Good evening, and thank you for standing by. Welcome to Accendra Health's third quarter 2026 earnings conference call. Please be advised that today's conference call is being recorded. After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I would now like to hand the conference call over to your first speaker today, Will Parrish, Vice President, Corporate Development and Investor Relations.
Thank you, operator, and good evening, everyone. I'd like to welcome you to Accendra Health's third quarter earnings call. Our comments on the call will be focused on the financial results of the third quarter of 2026, all of which are included in today's press release. The press release, along with the third quarter 2026 supplemental slides, to which we will refer during the call, are posted on the Investor Relations section of our website.
Please note that during this call, we will make forward-looking statements that reflect the current views of Accendra Health about our business, financial performance, and future events. Matters addressed in these statements are subject to risks and uncertainties which could cause actual results to differ materially from those projected or implied here today. Our expectations, beliefs, and projections are expressed in good faith, and we believe there is a reasonable basis for them.
However, there can be no assurance that our expectations, beliefs, and projections will result or be achieved. Please refer to our SEC filings for a full description of these risks and uncertainties, including the risk factor section of our annual report on Form 10-K and quarterly reports on Form 10-Q. Any forward-looking statements that we make on this call, in our earnings press release, or in our supplemental slides are as of today, and we undertake no obligation to update these statements as a result of new information or future events, except to the extent required by applicable law. In our discussion today, we will refer to non-GAAP financial measures and believe they might help investors to better understand our performance or business trends. Information about these measures and reconciliations to the most comparable GAAP financial measures are included in our press release.
Today, I am joined by Kenny Gardner-Smith, Accendra Health's President and Chief Executive Officer, Jonathan Leon, the company's Chief Financial Officer, and Scott Lloyd, the company's Chief Commercial Officer. I will now turn the call over to Kenny. Kenny?
Thank you, Will, and good evening to everyone joining us. It is a pleasure to be speaking with you for the first time as CEO. Accendra is home to leading brands that serve important segments of the home DME market. I have had the privilege of serving on the board for the past several years, which gave me a deep appreciation for the clinical importance of what we do and the strength of our brands and footprint. When the opportunity arose to step into the CEO role, I took it because I believe these assets, combined with a more disciplined operating system, can deliver meaningfully better outcomes for patients, referral sources, and shareholders. My background in growing, optimizing, and scaling specialty healthcare operations and leading turnarounds gives me conviction that most of the issues we face are fixable and largely within our control.
I am excited to be here and optimistic about our future. Prior to my official start, I worked closely with the management team and the Board on a forward-looking value creation plan. Over the past month, I have spent time digging into the business, listening to leaders and frontline teammates, connecting with key partners, and speaking with our investors. Those conversations, together with the strategy work and the value creation plan, have given myself and the team a clear view of where we stand and what must change. We will not be in a period of prolonged diagnosis. Rather, we are already in the midst of active execution focused on speed to value. I want to acknowledge that in spite of that optimism about our future, we have significantly underperformed expectations in 2026.
Before I share my perspective on what has caused the deterioration in performance in 2026 and how we will address it, I will turn it over to Jon to walk through our Q3 results and balance sheet positioning in more detail.
Thanks, Kenny, and good evening. Turning right to the financial results, the quarter was extremely disappointing, as most of the near-term profit improvement efforts over the last few months did not yield the expected results. On the positive side, we have continued to effectively manage cash flow and expect to have plenty of liquidity for the foreseeable future. Before getting into the specifics of the quarter, please note that any discussion about the financial results and outlook for the company will cover predominantly non-GAAP financial measures. You can find GAAP to non-GAAP financial reconciliations in the press release filed a short time ago and residing on our website at accendrahealth.com.
First, as shown on slide six, third quarter revenue was just under $602 million and was down 1% from the prior year, excluding the impact of the large commercial payer loss earlier this year and the third quarter sale of a non-core asset. This was the first quarter in 2026 in which revenue was down versus the prior year, excluding the impact of the large commercial payer, and the entire organization is focused on reversing this as quickly as possible. Despite attractive year-over-year growth in the very important sleep category, it was not enough to offset ongoing declines in the CGM, respiratory, and wound categories. The soft goods group of ostomy, urology, and incontinence showed growth, although at a much slower rate than they had been growing earlier in the year.
