primarily due to increased volume of patients requiring ventilation therapy and higher reimbursement levels, partially offset by decreased volume of oxygen therapy. Net revenues also increased due to increased Medicare reimbursement rates from the CARES Act and the temporary suspension of Medicare sequestration partially offset by a reduction in commercial Payor reimbursement rates.

 

   

OSA treatment. Net revenues increased 3.4% primarily due to organic growth in equipment and related supplies, as well as higher reimbursement levels, despite experiencing a reduction in demand from new

 

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patient starts during the COVID-19 pandemic. The increase in net revenues was offset by reductions in commercial Payor reimbursement rates which were in turn partially offset by increased Medicare reimbursement rates from the CARES Act and the temporary suspension of Medicare sequestration.

 

   

NPWT. Net revenues increased 1.3% due to higher reimbursement levels and increased volume resulting from the deliberate focus of our NPWT sales force on acute referral sources, where most wound treatment begins, despite experiencing a reduction in demand associated with elective medical procedures during the COVID-19 pandemic. The increase was partially offset by a reduction in reimbursement rates.

 

   

Other equipment and services. Net revenues decreased 10.6% primarily due to a decrease in enteral nutrition as part of our strategic deemphasis of the product in 2019 and a decrease in other respiratory therapy volume partially due to a reduction in demand associated with elective medical procedures and the disruption in physician practices during the COVID-19 pandemic.

Revenues reimbursed under arrangements with Medicare and Medicaid were approximately 21% and 1%, respectively, of total net revenues for the nine months ended September 30, 2020. Revenues reimbursed under arrangements with Medicare and Medicaid were approximately 19% and 1%, respectively, of total net revenues for the nine months ended September 30, 2019.

Cost of Net Revenues and Gross Margin.

Cost of Net Revenues. Cost of net revenues for the nine months ended September 30, 2020 was $243.9 million compared to $255.1 million for the nine months ended September 30, 2019, a decrease of $11.1 million or 4.4%. The decrease in cost of net revenues for the nine months ended September 30, 2020 was primarily due to lower product and supply costs and lower home respiratory therapists costs offset by increased patient equipment depreciation as described below. Our cost of net revenues was as follows:

 

     Nine Months Ended September 30,               
(dollar amounts in thousands)          2020                  2019            Change $     Change %  

Product and supply costs

   $ 141,563      $ 154,591      $ (13,028     (8.4 )% 

Patient equipment depreciation

     75,840        72,588        3,252       4.5

Home respiratory therapists costs

     12,848        14,844        (1,996     (13.4 )% 

Other

     13,669        13,043        626       4.8
  

 

 

    

 

 

    

 

 

   

 

 

 

Total cost of net revenues

   $ 243,920      $ 255,066      $ (11,146     (4.4 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Product and supply costs decreased primarily due to a decrease in enteral nutrition costs as part of our strategic deemphasis of the product in 2019 as well as reduced demand in certain services associated with elective medical procedures and the disruption in physician practices during the COVID-19 pandemic. The decrease was partially offset by increased product and supply costs to support increased volume in OSA treatment.

Patient equipment depreciation costs increased primarily as a result of equipment purchases to support increased volume in OSA treatment.

Home respiratory therapists costs decreased primarily due to reduced demand in certain services associated with elective medical procedures and the disruption in physician practices during the COVID-19 pandemic.

Other costs increased as a result of a $1.9 million insurance settlement in the prior year, partially offset by a decrease in volume of sales or title transfers of patient equipment driven by contractual requirements.

Gross margin. Gross margin for the nine months ended September 30, 2020 was 70.1% compared to 68.4% for the nine months ended September 30, 2019, an increase of 1.7%. The gross margin increase was driven by

 

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higher reimbursement levels due to revenue cycle management improvements, increased Medicare reimbursement rates from the CARES Act, the temporary suspension of Medicare sequestration and reduced demand for certain products and services associated with elective medical procedures and the disruption in physician practices under capitation arrangements during the COVID-19 pandemic. The increase was partially offset by increased patient equipment depreciation and reductions in commercial Payor reimbursement rates.

Selling, Distribution and Administrative. Selling, distribution and administrative expenses for the nine months ended September 30, 2020 were $534.1 million compared to $537.5 million for the nine months ended September 30, 2019, a decrease of $3.4 million or 0.6%. Selling, distribution and administrative expenses for the nine months ended September 30, 2020 were 65.5% of total net revenues compared to 66.6% of total net revenues for the nine months ended September 30, 2019. The decrease was primarily due to a reduction in operating costs as a result of our 2019 business transformation initiative to shift to a patient-centric platform and optimize end-to-end customer service, including a reduction in the associated $9.8 million one-time costs of the initiative, as well as, a reduction in costs in response to the COVID-19 pandemic. It is difficult to ascertain with precision what portion of the decrease is attributable to the COVID-19 pandemic as compared to the impact of the business improvements. The reduction in costs also includes a $6.6 million decrease in stock compensation expense related to the accelerated vesting of outstanding performance Class B profit interest units in 2019. The reductions were partially offset by increased one-time legal expenses of $32.5 million, representing the change in the estimated probable loss in relation to a series of civil investigative demands, higher incentive compensation based on performance, a special recognition bonus for employees that do not otherwise participate in the Company’s variable compensation programs and an increase in other one-time costs primarily associated with this offering and implementation of a new financial system.

Income Tax Expense. Income tax expense for the nine months ended September 30, 2020 was $13.0 million compared to $3.5 million for the nine months ended September 30, 2019, an increase of $9.6 million. Our effective tax rate was 39.1% and 26.0% for the nine months ended September 30, 2020 and 2019, respectively. The change in income tax expense is primarily a result of increased taxable operating income. For the nine months ended September 30, 2020, the Company’s effective tax rate differed from federal and state statutory rates primarily due to non-deductible expenses for tax purposes.

Comparison of Years Ended December 31, 2019 and December 31, 2018.

The following table summarizes our consolidated results of operations:

 

     Year Ended December 31,              
(dollar amounts in thousands)    2019     2018     Change $     Change %  

Net revenues(1)

   $ 1,088,875     $ 1,110,883     $ (22,008     (2.0 )% 

Cost of net revenues, including related depreciation

     340,714       360,086       (19,372     (5.4 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     748,161       750,797       (2,636     (0.4 )% 

Provision for doubtful accounts(1)

     —         31,719       (31,719     (100.0 )% 

Selling, distribution and administrative

     720,746       698,681       22,065       3.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     1,061,460       1,090,486       (29,026     (2.7 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     27,415       20,397       7,018       34.4

Interest expense

     5,112       1,338       3,774       282.1

Interest income and other

     (1,446     (897     (549     61.2

Income tax expense

     8,127       6,829       1,298       19.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 15,622     $ 13,127     $ 2,495       19.0
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Upon adoption the provision for doubtful accounts associated with rental revenue of $34.5 million for the year ended December 31, 2019 is now treated as net rental revenue instead of general and administrative expense.

 

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Net Revenues. Net revenues for the year ended December 31, 2019 were $1,088.9 million compared to $1,110.9 million for the year ended December 31, 2018, a decrease of $22.0 million or 2.0%. The decrease in net revenues for the year ended December 31, 2019 was primarily driven by the impact of adopting Topic 842. Upon adoption the provision for doubtful accounts associated with rental revenue of $34.5 million for the year ended December 31, 2019 is now treated as net rental revenue instead of general and administrative expense. Our core services comprise total net revenues as follows:

 

     Year Ended December 31,               
(dollar amounts in thousands)    2019      2018      Change $     Change %  

Home respiratory therapy

   $ 435,680      $ 441,190      $ (5,510     (1.2 )% 

OSA treatment

     438,572        430,354        8,218       1.9

NPWT

     42,122        41,383        739       1.8

Other equipment and services

     172,501        197,956        (25,455     (12.9 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Net revenues

   $ 1,088,875      $ 1,110,883      $ (22,008     (2.0 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Net revenues for the year ended December 31, 2019 decreased primarily due to the following:

 

   

Home respiratory therapy. Net revenues decreased 1.2% primarily due to reserves for expected credit losses of $19.9 million being recorded to net rental revenue under the adoption of Topic 842 in 2019, as well as reductions in the reimbursement rates of oxygen therapy. The decrease was partially offset by increased volume of patients requiring ventilation therapy, partially offset by decreased volume of oxygen therapy, each driven by the focus of our sales efforts towards physicians treating ventilation patients.

 

   

OSA treatment. Net revenues increased 1.9% primarily due to increased volume as a result of the rising diagnoses of OSA across the industry and the related increase in equipment rentals and supplies partially offset by reductions in reimbursement rates and reserves for expected credit losses of $10.0 million being recorded to net rental revenue under the adoption of Topic 842 in 2019.

 

   

NPWT. Net revenues increased 1.8% due to increased volume resulting from the deliberate focus of our NPWT sales force on acute referral sources, where most wound treatment begins. The increased volume was partially offset by reductions in reimbursement rates and reserves for expected credit losses of $1.3 million being recorded to net rental revenue under the adoption of Topic 842 in 2019.

 

   

Other equipment and services. Net revenues decreased 12.9% primarily due to a decrease in enteral nutrition as part of our strategic deemphasis of the product in 2019, a decrease in respiratory medications and other respiratory therapy volume due to our strategic shift towards patients requiring ventilation therapy as well as reserves for expected credit losses of $3.3 million being recorded to net rental revenue under the adoption of Topic 842 in 2019.

Revenues reimbursed under arrangements with Medicare and Medicaid were approximately 19% and 1%, respectively, of total net revenues for the year ended December 31, 2019. Revenues reimbursed under arrangements with Medicare and Medicaid were approximately 18% and 1%, respectively, of total net revenues for the year ended December 31, 2018.

 

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Cost of Net Revenues and Gross Margin.

Cost of Net Revenues. Cost of net revenues for the year ended December 31, 2019 were $340.7 million compared to $360.1 million for the year ended December 31, 2018, a decrease of $19.4 million or 5.4%. Our cost of net revenues was as follows:

 

     Year Ended December 31,               
(dollar amounts in thousands)    2019      2018      Change $     Change %  

Product and supply costs

   $ 206,067      $ 218,099      $ (12,032     (5.5 )% 

Patient equipment depreciation

     97,386        108,340        (10,954     (10.1 )% 

Home respiratory therapists costs

     19,560        20,371        (811     (4.0 )% 

Other

     17,701        13,276        4,425       33.3
  

 

 

    

 

 

    

 

 

   

 

 

 

Total cost of net revenues

   $ 340,714      $ 360,086      $ (19,372     (5.4 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Product and supply costs decreased primarily due to a decrease in enteral nutrition costs as part of our strategic deemphasis of the product in 2019. The decrease was partially offset by increased product and supply costs to support increased volume in OSA treatment and increased patient equipment dispositions cost.

Patient equipment depreciation costs decreased primarily as a result of a contractual change in the timing of when title to certain patient equipment is transferred to the patient. The decrease was partially offset by the related increase in patient equipment costs included in other costs and increased disposition costs included in product and supply costs. Patient equipment depreciation costs also decreased due to oxygen therapy equipment becoming fully depreciated without replacement.

Gross margin. Gross margin for the year ended December 31, 2019 was 68.7% compared to 67.6% for the year ended December 31, 2018, an increase of 1.1%. The gross margin increase was driven by favorable product mix and lower patient equipment depreciation. The favorability was partially offset by a 1.0% reduction due to reserves for expected credit losses being recorded to net rental revenue under the adoption of Topic 842 in 2019 and lower reimbursement rates.

Provision for Doubtful Accounts. Provision for doubtful accounts for the year ended December 31, 2019 was $0.0 million compared to $31.7 million for the year ended December 31, 2018, a decrease of $31.7 million or 100.0%. The provision for doubtful accounts, expressed as a percentage of total net revenues, was 0.0% and 2.9% for the years ended December 31, 2019 and December 31, 2018, respectively. The decrease in the provision for doubtful accounts for the year ended December 31, 2019 was due to the adoption of Topic 842. Upon adoption the provision for doubtful accounts associated with rental revenue of $34.5 million for the year ended December 31, 2019 is now charged to net rental revenue instead of general and administrative expense.

Selling, Distribution and Administrative. Selling, distribution and administrative expenses for the year ended December 31, 2019 were $720.7 million compared to $698.7 million for the year ended December 31, 2018, an increase of $22.1 million or 3.2%. Selling, distribution and administrative expenses for the year ended December 31, 2019 were 66.2% of total net revenues compared to 62.9% of total net revenues for the year ended December 31, 2018.

The increase was primarily a result of increased one-time costs associated with our strategic transformation initiatives of $10.1 million, an accrual related to the CID legal matter of $12.2 million and stock compensation expense of $7.4 million, partially offset by a decrease in costs directly attributable to the initial public offering of $5.1 million. The increase was also offset by the continued favorable outcome of improved productivity initiatives and related reductions in operating costs associated with the strategic transformation.

 

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Comparison of Years Ended December 31, 2018 and December 31, 2017.

The following table summarizes our consolidated results of operations:

 

     Year Ended December 31,              
(dollar amounts in thousands)    2018     2017     Change $     Change %  

Net revenues

   $ 1,110,883     $ 1,073,810     $ 37,073       3.5

Cost of net revenues, including related depreciation

     360,086       332,545       27,541       8.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     750,797       741,265       9,532       1.3

Provision for doubtful accounts

     31,719       42,672       (10,953     (25.7 )% 

Selling, distribution and administrative

     698,681       672,442       26,239       3.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     1,090,486       1,047,659       42,827       4.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     20,397       26,151       (5,754     (22.0 )% 

Interest expense

     1,338       1,246       92       7.4

Interest income and other

     (897     (486     (411     84.6

Income tax expense (benefit)

     6,829       (71,560     78,389       (109.5 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 13,127     $ 96,951     $ (83,824     (86.5 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Revenues. Net revenues for the year ended December 31, 2018 were $1,110.9 million compared to $1,073.8 million for the year ended December 31, 2017, an increase of $37.1 million or 3.5%. The increase was primarily due to volume growth in home respiratory therapy and OSA treatment as described below. The increase in net revenues for the year ended December 31, 2018 was partially offset by the impact of adopting Topic 606. Upon adoption, patient co-pay and deductible amounts that were previously included in the provision for doubtful accounts in selling, general and administrative costs related to implicit price concessions, which were $9.5 million for the year ended December 31, 2018, are now presented as an offsetting adjustment to the related fee-for-service sale net revenues.

Our core services comprise total net revenues as follows:

 

     Year Ended December 31,               
(dollar amounts in thousands)    2018      2017      Change $     Change %  

Home respiratory therapy

   $ 441,190      $ 432,416      $ 8,774       2.0

OSA treatment

     430,354        400,672        29,682       7.4

NPWT

     41,383        42,013        (630     (1.5 )% 

Other equipment and services

     197,956        198,709        (753     (0.4 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Net revenues

   $ 1,110,883      $ 1,073,810      $ 37,073       3.5
  

 

 

    

 

 

    

 

 

   

 

 

 

Net revenues for the year ended December 31, 2018 increased primarily due to the following:

 

   

Home respiratory therapy. Net revenues increased 2.0% primarily due to increased volume offset by a reduction in the reimbursement rates of oxygen therapy and implicit price concessions under the adoption of Topic 606 of $2.3 million. The increase in volume was primarily the result of an increase in patients requiring ventilation therapy, which was driven by the focus of our sales efforts towards physicians treating ventilation patients.

