AdaptHealth Corp.: Form 10-Q for the period ended Sep 30, 2023

The following discussion should be read in conjunction with AdaptHealth Corp.’s (“AdaptHealth” or the “Company”) consolidated financial statements and the accompanying notes included in this report. All amounts presented are in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), except as noted. 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 include, but are not limited to, those discussed in Item 1A, “Risk Factors”, in our 2022 Annual Report on Form 10-K filed with the SEC on February 28, 2023. Certain amounts that appear in this section may not sum due to rounding.

AdaptHealth Corp. Overview

AdaptHealth is a national leader in providing patient-centered, healthcare-at-home solutions including home medical equipment (“HME”), medical supplies, and related services. The Company focuses primarily on providing (i) sleep therapy equipment, supplies and related services (including CPAP and bi PAP services) to individuals suffering from obstructive sleep apnea (“OSA”), (ii) medical devices and supplies to patients for the treatment of diabetes (including continuous glucose monitors and insulin pumps), (iii) home medical equipment to patients discharged from acute care and other facilities, (iv) oxygen and related chronic therapy services in the home, and (v) other HME devices and supplies on behalf of chronically ill patients with wound care, urological, incontinence, ostomy and nutritional supply needs. The Company services beneficiaries of Medicare, Medicaid and commercial insurance payors. As of September 30, 2023, AdaptHealth serviced approximately 4.0 million patients annually in all 50 states through its network of approximately 690 locations in 47 states. The Company’s principal executive offices are located at 220 West Germantown Pike, Suite 250, Plymouth Meeting, Pennsylvania 19462.

Impact of Inflation

Current and future inflationary effects may be driven by, among other things, general inflationary cost increases, supply chain disruptions and governmental stimulus or fiscal policies. The cost to manufacture and distribute the equipment and products that AdaptHealth provides to patients is influenced by the cost of materials, labor, and transportation, including fuel costs. AdaptHealth continues to experience inflationary pressure and higher costs as a result of the increasing cost of materials, labor and transportation. The increase in the cost of equipment and products is due in part to higher cost of shipping and general inflationary cost increases. Additionally, it is not certain that AdaptHealth will be able to pass increased costs onto customers to offset inflationary pressures. Continuing increases in inflation could impact the overall demand for AdaptHealth’s products and services, its costs for labor, equipment and products, and the margins it is able to realize on its products, all of which could have an adverse impact on AdaptHealth’s business, financial position, results of operations and cash flows. In addition, future volatility of general price inflation and the impact of inflation on costs and availability of materials, costs for shipping and warehousing and other operational overhead could adversely affect AdaptHealth’s financial results. Although there have been increases in inflation, AdaptHealth cannot predict whether these trends will continue. AdaptHealth’s mitigation efforts relating to these inflationary pressures include utilizing AdaptHealth’s purchasing power in negotiations with vendors and the increased use of technology to drive operating efficiencies and control costs, such as AdaptHealth’s digital platform for prescriptions, orders and delivery. In April 2023, AdaptHealth formalized a cost management program to drive operating efficiencies and implement more simplified and scalable business processes, which was substantially complete as of September 30, 2023. Management has initiated all steps in the program, which included a rationalization of AdaptHealth's real estate footprint, renegotiation of certain supply contracts, workforce reductions, and expanded use of more efficient operating models for certain back-office functions. These changes reflect AdaptHealth's continued strategic focus on process standardization and efficiency across the enterprise through technology and related investments. This program will deliver Adjusted EBITDA improvement in 2023 of approximately $25 million, and will result in approximately $40 million of annualized Adjusted EBITDA improvement in future years. The cost to achieve this program during the nine months ended September 30, 2023 was approximately $12.2 million. In addition, AdaptHealth continues to evaluate all opportunities to rationalize its operating footprint and related cost structure to better align with business needs.

Key Components of Operating Results

Net Revenue. Net revenue is recognized for services that AdaptHealth provides to patients for home healthcare equipment, medical supplies to the home and related services. AdaptHealth' s primary product lines are (i) sleep therapy equipment, supplies and related services (including CPAP and bi PAP services) to individuals suffering from OSA, (ii) medical devices and supplies to patients for the treatment of diabetes (including continuous glucose monitors and insulin pumps), (iii) home medical equipment to patients discharged from acute care and other facilities, (iv) oxygen and related chronic therapy services in the home, and (v) other HME devices and supplies on behalf of chronically ill patients with wound care, urological, incontinence, ostomy and nutritional supply needs. Revenues are recognized either at a point in time for the sale of supplies and disposables, over the service period for equipment rental (including, but not limited to, CPAP machines, hospital beds, wheelchairs and other equipment), at amounts estimated to be received from patients or under reimbursement arrangements with Medicare, Medicaid and other third-party payors, including private insurers, or in the month in which eligible members are entitled to receive healthcare services in connection with at-risk capitation arrangements. Certain trends or uncertainties that may have a material impact on revenue growth and operating results include the Company's ability to obtain new patient starts and to generate referrals from patient referral sources and the ability to meet the increased demand considering supply chain issues and inflationary pressures.

Cost of Net Revenue. Cost of net revenue primarily includes the cost of non-capitalized medical equipment and supplies, distribution expenses, labor costs, facilities and vehicle rental costs, revenue cycle management costs and depreciation for capitalized patient equipment. Distribution expenses represent 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.

General and Administrative Expenses. General and administrative expenses consist of corporate support costs including information technology, human resources, finance, contracting, legal, compliance, equity-based compensation, transaction expenses and other administrative costs.

Depreciation and Amortization, Excluding Patient Equipment Depreciation. Depreciation expense includes depreciation charges for capital assets other than patient equipment (which is included as part of the cost of net revenue). Amortization expense includes amortization of identifiable intangible assets.

Goodwill Impairment. AdaptHealth has a significant amount of goodwill on its balance sheet that resulted from the business acquisitions AdaptHealth has made. Goodwill is not amortized, rather, it is assessed for impairment annually and upon the occurrence of a triggering event or change in circumstances indicating a possible impairment. Such triggering events potentially warranting an annual or interim goodwill impairment assessment include, among other factors, declines in historical or projected revenue, operating income or cash flows, and sustained decreases in AdaptHealth's’s stock price or market capitalization. Such changes in circumstance can include, among others, changes in the legal environment, reimbursement environment, operating performance, and/or future prospects. AdaptHealth performs its annual impairment assessment of goodwill during the fourth quarter of each year. The impairment assessment can be performed on either a quantitative or qualitative basis. AdaptHealth first assesses qualitative factors to determine whether it is necessary to perform a quantitative goodwill impairment analysis. If determined necessary, AdaptHealth applies the quantitative impairment test to identify and measure the amount of impairment, if any. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors, such as estimates of a reporting unit's fair value and judgment about impairment triggering events. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual or interim goodwill impairment test will prove to be accurate predictions of the future.

