EDGAR 10-K Filing

Company CIK: 742112
Filing Year: 2023
Filename: 742112_10-K_2023_0000742112-23-000036.json

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ITEM 1. BUSINESS
Item 1. Business
Item 1. Business.
GENERAL
Invacare Corporation (“Invacare,” the “company,” including its subsidiaries, unless otherwise noted) is a leading manufacturer and distributor in its markets for medical equipment used in non-acute care settings. At its core, the company designs, manufactures and distributes medical devices that help people to move, rest and perform essential hygiene. The company provides clinically complex medical device solutions for congenital (e.g., cerebral palsy, muscular dystrophy, spina bifida), acquired (e.g., stroke, spinal cord injury, traumatic brain injury, post-acute recovery, pressure ulcers) and degenerative (e.g., ALS, multiple sclerosis, age related, bariatric) conditions. The company's products are an important component of care for people facing a wide range of medical challenges, from those who are active and heading to work or school each day and may need additional mobility, to those who are cared for in residential care settings, at home and in rehabilitation centers. The company sells its products principally to home medical equipment providers, through retail and e-commerce channels, residential care operators, dealers and government health services in North America, Europe and Asia Pacific. Invacare's products are sold through its worldwide distribution network by its sales force, independent manufacturers' representatives, and distributors.
Invacare is committed to providing medical products that deliver the best clinical value; promote recovery, independence and active lifestyles; and support long-term conditions and palliative care. The company's global tagline - Yes, You Can.® is indicative of the “can do” attitude of many of the people who use the company's products and their care providers. In everything it does, the company strives to leave its stakeholders with its brand promise - Making Life's Experiences Possible®.
The company is a corporation organized under the laws of the State of Ohio in 1971. When the company was first established as a stand-alone enterprise in December 1979, it had $19.5 million in net sales and a limited product line of basic wheelchairs and patient aids. Since then, the company has made approximately fifty acquisitions and, after some recent divestitures to harmonize its portfolio, Invacare's net sales in 2022 were approximately $740 million. Based upon the company's distribution channels, breadth of product lines and net sales, Invacare is a leading company in many of the following medical product categories: custom power wheelchairs; custom manual wheelchairs; electromotive technology to augment wheelchairs and recreational products; recreational adaptive sports products; non-acute bed systems; and patient transfer and bathing equipment.
BANKRUPTCY
On January 31, 2023 (the “Petition Date”), the company and two of its U.S. subsidiaries (collectively, the “Debtors” or “Company Parties”) filed voluntary petitions under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United Sates Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The Debtors obtained joint administration of their chapter 11 cases under the caption In re Invacare Corporation, et al., Case No. 23-90068 (CML) (the “Chapter 11 Cases”).
The Debtors continue to operate their business and manage their properties as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. To ensure ordinary course operations, the Company Parties obtained approval from the Bankruptcy Court for certain “first day” motions, including motions to obtain customary relief intended to continue ordinary course operations after the Petition Date.
Restructuring Support Agreement
On January 31, 2023, the Debtors entered into a Restructuring Support Agreement (the “Restructuring Support Agreement” or “RSA”) with certain prepetition stakeholders (the “Consenting Stakeholders”). The Consenting Stakeholders represent holders of at least a majority of the aggregate principal amount of the Company Parties’ debt obligations under various debt agreements. Under the RSA, the Consenting Stakeholders have agreed, subject to certain terms and conditions, to support a financial restructuring (the “Restructuring”) of the existing debt of, existing equity interests in, and certain other obligations of the Debtors, The Restructuring Support Agreement contemplated: (a) the Debtors' entry into the $70 million debtor-in-possession term loan facility; (b) the Debtors' entry into the $17.4 million debtor-in-possession ABL facility; (c) the consummation of a rights offering, backstopped by members of the Ad Hoc Committee of Noteholders (the “Backstop Parties”) pursuant to a certain Backstop Commitment Agreement (as may be modified, amended, or supplemented from time to time, the “Backstop Commitment Agreement”); (d) issuance of the new common equity; (e) exit takeback financing in the form of an Exit Term Loan Facility and Exit Secured Convertible Notes, and (f) as necessary, exit financing in the form of the Exit NA ABL Facility and Exit EMEA ABL Facility.
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Item 1. Business
Chapter 11 Plan
Since the Petition Date, the Debtors have developed the Restructuring Support Agreement into a chapter 11 plan of reorganization (as may be modified, amended, or supplemented from time to time, the “Plan”). The Plan, among other Plan treatment, contemplates the following:
•Each holder of an allowed term loan claim shall receive (i) with respect to allowed term loan claims representing principal amounts owed, its pro rata share of the exit term loan facility and (ii) with respect to allowed term loan claims representing principal amounts owed, its pro rata share of the exit term loan facility and (ii) with respect to all other allowed term loan claims, payment in full in cash.
•Each holder of an allowed secured notes claim shall receive (i) with respect to allowed secured notes claims representing principal amounts owed, its pro rata share of the exit secured convertible notes and (ii) with respect to all other allowed secured notes claims, payment in full in cash; provided that, if applicable pursuant to and in accordance with the Plan, such holder will also receive its pro rata share of the applicable portion of the excess new money in cash.
•Each holder of an allowed unsecured notes claim shall receive (i) the unsecured noteholder rights, in accordance with the rights offering procedures; (ii) with respect to any residual unsecured notes claims, its share (on a pro rata basis with other holders of allowed unsecured notes claims and holders of allowed general unsecured claims that select the class 6 equity option) of 100% of the new common equity after the distribution of the new common equity on account of the backstop commitment premium (subject to dilution on account of the exit secured convertible notes, the new convertible preferred equity, the backstop commitment premium, and the management incentive plan); (iii) and the distributions in respect of its litigation trust interests, to the extent provided in the Plan.
•Each holder of an allowed general unsecured claim shall receive its pro rata either (x) (i) if such holder of an allowed general unsecured claim does not elect to receive the class 6 equity option, the general unsecured claims cash settlement and (ii) its pro rata share of the distributions in respect of its litigation trust interests, to the extent provided in the Plan; or (y) if such holder of an allowed general unsecured claim elects to receive the class 6 equity option in lieu of the general unsecured creditors cash settlement, its share (on a pro rata basis with holders of allowed unsecured notes claims in respect of their residual unsecured
notes claims and other holders of allowed general unsecured claims that select the class 6 equity option) of 100% of the new common equity after the distribution of the new common equity on account of the backstop commitment premium (subject to dilution on account of the exit secured convertible notes, the new convertible preferred equity, and the management incentive plan); and (z) its pro rata share of the distributions in respect of its litigation trust interests, to the extent provided in the Plan.
•All existing equity interests shall be discharged, cancelled, released, and extinguished without any distribution, and will be of no further force or effect, and each holder of an existing equity interest shall not receive or retain any distribution, property, or other value on account of such existing equity interest.
Although the company intends to pursue the Restructuring in accordance with the terms set forth in the Plan, there can be no assurance that the company will be successful in completing a restructuring or any other similar transaction on the terms set forth in the Plan, on different terms or at all.
DIP Credit Agreements
The company and certain lenders (the “DIP Parties”) have agreed to a superpriority, senior secured and priming debtor-in-possession term loan credit facility in an aggregate principal amount of $70 million subject to the terms and conditions set forth in the superpriority secured credit agreement dates as of February 2, 2023 (the “Term DIP Credit Agreement”) and a superpriority senior secured and priming debtor-in-possession asset-based revolving facility in an aggregate amount of $17.4 million subject to the terms and conditions set forth in the debtor-in-possession revolving credit and security agreement dated as of February 2, 2023 (the “ABL DIP Credit Agreement” and together with the Term DIP Credit Agreement, the “DIP Credit Agreements”).
The DIP Credit Agreements include conditions precedent, representations and warranties, affirmative and negative covenants, and events of default customary for financings of this type and size. The proceeds of all or a portion of the proposed DIP Credit Agreements may be used for, among other things, post-petition working capital for the company and its subsidiaries, payment of costs to administer the Chapter 11 Cases, payment of expenses and fees of the transactions contemplated by the Chapter 11 Cases, payment of court-approved adequate protection obligations under the DIP Credit Agreements, and payment of other costs in an approved budget and other such purposes permitted under the DIP Credit Agreements.
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The foregoing description of the RSA and the DIP Credit Agreements is not complete and is qualified in its entirety by reference to each of the Restructuring Support Agreement and each DIP Credit Agreement, which were filed on February 1, 2023 on the Current Report on Form 8-K, February 3, 2023 on the Current Report on Form 8-K, as applicable. Additionally, the foregoing description of the Backstop Commitment Agreement is not complete and is qualified in its entirety by reference to the Backstop Commitment Agreement filed in this Annual Report on 10-K.
The company cannot predict the ultimate outcome of its Chapter 11 Cases at this time or the satisfaction of any of the RSA milestones yet to come. For the duration of the company’s Chapter 11 Cases, the company’s operations and ability to develop and execute its business plan are subject to the risks and uncertainties associated with the Chapter 11 process. As a result of these risks and uncertainties, the amount and composition of the company’s assets, liabilities, officers and/or directors could be significantly different following the outcome of the Chapter 11 Cases, and the description of the company’s operations, properties and liquidity and capital resources included in this annual report may not accurately reflect its operations, properties and liquidity and capital resources following the Chapter 11 process. Refer to “Item 1A. Risk Factors - Bankruptcy” for further discussion of potential adverse effects on the company of the Bankruptcy.
THE NON-ACUTE DURABLE MEDICAL EQUIPMENT INDUSTRY
The non-acute durable medical equipment market includes a broad range of equipment and services that enable the care and lifestyle needs of individuals with a broad range of conditions. With expected long-term pressure to control healthcare spending per capita, the company believes the market for equipment and services that support higher acuity care in lower acuity settings will continue to grow. Healthcare payors and providers continue to seek to optimize therapies which result in improved outcomes, reduced cost protocols, and ultimately, earlier discharge, including recovery and treatment in non-acute settings. Care in these settings may reduce exposure to concomitant issues and be preferred by patients.
As healthcare costs continue to increase, the interests of patients and healthcare providers are converging to focus on the most cost-effective delivery of the best care. As healthcare payors become more judicious in their spending, companies that provide better care or demonstrate better clinical outcomes will have an advantage. With its diverse product portfolio, clinical solutions, global scale and focus on the non-acute care
setting, the company believes it is well positioned to serve this growing market.
Macro trends are impacting the world's aging population. While institutional care will likely remain an important part of healthcare systems in the wealthiest economies, the company believes care settings other than traditional hospitals will increasingly provide higher acuity care. With a broad product offering, diversified channels of trade, and infrastructure capable of serving many of the largest healthcare economies, the company believes it is well positioned to benefit from these global demographic trends and changes to the provision of healthcare.
North America Market
The population of the United States is growing and aging. As a result, there is a greater prevalence of disability among major U.S. population groups and an increasing need for assistance and care. The U.S. Census Bureau has projected the U.S. population will continue to grow to an estimated 400 million by 2050. Along the way, the bolus of Baby Boomers is expected to continue to raise the average age of the U.S. population. By 2030, the government estimates that more than 20% of the U.S. population will consist of individuals over the age of 65, a 50% increase compared to the population in 2010.
In the United States, healthcare provision is supported by reimbursement from the federal Centers for Medicare and Medicaid Services (“CMS”), the Department of Veterans Affairs, state agencies, private payors and healthcare recipients themselves. In total, CMS estimates U.S. national healthcare expenditures will grow by more than 5% annually between 2019 and 2028. At this rate, healthcare spending would exceed GDP growth by 1%, which will sustain pressure to deploy care in ways that deliver the best outcomes for lower cost.
The Canadian health care system is a publicly funded model that provides coverage to all citizens. Provinces and territories are primarily responsible for the administration and delivery of Canada's health care services, and all health insurance plans are expected to meet the national guidelines established by the Canada Health Act. The objective of the Canada Health Act is to provide consumer-centered support and funding to residents with long-term physical disabilities and to provide access to personalized assistive devices that meet the basic needs of each patient. Each provincial and territorial health insurance plan differs with respect to reimbursement policies and product specification standards, allowing healthcare services to be adjusted based on regional needs. Invacare sells across Canada, taking into consideration the regional differences among the various provinces and territories.
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Europe, Middle East and Africa Markets
While the healthcare equipment market in each country in Europe has distinct characteristics, many of the factors driving demand and affecting reimbursement are consistent with those in North America: population aging; more patients with chronic illnesses; an increasing preference to deliver healthcare outside hospitals; and a focus on the use of technology to increase productivity and reduce ancillary costs. Each European country has variations in product specifications and service requirements, regulations, distribution needs and reimbursement policies. These differences, as well as differences in the competitive landscape, require the company to tailor its approach based on the local market and the reimbursement requirements into which the products are being sold. The company's core strategy is to address these distinct markets with global product platforms that are localized with country-specific adjustments as necessary. This is especially the case for power wheelchairs and manual wheelchairs. Customers in all European markets typically make product selections based upon quality, features, alignment with local reimbursement requirements, ability to reduce total cost of care, and customer service.
The company serves various markets in Eastern Europe, Middle East and Africa. It approaches these markets with the global portfolio of products developed and manufactured elsewhere. Sales in these markets are made somewhat opportunistically to balance changes in demand and specific product requirements. Often, sales in the Middle East and Africa represent episodic tenders as well as in some cases consistent sustained trade over the years. Most of the company's sales in these markets result from business conducted in Western Europe, as well as through dedicated local distributors.
Asia Pacific Market
The company's Asia Pacific market comprises revenue from products sold in Australia, New Zealand, China, Japan, Korea, India and Southeast Asia. Invacare's Asia Pacific businesses sell through multiple channels. Mobility and seating products are sold directly in New Zealand and through a network of dealers in all other countries, with almost all sales funded to reimbursed levels directly by governmental payors. Homecare products are sold via a dealer network that sells products to the consumer market. Long-term care products are sold via a dealer network and directly to care facilities. The company operates a rental business in New Zealand supporting the three largest hospital districts on New Zealand's North Island. Sales to other parts of Asia are sold via distributors and agents based in China, Japan, Korea, India and Southeast Asia. The company has a distribution and assembly center in Thailand.
Reimbursement
In most markets, the company does not make significant sales directly to end-users. In some markets, such as the United States, the United Kingdom, New Zealand and certain Scandinavian countries, the company sells directly to a government payor. In other markets, the company's customers purchase products to have available for use by, or re-sale to, end-users. These customers then work with end-users to determine what equipment may be needed to address the end-user's particular medical needs. Products are then provided to the end-user, and the company's customer may seek reimbursement on behalf of the end-user or sell the products, as appropriate. Product mix, pricing and payment terms vary by market. The company believes its market position and technical expertise will allow it to respond to ongoing changes in demand and reimbursement.
PRODUCT CATEGORIES
The company designs, manufactures, markets and distributes products in two key product categories: Mobility and Seating and Lifestyle.
Mobility and Seating
•Power Wheelchairs. This product category includes complex power wheelchairs for individuals who require powered mobility. The company's power wheelchair product offerings include products that can be highly customized to meet an individual end-user's needs, as well as products that are inherently versatile and designed to meet a broad range of requirements. Center-wheel drive power wheelchair lines include the Invacare® TDX® SP2 (Total Driving eXperience) product line and the ROVI® X3 and A3 power base product line, offered through the company's Motion Concepts subsidiary. ROVI® is a registered trademark owned by Shoprider Mobility Products, Inc. The TDX SP2 line of power wheelchairs offers a combination of power, stability and maneuverability, including the Invacare® SureStep® suspension system with Stability Lock and available G-Trac™ Technology. Seating systems offer elevate, power tilt and recline features. The ROVI A3 also offers the Multi-Positioning-Standing-MAXX System (MPS), an innovative, highly adjustable system that provides consumers the medical benefits of adjusting to a standing position throughout the day, adding additional independence, function and accessibility.
The company also offers rear-wheel and front-wheel drive power wheelchair technology through the Invacare® AVIVA® Power Wheelchairs, a new
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generation of power products. The rear-wheel drive chair has become a leader in some markets thanks to its innovation suspension technology. AVIVA® expanded the portfolio and provided new market share opportunities. Several of the company's subsidiaries specialize in the development and implementation of complementary technology designed to enhance the utility of wheelchairs to meet unique and complex physiological needs. For example, Adaptive Switch Labs has developed alternative electronic control systems and human/machine input devices that enable wheelchair and environmental control via alternative interfaces to joysticks, such as sip/puff, and head position inputs. Motion Concepts designs and produces custom powered seating and power positioning systems. Alber GmbH sells innovative power add-on devices that enable manual wheelchair users to have optional electric power to augment manual propulsion and enable caretakers to easily maneuver manual wheelchairs. The company continues to be a leader in this market with unique intellectual property in wheelchair suspension, seating, alternative controls, and electronic components.
•Manual and Custom Manual Wheelchairs. The company provides a wide range of mobility solutions for everyday activities. The company offers a wide range of highly customized and standard box wheelchairs with superior features and functionality. Cross compatible and adjustable across the portfolio with some wheelchairs that can be folded to fit into very small spaces for ease of transportability.
These products are sold for use in the home and in institutional care settings. Users include people who are chronically or temporarily-disabled, require basic mobility with little or no frame modification, and may propel themselves or be moved by a caregiver.
The company's standard / manual wheelchairs are marketed under the Invacare® brand name. Examples include the 9000 and Tracer® wheelchair product lines in North America, as well as the Action family in Europe.
The company also offers custom manual wheelchairs for independent everyday use under the Invacare® brand name. The company markets a premiere line of lightweight, aesthetically-stylish custom manual wheelchairs under the Küschall® brand name. It was relaunched during 2020 and has been continuously growing in customer demand since then. Thanks to new Hydroforming technology, the rigidity and the driving performance of chairs improved significantly while the weight has been reduced. This new
technology has allowed Invacare to increase its price in the market and gain competitive advantage.
•Seating and Positioning Products. At the core of care for seated end-users is the need for proper seating and positioning. Invacare designs, manufactures and markets some of the industry's best custom seating and positioning systems, custom molded and modular seat cushions, back supports and accessories to enable care givers to optimize the posture of their patients in mobility products. The Invacare® Seating and Positioning series provides seating solutions for less complex end-user needs. The Invacare® Matrx® Series offers versatile modular seating components with unique proprietary designs and materials designed to optimize pressure management and to help ensure long-term proper posture. The company's Pin Dot® series provides custom molded seat modules that can accommodate the most unique anatomic needs, and that can be adapted to fit with a wide range of mobility products. The company's ability to rapidly produce highly-customized products is highly specialized in the market, and is valued by therapists who need timely solutions for their patient's most complex clinical needs. Through Invacare One Solution, the company promotes its seating solutions integrated with its Manual & Power Wheelchairs offer. This initiative was launched in Europe in 2021 on Küschall® wheelchairs range and rolled out to the rest of the portfolio.
•Power Add-Ons The company sells innovative power add-on devices that enable manual wheelchair users to have optional electric power to augment manual propulsion and enable caretakers to more easily maneuver manual wheelchairs. This product category includes six main product lines: stairclimbers (scalamobil® and scalacombi); push and brake aids (viamobil® and viamobil eco), push-rim activated power assists (e-motionTM, twion®, SMOOV®), Joystick controlled add-on kits (e-fix® and Esprit); Handbikes (e-pilot®) and E-Bike drive train components (neodrives®). Add-on drives can be retrofitted to almost any manual wheelchair. The products are characterized by their light weight design and compactness, which makes them an ideal travel companion. Highly efficient hub motors along with the latest lithium-ion battery technology are used to enhance freedom of movement for users and their caregivers.
Lifestyle Products
•Pressure Relieving Sleep Surfaces. This product category includes a complete line of therapeutic pressure redistributing overlays and mattress replacement systems. Invacare's portfolio consists of
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well-known and respected brand names such as Softform, Dacapo, Propad and microAirTM and offer a broad range of pressure redistributing foam mattresses, hybrid mattresses, and powered mattresses with alternating pressure, low-air-loss, or rotational design features, which redistribute weight and assist with microclimate management. These mattresses are designed to provide comfort, support, and pressure redistribution to those patients who are immobile or have limited mobility; who may have fragile skin or be susceptible to skin breakdown; and who spend long periods in bed. In the last few years, the company has focused within the category on sustainability and reducing complexity within the portfolio.
•Safe Patient Handling. This product category includes products needed to assist caregivers in transferring individuals from surface to surface (e.g., bed to chair). Designed for use in the home or in institutional settings, these products include ceiling and floor lifts, sit-to-stand devices, and a comprehensive line of slings. The company has very strong development in these areas thanks to numerous launches in the last year; Birdie™, Evo, ISA™, and new Optislings.
•Beds. This product category includes a wide variety of Invacare® branded semi-electric and fully-electric bed systems designed for both residential and institutional care for a range of patient sizes. It includes bed accessories, such as bedside rails, overbed tables, and trapeze bars. The company's bed systems introduced the split-spring bed design, which is easier for home medical equipment providers to deliver, assemble and clean than other bed designs. Invacare's bed systems also feature patented universal bed-ends, where the headboard and footboard may be used interchangeably for improved user experience.
•Personal Care. This product category includes a full line of personal care products, including bathing safety aids, such as tub transfer benches and shower chairs, as well as patient care products, such as commodes and other toileting aids. In markets where payors value durable long-lasting devices, especially those markets outside of North America, personal care products continue to be an important part of the company's lifestyle products business.
Other Products and Services
The company also distributes ambulatory aids, such as rollators, walkers, and wheeled walkers, but as of 2020, it has deprioritized and streamlined to improve overall business efficiencies.
Other products and services include various services, including repair services, equipment rentals and external contracting. In certain regions of Europe and Asia Pacific, refurbishing of products is increasing as governments look for ways to lower costs while still providing needed equipment. A range of distributed products including a heart rate monitor, thermometer and nebulizer were launched for the Asia Pacific market. Portable ramps are sold throughout Asia and Europe, largely to public transport providers.
After careful evaluation of strategic options and its core revenue streams, the company decided to exit its respiratory line of products in the fourth quarter of 2022 and sold assets related to the respiratory product line in January of 2023. In addition, in January 2023, the company sold its Top End® sports and recreational wheelchair product line.
GEOGRAPHIC SEGMENTS
Europe
The company's Europe segment operates as an integrated unit across the European, Middle Eastern and African markets with sales and operations throughout Europe. The Europe segment is coordinated with other global business units for new product development, supply chain resources and additional corporate resources. This segment primarily includes mobility and seating and lifestyle product lines. Products are sold through home healthcare providers and government provider agencies. In total, the Europe segment comprised 58.6%, 57.2% and 55.0% of net sales in 2022, 2021 and 2020, respectively.
North America
The company's North America segment comprises sales and operations throughout the United States, Mexico and Canada. This segment primarily includes mobility and seating and lifestyle product lines. Products are sold through rehabilitation providers, home healthcare providers, and government provider agencies, such as the U.S. Department of Veterans Affairs. The North America segment represented 37.3%, 39.1% and 40.9% of net sales in 2022, 2021 and 2020, respectively.
All Other
All Other combines sales and services operations supporting customers principally in Australia and New Zealand and increasingly in other regions in the Asia Pacific market. All Other included the Dynamic Controls business, until it was divested in March 2020. All Other represented 4.1%, 3.7% and 4.1% of net sales in 2022, 2021 and 2020, respectively.
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Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
For financial information regarding reportable segments, including revenues from external customers, products, segment profitability, assets and other information by segments, refer to Business Segments in the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K.
WARRANTY
Generally, the company's products are covered by warranties against defects in material and workmanship for product-specific warranty periods starting from the date of sale to the customer. Certain components, principally wheelchair and bed frames, carry a lifetime warranty.
COMPETITION
The durable medical equipment markets are highly competitive, and Invacare products face significant competition from other well-established manufacturers and distributors in the industry. Each country into which the company sells and markets its products has a set of unique conditions that impact competition, including healthcare coverage, forms and levels of reimbursement, presence of payor and provider structures and various competitors. Many factors may play a role in the selection of products and success of the company including specific features, aesthetics, quality, availability, service levels and price. Various competitors, from time to time, have instituted price-cutting programs in an effort to gain market share, and they may do so again in the future. In addition, reimbursement pressures may continue to persist in major markets, such as the U.S. These pressures have and may again significantly alter market dynamics. Increasingly, customers have access to manufacturers in low-cost locations and are able to source certain products directly in lieu of purchasing from Invacare or its traditional competitors, particularly for less complex products where price is the primary selection criterion.
The company believes that successfully increasing its market share is dependent on its ability to provide value to its customers based on clinical benefits, quality, performance, and durability of the company's products and services. In addition, the company's cost reduction achievements are expected to improve the market competitiveness of its products. Customers also value the technical and clinical expertise of the company's sales force, the effectiveness of the company's distribution system, the strength of its dealer and distributor network, the availability of prompt and reliable service for its products, and the ease of doing business with the company. The company's focus on quality is paramount. By
embracing quality in all aspects of the company's activities, the company believes that its products will be better aligned with customer needs and brought to market more quickly, resulting in a better customer experience and economic return.
SALES, MARKETING AND DISTRIBUTION
Europe
The company's European operations primarily conduct manufacturing, marketing and distribution functions in Western Europe and coordinate export sales activities through local distributors for markets in Eastern Europe, Middle East and Africa. The company utilizes an employee sales force and independent distributors. In markets where the company has its own sales force, product sales are made to medical equipment dealers and directly to government agencies. Marketing functions are staffed by central and regional teams to optimize coverage and content. The company operates distribution centers in various locations to optimize cost and delivery performance.
Since the pandemic, the company has utilized webinars and digital events. Starting in 2022, attendance at trade shows has resumed across the European and Middle eastern geographies. The company builds brand awareness through a strong presence in social media (LinkedIn, Facebook, Twitter, YouTube, Instagram) and has a dedicated blog. Invacare continues to increase the knowledge and awareness of its products by interacting with its target audience through various digital marketing channels including Facebook, YouTube, blog, Instagram, LinkedIn and inbound email marketing actions, as well as improving the customer experience with its renewed websites. In some European countries, the company sponsors key events and several individual wheelchair athletes and teams. In addition, every year the company conducts numerous marketing campaigns targeted to dealers, therapists, and end users to promote current and new products.
North America
In the United States, Invacare products are marketed primarily to clinical specialists in rehabilitation centers, long-term care facilities, hospice facilities, government agencies and residential care settings. The company markets to these medical professionals, who refer their patients to rehabilitation, HME, and government providers to obtain specific types of the company's medical equipment. The company sells its products to these providers.
In 2022, the North America sales force was focused on mobility and seating products and lifestyle solutions to
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support customer needs. The sales force is comprised of both inside and outside representatives.
The company contributes extensively to editorial coverage in trade publications concerning the products the company manufactures. Company representatives attend numerous online trade shows and conferences on a national and regional basis in which Invacare products are displayed to providers, health care professionals, managed care professionals and consumers. The company also drives brand awareness through its website, as well as online communities of people who may use its products.
The company raises consumer awareness of its products through a strong presence in social and digital media as well as its support of various philanthropic causes benefiting consumers of the company's products. In addition, the company supports disabled veterans with its continuous sponsorship of the National Veterans Wheelchair Games, the largest annual wheelchair sporting event in the world. These sporting events bring a competitive and recreational sports experience to military veterans who, due to spinal cord injury, neurological conditions or amputation, use various assistive technology devices for their mobility needs.
The company's products are distributed through a network of facilities and directly from some manufacturing sites to optimize cost, inventory and delivery performance.
All Other
All Other comprises revenue primarily from Australia and New Zealand and to a lesser extent from other regions of the Asia Pacific market. The New Zealand revenues include rental of durable medical equipment. It uses an employee sales force and service representatives to support this revenue. Complex rehabilitation products are assembled in Thailand and sourced from global sources via a network of distribution nodes designed to optimize cost, inventory and delivery performance.
Sales and marketing efforts in Asia Pacific region are managed within the region and leveraged from other regions of the company. Sponsorship efforts are focused at the grass roots level and around programs designed to introduce people with disabilities to sports as a pathway to inclusion. Invacare APAC is very active on social media and online platforms and has created a community following whereby end-users, dealers, carers and healthcare professionals activity participate in two way discussions, polls, blogs and competitions thereby increasing brand awareness throughout the region. Customers are also encouraged to utilize Invacare marketing capability and skills to assist them in marketing and selling Invacare products through their respective dealerships.
PRODUCT LIABILITY COSTS
The company was self-insured in North America for product liability exposures through its captive insurance company, Invatection Insurance Company, which had a policy year that ran from September 1 to August 31 and insured annual policy losses up to $10,000,000 per occurrence and $13,000,000 in the aggregate. The company has additional layers of external insurance coverage, related to all lines of insurance, insuring up to $75,000,000 in aggregate losses per policy year arising from individual claims anywhere in the world that exceed the captive insurance company policy limits or the limits of the company's per-country foreign liability limits, as applicable. There can be no assurance that Invacare's current insurance levels will continue to be adequate or available at affordable rates.
Product liability reserves are recorded for individual claims based upon historical experience, industry expertise and other indicators. Additional reserves, in excess of the specific individual case reserves, are provided for incurred unreported claims based upon actuarial valuations at the time such valuations are conducted. Historical claims experience and other assumptions are taken into consideration by the company in estimating the ultimate reserves. For example, the actuarial analysis assumes that historical loss experience is an indicator of future experience, that the distribution of exposures by geographic area and nature of operations for ongoing operations is expected to be very similar to historical operations with no dramatic changes and that the government indices used to trend losses and exposures are appropriate. Estimated amounts used in the calculation of reserves are adjusted on a regular basis and can be impacted by actual loss awards and claim settlements. While actuarial analysis is used to help determine adequate reserves, the company is responsible for determining and recording adequate reserves in accordance with accepted loss reserving standards and practices and applicable accounting principles.
Subsequent to the 2022 year-end and as a result of the bankruptcy filing, Invatection Insurance Company has been dissolved. The company will continue to be self-insured for product liability exposures in North America on a go-forward basis.
PRODUCT DEVELOPMENT AND ENGINEERING
The company's strategy includes developing meaningful new products in key markets and product areas. As the result of work among the company's development groups in North America, Europe and Asia, Invacare launched a series of new innovations in 2022, including the following:
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•Power Wheelchair Product Enhancements: Following innovative features/additions were added to Power Wheelchair offerings:
◦Power elevating and articulating calf panel with optional power down footplate
◦Lateral tilt Ultra Low Maxx seating system on AVIVA Storm RXTM base
◦Knee bolster with rapid connect system for mini Stander seating system
◦Locking outback cantilever recline armrest
◦LNX mini center mount power footrest
◦Interface for Ride Multi-axis back mount
◦Various accessories for conveniently mounting phone, tablet or water bottle or a storage basket.
•Lifestyle Products: Dacapo Green mattress was the major product launch in the Lifestyle category in the lifestyle category.
•Alber: Launched “Erivo” a lightweight, foldable power-wheelchair. It is characterized by easy handling, comfort, compactness and unique design. With just one movement, the Erivo is folded to save space, but at the same time offers excellent seat ergonomics. With its powerful battery, it also covers longer distances with first-class workmanship and high-quality materials.
The engineering teams also focused on portfolio and product optimization projects during the year.
MANUFACTURING AND SUPPLIERS
The company's objective is to efficiently deploy resources in its supply network to achieve the best quality, service performance and lowest total cost. The company seeks to achieve this result through a combination of inputs from Invacare facilities, contract manufacturers and key suppliers.
The company continues to emphasize quality excellence and efficiency across its manufacturing and distribution operations. The company is expanding its culture of deploying current Good Manufacturing Practices (“cGMP”) and Lean Manufacturing principles to eliminate waste throughout the network and will continue to pursue improvements in its manufacturing processes. At its core, the company's operations produce and distribute both custom-configured products for use in specialized clinical situations and standard products.
The company procures raw materials, components and finished goods from a global network of internal and external sources. The company utilizes regional sourcing offices to identify, develop and manage its external supply base. Where appropriate, Invacare utilizes suppliers across multiple regions to ensure flexibility, continuity and
responsiveness. The company's network of engineering design centers, product management groups and sources of supply are used to optimize cost and satisfy customer demand.
The company continually reviews its operations network capacity, workforce skills and technologies along with its distribution network to optimize design, manufacture, sourcing and delivery performance, inventory and cost.
Europe
The company's manufacturing and assembly facilities in Europe are operated as centers of excellence, i.e., factories, with specific capabilities. The company manufactures power wheelchair products, wheelchair power add-ons and hygiene products in one single facility in Albstadt, Germany. Manual wheelchair production is based in Fondettes, France. The company manufactures beds in Porto, Portugal and Diö, Sweden for various markets. Invacare manufactures therapeutic support surfaces as well as seating and positioning products in Pencoed, Wales. The Europe segment uses these internal sources and also external sources of finished goods and components to create the portfolio of products it distributes. Products manufactured or assembled in Europe are sold to external European customers as well as to other internal customers.
North America
The company operates several vertically integrated centers of excellence, i.e., factories, in North America, each with specific capabilities: custom powered wheelchairs and seating products in Elyria, OH; manual and passive manual wheelchairs, safe patient handling and patient aids in Reynosa, MX; beds in Sanford, FL; passive manual and pediatric wheelchairs in Simi Valley, CA; and seating and positioning systems in Toronto, Canada. Products designed and produced in North American operations are sold in North America and are shipped as finished goods and as subcomponents to internal and external customers globally.
Asia Pacific
Invacare Asia Pacific assembles components used primarily in rehabilitation products that serve Asia Pacific markets at a facility based in Thailand. The company operates a centralized distribution node in Thailand, with additional nodes in Australia and New Zealand, to supply customer needs while optimizing cost, inventory and service levels.
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STRATEGY
With the changes to senior management and the Board of Directors in the third quarter of 2022, and after careful evaluation of strategic options, the company concluded that the lifestyle and mobility & seating businesses are core to restoring growth and profitability. As a result, the company decided to discontinue the production and sale of respiratory products. This will allow the company to further streamline its operations and improve profitability by focusing resources on lifestyle and mobility & seating products, which continue to experience strong demand. The company will continue to be subject to its warranty and regulatory obligations related to respiratory products.
The company's anticipated business optimization actions balance product portfolio changes across all regions and cost improvements in supply chain and administrative functions. Key elements of the global business optimization plans are:
•Focus on lifestyle and mobility & seating product lines based on their potential to achieve a leading market position and to support profitability goals;
•Simplify the organization to leverage a reduced cost structure while allocating resources to the business units or product categories which deliver improved financial returns;
•Product rationalization and discontinuance with consideration of cost increases incurred by the company and those anticipated to continue. Adjust the product portfolio to consistently grow profitability amid cost increases by adding new products, reducing costs and continuing to improve customer experiences; and
•Take actions globally to reduce working capital and improve free cash flow.
As it navigates the uncertain business environment, the company continues to allocate more resources to the business units experiencing increased demand and expects to continue taking actions to mitigate the potential negative financial and operational impacts on other parts of the business that have declined.
The company intends to continue to make investments in its business improvement initiatives with a focus on improving profitability and free cash flow generation. As a result, the company may take actions which may reduce sales in certain areas, refocus resources away from less profitable activities, and look at its global infrastructure for opportunities to further optimize the business. As part of the company’s efforts to streamline its operations and focus its resources on core product lines that provide the greatest value and financial returns, the company continuously evaluates opportunities and
activities, including potential divestitures, which it considers from time to time, particularly if they involve businesses or assets outside of the company’s primary areas of focus.
GOVERNMENT REGULATION
The company is governed by regulations that affect the manufacture, distribution, marketing and sale of its products and regulate healthcare reimbursement that may affect its customers and the company directly. Reimbursement policies differ among and within every country in which the company operates. Changes in regulations, guidelines, procedural precedents, enforcement and healthcare policy take place frequently and can impact the size, growth potential and profitability of products sold in each market.
In many markets, healthcare costs have been consistently increasing in excess of the rate of inflation and as a percentage of GDP. Efforts to control payor's budgets have impacted reimbursement levels for healthcare programs. Private insurance companies often mimic changes in government programs. Reimbursement guidelines in the home healthcare industry have a substantial impact on the nature and type of equipment consumers can obtain and thus, affect the product mix, pricing and payment patterns of the company's customers who are typically the medical equipment providers to end-users.
FDA
The United States Food and Drug Administration (“FDA”) regulates the manufacture, distribution and marketing of medical devices. Under such regulation, medical devices are classified as Class I, Class II or Class III devices, depending on the level of risk posed to patients, with Class III designating the highest-risk devices. The company's principal products are designated as Class I or Class II. In general, Class I devices must comply with general controls, including, but not limited to, requirements related to establishment registration and device listing, labeling, medical device reporting, and the Quality System Regulation (QSR). In addition to general controls, certain Class II devices must comply with design controls, premarket notification and clearance, and applicable special controls. Domestic and foreign manufacturers of medical devices sold in the U.S. are subject to routine inspections by FDA. In addition, some foreign governments have adopted regulations relating to the design, manufacture and marketing of health care products, and imposing similar controls as the FDA regulations.
2012 Consent Decree, Taylor Street and Corporate Facilities
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In December 2012, the company became subject to a consent decree of injunction filed by FDA with respect to the company's Corporate Headquarters and its Taylor Street facility's operations in Elyria, Ohio. The consent decree initially limited the company's (i) manufacture and distribution of power and manual wheelchairs, wheelchair components and wheelchair sub-assemblies at or from its Taylor Street manufacturing facility (“Taylor Street Products”), except in verified cases of medical necessity, (ii) design activities related to wheelchairs and power beds that take place at the impacted Elyria facilities and (iii) replacement, service and repair of products already in use and supplied from the Taylor Street manufacturing facility. Under the terms of the consent decree, in order to resume full operations, the company had to successfully complete independent, third-party expert certification audits at the impacted Elyria facilities, comprised of three distinct certification reports separately submitted to, and accepted by, the FDA; submit its own report to the FDA; and successfully complete a reinspection by the FDA of the company's Corporate and Taylor Street facilities.
On July 24, 2017, following its June 2017 reinspection of the Corporate and Taylor Street facilities, the FDA notified the company that it was in substantial compliance with the Federal Food, Drug and Cosmetic Act (“FDA Act”), FDA regulations and the terms of the consent decree and that the company was permitted to resume full operations at those facilities including the resumption of unrestricted sales of products made in those facilities.
Since July 24, 2017, an independent expert audit firm retained by the company retained by the company conducted two semi-annual audits in the first year and then four annual audits in the next four years of the company's Corporate and Taylor Street facilities, as required under the consent decree. The expert audit firm determined that the facilities remained in continuous compliance with the FDA Act, FDA regulations and the terms of the consent decree and issued post-audit reports contemporaneously to the FDA. The FDA has the authority to inspect these facilities and any other FDA registered facility, at any time.
In 2021, FDA conducted an inspection of the company’s Corporate and Taylor Street facilities from May 25 through June 24, 2021. At the close of the inspection, six FDA Form 483 observations were issued, and the company timely responded to FDA, has diligently taken actions to address FDA’s inspectional observations, and has provided FDA regular updates on the corrective actions taken to address these observations. On November 18, 2021, the company received a warning letter from the FDA concerning certain of the inspectional observations in the June 2021 FDA Form 483 related to the complaint handling process, the corrective and preventive action
(“CAPA”) process, and medical device reporting (“MDR”) associated with oxygen concentrators (the “Warning Letter”). On November 16, 2021, the company received a consent decree non-compliance letter from the FDA concerning the same complaint and CAPA handling matters as in the Warning Letter observations but associated with the Taylor Street products (this letter, together with the Warning Letter, the “FDA Letters”). The company timely responded to the FDA Letters, has diligently taken actions to address FDA’s concerns, and has provided FDA with periodic updates on the corrective actions taken to address the matters in the FDA Letters. The company remains committed to resolving the FDA’s concerns; however, it is not possible to predict the outcome or timing of a resolution at this time. There can be no assurance that the FDA will be satisfied with the company’s responses to the FDA Letters, nor any assurance as to the timeframe that may be required for the company to adequately address the FDA’s concerns or whether the matters in the FDA Letters will result in an extension in the duration of the consent decree. See “Item 1A. Risk Factors - Regulatory and Development Risks” for further discussion of potential adverse effects on the company of non-compliance with medical device regulatory requirements. As of the date of filing of this Annual Report on Form 10-K, there has been no impact on the company’s ability to produce and market its products as a result of the FDA Letters.
The FDA conducted an inspection at the company’s Alber GmbH facility in Albstadt, Germany from December 12 through December 15, 2022. At the completion of the inspection, the FDA issued no findings or observations.
The FDA conducted an inspection at the company’s Corporate and Taylor Street facilities from March 1 through March 30, 2023. At the conclusion of the inspection, two FDA Form 483 observations were issued. The company intends to timely respond to the FDA and address the observations.
Under the consent decree, the FDA has the authority to order the company to take a wide variety of actions if the FDA finds that the company is not in compliance with the consent decree, FDA Act or FDA regulations, including requiring the company to cease all operations relating to Taylor Street products. The FDA also can order the company to undertake a partial cessation of operations or a recall, issue a safety alert, public health advisory, or press release, or to take any other corrective action the FDA deems necessary with respect to Taylor Street products.
The FDA also has authority under the consent decree to assess liquidated damages of $15,000 per violation per day for any violations of the consent decree, FDA
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regulations or the FDA Act. The FDA also may assess liquidated damages for shipments of adulterated or misbranded devices in the amount of twice the sale price of any such adulterated or misbranded device. The liquidated damages, if assessed, are limited to a total of $7,000,000 for each calendar year. The authority to assess liquidated damages is in addition to any other remedies otherwise available to the FDA, including civil money penalties.
For additional information regarding the consent decree, refer to the following sections of this Annual Report on Form 10-K: Item 1A. Risk Factors.