 

   

OSA treatment. Net revenues increased 7.4% primarily due to increased volume as a result of the rising diagnoses of OSA across the industry and the related increase in equipment rentals and supplies. The increase was partially offset by implicit price concessions under the adoption of Topic 606 of $3.9 million.

 

   

NPWT. Net revenues decreased 1.5% primarily due to implicit price concessions under the adoption of Topic 606 of $1.1 million.

 

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Other equipment and services. Net revenues decreased 0.4% primarily due to implicit price concessions under the adoption of Topic 606 of $2.2 million, as well as a decrease in respiratory medications and other respiratory equipment volume. This was driven by our strategic decision to focus on ventilation patients, thereby driving lower sales and rental of other respiratory equipment such as nebulizers. The decrease was partially offset by increased enteral nutrition volume due to the relaunch of the product.

Revenues reimbursed under arrangements with Medicare and Medicaid were approximately 18% and 1%, respectively, of total net revenues for the year ended December 31, 2018. Revenues reimbursed under arrangements with Medicare and Medicaid were approximately 18% and 2%, respectively, of total net revenues for the year ended December 31, 2017.

Cost of Net Revenues and Gross Margin.

Cost of Net Revenues. Cost of net revenues for the year ended December 31, 2018 was $360.1 million compared to $332.5 million for the year ended December 31, 2017, an increase of $27.5 million or 8.3%. Our cost of net revenues was as follows:

 

     Year Ended
December 31,
              
(dollar amounts in thousands)    2018      2017      Change $     Change %  

Product and supply costs

   $ 218,099      $ 200,621      $ 17,478       8.7

Patient equipment depreciation

     108,340        101,724        6,616       6.5

Home respiratory therapists costs

     20,371        20,802        (431     (2.1 )% 

Other

     13,276        9,398        3,878       41.3
  

 

 

    

 

 

    

 

 

   

 

 

 

Total cost of net revenues

   $ 360,086      $ 332,545      $ 27,541       8.3
  

 

 

    

 

 

    

 

 

   

 

 

 

Product and supply costs increased due to additional costs to support increased OSA treatment and enteral nutrition volume due to product relaunch and patient equipment reserves due to a payor contractual change and obsolete equipment. The increase was partially offset by lower lease expenses associated with patient services equipment based on a change in strategy to purchase equipment.

Patient equipment depreciation costs increased as a result of equipment purchases to support volume growth in OSA treatment and ventilation therapy, as well as a change from leasing to purchasing patient services equipment. Historically, expenses associated with leasing this service equipment were included within product and supply costs, whereas depreciation expense is included within patient equipment depreciation.

Other costs increased as a result of an increase in sales or title transfers of patient equipment driven by equipment not being returned by patients and contractual requirements. Costs related to the carrying net book value are included within other costs.

Gross margin. Gross margin for the year ended December 31, 2018 was 67.6% compared to 69.0% for the year ended December 31, 2017, a decrease of 1.4%. The decrease in gross margin was primarily driven by implicit price concessions, higher depreciation costs, a reduction in reimbursement rates and patient equipment reserves (as referenced above), partially offset by the favorable shift from leasing to purchasing patient equipment. Upon adoption of Topic 606, patient co-pay and deductible amounts that were previously included in the provision for doubtful accounts related to implicit price concessions are now presented as an offsetting adjustment to the related fee-for-service sale net revenues. The adoption of Topic 606 resulted in a decrease in gross margin of 0.3% in 2018.

Provision for Doubtful Accounts. Provision for doubtful accounts for the year ended December 31, 2018 was $31.7 million compared to $42.7 million for the year ended December 31, 2017, a decrease of $11.0 million

 

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or 25.7%. The provision for doubtful accounts, expressed as a percentage of total net revenues, was 2.9% and 4.0% for the year ended December 31, 2018 and 2017, respectively. The decrease in the provision for doubtful accounts during the year ended December 31, 2018 was primarily due to the adoption of Topic 606. Upon adoption, patient co-pay and deductible amounts that were previously included in the provision for doubtful accounts related to implicit price concessions are now presented as an offsetting adjustment to the related fee-for-service sale net revenues.

Selling, Distribution and Administrative Expenses. Selling, distribution and administrative expenses for the year ended December 31, 2018 were $698.7 million compared to $672.4 million for the year ended December 31, 2017, an increase of $26.2 million or 3.9%. Selling, distribution and administrative expenses for the year ended December 31, 2018 were 62.9% of total net revenues compared to 62.6% for the year ended December 31, 2017.

The overall increase was primarily a result of increased variable costs associated with revenue growth across our core service lines and an increase in one-time costs directly attributable to the offering of $6.2 million. The increase was offset by the favorable outcome of improved productivity initiatives and related reductions in headcount, lower facilities costs associated with strategic transformation and a decrease in incentive compensation based on certain performance metrics.

Income Tax Expense (Benefit). Income tax expense for the year ended December 31, 2018 was $6.8 million compared to an income tax benefit of $(71.6) million for the year ended December 31, 2017, a change of $78.4 million. Our effective tax rate was 34.2% and (281.8)% for the years ended December 31, 2018 and 2017, respectively. The $78.4 million change was primarily due to the release of the $105.1 million valuation allowance against the net deferred tax assets. This benefit was partially offset by a charge to tax expense of $24.2 million, due to the re-measurement of deferred tax assets and liabilities resulting from the decrease in the federal corporate tax rate as a result of the enactment of the Tax Cuts and Jobs Act in December 2017. The change was also partially offset by a $4.7 million decrease in income tax expense calculated at statutory rates and a $2.1 million increase due to state taxes and other non-deductible items.

Impact of Inflation and Changing Prices

We experience pricing pressures in the form of continued reductions in reimbursement rates, particularly from managed care organizations and from governmental Payors such as Medicare and Medicaid. We are also impacted by rising costs for certain inflation-sensitive operating expenses such as labor and employee benefits, facility and equipment leases, and vehicle fuel.

Liquidity and Capital Resources

Our principal source of liquidity is our operating cash flow, which is supplemented by extended payment terms from our suppliers and our Revolver, which provides for revolving credit of up to $100.0 million, subject to availability. Our principal liquidity requirements are labor costs, including salaries, bonuses, benefits and travel-related expenses, product and supply costs, third-party customer service, billing and collections and logistics costs and patient equipment capital expenditures. Our future capital expenditure requirements will depend on many factors, including our revenue growth rates. Our capital expenditures are made in advance of patients beginning service. Certain operating costs are incurred at the beginning of the equipment rental period and during initial patient set up. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, results of operations, and financial condition would be materially and adversely affected. We believe that our operating cash flow, together with our existing cash, cash equivalents, and Revolver, will continue to be sufficient to fund our operations and growth strategies for at least the next 12 months.

Apria, Inc. is a holding company and our operations will be conducted entirely through our subsidiaries. Our ability to generate cash to pay applicable taxes at assumed tax rates and pay cash dividends we declare, if any, is

 

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dependent on the earnings and the receipt of funds from Apria Healthcare Group and its subsidiaries via dividends or intercompany loans. Deterioration in the financial condition, earnings or cash flow of Apria Healthcare Group and its subsidiaries for any reason could limit or impair their ability to pay such distributions. Additionally, the terms of our financing arrangements, including the TLA and the Revolver, contain covenants that may restrict Apria Healthcare Group and its subsidiaries from paying such distributions, subject to certain exceptions. See “Risk Factors—We are a holding company with no operations of our own and we are accordingly dependent upon distributions from our subsidiaries to pay taxes and pay dividends.”

On December 11, 2020, we entered into the Credit Facility Amendment to incur $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 our stockholders and $9.7 million distribution to SARs holders declared and paid in December 2020, with the remaining proceeds used to pay fees and expenses in connection with the Credit Facility Amendment and for general corporate purposes. We also declared and paid a $175.0 million dividend to common stockholders and SARs holders payable in June 2019 and a $75.0 million dividend to common stockholders in July 2018. We have no current plans to pay dividends on our common stock following this offering.

As permitted under the CARES Act, we have elected to defer certain portions of employer-paid FICA taxes otherwise payable from March 27, 2020 to January 1, 2021, which will be paid in two equal installments on December 31, 2021 and December 31, 2022. The amount deferred at September 30, 2020 was $9.5 million.

Cash Flow. The following table presents selected data from our consolidated statement of cash flows:

 

    Nine Months Ended September 30,     Year Ended December 31,  
(in thousands)           2020                     2019             2019     2018     2017  

Net cash provided by operating activities

  $ 158,939     $ 83,850     $ 161,850     $ 159,578     $ 155,345  

Net cash used in investing activities

    (72,532     (68,266     (92,713     (97,469     (105,919

Net cash used in financing activities

    (20,973     (51,141     (59,116     (109,802     (20,108

Net increase (decrease) in cash, cash equivalents and restricted cash

    65,434       (35,557     10,021       (47,693     29,318  

Cash, cash equivalents and restricted cash at beginning of period

    74,691       64,670       64,670       112,363       83,045  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash, cash equivalents and restricted cash at end of period

  $ 140,125     $ 29,113     $ 74,691     $ 64,670     $ 112,363  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of Nine Months Ended September 30, 2020 and September 30, 2019. Net cash provided by operating activities for the nine months ended September 30, 2020 was $158.9 million compared to $83.9 million for the nine months ended September 30, 2019, an increase of $75.1 million. The increase in net cash provided by operating activities was primarily the result of the following:

 

   

$10.4 million increase in net income;

 

   

$4.1 million increase in non-cash items; and

 

   

$60.6 million increase in cash provided by the change in operating assets and liabilities, due primarily to the increase of cash provided by legal reserve of $32.5 million and accrued expenses of $15.3 million (which includes the deferral of $9.5 million employer-paid FICA taxes as permitted under the CARES Act) and the decrease of cash used in accounts payable of $9.2 million and accrued payroll and related taxes and benefits of $5.8 million, partially offset by cash used for prepaid expenses and other assets of $6.9 million.

Net cash used in investing activities for the nine months ended September 30, 2020 was $72.5 million, compared to $68.3 million for the nine months ended September 30, 2019. The primary use of funds in the nine months ended September 30, 2020 was $85.8 million to purchase patient equipment and property, equipment and

 

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improvements, which was partially offset by proceeds from the sale of patient equipment and other of $13.3 million. The primary use of funds in the nine months ended September 30, 2019 was $85.2 million to purchase patient equipment and property, equipment and improvements, which was partially offset by proceeds from the sale of patient equipment and other of $16.9 million.

Net cash used in financing activities for the nine months ended September 30, 2020 was $21.0 million compared to $51.1 million for the nine months ended September 30, 2019. Net cash used in financing activities for the nine months ended September 30, 2020 primarily reflected payments on asset financing of $17.2 million and payments on long-term debt of $3.8 million. Net cash used in financing activities for the nine months ended September 30, 2019 primarily reflected cash dividends paid to common stockholders and SARs holders of $175.0 million, payments on asset financing of $23.4 million and payments of deferred financing costs related to the credit agreement with Citizens Bank of $2.8 million, offset by borrowings on the TLA of $150.0 million.

Comparison of Years Ended December 31, 2019 and December 31, 2018. Net cash provided by operating activities for the year ended December 31, 2019 was $161.9 million compared to $159.6 million for the year ended December 31, 2018, an increase of $2.3 million. The increase in net cash provided by operating activities was primarily the result of the following:

 

   

$2.5 million increase in net income;

 

   

$3.9 million decrease in non-cash items; and

 

   

$3.7 million decrease in cash used in the change in operating assets and liabilities, due primarily to the increase of cash provided by accounts receivable and accrued payroll and related taxes and benefits offset by the cash used for accounts payable.

Net cash used in investing activities for the year ended December 31, 2019 was $92.7 million, compared to $97.5 million for the year ended December 31, 2018. The primary use of funds in 2019 was $114.5 million to purchase patient equipment and property, equipment and improvements, which was partially offset by proceeds from the sale of patient equipment and other of $21.8 million. The primary use of funds in 2018 was $122.1 million to purchase patient equipment and property, equipment and improvements, which was partially offset by proceeds from sale of patient equipment and other of $21.9 million and proceeds from the settlement of corporate-owned life insurance of $3.5 million.

Net cash used in financing activities for the year ended December 31, 2019 was $59.1 million compared to $109.8 million for the year ended December 31, 2018. Net cash used in financing activities for the year ended December 31, 2019 primarily reflected cash dividends paid to our stockholders of $175.0 million, payments on asset financing of $31.4 million and payments of deferred financing costs related to the new credit agreement with Citizens Bank of $2.8 million, offset by borrowings on the TLA of $150.0 million. Net cash used in financing activities for the year ended December 31, 2018 primarily reflected cash dividends paid to our stockholders of $75.0 million and payments on asset financing of $33.4 million.

Comparison of Years Ended December 31, 2018 and December 31, 2017. Net cash provided by operating activities for the year ended December 31, 2018 was $159.6 million compared to $155.3 million for the year ended December 31, 2017, an increase of $4.2 million. The increase in net cash provided by operating activities was primarily the result of the following:

 

   

$11.1 million decrease in net income, after excluding the $72.7 million change in deferred income taxes which is a non-cash item;

 

   

$10.2 million increase in non-cash items, excluding the $72.7 million change in deferred income taxes; and

 

   

$5.2 million decrease in cash used in the change in operating assets and liabilities, due primarily to the decrease of cash used in accrued expenses and changes in accounts receivable offset by the increase in

 

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cash used for prepaid expenses and other assets, increase in cash used in accrued payroll and related taxes and benefits, and decrease in cash provided by the changes in accounts payable.

Net cash used in investing activities for the year ended December 31, 2018 was $97.5 million compared to $105.9 million for the year ended December 31, 2017. The primary use of funds in the year ended December 31, 2018 was $122.1 million to purchase patient equipment and property, equipment and improvements, which was partially offset by proceeds from the sale of patient equipment and other of $21.9 million and proceeds from the settlement of corporate-owned life insurance of $3.5 million. The primary use of funds in the year ended December 31, 2017 was $126.4 million to purchase patient equipment and property, equipment and improvements, which was partially offset by proceeds from sale of patient equipment and other of $20.5 million.

Net cash used in financing activities for the year ended December 31, 2018 was $109.8 million compared to $20.1 million for the year ended December 31, 2017. Net cash used in financing activities for the year ended December 31, 2018 primarily reflected cash dividends paid to our stockholders of $75.0 million and payments on asset financing of $33.4 million. For the year ended December 31, 2017, net cash used in financing activities primarily reflected payments on asset financing of $20.4 million.

Non-GAAP Financial Information.

EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex. EBITDA is a non-GAAP measure that represents net income for the period before the impact of interest income, interest expense, income taxes, and depreciation and amortization. EBITDA is widely used by securities analysts, investors and other interested parties to evaluate the profitability of companies. EBITDA eliminates potential differences in performance caused by variations in capital structures, tax positions, the cost and age of tangible assets and the extent to which intangible assets are identifiable. Adjusted EBITDA is a non-GAAP measure that represents EBITDA before certain items that impact comparison of the performance of our businesses either period-over-period or with other businesses. We use Adjusted EBITDA as a key profitability measure to assess the performance of our businesses. We believe that Adjusted EBITDA should, therefore, be made available to securities analysts, investors and other interested parties to assist in their assessment of the performance of our businesses.