Factors Affecting AdaptHealth’s Operating Results

AdaptHealth’s operating results and financial performance are influenced by certain unique events during the periods discussed herein, including the following:

Acquisitions

AdaptHealth accounts for its acquisitions in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, Business Combinations, and the operations of the acquired entities are included in the historical results of AdaptHealth for the periods following the closing of the acquisition. Refer to Note 3, Acquisitions, included in our interim consolidated financial statements for the three and nine months ended September 30, 2023 included in this Quarterly Report on Form 10-Q for additional information regarding AdaptHealth’s acquisitions.

Seasonality

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

Goodwill Impairment

During the three months ended September 30, 2023, AdaptHealth experienced a decline in its market capitalization as a result of a sustained decrease in AdaptHealth's stock price and also revised its financial projections. AdaptHealth considered these items to represent a triggering event and performed a goodwill impairment test as of September 30, 2023. Based on the results of the test performed as of that date, it was concluded that the estimated fair value of AdaptHealth's reporting unit was less than its carrying value, as such, AdaptHealth recognized a non-cash goodwill impairment charge of $511.9 million during the three and nine months ended September 30, 2023. If in future periods AdaptHealth were to experience a further decline in its market capitalization or expected results for a sustained period of time, AdaptHealth may be required to perform an additional goodwill impairment test at an interim or annual period and could be required to recognize a non-cash goodwill impairment charge at that time, which could be material.

Key Business Metrics

AdaptHealth focuses on Net revenue, EBITDA, Adjusted EBITDA and Free Cash Flow as it reviews its performance. Refer to EBITDA, Adjusted EBITDA and Free Cash Flow included in the Non-GAAP measures section below.

Total net revenue is comprised of net sales revenue and net revenue from fixed monthly equipment reimbursements less implicit price concessions. Net sales revenue consists of revenue recognized at a point in time for the sale of supplies and disposables and revenue recognized in connection with at-risk capitation arrangements. Net revenue from fixed monthly equipment reimbursements consists of revenue recognized over the service period for equipment (including, but not limited to, CPAP machines, oxygen concentrators, ventilators, hospital beds, wheelchairs and other equipment).

(Unaudited)

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(Unaudited)

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Results of Operations

Comparison of Three Months Ended September 30, 2023 and Three Months Ended September 30, 2022.

The following table summarizes AdaptHealth’s consolidated results of operations for the three months ended September 30, 2023 and 2022:

(in thousands, except percentages)

(unaudited)

Net Revenue. The comparability of AdaptHealth's net revenue between periods was impacted by certain factors as described below. The table below presents the items that impacted the change in AdaptHealth's net revenue between periods.

(in thousands, except percentages)

(Unaudited)

Net revenue for the three months ended September 30, 2023 and 2022 was $804.0 million and $756.5 million, respectively, an increase of $47.5 million, or 6.3%. The increase in net revenue was driven by non-acquired growth $45.1 million, and acquisitions, which increased revenue by $2.5 million. Net revenue from AdaptHealth's sleep business increased by $44.8 million, or 16.5%, for the three months ended September 30, 2023 compared to the prior year period, primarily due to increased patient census driven by strong patient demand for sleep products, including CPAP resupply products. Net revenue from AdaptHealth's respiratory business increased by $10.7 million, or 7.6%, for the three months ended September 30, 2023 compared to the prior year period, primarily due to increased patient census driven by strong patient demand for respiratory products. Net revenue from AdaptHealth's diabetes business decreased by $13.3 million, or (7.7)%, for the three months ended September 30, 2023 compared to the prior year period, primarily due to a shift in diabetes patients by certain large commercial insurance and other payors from DME suppliers to dual-benefit and pharmacy-only suppliers, partially offset by an increase in CGM patient census. Additionally, there was lower net revenue from insulin pumps and supplies in the 2023 period compared to the 2022 period as a result of a shift toward more pumps being sold to patients through the pharmacy channel as well as the effect from manufacturers bringing additional distribution business in-house.

For the three months ended September 30, 2023, net sales revenue comprised 66% of total net revenue, compared to 68% of total net revenue for the three months ended September 30, 2022. For the three months ended September 30, 2023, net revenue from fixed monthly equipment reimbursements comprised 34% of total net revenue, compared to 32% of total net revenue for the three months ended September 30, 2022.

Cost of Net Revenue.

The following table summarizes cost of net revenue for the three months ended September 30, 2023 and 2022:

(in thousands, except percentages)

(unaudited)

Cost of net revenue for the three months ended September 30, 2023 and 2022 was $693.5 million and $646.7 million, respectively, an increase of $46.8 million or 7.2%. Costs of products and supplies increased by $31.9 million primarily as a result of increased net sales revenue and general inflationary cost increases. Salaries, labor and benefits slightly increased by $0.3 million, primarily due to increased benefits costs and annual merit increases, partially offset by cost savings actions. Patient equipment depreciation was 10.3% of net revenue in the 2023 period compared to 10.1% in the 2022 period, primarily as a result of higher medical equipment prices and rental counts.

General and Administrative Expenses. General and administrative expenses for the three months ended September 30, 2023 and 2022 were $45.2 million and $40.7 million respectively, an increase of $4.5 million or 11.1%. This increase is primarily due to higher professional fees, partially offset by lower transaction costs and lower equity-based compensation expense. General and administrative expenses as a percentage of net revenue was 5.6% in the 2023 period, compared to 5.4% in the 2022 period. General and administrative expenses in the 2023 period included $3.5 million of equity-based compensation expense, $0.3 million of transaction costs, and other non-recurring expenses of $7.0 million, primarily related to expenses associated with litigation and consulting expenses associated with systems implementation activities. General and administrative expenses in the 2022 period included $4.0 million of equity-based compensation expense, $1.2 million of transaction costs, and other non-recurring expenses of $8.5 million, primarily related to expenses associated with litigation, and consulting expenses associated with systems implementation activities and post-implementation support services.