Other FDA Matters
The company expects that substantially all of its facilities will be inspected by the FDA or other regulatory agencies from time to time. The frequency, duration, scope, findings and consequences of these inspections cannot be predicted.
From time to time, the company may undertake voluntary recalls or field corrective actions of the company's products to correct potential product safety issues that may arise, in furtherance of the company's high standards of quality, safety and effectiveness.
Other Medical Device Regulators
Outside the U.S., it is customary for foreign governments to have a ministry of health or similar government body that regulates and enforces regulations relating to the design, manufacture, distribution and marketing of medical devices. In some cases, there are common standards for design and testing. In some cases, there are country-specific requirements. These regulations are not always harmonized with those from other jurisdictions and in some cases, the consequence in costs, time to enter a market or support a product may be significant.
EEA and UK Regulators
The regulation of the company's products in Europe falls primarily within the United Kingdom (“UK”), Switzerland and the European Economic Area (“EEA”), which consists of the European Union member states, as well as Iceland, Liechtenstein and Norway. Only medical devices that comply with certain conformity requirements of the European Medical Device Regulation (“EMDR”) are allowed to be marketed within the EEA. The company's Class I products were in compliance with EMDR as of May 2021. Products that fail to be certified with the EMDR may not be marketed or sold in the European Union.
As a result of Brexit, beginning on January 1, 2021, the company's products sold in the UK have been required to be registered with the Medical and Healthcare Products Regulatory Agency (“MHRA”). Products in conformity with the EMDR and MDD may continue to be marked with their CE marking in the UK until June 2024, after which time products must comply with UK requirements. On May 26, 2021, the EU Commission announced that the Mutual Recognition Agreement between the European Union and Switzerland, which enabled medical devices approved in the European Union to be marketed in Switzerland, was no longer valid. As a result, medical devices must be separately registered with Swissmedic, the Swiss regulatory authority, and the company must comply with Swiss requirements. The regulatory requirements in the UK and Switzerland continue to evolve and the company is monitoring all changes and updates.
In addition, the national health or social security organizations of certain foreign countries, including those outside Europe, require the company's products to be qualified before they can be marketed in those countries.
Other Audit Requirements
Five countries have agreed to work together to harmonize regulations and allow for one single audit to be used to confirm compliance with those countries’ regulations under a program referred to as the Medical Device Single Audit Program, or MDSAP. The five countries that participate include the United States, Canada, Australia, Brazil and Japan. Under the MDSAP, annual surveillance audits of relevant facilities are conducted by a private organization designated by the MDSAP countries referred to as “Notified Body” which assesses conformity with applicable regulations. Under the EMDR and MDD, Notified Bodies have the right to conduct unannounced audits. In addition, the company's facilities in Europe are subject to audits by the applicable medical device regulatory authorities.
Other Quality Accomplishments
In 2022, the company's main facilities in Europe, Asia and North America were again certified as meeting ISO 13485-2016 requirements, a stringent international standard for quality management systems, demonstrating its continued commitment to quality excellence.
National Competitive Bidding
In the United States, the Centers for Medicare and Medicaid Services, or “CMS”, is a significant payor and governs healthcare reimbursement for Medicare services. From January 2011 through October 2020, CMS conducted its National Competitive Bidding (“NCB”) program to reduce healthcare spending. This program resulted in new,
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lower Medicare payment rates for medical equipment, which negatively influenced the company’s selling prices. As a result, the company’s revenue, profit, and cash flow were also negatively impacted.
The company's exposure to effects of NCB rate reductions and any similar reductions from private payors or state agencies can increase the company's credit risk associated with customers whose revenue, based on reimbursement, may be significantly reduced. As reimbursement rates are reduced, the company's customers may experience pressure on profitability and liquidity. The company therefore remains focused on being judicious in its extension of credit to its customers and vigilant about collections efforts.
In addition, the consequence of reduced reimbursement has and may continue to compel customers to consider alternative sources of supply, which may be available at lower purchase prices, thereby reducing sales or the price at which customers will transact for certain products.
Although reductions in CMS payments are disruptive to the homecare industry, the company believes it can grow and thrive in this environment. The company expects to continue pursuing productivity initiatives intended to lower the costs to serve customers, in an effort to profitably meet lower customer price targets. The company also produces certain solutions, which can provide lower total cost of business for its customers. The company intends to continue developing solutions that help providers improve profitability and reduce the overall cost of care for payors including service and support of their end-user customers.
BACKLOG
The company generally manufactures its products to meet near-term demands by shipping from stock or by building to order based on the specialized nature of certain products. As a result, the company does not ordinarily have a substantial backlog of orders for any particular product. However, in 2022, the order backlogs in Europe and North America remained elevated as a result of supply chain constraints which affected access to components and finished products.
HUMAN CAPITAL
As of December 31, 2022, the company had approximately 2,800 employees. The company believes that its employees are integral to its success and strive to create a rewarding culture through commitment to its core values of Integrity, Innovation, Leadership, Excellence and Accountability. The company's compensation programs are designed to attract, retain and motivate employees to be part of the company's success. The company provides
wages that are locally competitive and globally consistent to reward employees for performance. The company's long-term incentive program is equity based to align leadership with the interests of shareholders.
Invacare is committed to its Environmental, Social and Governance program and embraces diversity, equity and inclusion. The company believes that an innovative workforce needs to be diverse, with skills and perspectives drawn from a broad spectrum of backgrounds and experiences. Global and U.S. demographics include:
December 31, 2022 global gender demographics
Female Male
Manager Level and Above 30% 70%
Individual Contributors 43% 57%
Manufacturing and Warehouse Associates 31% 69%
Total Invacare 37% 63%
December 31, 2022 U.S. race and ethnicity demographics
Total U.S. M&W 1
IC 2
Mgr and Above 3
Black / African American 10% 16% 7% 3%
Asian 2% 2% 3% 3%
Hispanic / Latino 24% 42% 11% 6%
White 61% 38% 76% 86%
Multiracial, Native American and Pacific Islander 3% 2% 3% 2%
1 Manufacturing and Warehousing
2 Individual Contributors (below manager who do not supervise others)
3 Manager and Above
The company focuses on training employees and conducting self-audits to create a safe work environment.
FOREIGN OPERATIONS AND EXPORT SALES
The company markets its products for export to other foreign countries. In 2022, the company's products were sold in over 100 countries. For information relating to net sales, operating income and identifiable assets of the company's foreign operations, refer to Business Segments in the Notes to the Consolidated Financial Statements.
AVAILABLE INFORMATION
The company files Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments thereto, as well as proxy
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statements and other documents with the U.S. Securities and Exchange Commission (“SEC”). The SEC maintains a website, http://www.sec.gov, which contains all reports, proxy and information statements and other information filed by the company with the SEC.
Additionally, Invacare's filings with the SEC are available on or through the company's website, www.invacare.com, as soon as reasonably practicable after they are filed electronically with, or furnished to, the SEC. Copies of the company's filings also can be requested, free of charge, by writing to: Shareholder Relations Department, Invacare Corporation, One Invacare Way, Elyria, OH 44035. The contents of the company's website are not part of this Annual Report on Form 10-K.
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FORWARD-LOOKING INFORMATION
This Form 10-K contains forward-looking statements within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that describe future outcomes or expectations that are usually identified by words such as will,” "may," “should,” “could,” “plan,” “intend,” “expect,” “continue,” "forecast," “believe” and “anticipate,” as well as similar comments, denote forward-looking statements that are subject to inherent uncertainties that are difficult to predict. These include, for example, statements related to the company’s ability to successfully complete a restructuring under Chapter 11. Actual results and events may differ significantly from those expressed or anticipated as a result of various risks and uncertainties, including the potential adverse effects of the Chapter 11 Cases on the company's liquidity and results of operations; the company’s ability to obtain timely approval by the Bankruptcy Court with respect to the motions filed in the Chapter 11 Cases; objections to the company’s recapitalization process, DIP Credit Agreements, or other pleadings filed that could protract the Chapter 11 Cases; employee attrition and the company’s ability to retain senior management and other key personnel due to the distractions and uncertainties; the company’s ability to comply with the restrictions imposed by the terms and conditions of the DIP Credit Agreements and other financing arrangements; the company’s ability to maintain relationships with suppliers, customers, employees and other third parties and regulatory authorities as a result of the Chapter 11 Cases; the effects of the Chapter 11 Cases on the company and on the interests of various constituents, including holders of the company’s common shares; the Bankruptcy Court’s rulings in the Chapter 11 Cases, including the approvals of the terms and conditions of any plan of reorganization and the DIP Credit Agreements, and the outcome of the Chapter 11 Cases generally; the length of time that the company will operate under Chapter 11 protection and the continued availability of operating capital during the pendency of the Chapter 11 Cases; risks associated with third party motions in the Chapter 11 Cases, which may interfere with the company’s ability to consummate a plan of reorganization or an alternative restructuring; increased administrative and legal costs related to the Chapter 11 process; and other litigation and inherent risks involved in a bankruptcy process, on-going supply chain challenges and component shortages; sales and free cash flow trends; the impact of contingency plans and cost containment actions; the company’s liquidity and working capital expectations; the company’s future financial results including expectations as to consolidated and segment revenue, net sales and profitability; the company’s future business plans and similar statements. The availability and cost to the company of needed products, components or raw materials from the company’s suppliers, including delivery delays and production interruptions from pandemic-related supply chain challenges and supplier
delivery holds resulting from past due payables; global shortages in, or increasing costs for, transportation and logistics services and capacity; actions that governments, businesses and individuals take in response to the pandemic, including mandatory business closures and restrictions on onsite commercial interactions; the impact of the pandemic or political or geopolitical crises, such as the Russian war with Ukraine, and actions taken in response on global and regional economies and economic activity; general economic uncertainty in key global markets and a worsening of global economic conditions or low levels of economic growth, including negative conditions attributable to inflationary economic conditions, rising interest rates and credit market volatility; the effects of steps the company has taken or will take to reduce operating costs; the ability of the company to sustain profitable sales growth, achieve anticipated improvements in segment operating performance, convert high inventory levels to cash or reduce its costs; the ability of the company to successfully improve output and convert order backlog into sales; the ability of the company to successfully focus on lifestyle and mobility & seating products; lack of market acceptance of the company's new product innovations; potential adverse effects of revised product pricing and/or product surcharges on revenues or the demand for the company's products; circumstances or developments that may make the company unable to implement or realize the anticipated benefits, or that may increase the costs, of its current and planned business initiatives, in particular the key elements of its growth plans, such as its new product introductions, commercialization plans, additional investments in demonstration equipment, product distribution strategy in Europe, supply chain actions and global information technology insourcing and ERP implementation activities; possible adverse effects on the company's liquidity, including (i) potential adverse effects of the Chapter 11 Cases on the company's liquidity and results of operations, (ii) the company's ability to address future debt maturities or other obligations, including additional debt that may be incurred in the future or (iii) the company's ability to access financing under the reorganization plan (as discussed in the notes to the condensed consolidated financial statements) in the event of a failure to satisfy one or more of the applicable closing conditions; increases in interest rates or the costs of borrowing; potential limitations on the company’s business activities from obligations in the company’s debt agreements; adverse changes in government and third-party payor reimbursement levels and practices; consolidation of health care providers; decreased availability or increased costs of materials which could increase the company’s cost of producing or acquiring the company’s products, including the adverse impacts of tariffs and increases in commodity costs or freight costs; consolidation of health care providers; increasing pricing pressures in the markets for the company's products; risks of failures in, or disruptions to, legacy IT systems; risks of cybersecurity attack, data breach or data loss and/or delays in or
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inability to recover or restore data and IT systems; adverse effects of the company's consent decree of injunction with the U.S. Food and Drug Administration (FDA), including but not limited to, compliance costs, inability to rebuild negatively impacted customer relationships, unabsorbed capacity utilization, including fixed costs and overhead; any circumstances or developments that might adversely impact the third-party expert auditor's required audits of the company's quality systems at the facilities impacted by the consent decree, including any possible failure to comply with the consent decree or FDA regulations or the inability to adequately address the matters identified in the FDA Letters; regulatory proceedings or the company's failure to comply with regulatory requirements or receive regulatory clearance or approval for the company's products or operations in the United States or abroad; adverse effects of regulatory or governmental inspections of the company's facilities at any time and governmental enforcement actions; product liability or warranty claims; product recalls, including more extensive warranty or recall experience than expected; possible adverse effects of being leveraged, including interest rate or event of default risks; exchange rate fluctuations, particularly in light of the relative importance of the company's foreign operations to its overall financial performance; legal actions, including adverse judgments or settlements of litigation or claims in excess of available insurance limits; tax rate fluctuations; additional tax expense or additional tax exposures, which could affect the company's future profitability and cash flow; uncollectible accounts receivable; risks inherent in managing and operating businesses in many different foreign jurisdictions; heightened vulnerability to a hostile takeover attempt or other shareholder activism; provisions of Ohio law or in the company's debt agreements, charter documents or other agreements that may prevent or delay a change in control, as well as the risks described elsewhere in this Annual Report on Form 10-K and from time to time in the company's reports as filed with the Securities and Exchange Commission. The company may not be able to predict and may have little or no control over many factors or events that may influence its future results and, except to the extent required by law, the company does not undertake and specifically declines any obligation to review or update any forward-looking statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments or otherwise.
Part I

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
Item 1A. Risk Factors.
The company's business, financial condition, results of operations and prospects are subject to various risks and uncertainties. One should carefully consider the risks and uncertainties described below, together with all the other information in this Annual Report on Form 10-K and in the company's other filings with the SEC, before making any investment decision with respect to the company's securities. The risks and uncertainties described below may not be the only ones the company faces. Additional risks and uncertainties not presently known by the company or that the company currently deems immaterial may also affect the company's business. If any of these known or unknown risks or uncertainties occur, develop or worsen, the company's business, financial condition, results of operations and prospects could change substantially.
Summary of Risk Factors
As noted above, the company is subject to a number of risks that if realized could materially harm its business, financial condition, results of operations and prospects. Some of the more significant risks and uncertainties the company faces include those summarized below. The summary below is not exhaustive and is qualified by reference to the full set of risk factors set forth in this “Item 1A. Risk Factors” section.
Specific bankruptcy risk factors have been included in the summary below as a result of the Debtors filing bankruptcy in the U.S. in January 2023. These risk factors are specific for the Debtors but can also have implications on other entities within the company. The occurrence or non-occurrence of any or all of the following contingencies, and any others, could affect distributions available to Holders of Allowed Claims and Interests under the Plan but will not necessarily affect the validity of the vote of the Impaired Classes to accept or reject the Plan or necessarily require a re-solicitation of the votes of Holders of Claims and Interests in such Impaired Classes.
In addition, the risks outside of bankruptcy, are applicable to all the subsidiaries of the company, including the Debtors.
Risks Related to the Chapter 11 Cases
•There is no assurance that the company will be able to successfully complete the Restructuring contemplated in the Plan, creating substantial doubt about its ability to continue as a going concern.
•The company has sought the protection of the Bankruptcy Court, which subjects it to the risks and uncertainties associated with bankruptcy and may harm its business.
•There is a risk of termination of the Restructuring Support Agreement.
•Parties in Interest May Object to the Plan’s Classification of Claims and Interests.
•The Conditions Precedent to the Effective Date of the Plan May Not Occur.
•The Debtors May Fail to Satisfy Vote Requirements.
•The Debtors May Not Be Able to Secure Confirmation of the Plan.
•Nonconsensual Confirmation.
•Continued Risk Upon Confirmation.
•The Chapter 11 Cases May Be Converted to Cases under Chapter 7 of the Bankruptcy Code or One or More of the Chapter 11 Cases May Be Dismissed.
•The Debtors May Object to the Amount or Classification of a Claim or Interest.
•Releases, Injunctions, and Exculpations Provisions May Not Be Approved.
•The Debtors Cannot Predict the Amount of Time Spent in Bankruptcy for the Purpose of Implementing the Plan, and a Lengthy Bankruptcy Proceeding Could Disrupt the Debtors’ Businesses, as Well as Impair the Prospect for Reorganization on the Terms Contained in the Plan.
•Risk of Non-Occurrence of the Effective Date.
•The Consummation of the Transactions Contemplated by the Plan May Not Occur.
Risks Related to Recoveries under the Plan
•The Reorganized Debtors May Not Be Able to Achieve Their Projected Financial Results.
•The New Common Equity is Subject to Dilution.
•A Liquid Trading Market for the Shares of New Common Equity and New Preferred Equity May Not Develop.
•Certain of the New Common Equity and the New Preferred Equity Issued Under the Plan May Not Be Resold or Otherwise Transferred Unless Such Resale or Transfer is Registered Under the Securities Act or an Exemption from Registration Applies.
•Holders of the New Common Equity and the New Preferred Equity May Not Have Access to the Same Level of Information Available to Holders of Registered Securities.
•Certain Claimants May Receive a Substantial Amount of the Shares of New Common Equity and, Accordingly, May Have Substantial Influence.
•Certain Tax Implications of the Plan.
•The Debtors May Not Be Able to Accurately Report Their Financial Results.
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Item 1A. Risk Factors
•Contingencies Could Affect Allowed Claims Classes.
Risks Related to the Debtors’ and the Reorganized Debtors’ Businesses
•The Reorganized Debtors May Not Be Able to Generate Sufficient Cash to Service All of Their Indebtedness.
•The Debtors Will Be Subject to the Risks and Uncertainties Associated with the Chapter 11 Cases.
•Operating in Bankruptcy for a Long Period of Time May Harm the Debtors’ Businesses.
•Financial Results May Be Volatile and May Not Reflect Historical Trends.
•The Debtors’ Substantial Liquidity Needs May Impact the Debtors’ Ability to Operate.
•The Reorganized Debtors May Be Adversely Affected by Potential Litigation, Including Litigation Arising Out of the Chapter 11 Cases.
•Certain Claims May Not Be Discharged and Could Have a Material Adverse Effect on the Debtors’ Financial Condition and Results of Operations.
•Termination of the Restructuring Support Agreement, Inability to Confirm the Plan, or Other Impediments to a Successful and Expedient Chapter 11 Process Could Adversely Affect the Debtors’ Relationship with their Key Suppliers.
•The Company’s Ability to Use Net operating Loss Carryforwards (“NOLs”) May Become Subject to Limitation, or May Be Reduced or Eliminated, in Connection with the Implementation of a Plan of Reorganization. The Bankruptcy Court Has Entered an Order That Is Designed to Protect Our NOLs Until a Plan of Reorganization is Consummated.
Commercial and Operational Risks
•If the company's business improvement efforts are ineffective, the company's strategic goals, business plans, financial performance or liquidity could be negatively impacted.
•If the company is unable to attract and retain critical IT Governance, Project Management and Contract Management competencies, it may limit the effectiveness of the company's cost improvement and business efficiency initiatives and adversely affect the company's profitability and growth.
•Changes in government and other third-party payor reimbursement levels and practices have negatively impacted and could continue to negatively impact the company's revenues and profitability.
•If the company's products are not included within an adequate number of customer formularies, or if pricing policies otherwise favor competitors' products, the company's market share and gross margin could be negatively affected.
•The company's industry is highly competitive and the consolidation of customers and competitors could result in a loss of customers or in additional competitive pricing pressures.
•The company's business strategy relies on certain assumptions concerning demographic trends that impact the market for its products. If these assumptions prove to be incorrect, demand for the company's products may be lower than expected.
Risks Related to Financial Results and Liquidity
•The terms of the company's current and future debt facilities and financing arrangements may limit the company's flexibility in operating its business.
•The company's leverage and debt obligations could adversely affect its financial condition, limit its ability to raise additional capital to fund its operations, impact the way it operates its business and prevent it from fulfilling its debt service and other obligations.
•Servicing the company’s debt requires a significant amount of cash, and the company may not have sufficient cash flow from its business to pay its substantial debt.
Risks Related to Information Technology and Reliance on Third Parties
•Any major disruption or failure of the company’s information technology systems, or its failure to successfully implement new technology effectively, could adversely affect the company.
•Cyber security threats and more sophisticated and targeted computer crime pose a risk to the company's systems, networks, products and services, and a risk to the company's compliance with data privacy laws.
•As the company transitions IT services inhouse, disruptions or delays at or by the company’s third-party service providers could adversely impact its operations.
Regulatory and Development Risks
•The company remains subject to a consent decree of injunction with the U.S. Food and Drug Administration, and failure by the company to comply with the consent decree could adversely affect the company.
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Item 1A. Risk Factors
•Any failure by the company to comply with medical device regulatory requirements or receive regulatory clearance or approval for the company's products or operations in the United States or abroad could adversely affect the company's business.
•If the company fails to comply with applicable health care laws or regulations, the company could suffer severe civil or criminal sanctions or may be required to make significant changes to the company's operations.
•Legislative developments in all regions in which the company operates may adversely affect the company.
Intellectual Property Risks
•The company's operating results and financial condition could be adversely affected if the company becomes involved in litigation regarding its patents or other intellectual property rights.
•If the company is unable to protect its intellectual property rights or resolve successfully claims of infringement brought against it, the company's product sales and business could be affected adversely.
Manufacturing and Supply Risks
•Decreased availability or increased costs of materials could increase the company's costs of producing its products.
•Inflationary economic conditions have increased, and may continue to increase, the company's costs of producing its products.
•Geopolitical risks, such as those associated with the military conflict in Ukraine, could result in increased market volatility and uncertainty, which could negatively impact the company's business, financial condition, and results of operations.
•The company's ability to manage an effective supply chain is a key success factor.
•As the company outsources functions, it becomes more dependent on the entities performing those functions.
Other Regulatory and Litigation Risks
•The company is subject to certain risks inherent in managing and operating businesses in many different foreign jurisdictions.
•The company's products may be subject to product liability claims or recalls, which could be costly, harm the company's reputation and adversely affect its business.
Other Risk Factors - Other Financial Risks, Risks Related to Employees and the Company's Common Shares
•The company has long-term finance leases on significant facilities which can affect the company's liquidity and cash flow.
•The company's revenues and profits are subject to exchange rate and interest rate fluctuations which can affect the company's profitability and cash flow.
•Additional tax expense or additional tax exposures could affect the company's future profitability and cash flow.
•The company's ability to use net operating losses carryforwards (“NOLs”) may become subject to limitation, or may be reduced or eliminated, in connection with the implementation of a plan of reorganization. The Bankruptcy Court has entered an order that is designated to protect our NOLs until a plan of reorganization is consummated.
•The company's reported results may be adversely affected by increases in reserves for uncollectible accounts receivable.
•The inability to attract and retain, or loss of the services of, the company's key management and personnel could adversely affect its ability to operate the company's business.
Risks Related to the Chapter 11 Cases
There is no assurance that the company will be able to successfully complete the Restructuring contemplated in the Plan, creating substantial doubt about its ability to continue as a going concern.
The company's ability to continue as a going concern is dependent upon its ability to consummate the Restructuring and to generate sufficient liquidity from the Restructuring to meet our obligations and operating needs. Our ability to consummate the Restructuring is subject to risks and uncertainties many of which are beyond our control. These factors, together with the company’s recurring losses from operations and accumulated deficit, create substantial doubt about our ability to continue as a going concern. There can be no assurance that the company will be able to successfully consummate the Restructuring on the terms set forth in the Plan, or at all, or realize all or any of the expected benefits from the Restructuring. See the notes to consolidated financial statements contained herein for more information on the Restructuring and the risks related thereto.
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Item 1A. Risk Factors
The company has sought the protection of the Bankruptcy Court, which subjects it to the risks and uncertainties associated with bankruptcy and may harm its business.
The company has sought the protection of the Bankruptcy Court and as a result our operations and ability to develop and execute its business plan, and its ability to continue as a going concern, are subject to the risks and uncertainties associated with bankruptcy. As such, seeking Bankruptcy Court protection could have a material adverse effect on our business, financial condition, results of operations and liquidity. Senior management has been required to spend a significant amount of time and effort attending to the Restructuring instead of focusing exclusively on our business operations. Bankruptcy Court protection also might make it more difficult to retain management and other employees necessary to the success and growth of our business.
Other significant risks include the following:
•the company's ability to consummate the Plan;
•the high costs of bankruptcy and related fees;
•the imposition of restrictions or obligations on the company by regulators related to
•the bankruptcy and emergence from Chapter 11;
•the company's ability to obtain sufficient financing to allow us to emerge from bankruptcy and execute its business plan post-emergence;
•the company's ability to maintain its relationships with our suppliers, service providers, customers, employees, and other third parties;
•the company's ability to maintain contracts that are critical to its operations; and
•the actions and decisions of the company's debtholders and other third parties who have interests in the company's Chapter 11 Cases that may be inconsistent with the company's plans.
Delays in the Chapter 11 Cases could increase the risks of our being unable to reorganize the company's business and emerge from bankruptcy and increase costs associated with the bankruptcy process.
There Is a Risk of Termination of the Restructuring Support Agreement.
To the extent that events giving rise to termination of the Restructuring Support Agreement occur, the Restructuring Support Agreement may terminate prior to the Confirmation or Consummation of the Plan, which could result in the loss of support for the Plan by important creditor constituencies and could result in the loss of use of cash collateral by the Debtors under certain circumstances. Any such loss of support could adversely affect the Debtors’ ability to confirm and consummate the Plan.
Parties in Interest May Object to the Plan’s Classification of Claims and Interests.
Section 1122 of the Bankruptcy Code provides that a plan may place a claim or an equity interest in a particular class only if such claim or equity interest is substantially similar to the other claims or equity interests in such class. The Debtors believe that the classification of the Claims and Interests under the Plan complies with the requirements set forth in the Bankruptcy Code because the Debtors created Classes of Claims and Interests each encompassing Claims or Interests, as applicable, that are substantially similar to the other Claims or Interests, as applicable, in each such Class. Nevertheless, there can be no assurance that the Bankruptcy Court will reach the same conclusion.
The Conditions Precedent to the Effective Date of the Plan May Not Occur.
As more fully set forth in Article IX of the Plan, the Confirmation Date and the Effective Date of the Plan are subject to a number of conditions precedent. If such conditions precedent are not met or waived, the Confirmation Date or the Effective Date will not take place.
The Debtors May Fail to Satisfy Vote Requirements.
If votes are received in number and amount sufficient to enable the Bankruptcy Court to confirm the Plan, the Debtors intend to seek, as promptly as practicable thereafter, Confirmation of the Plan. In the event that sufficient votes are not received, the Debtors may seek Confirmation of the Plan pursuant to section 1129(b) of the Bankruptcy Code with respect to any rejecting Class of Claims, or may seek to confirm an alternative chapter 11 plan or transaction. There can be no assurance that the terms of any such alternative chapter 11 plan or other transaction would be similar or as favorable to the Holders of Interests and Allowed Claims as those proposed in the Plan, and the Debtors do not believe that any such transaction exists or is likely to exist that would be more beneficial to the Estates than the Plan.
The Debtors May Not Be Able to Secure Confirmation of the Plan.
Section 1129 of the Bankruptcy Code sets forth the requirements for confirmation of a chapter 11 plan, and requires, among other things, a finding by the Bankruptcy Court that: (a) such plan “does not unfairly discriminate” and is “fair and equitable” with respect to any non-accepting classes; (b) confirmation of such plan is not likely to be followed by a liquidation or a need for further financial reorganization unless such liquidation or reorganization is contemplated by the plan; and (c) the value of distributions to non-accepting holders of claims or equity interests within a particular class under such plan will not be less than the value of distributions such holders
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would receive if the debtors were liquidated under chapter 7 of the Bankruptcy Code.
There can be no assurance that the requisite acceptances to confirm the Plan will be received. Even if the requisite acceptances are received, there can be no assurance that the Bankruptcy Court will confirm the Plan. A non-accepting Holder of an Allowed Claim might challenge either the adequacy of the Disclosure Statement or whether the balloting procedures and voting results satisfy the requirements of the Bankruptcy Code or Bankruptcy Rules. Even if the Bankruptcy Court determines that the Disclosure Statement, the balloting procedures, and voting results are appropriate, the Bankruptcy Court could still decline to confirm the Plan if it finds that any of the statutory requirements for Confirmation are not met. If a chapter 11 plan of reorganization is not confirmed by the Bankruptcy Court, it is unclear whether the Debtors will be able to reorganize their business and what, if anything, Holders of Interests and Allowed Claims against them would ultimately receive.
The Debtors, subject to the terms and conditions of the Plan, reserve the right to modify the terms and conditions of the Plan as necessary for Confirmation. Any such modifications could result in less favorable treatment of any non-accepting class of Claims or Interests, as well as any class junior to such non-accepting class, than the treatment currently provided in the Plan. Such a less favorable treatment could include a distribution of property with a lesser value than currently provided in the Plan or no distribution whatsoever under the Plan.
In addition, at the outset of the Chapter 11 Cases, the Bankruptcy Code provides the Debtors with the exclusive right to propose the Plan and prohibits creditors and others from proposing a plan. If the Bankruptcy Court terminates that right, however, or the exclusivity period expires, there could be a material adverse effect on the Debtors’ ability to achieve confirmation of the Plan in order to achieve the Debtors’ stated goals.
Nonconsensual Confirmation.
In the event that any impaired class of claims or interests does not accept a chapter 11 plan, a bankruptcy court may nevertheless confirm a plan at the proponents’ request if at least one impaired class (as defined under section 1124 of the Bankruptcy Code) has accepted the plan (with such acceptance being determined without including the vote of any “insider” in such class), and, as to each impaired class that has not accepted the plan, the bankruptcy court determines that the plan “does not discriminate unfairly” and is “fair and equitable” with respect to the dissenting impaired class(es). The Debtors believe that the Plan satisfies these requirements, and the Debtors may request such nonconsensual Confirmation in accordance with subsection 1129(b) of the Bankruptcy Code. Nevertheless, there can be no assurance that the Bankruptcy Court will reach this conclusion. In addition,
the pursuit of nonconsensual Confirmation or Consummation of the Plan may result in, among other things, increased expenses relating to professional compensation.
Continued Risk Upon Confirmation.
Even if the Plan is consummated, the Debtors will continue to face a number of risks, including certain risks that are beyond their control, such as further deterioration or other changes in economic conditions, changes in the industry, potential revaluing of their assets due to chapter 11 proceedings, and increasing expenses. Some of these concerns and effects typically become more acute when a case under the Bankruptcy Code continues for a protracted period without indication of how or when the case may be completed. As a result of these risks and others, there is no guarantee that a chapter 11 plan of reorganization reflecting the Plan will achieve the Debtors’ stated goals.
Furthermore, even if the Debtors’ debts are reduced and/or discharged through the Plan, the Debtors may need to raise additional funds through public or private debt or equity financing or other various means to fund the Debtors’ businesses after the completion of the proceedings related to the Chapter 11 Cases. Adequate funds may not be available when needed or may not be available on favorable terms.
The Chapter 11 Cases May Be Converted to Cases under Chapter 7 of the Bankruptcy Code or One or More of the Chapter 11 Cases May Be Dismissed.
If the Bankruptcy Court finds that it would be in the best interest of creditors and/or the debtor in a chapter 11 case, the Bankruptcy Court may convert a chapter 11 bankruptcy case to a case under chapter 7 of the Bankruptcy Code. In such event, a chapter 7 trustee would be appointed or elected to liquidate the debtor’s assets for distribution in accordance with the priorities established by the Bankruptcy Code. The Debtors believe that liquidation under chapter 7 would result in significantly smaller distributions being made to creditors than those provided for in a chapter 11 plan because of (a) the likelihood that the assets would have to be sold or otherwise disposed of in a disorderly fashion over a short period of time, rather than reorganizing or selling the business as a going concern at a later time in a controlled manner, (b) additional administrative expenses involved in the appointment of a chapter 7 trustee, and (c) additional expenses and Claims, some of which would be entitled to priority, that would be generated during the liquidation, including Claims resulting from the rejection of Unexpired Leases and other Executory Contracts in connection with cessation of operations.
Additionally, if the Bankruptcy Court finds that the Debtors have incurred substantial or continuing loss or diminution to the estate and lack of a reasonable likelihood of rehabilitation of the Debtors or the ability to effectuate substantial consummation of a confirmed plan, or
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otherwise determines that cause exists, the Bankruptcy Court may dismiss one or more of the Chapter 11 Cases. In such event, the Debtors would be unable to confirm the Plan with respect to the applicable Debtor or Debtors, which may ultimately result in significantly smaller distributions to creditors than those provided for in the Plan.
The Debtors May Object to the Amount or Classification of a Claim or Interest.
Except as otherwise provided in the Plan, the Debtors reserve the right to object to the amount or classification of any Claim or Interest under the Plan. The estimates set forth in the Disclosure Statement cannot be relied upon by any Holder of a Claim where such Claim is subject to an objection. Any Holder of a Claim that is subject to an objection thus may not receive its expected share of the estimated distributions described in the Disclosure Statement.
Releases, Injunctions, and Exculpations Provisions May Not Be Approved.
Article VIII of the Plan provides for certain releases, injunctions, and exculpations, including a release of liens and third-party releases that may otherwise be asserted against the Debtors, Reorganized Debtors, or Released Parties, as applicable. The releases, injunctions, and exculpations provided in the Plan are subject to objection by parties in interest and may not be approved. If the releases are not approved, certain Released Parties may withdraw their support for the Plan.
The releases provided to the Released Parties and the exculpation provided to the Exculpated Parties are necessary to the success of the Debtors’ reorganization because the Released Parties and Exculpated Parties have made significant contributions to the Debtors’ reorganizational efforts that are important to the success of the Plan and have agreed to make further contributions, including by agreeing to massive reductions in the amounts of their claims against the Debtors’ estates and facilitating a critical source of post-emergence liquidity, but only if they receive the full benefit of the Plan’s release and exculpation provisions. The Plan’s release and exculpation provisions are an inextricable component of the Plan.
The Debtors Cannot Predict the Amount of Time Spent in Bankruptcy for the Purpose of Implementing the Plan, and a Lengthy Bankruptcy Proceeding Could Disrupt the Debtors’ Businesses, as Well as Impair the Prospect for Reorganization on the Terms Contained in the Plan.
Although the Debtors propose to complete the process of obtaining Confirmation and Consummation of the Plan within one hundred and twenty (120) days from the Petition Date, the process could last considerably longer if, for example, Confirmation is contested or the conditions to Confirmation or Consummation are not satisfied or waived.
While the Debtors have made efforts to minimize the length of the Chapter 11 Cases, it is impossible to predict with certainty the amount of time that the Debtors may spend in bankruptcy, and the Debtors cannot be certain that the Plan will be confirmed. Even if confirmed on a timely basis, a bankruptcy proceeding to confirm the Plan could itself have an adverse effect on the Debtors’ businesses. There is a risk, due to uncertainty about the Debtors’ futures that, among other things: employees could be distracted from performance of their duties or more easily attracted to other career opportunities; and suppliers, vendors, or other business partners could terminate their relationship with the Debtors or demand financial assurances or enhanced performance, any of which could impair the Debtors’ prospects and ability to generate stable, recurring cash flows.
Lengthy Chapter 11 Cases also would involve additional expenses, putting strain on the Debtors’ liquidity position, and divert the attention of management from the operation of the Debtors’ businesses.
The disruption that the bankruptcy process would have on the Debtors’ businesses could increase with the length of time it takes to complete the Chapter 11 Cases. If the Debtors are unable to obtain Confirmation of the Plan on a timely basis, because of a challenge to the Plan or otherwise, the Debtors may be forced to operate in bankruptcy for an extended period of time while they try to develop a different plan of reorganization that can be confirmed. A protracted bankruptcy case could increase both the probability and the magnitude of the adverse effects described above.
Risk of Non-Occurrence of the Effective Date.
Although the Debtors believe that the Effective Date may occur quickly after the Confirmation Date, there can be no assurance as to such timing or as to whether the Effective Date will, in fact, occur. As more fully set forth in Article IX of the Plan, the Effective Date of the Plan is subject to a number of conditions precedent. If such conditions precedent are not waived or not met, the Effective Date will not take place.
The Consummation of the Transactions Contemplated by the Plan May Not Occur.
The company will not complete the transactions contemplated by the Plan unless and until all conditions precedent to the consummation of the Plan are satisfied or waived. Those conditions include:
•the entry by the Bankruptcy Court of the Confirmation Order, with such Confirmation Order being a final order and in full force and effect; and
•such other conditions as mutually agreed by the company and two of its U.S. subsidiaries that has
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Item 1A. Risk Factors
executed the Restructuring Support Agreement and the Consenting Stakeholders.
Some of these conditions are not under our control. There can be no assurance that any or all of the conditions precedent will be satisfied or waived or that these transactions will be completed as currently contemplated or at all. Even if these transactions are completed, they may not be completed on the anticipated schedule or terms. If these transactions are not completed on the anticipated schedule or terms, the company may incur significant additional costs and expenses.
Risks Related to Recoveries under the Plan (as outlined in the Disclosure Statement previously filed with the Bankruptcy Court).
The Reorganized Debtors May Not Be Able to Achieve Their Projected Financial Results.
The Reorganized Debtors may not be able to achieve their projected financial results. The Financial Projections set forth in the Disclosure Statement represent the Debtors’ management team’s best estimate of the Debtors’ future financial performance, which is necessarily based on certain assumptions regarding the anticipated future performance of the Reorganized Debtors’ operations, as well as the United States and world economies in general, and the industry segments in which the Debtors operate in particular. While the Debtors believe that the Financial Projections contained in the Disclosure Statement are reasonable, there can be no assurance that they will be realized. If the Reorganized Debtors do not achieve their projected financial results or are unable to procure sufficient exit financing to effectuate the restructuring transactions, the value of the New Common Equity or the New Preferred Equity may be negatively affected and the Reorganized Debtors may lack sufficient liquidity to continue operating as planned after the Effective Date. Moreover, the financial condition and results of operations of the Reorganized Debtors from and after the Effective Date may not be comparable to the financial condition or results of operations reflected in the Debtors’ historical financial statements.
The New Common Equity is Subject to Dilution.
The ownership percentage represented by the New Common Equity distributed under the Plan will be subject to dilution from the Management Incentive Plan, the New Preferred Equity, the Backstop Equity Premium, and the Exit Secured Convertible Notes.
A Liquid Trading Market for the Shares of New Common Equity and New Preferred Equity May Not Develop.
The New Common Equity and the New Preferred Equity will be a new issuance of securities, and there is no established trading market for those securities. An active trading market for the securities may never develop, or if
developed, may not be sustained. The Debtors do not intend to apply for the New Common Equity or the New Preferred Equity to be listed on any securities exchange or to arrange for quotation on any automated dealer quotation system. The liquidity of any market for shares of New Common Equity or New Preferred Equity will depend upon, among other things, the number of holders of shares of New Common Equity or New Preferred Equity, the Reorganized Debtors’ financial performance, and the market for similar securities, none of which can be determined or predicted. Accordingly, there can be no assurance that an active trading market for the New Common Equity or the New Preferred Equity will develop, nor can any assurance be given as to the liquidity or prices at which such securities might be traded. In the event an active trading market does not develop, the ability to transfer or sell New Common Equity or New Preferred Equity may be substantially limited. The lack of an active market may also impair your ability to sell your shares of New Common Equity at the time you wish to sell them or at a price you consider reasonable. The lack of an active market may also reduce the market price of your shares of New Common Equity or New Preferred Equity. Accordingly, you may be required to bear the financial risk of your ownership of the New Common Equity or New Preferred Equity indefinitely.
Certain of the New Common Equity and the New Preferred Equity Issued Under the Plan May Not Be Resold or Otherwise Transferred Unless Such Resale or Transfer is Registered Under the Securities Act or an Exemption from Registration Applies.
Upon the Effective Date, the issuance of New Common Equity and New Preferred Equity will not be registered under the Securities Act or any Blue Sky Laws.
To the extent that shares of the New Common Equity or the New Preferred Equity issued under the Plan are covered by section 1145(a)(1) of the Bankruptcy Code, such securities may be resold by the holders thereof without registration under the Securities Act unless the holder is an “underwriter,” as defined in section 1145(b) of the Bankruptcy Code with respect to such securities; provided, however, such rights or shares of such New Common Equity will not be freely tradeable if, at the time of transfer, the holder is an “affiliate” of the Reorganized Debtors as defined in Rule 144(a)(1) under the Securities Act or had been such an “affiliate” within 90 days of such transfer. Such affiliate holders would only be permitted to sell such securities without registration if they are able to comply with an applicable exemption from registration, including Rule 144 under the Securities Act. Resales by Holders of Claims who receive New Common Equity and New Preferred Equity pursuant to the Plan that are deemed to be “underwriters” would not be exempted by section 1145 of the Bankruptcy Code from registration under the Securities Act or applicable Law. Such Holders would only be permitted to sell such securities without registration if they are able to comply with an applicable exemption from registration, including Rule 144 under the Securities Act.
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Item 1A. Risk Factors
To the extent that securities issued pursuant to the Plan are not covered by section 1145(a)(1) of the Bankruptcy Code, including with respect to the 4(a)(2) Securities, such securities shall be issued pursuant to section 4(a)(2) under the Securities Act and will be deemed “restricted securities” that may not be sold, exchanged, assigned, or otherwise transferred unless they are registered, or an exemption from registration applies, under the Securities Act. Holders of such restricted securities will not have a right to have their restricted securities registered and will therefore not be able to resell them except in accordance with an available exemption from registration under the Securities Act.
Under Rule 144 of the Securities Act, the resale of restricted securities is permitted if certain conditions are met, and these conditions vary depending on whether the holder of the restricted securities is an “affiliate” of the issuer, as defined in Rule 144. A non-affiliate who has not been an affiliate of the issuer during the preceding ninety days may resell restricted securities after a one-year holding period. An affiliate may also resell restricted securities after a one-year holding period but only if certain current public information regarding the issuer is available at the time of the sale and only if the affiliate also complies with the volume, manner of sale, and notice requirements of Rule 144. Since the Reorganized Debtors may not be subject to the reporting requirements of the Exchange Act and do not plan to list any of their securities on a national stock exchange, there can be no assurance that there will be current public information available about the issuer of the New Common Equity and the New Preferred Equity.