Adjusted EBITDA less Patient Equipment Capex is a non-GAAP measure that represents Adjusted EBITDA less purchases of patient equipment net of dispositions (“Patient Equipment Capex”). For purposes of this metric, Patient Equipment Capex is measured as the value of the patient equipment received less the net book value of dispositions of patient equipment during the accounting period. We use Adjusted EBITDA less Patient Equipment Capex as a key profitability measure to assess the performance of our businesses because our businesses require significant capital expenditures to maintain its patient equipment fleet due to asset replacement and contractual commitments. We believe that Adjusted EBITDA less Patient Equipment Capex should, therefore, be made available to securities analysts, investors and other interested parties to assist in their assessment of the performance of our businesses.

Below, we have provided a reconciliation of EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex to our net income, the most directly comparable financial measure calculated and presented in accordance with GAAP. EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex should not be considered alternatives to net income or any other measure of financial performance calculated and presented in accordance with GAAP. Our EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex may not be comparable to similarly titled measures of other organizations because other organizations may not calculate EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex in the same manner as we calculate these measures.

 

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Our uses of EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, EBITDA and Adjusted EBITDA do not reflect capital expenditure requirements for such replacements or other contractual commitments;

 

   

EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex do not reflect changes in, or cash requirements for, our working capital needs;

 

   

EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex do not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness; and

 

   

other companies, including companies in our industry, may calculate EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex measures differently, which reduces their usefulness as a comparative measure.

EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex exclude items that can have a significant effect on our profit or loss and should, therefore, be used in conjunction with, not as substitutes for, profit or loss for the period. We compensate for these limitations by separately monitoring net income from continuing operations for the period.

The following table reconciles net income, the most directly comparable GAAP measure, to EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex:

 

     Nine Months Ended September 30,     Year Ended December 31,  
(in thousands)            2020                     2019             2019     2018     2017  

Net income

   $ 20,268     $ 9,840     $ 15,622     $ 13,127     $ 96,951  

Interest expense, net and other

     3,596       1,793       3,666       441       760  

Income tax expense (benefit)

     13,034       3,465       8,127       6,829       (71,560

Depreciation and amortization

     86,915       83,250       111,576       124,989       119,297  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 123,813     $ 98,348     $ 138,991     $ 145,386     $ 145,448  

Strategic transformation initiatives:

          

Branch network optimization(a)

   $ —       $ 566     $ 570     $ 1,367     $ —  

Customer service optimization(b)

     99       238       264       789       —  

E-commerce platform(c)

     —         —         —       342       432  

Simplify(d)

     1,159       10,926       11,775       —       —  

Financial systems(e)

     1,414       —         —       —       —  

eImpact(f)

     —       —         —       —       3,742  

Technology investments(g)

     —       —         —       —       1,997  

Stock-based compensation and other(h)

     1,929       8,057       9,024       1,621       1,721  

Legal expense(i)

     32,525       —         12,200       —       —  

Offering costs(j)

     1,826       828       1,148       6,222       —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 162,765     $ 118,963     $ 173,972     $ 155,727     $ 153,340  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Patient Equipment Capex

     (63,482     (73,401     (93,449     (110,148     (149,923
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA less Patient Equipment Capex

   $ 99,283     $ 45,562     $ 80,523     $ 45,579     $ 3,417  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Branch network optimization represents one-time, third-party logistics advisory costs associated with a 24-month initiative launched in January 2018 designed to modify the branch network in order to reduce branch operating costs while maintaining or improving patient service levels.

 

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(b)

Customer service optimization primarily represents one-time costs associated with customer service initiatives, as well as evaluating a strategic partnership expansion for certain aspects of customer service.

(c)

E-commerce platform primarily represents one-time costs associated with developing and launching our e-commerce platform.

(d)

Simplify represents one-time advisory fees and implementation costs associated with a key 2019 business transformation initiative focused on shifting to a patient-centric platform and optimizing end-to-end customer service.

(e)

Costs associated with the implementation of a new financial system.

(f)

eImpact represents one-time advisory and implementation fees incurred in 2016 and 2017 as part of a 24-month cost saving initiative focused on identifying opportunities to improve branch operational and sales effectiveness, optimize training, reduce corporate overhead and eliminate unnecessary expenses.

(g)

Technology investments represent various one-time costs associated with order-to-cash process improvements, patient monitoring, implementation of driver productivity and safety tools, and offshoring of certain revenue management capabilities.

(h)

Stock-based compensation has historically been granted to certain of our employees in the form of profit interest units of our parent and stock appreciation rights (“SARs”). For time-based vesting awards, we recognize a non-cash compensation expense based on the fair value of the awards determined at the date of grant over the requisite service period. In June 2019, all outstanding performance Class B units were modified to accelerate vesting resulting in $7.0 million stock compensation expense. Other compensation includes long-term incentive compensation.

(i)

Legal expense represents an accrual of the estimated probable loss in relation to a series of civil investigative demands from the United States Attorney’s Office for the Southern District of New York. See “Business—Legal Proceedings—Civil Investigative Demand Issued by the United States Attorney’s Office for the Southern District of New York” and Note 8 in our unaudited condensed consolidated financial statements included elsewhere in this prospectus for additional information.

(j)

Offering costs represent one-time costs relating to preparation for our initial public offering and accelerated implementation of new accounting standards.

Contractual Obligations. The following table summarizes the long-term cash payment obligations to which we are contractually bound as of September 30, 2020. The years presented below represent 12-month periods ending September 30. The table does not reflect the $260.0 million of Incremental Term Loans we incurred on December 11, 2020. See “Summary—Recent Developments—Credit Facility Amendment and Dividend.”

 

(in thousands)

   Less than
1 Year
     1-3 Years      3-5 Years      More
than 5
Years
     Totals  

TLA(1)

   $ 7,500      $ 26,250      $ 112,500      $ —      $ 146,250  

Expected Interest(2)(3)

     3,855        7,050        2,215        —        13,120  

Operating Leases

     26,818        29,447        8,365        224        64,854  

Purchase Obligations(4)

     15,009        3,716        —          —        18,725  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Contractual Obligations

   $ 53,182      $ 66,463      $ 123,080      $ 224      $ 242,949  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Represents the principal amount of indebtedness under the TLA. See Note 4 in our unaudited condensed consolidated financial statements included elsewhere in this prospectus for additional information.

(2)

Consists of interest payable under the Credit Facility. Interest payments for future periods were estimated using the interest rate of 2.18%, which was assumed for the remainder of the loan period until maturity. The actual amounts of interest and fee payments under the Credit Facility will ultimately depend on the amount of debt and letters of credit outstanding and the interest rates in effect during each period. We are also required to pay customary letter of credit fees equal to the applicable rate based on the total net leverage ratio and certain agency fees.

(3)

The credit agreement permits the interest rate to be selected at our 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

 

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  Administrative Agent’s “Prime Rate”, (ii) the Federal Funds Effective Rate plus 0.50%, and (iii) one-month Adjusted LIBOR plus 1.00%. 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. There are additional margin and commitment fees payable on the TLA and available Revolver, based on the total net leverage ratio, including applicable margin fees ranging from 2.00% to 2.75% for Adjusted LIBOR Loans or 1.00% to 1.75% for Alternative Base Rate Loans and commitment fees ranging from 0.20% to 0.35%. As of September 30, 2020, there were no borrowings under the Revolver outstanding.
(4)

The purchase obligations primarily relate to amounts we expect to pay under extended payment term agreements for patient services equipment, as well as non-cancelable cash agreements for our software as a service contract.

Accounts Receivable. Accounts receivable decreased to $71.8 million as of September 30, 2020 from $84.1 million at December 31, 2019, a decrease of $12.3 million. Days sales outstanding (calculated as of each period-end by dividing accounts receivable, net by the rolling average of total net revenues) were 30 days at September 30, 2020 compared to 35 days at December 31, 2019. The decrease in 2020 accounts receivable was primarily due to higher reimbursement levels driven by revenue cycle management improvements and increased estimated reserves for expected credit losses due to economic conditions related to the COVID-19 pandemic.

Accounts receivable before allowance for doubtful accounts decreased to $84.1 million as of December 31, 2019 from $117.7 million at December 31, 2018, a decrease of $33.6 million. Days sales outstanding (calculated as of each period-end by dividing accounts receivable, less allowance for doubtful accounts, by the rolling average of total net revenues) were 35 days at December 31, 2019 compared to 40 days at December 31, 2018. The decrease in 2019 accounts receivable was primarily due to the adoption of Topic 842. Upon adoption, the allowance for doubtful accounts associated with rental revenue is now presented as an offsetting reduction to the related accounts receivable. The decrease was also due to the result of improved accounts receivable collections driven by revenue cycle management improvements.

Unbilled Receivables. Included in accounts receivable are earned but unbilled receivables of $17.1 million and $24.1 million at September 30, 2020 and December 31, 2019, respectively. Delays, ranging from a single day 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 our analysis of historical performance and collectability. Efficiencies gained from a transformation initiative to transition billing processes to our localized branch locations contributed to the decrease in unbilled receivables in 2020, as well as relaxed documentation and authorization guidelines during the COVID-19 pandemic from Medicare and other Payors.

Included in accounts receivable are earned but unbilled receivables of $24.1 million and $17.7 million at December 31, 2019 and December 31, 2018, respectively. Delays, ranging from a single day 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 our analysis of historical performance and collectability. The increase in unbilled receivables in 2019 is mainly due to a transformation initiative to transition billing processes to our localized branch locations.

Inventories and Patient Equipment. Inventories consist primarily of respiratory supplies and items used in conjunction with patient equipment. Patient equipment consists of respiratory and home medical equipment that is provided to in-home patients for the course of their care plan, normally on a rental basis, and subsequently returned to us for redistribution after cleaning and maintenance is performed. We maintain inventory and patient equipment at levels we believe will provide for the needs of our patients.

 

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Long-Term Debt. On November 2, 2018, we entered into a senior secured asset-based revolving credit facility (the “ABL Facility”), with Wells Fargo Bank, N.A., an administrative agent and a syndicate of financial institutions and institutional lenders. The ABL Facility replaced the prior secured asset-based revolving credit facility dated May 2, 2014, which provided for a revolving credit financing of up to $100.0 million.

On June 21, 2019, we entered into a credit agreement with Citizens Bank and a syndicate of lenders for both a Term Loan A Facility of $150.0 million and a Revolving Credit Facility of $100.0 million. The Revolver replaced the prior ABL Facility which provided for revolving credit financing of up to $125.0 million. Proceeds from the TLA were used to fund a dividend payment to common stockholders and SARs holders. On December 11, 2020, we entered into the Credit Facility Amendment to incur $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 our stockholders and $9.7 million distribution to SARs holders declared and paid in December 2020, 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 our 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:

 

Level

 

Total Net Leverage Ratio

  Applicable Margin for
Adjusted LIBOR Loans
    Applicable Margin for
Alternative Base Rate Loans
    Commitment
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 we are 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 Interim Term Loans. We expect to refinance, renew or replace the TLA prior to its maturity in June 2024 or to repay it with cash from operations. The table below is a summary of the expected principal repayments each year:

 

(in thousands)       

Years Ending December 31

      

2020

   $ 8,958  

2021

     20,833  

2022

     36,458  

2023

     41,667  

2024

     302,083  

The credit agreement encompassing the TLA and Revolver permits, subject to certain exceptions, an increase in our TLA or our Revolver, as well as incurs additional indebtedness, as long as it does not exceed a 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 at any time without any premium or penalty.

 

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Apria Healthcare Group’s assets and equity interests of Apria Healthcare Group and all present and future wholly owned direct domestic subsidiaries of Apria Healthcare Group, with certain exceptions, are pledged as collateral for the TLA and Revolver. The credit agreement contains a financial covenant requiring us 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 September 30, 2020, no amounts were outstanding under the Revolver, there were $15.9 million outstanding letters of credit, and additional availability under the Revolver net of letters of credit outstanding was $84.1 million. We were in compliance with all debt covenants set forth in the TLA and Revolver as of September 30, 2020.

In accordance with ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, we record origination and other expenses related to certain debt issuance cost as a 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. The unamortized debt issuance costs related to the ABL Facility dated November 2, 2018 were expensed as a result of the new credit agreement. Amortization of deferred debt issuance costs are classified within interest expense in our consolidated statements of income and was $0.4 million, $1.0 million, $1.1 million, $0.4 million, and $0.3 million for the nine months ended September 30, 2020 and 2019 and for the years ended December 31, 2019, 2018 and 2017, respectively.

Interest expense, excluding deferred debt issuance costs discussed above, was $3.7 million, $2.4 million, $4.0 million, $0.9 million and $0.9 million for the nine months ended September 30, 2020 and 2019 and for the years ended December 31, 2019, 2018 and 2017, respectively. Interest paid on debt totaled $3.7 million, $2.6 million, $4.2 million, $1.0 million and $1.0 million for the nine months ended September 30, 2020 and 2019 and for the years ended December 31, 2019, 2018 and 2017, respectively.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K during the periods presented.

Commitments and Contingencies

From time to time we enter into certain types of contracts that contingently require us to indemnify parties against third-party claims. The contracts primarily relate to: (i) certain asset purchase agreements, under which we may provide customary indemnification to the seller of the business being acquired; (ii) certain real estate leases, under which we may be required to indemnify property owners for environmental and other liabilities, and other claims arising from our use of the applicable premises; and (iii) certain agreements with our officers, directors and employees, under which we may be required to indemnify such persons for liabilities arising out of their relationship with us. In addition, we issued certain letters of credit under our Credit Facility as described under “Liquidity and Capital Resources—Long-Term Debt” above.

The terms of such obligations vary by contract and in most instances a specific or maximum dollar amount is not explicitly stated therein. Generally, amounts under these contracts cannot be reasonably estimated until a specific claim is asserted. Consequently, no liabilities have been recorded for these obligations on our balance sheets for any of the periods presented.

 

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Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, collectability of accounts receivable, reserves related to insurance and litigation, intangible assets, stock-based compensation, income taxes and contingencies. We base these estimates on our historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results experienced may vary materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations may be affected.

We consider the accounting policies that govern revenue recognition and the determination of the net realizable value of accounts receivable to be the most critical in relation to our consolidated financial statements. These policies require the most complex and subjective judgments of management. Additionally, the accounting policies related to long-lived assets, stock-based compensation, income taxes and self-insurance reserves require significant judgment.

Fee-for-Service Net Revenues. Revenues are recognized under fee-for-service arrangements for equipment we rent to patients and sales of equipment, supplies and other items we sell to patients.

Rental revenues – In accordance with Topic 842, revenue generated from equipment that is rented to patients is recognized over the noncancelable rental period, typically one month, and commences on delivery of the equipment to the patients. The portfolio of lease contracts is evaluated 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.