Depreciation and amortization, excluding patient equipment depreciation. Depreciation and amortization, excluding patient equipment depreciation, for the three months ended September 30, 2023 and 2022 was $14.5 million and $16.2 million, respectively, a decrease of $1.6 million, primarily related to lower intangible amortization expense.

Goodwill Impairment. The Company performed a goodwill impairment test as of September 30, 2023, and based on the results of the test, it was concluded that the estimated fair value of the Company’s reporting unit was less than its carrying value, as such, the Company recognized a non-cash goodwill impairment charge of $511.9 million. Refer to Note 5, Goodwill and Identifiable Intangible Assets, for additional details.

Interest Expense, net. Interest expense, net for the three months ended September 30, 2023 and 2022 was $32.3 million and $28.5 million, respectively, an increase of $3.8 million. Interest expense related to AdaptHealth's credit agreement increased by $5.5 million in the 2023 period compared to the 2022 period as a result of higher interest rates, offset by lower average outstanding borrowings in the 2023 period compared to the 2022 period. Interest expense related to the Company's senior unsecured notes decreased by $0.1 million in the 2023 period compared to the 2022 period. These increases were offset by a reduction in interest expense of $1.6 million related to AdaptHealth's interest rate swap agreements.

Change in Fair Value of Warrant Liability. AdaptHealth has outstanding warrants to purchase shares of Common Stock, as discussed in Note 10, Stockholders’ Equity, to the accompanying September 30, 2023 interim consolidated financial statements. These warrants are liability-classified, and the change in fair value of the warrant liability represents a non-cash gain in the 2023 period and a non-cash charge in the 2022 period for the change in the estimated fair value of such liability during the respective periods.

Other Loss, net. Other loss, net for the three months ended September 30, 2023 consisted of $3.5 million of lease termination costs associated with a cost management program and a $0.3 million charge for the increase in the fair value of a contingent consideration liability related to an acquisition, offset by $0.5 million relating to the write-off of certain operating lease liabilities for closed locations. Other loss, net for the three months ended September 30, 2022 consisted of $0.2 million of expenses associated with legal settlements and $0.1 million of other charges.

Income Tax Benefit/Expense. Income tax benefit and income tax expense for the three months ended September 30, 2023 and 2022 was $34.6 million and $5.6 million, respectively. Income tax expense on ordinary income decreased due to lower pre-tax income net of warrant liability fair value adjustments. Additionally, the Company recognized a $39.9 million discrete income tax benefit, and corresponding increase to net deferred tax assets, related to the non-cash goodwill impairment charge of $511.9 million recognized during the three months ended September 30, 2023. Refer to Note 5, Goodwill and Identifiable Intangible Assets, for additional details.

Comparison of Nine Months Ended September 30, 2023 and Nine Months Ended September 30, 2022.

The following table summarizes AdaptHealth’s consolidated results of operations for the nine months ended September 30, 2023 and 2022:

(in thousands, except percentages)

(unaudited)

Net Revenue. The comparability of AdaptHealth's net revenue between periods was impacted by certain factors as described below. The table below presents the items that impacted the change in AdaptHealth's net revenue between periods.

(in thousands, except percentages)

(Unaudited)

Net revenue for the nine months ended September 30, 2023 and 2022 was $2,341.9 million and $2,190.3 million, respectively, an increase of $151.6 million, or 6.9%. The increase in net revenue was driven by non-acquired growth $141.6 million, and acquisitions, which increased revenue by $10.0 million. Net revenue from AdaptHealth's sleep business increased by $131.1 million, or 16.8%, for the nine months ended September 30, 2023 compared to the prior year period, primarily due to increased patient census driven by strong patient demand for sleep products, including CPAP resupply products. Net revenue from AdaptHealth's respiratory business increased by $30.0 million, or 7.2%, for the nine months ended September 30, 2023 compared to the prior year period, primarily due to increased patient census driven by strong patient demand for respiratory products. Net revenue from AdaptHealth's diabetes business decreased by $19.7 million, or

4.0%, for the nine months ended September 30, 2023 compared to the prior year period, primarily due to a shift in diabetes patients by certain large commercial insurance and other payors from DME suppliers to dual-benefit and pharmacy-only suppliers, partially offset by an increase in CGM patient census. Additionally, the decrease was due to lower net revenue from insulin pumps and supplies as a result of a shift toward more pumps being sold to patients through the pharmacy channel as well as the effect from manufacturers bringing additional distribution business in-house.

For the nine months ended September 30, 2023, net sales revenue comprised 66% of total net revenue, compared to 68% of total net revenue for the nine months ended September 30, 2022. For the nine months ended September 30, 2023, net revenue from fixed monthly equipment reimbursements comprised 34% of total net revenue, compared to 32% of total net revenue for the nine months ended September 30, 2022.

Cost of Net Revenue.

The following table summarizes cost of net revenue for the nine months ended September 30, 2023 and 2022:

(in thousands, except percentages)

(unaudited)

Cost of net revenue for the nine months ended September 30, 2023 and 2022 was $2,022.3 million and $1,853.8 million, respectively, an increase of $168.4 million or 9.1%. Costs of products and supplies increased by $94.9 million primarily as a result of increased net sales revenue and general inflationary cost increases. Salaries, labor and benefits increased by $23.4 million, primarily due to increased benefits costs, annual merit increases, and workforce wage pressure driven by inflation, partially offset by cost savings actions. Patient equipment depreciation was 10.5% of net revenue in the 2023 period compared to 9.2% in the 2022 period, primarily as a result of higher medical equipment prices and rental counts.

General and Administrative Expenses. General and administrative expenses for the nine months ended September 30, 2023 and 2022 were $142.8 million and $124.7 million, respectively, an increase of $18.1 million or 14.5%. This increase is primarily due to higher professional fees and higher equity-based compensation expense, partially offset by lower transaction costs. General and administrative expenses as a percentage of net revenue was 6.1% in the 2023 period, compared to 5.7% in the 2022 period. General and administrative expenses in the 2023 period included $15.8 million of equity-based compensation expense, $0.6 million of transaction costs, and other non-recurring expenses of $24.2 million, primarily related to expenses associated with litigation, severance, and consulting expenses associated with systems implementation activities and cost savings initiatives. General and administrative expenses in the 2022 period included $11.5 million of equity-based compensation expense, $5.8 million of transaction costs, and other non-recurring expenses of $11.9 million, primarily related to expenses associated with litigation, and consulting expenses associated with systems implementation activities and post-implementation support services.