Holders of New Common Equity and New Preferred Equity who are deemed to be “underwriters” under Section 1145(b) of the Bankruptcy Code will also be subject to restrictions under the Securities Act on their ability to resell those securities.
The Reorganized Debtors do not intend to register or apply to list the New Common Equity or the New Preferred Equity on a national securities exchange. The Debtors make no representation regarding the right of any holder of New Common Equity or New Preferred Equity to freely resell the New Common Equity or New Preferred Equity.
Holders of the New Common Equity and the New Preferred Equity May Not Have Access to the Same Level of Information Available to Holders of Registered Securities.
The New Common Equity and the New Preferred Equity may not be registered under the Securities Act or any state securities laws and the Reorganized Debtors may not otherwise expect to have securities registered under the Exchange Act. As a result, the Reorganized Debtors may not be subject to the reporting requirements of the Exchange Act, and the information available to holders of the New Common Equity and the New Preferred Equity
may be less than would be required if the New Common Equity or the New Preferred Equity were registered. Such a reduced availability of information may impair your ability to evaluate your ownership and the marketability of the New Common Equity or the New Preferred Equity.
Certain Claimants May Receive a Substantial Amount of the Shares of New Common Equity and, Accordingly, May Have Substantial Influence.
Assuming that the Effective Date occurs, certain Holders of Claims and the Backstop Parties may receive a substantial amount of the equity of the Reorganized Debtors which, in turn, may allow such Holders or such Backstop Parties to have substantial influence over the Reorganized Debtors. Accordingly, such Holders or such Backstop Parties may be in a position to influence matters requiring the approval of the shareholders of the Reorganized Debtors, including, among other things, the election of directors and the approval of a change of control. Such Holders or such Backstop Parties may have interests that differ from those of the other shareholders and may vote in a manner adverse to the interests of other shareholders. This concentration of ownership may facilitate or may delay, prevent, or deter a change of control of the Reorganized Debtors and, consequently, impact the value of the New Common Equity and the New Preferred Equity. In addition, such a substantial shareholder may sell all or a large portion of its shares within a short period of time, which may adversely affect the share trading price. Such a substantial shareholder may, on its own account, pursue acquisition opportunities that may be complementary to the Reorganized Debtors’ businesses, and as a result, such acquisition opportunities may be unavailable to the Reorganized Debtors which, in turn, may have a material adverse impact on the Reorganized Debtors’ businesses, financial condition, and operating results.
Certain Tax Implications of the Plan.
Holders of Allowed Claims should carefully review Article XII of the Disclosure Statement entitled “Certain U.S. Federal Income Tax Consequences of the Plan,” to determine how the tax implications of the Plan and the Chapter 11 Cases may affect the Debtors, the Reorganized Debtors, and Holders of Claims, as well as certain tax implications of owning and disposing of the consideration to be received pursuant to the Plan.
The Debtors May Not Be Able to Accurately Report or Timely File Their Financial Results.
The Debtors have established internal controls over financial reporting. However, internal controls over financial reporting may not prevent or detect misstatements or omissions in the Debtors’ financial statements because of their inherent limitations, including the possibility of human error, and the circumvention or overriding of controls or fraud. Therefore, even effective internal
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controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If the Debtors fail to maintain the adequacy of their internal controls, the Debtors may be unable to provide financial information in a timely and reliable manner within the time periods required under the terms of the agreements governing the Debtors’ indebtedness. Any such difficulties or failure could materially adversely affect the Debtors’ business, results of operations, and financial condition. Further, the Debtors may discover other internal control deficiencies in the future and/or fail to adequately correct previously identified control deficiencies, which could materially adversely affect the Debtors’ businesses, results of operations, and financial condition. In addition, if the Debtors emerge from chapter 11, the Debtors may be required to adopt “fresh start” accounting in accordance with Accounting Standards Codification 852 (“Reorganizations”) in which case their assets and liabilities will be recorded at fair value as of the fresh start reporting date. As a result, there could be risk that the Debtors will not be able to timely file their financial results.
Contingencies Could Affect Allowed Claims Classes.
The distributions available to Holders of Allowed Claims under the Plan can be affected by a variety of contingencies, including, without limitation, whether the Bankruptcy Court orders certain Allowed Claims to be subordinated to other Allowed Claims. The occurrence of any and all such contingencies, which could affect distributions available to Holders of Allowed Claims under the Plan, will not affect the validity of the vote taken by the Impaired Classes to accept or reject the Plan or require any sort of revote by the Impaired Classes.
The estimated Claims set forth in the Disclosure Statement are based on various assumptions, and the actual Allowed amounts of Claims may significantly differ from the estimates. Should one or more of the underlying assumptions ultimately prove to be incorrect, the actual Allowed amounts of Claims may vary from the estimated amounts of Claims contained in the Disclosure Statement. Moreover, the Debtors cannot determine with any certainty at this time the number or amount of Claims that will ultimately be Allowed. Such differences may materially and adversely affect, among other things, the recoveries to Holders of Allowed Claims under the Plan.
Risks Related to the Debtors’ and the Reorganized Debtors’ Businesses.
The Reorganized Debtors May Not Be Able to Generate Sufficient Cash to Service All of Their Indebtedness.
The Reorganized Debtors’ ability to make scheduled payments on, or refinance their debt obligations, depends
on the Reorganized Debtors’ financial condition and operating performance, which are subject to prevailing economic, industry, and competitive conditions and to certain financial, business, legislative, regulatory, and other factors beyond the Reorganized Debtors’ control. The Reorganized Debtors may be unable to maintain a level of cash flow from operating activities sufficient to permit the Reorganized Debtors to pay the principal, premium, if any, and interest and/or fees on their indebtedness, including, without limitation, anticipated borrowings under the Exit Facilities upon emergence.
The Debtors Will Be Subject to the Risks and Uncertainties Associated with the Chapter 11 Cases.
For the duration of the Chapter 11 Cases, the Debtors’ ability to operate, develop, and execute a business plan, and continue as a going concern, will be subject to the risks and uncertainties associated with bankruptcy. These risks include the following: (a) ability to develop, confirm, and consummate the restructuring transactions specified in the Plan; (b) ability to obtain Bankruptcy Court approval with respect to motions filed in the Chapter 11 Cases from time to time; (c) ability to maintain relationships with suppliers, vendors, service providers, customers, employees, and other third parties; (d) ability to maintain contracts that are critical to the Debtors’ operations; (e) ability of third parties to seek and obtain Bankruptcy Court approval to terminate contracts and other agreements with the Debtors; (f) ability of third parties to seek and obtain Bankruptcy Court approval to terminate or shorten the exclusivity period for the Debtors to propose and confirm a chapter 11 plan, to appoint a chapter 11 trustee, or to convert the Chapter 11 Cases to chapter 7 proceedings; and (g) the actions and decisions of the Debtors’ creditors and other third parties who have interests in the Chapter 11 Cases that may be inconsistent with the Debtors’ plans.
These risks and uncertainties could affect the Debtors’ businesses and operations in various ways. For example, negative events associated with the Chapter 11 Cases could adversely affect the Debtors’ relationships with suppliers, customers, employees, and other third parties, which in turn could adversely affect the Debtors’ operations and financial condition. Also, the Debtors will need the prior approval of the Bankruptcy Court for transactions outside the ordinary course of business, which may limit the Debtors’ ability to respond timely to certain events or take advantage of certain opportunities. Because of the risks and uncertainties associated with the Chapter 11 Cases, the Debtors cannot accurately predict or quantify the ultimate impact of events that occur during the Chapter 11 Cases that may be inconsistent with the Debtors’ plans.
Operating in Bankruptcy for a Long Period of Time May Harm the Debtors’ Businesses.
The Debtors’ future results will be dependent upon the successful confirmation and implementation of a plan of reorganization. A long period of operations under
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Item 1A. Risk Factors
Bankruptcy Court protection could have a material adverse effect on the Debtors’ businesses, financial condition, results of operations, and liquidity. So long as the proceedings related to the Chapter 11 Cases continue, senior management will be required to spend a significant amount of time and effort dealing with the reorganization instead of focusing exclusively on business operations. A prolonged period of operating under Bankruptcy Court protection also may make it more difficult to retain management and other key personnel necessary to the success and growth of the Debtors’ businesses. In addition, the longer the proceedings related to the Chapter 11 Cases continue, the more likely it is that customers and suppliers will lose confidence in the Debtors’ ability to reorganize their businesses successfully and will seek to establish alternative commercial relationships.
So long as the Chapter 11 Cases continue, the Debtors may be required to incur substantial costs for professional fees and other expenses associated with the administration of the Chapter 11 Cases. If the Chapter 11 Cases last longer than anticipated, the Debtors will require additional debtor-in-possession financing to fund the Debtors’ operations. If the Debtors are unable obtain such financing in those circumstances, the chances of successfully reorganizing the Debtors’ businesses may be seriously jeopardized, the likelihood that the Debtors will instead be required to liquidate or sell their assets may be increased, and, as a result, creditor recoveries may be significantly impaired.
Furthermore, the Debtors cannot predict the ultimate amount of all settlement terms for the liabilities that will be subject to a plan of reorganization. Even after a plan of reorganization is approved and implemented, the Reorganized Debtors’ operating results may be adversely affected by the possible reluctance of prospective lenders and other counterparties to do business with a company that recently emerged from bankruptcy protection.
Financial Results May Be Volatile and May Not Reflect Historical Trends.
During the Chapter 11 Cases, the Debtors expect that their financial results will continue to be volatile as asset impairments, asset dispositions, restructuring activities and expenses, contract terminations and rejections, significant restructuring fees, and/or claims assessments may significantly impact the Debtors’ consolidated financial statements. As a result, the Debtors’ historical financial performance likely will not be indicative of their financial performance after the Petition Date.
In addition, if the Debtors emerge from chapter 11, the amounts reported in subsequent consolidated financial statements may materially change relative to historical consolidated financial statements, including as a result of revisions to the Debtors’ operating plans pursuant to a plan of reorganization. The Debtors also may be required to adopt “fresh start” accounting in accordance with Accounting Standards Codification 852
(“Reorganizations”) in which case their assets and liabilities will be recorded at fair value as of the fresh start reporting date, which may differ materially from the recorded values of assets and liabilities on the Debtors’ consolidated balance sheets. The Debtors’ financial results after the application of fresh start accounting also may be different from historical trends.
The Financial Projections are based on assumptions that are an integral part of the projections, including Confirmation and Consummation of the Plan in accordance with its terms, the anticipated future performance of the Debtors, industry performance, general business and economic conditions, and other matters, many of which are beyond the control of the Debtors and some or all of which may not materialize.
The Financial Projections set forth in the Disclosure Statement represent the best estimate of the future financial performance of the Debtors based on currently known facts and assumptions about future operations as well as the United States and world economies in general, and the relevant industries in which the Debtors operate. The actual financial results may differ significantly from the projections. If the Debtors do not achieve their projected financial results, then the value of the Debtors’ debt or equity issued pursuant to the Plan may experience a decline and the Debtors may lack sufficient liquidity to continue operating as planned after the Effective Date. There are numerous factors and assumptions inherent in estimating the Debtors’ future financial results, many of which are beyond the Debtors’ control.
The Debtors’ Substantial Liquidity Needs May Impact the Debtors’ Ability to Operate.
The Debtors’ business requires sufficient liquidity to ensure that the Debtors’ manufacturing and distribution operations are maintained. If the Debtors’ cash flow from operations remains depressed or decreases, the Debtors may not have the ability to expend the capital necessary to improve or maintain their current operations, resulting in decreased revenues over time.
The Debtors face uncertainty regarding the adequacy of their liquidity and capital resources. In addition to the cash necessary to fund ongoing operations, the Debtors have incurred significant Professional fees and other costs in connection with the Chapter 11 Cases and expect to continue to incur significant Professional fees and costs throughout the remainder of the Chapter 11 Cases. The Debtors cannot guarantee that cash on hand, cash flow from operations, and cash provided by the DIP Facilities will be sufficient to continue to fund their operations and allow the Debtors to satisfy obligations related to the Chapter 11 Cases until the Debtors are able to emerge from bankruptcy protection.
The Debtors’ liquidity, including the ability to meet ongoing operational obligations, will be dependent upon, among other things: (a) their ability to comply with the
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Item 1A. Risk Factors
terms and conditions of the DIP Orders; (b) their ability to maintain adequate cash on hand; (c) their ability to develop, confirm, and consummate the Plan or other alternative restructuring transaction; and (d) the cost, duration, and outcome of the Chapter 11 Cases. The Debtors’ ability to maintain adequate liquidity depends, in part, upon industry conditions and general economic, financial, competitive, regulatory, and other factors beyond the Debtors’ control. In the event that cash on hand, cash flow from operations, and cash provided under the DIP Facilities are not sufficient to meet the Debtors’ liquidity needs, the Debtors may be required to seek additional financing. The Debtors can provide no assurance that additional financing would be available or, if available, offered to the Debtors on acceptable terms. The Debtors’ access to additional financing is, and for the foreseeable future likely will continue to be, extremely limited if it is available at all. The Debtors’ long-term liquidity requirements and the adequacy of their capital resources are difficult to predict at this time.
The Reorganized Debtors May Be Adversely Affected by Potential Litigation, Including Litigation Arising Out of the Chapter 11 Cases.
In the future, the Reorganized Debtors may become parties to litigation. In general, litigation can be expensive and time consuming to bring or defend against. Such litigation could result in settlements or damages that could significantly affect the Reorganized Debtors’ financial results. It is also possible that certain parties will commence litigation with respect to the treatment of their Claims under the Plan. It is not possible to predict the potential litigation that the Reorganized Debtors may become party to nor the final resolution of such litigation. The impact of any such litigation on the Reorganized Debtors’ businesses and financial stability, however, could be material.
Certain Claims May Not Be Discharged and Could Have a Material Adverse Effect on the Debtors’ Financial Condition and Results of Operations.
The Bankruptcy Code provides that the confirmation of a plan of reorganization discharges a debtor from substantially all debts arising prior to confirmation. With few exceptions, all Claims that arise prior to the Debtors’ filing of their Petitions or before confirmation of the plan of reorganization (a) would be subject to compromise and/or treatment under the plan of reorganization and/or (b) would be discharged in accordance with the terms of the plan of reorganization. Any Claims not ultimately discharged through a plan of reorganization could be asserted against the reorganized entity and may have an adverse effect on the Reorganized Debtors’ financial condition and results of operations.
Termination of the Restructuring Support Agreement, Inability to Confirm the Plan, or Other Impediments to a Successful and Expedient Chapter 11 Process Could
Adversely Affect the Debtors’ Relationship with their Key Suppliers.
Given the highly regulated nature of the Debtors’ business, the Debtors rely on certain sole source suppliers and suppliers approved by regulators. Certain suppliers provide the company with specially fabricated parts for the company’s power wheelchairs, manual wheelchairs, long term care beds, home care medical beds, patient lifts, and other home and long-term care products and supplies, which parts are either based on patented designs available only from a specific manufacturer or that are made or provided to the company’s exact specifications. As a result, there is no alternative provider for certain critical goods. Additionally, when selecting suppliers for certain products, the Debtors must comply with FDA regulations associated with supplier selection, qualification, and approval. Given the highly specialized and regulated supplier network the company relies on, a swift exit from chapter 11 with minimal disruption on the Debtors’ operations is essential for the Debtors to continue relationships with their key suppliers and, in turn, satisfy customer orders, including the elevated backlog of existing orders.
The Company’s Ability to Use Net operating Loss Carryforwards (“NOLs”) May Become Subject to Limitation, or May Be Reduced or Eliminated, in Connection with the Implementation of a Plan of Reorganization. The Bankruptcy Court Has Entered an Order That Is Designed to Protect Our NOLs Until a Plan of Reorganization is Consummated.
Generally, a company generates NOLs if the operating expenses it has incurred exceed the revenues it has earned during a single tax year. A company may apply, or “carry forward,” NOLs to reduce future tax payments (subject to certain conditions and limitations). To date, the company has generated a significant amount of U.S. federal NOLs.
We expect that we may undergo an ownership change under Section 382 of the Code in connection with the consummation of a plan of reorganization. Nevertheless, we believe these NOLs are a valuable asset for us, particularly in the context of the Chapter 11 Cases. In February 2023, the Bankruptcy Court entered an order that sets forth procedures (including notice requirements) that certain shareholders and potential shareholders must comply with regarding transfers of, or declarations of worthlessness with respect to, our common stock, as well as certain obligations with respect to notifying us of current share ownership (the “Procedures”). The Procedures are designed to reduce the likelihood of an “ownership change” occurring prior to the consummation of a bankruptcy plan of reorganization, both to ensure that our NOLs (and other tax attributes) are available to address the immediate tax consequences of any such bankruptcy plan of reorganization and to preserve the potential ability to rely on certain rules that apply to ownership changes occurring as a result of a bankruptcy plan of
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Item 1A. Risk Factors
reorganization. However, there is no assurance that the Procedures will prevent all transfers that could result in such an “ownership change.”
In addition, our NOLs (and other tax attributes) may be subject to use in connection with the implementation of any bankruptcy plan of reorganization or reduction as a result of any cancellation of indebtedness income arising in connection with the implementation of any bankruptcy plan of reorganization. As such, at this time, there can be no assurance that we will have NOLs to offset future taxable income.
Commercial and Operational Risks
If the company's business improvement efforts are ineffective, the company's strategic goals, business plans, financial performance or liquidity could be negatively impacted.
The company has been implementing a multi-year business improvement strategy intended to substantially improve its business and re-orient its resources to a more clinically complex mix of products and solutions. To date, this strategy has included actions to re-orient the company's global commercial team, continue the company's innovation pipeline, shift its product mix, develop and expand its talent, and strengthen its balance sheet. The company also has taken steps to realign infrastructure and processes that are intended to drive efficiency and reduce costs.
The company may not be successful in achieving the full long-term growth and profitability, operating efficiencies and cost reductions, or other benefits expected from these business improvement efforts in a timely manner or at all. The company also may experience business disruptions associated with these activities. Further, the full benefits of the strategy, if realized, may be realized later than expected, the costs of implementing the strategy may be greater than anticipated, and the company may lack adequate cash or capital or may not be able to attract and retain the necessary talent, to complete the improvement actions. If these business improvement measures are not successful, the company may undertake additional actions, which could result in future expenses. If the company's business improvement efforts prove ineffective, the company's ability to achieve its strategic goals and business plans, and the company's financial performance, including its ability to repay or refinance its indebtedness and satisfy other obligations, may be materially adversely affected. Under these circumstances, the company may require additional financing, which may be difficult or expensive to obtain, and the company can make no assurances that it would be available on terms acceptable to the company, if at all. Refer to Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.” The company also may evaluate and
implement changes to its strategic goals and business plans, which may involve restructuring of its operations. If undertaken, any such restructuring may be substantial and involve significant effort and expense, and the company can make no assurances that such efforts, if undertaken, would be successful and result in improvements to the company business performance and financial condition,
If the company is unable to attract and retain critical IT Governance, Project Management and Contract Management competencies it may limit the effectiveness of the company's cost improvement and business efficiency initiatives and adversely affect the company's profitability and growth.
The company is implementing a multi-year business improvement strategy which involves projects focused on streamlining the company’s supply chain and operations infrastructure, upgrading and modernizing its information technology capabilities and implementation of new or upgraded ERP systems. In addition, the company has outsourced certain key functions to third-party service providers and may continue to do so in the future. The success of these activities is dependent on the company’s ability to maintain an adequate IT governance management structure and adequate capabilities in project management and contract management functions. Despite its efforts to build and maintain these capabilities, the company could have inadequate skills, personnel, management skills, or processes necessary to successfully implement the programs and projects necessary to successfully improve the business and achieve the intended operating efficiencies and cost reductions from such programs and projects, which in turn may adversely affect the company's profitability and growth.
Changes in government and other third-party payor reimbursement levels and practices have negatively impacted and could continue to negatively impact the company's revenues and profitability.
The company's products are sold primarily through a network of medical equipment and home health care providers, extended care facilities and other providers such as various government-provider agencies throughout the world. Many of these providers (the company's customers) are reimbursed for the products and services provided to their customers and patients by third-party payors, such as government programs, including Medicare and Medicaid, private insurance plans and managed care programs. Most of these programs set maximum reimbursement levels for some of the products sold by the company in the United States and abroad. If third-party payors deny coverage, make the reimbursement process or documentation requirements more uncertain or reduce their levels of reimbursement, or if the company is unable to reduce its costs of production to keep pace with decreases in
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Item 1A. Risk Factors
reimbursement levels, the company may be unable to sell the affected product(s) through its distribution channels on a profitable basis.
Reduced government reimbursement levels and changes in reimbursement policies have in the past added, and could continue to add, significant pressure to the company's revenues and profitability. For example, the National Competitive Bidding, or “NCB”, program introduced by CMS has had the effect of substantially reducing reimbursement and payment rates for medical equipment and supplies by Medicare. The reduced reimbursement and payment rates have, in some cases, prompted customers to consider lower-priced alternatives to the company's products and compelled the company to reduce prices on certain products, which has negatively impacted the company's revenues and profitability. In October 2020, CMS announced the delay to changes to NCB for three years. The potential impact of any modifications may be uncertain and may further negatively impact the company's revenues and profitability. Refer to “Item 1. Business -Government Regulation-National Competitive Bidding.”
Similar trends and concerns are occurring in state Medicaid programs. These recent changes to reimbursement policies, and any additional unfavorable reimbursement policies or budgetary cuts that may be adopted in the future, could adversely affect the demand for the company's products by customers who depend on reimbursement from the government-funded programs. The percentage of the company's overall sales that are dependent on Medicare or other insurance programs may increase as the portion of the U.S. population over age 65 continues to grow, making the company more vulnerable to reimbursement level reductions by these organizations. Reduced government reimbursement levels also could result in reduced private payor reimbursement levels because some third-party payors index their reimbursement schedules to Medicare fee schedules. Reductions in reimbursement levels also may affect the profitability of the company's customers and ultimately force some customers without strong financial resources to become unable to pay their bills as they come due or go out of business. The reimbursement reductions may prove to be so dramatic that some of the company's customers may not be able to adapt quickly enough to survive. The company is one of the industry's significant creditors and an increase in bankruptcies or financial weakness in the company's customer base could have an adverse effect on the company's financial results.
Outside the U.S., reimbursement systems vary significantly by country. Many foreign markets have government-managed health care systems that govern reimbursement for home health care products. The ability
of hospitals and other providers supported by such systems to purchase the company's products is dependent, in part, upon public budgetary constraints. Various countries have tightened reimbursement rates and other countries may follow. If adequate levels of reimbursement from third-party payors outside of the U.S. are not obtained, international sales of the company's products may decline, which could adversely affect the company's net sales.
The impact of all the above is uncertain and could have a material adverse effect on the company's business, financial condition, liquidity and results of operations.
If the company's products are not included within an adequate number of customer formularies, or if pricing policies otherwise favor competitors' products, the company's market share and gross margin could be negatively affected.
Many of the medical equipment and home health care providers to whom the company sells its products negotiate the price of products and develop formularies which establish pricing and reimbursement levels. Many of these providers also compensate their sales personnel based on the formulary position of the products they sell. Exclusion of a product from a formulary, unfavorable positioning of a product within a formulary, or lower compensation levels for customer sales personnel associated with the products can lead to such product's sharply reduced usage in the provider's patient population. If the company's products are not included, or favorably positioned, within an adequate number of formularies, or if the pricing policies or sales compensation programs of providers otherwise favor other products, the company's sales revenues, market share and gross margin could be negatively affected, which could have a material adverse effect on the company's results of operations and financial condition.
The company's industry is highly competitive and the consolidation of health care provider customers and the company's competitors could result in a loss of customers or in additional competitive pricing pressures.
The home medical equipment market is highly competitive and the company's products face significant competition from other well established manufacturers. Numerous initiatives and reforms instituted by legislators, regulators and third-party payors to reduce home medical equipment costs have caused pricing pressures which have resulted in a consolidation trend in the home medical equipment industry as well as among the company's customers, including home health care providers. In the past, some of the company's competitors, which may include distributors, have been lowering the purchase prices of their products in an effort to attract customers. This in turn has resulted in greater pricing pressures,
Part I Table of Contents
Item 1A. Risk Factors
including pressure to offer customers more competitive pricing terms, exclusion of products from or unfavorable position on provider formularies and the exclusion of certain suppliers from important market segments as group purchasing organizations, independent delivery networks and large single accounts continue to consolidate purchasing decisions for some of the company's customers. Further consolidation could result in a loss of customers, increased collectability risks, or increased competitive pricing pressures. In addition, as reimbursement pressures persist, some customers may directly source their own products to secure a low-cost advantage.
The company's business strategy relies on certain assumptions concerning demographic trends that impact the market for its products. If these assumptions prove to be incorrect, demand for the company's products may be lower than expected.
The company's ability to achieve its business objectives is subject to a variety of factors, including the relative increase in the aging of the general population. The company believes that these trends will increase the need for its products. The projected demand for the company's products could materially differ from actual demand if the company's assumptions regarding these trends and acceptance of its products by health care professionals and patients prove to be incorrect or do not materialize. If the company's assumptions regarding these factors prove to be incorrect, the company may not be able to successfully implement the company's business strategy, which could adversely affect the company's results of operations. In addition, the perceived benefits of these trends may be offset by competitive or business factors, such as the introduction of new products by the company's competitors or the emergence of other countervailing trends, including lower reimbursement and pricing.
Risks Related to Financial Results and Liquidity
The terms of the company's current and future debt facilities and financing arrangements, including restrictive covenants under such arrangements, may limit the company's flexibility in operating its business.
The company's ABL DIP Credit Agreement provides the company and certain of the company's U.S. and Canadian subsidiaries with the ability to borrow under senior secured revolving credit and swing line loan facilities. The ABL DIP Credit Agreement also deems the outstanding letters of credit issued under the ABL Credit Agreement to have been issued under the ABL DIP Credit Agreement but does not provide an obligation for further letters of credit to be issued. The aggregate borrowing availability under the credit facilities is determined based on borrowing base formulas set forth in the ABL DIP
Credit Agreement. The credit facilities under the ABL DIP Credit Agreement are secured by substantially all the company's domestic and Canadian assets, other than real estate. The ABL DIP Credit Agreement contains customary default provisions, with certain grace periods and exceptions, that include, among other things, failure to pay amounts due, breach of covenants, representations or warranties, bankruptcy, the occurrence of a material adverse effect, exclusion from any medical reimbursement program, and an interruption of any material manufacturing facilities for more than ten consecutive days. There is no assurance that additional availability would be accessible under the ABL DIP Credit Agreement and such availability would be influenced by the amount of U.S. and Canadian assets which collateralize the agreement.
In addition, the DIP Credit Agreements and the agreements that will govern the company’s post-emergence indebtedness, and any future indebtedness the company incurs may contain, various negative covenants that restrict, among other things, the company’s indebtedness, liens, fundamental changes, asset sales, investments and other matters. In addition, the Term DIP Credit Agreement and certain of the agreements that will govern the company’s post-emergence indebtedness have and will have a minimum liquidity requirement. The company’s obligations under the DIP Credit Agreements and certain obligations that will be incurred in connection with emergence, collectively, are or will be secured by substantially all of the company’s assets. As a result, the company is limited in the manner in which it conducts its business and the company may be unable to engage in favorable business activities.
Despite the company’s current consolidated debt levels, subject to certain conditions and limitations in the DIP Credit Agreements and the agreements governing the company’s post-emergence indebtedness, the company may or will be able to incur additional debt in the future. Although the terms of the agreements governing existing debt restrict the company's ability to incur additional debt (including secured debt), such restrictions are subject to several exceptions and qualifications and such restrictions and qualifications may be waived or amended, and debt (including secured debt) incurred in compliance with such restrictions and qualifications (as they may be waived or amended) may be substantial. To the extent new debt, in particular secured debt, is added to the company's current debt levels, the substantial leverage risks described above and below would increase.
The restrictive terms of the company's credit agreement, term loan, convertible debt instruments and any future debt may limit the company's ability to conduct and expand its business and pursue its business strategies. The company's ability to comply with the provisions of its
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Item 1A. Risk Factors
existing debt agreements and agreements governing future debt can be affected by events beyond its control, including changes in general economic and business conditions, or by government enforcement actions, such as, for example, adverse impacts from the FDA consent decree of injunction. If the company is unable to comply with the provisions in the credit agreement or other debt, it could result in a default which could trigger acceleration of, or the right to accelerate, the related debt. Because of cross-default provisions in its agreements and instruments governing certain of the company's indebtedness, a default under the credit agreement or other debt could result in a default under, and the acceleration of, certain other company indebtedness. In addition, the company's lenders would be entitled to proceed against the collateral securing the indebtedness.
The company's ability to meet its liquidity needs will depend on many factors, including the operating performance of the business, as well as the company's continued compliance with the covenants under its credit agreement. Refer to “Commercial and Operational Risks - If the company's business improvement efforts are ineffective, the company's strategic goals, business plans, financial performance or liquidity could be negatively impacted.” and Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.” Notwithstanding the company's expectations, if the company's operating results decline, the company may be unable to comply with the financial covenants, and its lenders could demand repayment of the amounts outstanding under the company's credit facility.
The company also has an agreement with De Lage Landen, Inc. (“DLL”), a third-party financing company, to provide financing to the company's U.S. customers. Either party could terminate this agreement with 180 days' notice or 90 days' notice by DLL upon the occurrence of certain events. Should this agreement be terminated, the company's borrowing needs under the credit agreement could increase.
The company's leverage and debt obligations could adversely affect its financial condition, limit its ability to raise additional capital to fund its operations, impact the way it operates its business and prevent it from fulfilling its debt service and other obligations.
The company has significant outstanding indebtedness and may incur significant additional debt in the future. As of December 31, 2022, the company had outstanding $72,909,000 aggregate principal amount of 5.00% Series I Convertible Senior Notes that mature in November 2024 (the “Series I 2024 Notes”), $77,309,000 aggregate principal and accretion amount of 5.00% Series II Convertible Senior Notes that mature in November 2024
(the “Series II 2024 Notes”), $69,700,000 aggregate principal amount of 4.25% Convertible Senior Notes that mature in March 2026 (the “2026 Notes”), $41,475,000 aggregate principal amount of 5.68% Secured Convertible Senior Notes that mature in July 2026, $90,500,000 aggregate principal amount of variable rate Secured Term Loan which matures in July 2026 and $2,000,000 of insurance debt against the cash surrender value of policies. The company has an Amended and Restated Credit Agreement providing for asset-based lending senior secured revolving credit facility which matures in January 2026 with outstanding indebtedness at December 31, 2022 of $15,220,000.
The company's indebtedness could have important negative consequences, including:
•reduced availability of cash for the company's operations and other business activities after satisfying interest payments and other requirements under the terms of its debt instruments;
•less flexibility to plan for or react to competitive challenges, and suffer a competitive disadvantage relative to competitors that do not have as much indebtedness;
•difficulty in obtaining additional financing in the future;
•inability to comply with covenants in, and potential for default under, the company's debt instruments; and
•challenges to repaying or refinancing any of the company's debt.
The company’s ability to satisfy its debt and other obligations will depend principally upon its future operating performance. As a result, prevailing economic conditions and financial, business, legal and regulatory and other factors, many of which are beyond the company’s control, may affect its ability to make payments on its debt and other obligations. If it does not generate sufficient cash flow to satisfy its debt and other obligations, the company may have to undertake alternative financing plans, such as refinancing or restructuring its debt, exchanging debt for equity, selling assets, seeking additional capital or reducing or delaying capital investments. The company’s ability to restructure or refinance its debt will depend on the capital markets and the company’s financial condition at the time. Restructuring or refinancing indebtedness could require the company to issue additional debt (including secured debt), pay additional fees and interest, issue potentially dilutive additional equity, further encumber certain of the company’s assets, agree to covenants that could restrict its future operations and pay related transaction fees and expenses. Any such measures would require agreements with counterparties, including potentially the company’s existing creditors, and may not be successful on attractive
Part I Table of Contents
Item 1A. Risk Factors
terms or otherwise. Whether or not successful, any such measures may have a negative impact on the company’s financial condition and results of operations, including on the market price of the company’s common stock and debt securities.
Refer to Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”
Servicing the company’s debt requires a significant amount of cash, and the company may not have sufficient cash flow from its business to pay its substantial debt.
The company’s ability to make scheduled payments of the principal of, to pay interest on or to refinance its existing or future indebtedness, including post-emergence indebtedness, depends and will depend on its future performance, which is subject to economic, financial, competitive and other factors beyond its control, including uncertainties related to the company’s supply chain. Supply chain challenges, as well as supplier delivery holds resulting from past due payables, have had, and may continue to have, the effect of interrupting production and negatively impacting the company’s ability to fulfill orders and generate sales and cash flow. The company’s business may not generate cash flow from operations in the future sufficient to service its debt and make necessary capital expenditures. If the company is unable to generate such cash flow, it may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. The company’s ability to refinance its indebtedness will depend on the capital markets and its financial condition at such time. The company may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on the company’s debt obligations.
Risks Related to Information Technology and Reliance on Third Parties
Any major disruption or failure of the company’s information technology systems, or its failure to successfully implement new technology effectively, could adversely affect the company.
The company relies on various information technology systems to manage its operations, and the company has outsourced substantially all of its information technology services to a third party service provider. In January 2023, the company terminated its relationship with the third party service provider. This service provider had contracted with the company to implement, over a multi-year period, modifications and upgrades to the company's systems, including making changes to legacy systems, replacing legacy systems with successor systems with new functionality and acquiring new systems with new functionality. Among other projects, the company engaged
this provider to assist in implementing a new enterprise resource planning (“ERP”) system across the company. These activities subject the company to inherent risks associated with replacing and upgrading these systems. The company has paused these ERP implementation projects, and further system implementations may be substantially delayed, and the assistance of alternative service providers may be necessary to complete the implementation. As a result, the costs may substantially increase. Even if the ERP systems are successfully implemented, the new systems may not result in productivity improvements at a level that outweighs the risks and burdens of implementation, or at all. In addition, the difficulties with implementing new or upgraded technology systems may cause disruptions in the company's business operations. Any of these developments may have an adverse effect on the company's business and operations.
Cybersecurity threats and more sophisticated and targeted computer crime pose a risk to the company's systems, networks, products and services, and a risk to the company's compliance with data privacy laws.
Global IT security threats and more sophisticated and targeted computer crime pose a risk to the security of the company's systems and networks as well as the confidentiality, protection, availability and integrity of the company's data and any personal data on such networks or systems, including regulatory risks under the EU General Data Protection Regulation (GDPR), the California Consumer Privacy Act (CCPA) and the U.S. Health Insurance Portability and Accountability Act (HIPAA), among other risks. In addition, data security breaches can also occur as a result of a failure by the company or its employees to follow policies, procedures or training, or by acts, omissions or breaches by persons with whom the company has commercial relationships that result in the unauthorized release of personal or confidential information.
Through its sales channels, the company may collect and store personal or confidential information that customers provide to purchase products or services, enroll in promotional programs and register on the company's website, among other reasons. The company may also acquire and retain information about customers, product end users, suppliers and employees in the normal course of
business. The company also creates and maintains proprietary information that is critical to its business, such
as its product designs and manufacturing processes. In addition to the company’s own databases, it uses third-party service providers to store, process and transmit confidential or personal information on its behalf. Although the company contractually requires these service providers to implement and use reasonable security measures and to comply with laws relating to privacy and data protection, the company cannot control third parties
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Item 1A. Risk Factors
and cannot guarantee that a data security breach will not occur in the future either at their location or within their systems. Some of the company’s information technology systems have aged and are no longer supported or maintained by the original system vendors. Despite the company's efforts to secure its systems and networks, and any personal or sensitive information stored thereon, the company could experience a significant data security breach. Computer hackers may attempt to penetrate the company's or its vendors' information systems and, if successful, misappropriate confidential customer, supplier, employee or other business or personal information, including company intellectual property. Third parties could also gain control of company systems and use them for criminal purposes. Depending on their nature and scope, such threats could result in the loss of existing customers, difficulty in attracting new customers, exposure to claims from customers, governmental or data privacy or data protection authorities, financial institutions, payment card associations, employees and other persons, imposition of regulatory sanctions or penalties, incurring of additional expenses or lost revenues, or other adverse consequences, any of which could have a material adverse effect on the company's business and results of operations.
As the company transitions IT services inhouse, disruptions or delays at or by the company’s third-party service providers could adversely impact its operations.
There are risk associated with the transition of IT services as a result of the termination of the Birlasoft Master Services Agreement in January 2023 for breach including but not limited to Birlasoft's failure to meet transformation milestones, failure to provide services, and breach of representations, warranties and covenants in the Master Services Agreement. There may be disruptions in, or delays to the company's IT systems support, which may adversely impact the company’s operations. The company could face increased costs or disruption associated with finding replacement service providers or hiring new employees in order to continue these IT services.
Regulatory and Development Risks
The company remains subject to a consent decree of injunction with the U.S. Food and Drug Administration, and failure by the company to comply with the consent decree could adversely affect the company.
In December 2012, the company became subject to a consent decree of injunction filed by the FDA with respect to the company's Corporate facility and its Taylor Street manufacturing facility in Elyria, Ohio. The consent decree initially limited the company's (i) manufacture and distribution of power and manual wheelchairs, wheelchair components and wheelchair sub-assemblies at or from its Taylor Street manufacturing facility, except in verified
cases of medical necessity, (ii) design activities related to wheelchairs and power beds that take place at the impacted Elyria facilities and (iii) replacement, service and repair of products already in use from the Taylor Street manufacturing facility. Under the terms of the consent decree, in order to resume full operations, the company had to successfully complete independent, third-party expert certification audits at the impacted Elyria facilities, comprising three distinct certification reports separately submitted to, and accepted by, the FDA; submit its own report to the FDA; and successfully complete a reinspection by the FDA of the company's Corporate and Taylor Street facilities.
On July 24, 2017, following its reinspection, the FDA notified the company that it was in substantial compliance with the QSR and the Federal Food, Cosmetic & Drug Act (The FDA Act), the FDA regulations and the terms of the consent decree that the company was permitted to resume full operations at those facilities including the resumption of unrestricted sales of products made in those facilities.
The consent decree will continue in effect for a minimum of five years from July 24, 2017, during which time the company's Corporate and Taylor Street facilities must complete two semi-annual audits in the first year and then four annual audits in the next four years performed by an independent company retained audit firm. The expert audit firm will determine whether the facilities remain in continuous compliance with the FDA Act, regulations and the terms of the consent decree. Thus far, the two semi-annual audits and the first three annual audits have been completed successfully. The FDA has the authority to inspect these facilities and any other FDA registered facility, at any time.
In 2021, FDA conducted an inspection of the company’s Corporate and Taylor Street facilities from May 25 through June 24, 2021. At the close of the inspection, six FDA Form 483 observations were issued, and the company timely responded to FDA, has diligently taken actions to address FDA’s inspectional observations, and has provided FDA monthly updates on the corrective actions taken to address these observations. On November 18, 2021, the company received a warning letter from the FDA, which we refer to as the Warning Letter, concerning certain of the inspectional observations in the June 2021 FDA Form 483 related to the complaint handling process, the corrective and preventive action, or CAPA, process, and medical device reporting, or MDR, associated with oxygen concentrators. On November 16, 2021, the company received a consent decree non-compliance letter from the FDA concerning the same complaint and CAPA handling matters as in the Warning Letter observations but associated with the Taylor Street products, which letter we
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refer to together with the Warning Letter as the FDA Letters. The company timely responded to the FDA Letters, has diligently taken actions to address FDA’s concerns, and has provided FDA with periodic updates on the corrective actions taken to address the matters in the FDA Letters. The company remains committed to resolving the FDA’s concerns; however, it is not possible to predict the outcome or timing of a resolution at this time. There can be no assurance that the FDA will be satisfied with the company’s responses to the FDA Letters, nor any assurance as to the timeframe that may be required for the company to adequately address the FDA’s concerns or whether the matters in the FDA Letters will result in an extension in the duration of the consent decree. See “Item 1. Business - Government Regulation- 2012 Consent Decree, Taylor Street and Corporate Facilities” for further discussion of the FDA Letters.
The FDA conducted an inspection at the company’s Corporate and Taylor Street facilities from March 1 through March 30, 2023. At the conclusion of the inspection, two FDA Form 483 observations were issued. The company intends to timely respond to the FDA and address the observations. There can be no assurance that the FDA will be satisfied with the company’s responses to the FDA Form 483 observations.
The FDA also has the authority to order the company to take a wide variety of remedial actions if the FDA finds that the company is not in compliance with the consent decree or FDA regulations. The FDA also has authority under the consent decree to assess liquidated damages for any violations of the consent decree, FDA regulations or the FDA Act. Any such failure by the company to comply with the consent decree, the FDA Act or FDA regulations, or any need to complete significant remediation as a result of any such audits or inspections, or actions taken by the FDA as a result of any such failure to comply, could have a material adverse effect on the company's business, financial condition, liquidity or results of operations.
The limitations previously imposed by the FDA consent decree negatively affected net sales in the North America segment and, to a certain extent, the Asia Pacific region beginning in 2012. The limitations led to delays in new product introductions. Further, uncertainty regarding how long the limitations would be in effect limited the company's ability to renegotiate and bid on certain customer contracts and otherwise led to a decline in customer orders.