Our lease agreements generally contain lease and non-lease components. Non-lease components primarily relate to supplies. The transaction price is allocated 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 health plans, Medicare, Medicaid and patients. The sales transaction price is determined based on contractually agreed-upon rates, adjusted for estimates of variable consideration. The expected value method is used 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 we stand ready to provide to the members of these payors without regard to the

 

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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.

Realizable Value of Accounts Receivable. Due to the nature of our industry and the reimbursement environment in which we operate, 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.

We perform periodic analyses to evaluate accounts receivable balances to ensure that recorded amounts reflect estimated net realizable value. Specifically, we consider 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 healthcare industry and third-party reimbursement, it is possible that our estimate could change in the near term, which could have an impact on operations and cash flows.

Prior to adoption of Topic 842, accounts receivable was reduced by a separate allowance for doubtful accounts which provided for those accounts from which payment was not expected to be received, although services were provided and revenue was earned. Upon determination that an account was uncollectible, it was written off and charged to the allowance. Upon adoption of Topic 842, we have elected to record 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.

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. We perform the annual test for impairment for indefinite-lived intangible assets as of the first day of the fourth quarter. The fair value of the trade name is determined using a relief-from-royalty method under the income approach, which uses projected revenue allocable to the trade name and an assumed royalty rate. We assessed qualitative factors and determined it was more likely than not that the fair value of the accreditations with commissions is greater than its carrying amount.

We 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 less than its carrying amount, we 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.

We performed an assessment of qualitative factors and determined that no events or circumstances existed that would lead to a determination that it is more likely than not that the fair value of indefinite-lived assets were less than the carrying amount. As such, a quantitative analysis was not required to be performed.

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

 

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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.

We did not record any impairment charges related to indefinite-lived intangible assets or long-lived assets for the nine months ended September 30, 2020 and 2019. We did not record any impairment charges related to indefinite-lived intangible assets or long-lived assets for the years ended December 31, 2019, 2018 and 2017.

Leases. We determine if an arrangement is a lease at commencement and perform 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 consolidated balance sheet. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our 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 our leases do not provide an implicit rate, we use its incremental borrowing rate (IBR) based on the information available at the lease commencement date in determining the present value of future lease payments. We use 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 we 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 consolidated balance sheet, as permitted by the short-term lease exception. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We do not have any material subleases. We do not have any leases classified as a finance leasing arrangement. As such, all leases are classified as operating leases. See further discussion at Note 8 – Leases.

Stock-Based Compensation. Stock-based compensation has historically been granted to certain of our employees in the form of profit interest units of our parent entity and SARs. We account for our stock-based awards in accordance with provisions of Accounting Standards Codification 718, “Compensation—Stock Compensation.”

We recognize compensation expense in respect of the profit interest units and 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. As our equity is not publicly traded, we must estimate the fair value of our equity instruments, as discussed in “Equity Valuations” below and in the audited consolidated financial statements included elsewhere in this prospectus. To the extent applicable, following the closing of this offering, the fair value of our equity instruments for purposes of determining stock-based compensation will be the closing price of shares as reported on the applicable date.

Generally, the 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. Compensation expense for awards containing performance conditions is recognized only to the extent that it is probable the performance conditions will be made.

 

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We expect to continue to grant stock-based compensation in the future, and, to the extent that we do, our stock-based compensation expense in future periods will likely increase.

Equity Valuations. The fair value of our equity instruments has historically been determined based upon information available at the time of grant. Given the absence of a public trading market for our equity and in accordance with the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately Held Company Equity Securities Issued as Compensation, management has exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our equity instruments at each grant date.

These factors included:

 

   

our operating and financial performance;

 

   

current business conditions and projections;

 

   

the likelihood of achieving a liquidity event for the underlying equity instruments, such as an initial public offering or sale of our company, given prevailing market conditions;

 

   

the lack of marketability of our shares; and

 

   

the market performance of comparable publicly traded companies.

In valuing our equity instruments, we determined the equity value of our business using a weighted blend of the income and market approaches. The income approach estimates the fair value of a company based on the present value of such company’s future estimated cash flows and the residual value of such company beyond the forecast period. These future values are discounted to their present values to reflect the risks inherent in such company achieving these estimated cash flows.

Significant inputs of the income approach (in addition to our estimated future cash flows themselves) include the long-term growth rate assumed in the residual value, discount rate and normalized long-term operating margin. The terminal value was calculated to estimate our value beyond the forecast period by applying valuation metrics to the final year of our forecasted revenue and discounting that value to the present value using the same weighted average cost of capital applied to the forecasted periods.

Income Taxes. Our provision for income taxes is based on expected income, permanent book/tax differences and statutory tax rates in the various jurisdictions in which we operate. Significant 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.

In determining the necessity and amount of a valuation allowance, all available information (both positive and negative) is considered and analysis is performed to determine the appropriate weight that should be afforded to available objective and subjective evidence.

For the year ended December 31, 2017, we recorded a net valuation allowance release of $105.1 million on the basis of management’s reassessment of the amount of its deferred tax assets that are more likely than not to be realized. As of December 31, 2017, we evaluated all of the positive and negative evidence related to the valuation allowance, including three years of cumulative pre-tax income and projected income, and determined that there was sufficient positive evidence to conclude that it is more likely than not that net deferred taxes of $50.7 million were realizable. We therefore reduced the valuation allowance accordingly.

 

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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.

Legal Reserves. We are involved in various legal proceedings, claims, and litigation that arise in the ordinary course of business. We investigate 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 8 – Commitments and Contingencies to our unaudited condensed consolidated financial statements included elsewhere in this prospectus.

Accounting Pronouncements Not Yet Adopted

Recently issued accounting pronouncements that may be relevant to our operations but have not yet been adopted are outlined in Note 2 – Recent Accounting Pronouncements to our consolidated financial statements included elsewhere in this prospectus.

Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk relates to fluctuations in interest rates from borrowings under the Credit Facility. Our letter of credit fees and interest accrued on our debt borrowings carry a floating interest rate which is tied either Adjusted LIBOR or Alternative Base Rate plus their respective applicable margin and therefore are exposed to changes in interest rates. As of September 30, 2020, there was $146.3 million outstanding on the TLA, no amounts outstanding under the Revolver, $15.9 million outstanding letters of credit, and additional availability under the Revolver, net of letters of credit outstanding, was $84.1 million.

 

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BUSINESS

Apria

We are a leading provider of integrated home healthcare equipment and related services in the United States. We offer a comprehensive range of products and services for in-home care and delivery across three core service lines: (1) home respiratory therapy (including home oxygen and NIV services); (2) OSA treatment (including CPAP and bi-level positive airway pressure devices, and patient support services); and (3) NPWT. Additionally, we supply 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. Our revenues are generated through fee-for-service and capitation arrangements with Payors for equipment, supplies, services and other items we rent or sell to patients. Through our offerings, we also provide patients with 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. We are focused on being the industry’s highest-quality provider of home healthcare equipment and related services, while maintaining our commitment to being a low-cost operator. We offer a compelling value proposition to patients, providers and Payors by allowing patients to receive necessary care and services in the comfort of their own home, while, at the same time, reducing the costs of treatment. We generated over $1 billion of net revenue in 2019, of which approximately 80% was from home respiratory therapy and OSA treatment, service categories in which we believe we have a leading market position.

We believe our integrated product and service offerings, combined with our national scale and strong reputation, provide us with a strategic advantage in being a preferred home healthcare provider for patients, providers and Payors. Our Payors include substantially all of the national and regional insurers, managed care organizations and government Payors in the United States. We benefit from long-standing relationships with a community of providers and referral sources for post-acute services across the acuity spectrum because of the consistency and reliability of our high quality clinical support, our national distribution footprint and our breadth of Payor relationships.

Our product and service offerings are distinguished by the complexity and sophistication required in their clinical delivery, logistical coordination and payment arrangements. We offer patients and providers differentiated clinical service, leveraging our protocols and expertise to improve outcomes across our service lines. With an expansive network of delivery technicians and therapists that is not readily replicated, we are able to provide home healthcare therapies that require high-touch service, providing a bridge from the acute care setting to the home. In 2019, we served nearly 2 million patients, made over 2.4 million deliveries and conducted over 744,000 clinician interactions with our patients.

We believe that we are well positioned to capitalize on a number of opportunities for organic growth. The broader U.S. markets for respiratory devices and OSA devices, which align with our home respiratory and OSA treatment product lines, two of our core product lines and which represent over 80% of 2019 net revenue, are expected by industry analysts to grow at CAGRs of approximately 6% and approximately 8%, respectively, between 2018 and 2025. The U.S. market for NPWT devices is expected by industry analysts to grow at a CAGR of approximately 5% between 2018 to 2023. With top two market positions in the United States in home respiratory therapy, OSA treatment and NPWT, we believe this industry tailwind represents an attractive embedded opportunity for growth. Moreover, we believe the home healthcare industry, which plays a critical role in the transition of patients from an acute care setting to a lower cost home setting, is at the center of a paradigm shift by Payors from the traditional fee-for-service model to value-based reimbursement. As one of the industry leaders, we expect to increasingly benefit from this dynamic. We will also seek to capture efficiencies through increasing scale and operational improvements. Our existing distribution network can reach over 90% of the U.S. population and has substantial presence in both high-density urban markets and rural markets. Coupled with scalable technology and centralized operations, including customer service and revenue cycle management, we believe we can continue to grow our patient base without significant incremental capital investment in our infrastructure. We will also continue to focus on improving the cost-efficiency of our operations through various new technology initiatives and data analytics capabilities. Finally, we believe we can continue to enhance our cash profile through increased focus on less capital intensive products, such as sleep supplies and NPWT, and by benefitting from our investment in longer-lived, ventilation therapy equipment.

 

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In 2019, we generated $1.1 billion of net revenue, $15.6 million in net income, $174.0 million of Adjusted EBITDA and $80.5 million of Adjusted EBITDA less Patient Equipment Capex. Through various strategic and operational initiatives, we have improved profitability despite reimbursement rate pressure, improving our Adjusted EBITDA margin by 110 basis points from 2017 through 2019 on a basis that excludes the impact of new accounting policies adopted in 2018 and 2019. For reconciliations of Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex to net income, the most directly comparable financial measure prepared in accordance with GAAP, see “Summary—Summary Historical Financial and Other Data.”

Industry Overview

The U.S. home healthcare market comprises a broad range of products and services—including respiratory therapy, OSA therapy, negative pressure wound therapy, home medical equipment, infusion therapy, home healthcare nursing, orthotics and prosthetics, diabetic supplies and general medical supplies. CMS estimates that the total revenue of the U.S. home healthcare market was $108.9 billion in 2019, and forecasts this market to grow at a CAGR of approximately 7% between 2020 and 2028. CMS forecasts the durable medical equipment sub-segment to grow at a CAGR of approximately 6% between 2019 and 2028. This growth is forecasted despite the various cost control programs that have been implemented in the Medicare sector. The broader U.S. markets for respiratory devices and OSA devices, which align with our home respiratory and OSA treatment product lines, two of our core product lines and which represent over 80% of 2019 net revenue, are expected by industry analysts to grow at CAGRs of approximately 6% and approximately 8%, respectively, between 2018 and 2025. In 2018, industry analysts estimated that the market size for respiratory devices and OSA devices was approximately $6.2 billion and approximately $2.2 billion, respectively, in North America. The U.S. market for negative pressure wound therapy devices is expected by industry analysts to grow at a CAGR of approximately 5% between 2018 to 2023, and in 2018, the global market size of negative pressure wound therapy devices was estimated by industry analysts to be approximately $2.1 billion. Our sub-segment of the U.S. home healthcare industry is highly fragmented. The five largest players in this sub-segment accounted for approximately 50% of this sub-segment’s revenues in 2019. The remaining market revenues are attributable to thousands of other companies that primarily operate in local markets or regions.

We expect to benefit from the following continuing trends within the home healthcare market:

 

   

Aging Population. Favorable demographic trends have resulted in patient volume growth in the United States and are expected to continue to drive volume growth. As the baby boomer population ages and life expectancy increases, the elderly—who comprise a large portion of our patients—will represent a higher percentage of the overall population. The CMS Office of the Actuary projects that the number of Medicare beneficiaries will grow, on average, by 2.5% annually over the period from 2020 to 2028 and the U.S. Census Bureau projects that the United States population aged 65 and over will grow substantially from 15.2% of the population in 2016 to 20.6% of the population by 2030.

 

   

Rising Incidence of Chronic Diseases. Increasing obesity rates, the clinical consequences of the high prevalence of smoking from earlier decades, the current under-diagnosis of certain health conditions and higher diagnosis rates for a number of chronic health conditions, such as chronic obstructive pulmonary disease, OSA, diabetes and others, have collectively driven growth in the industry. We believe that in the United States 1 in 15 adults has moderate to severe obstructive sleep apnea, while 1 in 10 adults has diabetes, with asthma similarly prevalent among adults. We believe that patients with these chronic conditions will increasingly be treated in their homes instead of in the hospital setting and utilize the services that we provide.

 

   

Continued Shift Toward Home Healthcare Driven by the Compelling Economic Value Proposition to Key Stakeholders. Between 2019 and 2028, the nation’s healthcare spending is projected to increase to $6.2 trillion, growing at an average annual rate of 5.5%, according to CMS. In August 2020, CMS published national healthcare expenditure data which showed that durable medical equipment spending grew 25.6% for all Payors from 2012 to 2018. Despite multiple initiatives designed to reduce durable

 

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medical equipment spending in Medicare, which translated to a lower growth rate than the national average for all Payors, the rising cost of healthcare has caused many managed care Payors to look for ways to contain costs and home healthcare is increasingly sought out as an attractive, cost-effective, clinically appropriate alternative to expensive facility-based care.

 

   

Increased Prevalence of In-home Treatments and Preference for In-home Care Where Available. Improved technology has resulted in a wider variety of treatments being administered in patient homes. These improvements have allowed for earlier patient discharge and have lengthened the portion of the recuperation period spent outside of an institutional setting. In addition, medical advancements have also made medical equipment more simple, adaptable and cost-effective for use in the home. As technology continues to improve, we believe that these trends will likely continue. Furthermore, as the availability of in-home care increases, we believe that many patients will opt for in-home treatments since patients generally prefer the convenience and typical cost advantages of home healthcare over institutional care and the greater independence, increased responsibility and improved responsiveness to treatment that comes with it. According to CMS estimates, between 2020 and 2028, U.S. home healthcare spending is projected to increase to $201.3 billion, growing at a CAGR of approximately 7%.

 

   

Consolidation of the Highly Fragmented Market to the Benefit of National Players. According to HME News, between 2012 and 2018, the overall number of DMEPOS suppliers that bill Medicare more than $10 million annually fell from 73 to 57, and between 2013 and 2020, the total number of DMEPOS suppliers that bill Medicare fell from 8,837 to 6,152, a decline of approximately 30%. We attribute this decline to the inability of smaller local and regional players to make the significant capital investment and achieve the scale required to effectively compete in the economic environment that followed the implementation of the CBP. We believe that the home healthcare market will continue to favor larger, financially stable, national players with consistent, scalable, high quality service.

Our Value Proposition

We believe we offer a compelling value proposition for patients, providers and Payors.