Depreciation and amortization, excluding patient equipment depreciation. Depreciation and amortization, excluding patient equipment depreciation, for the nine months ended September 30, 2023 and 2022 was $45.6 million and $48.1 million, respectively, a decrease of $2.5 million, primarily related to lower intangible amortization expense.

Goodwill Impairment. The Company performed a goodwill impairment test as of September 30, 2023, and based on the results of the test, it was concluded that the estimated fair value of the Company’s reporting unit was less than its carrying value, as such, the Company recognized a non-cash goodwill impairment charge of $511.9 million. Refer to Note 5, Goodwill and Identifiable Intangible Assets, for additional details.

Interest Expense, net. Interest expense, net for the nine months ended September 30, 2023 and 2022 was $96.8 million and $78.9 million, respectively, an increase of $17.9 million. Interest expense related to AdaptHealth's credit agreement increased by $24.3 million in the 2023 period compared to the 2022 period as a result of higher interest rates, offset by lower average outstanding borrowings in the 2023 period compared to the 2022 period. This increase was offset by a reduction in interest expense of $6.4 million related to AdaptHealth's interest rate swap agreements.

Change in Fair Value of Warrant Liability. AdaptHealth has outstanding warrants to purchase shares of Common Stock, as discussed in Note 10, Stockholders’ Equity, to the accompanying September 30, 2023 interim consolidated financial statements. These warrants are liability-classified, and the change in fair value of the warrant liability represents a non-cash gain in the 2023 and 2022 periods for the change in the estimated fair value of such liability during the respective periods.

Other Loss, net. Other loss, net for the nine months ended September 30, 2023 consisted of $4.1 million of lease termination costs associated with a cost management program, $1.4 million of impairments of operating lease right-of-use assets, $1.2 million of expenses associated with legal settlements, and a $0.3 million charge for the increase in the fair value of a contingent consideration liability related to an acquisition, offset by $0.5 million relating to the write-off of certain operating lease liabilities for closed locations. Other loss, net for the nine months ended September 30, 2022 consisted of a $4.5 million expense related to changes in AdaptHealth’s estimated TRA liability, $1.2 million of expenses associated with legal settlements, $0.8 million loss related to the write-off of an investment, and $0.7 million of expenses associated with lease terminations.

Income Tax Benefit/Expense. Income tax benefit and income tax expense for the nine months ended September 30, 2023 and 2022 was $30.9 million and $20.0 million, respectively. Income tax expense on ordinary income decreased due to lower pre-tax income net of warrant liability fair value adjustments. Additionally, the Company recognized a $39.9 million discrete income tax benefit, and corresponding increase to net deferred tax assets, related to the non-cash goodwill impairment charge of $511.9 million recognized during the nine months ended September 30, 2023. Refer to Note 5, Goodwill and Identifiable Intangible Assets, for additional details.

EBITDA and Adjusted EBITDA

AdaptHealth uses EBITDA and Adjusted EBITDA, which are financial measures that are not in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, to analyze its financial results and believes that they are useful to investors, as a supplement to U.S. GAAP measures. In addition, AdaptHealth’s ability to incur additional indebtedness and make investments under its existing credit agreement is governed, in part, by its ability to satisfy tests based on a variation of Adjusted EBITDA.

AdaptHealth defines EBITDA as net income (loss) attributable to AdaptHealth Corp., plus net income (loss) attributable to noncontrolling interests, interest expense, net, income tax expense (benefit), and depreciation and amortization, including patient equipment depreciation.

AdaptHealth defines Adjusted EBITDA as EBITDA (as defined above), plus equity‑based compensation expense, transaction costs, change in fair value of the warrant liability, goodwill impairment and certain other non-recurring items of expense or income.

AdaptHealth believes Adjusted EBITDA is useful to investors in evaluating AdaptHealth’s financial performance. AdaptHealth uses this metric as the profitability measure in its incentive compensation plans that have a profitability component and to evaluate acquisition opportunities, where it is most often used for purposes of contingent consideration arrangements.

EBITDA and Adjusted EBITDA should not be considered as measures of financial performance under U.S. GAAP, and the items excluded from EBITDA and Adjusted EBITDA are significant components in understanding and assessing financial performance. Accordingly, these key business metrics have limitations as an analytical tool. They should not be considered as an alternative to net income or any other performance measures derived in accordance with U.S. GAAP or as an alternative to cash flows from operating activities as a measure of AdaptHealth’s liquidity.

The following unaudited table presents the reconciliation of net income attributable to AdaptHealth to EBITDA and Adjusted EBITDA for the three and nine months ended September 30, 2023 and 2022:

(in thousands)

(Unaudited)

(a) Represents equity-based compensation expense for awards granted to employees and non-employee directors.

(b) Represents transaction costs and expenses related to integration efforts related to acquisitions.

(c) Represents a non-cash charge or gain for the change in the estimated fair value of the warrant liability. Refer to Note 10, Stockholders’ Equity, included in the accompanying notes to the interim consolidated financial statements for the three and nine months ended September 30, 2023 for additional discussion of such non-cash charge or gain.

(d) Represents a non-cash goodwill impairment charge as a result of the fair value of the Company’s reporting unit being less than its carrying value. Refer to Note 5, Goodwill and Identifiable Intangible Assets, included in the accompanying notes to the interim consolidated financial statements for the three and nine months ended September 30, 2023 for additional discussion of such impairment charge.

(e) The 2023 year-to-date period consists of $12.5 million of expenses associated with litigation, $6.3 million of severance charges (of which $2.9 million relates to the separation of the Company's former CEO), $4.1 million of lease termination costs associated with a cost management program, $3.9 million of consulting expenses associated with systems implementation activities, $0.9 million of net impairments of operating lease right-of-use assets, and $5.5 million of other non-recurring expenses. The 2022 year-to-date period consists of a $9.0 million of consulting expenses associated with systems implementation activities and post-implementation support services, a $4.5 million expense related to changes in AdaptHealth's estimated liability related to its Tax Receivable Agreement, $3.8 million of expenses associated with litigation, claims and settlements, $0.7 million of lease termination costs, a $0.8 million loss related to the write-off of an investment, and $1.1 million of net other non-recurring expenses.