Although the company has been permitted to resume full operations at the Corporate and Taylor Street facilities, the negative effect of the consent decree on customer orders and net sales in the North America segment and Asia Pacific region has been considerable, and it is
uncertain as to whether, or how quickly, the company will be able to rebuild net sales to more typical historical levels, irrespective of market conditions. Accordingly, when compared to the company's 2010 results, the previous limitations in the consent decree had, and likely may continue to have, a material adverse effect on the company's business, financial condition and results of operations. Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Any failure by the company to comply with medical device regulatory requirements or receive regulatory clearance or approval for the company's products or operations in the United States or abroad could adversely affect the company's business.
The company's medical devices are subject to extensive regulation in the United States by the FDA, and by similar governmental authorities in the foreign countries where the company does business. The FDA regulates virtually all aspects of a medical device's development, testing, manufacturing, labeling, promotion, distribution and marketing. In addition, the company is required to file reports with the FDA if the company's products may have caused, or contributed to, a death or serious injury, or if they malfunction and would be likely to cause, or contribute to, a death or serious injury if the malfunction were to recur. In general, unless an exemption applies, the company's mobility products must receive a pre-market clearance from the FDA before they can be marketed in the United States. The FDA also regulates the export of medical devices to foreign countries. The company cannot be assured that any of the company's devices, to the extent required, will be cleared by the FDA through the pre-market clearance process or that the FDA will provide export certificates that are necessary to export certain of the company's products for sale in certain foreign countries. If the company is unable to obtain export certificates for its products, it will limit the company's ability to support foreign markets with such products, which may have an adverse impact on the company's business and results of operations.
Additionally, the company is required to obtain pre-market clearances to market modifications to the company's existing products or market its existing products for new indications. The FDA requires device manufacturers themselves to make and document a determination as to whether a modification requires a new clearance; however, the FDA can review and disagree with a manufacturer's decision. The company may not be successful in receiving clearances in the future or the FDA may not agree with the company's decisions not to seek clearances for any particular device modification. The FDA may require a clearance for any past or future modification or a new indication for the company's existing
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products. Such submissions may require the submission of additional data and may be time consuming and costly, and ultimately, may not be cleared by the FDA.
If the FDA requires the company to obtain pre-market clearances for any modification to a previously cleared device, the company may be required to cease manufacturing and marketing the modified device or to recall the modified device until the company obtains FDA clearance, and the company may be subject to significant regulatory fines or penalties. In addition, the FDA may not clear these submissions in a timely manner, if at all. The FDA also may change its policies, adopt additional regulations or revise existing regulations, each of which could prevent or delay pre-market clearance of the company's devices, or could impact the company's ability to market a device that was previously cleared. Any of the foregoing could adversely affect the company's business.
Any failure by the company to comply with the regulatory requirements of the FDA and other applicable U.S. regulatory requirements may subject the company to administrative or judicially imposed sanctions. These sanctions include warning letters, civil penalties, criminal penalties, injunctions, consent decrees, product seizure or detention, product recalls and total or partial suspension of production, any of which could materially adversely affect the company's business, financial condition, liquidity and results of operations. In November 2021, the company received the FDA Letters, and in March 2023, the company received two FDA Form 483 observations. See the preceding risk factor “The company remains subject to a consent decree of injunction with the U.S. Food and Drug Administration, and failure by the company to comply with the consent decree could adversely affect the company” and “Item 1. Business - Government Regulation - 2012 Consent Decree, Taylor Street and Corporate Facilities.”
As part of its regulatory function, the FDA routinely inspects the facilities of medical device companies and has continued to actively inspect the company's facilities, other than through the processes established under the consent decree. The company expects that the FDA will from time to time, inspect substantially all the company's domestic and foreign FDA-registered operational facilities and may do so repeatedly. The results of regulatory claims, proceedings or investigations are difficult to predict. An unfavorable resolution or outcome of any matter that may arise out of any FDA inspection of the company's facilities, including, for example, the matters in the FDA Letters, could materially and adversely affect the company's business, financial condition, liquidity and results of operations.
In many of the foreign countries in which the company manufactures or markets its products, the company is subject to extensive medical device regulations that are similar to those of the FDA, including those in
Europe. The regulation of the company's products in Europe falls primarily within the United Kingdom (“UK”) and the European Economic Area, which consists of the European Union member states, as well as Iceland, Liechtenstein and Norway. Only medical devices that comply with certain conformity requirements of the European Medical Device Regulation (“EMDR”) are allowed to be marketed within the European Economic Area and the United Kingdom. The company's Class I products were required to comply with the EMDR as of May 2021. Class IIa and IIb products are required to comply with the EMDR by no later than the expiration of their respective current Medical Device Directive (“MDD”) certifications, which will begin to expire in September 2023. Products that fail to be certified with the EMDR may not be marketed or sold in the European Union. As a result of Brexit, beginning on January 1, 2021, the company's products sold in Great Britain have been required to be registered with the Medical and Healthcare Products Regulatory Agency (“MHRA”) and the company is required to appoint an Authorized Representative (“AR”) in the UK. Products in conformity with the MDD may continue to be marked with their CE marking in the UK until June 2023, after which time products must be certified by a UK recognized Notified Body. In addition, beginning May 26, 2021, the company's products sold in Switzerland have been required to be registered with Swissmedic and the company is required to appoint an AR in Switzerland. In addition, the national health or social security organizations of certain foreign countries, including those outside Europe, require the company's products to be qualified before they can be marketed in those countries. Failure to receive, or delays in the receipt of, relevant foreign qualifications in the European Economic Area, the UK, Switzerland or other foreign countries could have a material adverse effect on the company's business. The company and its products are subject to registration requirements and regulations in various states and political subdivisions inside and outside of the United States. Failure by the company to comply with these requirements and regulations could have an adverse effect on the company or its business.
Under the EMDR and MDD, Notified Bodies have the right to conduct unannounced audits. Under the EMDR, the company will be subject to annual audits by a Notified Body for its Class IIa and IIb products, which would include on-site audits of the company's facilities in Elyria, Ohio and unannounced audits at least once every five years. In addition, the relevant regulatory authorities in various European countries may conduct audits of the company's facilities. Any significant findings from any such audits may impact the company's ability to manufacture or market certain products in those markets, or result in other unfavorable outcomes, that could materially and adversely affect the company's business.
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If the company fails to comply with applicable health care laws or regulations, the company could suffer severe civil or criminal sanctions or may be required to make significant changes to the company's operations.
The company sells its products principally to medical equipment and home health care providers who resell or rent those products to consumers. Many of those providers (the company's customers) are reimbursed by third-party payors, including Medicare and Medicaid, for the company products sold to their customers and patients. The U.S. federal government and the governments in the states and other countries in which the company operates regulate many aspects of the company's business and the business of the company's customers. As a part of the health care industry, the company and its customers are subject to extensive government regulation, including numerous laws directed at preventing fraud and abuse and laws regulating reimbursement under various government programs. The marketing, invoicing, documenting and other practices of health care suppliers and manufacturers are all subject to government scrutiny. Government agencies periodically open investigations and obtain information from health care suppliers and manufacturers pursuant to the legal process. Violations of law or regulations can result in severe administrative, civil and criminal penalties and sanctions, including disqualification from Medicare and other reimbursement programs, which could have a material adverse effect on the company's business. While the company has established numerous policies and procedures to address compliance with these laws and regulations, there can be no assurance that the company's efforts will be effective to prevent a material adverse effect on the company's business from noncompliance issues.
Health care is an area of rapid regulatory change. Changes in the law and new interpretations of existing laws may affect permissible activities, the costs associated with doing business, and reimbursement amounts paid by federal, state and other third-party payors, all of which may affect the company and its customers. The company cannot predict the future of federal, state and local regulation or legislation, including Medicare and Medicaid statutes and regulations, or possible changes in health care policies in any country in which the company conducts business. Future legislation and regulatory changes could have a material adverse effect on the company's business.
Legislative developments in all regions in which the company operates may adversely affect the company.
Future healthcare legislation, including any significant reform of existing healthcare laws, whether in the U.S. or in our other global markets, along with any programs implemented by such laws, whether at a federal
or state level, may reduce reimbursements for the company's products, may impact the demand for the company's products and may impact the prices at which the company sells its products. Such changes could have a material adverse effect on the company's business, results of operations and/or financial condition.
Intellectual Property Risks
The company's operating results and financial condition could be adversely affected if the company becomes involved in litigation regarding its patents or other intellectual property rights.
Litigation involving patents and other intellectual property rights is common in the company's industry, and other companies within the company's industry have used intellectual property litigation in an attempt to gain a competitive advantage. The company has been a party to lawsuits involving patents or other intellectual property. If the company were to receive an adverse judgment in any such proceeding, a court or a similar foreign governing body could invalidate or render unenforceable the company's owned or licensed patents, require the company to pay significant damages, seek licenses and/or pay ongoing royalties to third parties, require the company to redesign its products, or prevent the company from manufacturing, using or selling its products, any of which could have an adverse effect on the company's results of operations and financial condition. The company has brought actions against third parties for infringement of the company's intellectual property rights. The company may not succeed in these actions. The defense and prosecution of intellectual property actions and lawsuits in the courts, proceedings before the U.S. Patent and Trademark Office or its foreign equivalents and related legal and administrative proceedings are both costly and time consuming. Protracted litigation to defend, prosecute or enforce the company's intellectual property rights could seriously detract from the time the company's management would otherwise devote to running its business. Intellectual property litigation relating to the company's products could cause its customers or potential customers to defer or limit their purchase or use of the affected products until resolution of the litigation.
If the company is unable to protect its intellectual property rights or resolve successfully claims of infringement brought against it, the company's product sales and business could be affected adversely.
The company's business depends in part on its ability to establish, protect, safeguard and enforce its intellectual property and contractual rights and to defend against any claims of infringement, both of which involve complex legal, factual and marketplace uncertainties. The company
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relies on a combination of patent, trade secret, copyright and trademark law and security measures to protect its intellectual property, but effective intellectual property protection may not be available in all places that the company sells its products or services, particularly in certain foreign jurisdictions, and patents provide protection for finite time periods. In addition, the company uses nondisclosure, confidentiality agreements and invention assignment agreements with many of its employees, and nondisclosure and confidentiality agreements with certain third parties, in an effort to help protect its proprietary technology and know-how. If these agreements are breached or the company's intellectual property is otherwise infringed, misappropriated or violated, the company may have to rely on litigation to enforce its intellectual property rights. If any of these measures are unsuccessful in protecting the company's intellectual property, the company's business may be affected adversely.
In addition, the company may face claims of infringement, misappropriation or other violation of third parties' intellectual property that could interfere with its ability to use technology or other intellectual property rights that are material to the company's business operations. In the event that a claim of infringement, misappropriation or other violation against the company is successful, the company may be required to pay royalties or license fees to continue to use technology or other intellectual property rights that the company was using, or the company may be unable to obtain necessary licenses from third parties at a reasonable cost or within a reasonable time. If the company is unable to obtain licenses on reasonable terms, it may be forced to cease selling or using the products that incorporate the challenged intellectual property, or to redesign or, in the case of trademark claims, rename its products to avoid infringing the intellectual property rights of third parties, which may not be possible, or if possible, may be time-consuming. Any litigation of this type, whether successful or unsuccessful, could result in substantial costs to the company and adversely affect the company's business and financial condition.
The company also holds patent and other intellectual property licenses from third parties for some of its products and on technologies that are necessary in the design and manufacture of some of the company's products. The loss of these licenses could prevent the company from, or could cause additional disruption or expense in, manufacturing, marketing and selling these products, which could harm the company's business.
Manufacturing and Supply Risks
Decreased availability or increased costs of materials could increase the company's costs of producing its products.
The company purchases raw materials, fabricated components, some finished goods and services from a variety of suppliers. Raw materials such as plastics, steel and aluminum, purchased electronics and other components are considered key raw materials. Where appropriate, the company employs contracts with its suppliers, both domestic and international. From time to time, however, the prices, availability, or quality of these materials fluctuate due to global market demands, import duties and tariffs, delays or interruptions in production or delivery, including shipping and logistics disruptions or economic conditions, which could impair the company's ability to procure necessary materials or increase the cost of these materials. For example, global shortages of microprocessors for production of printed circuit boards have had, and may continue to have, an adverse effect on the company's ability to produce its products. Inflationary and other increases in costs of these materials have occurred in the past and may recur from time to time. In addition, freight costs associated with shipping and receiving product are impacted by fluctuations in the cost of oil and gas. A reduction in the supply or increase in the cost or change in quality of those materials or transportation costs, could impact the company's ability to manufacture its products and could increase the cost of production, which could negatively impact the company's revenues and profitability. For example, the tariffs on steel and aluminum on a wide range of products and components imported from China imposed by the U.S. as well as material cost increases imposed by domestic suppliers influenced by the tariffs, have had, and may continue to have, a significant adverse effect on the company's cost of product. The company's actions to date have greatly reduced the impact of tariffs. However, if the company is unsuccessful in mitigating the impact of tariffs in the future, its revenues, profitability and results of operations may continue to be adversely affected.
Inflationary economic conditions have increased, and may continue to increase, the company’s costs of producing its products.
The company’s products are manufactured using various metals and other commodity-based materials, including, steel and aluminum. Additionally, the company uses certain component parts, such as microprocessors, which may be in short supply and difficult or costly to obtain. Freight and labor costs also are significant elements of the company’s production costs. Inflationary economic conditions increase these various costs. If the company is
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unable to mitigate inflationary increases through customer pricing actions, alternative supply arrangements or other cost reduction initiatives, its profitability may be adversely affected.
The company has fixed-price contracts with certain of its customers, which could subject the company to losses if it has cost overruns. While fixed price contracts enable the company to benefit from performance improvements, cost reductions and efficiencies, they also subject the company to the risk of reduced margins or incurring losses if the company is unable to achieve estimated costs and revenues. This risk is further exacerbated when inflationary economic conditions persist.
Geopolitical risks, such as those associated with the military conflict in Ukraine, could result in increased market volatility and uncertainty, which could negatively impact the company’s business, financial condition, and results of operations.
The uncertain nature, magnitude, and duration of hostilities stemming from Russia’s military invasion of Ukraine, including the potential effects of sanctions limitations, retaliatory cyber-attacks on the world economy and markets, and potential shipping delays, have contributed to increased market volatility and uncertainty, which could have an adverse impact on macroeconomic factors that affect the company’s business. As a result of the military conflict in Ukraine, the United States, the United Kingdom and the European Union governments, among others, have developed coordinated economic and financial sanctions packages. As the military conflict in Ukraine continues, there can be no certainty regarding whether such governments or other governments will impose additional sanctions, or other economic or military measures against Russia.
The impact of the military conflict in Ukraine, including economic sanctions or expanded war or military conflict, as well as potential responses to them by Russia, could adversely affect the company’s business, supply chain, suppliers or customers. In addition, the continuation or expansion of the military conflict in Ukraine could lead to other disruptions, instability and volatility in global markets and industries that could negatively impact the company’s operations. It is not possible to predict the broader consequences of this conflict, which could include further sanctions, embargoes, regional instability, geopolitical shifts and adverse effects on macroeconomic conditions, the availability of raw materials, supplies, freight and labor, currency exchange rates and financial markets, all of which could impact the company’s business, financial condition and results of operations.
The company's ability to manage an effective supply chain is a key success factor.
The company needs to manage its supply chain efficiently from sourcing to manufacturing and distribution. Successful supply chain management is based on building strong supplier relationships, built on conforming, quality products delivered on-time and at a fair price and operating efficiency. Cost reduction efforts depend on the company's execution of global and regional product platforms that create leverage in sourcing. If the company's supply chain management or cost reduction optimization efforts are ineffective, or if the supply chain continues to be adversely affected by disruption due to shortages, trade barriers or other factors, the company's revenues and profitability can be negatively impacted.
As the company outsources functions, it becomes more dependent on the entities performing those functions.
As part of its actions to improve business efficiency, the company has sought opportunities to provide essential business services in a more cost-effective manner. In some cases, this results in the outsourcing of functions or parts of functions that can be performed more effectively by external service providers. While the company believes it conducts appropriate diligence before entering into agreements with any outsourcing entity, the failure of one or more of such entities to meet the company’s performance standards and expectations, including with respect to service levels, data security, compliance with data protection and privacy laws, providing services on a timely basis or providing services at the prices the company expects, may have an adverse effect on the company’s results of operations or financial condition. In addition, the company could face increased costs or disruption associated the outsource of those services. The company may outsource other functions in the future, which would increase its reliance on third parties.
Other Regulatory and Litigation Risks
The company is subject to certain risks inherent in managing and operating businesses in many different foreign jurisdictions.
The company has significant international operations, including operations in Australia, Canada, New Zealand, Mexico, Asia (primarily Thailand) and Europe. There are risks inherent in operating and selling products internationally, including:
•different regulatory environments and reimbursement systems;
•difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;
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•foreign customers who may have longer payment cycles than customers in the United States;
•fluctuations in foreign currency exchange rates;
•tax rates in certain foreign countries that may exceed those in the United States and foreign earnings that may be subject to withholding requirements;
•the imposition of tariffs, exchange controls or other trade restrictions including transfer pricing restrictions when products produced in one country are sold to an affiliated entity in another country;
•potential adverse changes in trade agreements between the United States and foreign countries, including the United States-Mexico-Canada Agreement (USMCA);
•potential adverse changes in economic and political conditions in countries where the company operates or where end-users of the company's products reside, or in their diplomatic relations with the United States;
•government control of capital transactions, including the borrowing of funds for operations or the expatriation of cash;
•potential adverse tax consequences, including those that may result from new United States tax laws, rules, regulations or policies;
•security concerns and potential business interruption risks associated with political and/or social unrest, or public health crisis, in foreign countries where the company's facilities or assets are located;
•the potential effects of geopolitical conflicts, such as the military conflict between Russia and Ukraine, including retaliatory and regulatory actions, in response to such conflicts;
•difficulties associated with managing a large organization spread throughout various countries;
•difficulties in enforcing intellectual property rights and weaker intellectual property rights protection in some countries;
•required compliance with a variety of foreign laws and regulations; and
•differing consumer product preferences.
The factors described above also could disrupt the company's product manufacturing and assembling operations or its key suppliers located outside of the United States or increase the cost to the company of conducting those operations or using those suppliers. For example, the company relies on its manufacturing operation in Mexico and suppliers in China and other countries to produce its products or components, and the global COVID-19 pandemic resulted in interruptions in production and supply of components and product on a global basis. Disruptions in, or increased costs related to, the company's foreign operations, particularly in Mexico, may impact the
company's revenues and profitability. The factors described above also or the failure of the company to adequately comply with regulatory and legal requirements in foreign countries could adversely affect the company’s ability to sell its products in those foreign countries or could subject the company to fines, penalties, or other adverse legal or regulatory enforcement.
The company's products may be subject to product liability claims or recalls, which could be costly, harm the company's reputation and adversely affect its business.
The manufacture and sale of medical devices and related products exposes the company to a significant risk of product liability claims. From time to time, the company has been, and currently is, subject to a number of product liability claims alleging that the use of the company's products has resulted in serious injury or even death.
Even if the company is successful in defending against any liability claims, these claims could nevertheless distract the company's management, result in substantial costs, harm the company's reputation, adversely affect the sales of all the company's products and otherwise harm the company's business. If there is a significant increase in the number of product liability claims, the company's business could be adversely affected.
The company was self-insured in North America for annual policy losses up to $10,000,000 per occurrence and $13,000,000 in the aggregate. The company also has additional layers of external insurance coverage, related to all lines of insurance coverage, insuring up to $75,000,000 in aggregate losses per policy year arising from individual claims anywhere in the world that exceed the captive insurance company policy limits or the limits of the company's per country foreign liability limits, as applicable. There can be no assurance that Invacare's current insurance levels will continue to be adequate or available at affordable rates.
Product liability reserves are recorded for individual claims based upon historical experience, industry expertise and indications from the third-party actuary. Additional reserves, in excess of the specific individual case reserves, are provided for incurred but not reported claims based upon actuarial valuations at the time such valuations are conducted. Historical claims experience and other assumptions are taken into consideration to estimate the ultimate reserves. For example, the actuarial analysis assumes that historical loss experience is an indicator of future experience, that the distribution of exposures by geographic area and nature of operations for ongoing operations is expected to be very similar to historical operations with no dramatic changes and that the government indices used to trend losses and exposures are
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appropriate. Estimates made are adjusted on a regular basis and can be impacted by actual loss awards and settlements on claims. While actuarial analysis is used to help determine adequate reserves, the company is responsible for the determination and recording of adequate reserves in accordance with accepted loss reserving standards and practices. If the company's reserves are not adequate to cover actual claims experience, the company's financial results could be adversely affected.
In addition, as a result of a product liability claim or if the company's products are alleged to be defective, the company may have to recall some of its products, may have to incur significant costs or may suffer harm to its business reputation.
The company is subject to ongoing medical device reporting regulations that require the company to report to the FDA or similar governmental authorities in other countries if the company's products cause, or contribute to, death or serious injury, or if they malfunction and would be likely to cause, or contribute to, death or serious injury if the malfunction were to recur. If a deficiency, defect in design or manufacturing or defect in labeling is discovered, the company may voluntarily elect to recall or correct the company's products. In addition, the FDA and similar regulatory authorities in other countries could force the company to do a field correction or recall of the company's products in the event of material deficiencies or defects in design or manufacturing. A government mandated or voluntary recall or field correction by the company could occur for various reasons, such as component failures, manufacturing errors or design defects, including defects in labeling. Any recall or field correction could divert managerial and financial resources and could harm the company's reputation with its customers, product users and the health care professionals that use, prescribe and recommend the company's products. The company could have product recalls or field actions that result in significant costs to the company in the future, and these actions could have a material adverse effect on the company's business. The company could have difficulty in implementing product recalls or field corrections in countries in which the company lacks adequate resources, facilities or personnel, and the failure to comply with the recall or field correction requirements of foreign governmental authorities could have an adverse impact on the company.
Other Risk Factors - Other Financial Risks, Risks Related to Employees and the Company's Common Shares
The company has long-term finance leases on significant facilities which can affect the company's liquidity and cash flow.
Under the terms of the real estate leases for the company’s facilities in Elyria and North Ridgeville, Ohio, and Sanford, Florida, defaults by the company under any one of such leases, would trigger a cross default under all related leases with the owner/landlord. The company also has a finance lease for its Albstadt, Germany facility. Should a default by the company occur, there could be a material adverse effect on the company's business, operations, financial condition or liquidity.
The company's revenues and profits are subject to exchange rate and interest rate fluctuations which can affect the company's profitability and cash flow.
Currency exchange rates are subject to fluctuation due to, among other things, changes in local, regional or global economic conditions, the imposition of currency exchange restrictions and unexpected changes in regulatory or taxation environments. The predominant currency used by the company's subsidiaries outside the U.S. to transact business is the functional currency used for each subsidiary. Through the company's international operations, the company is exposed to foreign currency fluctuations, and changes in exchange rates can have a significant impact on net sales and elements of cost. The company conducts a significant number of transactions in currencies other than the U.S. dollar. In addition, because certain of the company's costs and revenues are denominated in other currencies, such as those from its European operations, the company's results of operations are exposed to foreign exchange rate fluctuations as the financial results of those operations are translated from local currency into U.S. dollars upon consolidation. For example, in prior years, the devaluation of the Euro had a negative impact on the translation of company's European segment net income into U.S. dollars, and the foreign currency impact of Brexit in the U.K. had a negative impact on acquisition of dollar and Euro denominated goods in the U.K. If other countries also exit the European Union, similar negative impacts may result. In addition, in light of the military conflict between Russia and Ukraine and the resulting tensions between the European Union, other European countries, as well as the United States, with Russia, any resulting material change to the valuation of the Euro relative to the U.S. dollar could adversely impact the company's operating results.
While historically the company used foreign exchange forward contracts to help reduce its exposure to transactional exchange rate risk, as a result of the bankruptcy filing in the U.S. in 2023, the company is not able to enter into such transactions with their commercial banking partners. As a result, the company's revenues and profitability may be materially adversely affected by exchange rate fluctuations. The company does not have any arrangements that mitigate the company's exposure to
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foreign exchange translation risk and does not believe that any meaningful arrangement to do so is available to the company.
The company also is exposed to market risk through various financial instruments, including fixed rate and floating rate debt instruments. The company does at times use interest rate swap contracts to mitigate its exposure to interest rate fluctuations, but those efforts may not adequately protect the company from significant interest rate risks. Interest on some of the company's debt was based on the London Interbank Offered Rate (LIBOR) and has transitioned to being based primarily on the Secured Overnight Financing Rate (SOFR). These interest rates have been historically low but the company's borrowing rate has been negatively impacted by several rate increases implemented by the U.S. Treasury department in 2022. Increases in SOFR could have a significant impact on the company's reported interest expense, to the extent that the company has outstanding borrowings subject to SOFR-based interest rates.
Additional tax expense or additional tax exposures could affect the company's future profitability and cash flow.
The company is subject to income taxes in the United States and various non-U.S. jurisdictions. The domestic and international tax liabilities are dependent upon the allocation of income among these different jurisdictions. The company's tax expense includes estimates of additional tax which may be incurred for tax exposures and reflects various other estimates and assumptions. In addition, the assumptions include assessments of future earnings of the company that could impact the valuation of its deferred tax assets. The company's future results of operations could be adversely affected by changes in the company's effective tax rate which could result from changes in the mix of earnings in countries with differing statutory tax rates, changes in the overall profitability of the company, changes in tax legislation and rates, changes in generally accepted accounting principles, changes in the valuation of deferred tax assets and liabilities, the results of audits and examinations of previously filed tax returns and continuing assessments of its tax exposures. Corporate tax reform and tax law changes continue to be analyzed in many jurisdictions, including the potential impacts of new United States tax laws, rules, regulations or policies, and any legislation or regulations which may result from those policies.
The Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017. The Tax Act significantly revamped U.S. taxation of corporations, including a reduction of the federal income tax rate from 35% to 21%, a limitation on interest deductibility, and a new tax regime
for foreign earnings. The limitation on interest deductibility, the new U.S. taxes on accumulated and future foreign earnings, other adverse changes resulting from the Tax Act, or a change in the mix of domestic and foreign earnings, might offset the benefit from the reduced tax rate, and the company's future effective tax rates and/or cash taxes may increase, even significantly, or not decrease much, compared to recent or historical trends. Many of the provisions of the Tax Act are highly complex and may be subject to further interpretive guidance from the IRS or others. Some of the provisions of the Tax Act may be changed by a future Congress or challenged by the World Trade Organization (“WTO”) or be subject to trade or tax retaliation by other countries. Although the company cannot predict the nature or outcome of such future interpretive guidance, or actions by a future Congress, WTO or other countries, they could adversely impact the company's financial condition, results of operations and cash flows.
The company's ability to use net operating losses carryforwards (“NOLs”) may become subject to limitation, or may be reduced or eliminated, in connection with the implementation of a plan of reorganization. The Bankruptcy Court has entered and order that is designated to protect our NOLs until a plan of reorganization is consummated.
Generally, a company generates NOLs if the operating expenses it has incurred exceed the revenues it has earned during a single tax year. A company may apply, or “carry forward,” NOLs to reduce future tax payments (subject to certain conditions and limitations). To date, the company has generated a significant amount of U.S. federal NOLs.
We expect that we may undergo an ownership change under Section 382 of the Code in connection with the consummation of a plan of reorganization. Nevertheless, we believe these NOLs are a valuable asset for us, particularly in the context of the Chapter 11 Cases. In February 2023, the Bankruptcy Court entered an order that sets forth procedures (including notice requirements) that certain shareholders and potential shareholders must comply with regarding transfers of, or declarations of worthlessness with respect to, our common stock, as well as certain obligations with respect to notifying us of current share ownership (the “Procedures”). The Procedures are designed to reduce the likelihood of an “ownership change” occurring prior to the consummation of a bankruptcy plan of reorganization, both to ensure that our NOLs (and other tax attributes) are available to address the immediate tax consequences of any such bankruptcy plan of reorganization and to preserve the potential ability to rely on certain rules that apply to ownership changes occurring as a result of a bankruptcy plan of reorganization. However, there is no assurance that the Procedures will prevent all transfers that could result in such an “ownership change.”
Part I Table of Contents
Item 1A. Risk Factors
In addition, our NOLs (and other tax attributes) may be subject to use in connection with the implementation of any bankruptcy plan of reorganization or reduction as a result of any cancellation of indebtedness income arising in connection with the implementation of any bankruptcy plan of reorganization. As such, at this time, there can be no assurance that we will have NOLs to offset future taxable income.
The company's reported results may be adversely affected by increases in reserves for uncollectible accounts receivable.
The company has a large balance of accounts receivable and has established a reserve for the portion of such accounts receivable that the company estimates will not be collected because of the company's customers' non-payment. The specific reserve is based on historical trends and a general reserve is recorded to capture macroeconomic trends.
The inability to attract and retain, or loss of the services of, the company's key management and personnel could adversely affect its ability to operate the company's business.
The company's future success will depend, in part, upon the continued service of key managerial, engineering, marketing, sales and technical and operational personnel. In addition, the company's future success will depend on its ability to continue to attract and retain highly qualified personnel, including personnel experienced in sales, supply chain, marketing and manufacturing of medical equipment and in quality systems and regulatory affairs. As a result of the bankruptcy filing, the company may have difficulty in attracting and retaining key employees. If the company is not successful in retaining its current personnel or in hiring or retaining qualified personnel in the future, the company's business may be adversely affected. The company's future success depends, to a significant extent, on the abilities and efforts of its executive officers and other members of its management team, such as the company's President and Chief Executive Officer and its Senior Vice President and Chief Financial Officer, as well as other members of its management team. The company had significant turnover in personnel in recent years, which has been exacerbated by the company's financial condition and bankruptcy, and as a result, the company cannot be certain it can adequately recruit, hire and retain personnel or that its executive officers and other key employees will continue in their respective capacities for any period of time, and these employees may be difficult to replace. If the company loses the services of any of its management team or other key personnel, the company's business may be adversely affected.
Part I

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
Item 1B. Unresolved Staff Comments.
None.
Part I Table of Contents

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ITEM 2. PROPERTIES
Item 2. Properties
Item 2. Properties.
The company owns or leases its manufacturing facilities, warehouses and offices and believes that these facilities are well maintained, adequately insured and suitable for their present and intended uses. Information concerning certain leased facilities of the company as of December 31, 2022 is set forth in Leases and Commitments in the Notes to the Consolidated Financial Statements of the company included in this report. The company's corporate headquarters is in Elyria, Ohio and a summary of the company's materially important properties by segment is as follows:
Owned Leased
Number Square Feet Number Square Feet
Manufacturing Facilities
Europe 2 305,146 5 507,675
North America 1 152,256 6 463,856
3 457,402 11 971,531
Warehouse and Office Facilities
Europe 2 33,444 39 422,484
North America - - 11 329,742
All Other (Asia Pacific) - - 4 32,616
2 33,444 54 784,842
Part I

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
Item 3. Legal Proceedings.
On January 31, 2023 (the “Petition Date”), the company and two of its U.S. subsidiaries (collectively, the “Debtors” or “Company Parties”) filed voluntary petitions under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The Debtors obtained joint administration of their chapter 11 cases under the caption In re Invacare Corporation, et al., Case No. 23-90068 (CML) (the “Chapter 11 Cases”). See Item 1. Business - Bankruptcy and Item 1A. Risk Factors - Bankruptcy.
In the ordinary course of its business, the company is a defendant in a number of lawsuits, primarily product liability actions in which various plaintiffs seek damages for injuries allegedly caused by defective products. All the product liability lawsuits that were asserted against the company in the United States had been referred to the company's captive insurance company, Invatection Insurance Company (“Invatection”), and/or excess insurance carriers. All non-U.S. lawsuits have been referred to the company's commercial insurance carriers. All such lawsuits are generally contested vigorously. The coverage territory of the company's insurance is worldwide with the exception of those countries with respect to which, at the time the product is sold for use or at the time a claim is made, the U.S. government has suspended or prohibited diplomatic or trade relations. On January 31, 2023, the company entered into a Commutation and Release Agreement with Invatection pursuant to which, among other things, the company assumed all outstanding insured claims and cancelled the captive insurance policy. The company will self-insure product liability claims for the first $10 million per claim beyond which the company has commercial excess liability insurance coverage. Management does not believe that the outcome of any of these actions will have a material adverse effect upon the company's business or financial condition.
In December 2012, the company became subject to a consent decree of injunction filed by the FDA in the U.S. District Court for the Northern District of Ohio with respect to the company's Corporate facility and its Taylor Street manufacturing facility in Elyria, Ohio. On July 24, 2017, following its reinspection of the Corporate and Taylor Street facilities, FDA notified the company that it was in substantial compliance with the FDA Act, FDA regulations and the terms of the consent decree and that the company was permitted to resume full operations at those facilities, including the resumption of unrestricted sales of products made in those facilities.
Since July 24, 2017, an independent company-retained audit firm conducted two semi-annual audits in the first year and then four annual audits in the next four years
of the company's Corporate and Taylor Street facilities, as required under the consent decree. The expert audit firm determined that the facilities remained in continuous compliance with the Federal Food, Drug and Cosmetic Act (“FDA Act”), FDA regulations and the terms of the consent decree and issued post-audit reports contemporaneously to the FDA.
The FDA has the authority to inspect the Corporate and Taylor Street facilities, and any other FDA registered facility, at any time. The FDA also has the authority to order the company to take a wide variety of actions if the FDA finds that the company is not in compliance with the consent decree, FDA Act or FDA regulations, including requiring the company to cease all operations relating to Taylor Street products. The FDA also can order the company to undertake a partial cessation of operations or a recall, issue a safety alert, public health advisory, or press release, or to take any other corrective action the FDA deems necessary with respect to Taylor Street products.
The FDA also has authority under the consent decree to assess liquidated damages of $15,000 per violation per day for any violations of the consent decree, FDA Act or FDA regulations. The FDA also may assess liquidated damages for shipments of adulterated or misbranded devices in the amount of twice the sale price of any such adulterated or misbranded device. The liquidated damages, if assessed, are limited to a total of $7,000,000 for each calendar year. The authority to assess liquidated damages is in addition to any other remedies otherwise available to the FDA, including civil money penalties.
In November 2021, the company received a Warning Letter from the FDA concerning certain of the June 2021 FDA Form 483 inspectional observations related to the complaint handling, CAPA and MDR processes, associated with oxygen concentrators. The company also received a consent decree non-compliance letter from the FDA concerning the same complaint and CAPA handling matters as in the Warning Letter but associated with the Taylor Street products. The company timely responded to the FDA Letters, has diligently taken actions to address FDA’s concerns, and has provided FDA with periodic updates on the corrective actions taken to address the matters in the FDA Letters. The company remains committed to resolving the FDA’s concerns; however, it is not possible to predict the outcome or timing of a resolution at this time. There can be no assurance that the FDA will be satisfied with the company’s responses to the FDA Letters, nor any assurance as to the timeframe that may be required for the company to adequately address the FDA’s concerns or whether the matters in the FDA Letters will result in an extension in the duration of the consent decree. See “Item 1A. Risk Factors Regulatory and Development Risks -The company remains subject to a consent decree of injunction with the U.S. Food and Drug Administration, and failure by the company to comply with
Part I Table of Contents
Item 3. Legal Proceedings
the consent decree could adversely affect the company” and “Item 1. Business - Government Regulation - 2012 Consent Decree, Taylor Street and Corporate Facilities.”
Additional information regarding the consent decree and the FDA Letters is included in Item 1. Business - Government Regulation; Item 1A. Risk Factors.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
None.
Part I
Executive Officers of the Registrant
Executive Officers of the Registrant*
The following table sets forth the names of the executive officers of the company, each of whom serves at the pleasure of the Board of Directors, as well as certain other information.
Name Age Position
Geoffrey P. Purtill 57 President and Chief Executive Officer
Kathleen P. Leneghan 59 Senior Vice President and Chief Financial Officer
Anthony C. LaPlaca 64 Senior Vice President, General Counsel, Chief Administrative Officer and Secretary
Cintia Ferreira 48 Chief Human Resources Officer
* The description of executive officers is included pursuant to the General Instruction to Item 401 of Regulation S-K.
Geoffrey P. Purtill has served as the company's President and Chief Executive Officer and as a Director since December 2022 after having served as interim President and CEO from August 2022 to December 2022. Previously, he served as Senior Vice President and General Manager of EMEA and Asia Pacific from November 2021 to August 2022 and as head of Global Strategy from September 2021 to August 2022. Prior to that, Mr. Purtill served as Vice President & General Manager, Asia Pacific from 2010 to September 2021. Prior to joining the company, Mr. Purtill held various sales, category management and supply chain leadership roles at Johnson & Johnson and Nestle. Mr. Purtill spent 14 years in the Australian Army where he was a Captain in the Intelligence Corps.
Kathleen P. Leneghan has served as the Senior Vice President and Chief Financial Officer of the company since February 2018, after having served as interim Chief Financial Officer from November 2017 to February 2018. Prior to that, she served as Vice President and Corporate Controller of the company from 2003 to November 2017. Ms. Leneghan has been employed by the company since 1990, serving in various financial roles of increasing responsibility in North America and Europe. Prior to joining the company, Ms. Leneghan was an audit manager with Ernst & Young LLP.
Anthony C. LaPlaca serves as Senior Vice President, General Counsel, Chief Administrative Officer and Secretary of the company and oversees legal affairs, corporate governance, compliance and regulatory affairs. He has served as Senior Vice President, General Counsel and Secretary since October 2008. Prior to joining the company in October 2008, Mr. LaPlaca served as Vice President and General Counsel of Bendix Commercial Vehicle Systems LLC, Elyria, Ohio, a member of the Knorr-Bremse group, a supplier of commercial vehicle safety systems, since 2002. Prior to that, he served as Vice President and General Counsel of Honeywell Transportation & Power Systems and General Counsel to Honeywell Commercial Vehicle Systems LLC. Before joining Honeywell's predecessor, AlliedSignal Inc. in 1997, Mr. LaPlaca practiced law at a Cleveland-based
national law firm for 13 years, the last 3 years of which as a partner in the firm.
Cintia Ferreira has served as Chief Human Resources Officer since December 2022. Prior to that, Ms. Ferreira served as the company's Vice President, HR-EMEA from February 2021 to December 2022. Prior to that, Ms. Ferreira held various Human Resources roles with increasing responsibilities at country, regional and global levels in Latin America, U.S. and Europe at global companies across several industries, including telecommunications, IT, financial services and agricultural business.
Part II Table of Contents

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Items 5 - 6
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
During 2022, the company's common shares, without par value, traded on the New York Stock Exchange (NYSE) under the symbol “IVC”. As noted below, subsequent to 2022, the company's common shares, without par value, trade on the OTC Pink Open Market under the symbol “IVCRQ.” Ownership of the company's Class B common shares (which are not listed on any established trading market) cannot be transferred, except, in general, to family members without first being converted into common shares. Class B common shares may be converted into common shares at any time on a share-for-share basis. The number of record holders of the company common shares and Class B common shares at April 12, 2023 was 1,748 and 15, respectively.
The following table presents information with respect to repurchases of common shares made by the company during the three months ended December 31, 2022.
Period Total Number
of Shares Purchased (1) Average Price
Paid Per Share Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs Maximum Number
of Shares That May Yet
Be Purchased Under
the Plans or Programs (2)
10/1/2022 - 10/31/22 - $ __ - 2,453,978
11/1/2022 - 11/30/22 204 0.42 - 2,453,978
12/1/2022 - 12/31/22 - - - 2,453,978
Total 204 $0.42 - 2,453,978
________________________
(1)All 204 shares repurchased between October 1, 2022 and December 31, 2022 were surrendered to the company by employees for minimum tax withholding purposes in conjunction with the vesting of restricted shares awarded to the employees or exercise of non-qualified options under the company's equity compensation plans.
(2)In 2001, the Board of Directors authorized the company to purchase up to 2,000,000 common shares, excluding any shares acquired from employees or directors as a result of the exercise of options or vesting of restricted shares pursuant to the company's performance plans. The Board of Directors reaffirmed its authorization of this repurchase program on November 5, 2010, and on August 17, 2011 authorized an additional 2,046,500 shares for repurchase under the plan. To date, the company has purchased 1,592,522 shares under this program, with authorization remaining to purchase 2,453,978 shares. The company purchased no shares pursuant to this Board authorized program during 2022.
Under the terms of the company's Credit Agreement, repurchases of shares by the company generally are not permitted except in certain limited circumstances in connection with the vesting or exercise of employee equity compensation awards. Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources, regarding covenants of the company's senior credit facilities with respect to share purchases.
NYSE Delisting Proceedings
On February 1, 2023, the company was notified by the staff of NYSE Regulation, Inc. (“NYSE Regulation”) that it had suspended trading in the company's common shares on the New York Stock Exchange (“NYSE”) and determined to commence proceedings to delist the company’s common shares from the NYSE. NYSE Regulation reached its decision that the company is no longer suitable for listing pursuant to NYSE Listed company Manual Section 802.01D after the company filed the Chapter 11 Cases referenced in Item 1. Business - Bankruptcy. The company's common shares were subsequently delisted from the NYSE effective February 16, 2023.
Following delisting from the NYSE, the company's common shares commenced trading in the OTC Pink Open Market under the symbol “IVCRQ”. The OTC Pink Open Market is a significantly more limited market than the NYSE, and quotation on the OTC Pink Open Market likely results in a less liquid market for existing and potential holders of the common shares to trade the company’s common shares and could further depress the trading price of the common shares. The company can provide no assurance that its common shares will continue to trade on this market, whether broker-dealers will continue to provide public quotes of the common shares on this market, or whether the trading volume of the common shares will be sufficient to provide for an efficient trading market.
Part II
Items 5 - 6

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]
Part II Table of Contents
Management Discussion & Analysis - Overview

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
Management's discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes that appear elsewhere in this Annual Report on Form 10-K.
Invacare is a multi-national company with integrated capabilities to design, manufacture and distribute durable medical devices. The company makes products that help people move, rest and perform essential hygiene, and with those products the company supports people with congenital, acquired and degenerative conditions. The company's products and solutions are important parts of care for people with a range of challenges, from those who are active and involved in work or school each day and may need additional mobility support, to those who are cared for in residential care settings, at home and in rehabilitation centers. The company operates in facilities in North America, Europe and Asia Pacific, which are the result of dozens of acquisitions made over the company's forty-three year history. Some of these acquisitions have been combined into integrated operating units, while others have remained relatively independent.
Chapter 11 Bankruptcy
On January 31, 2023 (the “Petition Date”), the company and two of its U.S. subsidiaries (collectively, the “Debtors” or “Company Parties”) filed voluntary petitions under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The Debtors obtained joint administration of their chapter 11 cases under the caption In re Invacare Corporation, et al., Case No. 23-90068 (CML) (the “Chapter 11 Cases”).
The Debtors continue to operate their business and manage their properties as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. To ensure ordinary course operations, the Company Parties obtained approval from the Bankruptcy Court for certain “first day” motions, including motions to obtain customary relief intended to continue ordinary course operations after the Petition Date.
Restructuring Support Agreement
On January 31, 2023, the Debtors entered into a Restructuring Support Agreement (the “Restructuring Support Agreement” or “RSA”) with certain prepetition
stakeholders (the “Consenting Stakeholders”). The Consenting Stakeholders represent holders of at least a majority of the aggregate principal amount of the Company Parties’ debt obligations under various debt agreements. Under the RSA, the Consenting Stakeholders have agreed, subject to certain terms and conditions, to support a financial restructuring (the “Restructuring”) of the existing debt of, existing equity interests in, and certain other obligations of the Debtors. The Restructuring Support Agreement contemplated: (a) the Debtors’ entry into the $70 million debtor-in-possession term loan facility, (b) the Debtors’ entry into the $17.4 million debtor-in-possession ABL facility; (c) the consummation of a rights offering, backstopped by members of the Ad Hoc Committee of Noteholders (the “Backstop Parties”) pursuant to a certain Backstop Commitment Agreement (as may be modified, amended, or supplemented from time to time, the “Backstop Commitment Agreement”); (d) issuance of the new common equity; (e) exit takeback financing in the form of an Exit Term Loan Facility and Exit Secured Convertible Notes, and (f) as necessary, exit financing in the form of the Exit NA ABL Facility and Exit EMEA ABL Facility.
Chapter 11 Plan
Since the Petition Date, the Debtors have developed the Restructuring Support Agreement into a chapter 11 plan of reorganization (as may be modified, amended, or supplemented from time to time, the “Plan”). The Plan, among other Plan treatment, contemplates the following:
•Each holder of an allowed term loan claim shall receive (i) with respect to allowed term loan claims representing principal amounts owed, its pro rata share of the exit term loan facility and (ii) with respect to allowed term loan claims representing principal amounts owed, its pro rata share of the exit term loan facility and (ii) with respect to all other allowed term loan claims, payment in full in cash.
•Each holder of an allowed secured notes claim shall receive (i) with respect to allowed secured notes claims representing principal amounts owed, its pro rata share of the exit secured convertible notes and (ii) with respect to all other allowed secured notes claims, payment in full in cash; provided that, if applicable pursuant to and in accordance with the Plan, such holder will also receive its pro rata share of the applicable portion of the excess new money in cash.
•Each holder of an allowed unsecured notes claim shall receive (i) the unsecured noteholder rights, in accordance with the rights offering procedures; (ii) with respect to any residual unsecured notes claims, its share (on a pro rata basis with other holders of allowed unsecured notes claims and
Part II
Management Discussion & Analysis - Overview
holders of allowed general unsecured claims that select the class 6 equity option) of 100% of the new common equity after the distribution of the new common equity on account of the backstop commitment premium (subject to dilution on account of the exit secured convertible notes, the new convertible preferred equity, the backstop commitment premium, and the management incentive plan); (iii) and the distributions in respect of its litigation trust interests, to the extent provided in the Plan.
•Each holder of an allowed general unsecured claim shall receive its pro rata either (x) (i) if such holder of an allowed general unsecured claim does not elect to receive the class 6 equity option, the general unsecured claims cash settlement and (ii) its pro rata share of the distributions in respect of its litigation trust interests, to the extent provided in the Plan; or (y) if such holder of an allowed general unsecured claim elects to receive the class 6 equity option in lieu of the general unsecured creditors cash settlement, its share (on a pro rata basis with holders of allowed unsecured notes claims in respect of their residual unsecured notes claims and other holders of allowed general unsecured claims that select the class 6 equity option) of 100% of the new common equity after the distribution of the new common equity on account of the backstop commitment premium (subject to dilution on account of the exit secured convertible notes, the new convertible preferred equity, and the management incentive plan); and (z) its pro rata share of the distributions in respect of its litigation trust interests, to the extent provided in the Plan.
•All existing equity interests shall be discharged, cancelled, released, and extinguished without any distribution, and will be of no further force or effect, and each holder of an existing equity interest shall not receive or retain any distribution, property, or other value on account of such existing equity interest.
Although the company intends to pursue the Restructuring in accordance with the terms set forth in the Plan, there can be no assurance that the company will be successful in completing a restructuring or any other similar transaction on the terms set forth in the Plan, on different terms or at all.
DIP Credit Agreements
The company and certain lenders (the “DIP Parties”) have agreed to a superpriority, senior secured and priming debtor-in-possession term loan credit facility in an aggregate principal amount of $70 million subject to the
terms and conditions set forth in the superpriority secured credit agreement dated as of February 2, 2023 (the “Term DIP Credit Agreement”) and a superpriority senior secured and priming debtor-in-possession asset-based revolving facility in an aggregate amount of $17.4 million subject to the terms and conditions set forth in the debtor-in-possession revolving credit and security agreement dated as of February 2, 2023 (the “ABL DIP Credit Agreement” and together with the Term DIP Credit Agreement, the “DIP Credit Agreements”).
The DIP Credit Agreements include conditions precedent, representations and warranties, affirmative and negative covenants, and events of default customary for financings of this type and size. The proceeds of all or a portion of the proposed DIP Credit Agreements may be used for, among other things, post-petition working capital for the company and its subsidiaries, payment of costs to administer the Chapter 11 Cases, payment of expenses and fees of the transactions contemplated by the Chapter 11 Cases, payment of court-approved adequate protection obligations under the DIP Credit Agreements, and payment of other costs in an approved budget and other such purposes permitted under the DIP Credit Agreements.
The foregoing description of the RSA and the DIP Credit Agreements is not complete and is qualified in its entirety by reference to each of the Restructuring Support Agreement and each DIP Credit Agreement, which were filed on February 1, 2023 on the Current Report on Form 8-K, February 3, 2023 on the Current Report on Form 8-K, as applicable. Additionally, the foregoing description of the Backstop Commitment Agreement is not complete and is qualified in its entirety by reference to the Backstop Commitment Agreement filed in this Annual Report on Form 10-K.
The company cannot predict the ultimate outcome of its Chapter 11 Cases at this time or the satisfaction of any of the RSA milestones yet to come. For the duration of the company’s Chapter 11 Cases, the company’s operations and ability to develop and execute its business plan are subject to the risks and uncertainties associated with the Chapter 11 process. As a result of these risks and uncertainties, the amount and composition of the company’s assets, liabilities, officers and/or directors could be significantly different following the outcome of the Chapter 11 Cases, and the description of the company’s operations, properties and liquidity and capital resources included in this annual report may not accurately reflect its operations, properties and liquidity and capital resources following the Chapter 11 process. Refer to “Item 1A. Risk Factors - Bankruptcy” for further discussion of potential adverse effects on the company of the Bankruptcy.
Part II Table of Contents
Management Discussion & Analysis - Overview
Supply Chain Impacts
Supply chain disruptions continue to negatively impact the company’s business in 2022, impacting both input costs and availability of components, resulting in lower revenue and compressed gross margins. While the company has seen favorable trends in some input costs at the start of 2023 (i.e., certain component material costs and freight costs), there continue to be challenges with availability and higher costs associated with electronic components. While the company has implemented actions to mitigate the negative impact of higher input costs, including pricing actions, it is expected that there could continue to be a difference between the timing of when the benefits of mitigation actions are realized and when the cost inflation is incurred.
The company continues to experience elevated open orders across all product categories and regions. The company has, and continues to, experience availability issues with components which has limited and may continue to limit the ability to increase output and meet demand across product categories. In addition, the company has continued to experience cost increases from higher input costs and supply chain disruptions. These disruptions and availability issues, from supply chain challenges and supplier delivery holds resulting from delayed payments, have resulted in intermittent production stoppages and difficulty in fulfilling orders to meet demand. This has contributed to the year-over-year decline in revenue experienced in 2022.
The extent to which the company’s operations will continue to be impacted by the supply chain disruptions will depend on component and product availability. Supply chain disruptions and inflation continue to negatively impact the global economy and have affected and may continue to affect the business including availability and cost of components and freight, which may continue to have a negative impact on the company and results of operations, if mitigation actions are not effective.
Strategy
With the change to senior management and the Board of Directors in the third quarter of 2022 and after careful evaluation of strategic options, the company concluded that the lifestyle and mobility & seating businesses are core to restoring growth and profitability. As a result, the company decided to discontinue the production and sale of respiratory products. This will allow us to further streamline our operations and improve profitability by focusing resources on lifestyle and mobility & seating products, which continue to experience strong demand. The company will continue to fulfill warranty and regulatory obligations related to respiratory products.
The company's anticipated business optimization actions balance product portfolio changes across all regions and cost improvements in supply chain and administrative functions. Key elements of the global business optimization plans are:
•Focus on lifestyle and mobility & seating product lines based on their potential to achieve a leading market position and to support profitability goals;
•Simplify the organization to leverage a reduced cost structure while allocating resources to the business units or product categories which deliver improved financial returns;
•Product rationalization and discontinuance with consideration of cost increases incurred by the company and those anticipated to continue. Adjust the product portfolio to consistently grow profitability amid cost increases by adding new products, reducing costs and continuing to improve customer experiences; and
•Take actions globally to reduce working capital and improve free cash flow.
As it navigates the uncertain business environment, the company continues to allocate more resources to the business units experiencing increased demand and expects to continue taking actions to mitigate the potential negative financial and operational impacts on other parts of the business that have declined.
The company intends to continue to make investments in its business improvement initiatives with a focus on improving profitability and free cash flow generation. As a result, the company may take actions which may reduce sales in certain areas, refocus resources away from less profitable activities, and look at its global infrastructure for opportunities to further optimize the business. As part of the company’s efforts to streamline its operations and focus its resources on core product lines that provide the greatest value and financial returns, the company continuously evaluates opportunities and activities, including potential divestitures, which it considers from time to time, particularly if they involve businesses or assets outside of the company’s primary areas of focus.
Outlook
The company participates in durable healthcare markets and serves a persistent need for its products. By continuing to drive for improved operating efficiency, the company seeks to grow revenue and profit, and improve its cash flow performance into the future.
Cost pressures on the business due to supply chain disruptions and inflationary economic conditions are anticipated to continue into 2023. The company continues
Table of Contents Part II
Management Discussion & Analysis - Overview
to see higher input costs related to freight and materials, increasing the challenges to schedule deliveries of key components, including electronic components. While the company has implemented actions to mitigate these cost increases, additional restructuring actions may be implemented to drive profit and improve cash flows. These actions are expected to include organization and supply chain changes, and a narrowing of the product portfolio for those items which no longer meet customer or business needs. These actions are anticipated to continue through 2023, and as a result, the company anticipates incurring additional costs related to its restructuring actions.
On a consolidated basis, the company expects to realize profit improvement driven by favorable product mix, higher gross profit attributable to operational efficiencies, and restructuring benefits partially offset by continued higher input costs specifically related to electronic components. Revenue is anticipated to decline as compared to 2022 as a result of the exit of respiratory products. The company expects to incur restructuring charges in 2023 as it focuses on improving the profitability of the business for the long-term related to supply chain footprint projects, including severance costs.
The company's earnings performance for the long-term is expected to benefit from: (1) margin expansion related to favorable product mix results from product rationalization efforts and improved efficiencies in our operations offset our higher material and freight costs; and (2) restructuring actions.
The company continues to focus on executing its transformation plan to drive revenue growth and deliver significant improvement in financial performance.
Favorable Long-term Demand
Ultimately, demand for the company's products and services is based on the need to provide care for people with certain conditions. The company's medical devices provide solutions for end-users and caregivers. Therefore, the demand for the company's medical equipment is largely driven by population growth and the incidence of certain conditions where treatment may be supplemented by the company's devices. The company also provides solutions to help equipment providers and residential care operators deliver cost-effective and high-quality care. The company believes that its commercial team, customer relationships, products and solutions, supply chain infrastructure, and new product opportunities will create favorable business potential.
Part II Table of Contents
MD&A - Results of Operations
RESULTS OF OPERATIONS
NET SALES
2022 Versus 2021
($ in thousands USD) 2022 2021 % Change
Fav/(Unfav) Foreign Exchange % Impact Constant Currency % Change
Fav/(Unfav)
Europe 434,372 499,118 (13.0) (10.5) (2.5)
North America 276,891 340,980 (18.8) (0.2) (18.6)
All Other (Asia Pacific) 30,470 32,359 (5.8) (8.8) 3.0
Consolidated 741,733 872,457 (15.0) (6.4) (8.6)
The table above provides net sales change as reported and as adjusted to exclude the impact of foreign exchange translation and divestitures as applicable (constant currency net sales). “Constant currency net sales” is a non-Generally Accepted Accounting Principles (“GAAP”) financial measure, which is defined as net sales excluding the impact of foreign currency translation and divestitures. The current year's functional currency net sales are translated using the prior year's foreign exchange rates. These amounts are then compared to the prior year's sales to calculate the constant currency net sales change. Management believes that this financial measure provides meaningful information for evaluating the core operating performance of the company.
Consolidated reported net sales for 2022 decreased 15.0% for the year, to $741,733,000 from $872,457,000 in 2021. Foreign currency translation decreased net sales by 6.4%. Constant currency net sales decreased 8.6% compared to 2021 driven by primarily by declines in respiratory products of $44,427,000 or 5% given lower pandemic-related demand. The other product categories continued to be negatively impacted by component shortages influenced by the supply chain challenges.
Europe - European reported net sales decreased 13.0% in 2022 compared to 2021 to $434,372,000 from $499,118,000 as foreign currency translation decreased net sales by 10.5%. Constant currency net sales decreased
2.5% compared to 2021. The decline was across all product categories which continue to be negatively impacted by supply chain challenges. The countries which the company has a significant portion of the operations are France, Germany, UK and the Nordic countries. Changes in exchange rates have had, and may continue to have, a significant impact on sales in this segment.
North America - North America reported net sales decreased 18.8% in 2022 versus the prior year to $276,891,000 from $340,980,000. Foreign currency translation decreased net sales by 0.2%. Constant currency net sales decreased, driven by $37,790,000 or 49.2% reduction in respiratory products. Mobility and seating and lifestyle products sales continued to be negatively impacted by supply chain challenges.
All Other - Reported net sales, which relate entirely to the Asia Pacific region, decreased 5.8% in 2022 from the prior year to $30,470,000 from $32,359,000. Foreign currency translation decreased net sales by 8.8 %. Constant currency net sales increased 3.0% compared to 2021 primarily for mobility and seating and lifestyle products due to improved availability of product to fulfill orders in major markets. Changes in exchange rates have had, and may continue to have, a significant impact on sales in the Asia Pacific region.
Part II
MD&A - Net Sales
2021 Versus 2020
($ in thousands USD) 2021 2020 Reported % Change Foreign Exchange % Impact Divestiture % Impact Constant Currency % Change
Europe 499,118 468,041 6.6 5.8 - 0.8
North America 340,980 348,307 (2.1) 0.5 - (2.6)
All Other (Asia Pacific) 32,359 34,341 (5.8) 7.4 (8.2) (5.0)
Consolidated 872,457 850,689 2.6 3.7 (0.3) (0.8)
The divestiture impact is related to the SG&A expenses related to the Dynamic Controls business divested on March 7, 2020.
Consolidated reported net sales for 2021 increased 2.6% for the year, to $872,457,000 from $850,689,000 in 2020. Foreign currency translation increased net sales by 3.7 percentage points with the divestiture decreasing net sales by 0.3 percentage points. Constant currency net sales decreased 0.8% compared to 2020 driven by declines in lifestyle products offset by growth in respiratory and mobility and seating products. Both mobility and seating and lifestyle product categories continue to be impacted by restrictions which limited customer and end-user access to certain product selections. All products were also impacted by component shortages influenced by the supply chain challenges.
Europe - European reported net sales increased 6.6% in 2021 compared to 2020 to $499,118,000 from $468,041,000 as foreign currency translation increased net sales by 5.8 percentage points. Constant currency net sales increased 0.8% compared to 2020 driven by lifestyle products and mobility and seating products partially offset by respiratory products. Lifestyle product growth was helped by the company's decision to invest in inventory given the longer-supply chain related to these products. Mobility and seating products benefiting from improved access to healthcare and easing of public health restrictions across Europe starting in the second half of 2021. Respiratory products were limited by component shortages from global supply challenges. The countries which the company has a significant portion of the operations are France, Germany, UK and the Nordic countries. Changes in exchange rates have had, and may continue to have, a significant impact on sales in this segment.
North America - North America reported net sales decreased 2.1% in 2021 versus the prior year to $340,980,000 from $348,307,000. Foreign currency translation decreased net sales by 0.5 percentage points. Constant currency net sales decreased, driven by a 10.7% reduction in lifestyle products, which more than offset respiratory improvement of 11.7%. Mobility and seating products were flat. Lifestyle product sales continued to be impacted by supply chain challenges as well as the
enterprise resource planning (ERP) implementation launched in 4Q21. We successfully launched our new ERP for all of our lifestyle products, however, this temporarily impacted the timing of order fulfillment as we manually reviewed all transactions and shipments processed in the new system for accuracy. While demand for mobility and seating products continued to be impacted by pandemic-related restrictions limiting access to healthcare professionals and institutions, reported net sales were flat compared to 2020 with sequential and year over year growth in the second half of 2021.
All Other - Reported net sales, which relate entirely to the Asia Pacific region, decreased 5.8% in 2021 from the prior year to $32,359,000 from $34,341,000. Foreign currency translation increased net sales by 7.4 percentage points and the impact of the Dynamic Controls divestiture in 2020 decreased net sales by 8.2 percentage points. Constant currency net sales decreased 5.0% compared to 2020 primarily due to lack of timely arrival of inventory in major markets. Changes in exchange rates have had, and may continue to have, a significant impact on sales in the Asia Pacific region.
Part II Table of Contents
MD&A - Gross Profit
GROSS PROFIT
2022 Versus 2021
Consolidated gross profit as a percentage of net sales decreased by 380 basis points to 23.6% in 2022 as compared to 27.4% in 2021. Inventory and purchasing obligation charges related to the decision to exit the respiratory product line burdened gross profit dollars $8,651,000 or 120 basis points. Excluding these charges, gross profit decreased 260 basis points primarily attributable lower net sales impacting efficiency of operations, intermittent production stoppages and unfavorable foreign currency translation. These were partially offset by favorable product mix including pricing actions, which continue to lag higher costs.
Europe - Gross profit as a percentage of net sales decreased 260 basis points in 2022 compared to the prior year and gross profit dollars decreased by $31,070,000. Gross profit dollars were burdened primarily by lower sales, increased input costs and unfavorable foreign exchange. Inventory write downs related to the decision to exit the respiratory product line burdened gross profit dollars $916,000 or 30 basis points.
North America - Gross profit as a percentage of net sales decreased by 450 basis points in 2022 compared to the prior year while gross margin dollars decreased by $33,121,000. The decrease in gross profit dollars as a percentage of net sales was driven by lower sales in relation to fixed costs and increased input costs. Inventory and purchase obligation charges related to the decision to exit the respiratory product line burdened gross profit dollars by $7,679,000 or 250 basis points.
All Other - All other primarily relates to the company's Asia Pacific businesses. Gross profit as a percentage of net sales, increased 80 basis points in 2022 compared to the prior year and gross profit dollars
decreased $379,000. The decrease in gross profit dollars was primarily driven by higher input costs.
Research and Development
The company continued to invest strategically in research and development activities in 2022. The company dedicated funds to applied research activities to ensure that new and enhanced design concepts are available to its businesses. Research and development expenditures, which are included in costs of products sold, decreased to $3,492,000 in 2022 from $8,656,000 in 2021. The expenditures, as a percentage of net sales, were 0.5% and 1.0% in 2022 and 2021, respectively. The decline is primarily attributable to lower employment costs in both Europe and North America.
Part II
MD&A - Gross Profit
2021 Versus 2020
Consolidated gross profit as a percentage of net sales decreased by 140 basis points to 27.4% in 2021 as compared to 28.8% in 2020. Gross profit as a percentage of net sales declined significantly for North America while Europe and All Other margins declined slightly. Gross profit was significantly impacted by higher input costs of material, freight and labor from supply chain challenges impacting all regions. This was partially offset by favorable product mix.
Europe - Gross profit as a percentage of net sales decreased 10 basis points in 2021 compared to the prior year and gross profit dollars increased by $9,315,000. The increase in gross profit dollars was principally due to higher sales but margins were burdened significantly by increased freight and material costs stemming from global supply chain challenges. In addition, given the supply disruptions, operations costs were also unfavorable.
North America - Gross profit as a percentage of net sales decreased by 170 basis points in 2021 compared to the prior year while gross margin dollars decreased by $14,152,000. The decrease in gross profit dollars was primarily due to higher material and freight costs impacted by supply chain challenges, and reduced sales.
All Other - Gross profit as a percentage of net sales, decreased 30 basis points in 2021 compared to the prior year and gross profit dollars decreased $1,309,000. All other primarily relates to the company's Asia Pacific businesses. The decrease in gross profit dollars was primarily driven by reduced sales in the distribution business given untimely arrival of inventory in the region, and from the divestiture of the Dynamic Controls business as of March 7, 2020.
Research and Development
The company continued to invest strategically in research and development activities in 2021. The company dedicated funds to applied research activities to ensure that new and enhanced design concepts are available to its businesses. Research and development expenditures, which are included in costs of products sold, decreased to $8,656,000 in 2021 from $12,275,000 in 2020. The expenditures, as a percentage of net sales, were 1.0% and 1.4% in 2021 and 2020, respectively. The decline in expense in 2021 was primarily due to cost savings initiatives and to a lesser extent, the divestiture of Dynamic Controls.
Part II Table of Contents
MD&A - SG&A
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
2022 Versus 2021
($ in thousands USD) 2022 2021 Reported Change Foreign Exchange Impact Constant Currency Change
SG&A Expenses - $ 226,780 232,242 (5,462) (11,254) 5,792
SG&A Expenses - % change (2.4) (4.9) 2.5
% to net sales 30.6 26.6
The table above provides selling, general and administrative (SG&A) expense change as reported and as adjusted to exclude the impact of foreign exchange translation (constant currency SG&A). “Constant currency SG&A” is a non-GAAP financial measure, which is defined as SG&A expenses excluding the impact of foreign currency translation and divestitures, as applicable. The current year's functional currency SG&A expenses are translated using the prior year's foreign exchange rates. These amounts are then compared to the prior year's SG&A expenses to calculate the constant currency SG&A expense change. Management believes that this financial measure provides meaningful information for evaluating the core operating performance of the company.
Consolidated SG&A expenses as a percentage of net sales were 30.6% in 2022 and 26.6% in 2021. The overall dollar decrease was $5,462,000, or 2.4%, with foreign currency translation decreasing expense by $11,254,000. Excluding the impact of foreign currency translation SG&A expenses increased $5,792,000, or 2.5%, primarily driven by increased IT costs as a result of the temporary pause in the ERP roll-out, partially offset by reduced employee-related costs.
Europe - European SG&A expenses decreased by 9.9%, or $10,714,000, in 2022 compared to 2021. Foreign currency translation decreased expense by approximately $10,004,000 or 9.2%. Excluding the foreign currency translation impact, SG&A expenses decreased by $710,000, or 0.7%, primarily driven by reduced employee-related costs partially offset by unfavorable foreign currency transactions.
North America - SG&A expenses for North America decreased 1.0%, or $852,000, in 2022 compared to 2021 with foreign currency translation decreasing expense by $305,000 or 0.3%. Excluding the foreign currency translation, SG&A expense decreased $547,000, or 0.6%, driven primarily driven by reduced employee-related costs.
All Other - SG&A expenses increased $6,104,000 in 2022 compared to 2021. Foreign currency translation decreased expense by $945,000. All Other includes SG&A
related to the Asia Pacific businesses and non-allocated corporate costs.
SG&A expenses related to non-allocated corporate costs for 2022 increased 36.7%, or $8,508,000, compared to 2021. The increase was primarily driven by increased IT costs.
Related to the Asia Pacific businesses, SG&A for 2022 decreased 19.9%, or $2,404,000, compared to 2021 with foreign currency translation decreasing SG&A expenses $945,000. Constant currency SG&A expenses decreased $1,459,000 or 12.1%, primarily driven by favorable foreign currency exchange transactions.
Part II
MD&A - SG&A
2021 Versus 2020
($ in thousands USD) 2021 2020 Reported Change Foreign Exchange Impact Divestiture Impact Constant Currency Change
SG&A Expenses - $ 232,242 236,357 (4,115) 7,583 (826) (10,872)
SG&A Expenses - % change (1.7) 3.2 (0.3) (4.6)
% to net sales 26.6 27.8
The divestiture impact is related to the SG&A expenses related to the Dynamic Controls business divested on March 7, 2020.
Consolidated SG&A expenses as a percentage of net sales were 26.6% in 2021 and 27.8% in 2020. The overall dollar decrease was $4,115,000, or 1.7%, with foreign currency translation increasing expense by $7,583,000. Excluding the impact of foreign currency translation and the divestiture of Dynamic Controls, SG&A expenses decreased $10,872,000, or 4.6%, primarily driven by reduced employee-related costs.
Europe - European SG&A expenses decreased by 1.6%, or $1,772,000, in 2021 compared to 2020. Foreign currency translation increased expense by approximately $6,127,000 or 5.6%. Excluding the foreign currency translation impact, SG&A expenses decreased by $7,899,000, or 7.2%, primarily driven by reduced employee-related costs.
North America - SG&A expenses for North America decreased 3.0%, or $2,775,000, in 2021 compared to 2020 with foreign currency translation increasing expense by $691,000 or 0.6%. Excluding the foreign currency translation, SG&A expense decreased $3,466,000, or 3.8%, driven primarily driven by reduced employee-related costs.
All Other - SG&A expenses increased $432,000 in 2021 compared to 2020. Foreign currency translation increased expense by $765,000. All Other includes SG&A related to the Asia Pacific businesses and non-allocated corporate costs.
SG&A expenses related to non-allocated corporate costs for 2021 decreased 13.9%, or $3,747,000, compared to 2020. The decrease was primarily driven by reduced employee-related costs, including stock compensation. Stock compensation was lower in 2021 due to lowered projected vesting assumptions on multi-year cycle performance awards.
Related to the Asia Pacific businesses, 2021 SG&A increased 52.9%, or $4,179,000, compared to 2020 with foreign currency translation increasing SG&A expenses $765,000. The divestiture of Dynamic Controls decreased expense by $826,000 or 10.5%. Constant currency SG&A
expenses increased $4,240,000, primarily driven by unfavorable foreign currency exchange transactions.
Part II Table of Contents
MD&A - Operating Income (Loss)
OPERATING INCOME (LOSS)
2022 vs. 2021 2021 vs. 2020
($ in thousands USD) 2022 2021 2020 $ Change % Change $ Change % Change
Europe 13,413 33,769 22,682 (20,356) (60.3) 11,087 48.9
North America (34,197) (1,928) 9,449 (32,269) (1,673.7) (11,377) 120.4
All Other (30,603) (24,977) (23,236) (5,626) (22.5) (1,741) (7.5)
Gain on sale of business - - 9,790 - - (9,790) (100.0)
Charges related to restructuring (25,820) (2,534) (7,358) (23,286) (918.9) 4,824 65.6
Impairment of goodwill - (28,564) - 28,564 (100.0) (28,564) (100.0)
Impairment of intangible assets (3,259) - - (3,259) 100.0 - -
Consolidated Operating Income (Loss) (80,466) (24,234) 11,327 (56,232) (232.0) (35,561) 313.9
2022 Versus 2021
Consolidated operating loss increased by $56,232,000 to $80,466,000 in 2022 as compared to $24,234,000 in 2021 primarily due to lower sales, charges related to the exit of the respiratory product line, higher IT costs due to temporary pause in ERP implementation, and increased restructuring costs. Other declines were influenced by the global supply chain challenges and higher input costs not fully mitigated by pricing actions as well as unfavorable foreign currency.
Europe - Operating income decreased by $20,356,000 in 2022 compared to 2021 primarily related to lower net sales and lower gross profit impacted by higher input costs and operational inefficiencies, and unfavorable foreign currency partially offset by reduced SG&A expenses primarily driven by lower employee-related costs.
North America - Operating loss increased by $32,269,000 in 2022 compared to 2021 primarily related to lower sales, lower gross profit impacted by increased input costs and charges related to the exit of the respiratory product line.
All Other - Operating loss increased by $5,626,000 in 2022 compared to 2021 driven by higher SG&A expenses from IT costs recorded as operating expense due to temporary pause on ERP implementation.
Charge Related to Restructuring Activities
The company's restructuring charges were originally necessitated primarily by continued declines in Medicare and Medicaid reimbursement by the U.S. government, as well as similar healthcare reimbursement pressures abroad, which negatively affect the company's customers (e.g. home health care providers) and continued pricing pressures faced by the company due to the outsourcing by competitors to lower cost locations. Restructuring
decisions were also the result of reduced profitability in each of the segments. In addition, as a result of the company's business improvement strategy, additional restructuring actions continued in 2022. The company expects reduced salary and benefit costs principally impacting Selling, General and Administrative expenses and Cost of Products Sold as a result of the actions.
Charges for the year ended December 31, 2022 totaled $25,820,000 which were related to Europe ($13,918,000), North America ($10,646,000) and All Other ($1,256,000). Charges incurred related to severance ($9,087,000) and other restructuring costs ($16,733,000). Payments for the year ended December 31, 2022 were $18,311,000 and the cash payments were funded with company's cash on hand. The majority of the 2022 accrued balances are expected to be paid out within twelve months.
Charges for the year ended December 31, 2021 totaled $2,534,000 which were related to Europe ($1,560,000), North America ($964,000) and All Other ($10,000). The European charges incurred related to severance ($886,000) and lease termination costs ($674,000). In North America and All other, all charges incurred were related to severance. Payments for the year ended December 31, 2021 were $8,305,000 and the cash payments were funded with company's cash on hand.
See the company's disclosure below in Liquidity and Capital Resources and in “Item 1A. Risk Factors” which highlights factors that have, and could continue to, negatively impact the company's liquidity. Refer also to “Charges Related to Restructuring Activities” in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
Part II
MD&A - Operating Income (Loss)
2021 Versus 2020
Consolidated operating loss increased by $35,561,000 to $24,234,000 in 2021 as compared to operating income of $11,327,000 in 2020 primarily due to non-cash goodwill impairment charge of $28,564,000 in North America in 2021 (the result of changes in operating structure of the business following the recent IT implementation) and gain on sale of Dynamic Controls of $9,790,000 in 2020, partially offset by a decrease in restructuring costs of $4,824,000. Consolidated operating loss excluding goodwill impairment charge, gain on sale of business and restructuring costs declined by $2,031,000. This decline was primarily driven by higher input costs for material, freight and labor, influenced by the global supply chain challenges.
Europe - Operating income increased by $11,087,000 in 2021 compared to 2020 primarily related to higher gross profit on higher sales and a smaller benefit from reduced SG&A expenses partially offset by higher freight costs.
North America - Operating income (loss) decreased by $11,377,000 in 2021 compared to 2020 driven primarily by decreased gross profit impacted by higher input costs and lower sales partially offset by reduced SG&A expenses.
All Other - Operating loss increased by $1,741,000 in 2021 compared to 2020 driven by higher SG&A expenses in the Asia Pacific business and lower sales.
Charge Related to Restructuring Activities
Charges for the year ended December 31, 2021 totaled $2,534,000 which were related to Europe ($1,560,000), North America ($964,000) and All Other ($10,000). The European charges incurred related to severance ($886,000) and lease termination costs ($674,000). In North America and All other, all charges incurred were related to severance. Payments for the year ended December 31, 2021 were $8,305,000 and the cash payments were funded with company's cash on hand.
Charges for the year ended December 31, 2020 totaled $7,358,000 which were related to Europe ($5,934,000), North America ($1,306,000) and All Other ($118,000). The European charges incurred related to severance ($5,588,000) and lease termination costs ($346,000) primarily related to the German facility consolidation. In North America and All Other, all charges incurred were related to severance. Payments for the year ended December 31, 2020 were $8,132,000 and the cash payments were funded with company's cash on hand.
Part II Table of Contents
MD&A - Other Items
OTHER ITEMS
2022 Versus 2021
Impairment of intangible assets
($ in thousands USD) 2022 2021
Impairment of intangible assets 3,259 -
In 2022, the company performed an assessment for potential impairments and recognized intangible asset impairment charges within the North America operating segment of $1,012,000 ($729,000 after-tax) and within the Europe operating segment of $2,247,000 ($1,605,000 after-tax) related to trademarks with an indefinite life.
Impairment of goodwill
($ in thousands USD) 2022 2021
Impairment of goodwill - 28,564
During the third quarter of 2021, the company's reporting units of North America / HME and Institutional Products Group were merged into one reporting unit of North America, consistent with the operating segment. Developments in the third quarter of 2021 and the completion of the reporting units merger were tied most closely to the actions of the company to implement components of a new ERP system which both changes the level of discrete financial information readily available and the go-forward manner in which the company assesses performance and allocates resources to the North America operating segment.
The reporting unit change within the North America operating segment in the third quarter of 2021 was a triggering event and required the company to perform an interim goodwill impairment test. Based on the interim goodwill impairment test, the company concluded the carrying value of the North America reporting unit was above its fair value. That conclusion resulted in the recording of impairment of goodwill in the third quarter of 2021 of $28,564,000.
As a result of the goodwill impairment, the company recorded a reversal of deferred taxes related to the tax deductible goodwill previously deducted by the company, resulting in the company recognizing a tax benefit of $661,000.
Net gain on convertible debt derivatives
($ in thousands USD) 2022 2021
Net gain on convertible debt derivatives (1,510) -
In 2022, the company recognized a net gain of $1,510,000 related to the fair value of convertible debt
derivatives related to the Secured 2026 Notes. Refer to “Long-Term Debt” in the notes to the consolidated financial statements.
Net gain on debt extinguishment including debt finance changes and fees
($ in thousands USD) 2022 2021
Net gain on debt extinguishment including debt finance fees (9,419) (9,422)
During the third quarter of 2022, the company entered into various transactions which included the amendment and restatement of its asset-based lending facility, partial retirement of Series II 2024 Notes and partial exchange and retirement of 2026 Notes for new Secured 2026 Notes, a term loan and issuance of common shares as consideration for the transactions. During the fourth quarter, further 2026 Notes were exchanged for Secured 2026 Notes. The result of the transactions was a net gain on debt extinguishment including debt and finance fees of $9,419,000.
During the first quarter of 2021, the company repurchased and retired, at par plus accrued interest, $78,850,000 of its 2022 Notes. The result of the transaction was a loss on debt extinguishment including debt and finance fees of $709,000. During the third quarter of 2021, the company applied for forgiveness of its Cares Act loan along with its accrued interest. The company received notification of approval of its debt forgiveness including accrued interest, in full, and the company recorded a gain on extinguishment of debt of $10,131,000. These transactions resulted in a combined gain on debt extinguishment including debt and finance fees of $9,422,000.
Interest
($ in thousands USD) 2022 2021
Interest Expense 28,520 24,307
Interest Income (56) (1)
Interest expense increased as a result of increased debt levels primarily attributable to the term loan debt implemented in the third quarter of 2022 with higher average interest rates.
Income Taxes
The company had an effective tax rate charge of 3.1% and 16.5% on losses before taxes in 2022 and 2021, respectively, compared to an expected benefit at the U.S. statutory rate of 21.0% on the pre-tax losses for each period, respectively. The company's effective tax rate in 2022 and 2021 was unfavorable compared to the U.S.
Part II
MD&A - Other Items
federal statutory rate expected benefit, principally due to the negative impact of the company's inability to record tax benefits related to the significant losses in countries which had tax valuation allowances. The 2022 and 2021 effective tax rate was increased by certain taxes outside the United States, excluding countries with tax valuation allowances, that were at an effective rate higher than the U.S. statutory rate.
Part II Table of Contents
MD&A - Other Items
2021 Versus 2020
Impairment of goodwill
($ in thousands USD) 2021 2020
Impairment of goodwill 28,564 -
During the third quarter of 2021, the company's reporting units of North America / HME and Institutional Products Group were merged into one reporting unit of North America, consistent with the operating segment. Developments in the third quarter of 2021 and the completion of the reporting units merger were tied most closely to the actions of the company to implement components of a new ERP system which both changes the level of discrete financial information readily available and the go-forward manner in which the company assesses performance and allocates resources to the North America operating segment.
The reporting unit change within the North America operating segment in the third quarter of 2021 was a triggering event and required the company to perform an interim goodwill impairment test. Based on the interim goodwill impairment test, the company concluded the carrying value of the North America reporting unit was above its fair value. That conclusion resulted in the recording of impairment of goodwill in the third quarter of 2021 of $28,564,000.
As a result of the goodwill impairment, the company recorded a reversal of deferred taxes related to the tax-deductible goodwill previously deducted by the company, resulting in the company recognizing a tax benefit of $661,000.
Net loss (gain) on debt extinguishment including debt finance changes and fees
($ in thousands USD) 2021 2020
Net loss (gain) on debt extinguishment including debt finance fees (9,422) 7,360
During the first quarter of 2021, the company repurchased and retired, at par plus accrued interest, $78,850,000 of its 2022 Notes. The result of the transaction was a loss on debt extinguishment including debt and finance fees of $709,000. During the third quarter of 2021, the company applied for forgiveness of its Cares Act loan along with its accrued interest. The company received notification of approval of its debt forgiveness including accrued interest, in full, and the company recorded a gain on extinguishment of debt of $10,131,000. These transactions resulted in a combined gain on debt extinguishment including debt and finance fees of $9,422,000.
During the second quarter of 2020, the company entered into separate, privately negotiated agreements with certain holders of its 5.00% convertible senior notes due 2021 (“2021 Notes”) and certain holders of its 2022 Notes to exchange $35,375,000 in aggregate principal amount of 2021 Notes and $38,500,000 in aggregate principal amount of 2022 Notes, for aggregate consideration of $73,875,000 in aggregate principal amount of new Series II 2024 Notes of the company and $5,593,000 in cash. During the third quarter of 2020, the company repurchased and retired $24,466,000 its 2021 Notes. These transactions resulted in a combined loss on debt extinguishment including debt and finance fees of $7,360,000.
Interest
($ in thousands USD) 2021 2020
Interest Expense 24,307 28,499
Interest Income (1) (93)
Interest expense declined as a result the adoption of ASU 2020-06 which eliminated interest expense from convertible debt discount amortization effective January 1, 2021 offset by accretion from the Series II 2024 Notes which commenced in the second quarter of 2020.
Income Taxes
The company had an effective tax rate charge of 16.5% and 15.7% on losses before taxes in 2021 and 2020, respectively, compared to an expected benefit at the U.S. statutory rate of 21.0% on the pre-tax losses for each period, respectively. The company's effective tax rate in 2021 and 2020 was unfavorable compared to the U.S. federal statutory rate expected benefit, principally due to the negative impact of the company's inability to record tax benefits related to the significant losses in countries which had tax valuation allowances. The gain on the divestiture of Dynamic Controls in 2020 was not taxable locally. In addition, the company had accrued withholding taxes on earnings of its Chinese subsidiary based on the expectation of not permanently reinvesting those earnings. The sale of this entity, without such distribution resulted in the reversal of this accrual in an amount of $988,000 in 2020. The 2021 and 2020 effective tax rate was increased by certain taxes outside the United States, excluding countries with tax valuation allowances, that were at an effective rate higher than the U.S. statutory rate.
Part II
MD&A - Liquidity and Capital Resources
LIQUIDITY AND CAPITAL RESOURCES
Key balances on the company's balance sheet and related metrics:
($ in thousands USD) December 31, 2022 December 31, 2021 $ Change % Change
Cash and cash equivalents 58,792 83,745 (24,953) (29.8)
Working capital (1)
79,183 138,134 (58,951) (42.7)
Total debt (2)
430,394 382,586 47,808 12.5
Long-term debt (2)
427,134 376,462 50,672 13.5
Total shareholders' equity 81,092 218,489 (137,397) (62.9)
Credit agreement borrowing availability (3)
15,288 41,845 (26,557) (63.5)
(1) Current assets less current liabilities.
(2) Long-term debt and Total debt include finance leases but exclude debt issuance costs recognized as a deduction from the carrying amount of debt liability and debt discounts classified as debt or equity and operating leases.
(3) Reflects the combined availability of the company's North American and prior European asset-based revolving credit facilities before borrowings. At December 31, 2022, the company had drawn $15,220,000 on the North American credit facility. Outstanding borrowings and availability are calculated on a month lag related to the prior European credit facility.
The company's cash and cash equivalents were $58,792,000 and $83,745,000 at December 31, 2022 and December 31, 2021, respectively. The decrease in cash balances at December 31, 2022 compared to December 31, 2021 is attributable to cash used for operations.
Refer to “Long-Term Debt” in the Notes to the Consolidated Financial statements included in this report for a summary of the material terms of the company's long-term indebtedness.
Debt repayments, acquisitions, divestitures, the timing of vendor payments, the timing of customer rebate payments, the granting of extended payment terms to significant national accounts and other activity can have a significant impact on the company's cash flow and borrowings outstanding such that the cash reported at the end of a given period may be materially different than cash levels during a given period. While the company has cash balances in various jurisdictions around the world, there are no material restrictions regarding the use of such cash for dividends within the company, loans or other purposes.
The company's total debt outstanding, inclusive of the debt discount and fees associated with the company's convertible senior notes due 2022, 2024 and 2026 secured convertible senior notes due 2026, secured term loan due 2026 and finance leases, increased by $47,808,000 to $430,394,000 at December 31, 2022 from $382,586,000 as of December 31, 2021. The increase is primarily driven by July, October and December financing transactions which included a new secured term loan offset by partial settlement of Series II 2024 Notes, exchanges of 2026 convertible notes for 2026 secured convertible notes and net borrowings and repayments of ABL credit facility.
At December 31, 2022 the company had drawn $15,220,000 on the North American credit facility. At December 31, 2021, the company had drawn $22,150,000 on the North American credit facility and $13,352,000 on the European credit facility.
In accordance with Accounting Standards Update (“ASU”) 2014-15, Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, the company is required to evaluate whether there is substantial doubt about its ability to continue as a going concern each reporting period. In evaluating the company's ability to continue as a going concern, management evaluated the conditions and events that could raise substantial doubt about the company's ability to continue as a going concern within one year after the date that the financial statements are issued on April 14, 2023.
On January 31, 2023 (the “Petition Date”), the company and two of its U.S. subsidiaries (collectively, the “Debtors” or “Company Parties”) filed voluntary petitions under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The Debtors obtained joint administration of their chapter 11 cases under the caption In re Invacare Corporation, et al., Case No. 23-90068 (CML) (the “Chapter 11 Cases”).
Given the inherent risks, unknown results and inherent uncertainties associated with the bankruptcy process and the direct correlation between these matters and the company's ability to satisfy its financial obligations that
Part II Table of Contents
MD&A - Liquidity and Capital Resources
may arise, the company believes that there is substantial doubt that it will continue to operate as a going concern within one year after the date the financial statements are issued on April 14, 2023.
The company's operations and its ability to develop and execute its business plan are subject to a high degree of risk and uncertainty associated with the Chapter 11 Cases. The outcome of the Chapter 11 Cases is subject to a high degree of uncertainty and is dependent upon factors that are outside of the company's control, including actions of the Bankruptcy Court and the company's creditors. There can be no assurance that the company will confirm and consummate the chapter 11 plan of reorganization (as may be modified, amended or supplemented from time to time, the “Plan”) as set forth in the RSA or complete another plan of reorganization with respect to the Chapter 11 Cases. As a result, the company has concluded that management's plans do not alleviate substantial doubt about the company's ability to continue as a going concern.
Refer to “Subsequent Events” in the Notes to the Consolidated Financial statements included in this report for a summary of the Chapter 11 Cases.
The company may incur additional debt in the future. Although the terms of the agreements governing existing debt restrict the company's ability to incur additional debt (including secured debt), such restrictions are subject to several exceptions and qualifications and such restrictions and qualifications may be waived or amended, and debt (including secured debt) incurred in compliance with such restrictions and qualifications (as they may be waived or amended) may be substantial.
The company also has an agreement with De Lage Landen, Inc. (“DLL”), a third-party financing company, to provide lease financing to the company's U.S. customers. Either party could terminate this agreement with 180 days' notice or 90 days' notice by DLL upon the occurrence of certain events. Should this agreement be terminated, the company's borrowing needs under its credit facilities could increase.
An increase of 1% to variable rate debt outstanding at December 31, 2022 would increase interest expense $1,057,200 annually. For 2022 and 2021, the weighted average interest rate on all borrowings, excluding finance leases, was 5.3% and 4.5%, respectively.
Refer to “Long-Term Debt” and “Leases and Commitments” in the Notes to the Consolidated Financial Statements for more details regarding the company's convertible notes and credit facilities and lease liabilities, respectively.
The company's contractual obligations primarily consist of debt, leases, product liability, the Supplemental Executive Retirement Plan and a purchase obligation. Refer to the Notes to the Consolidated Financial Statements for more details regarding these obligations. Regarding the purchase obligation, in October 2019, the company entered into an agreement to outsource substantially all of the company's information technology business service activities, including, among other things, support, rationalization and upgrading of the company's legacy information technology systems and implementation of a global enterprise resource planning system and eCommerce platform.
CAPITAL EXPENDITURES
There were no individually material capital expenditure commitments outstanding as of December 31, 2022. The company estimates that capital investments for 2023 could be approximately $9,000,000 to $15,000,000 compared to actual capital expenditures of $3,778,000 in 2022. The company believes that its balances of cash and cash equivalents and borrowing facilities will be sufficient to meet its operating cash requirements and fund required capital expenditures (refer to “Liquidity and Capital Resources”). The ABL Credit Agreement limits the company's annual capital expenditures to $25,000,000.
DIVIDEND POLICY
The Board of Directors decided to suspend the quarterly dividend on the company's common shares in the second quarter of 2020 and the quarterly dividend on the Class B common shares in the third quarter of 2018. Less than 4,000 Class B common shares remain outstanding, and holders of Class B common shares are entitled to convert their shares into common shares at any time on a share-for-share basis.
Part II
MD&A - Cash Flows
CASH FLOWS
Cash flows used by operating activities were $55,251,000 in 2022 compared to $14,309,000 in the previous year. The 2022 operating cash flows were burdened by the operating loss, reduced account payable and significant payments for restructuring costs. These were partially offset by lower accounts receivable and inventory levels.
Cash flows used by investing activities were $4,320,000 in 2022, compared to $17,802,000 in 2021. The decrease in cash flows used for investing was primarily driven by lower capital expenditures related to the ERP implementation.
Cash flows provided by financing activities in 2022 were $38,324,000 compared to cash flow provided of $12,873,000 in 2021.
Cash flows provided in 2022 included the issuance of $90,500,000 principal amount of Secured Term Loan offset by payment of $11,037,000 in financing costs and net credit facilities borrowings and repayments. Borrowing during 2022 were on credit facilities under the company's ABL Credit Agreement which provides an asset-based-lending senior secured credit facilities and the Highbridge Loan Agreement which provides the Secured Term Loan. The company's total debt outstanding, inclusive of the debt discount and fees associated with the company's convertible senior notes due 2022, 2024 and 2026 secured convertible senior notes due 2026, secured term loan due 2026 and finance leases, increased by $47,808,000 to $430,394,000 at December 31, 2022. The increase is primarily driven by July, October and December financing transactions which included a new secured term loan offset by partial settlement of $5,000,000 of Series II 2024 Notes, $55,300,000 exchanges of 2026 convertible notes for 2026 secured convertible notes and net borrowings and repayments of ABL credit facility.
Cash flows provided in 2021 was driven by the issuance of $125,000,000 principal amount of 2026 Notes in the first quarter of 2021, payment of $5,369,000 in financing costs, purchase of capped calls related to the 2026 Notes for $18,787,000, repurchase of $78,850,000 principal amount of 2022 Notes and repayment of $1,250,000 principal amount of 2021 Notes. Borrowing on credit facilities are under the company's Credit Agreement which provides an asset-based-lending senior secured credit facilities.
Part II Table of Contents
MD&A - Cash Flows
Free cash flow is a non-GAAP financial measure and is reconciled to the corresponding GAAP measure as follows:
($ in thousands USD) Twelve Months Ended
December 31,
2022 2021
Net cash used by operating activities $ (55,251) $ (14,309)
Plus: Sales of property and equipment 5 33
Less: Purchases of property and equipment (3,778) (17,698)
Free Cash Flow (usage) $ (59,024) $ (31,974)
Free cash flow usage was $59,024,000 in 2022 compared to usage of $31,974,000 in 2021. The change in free cash flow was driven by the same items impacting operating activities noted previously. Free cash flow is a non-GAAP financial measure composed of net cash used by operating activities less purchases of property and equipment plus proceeds from sales of property and equipment. Management believes that this financial measure provides meaningful information for evaluating
the overall financial performance of the company and its ability to repay debt or make future investments (including acquisitions, etc.).
In 2021, the company's capital expenditures included ERP implementation costs which were paused in 2022.
In the third quarter of 2021, the company initiated accounts receivable factoring programs within the Nordic countries of Norway, Sweden and Denmark which benefited free cash flow by $7,082,000.
The company historically generates negative free cash flow during the first half of the year. This pattern is expected to continue due to the timing of annual one-time payments such as customer rebates earned during the prior year and higher working capital usage from inventory increases. The absence of these payments and seasonally stronger sales in the second half of the year typically result in more favorable free cash flow in the second half of the year.
The company's approximate cash conversion days at December 31, 2022 and December 31, 2021 are as follows:
Days in receivables are equal to current quarter net current receivables divided by trailing four quarters of net sales multiplied by 365 days. Days in inventory and accounts payable are equal to current quarter net inventory and accounts payable, respectively, divided by trailing four quarters of cost of sales multiplied by 365 days. Total cash conversion days are equal to days in receivables plus days in inventory less days in accounts payable.
Improvement in cash conversion days primarily driven by lower inventory levels impacted by supply chain challenges and lower respiratory demand and higher level of accounts payable payments.
Part II
MD&A - Accounting Estimates and Pronouncements
ACCOUNTING ESTIMATES AND PRONOUNCEMENTS
CRITICAL ACCOUNTING POLICIES
The Consolidated Financial Statements included in the report include accounts of the company and all majority-owned subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying Consolidated Financial Statements and related footnotes. In preparing the financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. The following critical accounting policies, among others, affect the more significant judgments and estimates used in preparation of the company's consolidated financial statements.
Revenue Recognition
The company recognizes revenues when control of the product or service is transferred to unaffiliated customers. Revenues from Contracts with Customers, ASC 606, provides guidance on the application of generally accepted accounting principles to revenue recognition issues. The company has concluded that its revenue recognition policy is appropriate and in accordance with GAAP under ASC 606.
All of the company's product-related contracts, and a portion related to services, have a single performance obligation, which is the promise to transfer an individual good or service, with revenue recognized at a point in time. Certain service-related contracts contain multiple performance obligations that require the company to allocate the transaction price to each performance obligation. For such contracts, the company allocates revenue to each performance obligation based on its relative standalone selling price at inception of the contract. The company determined the standalone selling price based on the expected cost-plus margin methodology. Revenue related to the service contracts with multiple performance obligations is recognized over time. To the extent performance obligations are satisfied over time, the company defers revenue recognition until the performance obligations are satisfied.
The determination of when and how much revenue to recognize can require the use of significant judgment.
Revenue is recognized when obligations under the terms of a contract with the customer are satisfied; generally, this occurs with the transfer of control of the company's products and services to the customer.
Revenue is measured as the amount of consideration expected to be received in exchange for transferring the product or providing services. The amount of consideration received and recognized as revenue by the company can vary as a result of variable consideration terms included in the contracts such as customer rebates, cash discounts and return policies. Customer rebates and cash discounts are estimated based on the most likely amount principle and these estimates are based on historical experience and anticipated performance. Customers have the right to return product within the company's normal terms policy, and as such, the company estimates the expected returns based on an analysis of historical experience. The company adjusts its estimate of revenue at the earlier of when the most likely amount of consideration the company expects to receive changes or when the consideration becomes fixed. The company generally does not expect that there will be significant changes to its estimates of variable consideration (refer to Receivables in the Notes to the Consolidated Financial Statements include elsewhere in this report).
Depending on the terms of the contract, the company may defer recognizing revenue until the end of a given period as the result of title transfer terms that are based upon delivery and or acceptance which align with transfer of control of the company's products to its customers.
Sales are made only to customers with whom the company believes collection is probable based upon a credit analysis, which may include obtaining a credit application, a signed security agreement, personal guarantee and/or a cross corporate guarantee depending on the credit history of the customer. Credit lines are established for new customers after an evaluation of their credit report and/or other relevant financial information. Existing credit lines are regularly reviewed and adjusted with consideration given to any outstanding past due amounts.
The company records distributed product sales gross as a principal since the company takes title to the products and has the risks of loss for collections, delivery and returns. The company's payment terms are for relatively short periods and thus do not contain any element of financing. Additionally, no contract costs are incurred that would require capitalization and amortization.
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MD&A - Accounting Estimates and Pronouncements
Sales, value added, and other taxes the company collects concurrent with revenue producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. Shipping and handling costs are included in cost of products sold.
The majority of the company's warranties are considered assurance-type warranties and continue to be recognized as expense when the products are sold (refer to Current Liabilities in the Notes to the Consolidated Financial Statements include elsewhere in this report). These warranties cover against defects in material and workmanship for various periods depending on the product from the date of sale to the customer. Certain components carry a lifetime warranty. In addition, the company has sold extended warranties that, while immaterial, require the company to defer the revenue associated with those warranties until earned. The company has established procedures to appropriately defer such revenue. A provision for estimated warranty cost is recorded at the time of sale based upon actual experience. The company continuously assesses the adequacy of its product warranty accruals and makes adjustments as needed. Historical analysis is primarily used to determine the company's warranty reserves. Claims history is reviewed and provisions are adjusted as needed. However, the company does consider other events, such as a product recall, which could require additional warranty reserve provisions. Refer to Accrued Expenses in the Notes to the Consolidated Financial Statements for a reconciliation of the changes in the warranty accrual.
Allowance for Uncollectible Accounts Receivable
The estimated allowance for uncollectible amounts is based primarily on management's evaluation of the financial condition of the customer. In addition, as a result of the third-party financing arrangement, management monitors the collection status of these contracts in accordance with the company's limited recourse obligations and provides amounts necessary for estimated losses in the allowance for doubtful accounts and establishing reserves for specific customers as needed and general reserve for macroeconomic considerations.
The company continues to closely monitor the credit-worthiness of its customers and adhere to tight credit policies. The Centers for Medicare and Medicaid Services publishes Medicare contract prices under its NCB program which includes 100% of the Medicare population. The company believes that the NCB program contract pricing could have a significant impact on the collectability of accounts receivable for those customers which have a portion of their revenues tied to Medicare reimbursement. In addition, there is a risk that these precedent-setting price reductions could influence other
non-CMS payors' reimbursement rates for the same product categories. As a result, this is an additional risk factor which the company considers when assessing the collectability of accounts receivable.
The company has an agreement with DLL, a third-party financing company, to provide lease financing to Invacare's U.S. customers. The DLL agreement provides for direct leasing between DLL and the Invacare customer. The company retains a recourse obligation for events of default under the contracts. The company monitors the collections status of these contracts and has provided amounts for estimated losses in its allowances for doubtful accounts.
Goodwill, Intangible and Other Long-Lived Assets
Property, equipment, intangibles and certain other long-lived assets are amortized over their useful lives. Useful lives are based on management's estimates of the period that the assets will generate revenue. Under Intangibles-Goodwill and Other, ASC 350, goodwill and intangible assets deemed to have indefinite lives are subject to annual impairment tests. The company's measurement date for its annual goodwill impairment test is October 1 and the analysis is completed in the fourth quarter. Furthermore, goodwill and other long-lived assets are assessed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Most of the company's goodwill and intangible assets relate to the company's Europe reporting unit which was profitable in 2022.
To assess goodwill for impairment in accordance with ASC 350, the company first estimates the fair value of each reporting unit and compares the calculated fair value to the carrying value of each reporting unit. A reporting unit is defined as an operating segment or one level below. The company has determined that its reporting units are the same as its operating segments. To estimate the fair values of the reporting units, the company utilizes a discounted cash flow (DCF) method in which the company forecasts income statement and balance sheet amounts based on assumptions regarding future sales growth, operating income, inventory turns, days' sales outstanding, etc. to forecast future cash flows. The cash flows are discounted using a weighted average cost of capital (WACC) where the cost of debt is based on quoted rates for 20-year debt of companies of similar credit risk and the cost of equity is based upon the 20-year treasury rate for the risk-free rate, a market risk premium, the industry average beta and a small cap stock adjustment. The assumptions used are based on a market participant's point of view and yielded a WACC of 14.51% in 2022 for the company's impairment analyses for the reporting units with goodwill compared to 11.19% in 2021 and 11.27% in 2020. The financial forecast assumptions and WACC used have a significant impact
Part II
MD&A - Accounting Estimates and Pronouncements
upon the discounted cash flow methodology utilized in the company's annual impairment testing as lower projections of operating income or a higher WACC decrease the fair value estimates.
The company also utilizes an Enterprise Value (EV) to Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) method to compute the fair value of its reporting units which considers potential acquirers and their EV to EBITDA multiples adjusted by an estimated premium. While more weight is given to the discounted cash flow method, the EV to EBITDA method does provide corroborative evidence of the reasonableness of the discounted cash flow method results.
While there was no impairment in 2022 related to goodwill for the Europe, a future potential impairment is possible for Europe should actual results differ materially from forecasted results used in the valuation analysis or if business changes impact the company's assessment of reporting units. Furthermore, the company's valuation of goodwill can differ materially if the financial projections or market inputs used to determine the WACC change significantly. For instance, higher interest rates or greater stock price volatility would increase the WACC and thus increase the chance of impairment. In consideration of this potential, the company assessed the results if the WACC used were 100 basis points higher for the 2022 impairment analyses and determined that there still would not be any impairment for the Europe reporting unit.
During the third quarter of 2021, the company's reporting units of North America/HME and Institutional Products Group merged into one reporting unit of North America, consistent with the operating segment. Developments in 2021 and the conclusion of the reporting units merger were tied mostly to actions of the company to implement components of a new ERP system which changes both the level of discrete financial information readily available and the go-forward manner in which the company assesses performance and allocates resources to the North America operating segment.
The reporting unit change within the North America operating segment in the third quarter of 2021 was a triggering event and required the company to perform an interim goodwill impairment test. Based on the interim goodwill impairment test, the company concluded that the carrying value of the North America reporting unit was above its fair value. That conclusion resulted in the recording of impairment of goodwill in the third quarter of 2021 of $28,564,000.
The company completed its interim test in the third quarter of 2021 consistent with the process of its annual impairment assessment in the fourth quarter of each year or whenever events or changes in circumstances indicate the
carrying value of a reporting unit could be below a reporting unit's fair value.
The company also considers the potential for impairment of other intangible assets and other long-lived assets annually or whenever events or circumstances indicate impairment. In 2022, the company performed an assessment for potential impairments and recognized intangible asset impairment charges within the North America operating segment of $1,012,000 ($729,000 after-tax) and within the Europe operating segment of $2,247,000 ($1,605,000 after-tax) related to a trademarks with an indefinite life. The fair value of the trademarks were calculated using a relief from royalty payment methodology which requires applying an estimated market royalty rate to forecasted net sales and discounting the resulting cash flows to determine fair value. The cash flow projections were negatively impacted by the decision to exit certain lifestyle products. In 2021 and 2020, the company performed an assessment for potential impairments and recognized no intangible asset impairment charge or other long-lived asset impairment charge.
The company's intangible assets consist of intangible assets with defined lives as well as intangible assets with indefinite lives. Defined-lived intangible assets consist principally of customer lists and developed technology. The company's indefinite lived intangible assets consist entirely of trademarks.
The company evaluates the carrying value of definite-lived assets whenever events or circumstances indicate possible impairment. Definite-lived assets are determined to be impaired if the future undiscounted cash flows expected to be generated by the asset or asset group are less than the carrying value of the asset or asset group. Actual impairment amounts for definite-lived assets are then calculated using a discounted cash flow calculation. The company assesses indefinite-lived assets for impairment annually in the fourth quarter of each year and whenever events or circumstances indicate possible impairment. Any impairment amounts for indefinite-lived assets are calculated as the difference between the future discounted cash flows expected to be generated by the asset less than the carrying value for the asset.
Product Liability
The company was self-insured in North America for annual policy losses up to $10,000,000 per occurrence and $13,000,000 in the aggregate. The company also has additional layers of external insurance coverage, related to all lines of insurance coverage, insuring up to $75,000,000 in aggregate losses per policy year arising from individual claims anywhere in the world that exceed the captive insurance company policy limits or the limits of the
Part II Table of Contents
MD&A - Accounting Estimates and Pronouncements
company's per country foreign liability limits, as applicable. There can be no assurance that Invacare's current insurance levels will continue to be adequate or available at affordable rates.
Product liability reserves are recorded for individual claims based upon historical experience, industry expertise and other indicators. Additional reserves, in excess of the specific individual case reserves, are provided for incurred but not reported claims based upon actuarial valuations at the time such valuations are conducted. Historical claims experience and other assumptions are taken into consideration by the company in estimating the ultimate reserves. For example, the actuarial analysis assumes that historical loss experience is an indicator of future experience, that the distribution of exposures by geographic area and nature of operations for ongoing operations is expected to be very similar to historical operations with no dramatic changes and that the government indices used to trend losses and exposures are appropriate. Estimates made are adjusted on a regular basis and can be impacted by actual loss awards and settlements on claims. While actuarial analysis is used to help determine adequate reserves, the company is responsible for the determination and recording of adequate reserves in accordance with accepted loss reserving standards and practices.
Warranty
Generally, the company's products are covered by assurance-type warranties against defects in material and workmanship for various periods depending on the product from the date of sale to the customer. Certain components carry a lifetime warranty. In addition, the company has sold extended warranties that, while immaterial, require the company to defer the revenue associated with those warranties until earned. A provision for estimated warranty cost is recorded at the time of sale based upon actual experience. The company continuously assesses the adequacy of its product warranty accrual and makes adjustments as needed. Historical analysis is primarily used to determine the company's warranty reserves. Claims history is reviewed and provisions are adjusted as needed. However, the company does consider other events, such as a product recall, which could warrant additional warranty reserve provision. Refer to Accrued Expenses in the Notes to the Consolidated Financial Statements for a reconciliation of the changes in the warranty accrual.
Accounting for Stock Compensation
The company accounts for stock compensation under the provisions of Compensation-Stock Compensation, ASC 718. The company has not made any modifications to the terms of any previously granted awards (other than the modification in the fourth quarter of 2020 (refer to Equity
Compensation in the Notes to the Consolidated Financial Statements) and no changes have been made regarding the valuation methodologies or assumptions used to determine the fair value of awards granted and the company continues to use a Black-Scholes valuation model to value options granted. As of December 31, 2022, there was $2,221,000 of total unrecognized compensation cost from stock compensation arrangements, which is related to non-vested awards, and includes $2,146,000 related to restricted stock awards and $75,000 related to performance awards.
Most of the options awarded have been granted at exercise prices equal to the market value of the underlying stock on the date of grant. Restricted stock awards granted without cost to the recipients are expensed on a straight-line basis over the vesting periods. Performance awards granted are expensed based on estimated achievement of the performance objectives over the relevant performance award periods.
Income Taxes
As part of the process of preparing its financial statements, the company is required to estimate income taxes in various jurisdictions. The process requires estimating the company's current tax liability, including assessing uncertainties related to tax return filing positions, as well as estimating temporary differences due to the different treatment of items for tax and accounting policies. The temporary differences are reported as deferred tax assets and or liabilities. The company also must estimate whether it will more likely than not realize its deferred tax assets and whether a valuation allowance should be established. The company's deferred tax assets are offset by a valuation allowance in the U.S., Australia, Switzerland and New Zealand. In the event that actual results differ from its estimates, the company's provision for income taxes could be materially impacted. The company does not believe that there is a substantial likelihood that materially different amounts would be reported related to its critical accounting policies.
Accounting for Convertible Debt and Related Derivatives
During the third and fourth quarter of 2022, the company entered into privately negotiated Secured Convertible 2026 Notes of $31,106,000 and $10,369,000, respectively, in aggregate principal amount. Convertible debt conversion liabilities of $1,510,000 were recorded based on initial fair values and these fair values are updated each reporting period with the offset to the income statement.
Part II
MD&A - Accounting Estimates and Pronouncements
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
For the company's disclosure regarding recently issued accounting pronouncements, refer to Accounting Policies - Recent Accounting Pronouncements in the Notes to the Consolidated Financial Statements.
Part II Table of Contents
Items 7-9

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The company is at times exposed to market risk through various financial instruments, including fixed rate and floating rate debt instruments. An increase of 1% to variable rate debt outstanding at December 31, 2022 would increase interest expense $1,057,200 annually. Additionally, the company operates internationally and, as a result, is exposed to foreign currency fluctuations. Specifically, the exposure results from intercompany loans, intercompany sales or payments and third-party sales or payments. In an attempt to reduce this exposure, foreign currency forward contracts are utilized to hedge intercompany purchases and sales as well as third-party purchases and sales. The company does not believe that any potential loss related to these financial instruments would have a material adverse effect on the company's financial condition or results of operations.
The company is party to the ABL DIP Credit Agreement which became effective on February 2, 2023. Accordingly, while the company is exposed to increases in interest rates, its exposure to the volatility of the current market environment is currently limited until the ABL DIP Credit Agreement expires. Cash flow hedges are precluded under the ABL DIP Credit Agreement. The Highbridge Loan Agreement and the DIP Credit Agreements contain customary default provisions, with certain grace periods and exceptions, which provide that events of default that include, among other things, failure to pay amounts due, breach of covenants, representations or warranties, bankruptcy, the occurrence of a material adverse effect, exclusion from any medical reimbursement program, and an interruption of any material manufacturing facilities for more than ten consecutive days. Should the company fail to comply with these requirements, the company would potentially have to attempt to obtain alternative financing and thus likely be required to pay much higher interest rates.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data.
Reference is made to the Report of Independent Registered Public Accounting Firm (PCAOB ID: 42), Consolidated Balance Sheets, Consolidated Statements of Comprehensive Income (Loss), Consolidated Statements of Cash Flows, Consolidated Statement of Shareholders' Equity, Notes to Consolidated Financial Statements and Financial Statement Schedule of this Annual Report on Form 10-K.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
As of December 31, 2022, an evaluation was performed, under the supervision and with the participation of the company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, the company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that the company's disclosure controls and procedures were effective as of December 31, 2022, in ensuring that information required to be disclosed by the company in the reports it files and submits under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms and (2) accumulated and communicated to the company's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
(b) Management's Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining a system of adequate internal control over financial reporting that provides reasonable assurance that assets are safeguarded and that transactions are authorized, recorded and reported properly. The system includes self-monitoring mechanisms; regular testing by the company's internal auditors; a Code of Conduct; written policies and procedures; and a careful selection and training of employees. Actions are taken to correct deficiencies as they are identified. An effective internal control system, no matter how well designed, has inherent limitations-including the possibility of the circumvention or overriding of controls-and therefore can provide only reasonable assurance that errors and fraud that can be material to the financial statements are prevented or would be detected on a timely basis. Further, because of changes in conditions, internal control system effectiveness may vary over time.
Management's assessment of the effectiveness of the company's internal control over financial reporting is based on the Internal Control-Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).
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Items 7 - 9
In management's opinion, internal control over financial reporting was effective as of December 31, 2022.
(c) Changes in Internal Control Over Financial Reporting
There have been no changes in the company's internal control over financial reporting during the company's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Items 10 - 14
Item 10. Directors, Executive Officers and Corporate Governance.
Director Biographies and Qualifications
Below is certain biographical information regarding the company's Directors, as well as a discussion of the qualifications. Each of the individuals listed below has a wealth of knowledge, experience and expertise developed over a lifetime of achievement. In the discussion below, we have not detailed all of the numerous factors considered by the Board, but rather have highlighted the primary qualifications that led the Board to conclude that each of the following individuals should serve as a Director. The Board of Directors believes that the current Board composition reflects a group of individuals with relevant knowledge and experience that greatly benefits the company.
Edward F. Crawford and Steven H. Rosen were appointed as directors by the Board of Directors on August 22, 2022 pursuant to a cooperation agreement (the “Cooperation Agreement”) entered into on August 22, 2022. Additional information regarding the Cooperation Agreement is included in the Corporation’s Current Report on Form 8-K filed on August 24, 2022 and in Item 13 of this Annual Report on Form 10-K under the caption “Certain Relationships and Related Transactions.” There are no other arrangements or understandings pursuant to which any of the persons listed below were selected as directors.
Edward F. Crawford, age 84, was appointed as a Director of the company on August 22, 2022. Ambassador Crawford currently serves as a member of the Board of Park-Ohio Holdings Corp. (NASDAQ: PKOH), a public company based in Ohio and has previously served as its Chairman and Chief Executive Officer from 1998 until 2018 and as its President from 1997 to 2003. He currently serves as Chairman of the Board of Crawford United Corporation (OTC: CRAWA) since 2021 and previously has served as a director from 2012 to 2019. He has served as the U.S. Ambassador to Ireland from 2019 to 2021. Ambassador Crawford serves as a member of the Board of Advisors at Resilience Capital Partners LLC, a private equity firm. Ambassador Crawford has extensive experience in strategic planning and operations, as well as knowledge of public and private company strategy. Mr. Crawford has amassed extensive knowledge of public and private company strategies and operations and brings to the Board his experience in leading a variety of private enterprises for over 40 years.
Petra Danielsohn-Weil, PhD, age 63, has been a Director since May 2018. From 2014 until her retirement in August 2017, Ms. Danielsohn-Weil was the Regional
President for Pfizer Essential Health - Europe. Pfizer Essential Health is a producer of non-viral anti-infectives, biosimilars and sterile injectable medicines and is a business unit of Pfizer Inc. (NYSE:PFE), a research-based, global biopharmaceutical company. Ms. Danielsohn-Weil previously served in various general management, regional and global business unit executive roles in Europe and the United States for Pfizer from 2000 through 2014. Prior to that she served in various commercial and strategic leadership roles in Europe and the US for Warner-Lambert from 1988 until its acquisition by Pfizer in 2000. Since 2019, Ms. Danielsohn-Weil has been a member of the supervisory Board of Gruenenthal Pharma GmbH. Ms. Danielsohn-Weil has a wealth of executive experience leading biotech businesses in the European market, including in commercial development, business integration, research and development, sales, digital marketing, and implementing long-term strategic plans in a complex environment.
Marc M. Gibeley, age 58, has been a Director since November 2015. Mr. Gibeley has served as Chief Executive Officer and a Director of Nutritional Medicinals, LLC, a producer of organic whole food feeding tube formulas and meal replacements, since November 2018. Prior to that, Mr. Gibeley served as Chief Executive Officer and Director of Scientific Intake Ltd. Co., a medical device and digital healthcare company focused on weight management and the prevention of obesity related chronic diseases, from October 2016 to January 2018. Prior to that, Mr. Gibeley served as Head of Diabetes Care North America for Roche Holding AG (SIX: RO), a leading research-focused pharmaceuticals and diagnostics healthcare company from 2011 through 2016. Mr. Gibeley served as the President and Chief Executive Officer of WaveRx, a venture-backed diabetes neuropathy medical device company, from 2008 through 2011. Prior to joining WaveRx, Mr. Gibeley worked for several consumer packaged goods companies, including Procter & Gamble (NYSE: PG), Eastman Kodak (NYSE: KODK) and Kraft Foods (NASDAQ: KHC). Mr. Gibeley has extensive experience in leading and managing medical device companies that have undergone substantial changes and transformed to focus on marketing products directly to consumers. He has a wide range of management expertise, including in sales, marketing, finance, customer support and product launches, as well as in regulatory affairs, manufacturing, and operations and commercial development, which has been developed over a career in consumer products businesses at various stages of development.
Michael J. Merriman Jr., age 66, was appointed to the Board of Directors on August 28, 2022. Mr. Merriman Jr., previously served as a director of the company from 2014 to 2018 and chaired its Audit Committee. He has
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served as an operating advisor of Resilience Capital Partners LLC, a private equity firm focused on principal investing in lower, middle-market underperforming and turnaround opportunities, from 2008 until 2017, and currently serves on the board of one of Resilience’s portfolio companies. Mr. Merriman Jr. is a director of Nordson Corporation (Nasdaq: NDSN), a manufacturer of products that dispense adhesives, coatings, sealants, biomaterials and other materials, and has served as Chairman of the Board since 2018. He also is a director of Regis Corporation (NYSE: RGS), a company that owns, franchises, and operates beauty salons, hair restoration centers and cosmetology education facilities, where he is chair of the audit committee and a member of the compensation committee. Mr. Merriman Jr. served as president and chief executive officer of Lamson & Sessions Co. (formerly, NYSE: LMS), a manufacturer of thermoplastic conduit, fittings and electrical switch and outlet boxes, from 2006 to 2007; and served as senior vice president and chief financial officer of American Greetings Corporation (formerly, NYSE: AM), a designer, manufacturer and seller of greeting cards and other social expression products, from 2005 until 2006. Mr. Merriman Jr. previously served as a director of OMNOVA Solutions Inc., a specialty chemical company, from 2008 until its sale in 2020. Mr. Merriman Jr. has deep experience and significant knowledge in executive management, strategy, corporate governance, acquisitions and divestitures, product development and investor relations, as well as significant finance, financial reporting and accounting expertise, all developed through Mr. Merriman Jr.’s prior experience as a public company chief executive officer and chief financial officer, as a certified public accountant, and as a public company director.
Clifford D. Nastas, age 60, has been a Director since May 2015. Mr. Nastas has served as Chief Executive Officer and President of Tempel Steel, an independent manufacturer of precision magnetic steel laminations for the motor, generator, auto and transformer industries, since May 2019. Mr. Nastas served as President and Chief Executive Officer of Radiac Abrasives Company, a manufacturer of conventional bonded and super abrasives in North America from January 2016 until December 2018. Since 2014, Mr. Nastas has been a Director of Dan T. Moore Company, Inc., a holding company of diverse advanced materials manufacturing and technology businesses and became co-chairman in 2016. Also, since 2014, Mr. Nastas has served as a Director of Shorr Packaging Corporation, an ESOP-owned company that distributes packaging supplies throughout North America. Mr. Nastas served as Chief Executive Officer and a Director of Material Sciences Corporation (formerly, Nasdaq: MASC), Elk Grove Village, Illinois, a publicly traded diversified industrial manufacturing company providing high-value coated metal, acoustical and lightweight composite solutions from 2005 until the
company was sold in March 2014. From 2001 to 2005, Mr. Nastas served in various capacities at Material Sciences, including as President and Chief Operating Officer. Prior to joining Material Sciences, Mr. Nastas served in various general management, sales, and manufacturing capacities with Honeywell International, formerly Allied Signal (NYSE: HON), Morris Township, New Jersey, Avery Dennison Corporation (NYSE: AVY), Glendale, California, and Ford Motor Company (NYSE: F), Dearborn, Michigan. Mr. Nastas has extensive business leadership and management expertise, which includes a broad range of experience in management, operations, sales, marketing, product development and engineering in a number of global businesses, including as the CEO of a publicly-traded company.
Geoff Purtill, age 57, was appointed a Director on December 9, 2022. He has been President and Chief Executive Officer of the company since November 2022 and had previously served as interim President and CEO beginning in August 2022. Previously, Mr. Purtill also served as the Senior Vice President and General Manager of the company's European and Asia Pacific businesses and has led the Global Strategy efforts. Mr. Purtill joined Invacare in 2010, and prior to that had various leadership roles in sales, category management and supply chain roles at Johnson & Johnson. Mr. Purtill was in the Australian Army for 14 years, where he started as an Electronics Technician and left as a Captain in the Intelligence Corps. Mr. Purtill graduated with an MBA (Exec) from the Australian Graduated School of Management in 2003. Mr. Purtill was appointed as a director primarily due to his role as Chief Executive Officer, as well as his considerable experience in managing and operating businesses, which provides the Board with management perspective that is valuable in overseeing the company’s business operations.
Steven H. Rosen, age 52, was appointed as a Director of the company on August 22, 2022. Since 2001, Mr. Rosen has served as the Co-Founder and Co-Chief Executive Officer of Resilience Capital Partners LLC, a Cleveland, Ohio based private equity firm where he has been involved with all aspects of the firm’s operations and strategic planning efforts and the developing and maintaining of relationships with investors and investment intermediaries. He has a wide range of experience in operations, strategic planning and assisting companies undergoing strategic transformation. Mr. Rosen serves as a director of Park-Ohio Holdings Corp (NASDAQ: PKOH), Crawford United Corporation (OTC: CRAWA) and AmFin Financial Corporation (OTC: ANFL). Mr. Rosen holds a Bachelors Degree from the University of Maryland and an MBA from the Weatherhead School of Management at Case Western Reserve University. Mr. Rosen brings to the Board an extensive background in mergers and acquisitions, financial analysis and consulting as well as contacts throughout the financial and investing field.
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Aron I. Schwartz, age 52, was appointed as a Director on March 21, 2022. Mr. Schwartz is a Managing Partner at ACON Investments, LLC, a private equity firm based in Washington, D.C. Mr. Schwartz was previously a consultant to, and a Managing Director at, Avenue Capital, a global investment firm, from 2012 to 2014. Prior to that, from 1999 to 2011, he held various positions culminating in Managing Director of Fenway Partners, a middle market private equity firm. Since 2012, he has served on the board of directors and as chairman of the audit committee of CION Investment Corporation (NYSE: CION), a business development company that primarily provides senior secured loans to US middle-market companies. Mr. Schwartz previously served on the boards of various companies, including Melinta Therapeutics, Inc. (OTC: MLNTQ), a pharmaceutical development company from 2019 to 2020. Mr. Schwartz has a wide range of financial experience in managing and overseeing companies with operations in various industries, including companies undergoing strategic transformation.
Determination of Current Board Leadership Structure
The Board’s independent Directors bring experience, oversight and expertise from outside the company and industry, while the Chief Executive Officer brings company and industry-specific experience and expertise. One of the key responsibilities of the Board is to develop strategic direction and hold management accountable for the execution of strategy once it is developed. There is unified leadership and a focus on strategic development and execution and structure helps assure independent oversight of management.
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Members of the Board Committees
The composition of the Board committees, as of April 14, 2023, is set forth below.
Director Audit
Committee Nominating and Governance
Committee Compensation and
Management
Development
Committee Strategy and Operational Improvement Committee Special Committee Regulatory and Compliance
Committee
Edward F. Crawford Member Member
Petra Danielsohn-Weil, PhD Member Member Chair
Marc M. Gibeley Chair Member Member
Clifford D. Nastas Chair Chair Member
Michael J. Merriman Jr. (Chairman of the Board) Member Member Member Member
Steven H. Rosen Member Member Member
Aron I. Schwartz Chair Member Chair Member
Geoffrey P. Purtill Member
Principal Functions of the Board Committees
The Board has an Audit Committee; a Nominating and Governance Committee; a Compensation and Management Development Committee; a Strategy and Operational Improvement Committee; a Special Committee; and a Regulatory and Compliance Committee.
Audit Committee. The Audit Committee assists the Board in monitoring (i) the integrity of Invacare's financial statements, (ii) the independence, performance and qualifications of Invacare's internal and independent auditors, (iii) Invacare's compliance with legal and regulatory requirements related to the company's financial statements and accounting policies (iv) Invacare's risk assessment and management process. The specific functions and responsibilities of the Audit Committee are set forth in the Audit Committee Charter adopted by the Board of Directors, a copy of which is available at www.invacare.com by clicking on the Investor Relations tab and then the Corporate Governance link. The Audit Committee met four times during 2022.
The Board has determined that each member of the Audit Committee satisfies the current independence standards of Section 10A(m)(3) of the Securities Exchange Act of 1934, as amended. The Board also has determined that Aron I. Schwartz, the Chair of the Audit Committee, Michael J. Merriman Jr. and Steven H. Rosen each qualifies as an “audit committee financial expert” as that term is defined in Item 407(d)(5) of Regulation S-K. Mr. Merriman Jr. joined the Board of Directors on August 28, 2022 and the Audit Committee on December 8, 2022. Mr. Rosen joined the Board of Directors and the Audit Committee on August 22, 2022.
Nominating and Governance Committee. The Nominating and Governance Committee assists the Board (i) in identifying and recommending individuals qualified to become Directors and will consider all qualified
nominees recommended by shareholders, and (ii) on all matters relating to corporate governance of the company, including, but not limited to, the development and implementation of the company's corporate governance and ESG policies and guidelines. Each of the current members of the Nominating and Governance Committee is independent within the meaning of Invacare's Corporate Governance Guidelines. The Board of Directors has adopted a charter for the Nominating and Governance Committee, which is available at www.invacare.com by clicking on the Investor Relations tab and then the Corporate Governance link. The Nominating and Governance Committee met three times during 2022.
Compensation and Management Development Committee. The Compensation and Management Development Committee assists the Board in developing and implementing (i) executive compensation programs that are fair, equitable and aligned with the interests of shareholders and that are effective in the recruitment, retention and motivation of executive talent required to successfully meet Invacare's strategic objectives and (ii) a management succession plan that meets Invacare's present and future needs. Each of the current members of the Compensation and Management Development Committee is independent within the meaning of Invacare's Corporate Governance Guidelines. The Board of Directors has adopted a charter for the Compensation and Management Development Committee, which is available at www.invacare.com by clicking on the Investor Relations tab and then the Corporate Governance link. The Compensation and Management Development Committee met eight times during 2022. Mr. Rosen joined the Board of Directors and the Compensation and Management Development Committee on August 22, 2022. Mr. Merriman Jr. joined the Board of Directors on August 28, 2022, and the Compensation and Management Development Committee on November 17, 2022.
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Regulatory and Compliance Committee. The Regulatory and Compliance Committee assists the Board in its oversight of the company's legal and regulatory compliance matters, including medical device regulatory compliance. Each of the current members of the Regulatory and Compliance Committee is independent within the meaning of Invacare's Corporate Governance Guidelines. The Board of Directors has adopted a charter for the Regulatory and Compliance Committee, which is available at www.invacare.com by clicking on the Investor Relations tab and then the Corporate Governance link. The Regulatory and Compliance Committee met four times during 2022.
Strategy and Operational Improvement Committee. The Strategy and Operational Improvement Committee was formed on August 22, 2022 and its responsibilities include: (i) conducting a comprehensive review and evaluation of the current corporate strategies of the company; (ii) assisting and advising the Board on corporate strategies and strategic alternatives; and (iii) from time to time as it determines appropriate, making recommendations to the Board regarding actions to be considered in furtherance of the committee’s purpose.
Special Committee. The Special Committee was formed on December 9, 2022 to evaluate and approve (i) strategic and/or financial options and transactions related to financing, restructuring, reorganization, recapitalization, divestiture, acquisition, and similar transactions and, if appropriate, authorizing financing to augment the company’s liquidity, balance sheet, capital allocation, or otherwise, and authorizing any bankruptcy filing and related proceedings in respect of the company and/or one or more of its subsidiaries (each of the foregoing and any combination of the foregoing, a “Restructuring Transaction”), and (ii) conflicts between the interests of the company, on the one hand, and the interests of certain creditors of the company and/or the interests of the company’s equity interests with representation on the Board, on the other.
Board Nominations and Shareholder Recommendations
There have been no material changes to the procedures by which shareholders may recommend nominees to the company’s Board of Directors since the last disclosure of those procedures in the company’s definitive proxy statement filed with the SEC in connection with its 2022 annual meeting of shareholders.
Corporate Governance Guidelines
The Board has adopted Corporate Governance Guidelines which contain principles that, along with the charters of the standing committees of the Board of Directors, provide the framework for Invacare's corporate
governance. Among other things, the Corporate Governance Guidelines establish principles relating to:
•responsibilities and functions of the Board of Directors, such as meeting, orientation and continuing education guidelines;
•the composition of the Board, including Director independence and other qualification requirements;
•responsibilities of the Chairman of the Board, the Chief Executive Officer and the Lead Independent Director, if any;
•the establishment and functioning of Board committees;
•executive sessions of non-management Directors;
•Chief Executive Officer succession planning;
•Board access to management, and evaluation of the Chief Executive Officer;
•communication and interaction by the Board with shareholders and other interested parties;
•share ownership guidelines for Directors and executive officers;
•engagement by an independent committee of the Board with shareholder proponents following a majority vote on a shareholder proposal; and
•periodic self-assessment by the Board and each Board committee.
A copy of the Corporate Governance Guidelines can be found on the company's website at www.invacare.com by clicking on the Investor Relations tab and then selecting the Corporate Governance link.
Delinquent Section 16(a) Reports
Under Section 16(a) of the Exchange Act, Directors, executive officers, and beneficial owners of more than 10% of the company's common shares are required to report their initial ownership of common shares and any subsequent changes in that ownership to the SEC. Due dates for the reports are specified by those laws, and the company is required to disclose any failure to timely file such reports during the year ended December 31, 2022. Based solely on written representations of the Directors and executive officers and on copies of the reports that they have filed with the SEC, it is the company's belief that all of its Directors and executive officers complied with all Section 16(a) filing requirements applicable to them with respect to transactions in the company's equity securities during 2022, except for a Form 3 related to the June 3,
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2022 formation of a 10% ownership group filed by Crawford United Corporation, Edward F. Crawford and Matthew V. Crawford, which was filed on August 24, 2022. This late filing was due to an inadvertent error.
Codes of Ethics
The company has adopted a Code of Business Conduct and Ethics that applies to all Directors, officers and employees. The company has also adopted a separate Financial Code of Ethics that applies to its Chief Executive Officer (its principal executive officer), its Chief Financial Officer (its principal financial officer and principal accounting officer) and its controller or persons performing similar functions. Investors can find both codes on the company's website at www.invacare.com by clicking on the Investor Relations tab and then selecting the Corporate Governance link. The company will post any amendments to the codes, as well as any waivers that are required to be disclosed pursuant to the rules of the Securities and Exchange Commission, within four business days, on its website.
Employees have been notified that if they have any questions or concerns regarding financial integrity, legal or regulatory compliance, ethical business conduct, or activities that may be improper under the company’s Code of Business Conduct and Ethics, or otherwise have work related concerns, they are invited to speak with their supervisor, or any other member of management at any time. They also may report any concerns in writing to the Chief Executive Officer or the Chair of the Audit Committee, or submit a report to the company’s EthicsPoint ethics and compliance hotline reporting service, which is used to consolidate and summarize reports received. All EthicsPoint reports are reviewed by the Audit Committee.
The company’s EthicsPoint service is not intended to replace other communication channels already in place. However, if employees have a concern regarding a financial integrity, legal or regulatory compliance, or ethics related matter, or believe they cannot communicate effectively using existing internal channels, they may report the concern through the company’s EthicsPoint hotline reporting service by telephone or online at http://invacare.ethicspoint.com. Reports through EthicsPoint may be made anonymously and without reprisals for matters reported in good faith.
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Director Compensation Program
The Compensation and Management Development Committee (the “Compensation Committee”) is responsible for reviewing and making recommendations to the Board regarding all matters pertaining to compensation paid to non-employee Directors for Board, committee and committee chair services. In making non-employee Director compensation recommendations, the Compensation Committee takes various factors into consideration, including, but not limited to, the responsibilities of Directors generally, as well as committee chairs, and the form and amount of compensation paid to Directors by comparable companies. The Director compensation program is intended to be equitable based on the work required of non-employee Directors serving a healthcare technology company of our size and scope, and to tie a significant portion of non-employee Directors’ compensation to shareholder interests through the grant of restricted stock units. The Compensation Committee periodically reviews non-employee Director compensation and such compensation may be adjusted in the future as appropriate based on our peer group information and company performance.
The company's 2022 Director compensation program provided that non-employee Directors were paid the following cash compensation:
Effective January 2022 Effective April 2022 Effective September 2022
Annual Cash Retainer $ 65,000 $ 105,000 $ 105,000
Lead Independent Director Additional Fee 20,000 20,000 -
Non-Executive Chairman Fee - - 40,000
Committee Chair Additional Fees:
Audit 15,000 15,000 15,000
Compensation and Management Development 15,000 15,000 15,000
Regulatory and Compliance 15,000 15,000 15,000
Nominating and Governance 10,000 10,000 10,000
Special Committee* - - 20,000
Fee per meeting in excess of 24 meetings 1,500 1,500 1,500
* The Special Committee was formed in December 2022.
Additionally, in April 2022, each non-employee Director nominated at that time was granted a restricted stock unit award of 39,474 shares, which vests in full on May 15, 2023. In connection with their appointment to the Board in August 2022, Mr. Crawford and Mr. Rosen were granted restricted stock unit awards of 20,854 shares each. On November 21, 2022, Mr. Crawford and Mr. Rosen returned the awards for no consideration. On September 13, 2022, Mr. Merriman Jr. was granted 154,852 restricted stock unit awards which vest in full on November 15, 2023.
Fiscal 2022 Director Compensation Table
Name
Fees Earned or Paid in Cash ($) (2) Stock Awards
($)(1)
Total ($)
Susan H. Alexander 100,000 (3) 58,422 158,422
Julie A. Beck 75,372 (4) 58,422 133,794
Edward F. Crawford 11,128 (5) 19,984 31,112
Petra Danielsohn-Weil, PhD 86,500 (6) 58,422 144,922
Stephanie L. Fehr 73,872 (7) 58,422 132,294
Diana S. Ferguson 24,667 (8) - 24,667
Marc M. Gibeley 107,250 (9) 58,422 165,672
C. Martin Harris, M.D. 72,167 (10) - 72,167
Michael J. Merriman, Jr. 13,003 (11) 157,949 170,952
Clifford D. Nastas 104,040 (12) 58,422 162,462
Steven H. Rosen 11,128 (13) 19,984 31,112
Aron I. Schwartz 60,208 (14) 58,422 118,630
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(1) The values reported in this column represent the dollar amount of expense, calculated in accordance with ASC 718, Compensation - Stock Compensation, to be recognized for financial statement purposes over the respective vesting periods with respect to all restricted stock units awarded to each Director during 2022. These time-based restricted stock units were granted pursuant to the Invacare Corporation 2018 Equity Compensation Plan, and are scheduled to vest in full on May 15, 2023 with the exception of the awards granted to Messrs. Crawford, Rosen and Merriman, Jr. which are scheduled to vest in full on November 15, 2023. Messrs. Crawford and Rosen subsequently forfeited their awards to the company without consideration. For a description of the assumptions made in computing the values reported in this column, see “Equity Compensation” in the Notes to Consolidated Financial Statements.
(2) Fees presented in the table above and discussed within the footnotes below include payments in 2022 which includes fees earned in the fourth quarter of 2021 and paid in the first quarter of 2022 and exclude fees earned in the fourth quarter of 2022 and paid in the first quarter of 2023.
(3) The fees for Ms. Alexander include an $85,000 pro-rata retainer, $15,000 for her service as Chair of the Regulatory and Compliance Committee. Ms. Alexander resigned from the Board on November 16, 2022 and forfeited the restricted stock units granted to her in 2022.
(4) The fees for Ms. Beck include a $73,872 pro-rata retainer and $1,500 for one meeting in excess of 24 in 2021. Ms. Beck resigned from the Board on August 22, 2022 and forfeited the restricted stock units granted in 2022.
(5) The fees for Mr. Crawford include a $11,128 pro-rata retainer. Mr. Crawford joined the Board on August 22, 2022.
(6) The fees for Ms. Danielsohn-Weil include an $85,000 retainer and $1,500 for one meeting in excess of 24 in 2021.
(7) The fees for Ms. Fehr include a $73,872 pro-rata retainer. Ms. Fehr resigned from the Board on August 22, 2022 and forfeited the restricted stock units granted in 2022.
(8) The fees for Ms. Ferguson include a $21,667 pro-rata retainer and $3,000 for two meetings in excess of 24 in 2021. Ms. Ferguson resigned from the Board on January 19, 2022.
(9) The fees for Mr. Gibeley include a $85,000 pro-rata retainer, $11,250 for his service as Chair of the Compensation and Management Development Committee which was pro-rated for the partial year and $7,500 for five meetings in excess of 24 in 2021.
(10) The fees for Dr. Harris include a $49,167 pro-rata retainer, $13,333 for his service as Lead Independent Director, $6,666 for his service as Chair of the Nominating and Governance Committee, $3,000 for two meetings in excess of 24 in 2021.
(11) The fees for Mr. Nastas include a $85,000 pro-rata retainer, $10,000 for his service as Chair of the Audit Committee, $3,333 for his service as Chair of the Nominating and Governance Committee and $5,707 for his service as Lead Independent Director.
(12) The fees for Mr. Merriman Jr. include a $9,416 pro-rata retainer and $3,587 for his services as Non-Executive Chairman. Mr. Merriman Jr. joined the Board on August 28, 2022.
(13) The fees for Mr. Rosen include a $11,128 pro-rata retainer. Mr. Rosen joined the Board on August 22, 2022.
(14) The fees for Mr. Schwartz include a $51,458 pro-rata retainer and $8,750 for his services as Chair Audit Committee. Mr. Schwartz joined the Board on March 21, 2022.
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Outstanding Director Equity Awards at December 31, 2022
The following table shows outstanding equity awards held by each Director at December 31, 2022.
Option Awards
Stock Awards
Name (3)
Number
of
Securities
Underlying
Unexercised
Options
Exercisable (#)
Option
Exercise
Price ($)
Option
Expiration
Date
Number of
Shares or
Units of
Stock That
Have not
Vested (#)
Market
Value of
Shares or
Units of
Stock
That
Have not
Vested ($)
Edward F. Crawford - (1) -
Petra Danielsohn-Weil, PhD 39,474 (2) 16,579
Marc M. Gibeley 39,474 (2) 16,579
Clifford D. Nastas 39,474 (2) 16,579
Michael J. Merriman, Jr. 154,852 (3) 65,038
Steven H. Rosen - (1) -
Aron I. Schwartz 39,474 (2) 16,579
(1) Mr. Crawford and Mr. Rosen were appointed to the Board on August 22, 2022. Both had received 24,671 restricted stock unit awards on August 22, 2022 and voluntarily returned those awards for no consideration on November 21, 2022.
(2) The restricted stock unit awards are scheduled to vest in full on May 15, 2023 after a one-year “cliff” vesting period.
(3) Mr. Merriman Jr. was appointed to the Board on August 28, 2022. He received 154,852 restricted stock unit awards on September 13, 2022 which are scheduled to vest in full on November 15, 2023.
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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation.
The compensation provided to the company’s named executive officers for the fiscal year ended December 31, 2022 is detailed in the Summary Compensation Table and accompanying footnotes and narrative that follow. The company’s named executive officers for the year ended December 31, 2022 were:
•Geoffrey P. Purtill, President and Chief Executive Officer;
•Matthew E. Monaghan, former Chairman, President and Chief Executive Officer;
•Kathleen P. Leneghan, Senior Vice President and Chief Financial Officer; and
•Anthony C. LaPlaca, Senior Vice President, General Counsel, Chief Administrative Officer and Secretary.
The Compensation Committee is comprised of independent Directors and is responsible for approving and administrating the company’s executive compensation plans. Each year, the Compensation Committee reviews the compensation program and pay practices. This review includes determining whether the company’s compensation levels are competitive with its peer group and other similarly situated companies and whether any changes should be made to remain competitive and effective.
The Compensation Committee determines the principal components of compensation for the named executive officers each year and sets the performance goals for each performance-based compensation component. The Compensation Committee meets regularly throughout the year and reviews the company’s performance to date against the performance goals.
The Compensation Committee’s decisions to award compensation are based on its assessment of each executive’s performance during the year against a variety of factors which may include corporate and personal goals, leadership qualities, operational performance, business responsibilities, current compensation arrangements and long-term potential to enhance shareholder value. Among the factors which may be considered are financial and non-financial measures such as revenue, profit, cash flow, product innovations, individual achievements, and improvements that create value. To set executive target compensation, the company does not necessarily adhere to rigid formulae or react immediately to short-term changes in business performance.
In making its decisions, the Compensation Committee reviewed input from an independent compensation consultant, Pay Governance LLC, and from management, who provided the Compensation Committee with analysis and recommendations regarding base salary adjustments, payout levels under annual incentive plans and equity awards.
The company’s executive compensation is intended to:
•reward its executives for leading improvements that contribute to shareholder value with sustained financial and operating performance and leadership excellence;
•align the executives’ interests with those of the company’s shareholders;
•enable the company to attract needed talent in key positions; and
•encourage executives to remain with the company and continue making significant long-term contributions.
The company is a “smaller reporting company” as that term is used under the rules promulgated under the Securities Act, and as such the company has used the scaled compensation disclosure requirements applicable to smaller reporting companies in this Item 11.
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Summary Compensation Table
The following table presents the total compensation for the years indicated for the named executive officers of the company.
Name and Principal
Position
Year
Salary
($)
Bonus
($)
Stock
Awards
($)(1)
Non-
Equity
Incentive
Plan
Compen-
sation
($)
Non-qualified
Deferred
Compen-sation
Earnings
($)(2)
All Other
Compen-sation
($)(3)
Total
($)
Geoffrey P. Purtill 2022 486,314 52,456 179,160 - 200,354 (4) 918,284
President and Chief Executive Officer
Matthew E. Monaghan 2022 648,831 - 1,089,247 - - 5,716 (5) 1,743,794
Former Chairman, President and Chief Executive Officer 2021 955,000 - 4,998,751 - - 39,485 (5) 5,993,236
Kathleen P. Leneghan 2022 484,100 - 276,516 - - 16,493 (6) 777,109
Senior Vice President and Chief Financial Officer 2021 470,000 - 1,268,983 - - 15,862 (6) 1,754,845
Anthony C. LaPlaca 2022 475,417 - 77,160 - - 8,467 (7) 561,044
Senior Vice President, General Counsel, Chief Administrative Officer and Secretary 2021 461,570 - 354,101 - - 6,077 (7) 821,748
(1) The values reported in this column represent the aggregate grant date fair value, calculated in accordance with ASC 718, Compensation - Stock Compensation, of all restricted stock and performance shares awarded to each officer during the fiscal year. The value of performance share awards was estimated, as of the grant date, assuming that achievement of the performance targets would be 150% of target; however, the Compensation Committee will determine payouts under the awards based on the actual performance over the three-year period. For a description of the assumptions made in computing the values reported in this column, refer to Equity Compensation in the Notes to Consolidated Financial Statements contained in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
(2) There were no changes in the present value of the accumulated benefit obligations to any named executive officer who participated in the SERP in 2022 or 2021. No above market or preferential earnings on nonqualified deferred compensation were earned by any named executive officer in 2022 or 2021.
(3) Compensation reported in this column includes (i) in the case of Mr. Monaghan, Ms. Leneghan, and Mr. LaPlaca, the value of company contributions made in each fiscal year on behalf of the officer to the Invacare Retirement Savings Plan and in the case of Mr. Purtill to the DC Plus Plan; (ii) in the case of Ms. Leneghan, amounts paid for life insurance premiums; (iii) in the case of Mr. Purtill, amounts paid for car allowances, housing allowance, family education, relocation, and (iv) in the case of Mr. LaPlaca, the incremental cost to the company of perquisites provided by the company, which include: an annual physical exam and health screening. Perquisites are valued on the basis of the aggregate incremental cost to the company of providing the perquisite to the applicable officer.
(4) Other compensation for Mr. Purtill includes in 2022, $52,456 bonus paid by the company, $79,129 contributed by the company to the DC Plus Plan, $57,701 paid by the company for housing allowance, $15,265 paid by the company for car allowance, $15,911 paid by the company for family education, and $32,348 paid by the company for relocation.
(5) Other compensation for Mr. Monaghan includes (i) in 2022, $5,716 contributed by the company to the Invacare Retirement Savings Plan; and (ii) in 2021, $34,310 paid by the company for life insurance premiums, $0 contributed by the company to the DC Plus Plan, $5,175 contributed by the company to the Invacare Retirement Savings Plan.
(6) Other compensation for Ms. Leneghan includes (i) in 2022, $10,442 paid by the company for life insurance premiums, $6,051 contributed by the company to the Invacare Retirement Savings Plan; and (ii) in 2021, $10,062 paid by the company for life insurance premiums, $0 contributed by the company to the Invacare Retirement Savings Plan,$5,800 contributed by the company to the DC Plus Plan.
(7) Other compensation for Mr. LaPlaca includes (i) in 2022, $5,943 contributed by the company to the Invacare Retirement Savings Plan and $2,524 paid by the company for an annual physical exam; and (i) in 2021, $5,800 contributed by the company to the Invacare Retirement Savings Plan and $277 contributed by the company to the DC Plus Plan.
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Actual Annual Cash Incentive Awards for 2022
The eligibility for actual payouts under the annual cash bonus plan were computed based on the company’s actual corporate performance relative to the goals established under the plan for 2022, as outlined above. Because none of the requisite thresholds were met, no bonuses were paid to named executive officers for 2022. The non-payment of bonuses is reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table above, and in the following table.
2022 Target Award (% of Base Salary) 2022 Actual Payout (% of Target) 2022 Actual Payout Amount
Mr. Purtill* 75% 0% $0
Mr. Monaghan 107.9% 0% $0
Ms. Leneghan 75% 0% $0
Mr. LaPlaca 75% 0% $0
* 75% Europe results and 25% consolidated results.
Long-Term Incentive Plan
The company’s long-term equity compensation program for named executive officers, referred to as the “LTIP,” historically has included performance share awards, referred to as “performance shares,” and time-based restricted stock awards, referred to as “restricted stock.” In 2022, the program included restricted stock and performance unit awards, referred to as “performance units.” The program is intended to promote the company’s long-term success and increase shareholder value by further aligning the named executive officers’ total compensation with the interests of shareholders. Each share of restricted stock is one restricted common share of the company, and each vested performance share represents the right to receive one common share of the company. Each performance unit represents the right to receive $1.00 in cash.
The Compensation Committee approved a long-term equity compensation program with regular annual awards for 2022 having values weighted 70% in performance units and 30% in restricted stock for each of the named executive officers. This mix of equity awards was intended to enhance the performance-based incentives to increase shareholder value in the program by emphasizing awards tied to achieving long-term financial objectives that will support future value creation while managing shareholder dilution and compensation expense.
In making equity awards in 2022, the Compensation Committee reviewed information provided by Pay Governance regarding the median market value of long-term compensation awards, as well as median market value of total direct compensation. Equity award guidelines for the regular annual awards to named executive officers were generally developed around target grant values at 100% of the market median according to each executive’s salary and target cash compensation level, organizational level, reporting relationships and job responsibilities, to link executive compensation and the achievement of various long-term company goals.
The Compensation Committee considered each named executive officer’s performance and the company’s overall performance when determining the actual grant value of the 2022 awards of performance units and restricted stock of each named executive officer. The equity awards approximated the targeted range for each named executive officer.
Restricted Stock Granted in 2022
The restricted stock granted in 2022 was issued at no cost to the recipient and vests ratably over three years based on continued service by the recipient. To further enhance its retention value, the terms of the restricted stock allow the holder, subject to certain restrictions, to surrender a portion of the vested shares to the company to cover any minimum tax withholding obligation. The grants of restricted stock provide that the holders of that restricted stock will be entitled to receive cash dividends declared and paid by the company on the company’s outstanding common shares only to the extent vested at the time of the dividend.
Performance Shares Granted in 2022
The goals for performance shares granted in 2022 for the three-year performance period ending December 31, 2024, initially are based on a minimum average annual Gross Margin percentage (“Average Gross Margin Percentage”) over the first two years of the performance period. Meeting or exceeding the initial performance goal will qualify the performance share
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awards to potentially vest at 100% of the target number of shares specified in the applicable award agreement. This 100% maximum is less than the 200% maximum used by others in the company's peer group and allows the company to better manage the use of equity plan shares. At the end of the performance period, the Compensation Committee will then compare the company's actual level of Adjusted EBITDA for the last year of the period to the specific performance goals to be established by the Compensation Committee for that period, to determine the portion, if any, of the performance shares initially awarded in 2022 that will actually be earned.
Performance Units Granted in 2022
Each recipient of a performance unit award a number of performance units that is based on the average daily closing price of the company’s common shares from October 1, 2024 through December 31, 2024. Under the terms of the awards, performance units will vest if the average daily closing price of the company’s common shares is $5.00 or more, up to a maximum number of units if the price is $15.00 or more. If and to the extent that performance units are determined by the Compensation Committee to have vested at the conclusion of the three-year performance period ending December 31, 2024, the receipt will be entitled to receive $1.00 in cash for every vested performance unit. Because vesting is contingent upon the average share price of the company's common stock for the fourth quarter of 2024, the company cannot predict the amount of performance units that may vest, if any, at the end of the performance period
Performance Shares Granted in 2021
The goals for performance shares granted in 2021 for the three-year performance period ending December 31, 2023, initially are based on a minimum average annual Gross Margin percentage (“Average Gross Margin Percentage”) over the first two years of the performance period. Meeting or exceeding the initial performance goal will qualify the performance share awards to potentially vest at 150% of the target number of shares specified in the applicable award agreement. This 150% maximum is less than the 200% maximum used by others in the company's peer group and allows the company to better manage the use of equity plan shares. At the end of the performance period, the Compensation Committee will then compare the company's actual level of Adjusted EBITDA for the last year of the period to the specific performance goals to be established by the Compensation Committee for that period, to determine the portion, if any, of the performance shares initially awarded in 2021 that will actually be earned.
Because the 2021 performance shares are based on the Average Gross Margin Percentage performance over the first two years and that metric was not met, the 2021 performance shares are not expected qualify for payout.
Results of Performance Shares Granted in 2020
The three-year performance period for performance shares granted in 2020 concluded on December 31, 2022. Like the performance shares granted to the named executive officers in prior years, the initial funding performance goal for the 2020-2022 cycle was based on a target for the Average Gross Margin percentage over the three-year performance period. Meeting or exceeding the initial performance goal would fund the performance share awards at 150% of target. At the end of the period, the Compensation Committee compared the company's actual level of Adjusted EBITDA to specific performance goals for each of the threshold, target and maximum levels of achievement established by the Compensation Committee, to determine the portion, if any, of the performance share awards granted in 2020 that were actually be earned.
The company's Gross Margin performance in 2020 and 2021 were above the average target level but the company did not achieve at least the threshold Adjusted EBITDA performance for 2022 in order for any awards to vest. Accordingly, no performance shares were earned under the 2020 awards, and the awards were forfeited by the recipients without vesting.
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Retirement and Other Benefits
The company maintains the plans described below to provide U.S.-based executives the opportunity to address long-term financial and retirement planning with a degree of certainty and to provide financial stability in the event the executives are impacted by unforeseeable factors beyond their control.
The company maintains the Invacare Retirement Savings Plan, a qualified 401(k) defined contribution plan, for its eligible employees, to which the company has the discretion to make matching and quarterly contributions on behalf of participants, including each of the U.S.-based named executive officers. The amounts of the contributions made by the company to the Invacare Retirement Savings Plan on behalf of U.S.-based named executive officers are set forth in a footnote to the Summary Compensation Table and are consistent with the benefits provided to all other employees who participate in the plan, up to the regulatory limits imposed on the plan for highly compensated employees.
The company provides its highly compensated U.S. employees, including named executive officers, the opportunity to participate in the Deferred Compensation Plus Plan (“DC Plus Plan”), a non-qualified contributory savings plan, which allows the executives to defer compensation above the amount permitted to be contributed to the Invacare Retirement Savings Plan. Thus, the DC Plus Plan provides the executives with the opportunity to save additional pre-tax funds for retirement up to the amount that the executive otherwise would have been able to save under the Invacare Retirement Savings Plan but for the regulatory limits imposed on that plan for highly compensated employees. As a result, highly compensated employees are eligible to save for retirement at the same rate (based on percentage of compensation) as other employees. In addition to individual deferrals, the company has the discretion to provide matching contributions and additional quarterly contributions for participating executives which are similar in percentage to the company's contributions to employees who participate in the Invacare Retirement Savings Plan.
The company also provides a Supplemental Executive Retirement Plan, or “SERP,” to one of the named executive officers who was in his role prior to 2011, to supplement other savings plans offered by the company and to provide replacement compensation for the executive in retirement. The change in the present value of the accumulated benefit obligation to the named executive officer who participates in the SERP is set forth in the Summary Compensation Table. The terms of the SERP are further described below.
Effective July 1, 2011, the Compensation Committee, based on the recommendation of management, (1) reduced the discretionary quarterly contributions by the company for all participants in the Invacare Retirement Savings Plan and DC Plus Plan from 4% to 1% of total cash compensation and (2) suspended the contributions by the company for all participants in the SERP and reduced the interest accrual rate under the SERP from 6% to 0%. The reductions remain in effect indefinitely, until the company or, in the case of the SERP, the Compensation Committee determines to restore them. The Compensation Committee closed the SERP to new participants in 2011, so the only named executive officer participating in the SERP was Mr. LaPlaca.
Severance and Change of Control Benefits
Severance Benefits. The company has entered into agreements with each of the named executive officers that provide for the payment of certain severance benefits upon a termination of employment other than a termination following a change of control of the company. These agreements provide some level of income continuity should an executive’s employment be terminated without cause by the company, or, in the case of the Chief Executive Officer, by the executive for good reason. These agreements are further described below under Other Potential Post-Employment Compensation.
Change of Control Benefits. Each named executive officer also has entered into an agreement with the company that provides for certain benefits generally payable in the event of a termination following a change of control of the company. The company believes that these agreements help retain executives and provide for management continuity in the event of an actual or threatened change of control. They also help to ensure that the interests of executives remain aligned with shareholders’ interests during a time when their continued employment may be in jeopardy. Finally, they provide some level of income continuity should an executive’s employment be terminated without cause following a change of control. The “double-trigger” feature of the agreements provides for the payment and provision of certain benefits to the executive if there is a change of control of the company and a termination of the executive’s employment with the surviving entity within two years (three years in the case of Mr. LaPlaca, which includes a one-year retention benefit upon a change of control) after the change of control. These agreements are further described below under Other Potential Post-Employment Compensation.
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Equity Awards
Each outstanding restricted stock, performance share, stock option, performance option, and performance unit award was awarded under either the 2018 Equity Compensation Plan, or its predecessor, the 2013 Equity Compensation Plan. Under the plans and the performance share, restricted stock, stock option, performance option and performance unit award agreements entered into in connection with the awards, the Compensation Committee may make certain adjustments to the awards and the awards may be terminated or amended, as further described below.
Vesting. Shares of restricted stock generally are scheduled to vest in annual one-third increments over a three-year period beginning on May 15 of the year following the year of grant. If the recipient’s employment terminates for any reason other than the recipient’s death, then he or she will forfeit the unvested restricted shares. If the recipient dies during the vesting period, then his or her estate (or designated beneficiary) will become vested in a prorated number of restricted shares.
Performance shares, performance options and performance units generally vest after a three-year performance period, based on the level of achievement of predetermined performance goals. The performance shares granted in 2021 may be earned in a range between 0% and 150% of the number of shares specified in the applicable award agreement, depending on the company’s performance for the performance period compared to the initial performance goal. Meeting or exceeding the initial performance goal will qualify the performance share awards at 150% of target, however, the Compensation Committee will determine payouts under the awards based on the actual performance over the three-year period. The Compensation Committee determined to take this approach due to the difficulty of setting specific financial performance goals during the company’s business transformation. Performance goals for performance shares are based on gross margin percentage and Adjusted EBITDA. The performance units granted in 2022 may be earned if the average closing price of the company’s common shares for the fourth quarter of 2024 is at least $5.00 per share, up to a maximum amounts of units if the price equals or exceeds $15.00 per share. Recipients may be entitled to a prorated number of shares, based on actual performance, if their employment terminates during the performance period due to death, disability or retirement.
Dividends and Dividend Equivalents. Recipients are not entitled to receive any dividends that are paid with respect to the company’s common shares prior to the vesting of their restricted stock or performance shares and exercise of stock options or performance options. Following the vesting of the restricted stock or performance shares or exercise of stock options or
performance options, the recipient will become entitled to any dividends that are paid with respect to the vested portion of the shares underlying their restricted stock or performance shares after the applicable vesting date or the portion of shares exercised under their stock options or performance options after the applicable exercise date.
Adjustments. In the event of a recapitalization, stock dividend, stock split, reverse stock split, distribution to shareholders (other than cash dividends), or a similar transaction, the Compensation Committee will adjust, in any manner that it deems equitable, the number and class of shares that may be issued under the plans and the number and class of shares applicable to outstanding awards.
Termination of Awards. The Compensation Committee may cancel any awards if, without the company's prior written consent, the participant (1) renders services for an organization, or engages in a business, that is (in the judgment of the Compensation Committee) in competition with the company, or (2) discloses to anyone outside of the company or uses for any purpose other than the company's business, any confidential information relating to the company.
Amendment of Awards. The Compensation Committee may, subject to certain restrictions, amend the terms of any award under the plans, including to waive, in whole or in part, any restrictions or conditions applicable to any award. The Compensation Committee may not amend an award in a manner that impairs the rights of any participant without his or her consent, or to reprice any stock options or stock appreciation rights at a lower exercise price, unless in accordance with an adjustment in the context of certain corporate transactions described in “Adjustments” above.
In the event of a change of control of the company (as defined under the plans), the restricted shares, performance shares, stock options, performance options and performance units will continue under their original vesting or performance schedule if the awards are assumed or replaced by the new entity. If, however, the awards are not assumed by the new entity, then, upon the change of control, the restricted stock and stock options will fully vest and the performance shares, performance options and performance units will vest on a pro-rated basis as if a target level of performance was achieved. If the recipient’s employment is terminated without cause or by the recipient for good reason (as both terms are defined in the plans) following a change of control, then he or she will fully vest in the restricted shares and stock options and vest in the target number of performance shares, performance options and performance units.
Clawback. If the Board of Directors or any appropriate Board committee has determined that fraud or
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intentional misconduct by a participant in the 2018 Equity Compensation Plan or the 2013 Equity Compensation Plan (together, the “Equity Plans”) was a significant contributing factor to the company having to restate all or a portion of its financial statement(s), the Board or such committee may take actions it deems necessary, in its discretion, to remedy the misconduct and to prevent its recurrence. In determining what remedies to pursue, the Board or appropriate committee would take into account all relevant factors, including whether the restatement was the result of fraud or intentional misconduct. The Equity Plans provide that the Board may, to the extent permitted by applicable law, in appropriate cases, require reimbursement of any bonus or incentive compensation paid to the participant for any fiscal period commencing on or after January 1, 2008, if and to the extent that, (1) the amount of incentive compensation was calculated based upon the achievement of certain financial results that were subsequently reduced due to a restatement, (2) the participant engaged in any fraud or intentional misconduct that significantly contributed to the need for the restatement, and (c) the amount of the bonus or incentive compensation that would have been awarded to the participant had the financial results been properly reported would have been lower than the amount actually awarded. In addition, the Board may terminate the participant’s employment, authorize legal action, or take such other action to enforce the participant’s obligations to the company as it may deem appropriate.
2018 Equity Compensation Plan
The Invacare Corporation 2018 Equity Compensation Plan (the “2018 Equity Plan”) is the company’s shareholder-approved equity compensation plan and is the successor to the company’s 2013 Equity Compensation Plan (the “2013 Equity Plan”) and the company's 2003 Performance Plan. Under the 2018 Equity Plan, Directors and employees of the company and its affiliates may be granted the following types of awards with respect to the company’s common shares: incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, and performance shares. The maximum number of company common shares, without par value, available for issuance under the 2018 Equity Plan will not exceed the sum of the following: 8,700,000 shares plus any shares covered by an outstanding award made under the 2013 Equity Plan or the company’s 2003 Performance Plan that are forfeited or remain unpurchased or undistributed upon termination or expiration of the award. As of December 31, 2022, there were 5,285,644 shares available for issuance under the 2018 Equity Plan inclusive of 1,363,107 aggregate shares under the company’s 2013 Equity Plan and 2003 Performance Plan which can be transferred into and made available for use under the 2018 Equity Plan.
Executive Incentive Bonus Plan
The Executive Incentive Bonus Plan was approved and adopted by the shareholders of the company on May 25, 2005 and was reapproved by the shareholders of the company on May 20, 2010 and again on May 14, 2015.
Purpose. The Executive Incentive Bonus Plan is intended to provide an incentive to the company’s executive officers to improve the company’s inherent value, operating results and to enable the company to recruit and retain key officers by making the company’s overall compensation program competitive with compensation programs of other companies with which the company competes for executive talent.
Administration. The plan is administered by the Compensation Committee, which generally has the authority to determine the manner in which the Executive Incentive Bonus Plan will operate, to interpret the provisions of the plan and to make all determinations under the plan.
Eligibility and Participation. All officers of the company are eligible to be selected to participate in the Executive Incentive Bonus Plan. The Compensation Committee has the discretion to select those officers who will participate in the plan in any given year. A participant must be employed by the company on the payment date in order to receive a bonus payment under the Executive Incentive Bonus Plan, unless the officer’s employment is terminated prior to the payment date as a result of death, disability, or retirement, in which case the officer may receive a prorated payment. In 2022, there were seven participants in the Executive Incentive Bonus Plan, including the named executive officers.
Awards under the Executive Incentive Bonus Plan. Awards under the plan are designed to ensure that the compensation of the company’s officers is commensurate with their responsibilities and contribution to the success of the company based on market levels indicated by compensation data obtained from time to time by the company or the independent consultant engaged by the Compensation Committee. For each calendar year or other predetermined performance period, the Compensation Committee will establish a target bonus for each eligible officer, which is payable based on the level(s) of achievement of a specified performance goal(s) for the performance period. When making final payout determinations, the Compensation Committee may exercise negative discretion to award less than the maximum potential cash bonus amount.
Performance Goals. The performance goal(s) for each performance period will provide for a targeted level or levels of performance using one or more of the following predetermined measurements: return on equity;
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earnings per share; net income; pre-tax income; operating income; revenue; earnings before interest and taxes; earnings before interest, taxes, depreciation and amortization; cash flow; free cash flow; economic profit; total earnings; earnings growth; return on capital; operating measures (including, but not limited to, operating margin and/or operating costs); return on assets; return on net assets; return on capital; return on invested capital; increase in the fair market value of the shares; or total shareholder return. For 2022, the bonus opportunity was based upon satisfaction of established bonus targets.
The performance goal for a performance period is established in writing by the Compensation Committee during the first 90 days of the year. During this same time period, the Compensation Committee may adjust or modify the calculation of a performance goal for the performance period in order to prevent the dilution or enlargement of the rights of participants (1) in the event of, or in anticipation of, any unusual or extraordinary corporate item, transaction, event or development; (2) in recognition of, or in anticipation of, any other unusual or nonrecurring events affecting the company, or the financial statements of the company, or in response to, or in anticipation of, changes in applicable laws, regulations, accounting principles or business conditions; and (3) in view of the Compensation Committee’s assessment of the company’s business strategy, performance of comparable organizations, economic and business conditions, and any other circumstances deemed relevant by the Compensation Committee. The Compensation Committee may establish various levels of bonus depending upon relative performance toward a performance goal.
The target bonus payable to any officer for a performance period is a specified percentage of the officer’s compensation for the performance period, but in no event will the bonus payable to any officer for a performance period exceed $5,000,000.
In the event of a change in control of the company, the amount payable to each eligible participant in the plan at the time of such change in control would be equal to the greater of (1) the target bonus that would have been paid if
the performance goal for the calendar year in which the change in control occurs had been achieved, or (2) the bonus that would have been paid to the participant if the performance goal that was actually achieved during the portion of the calendar year which occurs prior to the change in control is annualized for the entire calendar year.
Clawback. If the Board of Directors or any appropriate committee has determined that any fraud or intentional misconduct by a participant in the Executive Incentive Bonus Plan was a significant contributing factor to the company having to restate all or a portion of its financial statement(s), the Board or committee may take, in its discretion, such actions as it deems necessary to remedy the misconduct and prevent its recurrence. In determining what remedies to pursue, the Board or committee will take into account all relevant factors, including whether the restatement was the result of fraud or intentional misconduct. The Board may, to the extent permitted by applicable law, in all appropriate cases, require reimbursement of any bonus or incentive compensation paid to the participant for any fiscal period commencing on or after January 1, 2008 if and to the extent that (1) the amount of incentive compensation was calculated based upon the achievement of certain financial results that were subsequently reduced due to a restatement, (2) the participant engaged in any fraud or intentional misconduct that significantly contributed to the need for the restatement, and (3) the amount of the bonus or incentive compensation that would have been awarded to the participant had the financial results been properly reported would have been lower than the amount actually awarded. In addition, the Board may terminate the participant’s employment, authorize legal action, or take such other action to enforce the participant’s obligations to the company as it may deem appropriate in view of all the facts surrounding the particular case.
Amendment and Termination. The company reserves the right, exercisable by the Compensation Committee, to amend the Executive Incentive Bonus Plan at any time and in any respect, or to terminate the plan in whole or in part at any time and for any reason.
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Outstanding Equity Awards held by the named executive officers at December 31, 2022
Option Awards
Stock Awards
Name
Number of
Securities
Underlying
Unexercised
Options
Exercisable (#)
Number of
Securities
Underlying
Unexercised
Options
Unexercisable (#) Option
Exercise
Price
($)
Option
Expiration
Date
Number of
Shares or
Units of
Stock That
Have not
Vested (#)
Market
Value of
Shares or
Units of
Stock
That
Have not
Vested ($)
Equity Incentive Plan Awards:
Number of
Unearned
Shares, Units
or Other Rights
That Have not
Vested (#)
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have not Vested ($)
Geoffrey P. Purtill 5,000 14.49 03/18/23
17,611 12.15 03/16/27
1,425 (1) 599
2,680 (2) 1,126
14,063 (6) 5,906
5,000 (3) 2,100
20,854 (4) 8,759
20,854 (7) 8,759
100,000 (5) 42,000
Kathleen P. Leneghan 8,000 14.49 03/18/23
11,281 (1) 4,738
22,148 (2) 9,302
116,243 (6) 48,822
74,734 (3) 31,388
74,734 (7) 31,388
Anthony C. LaPlaca 13,500 14.49 03/18/23
44,963 12.15 03/16/27
3,385 (1) 1,422
6,180 (2) 2,596
32,438 (6) 13,624
20,854 (3) 8,759
20,854 (7) 8,759
(1) The restricted share award vests in equal annual increments over three years beginning on May 15, 2021.
(2) The restricted share award vests in equal annual increments over three years beginning on May 15, 2022.
(3) The restricted share award vests in equal annual increments over three years beginning on February 20, 2022.
(4) The restricted share award vests in equal annual increments over three years beginning on May 15, 2023.
(5) The restricted share award vests in equal annual increments over three years beginning on November 15, 2023.
(6) The performance share award has a three-year performance period with payout based on achievement of certain performance goals. The number of shares earned will be determined following the performance period ending December 31, 2023. The number of shares reported in the table is based on achievement of 150% of target, which is the amount of shares to be qualified under the award if the performance goal is achieved, however, the Compensation Committee will determine payouts under the awards based on the actual performance over the three-year period. Refer to the description in “Performance Shares Granted in 2021.”
(7) The performance share award has a three-year performance period with payout based upon achievement of certain performance goals. The number of shares earned will be determined following the performance period ending December 31, 2024. The number of shares reported in the table is based on achievement of 100% of target, which is the amount of shares to be qualified under the award if the initial performance goal is achieved, however, the Compensation Committee will determine payouts under the awards based on the actual performance over the three-year period. Refer to the description in “Performance Shares Granted in 2022.”
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Supplemental Executive Retirement Plan
In 1995, the company established the Supplemental Executive Retirement Plan for certain executive officers to supplement other savings plans offered by the company to provide a specific level of replacement compensation for retirement. In order to comply with Section 409A of the Code, the Supplemental Executive Retirement Plan was amended and restated, effective as of December 31, 2008, as the Invacare Corporation Cash Balance Supplemental Executive Retirement Plan (the “SERP”).
Prior to amendment, the SERP provided for an annual benefit equal to 50% of a participant's annual base salary and target bonus on the April 1 immediately preceding or coincident with the date of termination. The benefit was reduced if the participant had less than 15 years of service with the company. As amended, the SERP provides a benefit stated as a hypothetical account balance. Current participants, who were participants in the SERP prior to amendment, receive annual credits in the amount and for a maximum number of years as specified in their participation agreements. For such participants, the annual credits, together with annual interest credits, were structured with the intent to result in a benefit at normal retirement age that is substantially equivalent to the benefit that would have been provided at normal retirement age under the SERP prior to amendment. Future participants would receive annual credits that are a specified percentage (ranging from 8% to 35%, based on age at date of entry) of their annual base salary and target bonus for each year of employment, plus annual interest credits. The annual credits for such participants would not be made for any year in which the participant's account balance at June 30 is equal to or greater than 3.65 times that year's base salary and target bonus. Effective July 1, 2011, the Compensation Committee suspended the contributions by the company to the SERP and closed the plan to new participants.
Normal retirement age is age 65 or attainment of age 62 with 15 years of service with the company. Annual interest credits at the established interest crediting rate would continue as long as the participant retains an account under the SERP. The interest crediting rate was initially set at 6% per year, compounded annually, and may be changed from time to time by the Compensation Committee. Effective July 1, 2011, the Compensation Committee reduced the interest crediting rate to 0%. A participant will vest in his or her benefit in 20% increments over 5 years; however, payment of a participant's benefit generally will be made no earlier than normal retirement age, even if a participant terminates employment with a vested benefit prior to reaching normal retirement age. Also, retirement benefits generally are delayed until at least the later of the seventh month or the January after termination of employment. Upon entry into the SERP, a participant can make an election to receive his or her benefit, when it is ultimately paid, either in the form of a lump sum payment
or in annual installments over a period not to exceed 25 years.
Notwithstanding the foregoing, if a participant's employment is terminated within two years following a “change of control” (as such term is defined in the SERP), the participant's account will become fully vested. In addition, his or her account will be credited with such additional amount to the extent necessary to bring the balance of the account to an amount equal to 3.65 times the greater of base salary plus target bonus for the year of termination or the preceding year, discounted from normal retirement age to the date of termination of employment (if earlier) at an interest crediting rate of 6% compounded annually. Payment of the benefit to such participant shall be made six months after termination of employment. Furthermore, if a participant dies prior to distribution of his or her benefits, a lump sum payment of the greater of his account balance or his base salary and target bonus at the time of death will be paid to his beneficiary within 30 days after death. If a participant's employment is terminated by reason of “disability” (as defined in the SERP), the participant will be entitled to an enhanced retirement benefit of not less than 3.65 times base salary plus target bonus, prorated for less than 15 years of service.
The SERP is a nonqualified plan and, thus, the benefits accrued under this plan would be subject to the claims of the company's general creditors if the company were to file for bankruptcy. The benefits will be paid (1) from an irrevocable grantor trust which has been partially funded from the company's general funds or (2) directly from the company's general funds.
DC Plus Plan
The DC Plus Plan is a non-qualified contributory savings plan for highly compensated employees. The program is offered to allow participants to defer compensation above the amount allowed in the Invacare Retirement Savings Plan, the company's qualified retirement plan, and to provide participants with additional pre-tax savings opportunities. The DC Plus Plan was adopted, effective January 1, 2005, in order to address the requirements of Section 409A of the Code.
The DC Plus Plan allows participants to defer all or any portion of their annual cash bonus compensation and up to 50% of their salary into the plan. The company has the discretion to provide matching contribution credits on amounts deferred, in accordance with the matching contribution percentage formula provided under the Retirement Savings Plan. The company also has the discretion to provide for quarterly contribution credits on amounts of compensation in excess of the qualified plan compensation limit, in accordance with the quarterly contribution formula under the Retirement Savings Plan. For 2021, if the participant deferred at least 3% of
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compensation to the DC Plus Plan, the match was 2% of compensation deferred under the DC Plus Plan. During 2021, quarterly contributions were 1% of compensation in excess of the qualified plan compensation limit, without regard to the amount of deferrals made under the DC Plus Plan for any quarter in which a contribution was made to the qualified plan.
Participants may allocate contributions among an array of funds representing a full range of risk/return profiles, including company common shares reflected in phantom share units. Employee deferrals and contributions by the company for the benefit of each employee are credited with earnings, gains or losses based on the performance of investment funds selected by the employee. Participants do not have any direct interest in or ownership of the funds. Participants' contributions are always 100% vested and employer contributions vest according to a five-year graduated scale.
Distributions under the DC Plus Plan may be made only upon termination of the participant's employment, death, or hardship, or at the time specified by the participant at the time of deferral in accordance with the terms of the plan. All distributions under the DC Plus Plan are in the form of cash. Distributions due to termination of employment are made within 90 days after termination of employment (or the seventh month after termination of employment in the case of key employees (as that term is defined in the Code)). Distributions are paid in the form of a lump sum, except that a participant may elect to have payment made in annual installments over a period of up to 15 years if termination occurs after retirement age (age 55 with 10 years of service) and the account is over a minimum amount. Elections to participate in the DC Plus Plan must be made by the employee in accordance with the requirements of the plan and applicable law.
Other Potential Post-Employment Compensation
Severance and Change of Control Benefits
Upon termination of employment for certain reasons (other than a termination following a change of control of the company) severance benefits may be paid to certain of the named executive officers.
Severance Arrangements
Agreement with Mr. Purtill. Mr. Purtill has an employment agreement with Invacare International GmbH, the company’s Swiss subsidiary (as amended from time to time, the “Purtill Employment Agreement”). Under the Purtill Employment Agreement, in the event the company terminates Mr. Purtill’s employment for any reason other than “for cause” (as defined in the Purtill Employment Agreement), he will be entitled to a six month notice
period in which he will receive his base salary and continuation of other benefits including health care. Additionally, upon such termination, the company, in its discretion and conditioned upon Mr. Purtill signing a release of claims, would provide Mr. Purtill with a severance benefit of base salary continuation for a period of three to six months plus executive outplacement services.
Agreement with Ms. Leneghan. The company entered into an offer letter agreement with Ms. Leneghan in connection with her employment in February 2018 which provides that, upon a termination of employment by the company other than for “cause” (as defined in Ms. Leneghan’s offer letter agreement), Ms. Leneghan will be entitled to a severance benefit in the amount equal to 12 months of her base salary in effect at the time of termination.
Agreement with Mr. LaPlaca. The company entered into an offer letter agreement with Mr. LaPlaca in connection with his employment in April 2008 which provides that, upon a termination of employment by the company other than for cause, Mr. LaPlaca will be entitled to continuation of his then-applicable base salary for one year, to receive a pro rata portion of his target bonus for the year in which his employment ends based on the date of termination, and to continuation of health insurance benefits until the earlier of the end of the severance period or such time as Mr. LaPlaca obtains employment that provides such coverage.
Technical Information and Non-Competition Agreements
The company also has entered into technical information and non-competition agreements with each of the named executive officers, and an employment agreement in the case of Mr. Purtill, which contain provisions requiring each executive to maintain the confidentiality of non-public company information during and after his or her employment and to assign to the company any rights that he or she may have in any intellectual property developed in the course of his employment. The agreements also contain provisions which restrict each executive's ability to engage in any business that is competitive with the company's business, or to solicit company employees, customers or suppliers for a period of two years following the date of termination of his employment, or in the case of Mr. Purtill, for a period of year following termination of his employment.
Change of Control Agreements
The company has entered into change of control agreements with its executive officers, including each of the named executive officers. The change of control agreements continue through December 31 of each year
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and are automatically extended in one-year increments unless the company gives prior notice of termination at least one year in advance. These agreements are intended to ensure the continuity of management and the continued dedication of the executives during any period of uncertainty caused by the possible threat of a takeover. Except for certain benefits under the agreement with Mr. LaPlaca described below, the company's change of control agreements are so-called “double trigger” agreements in that they do not provide for benefits unless there is both a change of control of the company and an executive is terminated without cause (as defined in the agreement) or resigns for good reason (as defined in the agreement) within two years after the change in control, or, in the case of Mr. LaPlaca, within three years after the change of control.
Agreements with Mr. Purtill and Ms. Leneghan. If there is a change of control of the company and the executive is terminated without cause (as defined in the agreement) or resigns for good reason (as defined in the agreement) at any time during the two-year period following a change of control under the conditions set forth in the agreement, each of them will receive the following:
•a lump sum amount equal to two times the sum of (a) his or her highest annual base salary paid by the company since the effective date of the agreement; and (y) the average of the annual bonuses earned by him or her with respect to the three fiscal years preceding the change of control;
•a lump sum amount equal to 24 times the current monthly COBRA premium rate in effect as of the termination date;
•immediate vesting of his or her rights under the DC Plus Plan;
•accelerated vesting of all outstanding unvested stock options and restricted stock; and
•accelerated vesting of all outstanding performance share awards, as if all applicable performance goals had been achieved at their target levels as of the termination date.
The agreements further provide for accelerated vesting of stock options, restricted stock and performance share awards upon a change of control, if the awards are not assumed by the acquiring company in the change of control. The company’s equity compensation plans provide for the accelerated vesting of these awards; however, under the change of control agreements, each of them would have the right to receive the accelerated vesting to the extent it is not otherwise provided for under the plan at the time of the change of control. The agreements further provide that all vested options will continue to be exercisable for two years after termination (unless the option earlier expires by its
terms). Finally, the agreements generally provide that they will automatically terminate upon a termination of employment prior to a change of control. However, if Mr. Purtill or Ms. Leneghan are involuntarily terminated or terminates employment for good reason within the six months before, and primarily in anticipation of, a change of control, then effective as of the date of the change of control, he or she would be vested in and entitled to receive the same benefits to which he or she would have been entitled to if his or her termination of employment had occurred after the change of control.
The change of control agreements with Mr. Purtill and Ms. Leneghan also contain a so-called “best pay” provision which provides that if any payment or benefit the executive would receive under the agreement, when combined with any other payment or benefit executive receives in connection with the termination of employment, would, be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code, then such payment will be either (i) the full amount of such payment or (ii) such lesser amount (with cash payments being reduced before stock option compensation) as would result in no portion of the payment being subject to the excise tax, whichever of the foregoing amounts results in the executive’s receipt of a greater amount, on an after-tax basis.
Agreement with Mr. LaPlaca. Under the agreement with Mr. LaPlaca entered into in December 2008, in the event that there is a change of control of the company (as defined in the agreement), and either (a) Mr. LaPlaca continues to be employed by the company on the first anniversary of the change of control, or (b) his employment is involuntarily terminated for any reason other than cause (as defined in the agreement), death or disability, or he terminates his employment for good reason (as defined in the agreement), within one year after the change of control, then Mr. LaPlaca is entitled to receive a payment equal to the sum of (x) the highest annual base salary paid by the company to Mr. LaPlaca since the effective date of the agreement; and (y) the higher of Mr. LaPlaca's target bonus in the year in which the change of control occurs or the target bonus in the preceding year (such sum being hereinafter referred to as “Base Compensation”).
In addition, if Mr. LaPlaca is terminated without cause (as defined in the agreement) or resigns for good reason (as defined in the agreement) at any time during the three-year period following a change of control under the conditions set forth in the agreements, Mr. LaPlaca will receive, in addition to the Base Payment noted above, the following:
•a lump sum amount equal to two times Mr. LaPlaca's Base Compensation;
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•a lump sum amount equal to three times the greatest contribution made by the company to each of the Invacare Retirement Savings Plan and the DC Plus Plan on behalf of Mr. LaPlaca for any year in the three years prior to the change of control, as well as a lump sum payment equal to the unvested portion of Mr. LaPlaca's account under the Invacare Retirement Savings Plan;
•a lump sum amount equal to the sum of the contributions and interest that were scheduled under Mr. LaPlaca's participation agreement under the SERP to be added to Mr. LaPlaca's account under the SERP during the three-year period immediately following the date of termination of employment if Mr. LaPlaca had continued to be employed by the company for three years after termination of employment;
•continuing coverage under the company's health, life and disability insurance programs (including those available only to executives and those generally available to employees of the company) for three years after termination of employment;
•a lump sum payment as necessary to “gross up,” on an after-tax basis, Mr. LaPlaca's compensation for all excise taxes and any penalties and interest imposed by Sections 4999 and 409A of the Code; and
•accelerated vesting of of all outstanding unvested stock options and restricted stock.
The DC Plus Plan provides for immediate vesting of the executive’s rights under the plan upon a change of control. The company's equity compensation plans provide for accelerated vesting of outstanding unvested stock options, restricted stock, performance shares and performance options if the executive’s employment is terminated without cause or by the executive for good reason within two years after a change of control, unless awards granted under the plan are not assumed by the acquiring company, in which case the vesting of all outstanding awards will be accelerated upon the change of control.
The change of control agreements also provide for these benefits (other than accelerated vesting of performance shares in the case of Mr. LaPlaca) if the executive is terminated without cause or resigns for good reason within two years (three years in the case of Mr. LaPlaca) after the change of control. Accordingly, the executive would have the right to receive the accelerated vesting of these benefits (other than accelerated vesting of performance shares in the case of Mr. LaPlaca) under the change of control agreements upon a qualifying termination of employment if they were not otherwise
provided for under the plans at the time of the change of control, as a result of the Board determining not to accelerate vesting or due to an amendment in the terms of the plans. The change of control agreements further provide that all vested options will continue to be exercisable for two years after termination (unless the option earlier expires by its terms). Finally, the change of control agreements generally provide that the agreements will automatically terminate upon a termination of employment prior to a change of control. However, if an executive is involuntarily terminated or terminates employment for good reason (as defined in the agreement) within the six months before, and primarily in anticipation of, a change of control, then effective as of the date of the change of control, the executive will be vested in and entitled to receive the same benefits to which he would have been entitled to if his termination of employment had occurred after the change of control.
Other Post-Termination Benefits
The company maintains other plans and arrangements for its named executive officers which provide for post-employment benefits upon the retirement or death of the executives, as further described below.
Retirement Plans
Only Mr. LaPlaca, who was in his position prior to 2011, participates in the SERP, which the Compensation Committee closed to new participants in 2011. The SERP is described above and the present value of the accumulated benefits of Mr. LaPlaca under the SERP was $448,961 at December 31, 2022. All of the named executive officers other than Mr. Purtill are eligible to participate in the DC Plus Plan.
Death Benefit Only Plan
The company maintains a Death Benefit Only Plan (“DBO Plan”) for certain of its senior executives. Mr. LaPlaca and Ms. Leneghan are the only named executive officers who are participants. Under the DBO Plan, subject to certain limitations, if a participant dies while employed by the company and prior to attaining age 65, his or her designated beneficiary will receive a benefit equal to three times the executive's highest annual base salary plus target bonus as in effect on the April 1st preceding or coincident with his or her death. If a participant dies while employed after attaining age 65, or dies after his or her employment with the company is terminated following a change of control of the company, a payment equal to his or her highest annual base salary plus target bonus as in effect on the April 1st preceding or coincident with such event will be payable on behalf of the participant. The company may, in its discretion, pay an additional amount in order to “gross up” the participant for some or all of the income taxes that may result from the benefits described above.
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Upon a change of control of the company, the company's obligations under the DBO Plan will be binding on any successor to the company and the foregoing benefits would be payable to a participant under the DBO Plan in accordance with the terms described above upon the death of the participant following the change of control.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.
NYSE Delisting Proceedings
On February 1, 2023, the company was notified by the staff of NYSE Regulation, Inc. (“NYSE Regulation”) that it had suspended trading in the company's common shares on the New York Stock Exchange (“NYSE”) and determined to commence proceedings to delist the company’s common shares from the NYSE. NYSE Regulation reached its decision that the company is no longer suitable for listing pursuant to NYSE Listed company Manual Section 802.01D after the company filed the Chapter 11 Cases referenced in Item 1. Business - Bankruptcy. The company's common shares were subsequently delisted from the NYSE effective February 16, 2023.
Following delisting from the NYSE, the company's common shares commenced trading in the OTC Pink Open Market under the symbol “IVCRQ”. The OTC Pink Open Market is a significantly more limited market than the NYSE, and quotation on the OTC Pink Open Market likely results in a less liquid market for existing and potential holders of the common shares to trade the company’s common shares and could further depress the trading price of the common shares. The company can provide no assurance that its common shares will continue to trade on this market, whether broker-dealers will continue to provide public quotes of the common shares on this market, or whether the trading volume of the common shares will be sufficient to provide for an efficient trading market.
Equity Compensation Plan Information
The following table provides information as of December 31, 2022 about our common shares that may be issued upon the exercise of options, warrants and rights granted under all of our existing equity compensation plans, including the Invacare Corporation 2018 Equity Compensation Plan.
Column (a) Column (b) Column (c)
Plan Category
Number of securities
to be issued upon
exercise of outstanding options, warrants and rights Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for future issuance under equity compensation plans
(excluding securities reflected in column (a))
Equity compensation plans approved by security holders 189,689 $13.43 5,285,644 (1)
Equity compensation plans not approved by security holders 416 (2) - -
Total 190,105 $13.43 5,285,644
(1) Represents shares available under the Invacare Corporation 2018 Equity Compensation Plan. This amount reflects the balance after reduction of (i) an aggregate of 1,061,867 shares underlying restricted share and restricted share unit awards outstanding at December 31, 2022 and (ii) an aggregate of 318,071 shares underlying performance share and performance share unit awards outstanding at December 31, 2022. Performance shares and performance share unit awards outstanding assumes awards at targets. For purposes of the number of shares available for future issuance, performance share and units awards assume achievement of maximum targets, even though the actual payout under such awards may be less than the 150% award maximum. Performance share and performance share unit awards and restricted share and restricted share unit awards granted under the 2018 Equity Plan and 2013 Equity Plan reduce the number of securities remaining at a rate of 2 shares for each full value share awarded. An aggregate of 1,363,107 shares underlying awards are available under the 2013 Equity Plan and 2003 Performance Plan at December 31, 2022. Shares underlying awards outstanding under the 2013 Equity Plan and 2003 Performance Plan may become available under the 2018 Equity Plan to the extent such awards are forfeited or expire unexercised.
(2) Represents phantom share units in the DC Plus Plan or a predecessor plan, which were allocated to participants' accounts at their discretion as their investment choice.
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Share Ownership and Voting Power of Principal Holders other than Management
The following table shows, as of March 17, 2023, the beneficial share ownership of each person or group known by Invacare to beneficially own more than 5% of either class of common shares of Invacare:
Name and business address of
beneficial owner Common Shares
Beneficially Owned
Percentage of
Total
Voting Power
Beneficially Owned
Number
of
Shares
Percentage
of
Outstanding
Shares
Charles Schwab Investment Management, Inc 3,575,752 9.5% 9.5%
211 Main Street
San Francisco, CA 94105 (1)(2)
Azurite Management LLC (together its investment group) 3,775,433 9.9% 9.9%
25101 Chagrin Blvd, Suite 350
Cleveland, OH 44122 (1)(3)
First Manhattan Co. LLC 3,000,000 8.0% 8.0%
399 Park Avenue
New York, NY 10022 (1)(4)
Renaissance Technologies LLC 1,841,441 5.3% 5.3%
800 Third Avenue
New York, NY 10022 (1)(5)
(1) The number of common shares beneficially owned is based upon a Schedule 13D or 13D/A, or Schedule 13G or 13G/A, filed by the holder with the SEC to reflect share ownership as of December 31, 2022, provided that the ownership percentages have been calculated by the company based on the company's issued and outstanding shares as of March 17, 2023. The referenced Schedule 13D or 13D/A, or Schedule 13G or 13G/A, filing dates were: February 3, 2023 for Charles Schwab Investment, Management, Inc, November 22, 2022 for Azurite Management LLC, February 13, 2023 for First Manhattan Co. LLC and February 14, 2023 for Renaissance Technologies LLC.
(2) Based on a Schedule 13G filed on February 3, 2023, by Charles Schwab Investment Management, Inc, which has sole voting power and sole dispositive power over 3,575,752 shares.
(3) Based on a Schedule 13D/A filed on November 22, 2022 by Azurite Management LLC, Steven H. Rosen, Crawford United Corporation, Edward F. Crawford and Matthew V. Crawford (collectively, the “Reporting Persons”). The Reporting Persons comprise a group within the meaning of Section 13(d)(3) of the Exchange Act. Mr. Rosen and Azurite disclaim beneficial ownership over the 110,200 Common Shares owned by Crawford United and Messrs. Crawford, and Crawford United and Messrs. Crawford disclaim beneficial ownership over the 3,665,233 Common Shares owned by Mr. Rosen and Azurite. However, as a group, the Reporting Persons may be deemed to collectively beneficially own 3,775,433 Common Shares, which represent 9.999% of the company’s outstanding Common Shares and 9.990% of the company’s total voting power. Azurite is the owner of record of 3,665,233 Common Shares. Mr. Rosen, in his capacity as the sole manager of Azurite, has the ability to indirectly control the decisions of Azurite regarding the vote and disposition of securities held by Azurite, and as such may be deemed to have indirect beneficial ownership of the 3,665,233 Common Shares held by Azurite. Crawford United is the owner of record of 110,200 Common Shares. Messrs. Crawford, in their capacity as holders of a majority of the voting power of Crawford United and as two of six members of Crawford United’s board of directors (of which Mr. Rosen is also a member), share the ability to indirectly control the decisions of Crawford United regarding the vote and disposition of securities held by Crawford United, and as such may be deemed to have indirect beneficial ownership of the 110,200 Common Shares held by Crawford United.
(4) Based on a Schedule 13G filed on February 14, 2023, by First Manhattan Co. LLC, which has sole voting power over 1,500,000 shares, shared voting power over 1,500,000 shares, sole dispositive power over 1,500,000 and shared dispositive power over 1,500,000 shares.
(5) Based on a Schedule 13G/A filed on February 13, 2023, by Renaissance Technologies LLC, which has sole voting power and dispositive power over 1,521,569 shares.
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Share Ownership and Voting Power of Invacare's Directors and Executive Officers
The following table sets forth, as of March 17, 2023, the beneficial share ownership of all Directors and our named executive officers, and all Directors and executive officers as a group:
Name of beneficial owner
Common Shares
Beneficially Owned
Percentage of
Total Voting Power
Beneficially Owned(1)
Number
of
Shares
Percentage
of Outstanding
Shares
Edward F. Crawford (2), (3) 110,200 <1% <1%
Petra Danielsohn-Weil, PhD (2) 91,936 <1% <1%
Marc M. Gibeley (2) 109,465 <1% <1%
Anthony C. LaPlaca (2) 116,120 <1% <1%
Kathleen P. Leneghan (2) 236,352 <1% <1%
Michael J. Merriman, Jr. (2) 154,852 <1% <1%
Clifford D. Nastas (2) 125,592 <1% <1%
Geoffrey P. Purtill (2) 156,086 <1% <1%
Steven H. Rosen (2), (4) 3,665,233 9.7% 9.7%
Aron I. Schwartz (2) 39,474 <1% <1%
All executive officers and Directors as a group (10 persons) (2) 4,805,310 12.6% 12.6%
(1) None of the Directors, Director nominees or executive officers beneficially owned Class B common shares as of March 17, 2023. All holders of Class B common shares are entitled to ten votes per share and are entitled to convert any or all of their Class B common shares to common shares at any time, on a share-for-share basis. In addition, Invacare may not issue any additional Class B common shares unless the issuance is in connection with share dividends on, or share splits of, Class B common shares.
(2) The common shares beneficially owned by Invacare's executive officers and Directors as a group include an aggregate of 4,805,310 common shares which may be acquired upon the exercise of stock options during the 60 days following March 17, 2023. For the purpose of calculating the percentage of outstanding common shares and voting power beneficially owned by each of Invacare's executive officers and Directors, and all of them as a group, common shares which they had the right to acquire upon the exercise of stock options within 60 days of March 17, 2023 are considered to be outstanding. The number of common shares that may be acquired upon the exercise of such stock options for the noted individuals is as follows: Mr. Purtill, 22,611 shares; Mr. LaPlaca, 71,933 shares; and Ms. Leneghan, 16,000 shares.
(3) Common shares are owned by Crawford United Corporation where Mr. Crawford serves on the board of directors and shares the ability to indirectly control the decisions of Crawford United Corporation regarding the vote and disposition of securities held by Crawford United Corporation. Mr. Crawford and Crawford United Corporation are members of a group within the meaning of Section 13(d)(3) of the Exchange Act. See footnote (3) to the preceding table “Share Ownership and Voting Power of Principal Holders other than Management.”
(4) Common shares are owned by Azurite Management LLC where Mr. Rosen, in his capacity of sole manager, has the ability to indirectly control the decisions of Azurite Management LLC. Mr. Rosen and Azurite Management LLC are members of a group within the meaning of Section 13(d)(3) of the Exchange Act. See footnote (3) to the preceding table “Share Ownership and Voting Power of Principal Holders other than Management.”
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Director Independence
To be considered independent, the Board of Directors must determine that a non-employee Director does not have a direct or indirect material relationship with Invacare. The Board of Directors has adopted the following guidelines (set forth in the Corporate Governance Guidelines, a copy of which is available at www.invacare.com by clicking on the Investor Relations tab and then the Corporate Governance link) to assist it in making such determinations:
A non-employee Director will be considered independent if he or she, at any time that is considered relevant:
(i) has not been employed by the company or its affiliates;
(ii) has not had an immediate family member who has been employed by the company or its affiliates as an executive officer;
(iii) has not received, and has not had an immediate family member who has received, more than such annual amount of direct compensation from the company as may be considered relevant from time to time, other than Director and committee fees and pension or other forms of deferred compensation for prior service (provided such deferred compensation is not in any way contingent on continued service);
(iv) is not a partner of the company's present internal or external auditor;
(v) does not have an immediate family member who is a partner of Invacare's present internal or external auditor;
(vi) has not been a partner or employee of a present or former internal or external auditor of Invacare who worked on Invacare's audit;
(vii) does not have an immediate family member who has been a partner or employee of a present or former internal or external auditor of Invacare who worked on Invacare's audit;
(viii) has not been employed, and does not have an immediate family member who has been employed, as an executive officer of another company where any of Invacare's present executives
serve on that company's compensation committee; and
(ix) has not been an executive officer or an employee of another company, and does not have an immediate family member who has been an executive officer of another company, that does business with Invacare and makes payments to, or receives payments from, Invacare for property or services in an amount that, in any one of the three last fiscal years, exceeds the greater of $1 million or 2% of such other company's consolidated gross revenues.
Additionally, the following commercial and charitable relationships will be considered immaterial relationships and a non-employee Director will be considered independent if he or she does not have any of the relationships described in clauses (i) - (ix) above, and:
(A) is not an executive officer of another company, and does not have an immediate family member who is an executive officer of another company, that is indebted to the company, or to which Invacare is indebted, where the total amount of either company's indebtedness to the other is more than 5% of the total consolidated assets of the other company and exceeds $100,000 in the aggregate; and
(B) does not serve, and does not have an immediate family member who serves, as an officer, Director or trustee of a foundation, university, charitable or other not for profit organization, and Invacare's, or Invacare foundation's, annual discretionary charitable contributions (any matching of employee charitable contributions will not be included in the amount of contributions for this purpose) to the organization, in the aggregate, are more than 5% percent of that organization's total annual revenues (or charitable receipts in the event such organization does not generate revenues).
In the event that a non-employee Director has a relationship of the type described in clauses (A) or (B) in the immediately preceding paragraph that falls outside of the “safe harbor” thresholds set forth in such clauses (A) and (B), or if the Director had any such relationship during the prior three years that fell outside of such “safe harbor” thresholds, then in any such case, the Board of Directors annually shall determine whether the relationship is material or not, and therefore, whether the Director would be independent or not. If any relationship does not meet the categorical standards of immateriality set forth in clauses (i) and (ii) in the immediately preceding paragraph, Invacare will explain in its next proxy statement the basis for any Board of Directors determination that such relationship is immaterial.
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In addition, any Director serving on the Audit Committee of Invacare may not be considered independent if he or she directly or indirectly receives any compensation from Invacare other than Director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not in any way contingent on continued service).
The Board examined the transactions and relationships between Invacare and its affiliates and each of the Directors, any of their immediate family members and their applicable affiliates. Based on this review, the Board affirmatively determined that each of the Directors, other than Mr. Purtill, is independent and does not have any direct or indirect material relationship with Invacare pursuant to the categorical standards set forth in Invacare's Corporate Governance Guidelines.
Certain Relationships and Related Transactions
The company has adopted a written policy for the review of transactions with related persons. The policy generally requires review, approval or ratification of transactions involving amounts exceeding $120,000 in which the company is a participant and in which a Director, Director nominee, executive officer, or a significant shareholder of the company, or an immediate family member of any of the foregoing persons, has a direct or indirect material interest. These transactions must be reported for review by the Nominating and Governance Committee. Following review, the Nominating and Governance Committee determines whether to approve or ratify these transactions, taking into account, among other factors it deems appropriate, whether they are on terms no less favorable to the company than those available with other unaffiliated parties and the extent of the related person's interest in the transaction. The Chairman of the Nominating and Governance Committee has the authority to approve or ratify any related party transaction in which the aggregate amount involved is expected to be less than $1,000,000. The policy provides for standing pre-approval of certain related party transactions, even if the amounts involved exceed $120,000, including certain transactions involving: compensation paid to executive officers and Directors of the company; other companies or charitable organizations where the amounts involved do not exceed the greater of $1,000,000 or 2% of the organization's total annual revenues or receipts; proportional benefits to all shareholders; rates or charges determined by competitive bids; services as a common or contract carrier or public utility; and banking-related services.
Azurite Cooperation Agreement
On August 22, 2022, the company entered into a Cooperation Agreement, which was amended on
November 21, 2022 (as amended, the “Cooperation Agreement”) with Azurite Management LLC, Steven H. Rosen, Crawford United Corporation, Edward F. Crawford and Matthew V. Crawford (collectively, “Azurite”).
On August 22, 2022, two directors of the company resigned from the board of directors of the company (the “Board”) and, pursuant to the Cooperation Agreement, and subject to the conditions set forth therein, the Board appointed Steven H. Rosen and Ambassador Edward F. Crawford to serve as directors of the company (each, a “Designee” and, together, the “Designees”) and certain Board committees. The company also agreed that, subject to the conditions set forth in the Cooperation Agreement, the Board will nominate each Designee for election to the Board at the company’s 2023 Annual Meeting of Shareholders (the “2023 Annual Meeting”). If, prior to the Expiration Date (as defined below), a Designee is unable or unwilling to serve, resigns, is removed, or otherwise ceases to be a director, then Azurite shall designate a replacement director who is reasonably acceptable to the Board.
In addition, the company agreed to form a Strategy and Operational Improvement Committee of the Board (the “Strategy Committee”), which is comprised of five (5) members, including the Designees, until at least the Expiration Date, subject to certain exceptions. The company also shall not (i) increase the size of the Board to more than ten (10) directors or (ii) classify the Board without the prior written consent of Azurite.
The foregoing obligations of the company will terminate with respect to both Designees if Azurite and its affiliates collectively do not own at least 3,600,000 shares of the common stock of the company. Unless otherwise provided in the Cooperation Agreement, the obligations of the company described above will terminate (i) the day after the company’s 2024 Annual Meeting of Shareholders or (ii) such earlier time as the company’s obligations terminate with respect to both Designees as described above (the “Expiration Date”).
Under the Cooperation Agreement, at any meeting of the shareholders held during the Cooperation Period, Azurite has agreed to vote or cause to be voted, all of the company’s common shares that Azurite or its controlling or controlled affiliates has the right to vote (i) in favor of directors nominated and recommended by the Board, (ii) against any shareholder nominations for directors that are not approved and recommended by the Board, (iii) against any proposals or resolutions to remove any member of the Board and (iv) and in accordance with the Board’s recommendation on all other proposals or business except with respect to an Extraordinary Transaction (as defined below), subject to certain limited exceptions.
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Pursuant to the Cooperation Agreement, Azurite is subject to certain standstill provisions (the “Standstill”) during the Cooperation Period, which prohibit Azurite from, among other things, (i) offering to acquire, agreeing to acquire or acquiring rights to acquire, directly or indirectly, any voting securities of the company which would result in the ownership or control of, or other beneficial ownership interest, in excess of 9.995% of the then-outstanding total voting power represented by all shares of capital stock of the company (the “Ownership Threshold”); (ii) (A) calling or seeking to call, alone or in concert with others, a meeting of the company’s shareholders, (B) seeking, alone or in concert with others, election or appointment to, or representation on, the Board or nominate or propose the nomination of, or recommend the nomination of, any candidate to the Board, except as provided in the Cooperation Agreement, (C) seeking, alone or in concert with others, the removal of any member of the Board or (D) conducting a referendum of shareholders of the company; (iii) making a request for any shareholder list or other books and records of the company or any of its subsidiaries; (iv) making any public proposal, public announcement or public request with respect to, (A) any change in the number, terms or identity of directors of the company or the filling of any vacancies on the Board other than as provided in the Cooperation Agreement, (B) any change in the business, capitalization, capital allocation policy or dividend policy of the company or sale, spinoff, splitoff or other similar separation of one or more business units, (C) any other change to the Board or the company’s management or corporate or governance structure, (D) any waiver, amendment or modification to the company’s organizational documents, (E) causing the common shares to be delisted from, or to cease to be authorized to be quoted on, any securities exchange, or (F) causing the common shares to become eligible for termination of registration pursuant to Section 12(g)(4) of the Exchange Act; (v) engaging in any solicitation of proxies with respect to the election or removal of directors of the company or any other matter or proposal relating to the company or becoming a participant in any such solicitation of proxies; (vi) making or submitting to the company or any of its affiliates any proposal for, or offer of (with or without conditions), either alone or in concert with others, any tender offer, exchange offer, merger, consolidation, acquisition, sale of all or substantially all assets or sale, spinoff, splitoff or other similar separation of one or more business units, business combination, recapitalization, restructuring, liquidation, dissolution or similar extraordinary transaction involving the company (including its subsidiaries and joint ventures or any of their respective securities or assets) (each, an “Extraordinary Transaction”) either publicly or in a manner that would reasonably require public disclosure by the company or Azurite; (vii) forming, joining or acting in concert with any “group” as defined in Section 13(d)(3) of the Exchange Act, with respect to any voting securities of the company, other than
solely with affiliates of Azurite; (viii) entering into a voting trust, arrangement or agreement with respect to any voting securities of the company, or subjecting any voting securities to any voting trust, arrangement or agreement, subject to certain exceptions; (ix) engaging in any short sale or any purchase, sale, or grant of any option, warrant, convertible security, or other similar right with respect to any security that derives any significant part of its value from a decline in the market price of any of the securities of the company and would result in Azurite ceasing to have a “net long position” in the company equivalent to its percentage beneficial ownership of the voting power of the then outstanding common shares; (x) selling, offering, or agreeing to sell, all or substantially all, voting rights decoupled from the underlying common shares; (xi) instituting, soliciting or joining as a party in any litigation or other proceeding against the company or any of its subsidiaries or any of its or their respective current or former directors or officers; (xii) entering into any negotiations, agreements, or understandings with any third party to take any action that Azurite is prohibited from taking pursuant to the Standstill; or (xiii) making any request or submitting any proposal to amend or waive the terms of the Cooperation Agreement, in each case publicly or which would reasonably be expected to result in a public announcement or disclosure of such request or proposal.
Azurite’s obligations under the Standstill terminate upon the earliest of the following: (i) the delivery of notice by Azurite at any time after the one year anniversary date of the Cooperation Agreement, that the Designees have resigned from the Board and all of their other respective positions with the company and that Azurite is terminating the Cooperation Period, (ii) any uncured material breach by the company of its obligations with respect to the appointment and nomination of the Designees or replacement directors designated by Azurite, formation of the Strategy Committee and size and structure of the Board; (iii) the company’s entry into (x) a definitive written agreement with respect to any Extraordinary Transaction that, if consummated, would result in the acquisition by any person or group of more than 50% of the voting securities of the company or assets having an aggregate value exceeding 50% of the aggregate enterprise value of the company or (y) one or more definitive written agreements providing for a transaction or series of related transactions which would in the aggregate result in the company issuing to one or more third parties at least 19.9% of the common shares outstanding immediately prior to such issuance(s) during the Cooperation Period (provided that securities issued as consideration for (or in connection with) the acquisition of the assets, securities and/or business(es) of another person by the company or one or more of its subsidiaries or upon exercise or conversion of currently outstanding options or convertible securities of the company shall not be counted toward this clause (y)); and (iv) the commencement of any tender or exchange
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offer (by any person or group other than Azurite or their affiliates) which, if consummated, would constitute an Extraordinary Transaction that would result in the acquisition by any person or group of more than 50% of the voting securities of the company, where the company files with the SEC a Schedule 14D-9 (or amendment thereto) that does not recommend that its shareholders reject such tender or exchange offer.
Each of the parties also agreed to mutual non-disparagement obligations until (i) the Expiration Date or (ii) such earlier time as the restrictions in the Standstill terminate (jointly referred to as the “Cooperation Period” provided that the Cooperation Period shall not end earlier than the first anniversary of the date of the Cooperation Agreement. Azurite’s obligations under the Cooperation Agreement terminate at the end of the Cooperation Period. The company’s obligations under the Cooperation Agreement terminate on the Expiration Date.
Separation Agreement with Matthew E. Monaghan
On December 5, 2022, the company and Matthew E. Monaghan, the company’s former Chairman, President and Chief Executive Officer, entered into a Separation Agreement and General Release with respect to the termination of his employment with the company effective August 28, 2022 (the “Separation Agreement”) and Mr. Monaghan resigned as a director of the company without any disagreement or dispute with the company or its Board of Directors.
Subject to the effectiveness of a general release of claims in accordance with the Separation Agreement (the “Release”), he is entitled to payment of the equivalent of 12 months of his regular monthly pay as of the date of separation, less applicable taxes and withholdings, paid over the six-month period from January 2023 through June 2023 on a semi-monthly basis consistent with the company’s regular payroll practices.
The Separation Agreement also provides that Mr. Monaghan is entitled to continuation of coverage under the company’s health insurance plan pursuant to COBRA, for which the company will pay all premiums (following effectiveness of the Release) retroactive to the date of separation through August 31, 2023 or such earlier time as Mr. Monaghan obtains new health insurance coverage. Upon effectiveness of the Release, certain unvested time-based restricted stock of the company held by Mr. Monaghan will continue to vest through May 15, 2023 in accordance with its terms, and the portion of such stock that would have remained unvested as of May 16, 2023 will be immediately forfeited.
Pursuant to the Separation Agreement, Mr. Monaghan agreed to certain restrictive covenants,
including among others, non-competition, non-interference and non-recruitment obligations, effective through August 31, 2023. Mr. Monaghan further agreed to provide certain transition assistance as reasonably required by the company for up to 12 hours per month until August 31, 2023
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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FEES AND SERVICES
Independent Registered Public Accounting Firm and Fees
Fees for services rendered by Ernst & Young LLP in 2022 and 2021 were:
2022 2021
Audit Fees $ 3,178,000 $ 3,145,000
Audit-Related Fees 250,542 434,700
Total Audit and Audit-Related Fees 3,428,542 3,579,700
Tax Fees
Tax Compliance Services 463,400 577,600
Tax Advisory Services 175,100 449,100
Total Tax Fees 638,500 1,026,700
All Other Fees - 425,000
Total Fees $ 4,067,042 $ 5,031,400
Audit Fees. Fees for audit services include fees associated with the audit of the company's annual financial statements and review of the company's quarterly financial statements, including fees for statutory audits that are required domestically and internationally and fees related to the completion and delivery of the auditors' attestation report on internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act. Audit fees also include fees associated with providing consents and review of documents filed with the SEC, other services in connection with statutory and regulatory filings or engagements, as well as accounting consultations billed as audit consultations and other accounting and financial reporting consultation and research work necessary to comply with generally accepted auditing standards.
Audit-Related Fees. Fees for audit-related services principally include fees associated with accounting consultations, audits in connection with proposed or completed acquisitions and other accounting advisory assistance.
Tax Fees. Fees for tax services include fees associated with tax compliance, advice and planning services.
All Other. Fees for permissible advisory services that are not contained in the above categories.
Pre-Approval Policies and Procedures
The Audit Committee has adopted a policy that requires advance approval for all audit, audit-related, tax services, and other services performed by the company's independent registered public accounting firm. The policy provides for pre-approval by the Audit Committee of specifically defined audit and non-audit services. Unless the specific service has been previously pre-approved with respect to that year, the Audit Committee must approve the permitted service before the independent registered public accounting firm is engaged to perform it. During 2022, no services were provided to the company by Ernst & Young LLP other than in accordance with the pre-approval policies and procedures described above.
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Items 15 - 16
Item 15. Exhibits and Financial Statement Schedules.
(a)(1) Financial Statements.
The following financial statements of the company are included in Part II, Item 8:
Consolidated Statements of Comprehensive Income (Loss)-years ended December 31, 2022, 2021 and 2020
Consolidated Balance Sheets-December 31, 2022 and 2021
Consolidated Statements of Cash Flows-years ended December 31, 2022, 2021 and 2020
Consolidated Statements of Shareholders' Equity-years ended December 31, 2022, 2021 and 2020
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules.
The following financial statement schedule of the company is included in Part II, Item 8:
Schedule II-Valuation and Qualifying Accounts
All other schedules have been omitted because they are not applicable or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto.
(a)(3) Exhibits.
Refer to Exhibit Index of this Annual Report on Form 10-K.