Value Proposition for Patients. We are committed to improving the experience and clinical outcome for each patient we serve. We believe our patients prefer the convenience and typical cost advantages of home healthcare over institutional care and the greater independence, increased responsibility and improved responsiveness to treatment that comes with it. By providing in-home delivery and equipment set-up, patient and caregiver education, as well as patient monitoring and compliance services, we enable the patient to move from or avoid an acute care setting and remain in or return to the home, which is the lowest cost, and overwhelmingly the patient-preferred, setting.

Value Proposition for Providers. Physicians, hospital professionals and other providers refer patients to us because of the consistent, high quality and reliable services we offer them and their patients. We seek to be a trusted advocate and provider of patient clinical needs in patients’ homes, while fostering lasting doctor-patient relationships. Additionally, the reliability of our clinical support, quality equipment and data collection facilitate a clinically adept transition to a lower-cost setting, which we believe benefits healthcare professionals, and helps to put them at ease regarding their patients’ ongoing treatments. We believe our services improve patient compliance and clinical outcomes, reduce hospital re-admissions and enable hospital providers to have greater control over timely patient discharges.

Value Proposition for Payors. We offer Payors access to an extensive national footprint, national logistics systems, respiratory clinical expertise, competitive pricing, alternative payment arrangements, including fee-for-service and capitation for defined patient populations, and our ability to connect electronically with Payors’ systems. We seek to effectively manage the transition from the acute care setting to a low-cost home setting with a high reliability of clinical support, data collection and quality equipment to lower readmission rates.

 

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Our Strategic Transformations

Since we were acquired by Blackstone in 2008, the home healthcare industry has experienced a number of significant changes, including reimbursement, regulatory and technological changes. We have continually worked to adapt our business and organizational structure to best meet the current needs of patients, providers and Payors.

Our most recent business initiative, which we call Simplify, focused on retaining clear customer ownership at our local branch level with support from our scalable national platform to greatly improve the patient and referral source experience. With a goal of optimizing the end-to-end customer experience while enabling us to increase our growth rate at lower cost, we evaluated local, regional and centralized processes to foster local branch customer ownership, supported by regional shared services where scale, consistency and process expertise is needed, and our national platform where scale can be leveraged. This transformation has led to significant improvement in profitability and lower operating costs and has positioned us well for future growth. Our patient-centric growth plan begins with an improved customer experience, which we believe will support increased cross-sell opportunities and growth across product lines to the over 2 million unique patients we serve annually.

In addition to Simplify, we have also made other substantial changes to our business since our acquisition by Blackstone:

 

   

we brought on a management team of individuals with extensive expertise and experience in the workings of our industry and regulatory environment and others who specialize in designing and developing scalable business infrastructures and business transformation;

 

   

we improved our business and revenue mix by growing our relationships with commercial Payors;

 

   

we expanded our service offerings to include more complex respiratory services, including NIV therapy, and we shifted our focus to three core service lines including less capital intensive products and services which complement our core offerings;

 

   

we invested in patient monitoring and outcomes data collection to differentiate our service offerings and provide enhanced value to patients, providers and Payors;

 

   

we improved sales productivity through changes in the sales force hiring profile and implementation of a new sales customer relationship management system;

 

   

we formed strategic relationships with our suppliers to help optimize equipment costs and provide state-of-the art patient equipment;

 

   

we streamlined our management structure and further optimized our branch network by reducing our locations open to the public from over 400 to approximately 275 without materially reducing the coverage of our service areas or the quality of our service;

 

   

we built a scalable infrastructure with data analytics and forecasting capabilities to more efficiently leverage the favorable trends of an aging population and the paradigm shift in healthcare from the acute setting to the home; and

 

   

we consolidated regional and branch level billing, collections and aspects of the customer service function, reorganized their work flows and adopted new technology and processes to help us improve productivity, monitor performance and more effectively manage important aspects of our business in real-time.

As result of these strategic transformations and future initiatives, we are well positioned to compete and win in the current industry environment and to successfully navigate any future changes.

Our Competitive Strengths

National Scale with Local Presence. Our platform combines local market presence with the advantages and efficiencies of national scale, clinical expertise and reputation. As one of the largest providers of home healthcare

 

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services in the United States, we enjoy long-tenured relationships with the majority of the major commercial Payors, who value an expansive geographic footprint that can service their entire patient populations, in addition to our reputation for reliable and quality care. We also offer alternative reimbursement arrangements such as capitations for defined patient populations. As a result, we are able to be a preferred provider for integrated healthcare systems and other major commercial Payors, including national single-source arrangements. We also benefit from the cost advantages and efficiencies of a scalable, centralized infrastructure. Our consolidated customer service and billing centers work with local branch locations to ensure seamless service to meet local customer requirements. Our revenue cycle management process utilizes centralized operations and technology to manage claims and patient collections on a single platform. At the same time, with approximately 275 branch locations and a substantial presence in high-density urban population centers, as well as a presence in non-urban markets, we have built an in-market network of last-mile logistics operations, delivery technicians and therapists that enables us to deliver high-touch, sophisticated clinical support and service in a fast and reliable manner. We manage and measure speed of delivery through a variety of means, depending on the type of product and patient-specific needs, including expedited order processing and delivery times (typically less than four hours) for patients discharging from the hospital to their homes. We believe this combination of national scale and local presence is not readily replicated by new entrants, and anticipate that industry trends toward continued consolidation of a highly fragmented home healthcare services market will inure to our benefit.

Expansive Offering with Exposure to Attractive Product Markets. We seek to offer high quality, clinically appropriate care across a broad spectrum of services and treatments amenable to the home setting. Our extensive offering helps make us an attractive and convenient choice for our patients, providers and Payors. With top two market positions in the United States in home respiratory therapy, OSA treatment and NPWT, we are aligned with large and growing addressable markets across our core service lines. The broader U.S. markets for respiratory devices and OSA devices, which align with our home respiratory and OSA treatment product lines, two of our core product lines and which represent over 80% of 2019 net revenue, are expected by industry analysts to grow at CAGRs of approximately 6% and approximately 8%, respectively, between 2018 and 2025.

Strong Relationships with Payors and Referral Sources Developed with Differentiated Sales Model. We enjoy deep and long-standing relationships with national and regional insurers and managed care organizations, many of whom we have been contracted with for over 20 years. We believe Payors value the breadth of our entire platform, in both the geographic markets we serve and the range of conditions our service offerings cover, and our flexibility in payment arrangements, including capitation for defined patient populations, demonstrating our competence in managing value as volume, as well as varying fee-for-service arrangements. We employ a centralized managed care sales function to handle Payor arrangements. Our team has negotiated over 1,600 contracts with national and regional commercial Payors, including fee-for-service as well as capitated arrangements. The depth and diversity of our contractual relationships with commercial Payors (which includes all Payors other than government Payors), which represented approximately 80% of our net revenue in 2019, enhances the stability of our pricing by reducing our dependence on any single contract. At the same time, we believe our critical mass with the traditional Medicare and Medicaid population, which represented approximately 20% of 2019 net revenue, enhances our ability to strategically rebalance our exposure to commercial and government Payors depending on market and reimbursement conditions.

Leveraging our broad market access to patients through our centralized Payor relationships, we cultivate individual relationships with thousands of local referral sources, including hospitals, outpatient facilities, physicians and sleep centers, through a field sales force of approximately 380 in-market sales representatives and approximately 200 front-line managers. We believe this differentiated approach of combining Company-wide Payor relationships with in-market referral relationships enhances the efficiency and productivity of our marketing efforts.

Leadership in Clinical Delivery. We specialize in certain complex home healthcare services and treatments that require deep technical and clinical expertise in addition to frequent patient interaction. We believe we are distinguished from e-commerce and logistics platforms by our ability to meet patient needs directly through our

 

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highly trained technicians and therapists who deliver and provide these services, as well as our ability to bill a patient’s insurance provider. We utilize differentiated clinical expertise and protocols to drive optimal outcomes across our core service lines and all of these operations are accredited by The Joint Commission. For example, our Premium Care SleepTM program (“Premium Care SleepTM”) is a fully-integrated sleep management program designed to conveniently provide OSA patients with the tools they need to improve their sleep. Through Premium Care SleepTM, we monitor the OSA treatment compliance of approximately 168,000 sleep patients on a nightly basis during the critical first 90 days of their treatment and proactively reach out to patients who may need help to improve their compliance through clinical intervention and other support from Apria. We believe this program has resulted in industry-leading sleep therapy compliance rates.

Leading Revenue Cycle Management. We manage medical claims and patient collections on a single operating platform that allows for capitation and fee-for-service arrangements. We believe we lead the industry in (1) ease of use for our key referral sources, (2) regulatory compliance and (3) revenue cycle management and billing and collections efficiency. Our process offers several advantages to our key referral sources and Payors, which we believe improve our ability to win new business and capture share from our competitors. We offer referral sources and Payors ease of use, speed, consistency, stability and predictability. Service preferences can be customized at the individual prescribing physician level, and standards for qualification and service can be customized to the requirements of each Payor. The integration of our processes, systems and our overall billing and collections capability allow us to effectively and efficiently bill, collect and manage our revenue. Almost all claims are billed electronically and almost all cash is posted automatically.

Strong and Experienced Management Team. We are led by a team of talented industry veterans, comprising individuals with long tenures at Apria and deep knowledge of our history and operations, as well as individuals who joined us more recently and bring fresh perspectives, insights and best practices developed through experience in other industries and at other companies. Together, they have led our strategic transformation and successfully navigated a challenging reimbursement environment. With an average of over 20 years of industry experience and over ten years with Apria, our senior leadership team has expertise spanning nearly every segment of the healthcare industry, including managed care, group purchasing organizations, manufacturing, supply chain, procurement, home healthcare, acute care, skilled nursing and long-term care pharmacy. They possess in-depth knowledge of our industry, markets, regulatory environment and service offerings.

Growth Strategy

Our goal is to be the market leader in the provision of high quality, cost-efficient home healthcare services, creating value for all stakeholders—patients, providers and Payors. We seek to achieve this goal through the following growth strategies:

Maintain leadership in markets with favorable industry dynamics. The broader U.S. markets for respiratory devices and OSA devices, which align with our home respiratory and OSA treatment product lines, two of our core product lines and which represent over 80% of 2019 net revenue, are expected by industry analysts to grow at CAGRs of approximately 6% and approximately 8%, respectively, between 2018 and 2025. With a national distribution platform that is difficult to replicate, deep and long-standing relationships with national and regional insurers and managed care organizations and a reputation for quality and reliability of service, we believe we are well positioned to maintain leadership in these attractive and growing markets. Industry groups suggest that approximately 80% of moderate and severe sleep-disordered breathing cases remain undiagnosed. We have been educating primary care physicians about the proper diagnosis and treatment of OSA. As the first line of care, these primary care physicians are more likely to encounter undiagnosed instances of OSA. In addition to traditional solutions, we coordinate an end-to-end virtual solution that includes home sleep testing (rather than testing at an offsite sleep clinic) which is convenient for the patient and safer, especially in the current pandemic environment. We believe that facilitating the diagnosis and treatment of this condition will lead to increased growth in OSA sales and increase revenue synergies as newly acquired OSA patients will have access to our other product and service lines when clinically indicated.

 

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Enable the transition to value-based healthcare. Government and commercial Payors are increasingly seeking ways to shift from traditional fee-for-service to a value-based model. We believe the ability to transition patients from the acute care setting to the home, as well as to prevent unnecessary readmissions, represents a critical part of this effort. As a leading provider of home healthcare equipment and related services, we believe we will increasingly benefit from this ongoing paradigm shift in the industry. In addition, we believe our demonstrated expertise in non-traditional payment models, such as capitation arrangements, will position us well to take advantage of this trend.

Expand product and service offerings. We continue to focus on expanding into new product lines and services both organically and through strategic acquisition to continue to grow and diversify our revenue with a patient-centric view centered on the long term value of each patient. For example, we are pursuing products and services related to the treatment of diabetes and the provision of diabetic supplies. Technological advances in continuous glucose monitoring and insulin pump delivery (creating an “artificial pancreas”) have changed the diabetes treatment paradigm and enabled providers to better treat patients in the home healthcare setting. Moreover, diabetic patients often suffer from many co-morbidities, including OSA, respiratory ailments and heart disease, many of which we already treat through our sleep and respiratory product lines. We believe we are well positioned to leverage our national platform and scalable infrastructure to help diabetic patients benefit from new diabetes treatment technologies as well as treatments for co-morbidities.

Leverage patient interactions. Our business model provides for frequent interaction with our patients and a direct entry point into the home, allowing our technicians, therapists and customer service agents to assess whether the patients are in need of additional services, supplies or convenience items. Where appropriate, our technicians, therapists and customer service agents can assist our patients in obtaining these additional services, supplies or convenience items through Apria. In addition, existing patients and potential patients may utilize our e-commerce platform to access additional items that are not covered by Payors and are purchased directly by patients.

Grow e-commerce through a patient-centric approach. Our e-commerce platform is primarily focused on supplies, accessories and additional items that are not covered by Payors and are purchased directly by patients. E-commerce is a convenient way to provide products and services to our existing patients and also serves as an additional acquisition channel for new patients. Through direct-to-patient marketing focused on service and clinical support, we believe we can continue to grow volume through our e-commerce channel. For example, we frequently acquire patients to meet a single product need even though they typically have additional home healthcare needs. Through patient interaction and education, they can discover and access other products and services that we offer through e-commerce that can address their needs. In addition, we believe the broader home healthcare trends discussed below will also enable us to grow our revenue and product and service offerings through e-commerce. Given that the supplies and accessories that are its primary focus are less capital intensive, we believe growing our e-commerce channel represents an attractive opportunity to increase cash flows and profitability.

Grow with new home healthcare trends. Telemedicine and remote provider care have been gaining traction in recent years and have been significantly accelerated given the recent COVID-19 pandemic. We believe that these trends will help accelerate growth in home healthcare and we are well positioned to benefit from these trends given our national footprint and scalable infrastructure. Moreover, due to the impacts of the COVID-19 pandemic, we expect accelerated and sustainable demand for home healthcare solutions including respiratory and other medical conditions that we treat regularly. These trends in telemedicine and the emphasis on treating patients in the home, outside the traditional medical clinic and hospital, will enable us to grow our revenue and product and service offerings further.

Strategic acquisitions. We believe there is also opportunity to accelerate our growth rate, market share gains and expand into new product markets through strategic acquisitions. We will continue to evaluate such opportunities through a disciplined approach, seeking only acquisitions that will complement our existing operations and businesses and/or create synergies. The various markets we participate in remain highly

 

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fragmented and ripe for consolidation and we believe that our nationally integrated platform, scale and strong reputation position us well to be a consolidator in our industry. We have a relatively unburdened balance sheet with low debt levels and meaningful debt capacity for acquisitions. Moreover, as a public company, we will have greater access to capital markets and we will be able to use our stock as an acquisition currency or to raise additional capital for strategic acquisitions.