Free Cash Flow

AdaptHealth uses free cash flow, which is a financial measure that is not in accordance with U.S. GAAP, in its operational and financial decision-making and believes free cash flow is useful to investors because similar measures are frequently used by securities analysts, investors, ratings agencies and other interested parties to evaluate AdaptHealth's competitors and to measure the ability of companies to service their debt. AdaptHealth's presentation of free cash flow should not be construed as a measure of liquidity or discretionary cash available to AdaptHealth to fund its cash needs, including investing in the growth of its business and meeting its obligations.

AdaptHealth defines free cash flow as net cash provided by operating activities less cash paid for purchases of equipment and other fixed assets. For further discussion on free cash flow, including a reconciliation from cash flows provided by operating activities, refer to Liquidity and Capital Resources - Free Cash Flow below.

Liquidity and Capital Resources

AdaptHealth’s principal sources of liquidity are its operating cash flows, borrowings under its credit agreements and other debt arrangements, and proceeds from equity issuances. AdaptHealth has used these funds to meet its capital requirements, which primarily consist of capital expenditures including patient equipment, product and supply costs, salaries, labor, benefits and other employee-related costs, third-party customer service, billing and collections and logistics costs, acquisitions and debt service, and to fund share repurchases. In addition, AdaptHealth continues to make operational changes that management believes will continue to improve accounts receivable collections in the future. AdaptHealth’s future capital expenditure requirements will depend on many factors, including its patient volume and revenue growth rates.

AdaptHealth’s capital expenditures are made in advance of patients beginning service. Certain operating costs are incurred at the beginning of the equipment service period and during initial patient set up.

AdaptHealth believes that its expected operating cash flows, together with its existing cash and amounts available under its existing credit agreement, will continue to be sufficient to fund its operations and growth strategies for at least the next twelve months.

AdaptHealth may seek additional equity or debt financing in connection with the growth of its business, primarily for acquisitions. In addition, economic conditions may cause disruption in the capital markets, which could make financing more difficult and/or expensive. In the event that additional financing is required from outside sources, AdaptHealth may not be able to raise it on acceptable terms or at all. If additional capital is unavailable when desired, AdaptHealth’s business, results of operations, and financial condition would be materially adversely affected.

As of September 30, 2023, AdaptHealth had approximately $56.1 million of cash.

At September 30, 2023, AdaptHealth had $740 million outstanding under its existing credit facility. In January 2021, AdaptHealth entered into a credit agreement, as amended, (the "2021 Credit Agreement"). The 2021 Credit Agreement consists of a $800 million secured term loan (the “2021 Term Loan”) and $450 million in commitments for revolving credit loans with a $55 million letter of credit sublimit (the “2021 Revolver”), both with maturities in January 2026. The borrowing under the 2021 Term Loan requires quarterly principal repayments of $5 million beginning June 30, 2021 through March 31, 2023, increasing to $10 million beginning June 30, 2023 through December 31, 2025, and the unpaid principal balance is due at maturity in January 2026. Borrowings under the 2021 Revolver may be used for working capital and other general corporate purposes, including for capital expenditures and acquisitions permitted under the 2021 Credit Agreement. As of September 30, 2023, and the date of this filing, there were no outstanding borrowings under the 2021 Revolver. At September 30, 2023, based on the financial debt covenants under the 2021 Credit Agreement, the maximum borrowings available pursuant to the 2021 Revolver was $144.3 million. Amounts borrowed under the 2021 Credit Agreement bear interest quarterly at variable rates based upon the sum of (a) the Secured Overnight Financing Rate ("Term SOFR") (subject to a zero percent floor) equal to Term SOFR (as defined) for the applicable interest period multiplied by the statutory reserve rate, plus (b) an applicable margin (as defined) ranging from 1.50% to 3.25% per annum based on the Consolidated Senior Secured Leverage Ratio (as defined), plus (c) a Term SOFR Adjustment (as defined) of 0.1%. On March 31, 2023, the Company amended the 2021 Credit Agreement to change the variable interest rate under the agreement to be based on Term SOFR The 2021 Revolver carries a commitment fee during the term of the 2021 Credit Agreement ranging from 0.25% to 0.50% per annum of the actual daily undrawn portion of the 2021 Revolver based on the Consolidated Senior Secured Leverage Ratio.

Under the 2021 Credit Agreement, AdaptHealth is subject to a number of restrictive covenants that, among other things, impose operating and financial restrictions on AdaptHealth. Financial covenants include a Consolidated Total Leverage Ratio and a Consolidated Interest Coverage Ratio, both as defined in the 2021 Credit Agreement. The 2021 Credit

Agreement also contains certain customary events of default, including, among other things, failure to make payments when due thereunder, failure to observe or perform certain covenants, cross-defaults, bankruptcy and insolvency-related events, and non-compliance with healthcare laws. Any borrowing under the 2021 Credit Agreement may be repaid, in whole or in part, at any time and from time to time without premium or penalty, other than customary breakage costs, and any amounts repaid under the 2021 Revolver may be reborrowed. Mandatory prepayments are required under the 2021 Revolver when borrowings and letter of credit usage exceed the total commitments for revolving credit loans. Mandatory prepayments are also required in connection with the disposition of assets to the extent not reinvested, unpermitted debt transactions, and excess cash flow, as defined, if certain leverage tests are not met. AdaptHealth was in compliance with all debt covenants as of September 30, 2023.

At September 30, 2023, AdaptHealth had $1,450.0 million outstanding under its existing unsecured senior notes. In August 2021, AdaptHealth LLC issued $600 million aggregate principal amount of 5.125% senior unsecured notes (the “5.125% Senior Notes”). The 5.125% Senior Notes will mature on March 1, 2030. Interest on the 5.125% Senior Notes is payable on March 1st and September 1st of each year, beginning on March 1, 2022. The 5.125% Senior Notes will be redeemable at AdaptHealth’s option, in whole or in part, at any time on or after March 1, 2025, and the redemption price for the 5.125% Senior Notes if redeemed during the 12 months beginning (i) March 1, 2025 is 102.563%, (ii) March 1, 2026 is 101.281%, (iii) March 1, 2027 and thereafter is 100.00%, in each case together with accrued and unpaid interest. AdaptHealth may also redeem some or all of the 5.125% Senior Notes before March 1, 2025 at a redemption price of 100% of the principal amount of the 5.125% Senior Notes, plus a “make-whole” premium, together with accrued and unpaid interest. In addition, AdaptHealth may redeem up to 40% of the original aggregate principal amount of the 5.125% Senior Notes before March 1, 2025 with the proceeds from certain equity offerings at a redemption price equal to 105.125% of the principal amount of the 5.125% Senior Notes, together with accrued and unpaid interest. Furthermore, AdaptHealth may be required to make an offer to purchase the 5.125% Senior Notes upon the sale of certain assets or upon specific kinds of changes of control.