Breaking it down further, excluding the impacts of the terminated contract with a large commercial payer and the sale of a non-core asset, sleep grew over 4%, primarily driven by growth in sleep supplies. However, diabetes declined by nearly 3% as the continuing year-long growth in pumps could not offset drops in CGMs and other diabetes supplies. Also, we did not see enough pickup in respiratory and wound as they fell about 6.5% and 6% respectively, continuing to run well below expectations. Clearly, our efforts to win referrals and maintain patients on therapy are not where they need to be, and as you will hear from Kenny, this is a major focus of our efforts going forward with action already underway.
Contractual allowances, which are an adjustment to gross revenue driven by the long-term collection rate, were again higher than prior year and have not improved to the extent previously expected. However, there has been improvement. Year- over- year, the third quarter contractual allowance impact was about $4 million smaller than the previous two quarters, coming in at $6 million in favorable versus the prior year, better than the approximately $10 million we cited in the first and second quarters. But collections clearly are still disappointing. The cost of net revenue was 56.6% of net revenue, 280 basis points higher than last year's third quarter, due largely to an almost even split between the category mix change resulting from the first quarter loss of the large commercial payer and the lower collection rate.
However, at 56.6% of net revenue, these costs have remained within 1% point all year and is worth noting to hopefully alleviate concerns about significant supplier price increases. SG&A costs were 41.5% of net revenue, up from 38.1% from the third quarter of 2025, and 180 basis points higher than the second quarter of 2026. The year-over-year change is again largely due to the previously discussed Q1 commercial payer loss and the challenges we continue to face to take out enough costs to offset the lost revenue. Also, throughout the year, we have experienced an increase in business insurance claims driving up SG&A. These issues are all addressable, and we intend to reverse these trends in the months ahead. All of this resulted in adjusted EBITDA of $47.8 million in the quarter.
Adjusted EBITDA plus non-cash convert to sale write-off expense, less patient service equipment CapEx, was just under $17 million. The details of key drivers are shown in slide eight. A very important detail is shown on that slide. You will see that we have footnoted that $35 million of the year-to-date 2026 patient service equipment CapEx is related to the former large commercial payer contract. As we have said in the past, the CapEx related to that former contract was disproportionately large relative to the adjusted EBITDA generated. Also, payment terms on much of that equipment are such that the final cash outlays continued into the third quarter of this year. When looking ahead, adjusted EBITDA less CapEx will benefit meaningfully, and future CapEx will be quite a bit lower in 2027 than 2026. Turning to the balance sheet.
Net debt of $1.73 billion was down $40 million versus December 31st, but was higher by $18 million or 1% from the end of June. Total debt for the year is down $295 million due to the application of the net proceeds from the year-end 2025 divestiture and the balance sheet optimization transactions that closed in June. We are in compliance with our quarterly debt covenants. Moving to the cash flow statement, recognizing that the year has seen significant one-time cash items, on slide nine, we have included a detailed bridge from adjusted EBITDA to cash flow for operations, which illustrates these one-time items as well as ordinary course items to help reconcile between the two figures.
As you can see, there has been approximately $94 million of one-time cash expenses within cash flow for operations for the nine months ended September 30, and an additional $21 million of one-time cash expenses in cash flow used for our financing activities. Thanks to prudent actions taken earlier in the year, coupled with effective working capital management, our liquidity position remains strong with $27 million of cash and only $35 million drawn on our revolving credit facility as of September 30th, giving us nearly $300 million of available liquidity sources. Demonstrating well-managed working capital, and as you can see on the statements of cash flows, changes in receivables, payables, and inventory provided approximately $24 million in cash flow in the third quarter and $7 million for the nine months ended September 30th.
As expected, the payer audits mentioned last quarter are largely behind us, and we began to receive the cash we have been expecting during the third quarter. Also, we were very pleased to have extended our accounts receivable securitization program a few days ago. Working with our banking partner, we were able to extend the facility for two years beyond the last maturity date.
The facility is now available until October of 2029. The facility size remains unchanged at $150 million, further ensuring plenty of liquidity and is evidence of the high quality and generally effective management of our receivables. As a reminder, we are still working toward closing the sale of a small, very non-core asset, which will generate about $14 million in proceeds. The sale will have no impact on revenue or adjusted EBITDA, and we are hoping for the fourth quarter close of that transaction.
In a moment, Kenny will discuss his early observations, the turnaround steps already underway, and the plan to put the company back on the path to higher growth and profitability. As the process that Kenny will outlay develops, it will inform our outlook for 2027, which we plan to share early next year. For the remainder of 2026, acknowledging the missed guidance and significant underperformance throughout the year, we now believe full-year net revenue will be at the bottom of our previous guidance range of $2.45 billion-$2.55 billion, and that adjusted EBITDA could be as much as 30% lower than the $310 million midpoint of the last adjusted EBITDA guidance provided. Meaning, adjusted EBITDA for Q4 is expected to be comparable to the third quarter.
Finally, as we move through the fourth quarter and into 2027, we will be enhancing our reporting shared with the investment community in an effort to improve transparency, align stakeholders with the same metrics management uses, and simplify the investment thesis so that investors can quickly regain confidence in our story. With that, I'll turn the call back to Kenny. Kenny?
Thank you, Jon. Our Q3 results were very disappointing, and it is clear we need to quickly and fundamentally change both elements of our strategy, and most importantly, the consistency of our execution. Through the strategy work and the subsequent value creation plan we have developed, a clear picture of the issues has emerged. The shortfalls are not primarily a market or brand problem. In fact, we have great brands and attractive end markets. It has become clear to me that in particular, in sleep and respiratory, two of our most attractive businesses, we have lost share while the markets grew. We have identified that our current operating model suffers from high friction for customers, slower and more costly order intake than necessary, and inconsistent sales execution, all of which have constrained new patient starts, revenue, and collections.
Our adoption of e-prescribe, which is digital referral management, sits well below industry peers. Too many orders require rework, and the time from intake to shipment and ultimately to collections is longer than it needs to be. On the patient retention side, material portions of new sleep patients lapse before the 90-day compliance window, and a meaningful number of those who do reach compliance do not return for resupply. Weak early engagement relative to competitors, limited adoption of the digital tools, and a lack of clear accountability and structure for our patient-facing sleep resources have all contributed to our lack of sustained census growth. Similar gaps show up in respiratory conversion programs, which exist but have not been executed properly.
Over my first few weeks, I've heard these same themes regarding friction at intake, inconsistent early patient support, and excess administrative burden in the branches and central functions repeated firsthand by our sales, clinical, and operations professionals. That alignment gives me high confidence that we are focused on the right problems. Our vision for the path forward is both clear and simple. We need to be the most trusted partner across the clinical conditions we serve so that every referral is easy to send, patients comply with and remain on therapy, and we timely collect the dollars that we earn. To execute on that vision, we will focus on four key areas that directly address the gaps identified. First, winning referrals. We need to improve both our go-to-market approach and our intake process, particularly in respiratory and sleep.
We must make the referral process easier and faster so the decision to refer is straightforward for referral sources. Second, supporting and maintaining patients over the life of their therapy. Therapy compliance within the first 90 days has material room to improve. Supporting and maintaining patients after setup will become a North Star objective and KPI for our teams, ensuring therapy compliance for patients aligns with our mission, bringing care to life. Third, optimizing our revenue cycle management to ensure we collect timely and completely. Improvements here do not require a new referral, a new branch, or a new product. They require for us clean orders, on-time filing, fewer reasons for denials, and faster rework. Every 1 percentage point of improvement could generate meaningful operating cash flow tailwinds and help reduce our reserves.
Finally, rebuilding our back office and branch operating system to accelerate speed to serve while materially reducing cost to serve. Our goal is to shift branches towards patient service and clinical hubs, not administrative warehouses. We believe we can further consolidate key administrative functions while increasing productivity through automation and process simplification. From my personal experience and what I have seen thus far at Accendra, as we execute on these key areas and tighten underlying operations, returning to market-leading growth rates is very achievable. We fully believe our problems are fixable. Most of what we need to do is in our control, and the work to improve is already underway. Some things will take time as we test and learn, but we are moving quickly where we can. A few examples I'd like to share.
We are actively reorganizing the structure of all our commercial operations, including commercial contracting, and have consolidated this function under our new Chief Commercial Officer. I have the utmost confidence that this change will improve our go-to-market strategy and execution, and will allow us to more effectively manage our strategic relationships with commercial payers. In addition, after decades of service, Perry Bernocchi, our Chief Operating Officer, has transitioned to an advisory role, and I now have direct oversight over our branch and back office operations. We will continue our work on fully scaling our Sleep Center of Excellence while accelerating adoption of end-to-end digital referral management. In addition, in Q1, we will launch the first iteration of revamped branch and back office operations. simplify processes and key automated activities.
To support these efforts, we have launched a dedicated transformation function that will be focused 100% on execution of our multi-year value creation plan, with quarterly hard dollar targets. Lastly, I want to reemphasize an important point made by Jon. We believe the prior work on liquidity and the balance sheet and the recurring revenue nature of the business have given us the runway we need to make the necessary changes ahead of needing to refinance our first maturity in early 2029. We look forward to sharing further details, including our expectations on the financial impact of the changes I am previewing in Q1 of 2027. I will now turn the call back over to the operator for Q&A. Operator.
We will now begin the question- and- answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Rishi Parekh with JPMorgan. Rishi, your line is open. Please go ahead.
Great. Can you just Well, first, on the commercial side, you said that you resolved the issues around it. We saw the $88 million and the $20 million hit on the commercial payers. I assume that is going to continue in the fourth quarter. Can you just walk us through what has been resolved? How do we think about the commercial side of it? And ultimately, what is going to leak into 2027 as we think about the commercial payer side? And I have a follow-up.
Rishi, are you referring to the prepay audit that we discussed last quarter and addressed again today?
Yes, please.
Yeah. Okay, on that issue, as I said, it is largely behind us. Frankly, I am sure, and we really, it is not really relevant as to what led to it. It was, I think, a lot of a series of miscommunications and administrative matters, but it was a very odd set of circumstances that we got disproportionately number of prepay audits from a couple of large commercial payers. As I said, it is largely behind us.
It is just a matter of cleaning up the work that needs to be done. We actually reached an agreement with the payers, at least one of the major payer, that allowed them to take a sample of some of the prepay audits that they were giving us, which, as you mentioned before, were unprecedented levels of audit requests. We passed those audits with flying colors, and that allowed the cash to begin to roll in.
I think that wraps up in Q4. Nothing leaks into 2027, in my estimation. The dollars that we are behind now are measured by millions on fingers on one hand. So, it is an immaterial amount of cash that we are still delayed in getting, but we expect to get that over the next several weeks, and the issue will be completely done at that point.
Then you highlighted a number of operational challenges, and you do not operate in a vacuum, and your competitors are probably also on this call as well. You have noted that you need to make a number of changes within the sales organization. How long do you think it is going to take, and what are the costs to actually implement some of these strategies going through this year and into next year? It seems that it sounds difficult that you are going to be able to really turn this business around immediately in 2027, and you talked about liquidity being fine. I guess I am having a really tough time trying to understand how that is going to be possible. Is it just your AR facility? Is it that you are going to borrow the entire amount on your revolver?
What do you expect to do to bridge that liquidity gap that you plan on for 2027?
Rishi, this is Kenny. I'll start with the commercial execution piece. Some of the changes that we intend to do are already underway. Some of it's organizational in nature, so bringing in a new Chief Commercial Officer who's been in role now for a month, making changes across the team, and really going back and reevaluating our go-to-market strategy to make sure that's adequate. There are some things that we need to do that are related to the way we operate in the backend, which I talked about. A framework that will be critical for us is speed to serve and cost to serve. Those have tentacles into our commercial execution. We feel good about the pace to be able to get those initiatives launched into 2027.
We aren't really prepared today to talk about exactly when we expect to reach the dollar impact that we expect to achieve from the initiatives, but they're well underway. I'll let Jon give additional clarity on the liquidity point, but as we said in the call, we did a lot of work earlier in this year to set the company up for the liquidity necessary to execute on the changes, and we feel we have the runway to do that. Jon, any clarity you want to add to that?
Rishi, I would just add, I mean, we're not going to have to certainly draw significantly on any of our facilities, and we'll continue to use those as we have been throughout the year. If you think about 2026, which obviously, admittedly, a terrible adjusted EBITDA performance year, and keeping in mind we had $115 million to date through the third quarter of one-time cash outflows, with just a little bit of improvement in our EBITDA, we think we'll be in pretty good shape. There's no need for us to draw really on any more than we have been in the past. Working capital will continue to be a go-forward benefit for us, as it was this quarter, so I think you'll see decent cash flow for the business.
There are no further questions at this time. I will now turn the call back to Kenny for closing remarks.
Thank you, operator, and thank you everyone again for joining us on the call and the continued interest in our organization. I'll just make a couple of really quick points. Number one, as I said in the call, we are in the early stages of doing the critical work to revamp our company and to take advantage of our scale and brands. We have both scale and amazing brands out in the market, and we have critical work to do to unleash the full potential there. Lastly, the last point I'll make is we look forward to sharing the details of the impact of that plan into the next year. A lot of the work is underway. I highlighted a few of the changes in my remarks in the call.
We continue to reaffirm and test our assumptions, but we will be prepared in early Q1 of next year to share greater details on our plan, including timing, and we look forward to unveiling that as early as possible. Again, thank you everyone for your interest, and we look forward to communicating again. Thank you.
This concludes today's call. Thank you for attending. You may now disconnect.