Continue to capture efficiencies through scale and operational improvement. Our existing distribution network of approximately 275 branch locations can reach more than 90% of the U.S. population across both high-density urban markets and rural markets. Coupled with scalable technology and centralized operations, including revenue cycle management, we believe we can continue to grow beyond our nearly 2 million patients served in 2019 without significant incremental capital investment in infrastructure. As we maintain our strong position in growing product markets, we believe the ability to scale our operations and leverage fixed costs represents a significant opportunity for growth in profitability. In addition, we believe we can continue to improve the cost-efficiency of our operations and support functions through new and recently completed technology initiatives, such as RDA to simplify agent workflow, RPA for certain repetitive and volume staff tasks and automating activities such as new employee onboarding and equipment provisioning, and enhanced workflow to improve ease of use and direct activity to the appropriately skilled staff. We have also invested in DMEhub, a cloud-based e-prescribing platform that allows providers to submit medical equipment orders more efficiently and accurately, which we believe drives ease of use, enables more efficient order processing and reduces administrative burden.

Continue to improve cash profile. We continually evaluate opportunities to enhance our cash flow and return on investment. We see opportunities in this regard both to increase our exposure to less capital intensive products and to benefit from recent investment in our longer-lived, complex equipment fleet. Patients on OSA therapy and NPWT require periodic replenishment of supplies and accessories in order to remain in compliance with their prescribed therapies. These supplies are less capital intensive and we believe represent a multi-billion dollar market with an attractive growth profile. The opportunity to increase our exposure to this market is enhanced by our growing e-commerce distribution channel, which is primarily focused on these supplies and accessories, offering patients speed and convenience and helping us to continue to grow our volume.

Service Lines

Our business activities comprise a single operating segment focused on three core service lines: (1) home respiratory therapy (including oxygen and NIV services); (2) OSA treatment (including CPAP and bi-level positive airway pressure devices, and patient support services); and (3) NPWT. Additionally, we supply a wide range of home medical equipment, other products and services to help improve the quality of life for patients with home care needs. Through our offerings, we also provide a broad range of home healthcare products and services, and provide patients with a variety of clinical and administrative support services and supplies, most of which are prescribed by a physician as part of a care plan. We provide substantial benefits to both patients and Payors by allowing patients to receive necessary care and services in the comfort of their own home while reducing the cost of treatment. For example, on average, it costs approximately $50 per day to create an in-home hospital room versus approximately $2,271 per day for in-patient hospital care, according to the Medicare Payment Advisory Commission and Henry J. Kaiser Family Foundation. Our services include:

 

   

providing in-home delivery, set-up and maintenance of equipment and/or supplies;

 

   

educating patients and caregivers about health conditions or illnesses and providing instructions about home safety, self-care and the proper use of equipment;

 

   

monitoring therapy compliance and intervening to enhance compliance;

 

   

clinical monitoring of complex respiratory service patients’ individualized treatment plans;

 

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reporting patient progress and status to the physician, national and regional insurers and/or managed care organizations; and

 

   

processing claims to Payors on behalf of patients.

The following table sets forth a summary of total net revenues by service line, expressed as percentages of total net revenues:

 

     Year Ended December 31,  
     2019     2018     2017  

Home respiratory therapy

     40.0     39.7     40.3

OSA treatment

     40.3       38.7       37.3  

NPWT

     3.9       3.7       3.9  

Other equipment and services

     15.8       17.9       18.5  
  

 

 

   

 

 

   

 

 

 

Total

     100     100     100
  

 

 

   

 

 

   

 

 

 

Home Respiratory Therapy. ($435.7 million, $441.2 million and $432.4 million, or 40.0%, 39.7% and 40.3%, of our net revenues for the years ended December 31, 2019, 2018 and 2017, respectively).

We are one of the largest providers of home respiratory therapies in the United States, which includes the supply of stationary and portable home oxygen equipment and non-invasive ventilators. Our distribution model allows our respiratory care practitioners to educate, on a timely and efficient basis, newly-diagnosed patients about their condition, the equipment their physician has prescribed for them, and the long-term importance of complying with the physician’s order. Our services offer a compelling relative cost advantage to our patients and Payors. Patients utilize our products to treat a variety of conditions, including chronic obstructive pulmonary diseases, such as emphysema and chronic bronchitis (collectively, the third leading cause of death in the United States), neuromuscular disorders and restrictive thoracic disorder.

We employ a nationwide clinical staff of approximately 450 respiratory care professionals, including home respiratory therapists who perform patient assessments and set-ups for highly complex clinical equipment, and provide direct patient care, monitoring and 24-hour support services under physician-directed treatment plans and in accordance with our proprietary program.

OSA Treatment. ($438.6 million, $430.4 million and $400.7 million, or 40.3%, 38.7% and 37.3%, of our net revenues for the years ended December 31, 2019, 2018 and 2017, respectively).

We are one of the largest providers of OSA therapy devices, including CPAP and bi-level positive airway pressure devices, and patient support services in the United States. The incidence and diagnosis of OSA continues to increase in the United States. We believe that the strength of our position in this market is partly due to our significant presence in the commercial Payor market, since the initial diagnosis of OSA typically occurs among adults between the ages of 35 and 65 rather than the population served by Medicare. To manage our significant new and recurring patient volumes in a cost-effective, clinically sound manner, we developed an innovative care model, which includes initial delivery and instructional services, an ongoing customer service relationship, and offering sleep supplies to patients for convenience purposes and continuing to provide such supplies to the patients into the future. We believe that an increasing focus on our user-friendly e-commerce platform will help contribute to this provision of sleep supplies. In addition, we operate a comprehensive patient compliance model to ensure that commercially insured patients and Medicare patients adhere to their therapy according to their physician’s prescription and the established guidelines for reimbursement, and a Payor compliance and monitoring model. The patient compliance model includes both one-on-one patient education and teaching performed in group settings, as well as remote monitoring technologies.

NPWT. ($42.1 million, $41.4 million and $42.0 million, or 3.9%, 3.7% and 3.9%, of our net revenues for the years ended December 31, 2019, 2018 and 2017, respectively).

 

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We provide NPWT pumps, supplies, and the dressings needed for patients’ individualized therapy. The most common types of wounds treated with NPWT are pressure ulcers, diabetic ulcers, post-surgical wounds, burns or other wounds developed as a result of traumatic injury. Our strength comes from partnering with manufacturers who are proven leaders in wound care to provide state-of-the-art pumps, supplies and dressings with an individualized patient care model to help promote wound healing while minimizing dressing-related pain and trauma. In order to facilitate a streamlined care transition, we leverage our national distribution network to deliver the initial kit either before the patient is transitioned from the hospital or shortly after they return home. We continue to provide supplies to the patient to ensure continuity in therapy as prescribed by their physician. This service integrates well with our goal of being the home healthcare provider that helps transition patients from the hospital setting to home healthcare.

Other Equipment and Services. ($172.5 million, $198.0 million and $198.7 million, or 15.8%, 17.9% and 18.5%, of our net revenues for the years ended December 31, 2019, 2018 and 2017, respectively).

In addition to the core services described above, we also supply a wide range of home medical equipment, other respiratory services and other products to help improve the quality of life for patients with home care needs. Our integrated service approach allows patients, hospital and physician referral sources and managed care organizations accessing any of our service offerings to also access needed home medical equipment and other respiratory services through a single source. The use of home medical equipment provides a significant relative cost advantage to our patients and Payors.

Patients and Payors

Patients and Payors rely on the equipment and high quality services that we provide in managing patients with chronic conditions.

Patients. In contrast to many healthcare services which are single transaction in nature, Apria develops long-term relationships with its patients through the provision of recurring services over time to treat chronic conditions. Home healthcare patients are generally diagnosed at a point in their disease progression where the proper use of durable medical equipment allows them to manage their diseases at home over an extended period of time. For respiratory therapy and OSA treatment, these therapies are often provided for multiple years, during which time Apria provides continued equipment servicing and certain supplies, such as sleep supplies, used in conjunction with the equipment. While the length of care for NPWT is normally shorter in duration, it is typically longer than one month and often extends for multiple months. In addition to providing equipment and ongoing service, Apria also bills and collects payments from the Payor source, on behalf of the patients. Starting at the patient’s initial admission and extending through the length of service, Apria collects the necessary paperwork and information needed for reimbursement from the patient’s Payor source. In order to meet any established utilization management guidelines required for ongoing reimbursement, Apria also coordinates with the patient and their Payor throughout the patient’s time as a customer.

Commercial Payors. National and regional insurers and managed care organizations continue to represent a significant portion of our business and we have long-standing relationships with most of the commercial Payors that we contract with. For the year ended December 31, 2019, approximately 80% of our revenue was from commercial Payors (which includes all Payors other than government Payors), including approximately 23% from Kaiser Foundation Health Plan, Inc. No other third-party Payor accounts for more than 10% of our revenues for the year ended December 31, 2019. Most of our commercial Payor contracts have two to five year terms with an automatic extension unless it otherwise terminates. Most of our commercial Payor contracts are based on price – we generally do not have contracted volume. We believe that our long-term relationships with national and regional insurers and managed care organizations provides considerable stability to our business. We have more than 1,600 agreements in place with various commercial Payors, from large nationals to regional and local Payors. For the year ended December 31, 2019, approximately 50% of our revenues were from commercial Payors with whom we have been contracted for over 20 years.

 

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Medicare. For the year ended December 31, 2019, approximately 19% of our revenue was from servicing patients with traditional Medicare coverage. While in previous rounds of the DMEPOS CBP we had CBP contracts in many of the CBAs, in recent years, we have reduced our reliance on Medicare business in response to the implementation of the DMEPOS CBP, which is burdensome and does not reflect the true cost of equipment and services provided. The next round of the CBP, beginning on January 1, 2021, was originally expected to include a number of products in our product lines. However, CMS announced on October 27, 2020 that only two out of the original 16 product categories will be included in Round 2021 of the DMEPOS CBP. Accordingly, none of our products will be subject to the DMEPOS CBP for the three-year period in which Round 2021 is in effect, and we are not restricted from supplying our products in any regions of the country during this period. We have maintained critical mass with the traditional Medicare population to allow for future flexibility should improvements to the DMEPOS CBP be made that provide opportunities for growth in this segment.

Sales and Marketing

Our sales and marketing strategy is tailored around our Payors and referral sources. In order to effectively serve our Payors and referral sources, we have a managed care sales team and a field sales team. As of December 31, 2019, we employed approximately 25 managed care sales professionals whose primary responsibilities are to build and maintain existing referral relationships with Payors and negotiate Payor pricing and contract terms. We also employed approximately 380 sales professionals whose primary responsibilities are to obtain new referrals and to maintain existing referral relationships for all of our service lines. We provide our sales professionals with the necessary clinical and technical training to represent our service offerings. Our sales structure and strategies are designed to adapt to changing market factors and will continue to adjust as further changes in the industry occur. While in most cases the ultimate referral decision is made by an individual referral source, our relationships with commercial Payors are important to ensure broad market access given that most of our patients are their members.

Marketing Initiatives. We have developed and put into practice several marketing initiatives to enhance the attractiveness of our service offerings, including:

 

   

Comprehensive, Patient-Centric Clinical and Therapy Management Programs. We offer a number of clinical management programs, such as Premium Care SleepTM, which are designed to help improve patients’ quality of life and clinical outcomes, and to reduce costs for providers and Payors through reduced hospital and emergency admissions.

 

   

Patient Satisfaction and Complaint Resolution Process. We have a centralized patient satisfaction survey function that periodically conducts patient surveys and targeted member satisfaction studies for key national and regional insurers and managed care organizations as specified by various contractual arrangements. We also have a centralized team that administers a portal where patients’ complaints can be addressed. This team routes patient complaints to specific subject matter experts throughout the Company to resolve complaints. This process has enriched our data collection and analysis which is used to better manage resolutions and capture trends, allowing us to focus our improvement efforts. We believe that both centralized processes afford us visibility to centralized performance improvement data and trends that enable us to amend policies and procedures as necessary to meet the needs of patients.

Organization and Operations

Organization. Our approximately 6,500 employees deliver home healthcare products and services to patients in their homes and to other care sites with the support of our approximately 275 branch locations, six regional distribution and repair centers, consolidated billing team, delivery fleet and qualified delivery professionals and clinical employees. Our home respiratory therapy, OSA treatment, NPWT and other equipment and service lines are organized into geographic zones and markets that provide management oversight.

Corporate Compliance. As a leader in the home healthcare industry, we have a robust compliance program that is designed to further our commitment to providing quality home healthcare products and services while

 

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maintaining high standards of ethical and legal conduct. Our enterprise-wide corporate compliance program applies to all operating divisions and is grounded in existing laws, rules and regulations and guidelines for healthcare organizations issued by the HHS OIG. We believe that it is essential to operate our business with integrity and in full compliance with applicable laws. Our corporate compliance program is headed by an experienced corporate compliance officer who reports directly to the board of directors and our Chief Executive Officer, for compliance purposes. The program also includes a written code of ethical business conduct that employees receive as part of their initial orientation process and which management reviews with employees under their supervision through a periodic review and attestation process. The program is designed to accomplish the goals described above through employee education, a confidential disclosure program, written policy guidelines, excluded parties, checks, periodic reviews, frequent reinforcement, compliance audits, a formal disciplinary component and other programs. Compliance oversight is provided by our corporate compliance committee, which meets quarterly and consists of senior and mid-level management personnel from various functional disciplines. In addition to updates provided to the board of directors during its regular meetings, a written compliance program report is submitted annually to the board of directors for review and discussion. On December 18, 2020, a federal judge approved a civil and administrative settlement Apria entered into with the United States and state Medicaid programs. As part of the settlement, Apria also entered into a five-year Corporate Integrity Agreement, under which we agreed to undertake certain obligations designed to promote compliance with federal healthcare programs. In addition, Apria entered into settlements to resolve claims brought under the laws of the States of California and Illinois on behalf of private insurers. For further information, see “Summary—Recent Developments—Settlement with SDNY Office.”

Operating Systems and Controls. Our operating and field information operating systems, policies and procedures for proper contract administration, accurate order entry and pricing, billing and collections, and inventory and patient equipment management enable us to monitor operational performance. Our information services department works closely with all of the operating areas of our business to ensure that our information technology policies, procedures and functions are compliant with government regulations and Payor requirements and to support their business improvement initiatives with technological solutions.

We have established performance indicators which measure operating results against expected thresholds for the purpose of allowing all levels of management to identify and modify areas requiring improvement and to monitor the resulting progress. Operating models with strategic targets have been developed to move us toward more effective management of the sales, customer service, accounts receivable, clinical and distribution areas of our business.

Receivables Management. We operate in an environment with complex requirements governing billing and reimbursement for our products and services. We have ongoing initiatives focused specifically on accounts receivables management such as system enhancements, process refinements and organizational changes.

We are continuing to expand our use of technology in areas such as web portals/electronic ordering, electronic claims submission and electronic funds transfer with managed care organizations to more efficiently process business transactions. This use of technology can improve the initial patient admission process, expedite claims processing and reduce the administrative costs associated with this activity for both us and our providers and Payors. We now submit almost all of our home respiratory and other equipment and services claims electronically. We have also developed and are continuing to develop internal expertise with the unique reimbursement requirements of certain large Payors and continue to negotiate simplifications in the claims submission process in an effort to reduce subsequent denials and shorten related collection periods. Our policy is to collect co-payments from the patient or applicable secondary Payor. In the absence of a secondary Payor, we generally require the co-payment at the time the patient is initially established with the product/service. Subsequent months’ co-payments are billed to the patient. We are also seeking to streamline related processes in order to improve the co-payment collection and initial claim denial rates. Certain accounts receivable administrative functions continue to be administered by third-party providers while others have been incorporated into our existing customer service and billing centers. We have established policies and procedures and provide training for all contracted service providers to perform effectively on our behalf.