In January 2021, AdaptHealth LLC issued $500 million aggregate principal amount of 4.625% senior unsecured notes (the “4.625% Senior Notes”). The 4.625% Senior Notes will mature on August 1, 2029. Interest on the 4.625% Senior Notes is payable on February 1st and August 1st of each year, beginning on August 1, 2021. The 4.625% Senior Notes will be redeemable at AdaptHealth’s option, in whole or in part, at any time on or after February 1, 2024, and the redemption price for the 4.625% Senior Notes if redeemed during the 12 months beginning (i) February 1, 2024 is 102.313%, (ii) February 1, 2025 is 101.156%, and (iii) February 1, 2026 and thereafter is 100.00% in each case together with accrued and unpaid interest. AdaptHealth may also redeem some or all of the 4.625% Senior Notes before February 1, 2024 at a redemption price of 100% of the principal amount of the 4.625% Senior Notes, plus a “make-whole” premium, together with accrued and unpaid interest. In addition, AdaptHealth may redeem up to 40% of the original aggregate principal amount of the 4.625% Senior Notes before February 1, 2024 with the proceeds from certain equity offerings at a redemption price equal to 104.625% of the principal amount of the 4.625% Senior Notes, together with accrued and unpaid interest. Furthermore, AdaptHealth may be required to make an offer to purchase the 4.625% Senior Notes upon the sale of certain assets or upon specific kinds of changes of control.

In July 2020, AdaptHealth LLC issued $350 million aggregate principal amount of 6.125% senior unsecured notes (the “6.125% Senior Notes”). The 6.125% Senior Notes will mature on August 1, 2028. Interest on the 6.125% Senior Notes is payable on February 1st and August 1st of each year, beginning on February 1, 2021. The 6.125% Senior Notes will be redeemable at AdaptHealth’s option, in whole or in part, at any time on or after August 1, 2023, and the redemption price for the 6.125% Senior Notes if redeemed during the 12 months beginning (i) August 1, 2023 is 103.063%, (ii) August 1, 2024 is 102.042%, (iii) August 1, 2025 is 101.021% and (iv) August 1, 2026 and thereafter is 100.000%, in each case together with accrued and unpaid interest. AdaptHealth may also redeem some or all of the 6.125% Senior Notes before August 1, 2023 at a redemption price of 100% of the principal amount of the 6.125% Senior Notes, plus a “make-whole” premium, together with accrued and unpaid interest. In addition, AdaptHealth may redeem up to 40% of the original aggregate principal amount of the 6.125% Senior Notes before August 1, 2023 with the proceeds from certain equity offerings at a redemption price equal to 106.125% of the principal amount of the 6.125% Senior Notes, together with accrued and unpaid interest. Furthermore, AdaptHealth may be required to make an offer to purchase the 6.125% Senior Notes upon the sale of certain assets or upon specific kinds of changes of control.

As of September 30, 2023 and December 31, 2022, AdaptHealth had working capital of $136.9 million and $129.1 million, respectively. A significant portion of AdaptHealth’s assets consists of accounts receivable from third-party payors that are responsible for payment for the products and services that AdaptHealth provides.

Cash Flow. The following table presents selected data from AdaptHealth’s consolidated statements of cash flows for the nine months ended September 30, 2023 and 2022:

(in thousands)

(unaudited)

Net cash provided by operating activities for the nine months ended September 30, 2023 and 2022 was $325.4 million and $276.9 million, respectively, an increase of $48.5 million. The increase was the result of a $495.9 million reduction in net (loss) income, a net increase of $498.0 million in non-cash charges, primarily from a goodwill impairment charge, depreciation and amortization, the change in the estimated fair value of the warrant liability, deferred income taxes, and the reduction in the carrying amount of operating and finance lease right-of-use assets, payments of contingent consideration related to acquisitions of $2.5 million in the 2022 period, and a net $43.9 million increase resulting from the change in operating assets and liabilities, primarily from the change in accounts receivable, inventory and accounts payable and accrued expenses.

Net cash used in investing activities for the nine months ended September 30, 2023 and 2022 was $266.9 million and $265.4 million, respectively. The use of funds in the 2023 period consisted of $248.8 million for equipment and other fixed asset purchases, $17.9 million for business acquisitions, and $0.1 million for other investments. The use of funds in the 2022 period consisted of $248.5 million for equipment and other fixed asset purchases, $16.1 million for business acquisitions, and $0.7 million for other investments.

Net cash used in financing activities for the nine months ended September 30, 2023 and 2022 was $48.7 million and $50.5 million, respectively. Net cash used in financing activities for the 2023 period consisted of repayments of $79.6 million on long-term debt and finance lease liabilities payments of $9.2 million for Common Stock purchases under a share repurchase program, payments of $3.2 million in connection with the Company's liability relating to the TRA, payments of $5.3 million for tax withholdings associated with equity-based compensation and stock option exercises, a payment of $2.5 million for a distribution to the noncontrolling interest, and payments of $1.5 million for deferred purchase price in connection with acquisitions, offset by borrowings of long-term debt of $50.0 million, proceeds of $2.0 million in connection with the employee stock purchase plan and proceeds of $0.5 million relating to stock option exercises. Net cash used in financing activities for the nine months ended September 30, 2022 consisted of repayments of $29.2 million on long-term debt and finance lease liabilities, payments of 5.6 million for contingent consideration and deferred purchase price in connection with acquisitions, a payment of 14.0 million for Common Stock purchases under a share repurchase program, a payment of $2.0 million for a distribution to the noncontrolling interest, and payments of $2.7 million for tax withholdings associated with equity-based compensation and stock option exercises, offset by proceeds of $1.6 million in connection with the employee stock purchase plan and proceeds of $1.4 million relating to stock option exercises.