 

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Suppliers. Virtually all products used in our business are purchased from third parties. We have a number of key supplier relationships.

We believe that we are not wholly dependent upon any single product supplier and that our product needs can be met by several similar suppliers if any one supplier became unable to continue our current business relationship. Our sourcing strategy leverages relationships with industry-leading suppliers but maintains competition and standardization that allows us to source from any supplier in a given category.

Nationwide Accreditation. All of our operations, including our branch locations, are accredited by The Joint Commission. As the home healthcare industry has grown and accreditation has become a mandatory requirement for Medicare DMEPOS providers, the need for objective quality measurements has increased. Accreditation by The Joint Commission entails a lengthy voluntary review process that is conducted every three years. Accreditation is also widely considered a prerequisite for entering into contracts with managed care organizations.

Essential Care Model. We have developed the Essential Care Model, a proprietary model that outlines Apria’s product formulary and defines the base-line levels of services, supplies and products offered in conjunction with key prescribed home healthcare equipment and therapies. The Essential Care Model is used to establish consistent and clear base-line expectations for patients, providers and Payors.

Outsourced Activities

We engage third-party providers for certain billing, collections, administrative and information systems and other services. As part of our outsourcing strategy, we seek to minimize the risk of business disruption by contracting with multiple vendors across multiple locations.

Competition

The segment of the healthcare market in which we operate is highly fragmented and highly competitive. In each of our service lines there are a limited number of national providers and numerous regional and local providers. Ultimately, our services are provided to an individual patient that is usually referred to Apria by a third-party healthcare professional. The competitive factors most important in the referral process are: reputation with referral sources, including local physicians and hospital-based professionals; accessibility and an efficient, responsive referral process; speed and quality of services; overall ease of doing business; quality of patient care and associated services; range of home healthcare products and services; and being an in-network provider for the commercial Payor(s) specific to an individual patient.

We compete with other large national providers, including Lincare Holdings, Inc., AdaptHealth, Rotech and Aerocare. Other types of healthcare providers, including individual hospitals and hospital systems, physicians and physician groups, home healthcare agencies, health maintenance organizations and managed services intermediaries have entered and may continue to enter the market to compete with our various service lines.

Government Regulation

We are subject to extensive government regulation, including numerous federal, state and local laws directed at regulating reimbursement of our products and services under various government programs and preventing fraud and abuse, as more fully described below. We maintain certain safeguards intended to reduce the likelihood that we will engage in conduct or enter into arrangements in violation of these restrictions. Legal department personnel review and approve written contracts, such as agreements with physicians, subject to these laws. We also maintain various educational and audit programs designed to keep our managers and employees updated and informed regarding developments on these topics and to reinforce to employees our policy of strict compliance in this area. Notwithstanding these measures, violations of these laws and regulations may still occur,

 

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which could subject us to civil and criminal enforcement actions; licensure revocation, suspension, or non-renewal; severe fines and penalties; the repayment of amounts previously paid to us; and even the termination of our ability to provide services under certain government programs such as Medicare and Medicaid. See “Risk Factors—Risks Related to Our Business and Industry— Reductions in Medicare, Medicaid and commercial Payor reimbursement rates and/or exclusion from markets or product lines, including due to the DMEPOS CBP, could have a material adverse effect on our results of operations and financial condition.”

Medicare and Medicaid Revenues. For the year ended December 31, 2019, approximately 19% and 1% of our net revenues were reimbursed by the Medicare and state Medicaid programs, respectively. With the exception of Kaiser Foundation Health Plan, Inc., which represented approximately 23% of our revenues during the period, no other third-party Payor represented more than 10% of our total net revenues for the year ended December 31, 2019. The majority of our revenues are derived from rental income on equipment rented and related services provided to patients, and the sales of equipment, supplies, pharmaceuticals and other items we sell to patients for patient care under fee-for-service arrangements.

Medicare Reimbursement. There are a number of historic and ongoing legislative and regulatory activities in Congress and at CMS that affect or may affect Medicare reimbursement policies for products and services we provide. Specifically, a number of important legislative changes that affect our business were included in the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “MMA”), the Deficit Reduction Act of 2005 (the “DRA”) and the Medicare Improvements for Patients & Providers Act of 2008 (the “MIPPA”). The MMA, DRA and MIPPA and their implementing regulations and guidelines contain numerous provisions that were significant to us when enacted and continue to have an impact on our operations today, as described below. In addition, more recent legislative changes that will have an ongoing effect on our business were included in the PPACA, the Medicare Access and CHIP Reauthorization Act of 2015 (the “MACRA”), the 21st Century Cures Act and the Bipartisan Budget Act of 2018 (the “BBA”).

DMEPOS Competitive Bidding. A significant regulatory activity affecting Medicare reimbursement is the DMEPOS CBP, which was mandated by Congress through the MMA. The DMEPOS CBP impacts the Medicare reimbursement amounts for suppliers of certain DMEPOS items, and in the past, included some DMEPOS items that we provide to our patients.

The first round of the DMEPOS CBP was implemented briefly in 2008, but temporarily delayed and revised through the MIPPA. Subsequently, round one rebid contracts were fully implemented in January 1, 2011 in nine CBAs for nine product categories. CMS is required by law to recompete contracts under the DMEPOS CBP at least once every three years. Accordingly, the round one rebid contracts went through two re-competition processes since the original contract period started in 2011, for contract periods running from January 1, 2014 through December 31, 2016 (in nine CBAs for six product categories) and from January 1, 2017 through December 31, 2018 (in 13 CBAs for eight product categories). CMS implemented round two of the DMEPOS CBP on July 1, 2013 in 91 CBAs for eight product categories. Round two contracts went through one re-competition process, for contract periods running from July 1, 2016 through December 31, 2018 (in 117 CBAs for seven product categories). Cumulatively, in round one, round two, round one recompete, round two recompete and round one 2017, we were offered contracts for a substantial majority of the CBAs and product categories for which we submitted bids for oxygen, CPAP and NPWT.

In general, when a DMEPOS CBP competition round becomes effective in a CBA, beneficiaries under the Medicare fee-for-service program must obtain competitively bid DMEPOS items from a contract supplier. However, suppliers who are not awarded contracts through a DMEPOS CBP competition round, but who are furnishing competitively bid DMEPOS items at the time a DMEPOS CBP competition round begins, may continue furnishing certain items to beneficiaries if the supplier chooses to become a “grandfathered” supplier. The decision to become a grandfathered supplier applies to all items within a DMEPOS CBP product category that the supplier furnished prior to implementation of the DMEPOS CBP competition round. There are specific payment and policy requirements for grandfathered suppliers under each category of DMEPOS (e.g., capped

 

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rental, inexpensive and routinely purchased, oxygen and oxygen equipment), as well as specific beneficiary transition rules that a non-contract supplier must comply with, depending on whether the non-contract supplier chooses to be a grandfathered supplier or not.

In January 2017, CMS announced plans to consolidate all rounds and areas of the DMEPOS CBP into a single round of competition that would go into effect on January 1, 2019 in 141 CBAs for 11 product categories. However, CMS subsequently rescinded the originally published guidance. The then-existing DMEPOS CBP round one and round two contracts expired on December 31, 2018. In March 2019, CMS announced that it would consolidate all rounds and areas of the DMEPOS CBP into a single round of competition that would not go into effect until January 1, 2021 (“Round 2021”). Since that time, and as a result, there has been a temporary gap in the DMEPOS CBP. Since January 1, 2019, and through December 31, 2020, any Medicare-enrolled DMEPOS supplier has been able to furnish DMEPOS equipment and services in all areas of the country.

Round 2021 contracts are scheduled to become effective on January 1, 2021, and to extend through December 31, 2023. The bid window for Round 2021 closed on September 18, 2019. For each CBA included in Round 2021, providers submitted bids in September 2019 to CMS offering to supply certain covered items of DME in the CBA at certain prices. A number of products in our product lines originally were included on the list of products subject to Round 2021, including oxygen and oxygen equipment, CPAP devices and RADs, nebulizers and NPWT pumps. Although NIVs were originally included in the list of products subject to Round 2021, on April 9, 2020, CMS announced that the NIV product category has been removed from Round 2021 due to the COVID-19 pandemic. By removing NIVs from Round 2021, any Medicare-enrolled DMEPOS supplier can furnish any of the types of ventilators covered under the Medicare program. On October 27, 2020, CMS announced further revisions to Round 2021 of the DMEPOS CBP. Namely, only two out of the original 16 product categories, OTS back braces and OTS knee braces, are going to be included in Round 2021 of the DMEPOS CBP. All other product categories were removed from Round 2021. Accordingly, there are no longer any products in our product lines included on the list of products subject to Round 2021 of the DMEPOS CBP.

Competitive bidding contracts are expected to be re-bid at least every three years. Although none of our products are subject to Round 2021 of the DMEPOS CBP, we cannot guarantee that our products will be excluded from any subsequent rounds of the DMEPOS CBP. Our exclusion from certain markets or product lines could materially adversely affect our financial condition and results of operations. Further, the competitive bidding process has historically put downward pressure on the amount we are reimbursed in the markets in which we operate, as well as in areas that are not subject to the DMEPOS CBP. The rates required to win future competitive bids could continue to depress reimbursement rates. While we cannot predict the outcome of the DMEPOS CBP on our business in the future nor the Medicare payment rates that will be in effect in future years for the items subjected to competitive bidding, the program may materially adversely affect our financial condition and results of operations.

Medicare Fee Schedule for DMEPOS and CPI Adjustments. DMEPOS items that are not subject to the CBP are paid for under the Medicare DMEPOS fee schedule. The fee schedule amounts are calculated on a statewide basis. Further, the fee schedule amounts are updated annually by the percentage increase in the CPI-U and adjusted by the change in economy-wide productivity that is equal to the 10-year moving average of changes in the annual economy-wide private non-farm business Multi-Factor Productivity (“MFP”). For 2020, the CPI-U percentage increase is 1.6% and the MFP adjustment is 0.7%, resulting in a net increase of 0.9% for the update factor that is applied to the DMEPOS fee schedule amounts. For 2021, the CPI-U percentage increase is 0.6% and the MFP adjustment is 0.4%, resulting in a net increase of 0.2% for the update factor that is applied to the DMEPOS fee schedule amounts.

Effective January 1, 2016, DMEPOS items that are subject to CBP but furnished in all non-CBAs have experienced reductions in the Medicare DMEPOS fee schedule. The fee schedules for those items in the non-CBAs have been adjusted based on regional averages of the SPAs that apply to the DMEPOS CBP (referred to as the “Adjusted Fee Schedule”). Fee schedule amounts that are adjusted using information from the DMEPOS

 

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CBP are not subject to the annual CPI-U adjustments discussed above, but are updated when information from the DMEPOS CBP is updated.

However, the 21st Century Cures Act, enacted in December 2016, included a provision to roll back the full application of the Adjusted Fee Schedule amount to the non-CBAs that was effective from July 1, 2016 through December 31, 2016. Effective from January 1, 2017, non-CBA rates were set at 100% of the Adjusted Fee Schedule amount, based on the regional competitive bidding rates. In May 2018, CMS issued an interim final rule that resumed the transition period for phasing in adjustments to the Adjusted Fee Schedule amount in rural areas and non-contiguous areas (Alaska, Hawaii and U.S. territories) not subject to the DMEPOS CBP from June 1, 2018 through December 31, 2018. For this 7-month time period, DMEPOS items furnished in rural and non-contiguous areas were paid for based on a blended rate of 50% of the non-Adjusted Fee Schedule amount and 50% of the Adjusted Fee Schedule amount. Other non-CBAs (those that are not defined as rural or non-contiguous) were not impacted by this interim final rule and DMEPOS items furnished in these areas were paid at 100% of the Adjusted Fee Schedule amount.

During the temporary gap in the DMEPOS CBP, from January 1, 2019 through December 31, 2020, CMS established separate fee schedule adjustment methodologies for three geographic areas: (1) other non-CBAs (those that are not defined as rural or noncontiguous), (2) rural/non-contiguous areas, and (3) former CBAs. For other non-CBAs, the payment amounts for DMEPOS items were based on 100% of the Adjusted Fee Schedule amount. Because the SPAs generated from the DMEPOS CBP competitions expired on January 1, 2019, the Adjusted Fee Schedule amount was increased by the percentage change in the CPI-U (1.6%) on January 1, 2020, and will be increased again by 0.6% on January 1, 2021. For rural/non-contiguous areas, the payment amounts for DMEPOS items were based on a blended rate of 50% of the non-Adjusted Fee Schedule amount and 50% of the Adjusted Fee Schedule amount. The Adjusted Fee Schedule amount of the blended rate also was increased by the percentage change in the CPI-U (1.6%) on January 1, 2020, and will be increased again by 0.6% on January 1, 2021. For former CBAs, the payment amount for DMEPOS items are based on the lower of the supplier’s charge for the item or fee schedule amounts that are based on the SPAs that were in effect in the CBA before the CBP contract ended, increased by the projected percentage change in the CPI-U. Accordingly, for 2019, the fee schedule amounts were based on the SPAs in effect on December 31, 2018 for each specific CBA, increased by 2.5% (the projected percentage change in the CPI-U for the 12-month period ending January 1, 2019), and for 2020, the fee schedule amounts increased by 2.4% (the projected percentage change in the CPI-U for the 12-month period ending January 1, 2020). For 2021, the fee schedule amounts will be increased by 0.6% (the projected percentage change in the CPI-U for the 12-month period ending January 1, 2021).

The CARES Act introduced a new blended rate for DMEPOS items furnished in other non-CBAs (those that are not defined as rural or non-contiguous) that is based on 25% of the non-Adjusted Fee Schedule amount and 75% of the Adjusted Fee Schedule amount, effective March 6, 2020 through the end of the COVID-19 pandemic. For rural and non-contiguous areas, the payment amount for DMEPOS items will continue to be based on a blended rate of 50% of the non-Adjusted Fee Schedule amount and 50% of the Adjusted Fee Schedule amount until December 31, 2020 or the end of the COVID-19 pandemic, whichever is later.

On November 4, 2020, CMS issued a proposed rule establishing the methodologies for adjusting the fee schedule payment amounts for such DMEPOS items furnished in non-CBAs on or after April 1, 2021 or the date immediately following the duration of the public health emergency period (which has recently been extended through April 20, 2021), whichever is later. CMS proposes to pay 100% of the Adjusted Fee Schedule amount in other non-CBAs. Under the proposal, CMS would continue paying suppliers higher rates (e.g., at the 50/50 blended rate) for furnishing such DMEPOS items in rural and non-contiguous areas as compared to in other non-CBAs, informed by stakeholder input indicating higher costs in these areas, greater travel distances and costs in certain non-CBAs compared to CBAs, the unique logistical challenges and costs of furnishing items to beneficiaries in the non-contiguous areas, significantly lower volume of items furnished in these areas versus CBAs, and concerns about financial incentives for suppliers in surrounding urban areas to continue including outlying rural areas in their service areas. For such DMEPOS items that originally were included in Round 2021

 

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but for which contracts were not awarded, CMS is considering whether to simply extend application of the current fee schedule adjustment rules for non-CBAs, CBAs, and former CBAs until new SPAs are calculated for the items once competitive bidding of the items in a future round of the DMEPOS CBP. We believe that this proposal does not include NIVs, since they were not included in previous rounds of the DMEPOS CBP and therefore would continue to be paid based on the Medicare DMEPOS fee schedule.

We furnish DMEPOS items in both rural and non-contiguous areas, as well as other non-CBAs. While some relief has been provided for rural and non-contiguous areas and, recently, but only on a temporary basis, to other non-CBAs through the CARES Act, the overall impact has been a reduction in payments for DMEPOS items in these areas that reflect competitively bid prices. See “Risk Factors–Risks Related to Our Business and Industry– Reductions in Medicare, Medicaid and commercial Payor reimbursement rates and/or exclusion from markets or product lines, including due to the DMEPOS CBP, could have a material adverse effect on our results of operations and financial condition.”

Reimbursement for Capped Rentals and Oxygen Equipment. Medicare covers certain DMEPOS items, including CPAP and RAD under its category for “capped rentals.” In general, items in this category are rented to Medicare beneficiaries, and Medicare payment is based on a monthly rental payment that covers the cost of the base device and any necessary maintenance and service of the device. DMEPOS suppliers may bill Medicare separately for any related accessories (e.g., masks, filters, humidifiers) that are used with the capped rental device. The rental period for these items is limited to 13 months of continuous use, after which time the Medicare monthly payment for the base equipment ceases and the Medicare beneficiary takes ownership of the device. After the capped rental period ends, Medicare continues to pay for replacement of the accessories that are used with the beneficiary-owned device. At the end of the five-year useful life of the equipment, the beneficiary may obtain replacement equipment and, if he or she can be requalified for the Medicare benefit, a new maximum 13-month payment and five-year useful life cycle would begin.

Medicare reimbursement for oxygen and oxygen equipment is limited to a maximum of 36 months within a 60-month service period. The supplier that billed Medicare for the 36th month of service continues to be responsible for the beneficiary’s oxygen therapy needs for months 37 through 60, and generally there is no additional reimbursement for oxygen-generating portable equipment for these later months. CMS does not separately reimburse DMEPOS suppliers for any oxygen tubing, cannulas and supplies that may be required for the beneficiary. The DMEPOS supplier is required to keep the equipment provided in working order and in some cases, CMS will provide reimbursement for repair costs. At the end of the five-year useful life of the equipment, the beneficiary may obtain replacement equipment and, if he or she can be requalified for the Medicare benefit, a new maximum 36-month payment cycle would begin for the next 60 months of service. Unlike capped rental items, the oxygen equipment always remains the property of the DMEPOS supplier. Note that, for 2019, CMS added a new oxygen payment class and set the rental payment for portable liquid oxygen equivalent to the rental payment made for portable concentrators and transfilling equipment. CMS also added a new payment class for high-flow portable liquid oxygen contents when a patient’s prescribed flow rate exceeds 4 liters per minute. This new high-flow oxygen content class allows for the continuation of high-flow oxygen volume adjustment payments beyond the initial 36 months of continuous use. CMS implemented these changes in a budget neutral manner.

Reimbursement for Inhalation and Infusion Therapy Drugs. Inhalation therapy drugs are typically paid under the Medicare Part B fee schedule. Inhalation drugs have been paid based on the Average Sales Price (“ASP”) plus 6% for the drug since January 1, 2005. Effective January 1, 2017, the payment amount for infusion therapy drugs furnished through DME also began to be based on ASP plus 6%, rather than the historical payment amount based on 95% of the manufacturers’ Average Wholesale Price (“AWP”). This change in payment for infusion therapy drugs followed reports from the HHS OIG that found that the then-current AWP methodology may have resulted in excessive reimbursement for certain drugs while underpaying for other drugs. Inhalation and infusion therapy drugs are not subject to the DMEPOS CBP. However, the durable medical equipment used to deliver the inhalation and infusion therapy drugs (e.g., nebulizers, external infusion pumps and supplies) have been subject to various competition rounds under the DMEPOS CBP.

 

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Reimbursement for Non-Invasive Pressure Support Ventilators. For patients experiencing chronic respiratory failure, we offer NIV therapy. Medicare pays for NIV therapy under the DME benefit category for items requiring frequent and substantial servicing, and payments may continue until medical necessity ends (rather than being capped after a certain period of time). CMS and its contractors have expressed concerns about the recent substantial increase in Medicare billing for non-invasive pressure support ventilators. As described by the HHS OIG in a September 2016 data brief, ventilator technology has evolved so that it is possible for a single device to treat numerous respiratory conditions by operating in several different modes. According to the HHS OIG, this creates an opportunity for abuse if DMEPOS suppliers were to bill Medicare for the device as if it were being used as a ventilator, when use of a lower cost device (e.g., CPAP, RAD) is indicated based on the beneficiary’s medical condition. The HHS OIG’s data brief examined the results of prepayment reviews conducted by two of the DME MACs that resulted in the denial of more than 90% of claims for NIVs. The primary reason cited for many of these denials was insufficient clinical documentation. Following the release of the HHS OIG’s 2016 data brief, in which the HHS OIG recommended that CMS monitor providers with the largest market shares of ventilator beneficiaries, CMS consolidated billing codes for ventilators effective January 1, 2016 and decreased the reimbursement amount for non-invasive pressure support ventilators. On July 22, 2020, CMS conducted a virtual Medicare Evidence Development & Coverage Advisory Committee (“MEDCAC”) meeting to review the evidence specific to the home use of noninvasive positive pressure ventilation by patients with chronic respiratory failure consequent to chronic obstructive pulmonary disease (“COPD”). Devices to be considered are home mechanical ventilators, bi-level positive airway pressure (BPAP) devices, and CPAP devices. Following the MEDCAC panel, an informal Technical Expert Panel (“TEP”) led by the American College of Chest Physicians (“CHEST”) with representatives from the American Association for Respiratory Care (“AARC”), the American Thoracic Society (“ATS”), and the American Academy of Sleep Medicine (“AASM”) was convened to develop recommendations to inform CMS coverage policy regarding the use of at-home NIV devices for patients in five diagnostic categories. The five categories include: (1) Bilevel Transition from CPAP When Therapeutic Benefit Was Not Achieved; (2) Severe COPD; (3) Hypoventilation Syndrome; (4) Thoracic Restrictive Disorders; and (5) Complex/Central Sleep Apnea. A final document with the TEP’s findings will be presented to CMS and submitted for peer-reviewed publication. Together, the efforts of the MEDCAC panel and the TEP are likely to be used by CMS to shape a Medicare national coverage determination (“NCD”) related to the use of at-home NIV devices in COPD patients in the future.

Claims Auditing and Monitoring and Medical Necessity Documentation Requirements. As a Medicare provider, we are subject to extensive government regulation, including laws and regulations directed at ascertaining the appropriateness of reimbursement, preventing fraud and abuse, and otherwise regulating reimbursement under the Medicare program. The federal government has contracted with private entities to audit and recover revenue resulting from payments made in excess of those permitted by federal and state benefit program rules. These entities include but are not limited to comprehensive error rate testing program contractors that are responsible for measuring improper payments on Medicare fee-for-service claims and Unified Program Integrity Contractors (UPICs) that are responsible for the identification of suspected fraud through medical record review.

In order to ensure that Medicare beneficiaries only receive medically necessary items and services, the Medicare program has adopted a number of documentation requirements. Additionally, to ensure compliance with Medicare, the DME MACs conduct pre- and post-payment audits or other types of inquiries, and request patient records and other documentation, to support claims we submit for payment for services and products we render to Medicare beneficiaries. These audits typically involve a complex medical review, by Medicare, or its designated contractors and representatives, of documentation supporting the services and products provided. In connection with a Medicare request for supporting documentation, we are obligated to procure and submit the underlying medical records retained by various clinical providers, medical facilities and prescribers. Obtaining these medical records in connection with a claims audit may be challenging and, in any event, all of these records are subject to further examination, interpretation and dispute by the auditing authority. Under standard Medicare procedures, we are entitled to demonstrate the sufficiency of documentation and the establishment of medical necessity and we have the right to appeal any adverse determinations. If a determination is made that our records

 

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or the patients’ medical records are insufficient to meet medical necessity or Medicare coverage or reimbursement requirements for the claims, we could be subject to denials or overpayment demands for claims submitted for Medicare reimbursement. In the rare event that such an audit results in major discrepancies of claims records which lacked medical necessity, Medicare may be entitled to take additional corrective measures, including extrapolation of audit results across a wider population of claims, submission of recoupment demands for claims other than those examined in the audit, or placing the provider on a full pre-payment review.

Face-to-Face Provisions for DMEPOS. In November 2012, CMS issued a final rule that implemented a provision of the Social Security Act (“SSA”) establishing requirements for a face-to-face encounter and written orders prior to delivery for certain items of DMEPOS. As written, the final rule would have required a physician to document that the physician, or a nurse practitioner, physician assistant, or clinical nurse specialist, had a face-to-face encounter with the beneficiary prior to issuing a written order to the beneficiary for certain DMEPOS items. The MACRA eliminated this face-to-face requirement as originally written, and revised the requirement to be that a physician, nurse practitioner, physician assistant, or clinical nurse specialist must document they have written an order for a DMEPOS item pursuant to a face-to-face encounter with the beneficiary, but that encounter could have occurred anytime within the six months before the order was written for the DMEPOS item.

In response to the COVID-19 pandemic, CMS has exercised enforcement discretion with respect to the clinical conditions and face-to-face encounter requirements established under certain national and local coverage determinations applicable to certain items and supplies, including respiratory items (oxygen, CPAP, RADs, nebulizers) and infusion pumps. Accordingly, on an interim basis, requirements related to face-to-face or in-person encounters for evaluations, assessments, certifications or other implied face-to-face services would not apply. This enforcement discretion is temporary, as it is only in effect for the duration of the COVID-19 pandemic, and it is subject to ongoing and evolving interpretation by CMS and the DME MACs. As such, we may be required to modify our policies and procedures to remain in compliance with these CMS requirements.

Prior Authorization Rules for DMEPOS. In December 2015, CMS issued a final rule to require prior authorization (“PA”) by Medicare for certain DMEPOS items that the agency characterizes as frequently subject to unnecessary utilization. The final rule specifies a master list of DMEPOS items that potentially could be subject to PA and CMS will update this master list annually. The first two DMEPOS items requiring PA are two types of power wheelchairs (single and multiple power options) and in March 2017 the DME MACs began accepting PA requests for these items. The PA final rule did not create any new clinical documentation requirements; instead, the same information necessary to support Medicare payment was required, but simply prior to the DMEPOS item being furnished to the Medicare beneficiary.

CMS has established a list of DMEPOS items frequently subject to unnecessary utilization. Items on this list could be subject to PA as a condition of Medicare payment. Since 2012, CMS also has maintained a list of categories of DMEPOS items that require face-to-face encounters with practitioners and written orders before the DMEPOS supplier may furnish the items to Medicare beneficiaries. In a final rule published in November 2019, CMS combined these two lists to create a single, unified “master list” that CMS will use to identify DMEPOS items for which face-to-face encounters, written orders prior to delivery, and/or PA will be required. This expanded master list increases the number of DMEPOS items potentially eligible to be subject to prior authorization, face-to-face encounters, and written order prior to delivery requirements as a condition of payment.

While the current list of DMEPOS items requiring PA does not affect any of our products other than support surfaces, CMS may include products from our product lines on the required PA list in future phases of the PA process. If any of our products are ultimately subject to PA, it could reduce the number of our patients qualified to come on service using their Medicare benefits, it could delay the start of those patients’ service while we wait for PA to be received, and/or it could decrease our sales productivity. As a result, this could adversely affect our business, financial condition, results of operations, cash flow, capital resources and liquidity.

 

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Reimbursement Under Medicare Part C (Medicare Advantage). We maintain contracts to provide home respiratory, home medical equipment and related services to a significant number of managed care companies that maintain Medicare Advantage plans nationwide. While Medicare Advantage plans are required to cover all benefits to which beneficiaries are entitled under the Medicare Parts A and B programs, these plans have flexibility to negotiate and set payment rates that differ from the Medicare rates. Further, the DMEPOS CBP only applies to the Medicare fee-for-service program and therefore does not apply to Medicare Advantage plans. Enrollment in Medicare Advantage plans continues to grow and these plans are likely to continue to be attractive alternatives to traditional Medicare fee-for-service for those beneficiaries who choose them and we intend to continue to contract with these plans.

We cannot estimate the combined possible impact of all legislative, regulatory, and contemplated reimbursement changes that could have a material adverse effect on our business, financial condition and results of operations. Moreover, our estimates of the impact of certain of these changes appearing in this “Government Regulation” section are based on a number of assumptions and there can be no assurance that the actual impact was not or will not be different from our estimates.

Medicaid Reimbursement. State Medicaid programs implement reimbursement policies for the products and services we provide. Such policies may or may not be similar to those of the Medicare program. Budget pressures on state Medicaid programs often result in pricing and coverage changes that may have a detrimental impact on our operations. States sometimes have adopted alternative pricing methods for certain drugs and home medical equipment under their Medicaid programs that reduce the level of reimbursement received by us, without a corresponding offset or increase to compensate for the service costs incurred.

The 21st Century Cures Act accelerated the implementation of the omnibus spending bill passed in December 2015 that requires state Medicaid agencies to match Medicare reimbursement rates for certain durable medical equipment items, including oxygen, to be effective beginning January 1, 2018. Through passage of the 21st Century Cures Act, Congress added section 1903(i)(27) to the SSA, which prohibits federal Medicaid reimbursement to states for certain durable medical equipment expenditures that are, in the aggregate, in excess of what Medicare would have paid for such items. As such, a state’s Medicaid expenditures for DME items that are subject to this provision will be determined in the aggregate and any expenditures in excess of what Medicare would have paid for such items in the aggregate, either on a fee schedule basis or under its competitive bidding process, are not eligible for federal financial participation. CMS issued guidance through a federal register notice published on November 28, 2017 and in a state Medicaid director letter dated December 27, 2017 regarding state implementation of this Medicaid program requirement. Unfortunately, most states did not take the appropriate action and this became effective on January 1, 2018. States then worked to enact changes to their fee schedules. In addition, states considered whether to make such changes retroactive to January 1, 2018. The impact of this Medicaid program requirement has varied by state, depending on how much the state’s Medicaid fee-for-service rate differs from the applicable Medicare rate.

On January 30, 2020, CMS, on behalf of the Trump Administration, announced a new opportunity called the Healthy Adult Opportunity (“HAO”) to support states with greater flexibility to improve the health of their Medicaid populations. According to the Trump Administration, the HAO “emphasizes the concept of value-based care while granting states with extensive flexibility to administer and design their programs within a defined budget.” The Trump Administration has viewed HAO as a unique opportunity for states to enhance their Medicaid program’s integrity and potentially increase enrollment opportunities for previously ineligible recipients (about 2 million people in non-expansion states could theoretically be eligible under the criteria CMS outlined. CMS states that other low-income adults, children, pregnant women, elderly adults and people with disabilities will not be affected by this initi