Free Cash Flow

The following table reconciles net cash provided by operating activities to free cash flow, which is a non-GAAP measure, for the three and nine months ended September 30, 2023 and 2022:

(in thousands)

Free cash flow was $21.7 million for the three months ended September 30, 2023 compared to $12.9 million for the three months ended September 30, 2022. The increase in free cash flow was primarily due to a decrease in, and timing of, purchases of patient medical equipment for operating requirements, offset by lower net cash provided by operating activities, primarily relating to an increase in cash paid for interest in the 2023 period compared to the 2022 period.

Free cash flow was $76.6 million for the nine months ended September 30, 2023 compared to $28.4 million for the nine months ended September 30, 2022. The increase in free cash flow was primarily due to higher net cash provided by operating activities due to a net decrease in the use of cash from operating assets and liabilities, primarily from accounts receivable, inventory and accounts payable and accrued expenses, offset by an increase in cash paid for interest in the 2023 period compared to the 2022 period.

Critical Accounting Policies and Critical Estimates

The discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of the Company’s consolidated financial statements requires its management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. The Company’s management bases its estimates, assumptions and judgments on historical experience and various other factors that are believed 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. Different assumptions and judgments would change the estimates used in the preparation of the Company’s consolidated financial statements which, in turn, could change the results from those reported. In addition, actual results may differ from these estimates and such differences could be material to the Company’s financial position and results of operations.

Critical accounting policies and critical estimates are those that the Company’s management considers the most important to the portrayal of the Company’s financial condition and results of operations because they require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company’s critical accounting policies and critical estimates in relation to its consolidated financial statements include those related to revenue recognition, valuation of accounts receivable (implicit price concession), and valuation of goodwill and long-lived assets. There have been no material changes in the Company’s critical accounting policies and critical estimates as compared to the critical accounting policies and critical estimates described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Commitments and Contingencies

In the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of its business that cover a wide range of matters. In accordance with FASB ASC Topic 450, Accounting for Contingencies, the Company records accruals for such loss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. The Company reviews its accruals at least quarterly and adjusts accordingly to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information. At this time, the Company has no material accruals related to lawsuits, claims, investigations and proceedings. While there can be no assurance, based on the Company’s evaluation of information currently available, the Company’s management believes any liability that may ultimately result from resolution of such loss contingencies will not have a material adverse effect on the Company’s financial conditions or results of operations. However, the Company’s assessment may be affected by limited information. Accordingly, the Company’s assessment may change in the future based upon availability of new information and further developments in the proceedings of such matters. The results of legal proceedings are inherently uncertain, and material adverse outcomes are possible.

On July 25, 2017, AdaptHealth Holdings LLC, a Delaware limited liability company (AdaptHealth Holdings), was served with a subpoena by the U.S. Attorney’s Office for the United States District Court for the Eastern District of Pennsylvania (“EDPA”) pursuant to 18 U.S.C. §3486 to produce certain audit records and internal communications regarding ventilator billing. The investigation focused on billing practices regarding one payor that contracted for bundled payments for certain ventilators. AdaptHealth Holdings has cooperated with investigators and, through agreement with the EDPA, has submitted all information requested in the Company’s possession. An independent third party was retained by AdaptHealth Holdings that identified overpayments and underpayments for ventilator billings related to the payor, and a remittance was sent to reconcile that account. On October 3, 2019, the Company received a follow-up civil investigative demand from the EDPA regarding a document previously produced to the EDPA and patients included in the review by the independent third party. The Company has responded to the EDPA and supplemented its production as requested with any relevant documents in the Company’s possession. During subsequent communications, the EDPA indicated to the Company that the investigation remained ongoing. The EDPA also requested additional information regarding certain patient services and claims refunds processed by the Company in 2017. The Company produced this information in coordination with the EDPA. The EDPA also raised questions regarding other aspects of ventilator billing. On April 21, 2023, the Company entered into a settlement agreement with the EDPA resolving all allegations and claims related to the investigation without a determination of liability on the part of the Company. In connection with the settlement, the Company made a payment of $5.3 million, which was fully accrued as of December 31, 2022, and was not required to enter into any post-settlement agreements related to the settlement.

In March 2019, prior to its acquisition by the Company, AeroCare was served with a civil investigative demand (CID) issued by the United States Attorney for the Western District of Kentucky (WDKY). The CID seeks to investigate allegations that AeroCare improperly billed, or caused others to improperly bill, for oxygen tank contents that were not delivered to beneficiaries. The WDKY has requested documents related to such oxygen tank content billing as well as other categories of information. AeroCare has cooperated with the WDKY and has produced documents and provided explanations of its billing practices. In September 2020, the WDKY indicated the investigation includes alleged violations of the federal False Claims Act and as well as alleged violations of state Medicaid false claims acts in ten states. AeroCare has cooperated fully with the investigation and has indicated to the WDKY that concerns raised do not accurately identify Medicare coverage criteria and that state Medicaid coverage requirements generally do not provide for separate reimbursement for portable gaseous oxygen contents in the circumstances at issue. On June 23, 2022, the complaint filed in connection with this investigation was dismissed by the United States District Court in the Western District of Kentucky with the consent of the WDKY.

On July 29, 2021, Robert Charles Faille Jr., a purported shareholder of the Company, filed a purported class action complaint against the Company and certain of its current and former officers in the United States District Court for the Eastern District of Pennsylvania (the “Complaint”). The Complaint purports to be asserted on behalf of a class of persons who purchased the Company’s stock between November 11, 2019 and July 16, 2021. The Complaint generally alleges that the Company and certain of its current and former officers violated federal securities laws by making allegedly false and misleading statements and/or failing to disclose material information regarding the Company’s organic growth trajectory. The Complaint seeks unspecified damages. On October 14, 2021, the Delaware County Employees Retirement System and the Bucks County Employees Retirement System were named Lead Plaintiffs. Pursuant to the scheduling order, Lead Plaintiffs filed a consolidated complaint on November 22, 2021 (the “Consolidated Complaint”), which asserts substantially the same claim, but adds a number of current and former directors of the Company as additional defendants and a new theory of recovery based on the Company’s alleged failure to disclose information concerning the Company’s former Co-CEO’s alleged tax fraud arising from certain past private activity (the “Consolidated Class Action”). On January 20, 2022, the defendants filed a motion to dismiss the Consolidated Complaint. Lead Plaintiffs’ opposition to defendants’ motion was filed on March 21, 2022, and defendants’ reply was filed April 15, 2022. On June 9, 2022, the court issued an opinion and order denying the defendants’ motion to dismiss the Consolidated Complaint.

On July 15, 2022, the court entered a scheduling order providing for, inter alia, a schedule for completing class certification discovery, as well as setting a briefing schedule for motions for class certification. Pursuant to the scheduling order, Lead Plaintiffs filed their motion for class certification on July 28, 2022. On December 12, 2022, the court entered an amended scheduling order with respect to class certification discovery and remaining briefing on Lead Plaintiffs’ motion for class certification. Pursuant to the amended scheduling order, the defendants filed their opposition to Lead Plaintiffs’ motion for class certification on March 30, 2023, and Lead Plaintiffs filed their reply on May 22, 2023.

On June 7, 2023, the court entered an order staying the Consolidated Class Action pending the outcome of a private mediation between the parties.

The Company intends to vigorously defend against the allegations contained in the Consolidated Complaint, but there can be no assurance that the defense will be successful. The Company is currently in a dispute with its directors and officers liability insurers concerning coverage related to the Complaint, which is proceeding in Delaware Superior Court.

On December 6, 2021, a putative shareholder of the Company, Carol Hessler, filed a shareholder derivative complaint against certain current and former directors and officers of the Company in the United States District Court for the Eastern District of Pennsylvania (the “Derivative Complaint”). The Derivative Complaint generally alleges that the defendants breached their fiduciary duties owed to the Company by allegedly causing or allowing misrepresentations and/or omissions regarding the Company’s organic growth and the Company’s former Co-CEO’s alleged criminal activity, failing to maintain an adequate system of oversight, disclosure controls and procedures, and internal controls over financial reporting and due diligence into the Company’s management team, and engaging in insider trading. The Derivative Complaint also alleges claims for waste of corporate assets and unjust enrichment. Finally, the Derivative Complaint alleges that certain of the individual defendants violated Section 14(a) of the Securities Exchange Act by allegedly negligently issuing, causing to be issued, and participating in the issuance of materially misleading statements to stockholders in the Company’s Proxy Statements on Schedule DEF 14A in connection with a Special Meeting of Stockholders, held on March 3, 2021, and the 2021 Annual Meeting of Stockholders, held on July 27, 2021. The Derivative Complaint seeks, among other things, an award of money damages.

On March 4, 2022, the parties stipulated to stay the Hessler action pending final resolution of the Consolidated Class Action. On March 7, 2022, the court so-ordered the parties’ stipulation.

The Company intends to vigorously defend against the allegations contained in the Derivative Complaint, but there can be no assurance that the defense will be successful.

On May 2, 2022, the U.S. Attorney’s Office for the Southern District of New York issued a civil investigative demand to a subsidiary of the Company, pursuant to the False Claims Act, 31 U.S.C. § 3733 (FCA) surrounding whether the subsidiary submitted false claims in violation of the FCA related to it’s billing of, and reimbursements from, federal health care programs for ventilators provided to patients from January 1, 2015 to the present. The Company is fully cooperating with the investigation. Given the investigation is in the early stages, it is not possible to determine whether it will have a material adverse effect on the Company.

On October 24, 2023, Allegheny County Employees’ Retirement System, a purported shareholder of the Company, filed a purported class action complaint against the Company and certain of its current and former officers, and certain underwriters for a Company follow-on offering conducted in January 2021 in the United States District Court for the Eastern District of Pennsylvania (the “Allegheny County Complaint”). The Allegheny County Complaint purports to be asserted on behalf of a class of persons who purchased the Company’s stock between August 4, 2020 and February 27, 2023. The Allegheny County Complaint generally alleges that the defendants violated federal securities laws by making allegedly false and misleading statements and/or failing to disclose material information regarding the Company’s organic growth in its diabetes segment. The Allegheny County Complaint seeks unspecified damages.

The Company intends to vigorously defend against the allegations contained in the Allegheny County Complaint, but there can be no assurance that the defense will be successful.

Our exposure to market risk relates to fluctuations in interest rates from borrowings under the 2021 Credit Agreement. The interest accrued on our debt borrowings is based on a variable rate which is tied to the Secured Overnight Financing Rate plus an applicable margin and therefore is exposed to changes in interest rates. As of September 30, 2023, there was $740.0 million outstanding under the 2021 Term Loan, no outstanding borrowings under the 2021 Revolver, $21.6 million outstanding under letters of credit, and based on the financial debt covenants under the 2021 Credit Agreement, the maximum borrowings available pursuant to the 2021 Revolver was $144.3 million.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of September 30, 2023. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, during the period covered by this Quarterly Report, our disclosure controls and procedures were not effective due to material weaknesses in internal control over financial reporting as further described below in Management’s Report on Internal Control Over Financial Reporting.

As previously disclosed in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, management identified material weaknesses in internal control over financial reporting relating to an insufficient complement of resources to complete risk assessment which resulted in a lack of implementation and ineffectiveness of both process level controls in substantially all processes and the general information technology controls that support our financial statements and reporting.

Notwithstanding the identified material weaknesses, management, including our principal executive officer and principal financial officer, believes the consolidated financial statements included in this Quarterly Report on Form 10-Q fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.

Remediation of Previously Reported Material Weaknesses in Internal Control Over Financing Reporting

With respect to the material weaknesses identified in 2022, management continues to take steps to remediate such material weaknesses, including (1) implementing a system to provide real time visibility for process and control owners to the remediation of internal control matters, (2) expanding the number of management and third-party consultants with expertise in process mapping and internal controls; (3) completing an entity wide risk assessment including process mapping for each of the Company’s business cycles to identify relevant process risk points, service and sub-service organizations, information technology systems and information used in the operation of controls, (4) identifying manual and automated controls responsive to the process risk points for significant processes, and (5) implementing an enterprise resource planning system in 2022 and continuing implementing additional technology and processes to enhance control environment. While management has completed the risk assessment to identify controls, the material weaknesses cannot be considered remediated until the enhanced controls have been fully implemented and determined to be operating effectively for a sufficient period of time.

Changes in Internal Control over Financial Reporting

Except with respect to the changes in connection with the implementation of the initiatives to remediate the material weaknesses noted above, there were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Factors that could cause our actual results to differ materially from those in this report are any of the risks disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 28, 2023. Any of those factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations.