CANO HEALTH, INC. Unless otherwise indicated or the context otherwise requires, references in this section to "the Company," "Cano Health ," "we," "us," "our," and other similar terms refer, for periods prior to the completion of the Business Combination, to PCIH and its subsidiaries, and for periods upon or after the completion of the Business Combination, to the consolidated operations ofCano Health, Inc. and its subsidiaries, including PCIH and its subsidiaries. The following discussion and analysis is intended to help the reader understand our business, results of operations, financial condition, liquidity and capital resources. This discussion should be read in conjunction withCano Health, Inc.'s unaudited condensed consolidated financial statements and related notes presented here in Part I, Item 1 included elsewhere in this Quarterly Report on Form 10-Q as well as PCIH's audited financial statements and the accompanying notes as well as "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations ofCano Health " included in our Form 8-K filed with theSecurities and Exchange Commission onJune 9, 2021 . The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in the sections entitled "Forward-Looking Statements" and Part II, Item 1A, "Risk Factors." Overview We are a primary care-centric, technology-powered healthcare delivery and population health management platform designed with a focus on clinical excellence. Our mission is simple: to improve patient health by delivering superior primary care medical services, while forging life-long bonds with our members. Our vision is clear: to become the national leader in primary care by improving the health, wellness and quality of life of the communities we serve, while reducing healthcare costs. In 2016, we entered into a relationship withInTandem Capital Partners, LLC ("InTandem") to provide financial support and guidance to fund platform investments and accelerate our growth. We have subsequently expanded our services from two markets in 2017 to 34 markets as ofSeptember 30, 2021 , while growing membership from 13,685 members in 2017 to 210,663 members as ofSeptember 30, 2021 . See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Key Performance Metrics" for how we define our members and medical centers. Today, we are one of the largest and most sophisticated independent primary care platforms in theU.S. , but still maintain significant growth runway. We have sought to address the fundamental problems with traditional healthcare payment models by leveraging our technology solutions and proven business model to align incentives among patients, payors and providers: •Patients: Our members are offered services in modern, clean, and contemporary medical centers, with same or next day appointments, integrated virtual care, wellness services, ancillary services (such as physiotherapy), home services, transportation, telemedicine and a 24/7 urgency line, all without additional cost to them. This broad-based care model is critical to our success in delivering care to members of low-income communities, including large minority and immigrant populations, with complex care needs, many of whom previously had very limited or no access to quality healthcare. We are proud of the impact we have made in these underserved communities. •Providers: We believe that providers want to be clinicians. Our employed physicians enjoy a collegial, near-academic environment and the tools and multi-disciplinary support they need to focus on medicine, their patients and their families rather than administrative matters like pre-authorizations, referrals, billing and coding. Our physicians receive ongoing training through regular clinical meetings to review the latest findings in primary care medicine. Furthermore, we offer above-average pay and no hospital call requirements. In addition, our physicians are eligible to receive a bonus based upon patient results, including reductions in patient emergency room visits and hospital admissions, among other metrics. •Payors: Payors want three things: high-quality care, membership growth and effective medical cost management. We have a multi-year and multi-geography track record of delivering on all three. Our proven track record of high-quality ratings increases the premiums paid by the CMS to health plans, increases our quality primary-care-driven membership growth, and increases our scaled, highly professional value-based provider group that delivers quality care. CanoPanorama, our proprietary population health management technology-powered platform, powers our efforts to deliver superior clinical care. Our platform provides the healthcare providers at our medical centers with a 360-degree view of their members, along with actionable insights to empower better care decisions and drive high member engagement. We leverage -60- -------------------------------------------------------------------------------- our technology to risk-stratify members and apply a highly personalized approach to primary care, chronic care, preventive care and members' broader healthcare needs. We believe our model is well-positioned to capitalize on the large and growing opportunity being driven by the marketplace's shift to value-based care, demographic tailwinds in the market and the increased focus on improving health outcomes, care quality and the patient experience. We predominantly enter into capitated contracts with the nation's largest health plans to provide holistic, comprehensive healthcare. We predominantly recognize recurring per-member-per-month capitated revenue, which, in the case of health plans, is a pre-negotiated percentage of the premium that the health plan receives from the CMS. We also provide practice management and administrative support services to independent physicians and group practices that we do not own through our managed services organization relationships, which we refer to as our affiliate relationships. Our contracted recurring revenue model offers us highly predictable revenue and rewards us for providing high-quality care rather than driving a high volume of services. In this capitated arrangement, our goals are well-aligned with payors and patients alike - the more we improve health outcomes, the more profitable we will be over time. Our capitated revenue is generally a function of the pre-negotiated percentage of the premium that the health plan receives from CMS as well as our ability to accurately and appropriately document member acuity and achieve quality metrics. Under this capitated contract structure, we are responsible for all members' medical costs inside and outside of our medical centers. Keeping members healthy is our primary objective. When they need medical care, delivery of the right care in the right setting can greatly impact outcomes. Through members' engagement with our entire suite of services, including high-frequency primary care and access to ancillary services like our wellness programs,Cano Life and Cano@Home, we aim to reduce the number of occasions that members need to seek specialty care in higher-cost environments. When care outside of our medical centers is needed, our primary care physicians control referrals to specialists and other third-party care, which are typically paid by us on a fee-for-service basis. This allows us to proactively manage members' health within our medical centers first, prior to resorting to more costly care settings. As ofSeptember 30, 2021 , we employed approximately 345 providers (physicians, nurse practitioners, physician assistants) across our 113 owned medical centers, maintained affiliate relationships with over 1,000 physicians and approximately 600 clinical support employees focused on supporting physicians in enabling patient care and experience. For the nine months endedSeptember 30, 2020 and 2021, our total revenue was$569.6 million and$1.2 billion , respectively, representing a period-over-period growth rate of 110.7%. Our net loss increased from$24.3 million for the nine months endedSeptember 30, 2020 to$46.4 million for the nine months endedSeptember 30, 2021 . Key Factors Affecting Our Performance
Our historical financial performance has been, and we expect our financial performance in the future to be, driven by our ability to:
Build Long-Term Relationships with our Existing Members
We focus on member satisfaction in order to build long-term relationships. Our
members enjoy highly personalized value-based care and their visits to our
medical centers cover primary care and ancillary programs such as pharmacy and
dental services, in addition to wellness and social services, which lead to
healthier and happier members. By integrating member engagement and the Cano
Life wellness program within the CanoPanorama platform, we also help foster
long-term relationships with members. Resulting word-of-mouth referrals
contribute to our high organic growth rates. Patient satisfaction can also be
measured by a provider's Net Promoter Score ("NPS"), which measures the loyalty
of customers to a company. Our member NPS score of 82 speaks to our ability to
consistently deliver high-quality care with superior member satisfaction.
Add New Members in Existing Centers
Our ability to add new members organically is a key driver of our growth. We
have a large embedded growth opportunity within our existing medical center
base. As of December 31, 2020 , our existing medical centers in South Florida
operated at approximately 50% of capacity, providing us with the ability to
significantly increase our membership without the need for significant capital
expenditures. In medical centers that are approaching full capacity, we are able
to augment our footprint by expanding our existing medical centers, opening de
novo centers or acquiring centers that are a more convenient "medical home" for
our members. We also believe that even after COVID-19 subsides, we will continue
to conduct some visits
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by telemedicine based on member preference and clinical need, which in turn
could increase the average capacity of our medical centers. Additionally, as we
add members to our existing medical centers, we expect these members to
contribute significant incremental economics as we leverage our fixed cost base
at each medical center.
Our payor partners also direct members to our medical centers by either
assigning patients who have not yet selected a primary care provider or through
insurance agents who inform their clients about our services. We believe this
often results in the patient selecting us as their primary care provider when
they select a Medicare Advantage plan. Due to our care delivery model's
patient-centric focus, we have been able to consistently help payors manage
their costs while raising the quality of their plans, affording them quality
bonuses that increase their revenue. We believe that we represent an attractive
opportunity for payors to meaningfully improve their overall membership growth
in a given market without assuming any financial downside.
Expand our Medical Center Base within Existing and New Markets
We have successfully entered 32 new markets since 2017 and as of September 30,
2021 were operating in 34 markets in Florida , Texas , Nevada , New Jersey , New
York , New Mexico , Illinois , California and Puerto Rico . When entering a new
market, we tailor our entry strategy to the characteristics of the specific
market and provide a customized solution to meet that market's needs. When
choosing a market to enter, we look at various factors including (i) Medicare
population density, (ii) underserved demographics, (iii) existing payor
relationships, (iv) patient acuity and (v) specialist and hospital
access/capacity. We typically choose a location that is highly visible and
accessible and work to enhance brand development pre-entry. Our flexible medical
center design allows us to adjust to local market needs by building medical
centers that range from approximately 7,000 to 20,000 square feet that may
include ancillary services such as pharmacies and dental services. We seek to
grow member engagement through targeted multi-channel marketing, community
outreach and use of mobile clinics to expand our reach. When entering a new
market, based on its characteristics and economics, we decide whether it makes
the most sense to buy existing medical centers, build de novo medical centers or
to help manage members' health care via affiliate relationships. This highly
flexible model enables us to choose the right solution for each market.
When building or buying a medical center is the right solution, we own the
medical facility and employ physicians. In our medical centers, we receive
per-member-per-month capitated revenue, which, in the case of health plans, is a
pre-negotiated percentage of the premium that the health plan receives from CMS.
Although there is an upfront cost of development, historically approximately
$1.3 to $1.8 million per medical center, the owned medical center model provides
the best opportunity to drive improved health outcomes and allows us to practice
full value-based care.
Alternatively, our affiliate relationships allow us to partner with independent
physicians and group practices that we do not own and to provide them access to
components of our population health management platform. As of September 30,
2021 , we provided services to over 1,000 providers. As in the case of our owned
medical centers, we receive per-member-per-month capitated revenue and a
pre-negotiated percentage of the premium that the health plan receives from CMS.
We pay the affiliate a primary care fee and a portion of the surplus of premium
in excess of third-party medical costs. The surplus portion paid to affiliates
is recorded as direct patient expense. This approach is extremely capital
efficient as the costs of managing affiliates are minimal. Further, the
affiliate model is an important growth avenue as it serves as a feeder into our
acquisition pipeline, enabling us to evaluate and target affiliated practices
for acquisition based on our operational experience with them.
Contracts with Payors
Our economic model relies on our capitated partnerships with payors, which
manage Medicare members across the United States . We have established ourselves
as a top quality provider across multiple Medicare and Medicaid health plans,
including Humana, Anthem and UnitedHealthcare (or their respective affiliates).
Our relationships with our payor partners go back as many as ten years and are
generally evergreen in nature. We are viewed as a critical distributor of
effective healthcare with market-leading clinical outcomes (led by primary
care), and as such we believe our payor relationships will continue to be
long-lasting and enduring. These plans and others are seeking further
opportunities to expand their relationship with us beyond our current markets.
Having payor relationships in place reduces the risk of entering into new
markets. Maintaining, supporting and growing these relationships, particularly
as we enter new geographies, is critical to our long-term success. Health plans
look to achieve three goals when partnering with a provider: membership growth,
clinical quality and medical cost management. We are capable of delivering all
three based on our care coordination strategy, differentiated quality metrics
and strong relationships with members. We believe this alignment of interests
and our highly effective care model will ensure continued success with our payor
partners.
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Effectively Manage the Cost of Care for Our Members
The capitated nature of our contracting with payors requires us to invest in
maintaining our members' health while prudently managing the medical costs of
our members. Third-party medical costs and direct patient expense are our
largest expense categories, representing 82.0% of our total operating expenses
for the nine months ended September 30, 2021 . Our care model focuses on
maintaining health and leveraging the primary care setting as a means of
avoiding costly downstream healthcare costs. Our members, however, retain the
freedom to seek care at emergency rooms or hospitals without the need for
referrals; we do not restrict their access to care. Therefore, we are liable for
potentially large medical claims should we not effectively manage our members'
health. To mitigate this exposure, we utilize stop-loss insurance for our
members, protecting us from medical claims per episode in excess of certain
levels.
Significant Acquisitions
We supplement our organic growth through our highly accretive acquisition
strategy. We have a successful acquisition and integration track record. We have
established a rigorous data-driven approach and the necessary infrastructure to
identify, acquire and quickly integrate targets.
The acquisitions have all been accounted for in accordance with ASC 805, and the
operations of the acquired entities are included in our historical results for
the periods following the closing of the acquisition. See Note 3, "Business
Acquisitions" in our unaudited condensed consolidated financial statements
included elsewhere in this Quarterly Report on Form 10-Q. The most significant
of these acquisitions impacting the comparability of our operating results were:
•Primary Care Physicians and related entities. On January 2, 2020 , we acquired
Primary Care Physicians and related entities (collectively, "PCP") for total
consideration of $60.2 million , consisting of $53.6 million in cash, $4.0
million of Class A-4 Units and $2.6 million in other closing payments. PCP is
comprised of eleven primary care centers and a managed services organization
serving populations in the Broward County region of South Florida .
•HP Enterprises II, LLC and related entities. On June 1, 2020 we acquired HP
Enterprises II, LLC and related entities (collectively, "HP" or "Healthy
Partners ") for total consideration of $195.4 million , consisting of $149.3
million in cash, $30.0 million of Class A-4 Units and $16.1 million in deferred
payments. Healthy Partners is comprised of sixteen primary care centers and a
management services organization serving populations across Florida , including
the Miami-Dade , Broward , Palm Beach , Treasure Coast and Central Florida areas.
•University Health Care and its affiliates. On June 11, 2021 , we acquired
University Health Care and its affiliates (collectively, "University") for total
consideration of $611.1 million , consisting of $541.5 million in cash, $60.0
million of Class A common stock and $9.6 million in contingent consideration
from acquisition add-ons based on additional acquired entities. University is
comprised of thirteen primary care centers, a managed services organization and
a pharmacy serving populations throughout various locations in South Florida .
•Doctor's Medical Center, LLC and its affiliates. On July 2, 2021 , the Company
acquired Doctor's Medical Center , LLC and its affiliates ("DMC"). The purchase
price totaled $300.7 million , which was paid in cash. DMC is comprised of
fourteen primary care centers serving populations across Florida . In conjunction
with the primary care centers, DMC also provides MSO services to affiliated
medical centers, and operates a pharmacy.
Member Acuity and Quality Metrics
Medicare pays capitation using a risk-adjusted model, which compensates payors
based on the health status, or acuity, of each individual member. Payors with
higher acuity members receive a higher payment and those with lower acuity
members receive a lower payment. Moreover, some of our capitated revenues also
include adjustments for performance incentives or penalties based on the
achievement of certain clinical quality metrics as contracted with payors. Our
capitated revenues are recognized based on projected member acuity and quality
metrics and are subsequently adjusted to reflect actual member acuity and
quality metrics. Our ability to accurately project and recognize member acuity
and quality metric adjustments are affected by many factors. For instance,
Medicare requires that a member's health issues be documented semi-annually
regardless of the permanence of the underlying causes. Historically, this
documentation was required to be completed during an in-person visit with a
member. As part of the Coronavirus Aid, Relief and Economic Security Act,
Medicare is allowing documentation for
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conditions identified during video visits with members. However, given the
disruption caused by COVID-19, it is unclear whether we will be able to document
the health conditions and quality metrics of our members as comprehensively as
we did in prior years, which may adversely impact our capitated revenue.
Similarly, our ability to accurately project member acuity and quality metrics
may be more limited in the case of medical centers operating in new markets or
which were recently acquired.
Seasonality to Our Business
Our operational and financial results experience some variability depending upon the time of year in which they are measured. This variability is most notable in the following areas: Medical Costs Medical costs vary seasonally depending on a number of factors. Typically, we experience higher utilization levels during the first quarter of the year. Medical costs also depend upon the number of business days in a period. Shorter periods will have lesser medical costs due to fewer business days. Business days can also create year-over-year comparability issues if one year has a different number of business days compared to another. Additionally, we accrue stop loss reimbursements from September through December which can result in reduced medical expenses during the fourth quarter due to recoveries. Organic Member Growth We experience the largest portion of our organic member growth during the first quarter, when plan enrollment selections made during the prior Annual Enrollment Period fromOctober 15 through December 7 of the prior year take effect. We also add members throughout the year, including during Special Enrollment Periods when certain eligible individuals can enroll in Medicare Advantage midyear.
Per-Member Capitated Revenue
We experience some seasonality with respect to our per-member revenue, which
generally declines over the course of the year. In January of each year, CMS
revises the risk adjustment factor for each member based upon health conditions
documented in the prior year, leading to an overall change in per-member
premium. As the year progresses, our per-member revenue declines as new members
join us, typically with less complete or accurate documentation (and therefore
lower risk adjustment scores).
Key Performance Metrics
In addition to our U.S. GAAP and non-GAAP financial information, we review a
number of operating and financial metrics, including the following key metrics,
to evaluate our business, measure our performance, identify trends affecting our
business, formulate business plans and make strategic decisions.
September 30, 2021 December 31, 2020 September 30, 2020
Members 210,663 105,707 102,767
Owned medical centers 113 71 71
Members
Members represent those Medicare, Medicaid, and Affordable Care Act ("ACA") patients for whom we receive a fixed per-member-per-month fee under capitation arrangements as of the end of a particular period.
Owned Medical Centers
We define our medical centers as those primary care medical centers open for
business and attending to members at the end of a particular period in which we
own the medical operations and the physicians are our employees.
Impact of COVID-19
On March 11, 2020 , the World Health Organization designated COVID-19 as a global
pandemic. The rapid spread of COVID-19 around the world led to the shutdown of
cities as national, state, and local authorities implemented social distancing,
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quarantine and self-isolation measures. Many such restrictions remain in place,
and some state and local governments are re-imposing certain restrictions due to
the increasing rates of COVID-19 cases. Additionally, a new Delta variant of
COVID-19, which appears to be the most transmissible variant to date, has begun
to spread globally. The virus disproportionately impacts older adults,
especially those with chronic illnesses, which describes many of our patients.
In response to COVID-19, we remained open and augmented our Cano@Home program,
24/7 urgency line and pharmacy home delivery to enable members to access needed
care and support in the home. We successfully pivoted to a telemedicine offering
for routine care in order to protect and better serve our patients, staff and
community. Our centers remained open for urgent visits and necessary procedures.
As COVID-19 cases grew nationally, we took immediate action and deployed a
specific COVID-19 focused module under CanoPanorama that allowed our staff to
screen patients for COVID-19 and related complications, as well as refer them to
a specialized team that is dedicated to helping COVID-19 patients. The pandemic
did not have a material impact on our results of operations, cash flows and
financial position as of, and for the nine months ended, September 30, 2021 .
This is primarily attributable to the relatively fixed nature of our capitated
revenue arrangements. Over 95% of our total gross revenues are recurring,
consisting of fixed monthly per-member-per-month capitation payments we receive
from healthcare providers. Additionally, during this time, we completed and
integrated several acquisitions and expanded to new locations which had a
positive impact on our revenues. Due to our recurring contracted revenue model,
we experienced minimal impact to our revenue during 2020 and the first nine
months of 2021.
We experienced both cost increases and cost savings due to COVID-19. Increases
in operating expenses were primarily attributable to higher-than-budgeted
payroll expenses, pharmacy prescription expenses, provider payments, rent, and
marketing expenses. Deeply committed to our employees, we made a conscious
decision not to furlough any of our employees, even if their function was
disrupted by COVID-19. These higher costs were partially offset by lower
referral fees, vehicle expenses, IT costs, professional fees, office and
facility (ER) costs, and travel costs. We experienced a decrease in utilization
of services during March through June of 2020. Medical centers were open for
emergency visits, but we also expanded our at-home care services, resulting in
lower emergency transportation costs, and facility service costs (including
costs related to various wellness and activity services offered at clinics).
Even as utilization increased month to month through the second half of 2020 and
through 2021, we expect certain costs savings to remain permanent as some
members continue to take advantage of telemedicine and Cano@Home care services.
The full extent to which the COVID-19 pandemic will directly or indirectly
impact our business, future results of operations and financial condition will
depend on future factors that are highly uncertain and cannot be accurately
predicted. These factors include, but are not limited to, new information that
may emerge concerning COVID-19, the scope and duration of business closures and
restrictions, government-imposed or recommended suspensions of elective
procedures, and expenses required for supplies and personal protective
equipment. Additionally, the impact of the COVID-19 variants cannot be predicted
at this time, and could depend on numerous factors, including vaccination rates
among the population, the effectiveness of the COVID-19 vaccines against the
variants, and the response by the governmental bodies and regulators. Due to
these and other uncertainties, we cannot estimate the length or severity of the
impact of the pandemic on our business. Additionally, because of our business
model, the full impact of the COVID-19 pandemic may not be fully reflected in
our results of operations and overall financial condition until future periods.
We will continue to closely evaluate and monitor the nature and extent of these
potential impacts to our business, results of operations and liquidity. However,
based on our experience, we expect the overall negative impact from COVID-19 on
our business will be immaterial. In addition, we expect to offer more
telemedicine and mobile solutions which will create additional touchpoints to
timely capture member medical data, which in turn provide actionable insights to
empower better care decisions via our CanoPanorama system.
For additional information on the various risks posed by the COVID-19 pandemic,
please see the section entitled "Risk Factors" included in this Quarterly Report
on Form 10-Q.
Key Components of Results of Operations
Revenue
Capitated revenue. Our capitated revenue is derived from fees for medical
services provided at our medical centers or affiliated practices under
capitation arrangements made directly with various health plans or CMS. Fees
consist of a per-member-per-month ("PMPM") amount paid on an interim basis for
the delivery of healthcare services, and our rates are determined as a percent
of the premium that the health plans receive from the CMS for our at-risk
members. Those premiums are based upon the cost of care in a local market and
the average utilization of services by the members enrolled. Medicare pays
capitation using a "risk adjustment model," which compensates providers based on
the health status (acuity) of each individual patient. Groups with higher acuity
patients receive more, and those with lower acuity patients receive less. Under
the risk adjustment model, capitated premium is paid based on the acuity of
members enrolled for the preceding year and subsequently adjusted once current
year data is compiled. Our accrued revenue reflects the current period acuity of
members. The amount of capitated revenue may be affected by certain factors
outlined in the agreements with the health plans, such as administrative fees
paid to the health plans and risk adjustments to premiums.
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Generally, we enter into three types of capitation arrangements: non-risk
arrangements, limited risk arrangements, and full risk arrangements. Under our
non-risk arrangements, we receive monthly capitated payments without regard to
the actual amount of services provided. Under our limited risk arrangements, we
assume partial financial risk for covered members. Under our full risk
arrangements, we assume full financial risk for covered members.
Fee-for-service and other revenue. We generate fee-for-service revenue from
providing primary care services to patients in our medical centers and
affiliates when we bill the member or their insurance plan on a fee-for-service
basis as medical services are rendered. While substantially all of our patients
are members, we occasionally also provide care to non-members. Fee-for-service
amounts are recorded based on agreed-upon fee schedules determined within each
contract.
Other revenue consists of sales from our pharmacies. We contract with an
administrative services organization to collect and remit payments on our behalf
from the sale of prescriptions and medications. We have pharmacies at some of
our medical centers, where customers may fill prescriptions and retrieve their
medications. Patients also have the option to fill their prescriptions with a
third-party pharmacy of their choice.
Operating Expenses
Third-party medical costs. Third-party medical costs primarily consist of all
medical expenses paid by the health plans or the CMS (contractually on behalf of
Cano Health ) including costs for inpatient and hospital care, specialists, and
certain pharmacy purchases associated with the resale of third-party medicines.
Provider costs are accrued based on the date of service to members, based in
part on estimates, including an accrual for medical services incurred but not
reported ("IBNR"). Liabilities for IBNR are estimated using standard actuarial
methodologies including our accumulated statistical data, adjusted for current
experience. These estimates are continually reviewed and updated, and we retain
the services of an independent actuary to review IBNR on an annual basis. We
expect our third-party medical costs to increase given the healthcare spending
trends within the Medicare population and the increasing disease burden of our
patients as they age, which is also consistent with what we indirectly receive
(through capitated revenue) from the CMS.
Direct patient expense. Direct patient expense primarily consists of costs
incurred in the treatment of our patients, at our medical centers and affiliated
practices, including the compensation related to medical service providers and
technicians, medical supplies, purchased medical services, and drug costs for
pharmacy sales.
Selling, general, and administrative expense. Selling, general, and
administrative expenses include employee-related expenses, including salaries
and benefits, technology infrastructure, operations, clinical and quality
support, finance, legal, human resources, and corporate development departments.
In addition, selling, general, and administrative expenses include all corporate
technology and occupancy costs. We expect our selling, general, and
administrative expenses to increase over time following the closing of the
Business Combination due to the additional legal, accounting, insurance,
investor relations and other costs that we incur as a public company, as well as
other costs associated with continuing to grow our business. However, we
anticipate that these expenses will decrease as a percentage of revenue over the
long term, although they may fluctuate as a percentage of revenue from period to
period due to the timing and amount of these expenses. For purposes of
determining center-level economics, we allocate a portion of our selling,
general, and administrative expenses to our medical centers and affiliated
practices. The relative allocation of these expenses to each center depends upon
a number of metrics, including (i) the number of centers open during a given
period of time; (ii) the number of clinicians at each center at a given period
of time; or (iii) if determinable, the center where the expense was incurred.
Depreciation and amortization expense. Depreciation and amortization expenses
are primarily attributable to our capital investment and consist of fixed asset
depreciation and amortization of intangibles considered to have finite lives.
Transaction costs and other. Transaction costs and other primarily consist of
deal costs (including due diligence, integration, legal, internal staff, and
other professional fees, incurred from acquisition activity), bonuses due to
sellers, fair value adjustments in contingent consideration due to sellers, and
management fees for financial and management consulting services from our
advisory services agreement.
Other Income (Expense)
Interest expense. Interest expense primarily consists of interest incurred on
our outstanding borrowings under our notes payable related to our equipment
loans and credit facility. See "Liquidity and Capital Resources". Costs incurred
to obtain debt
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financing are amortized and shown as a component of interest expense.
Interest income. Interest income consists of interest earned through a loan
agreement with an affiliated company.
Loss on extinguishment of debt. Loss on extinguishment of debt primarily
consists of unamortized debt issuance costs related to certain term loans in
connection with our financing arrangements.
Change in fair value of embedded derivative. Change in fair value of embedded
derivative consists primarily of changes to an embedded derivative identified in
our debt agreement. The embedded derivative is revalued at each reporting
period.
Change in fair value of warrant liabilities. Change in fair value of warrant
liabilities consists primarily of changes to the Public Warrants and Private
Placement Warrants assumed upon the consummation of the Business Combination.
The liabilities are revalued at each reporting period.
Other expenses. Other expenses consist of legal settlement fees.
Results of Operations
The following table sets forth our consolidated statements of operations data
for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
($ in thousands) 2021 2020 2021 2020
Revenue:
Capitated revenue $ 501,780 $ 252,974 $ 1,148,041 $ 544,617
Fee-for-service and other revenue 25,018 10,159 52,055 25,020
Total revenue 526,798 263,133 1,200,096 569,637
Operating expenses:
Third-party medical costs 379,316 184,926 866,177 382,279
Direct patient expense 57,708 31,108 135,777 71,441
Selling, general, and administrative expenses 75,926 27,391 157,348 70,234
Depreciation and amortization expense 16,955 5,379 30,746 12,741
Transaction costs and other 6,528 7,716 32,140 29,854
Total operating expenses 536,433 256,520 1,222,188 566,549
Income (loss) from operations (9,635) 6,613 (22,092) 3,088
Other income and expense:
Interest expense (16,023) (12,346) (36,363) (21,728)
Interest income 1 80 4 239
Loss on extinguishment of debt - - (13,225) -
Change in fair value of embedded derivative - (5,138) - (5,444)
Change in fair value of warrant liabilities (14,650) - 24,565 -
Other expenses (29) - (54) (150)
Total other income (expense) (30,701) (17,404) (25,073) (27,083)
Net loss before income tax benefit (expenses) (40,336) (10,791) (47,165) (23,995)
Income tax benefit (expense) (547) (326) 762 (294)
Net loss (40,883) (11,117) (46,403) (24,289)
Net loss attributable to non-controlling
interests (26,246) - (41,283) -
Net loss attributable to Class A common
stockholders $ (14,637) $ - $ (5,120) $ -
The following table sets forth our consolidated statements of operations data expressed as a percentage of total revenues for the periods indicated:
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Three Months Ended Nine Months Ended
September 30, September 30,
(% of revenue) 2021 2020 2021 2020
Revenue:
Capitated revenue 95.3 % 96.1 % 95.7 % 95.6 %
Fee-for-service and other revenue 4.7 % 3.9 % 4.3 % 4.4 %
Total revenue 100.0 % 100.0 % 100.0 % 100.0 %
Operating expenses:
Third-party medical costs 72.0 % 70.3 % 72.2 % 67.1 %
Direct patient expense 11.0 % 11.8 % 11.3 % 12.5 %
Selling, general, and administrative expenses 14.4 % 10.4 % 13.1 % 12.3 %
Depreciation and amortization expense 3.2 % 2.0 % 2.6 % 2.2 %
Transaction costs and other 1.2 % 2.9 % 2.7 % 5.2 %
Total operating expenses 101.8 % 97.4 % 101.9 % 99.3 %
Loss from operations (1.8) % 2.6 % (1.9) % 0.7 %
Other income and expense:
Interest expense (3.0) % (4.7) % (3.0) % (3.8) %
Interest income 0.0 % 0.0 % 0.0 % 0.0 %
Loss on extinguishment of debt 0.0 % 0.0 % (1.1) % 0.0 %
Change in fair value of embedded derivative 0.0 % (2.0) % 0.0 % (1.0) %
Change in fair value of warrant liabilities (2.8) % 0.0 % 2.0 % 0.0 %
Other expenses 0.0 % 0.0 % 0.0 % 0.0 %
Total other income (expense) (5.8) % (6.7) % (2.1) % (4.8) %
Net loss before income tax benefit (expenses) (7.6) % (4.1) % (4.0) % (4.1) %
Income tax benefit (expense) (0.1) % (0.1) % 0.1 % (0.1) %
Net loss (7.7) % (4.2) % (3.9) % (4.2) %
Net loss attributable to non-controlling (5.0) % - % (3.4) % - %
interests
Net loss attributable to Class A common (2.7) % - % (0.5) % - %
stockholders
The following table sets forth the Company's disaggregated revenue for the
periods indicated:
Three Months Ended September 30,
2021 2020
($ in thousands) Revenue $ Revenue % Revenue $ Revenue %
Capitated revenue:
Medicare $ 447,250 84.9 % $ 220,591 83.8 %
Other capitated revenue 54,530 10.4 % 32,383 12.3 %
Total capitated revenue 501,780 95.3 % 252,974 96.1 %
Fee-for-service and other revenue:
Fee-for-service 8,176 1.6 % 3,258 1.2 %
Pharmacy 10,096 1.8 % 6,154 2.4 %
Other 6,746 1.3 % 747 0.3 %
Total fee-for-service and other revenue 25,018 4.7 % 10,159 3.9 %
Total revenue $ 526,798 100.0 % $ 263,133 100.0 %
-68---------------------------------------------------------------------------------
Nine Months Ended
2021 2020
($ in thousands) Revenue $ Revenue % Revenue $ Revenue %
Capitated revenue:
Medicare $ 1,008,329 84.0 % $ 455,986 80.0 %
Other capitated revenue 139,712 11.6 % 88,631 15.6 %
Total capitated revenue 1,148,041 95.7 % 544,617 95.6 %
Fee-for-service and other revenue:
Fee-for-service 17,113 1.4 % 6,269 1.1 %
Pharmacy 25,619 2.1 % 17,207 3.0 %
Other 9,323 0.8 % 1,544 0.3 %
Total fee-for-service and other revenue 52,055 4.3 % 25,020 4.4 %
Total revenue $ 1,200,096 100.0 % $ 569,637 100.0 %
The following table sets forth the Company's member and member month figures for
the periods indicated:
Three Months Ended September 30,
2021 2020 % Change
Members:
Medicare 120,086 72,806 64.9 %
Medicaid 63,871 19,169 233.2 %
ACA 26,706 10,792 147.5 %
Total members 210,663 102,767 105.0 %
Member months:
Medicare 360,439 216,353 66.6 %
Medicaid 187,212 53,511 249.9 %
ACA 81,437 32,285 152.2 %
Total member months 629,088 302,149 108.2 %
Per Member Per Month ("PMPM"):
Medicare $ 1,241 $ 1,020 21.7 %
Medicaid $ 271 $ 585 (53.7) %
ACA $ 47 $ 33 42.4 %
Total PMPM $ 798 $ 837 (4.7) %
Owned medical centers 113 71
-69---------------------------------------------------------------------------------
Nine Months Ended
September 30,
2021 2020 % Change
Members:
Medicare 120,086 72,806 64.9 %
Medicaid 63,871 19,169 233.2 %
ACA 26,706 10,792 147.5 %
Total members 210,663 102,767 105.0 %
Member months:
Medicare 867,520 483,878 79.3 %
Medicaid 321,581 136,658 135.3 %
ACA 195,290 92,577 110.9 %
Total member months 1,384,391 713,113 94.1 %
Per Member Per Month ("PMPM"):
Medicare $ 1,162 $ 942 23.4 %
Medicaid $ 414 $ 631 (34.4) %
ACA $ 36 $ 26 38.5 %
Total PMPM $ 829 $ 764 8.5 %
Owned medical centers 113 71
Comparison of the Three Months Ended September 30, 2021 and September 30, 2020
Revenue
Three Months Ended
September 30,
($ in thousands) 2021 2020 $ Change % Change
Revenue:
Capitated revenue $ 501,780 $ 252,974 $ 248,806 98.4 %
Fee-for-service and other revenue 25,018 10,159 14,859 146.3 %
Total revenue $ 526,798 $ 263,133 $ 263,665
Capitated revenue. Capitated revenue was $501.8 million for the three months
ended September 30, 2021 , an increase of $248.8 million , or 98.4%, compared to
$253.0 million for the three months ended September 30, 2020 . The increase was
primarily driven by a 108.2% increase in the total member months, slightly
offset by a 4.7% decrease in total revenue per member per month. The increase in
member months was primarily due to an increase in the total number of members
served and our acquisitions, primarily University in June 2021 and DMC in July
2021 , which resulted in the addition of new members and new markets in Florida .
Fee-for-service and other revenue. Fee-for-service and other revenue was $25.0
million for the three months ended September 30, 2021 , an increase of $14.9
million , or 146.3%, compared to $10.2 million for the three months ended
September 30, 2020 . The increase in fee-for-service revenue was primarily
attributable to an increase in members served across existing centers and the
acquisitions of affiliates in August 2021 . We experienced a decrease in
utilization of services due to the impact of COVID-19 in the third quarter of
2020, which contributed to lower fee-for service revenue in that period.
Further, other revenue
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increased in the third quarter of 2021 due to an acquisition that generated
ancillary fees earned under contracts with certain care organizations for the
provision of care coordination services. The increase in pharmacy revenue was
driven by organic growth as we continued to increase the number of members
served in our established pharmacies, as well as the addition of a new pharmacy
from our acquisition of University in June 2021 .
Operating Expenses
Three Months Ended
September 30,
($ in thousands) 2021 2020 $ Change % Change
Operating expenses:
Third-party medical costs $ 379,316 $ 184,926 $ 194,390 105.1 %
Direct patient expense 57,708 31,108 26,600 85.5 %
Selling, general, and administrative
expenses 75,926 27,391 48,535 177.2 %
Depreciation and amortization expense 16,955 5,379 11,576 215.2 %
Transaction costs and other 6,528 7,716 (1,188) (15.4) %
Total operating expenses $ 536,433 $ 256,520 $ 279,913
Third-party medical costs. Third-party medical costs were $379.3 million for the
three months ended September 30, 2021 , an increase of $194.4 million , or 105.1%,
compared to $184.9 million for the three months ended September 30, 2020 . The
increase was driven by a 108.2% increase in total member months, the addition of
Direct Contracting Entity members with higher medical costs, and higher
utilization of third party medical services as utilization normalized from lower
levels related to the COVID-19 pandemic.
Direct patient expense. Direct patient expense was $57.7 million for the three
months ended September 30, 2021 , an increase of $26.6 million , or 85.5%,
compared to $31.1 million for the three months ended September 30, 2020 . The
increase was driven by increases in payroll and benefits of $10.9 million ,
pharmacy drugs of $3.2 million , medical supplies of $1.1 million and provider
payments of $11.4 million .
Selling, general, and administrative expense. Selling, general, and
administrative expense was $75.9 million for the three months ended September
30, 2021 , an increase of $48.5 million , or 177.2%, compared to $27.4 million for
the three months ended September 30, 2020 . The increase was driven by higher
salaries and benefits of $19.3 million , stock-based compensation of $8.9
million , occupancy costs of $5.4 million , marketing expenses of $2.8 million ,
legal and professional services of $4.9 million , and other costs of $7.2
million . These increases were incurred to support the continued growth of our
business and expansion into other states.
Depreciation and amortization expense. Depreciation and amortization expense was
$17.0 million for the three months ended September 30, 2021 , an increase of
$11.6 million , or 215.2%, compared to $5.4 million for the three months ended
September 30, 2020 . The increase was driven by purchases of new property and
equipment to support the growth of our business during the period as well as the
addition of several new brand names, non-compete agreements, and payor
relationships from our 2020 and 2021 acquisitions.
Transaction costs and other. Transaction costs and other were $6.5 million for
the three months ended September 30, 2021 , a decrease of $1.2 million , or 15.4%,
compared to $7.7 million for the three months ended September 30, 2020 . The
decrease was due to lower integration, legal, internal staff, and other
professional fees incurred subsequent to the closing of the Business
Combination.
-71---------------------------------------------------------------------------------
Other Income (Expense)
Three Months Ended
September 30,
($ in thousands) 2021 2020 $ Change % Change
Other income and expense:
Interest expense $ (16,023) $ (12,346) $ (3,677) 29.8 %
Interest income 1 80 (79) (98.8) %
Change in fair value of embedded derivative - (5,138) 5,138 (100.0) %
Change in fair value of warrant liabilities (14,650) - (14,650) 0.0 %
Other expenses (29) - (29) 0.0 %
Total other income (expense) $ (30,701) $ (17,404) $ (13,297)
Interest expense. Interest expense was $16.0 million for the three months ended
September 30, 2021 , an increase of $3.7 million , or 29.8%, compared to $12.3
million for the three months ended September 30, 2020 . The increase was
primarily driven by interest incurred on our higher outstanding borrowings under
our credit facility to fund our acquisitions.
Change in fair value of the embedded derivative. Change in fair value of the
embedded derivative was $5.1 million for the three months ended September 30,
2020 which was due to a change in the fair value of the embedded derivative
related to our term loan agreement in 2020. The embedded derivative was settled
with the refinancing in November of 2020.
Change in fair value of warrant liabilities. Change in fair value of warrant
liabilities was $14.7 million for the three months ended September 30, 2021 .
This expense is a result of the change in the fair value of the Public Warrants
and Private Placement Warrants assumed in connection with the Business
Combination.
Comparison of the Nine Months Ended September 30, 2021 and September 30, 2020
Revenue
Nine Months Ended
September 30,
($ in thousands) 2021 2020 $ Change % Change
Revenue:
Capitated revenue $ 1,148,041 $ 544,617 $ 603,424 110.8 %
Fee-for-service and other revenue 52,055 25,020 27,035 108.1 %
Total revenue $ 1,200,096 $ 569,637 $ 630,459 110.7 %
Capitated revenue. Capitated revenue was $1,148.0 million for the nine months
ended September 30, 2021 , an increase of $603.4 million , or 110.8%, compared to
$544.6 million for the nine months ended September 30, 2020 . The increase was
primarily driven by a 94.1% increase in the total member months and an 8.5%
increase in total revenue per member per month. The increase in member months
was due to an increase in the total number of members served and our
acquisitions, primarily Healthy Partners in June 2020 and University in June
2021 , which resulted in the addition of new members and new markets in Florida .
Fee-for-service and other revenue. Fee-for-service and other revenue was $52.1
million for the nine months ended September 30, 2021 , an increase of $27.0
million , or 108.1%, compared to $25.0 million for the nine months ended
September 30, 2020 . The increase in fee-for-service revenue was primarily
attributable to an increase in members served across existing centers. We
experienced a decrease in utilization of services due to the impact of COVID-19
through the third quarter of 2020, which contributed to lower fee-for service
revenue in that period. Further, other revenue increased in the third quarter of
2021 due to an acquisition that generated ancillary fees earned under contracts
with certain care organizations for the
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provision of care coordination services. The increase in pharmacy revenue was
driven by organic growth as we continued to increase the number of members
served in our established pharmacies as well as the addition of a new pharmacy
from our acquisition of University in June of 2021.
Operating Expenses
Nine Months Ended
September 30,
($ in thousands) 2021 2020 $ Change % Change
Operating expenses:
Third-party medical costs $ 866,177 $ 382,279 $ 483,898 126.6 %
Direct patient expense 135,777 71,441 64,336 90.1 %
Selling, general, and administrative 87,114
expenses 157,348 70,234 124.0 %
Depreciation and amortization expense 30,746 12,741 18,005 141.3 %
Transaction costs and other 32,140 29,854 2,286 7.7 %
Total operating expenses $ 1,222,188 $ 566,549 $ 655,639
Third-party medical costs. Third-party medical costs were $866.2 million for the
nine months ended September 30, 2021 , an increase of $483.9 million , or 126.6%,
compared to $382.3 million for the nine months ended September 30, 2020 . The
increase was driven by a 94.1% increase in total member months, the addition of
Direct Contracting Entity members with higher medical costs, and higher
utilization of third party medical services as utilization normalized from lower
levels related to the COVID-19 pandemic.
Direct patient expense. Direct patient expense was $135.8 million for the nine
months ended September 30, 2021 , an increase of $64.3 million , or 90.1%,
compared to $71.4 million for the nine months ended September 30, 2020 . The
increase was driven by increases in payroll and benefits of $22.5 million ,
pharmacy drugs of $6.4 million , medical supplies of $2.8 million and provider
payments of $32.6 million .
Selling, general, and administrative expenses. Selling, general, and
administrative expenses were $157.3 million for the nine months ended September
30, 2021 , an increase of $87.1 million , or 124.0%, compared to $70.2 million for
the nine months ended September 30, 2020 . The increase was driven by higher
salaries and benefits of $36.8 million , stock-based compensation of $11.2
million , occupancy costs of $11.2 million , marketing expenses of $6.0 million ,
legal and professional services of $7.3 million , and other costs of $14.6
million . These increases were incurred to support the continued growth of our
business and expansion into other states.
Depreciation and amortization expense. Depreciation and amortization expense was
$30.7 million for the nine months ended September 30, 2021 , an increase of $18.0
million , or 141.3%, compared to $12.7 million for the nine months ended
September 30, 2020 . The increase was driven by purchases of new property and
equipment to support the growth of our business during the period as well as the
addition of several new brand names, non-compete agreements, and payor
relationships from our 2020 and 2021 acquisitions.
Transaction costs and other. Transaction costs and other were $32.1 million for
the nine months ended September 30, 2021 , an increase of $2.3 million , or 7.7%,
compared to $29.9 million for the nine months ended September 30, 2020 . The
increase was due to higher integration, legal, internal staff, and other
professional fees incurred in the first half of 2021 in connection with the
closing of the Business Combination.
Other Income (Expense)
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Nine Months Ended
September 30,
($ in thousands) 2021 2020 $ Change % Change
Other income and expense:
Interest expense $ (36,363) $ (21,728) $ (14,635) 67.4 %
Interest income 4 239 (235) (98.3) %
Loss on extinguishment of debt (13,225) - (13,225) - %
Change in fair value of embedded derivative - (5,444) 5,444 (100.0) %
Change in fair value of warrant liabilities 24,565 - 24,565 - %
Other expenses (54) (150) 96 (64.0) %
Total other income (expense) $ (25,073) Interest expense. Interest expense was$36.4 million for the nine months endedSeptember 30, 2021 , an increase of$14.6 million , or 67.4%, compared to$21.7 million for the nine months endedSeptember 30, 2020 . The increase was primarily driven by interest incurred on our higher outstanding borrowings under our credit facility to fund our acquisitions. Loss on extinguishment of debt. Loss on extinguishment of debt was$13.2 million for the nine months endedSeptember 30, 2021 due to the partial extinguishment of Term Loan 3 following the closing of the Business Combination. The loss on extinguishment was related to unamortized debt issuance costs. Change in fair value of the embedded derivative. Change in the fair value of the embedded derivative was$5.4 million for the three months endedSeptember 30, 2021 due to a change in the fair value of the embedded derivative related to our term loan agreement in 2020. The embedded derivative was settled with the refinancing in November of 2020. Change in fair value of warrant liabilities. Change in fair value of warrant liabilities was$24.6 million as a result of a change in the fair value of the Public Warrants and Private Placement Warrants assumed in connection with the Business Combination. Liquidity and Capital Resources General To date, we have financed our operations principally through the issuance of equity and debt. As ofSeptember 30, 2021 andDecember 31, 2020 , we had cash, cash equivalents and restricted cash of$208.9 million and$33.8 million , respectively. Our cash, cash equivalents and restricted cash primarily consist of highly liquid investments in money market funds and cash. Since our inception, we have generated significant operating losses from our operations, as reflected in our accumulated deficit of$52.5 million as ofSeptember 30, 2021 and negative cash flows from operations. We expect to incur operating losses and generate negative cash flows from operations for the foreseeable future due to the investments we intend to continue to make in acquisitions, expansion of operations, and due to additional selling, general, and administrative costs we expect to incur in connection with operating as a public company. As a result, we may require additional capital resources to execute strategic initiatives to grow our business. OnNovember 23, 2020 , we entered into the Credit Agreement with certain lenders, with Credit Suisse AG,Cayman Islands Branch, as the administrative agent, collateral agent and a letter of credit issuer, andCredit Suisse Loan Funding LLC , as the sole lead arranger and sole book runner. The Credit Agreement provided for an Initial Term Loan ("Term Loan 3") in an original aggregate principal amount of$480.0 million , a revolving credit facility with original commitments in an aggregate principal amount of$30.0 million (the "Revolving Credit Facility"), and a delayed draw term loan facility with commitments in an aggregate principal amount of$175.0 million (the" Delayed Draw Term Loan Facility"). The Revolving Credit Facility included a$10.0 million sub-limit for the issuance of letters of credit. Borrowings under the Revolving Credit Facility mature, and the revolving commitments thereunder terminate, onNovember 23, 2025 . The Initial Term Loan and Delayed Draw Term Loans mature onNovember 23, 2027 . InJune 2021 , we borrowed the remaining availability under our Delayed Draw Term Loan Facility and entered into the Third Amendment and Incremental Facility Amendment to the Credit Agreement pursuant to which we borrowed$295.0 million in incremental term loans ("Term Loan 4"), and made certain other amendments to our Credit Agreement. OnSeptember 30, 2021 , the Company modified the Credit Agreement by adding an incremental term loan for a principal amount of$100.0 million ("Term Loan 5"), subject to the same terms (including interest rate and maturity date) as Term -74- --------------------------------------------------------------------------------
Loans 3 and 4 above. As of
The Business Combination closed onJune 3, 2021 . Pursuant to the Business Combination Agreement, on the Closing Date, Jaws contributed cash to PCIH in exchange for 69.0 million common limited liability company units of PCIH ("PCIH Common Units") equal to the number of shares of Jaws' Class A ordinary shares outstanding on the Closing Date and 17.25 million Class B ordinary shares owned byJaws Sponsor LLC (the "Sponsor") . In connection with the Business Combination, the Company issued 306.8 million shares of Class B common stock to existing shareholders of PCIH. The Company also issued and sold 80.0 million shares of the Company's Class A common stock in a private placement for$800.0 million . In aggregate, the Company generated approximately$935.4 million in net cash proceeds after transaction costs and advisory fees paid and distributions to PCIH shareholders. OnJune 4, 2021 , the Company utilized$400.0 million of the net proceeds to pay off the Company's debt under Term Loan 3 and the remainder of the net proceeds was held on the balance sheet for general corporate purposes. See further discussion related to the Business Combination in Note 1, "Nature of Business and Operations" in our unaudited condensed consolidated financial statements. OnJune 11, 2021 , we entered into a purchase agreement with University for total consideration of$611.1 million . The transaction was financed through$541.5 million of cash on hand,$60.0 million of Class A common stock issued to University's sellers and$9.6 million in contingent consideration from acquisition add-ons based on additional acquired entities. OnJuly 2, 2021 , we entered into the Bridge Loan Agreement with certain lenders and Credit Suisse AG,Cayman Islands Branch, as administrative agent, pursuant to which the lenders provided a$250.0 million unsecured bridge term loan. We used the bridge term loan to acquire ("DMC"). OnSeptember 30, 2021 , the Company issued senior unsecured notes for a principal amount of$300.0 million (the "Senior Notes") in a private offering. Proceeds from the Senior Notes were used to repay in full the$250.0 million bridge term loan. The Senior Notes bear interest at 6.25% per annum, payable semi-annually onApril 1st andOctober 1st of each year, commencingApril 1, 2022 . As ofSeptember 30, 2021 , the effective interest rate of the Senior Notes was 6.65%. Principal on the Senior Notes is due in full onOctober 1, 2028 . The Company is a holding company with no material assets other than its ownership of the PCIH Common Units and its managing member interest in PCIH. As a result, we have no independent means of generating revenue or cash flow. Our ability to pay taxes, make payments under the Tax Receivable Agreement and pay dividends will depend on the financial results and cash flows of PCIH and the distributions we receive from PCIH. Deterioration in the financial condition, earnings or cash flow of PCIH for any reason could limit or impair PCIH's ability to pay such distributions. Additionally, to the extent that we need funds and PCIH is restricted from making such distributions under applicable law or regulation or under the terms of any financing arrangements, or PCIH is otherwise unable to provide such funds, it could materially adversely affect our liquidity and financial condition. We anticipate that the distributions we will receive from PCIH may, in certain periods, exceed our actual tax liabilities and obligations to make payments under the Tax Receivable Agreement. Our Board, in its sole discretion, may make any determination from time to time with respect to the use of any such excess cash so accumulated, which may include, among other uses, to pay dividends on our Class A common stock. We will have no obligation to distribute such cash (or other available cash other than any declared dividend) to our stockholders. Dividends on our common stock, if any, will be paid at the discretion of our Board, which will consider, among other things, our available cash, available borrowings and other funds legally available therefore, taking into account the retention of any amounts necessary to satisfy our obligations that will not be reimbursed by PCIH, including taxes and amounts payable under the Tax Receivable Agreement and any restrictions in then applicable bank financing agreements. Financing arrangements may include restrictive covenants that restrict our ability to pay dividends or make other distributions to our stockholders. In addition, PCIH is generally prohibited underDelaware law from making a distribution to a member to the extent that, at the time of the distribution, after giving effect to the distribution, liabilities of PCIH (with certain exceptions) exceed the fair value of its assets. PCIH's subsidiaries are generally subject to similar legal limitations on their ability to make distributions to PCIH. If PCIH does not have sufficient funds to make distributions, our ability to declare and pay cash dividends may also be restricted or impaired. Under the terms of the Tax Receivable Agreement, we generally are required to pay to the Seller, and to each other person from time to time that becomes a "TRA Party " under the Tax Receivable Agreement, 85% of the tax savings, if any, that we are deemed to realize in certain circumstances as a result of certain tax attributes that exist following the Business -75- -------------------------------------------------------------------------------- Combination and that are created thereafter, including as a result of payments made under the Tax Receivable Agreement. To the extent payments are made pursuant to the Tax Receivable Agreement, we generally will be required to pay to the Sponsor and to each other person from time to time that becomes a "Sponsor Party " under the Tax Receivable Agreement suchSponsor Party's proportionate share of, an amount equal to such payments multiplied by a fraction with the numerator 0.15 and the denominator 0.85. The term of the Tax Receivable Agreement will continue until all such tax benefits have been utilized or expired unless we exercise our right to terminate the Tax Receivable Agreement for an amount representing the present value of anticipated future tax benefits under the Tax Receivable Agreement or certain other acceleration events occur. These payments are the obligation of the Company and not of PCIH. Any payments made by us under the Tax Receivable Agreement will generally reduce the amount of overall cash flow that might have otherwise been available to us or PCIH and, to the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, the unpaid amounts generally will be deferred and will accrue interest until paid by us. We believe that the proceeds from the Business Combination, our Term Loans and our Revolving Credit Facility described above as well as our cash, cash equivalents and restricted cash will be sufficient to fund our operating and capital needs for at least the next 12 months. Our assessment of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties. Our actual results could vary because of, and our future capital requirements will depend on, many factors, including our growth rate, medical expenses, and the timing and extent of our expansion into new markets. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations, and financial condition would be adversely affected.
Cash Flows The following table presents a summary of our consolidated cash flows from operating, investing and financing activities for the periods indicated.
Nine Months Ended
September 30,
($ in thousands) 2021 2020
Net cash used in operating activities $ (91,498) $ (21,043)
Net cash used in investing activities (1,116,030) (253,554)
Net cash provided by financing activities 1,382,634 272,828
Net increase (decrease) in cash, cash equivalents and restricted 175,106 (1,769)
cash
Cash, cash equivalents and restricted cash at beginning of year 33,807 29,192 Cash, cash equivalents and restricted cash at end of period $ 208,913$ 27,423 Operating Activities For the nine months endedSeptember 30, 2021 , net cash used in operating activities was$91.5 million , an increase of$70.5 million in cash outflows compared to net cash used in operating activities of$21.0 million for the nine months endedSeptember 30, 2020 . Significant changes impacting net cash used in operating activities were as follows: •Net loss for the nine months endedSeptember 30, 2021 of$46.4 million compared to net loss for the nine months endedSeptember 30, 2020 of$24.3 million ; •Increases in accounts receivable, net of$96.0 million for the nine months endedSeptember 30, 2021 compared to increases in accounts receivable, net for the nine months endedSeptember 30, 2020 of$33.3 million due to increased member counts across existing providers which was partially offset by the assumption of service provider liabilities from those acquisitions; •Increases in accounts payable and accrued expenses for the nine months endedSeptember 30, 2021 of$56.6 million compared to increases in accounts payable and accrued expenses for the nine months endedSeptember 30, 2020 of$10.5 million due to the addition of new third-party provider payments related to businesses acquired after the first quarter of 2020 and higher accrued transaction costs; and -76- -------------------------------------------------------------------------------- •Increases in prepaid expenses and other current assets of$27.4 million for the nine months endedSeptember 30, 2021 compared to decreases in prepaid expenses and other current assets for the nine months endedSeptember 30, 2020 of$0.2 million due to higher prepaid insurance payments and prepaid bonus incentives.
Investing Activities
For the nine months ended
Financing Activities
Net cash provided by financing activities was$1.4 billion during the nine months endedSeptember 30, 2021 , an increase of$1.1 billion in cash inflows compared to net cash provided by financing activities of$272.8 million during the nine months endedSeptember 30, 2020 due primarily to$935.4 million in connection with the Business Combination and PIPE financing as well as additional proceeds from long-term debt and Delayed Draw Term Loans. Contractual Obligations and Commitments
Our principal commitments consist of obligations under operating and capital leases for our centers and equipment, repayments of long-term debt on notes payable, and payments due to sellers in connection with our acquisitions.
As ofSeptember 30, 2021 , we had future minimum operating lease payments under non-cancellable leases through the year 2028 of$79.1 million related to office facilities and office equipment. We also had non-cancellable capital lease agreements with third parties through the year 2026 with future minimum payments of$2.9 million .
As of
Additionally, we have amounts due to sellers in connection with our historical acquisitions of approximately$24.7 million as ofSeptember 30, 2021 that are due within the next twelve months. Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as ofSeptember 30, 2021 . Litigation We are exposed to various asserted and unasserted potential claims encountered in the normal course of business. We believe that the resolution of these matters will not have a material effect on our consolidated financial position or the results of operations. Non-GAAP Financial Metrics
The following discussion includes references to EBITDA and Adjusted EBITDA,
which are non-GAAP financial measures. A non-GAAP financial measure is a
performance metric that departs from
By definition, EBITDA consists of net loss before interest, income taxes,
depreciation and amortization. Adjusted EBITDA is EBITDA adjusted to add back
the effect of certain expenses, such as stock-based compensation expense, de
novo losses (consisting of losses incurred in the twelve months after the
opening of a new facility), acquisition transaction costs (consisting of
transaction costs, fair value adjustments in contingent consideration,
management fees and corporate development payroll costs), restructuring and
other charges, loss on extinguishment of debt, changes in fair value of an
embedded derivative, and changes in fair value of warrant liabilities.
Adjusted EBITDA is a key measure used by our management to assess the operating
and financial performance of our health centers in order to make decisions on
allocation of resources.
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The presentation of non-GAAP financial measures also provides additional
information to investors regarding our results of operations and is useful for
trending, analyzing and benchmarking the performance and value of our business.
By excluding certain expenses and other items that may not be indicative of our
core business operating results, these non-GAAP financial measures:
•allow investors to evaluate our performance from management's perspective,
resulting in greater transparency with respect to supplemental information used
by us in our financial and operational decision making;
•provide better transparency as to the measures used by management and others
who follow our industry to estimate the value of our company? and
•allow investors to view our financial performance and condition in the same
manner that our significant lenders and landlords require us to report financial
information to them in connection with determining our compliance with financial
covenants.
Our use of EBITDA and Adjusted EBITDA have limitations as an analytical tool,
and you should not consider them in isolation or as a substitute for analysis of
our financial results as reported under U.S. GAAP. Some of these limitations are
as follows:
•although depreciation and amortization expense are non-cash charges, the assets
being depreciated and amortized may have to be replaced in the future, and
EBITDA and Adjusted EBITDA do not reflect cash capital expenditure requirements
for such replacements or for new capital expenditure requirements;
•Adjusted EBITDA does not reflect: (1) changes in, or cash requirements for, our
working capital needs; (2) the potentially dilutive impact of non-cash
stock-based compensation; (3) tax payments that may represent a reduction in
cash available to us; or (4) net interest expense/income; and
•other companies, including companies in our industry, may calculate EBITDA
and/or Adjusted EBITDA or similarly titled measures differently, which reduces
its usefulness as a comparative measure.
Because of these and other limitations, you should consider Adjusted EBITDA
along with other
The following table provides a reconciliation of net loss to non-GAAP financial
information:
Three Months Ended Nine Months Ended
September 30, September 30,
($ in thousands) 2021 2020 2021 2020
Net loss $ (40,883) $ (11,117) $ (46,403) $ (24,289)
Interest income (1) (80) (4) (239)
Interest expense 16,023 12,346 36,363 21,728
Income tax expense (benefit) 547 326 (762) 294
Depreciation and amortization expense 16,955 5,379 30,746 12,741
EBITDA $ (7,359) $ 6,854 $ 19,940 $ 10,235
Stock-based compensation 8,909 66 12,148 177
De novo losses (1) 9,016 2,025 21,496 4,373
Acquisition transaction costs (2) 7,825 7,827 35,163 30,121
Restructuring and other 2,123 1,113 5,513 1,829
Loss on extinguishment of debt - - 13,225 -
Change in fair value of embedded derivative - 5,138 - 5,444
Change in fair value of warrant liabilities 14,650 - (24,565) -
Adjusted EBITDA $ 35,164 $ 23,023 $ 82,921 $ 52,179
(1) De novo losses include those costs associated with the ramp up of new
facilities and that are not expected to be incurred past the first 12 months
after opening. These costs collectively are higher than comparable expenses
incurred once such a facility has been open and generating revenue and would not
have been incurred unless a new facility was being opened.
(2) Acquisition transaction costs included
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costs for the nine months ended
We experienced a 207.4% decrease in EBITDA and a 52.7% increase in Adjusted EBITDA between the three months endedSeptember 30, 2021 andSeptember 30, 2020 . The decrease in EBITDA was primarily related to our acquisition activity, stock-based compensation, and changes in fair value of our warrant liabilities which all negatively impacted net income. The increase in Adjusted EBITDA related to overall growth in the business.
We experienced a 94.8% increase in EBITDA and a 58.9% increase in Adjusted
EBITDA between the nine months ended
Emerging Growth Company Status
We are an emerging growth company, as defined in the JOBS Act. The JOBS Act
provides that an emerging growth company can take advantage of an extended
transition period for complying with new or revised accounting standards. This
provision allows an emerging growth company to delay the adoption of some
accounting standards until those standards would otherwise apply to private
companies. We have elected to use the extended transition period under the JOBS
Act until the earlier of the date we (1) are no longer an emerging growth
company or (2) affirmatively and irrevocably opt out of the extended transition
period provided in the JOBS Act. Accordingly, our financial statements may not
be comparable to companies that comply with new or revised accounting
pronouncements as of public company effective dates. The Company will become a
"large accelerated filer," as defined in Rule 12b-2 of the Exchange Act and will
lose its "emerging growth company" status as of the end of the year ending
December 31, 2021 .
Recent Accounting PronouncementsSee Note 2, "Summary of Significant Accounting Policies-Recent Accounting Pronouncements" to our condensed consolidated financial statements for more information.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
is based upon our condensed consolidated financial statements and accompanying
notes, which have been prepared in accordance with U.S. GAAP. The preparation of
these financial statements requires us to make estimates and assumptions that
affect the amounts reported amounts of assets, liabilities, revenue and
expenses, and related disclosures of contingent assets and liabilities at the
date of our financial statements. We base our estimates on historical experience
and on various other assumptions that we believe are reasonable under the
circumstances. We evaluate our estimates and assumptions on an ongoing basis.
The future effects of the COVID-19 pandemic on our results of operations, cash
flows and financial position are unclear; however, we believe we have made
reasonable estimates and assumptions in preparing the financial statements.
Actual results may differ from these estimates under different assumptions or
conditions, impacting our reported results of operations and financial
condition.
Certain accounting policies involve significant judgments and assumptions by
management, which have a material impact on the carrying value of assets and
liabilities and the recognition of income and expenses. Management considers
these accounting policies to be critical accounting policies. The estimates and
assumptions used by management are based on historical experience and other
factors, which are believed to be reasonable under the circumstances. The
significant accounting policies which we believe are the most critical to aid in
fully understanding and evaluating our reported financial results are described
below. See Note 2 to our condensed consolidated financial statements "Summary of
Significant Accounting Policies" in our condensed consolidated financial
statements for more information.
Warrant Liabilities
We account for the Public Warrants and Private Placement Warrants in accordance
with the guidance contained in ASC 815-40 under which the Public Warrants and
Private Placement Warrants do not meet the criteria for equity treatment and
must be recorded as liabilities. Accordingly, we classify the Public Warrants
and Private Placement Warrants as liabilities at their fair value and adjust the
Public Warrants and Private Placement Warrants to fair value at each reporting
period. This liability is subject to re-measurement at each balance sheet date
until exercised, and any change in fair value is recognized in our statement
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--------------------------------------------------------------------------------of operations. The Public Warrants and the Private Placement Warrants for periods where no observable traded price was available are valued using a binomial lattice simulation model.
Revenue
Revenue consists primarily of fees for medical services provided under capitated arrangements with HMO health plans. Capitated revenue also consists of revenue earned through Medicare Advantage as well as through commercial and other non-Medicare governmental programs, such as Medicaid, which is captured as other capitated revenue. As we control the healthcare services provided to enrolled members, we act as the principal and the gross fees under these contracts are reported as revenue and the cost of provider care is included in third-party medical costs. Additionally, since contractual terms across these arrangements are similar, we group them into one portfolio. Capitated revenues are recognized in the month in which we are obligated to provide medical care services. The transaction price for the services provided is variable and depends upon the terms of the arrangement provided by or negotiated with the health plan and include PMPM rates that may fluctuate. The rates are risk adjusted based on the health status (acuity) of members and demographic characteristics of the plan. The fees are paid on an interim basis based on submitted enrolled member data for the previous year and are adjusted in subsequent periods after the final data is compiled by the CMS.
Third-Party Medical Costs
Third-party medical costs primarily consist of all medical expenses paid by the
health plans, including inpatient and hospital care, specialists, and medicines.
Provider costs are accrued based on date of service to members, based in part on
estimates, including an accrual for medical services incurred but not reported
("IBNR"). Actual claims expense will differ from the estimated liability due to
factors in estimated and actual member utilization of health care services, the
amount of charges, and other factors. Liabilities for IBNR are estimated using
standard actuarial methodologies, including our accumulated statistical data,
adjusted for current experience. These actuarially determined estimates are
continually reviewed and updated; as the amount of unpaid service provider cost
is based on estimates, the ultimate amounts paid to settle these liabilities
might vary from recorded amounts and these differences may be material.
We have included IBNR claims of approximately
Impairment of Long-Lived Assets
Long-lived assets are reviewed periodically for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Business Acquisitions We account for acquired businesses using the acquisition method of accounting. All assets acquired and liabilities assumed are recorded at their respective fair values at the date of acquisition. The determination of fair value involves estimates and the use of valuation techniques when market value is not readily available. We use various techniques to determine fair value in accordance with accepted valuation models, primarily the income approach. The significant assumptions used in developing fair values include, but are not limited to, revenue growth rates, the amount and timing of future cash flows, discount rates, useful lives, royalty rates and future tax rates. The excess of purchase price over the fair value of assets and liabilities acquired is recorded as goodwill. Refer to Note 3, "Business Acquisitions," for a discussion of the Company's recent acquisitions.
Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets acquired. We test goodwill for impairment annually onOctober 1st or more frequently if triggering events occur or other impairment indicators arise which might impair recoverability. These events or circumstances would -80- -------------------------------------------------------------------------------- include a significant change in the business climate, legal factors, operating performance indicators, competition, sale, disposition of a significant portion of the business or other factors.Goodwill is evaluated for impairment at the reporting unit level and we have identified a single reporting unit. ASC 350, "Intangibles-Goodwill and Other" allows entities to first use a qualitative approach to test goodwill for impairment by determining whether it is more likely than not (a likelihood of greater than 50%) that the fair value of a reporting unit is less than its carrying value. When we perform the quantitative goodwill impairment test, we compare the fair value of the reporting unit, which we primarily determine using an income approach based on the present value of expected future cash flows, to the respective carrying value, which includes goodwill. If the fair value of the reporting unit exceeds its carrying value, then goodwill is not considered impaired. If the carrying value is higher than the fair value, the difference would be recognized as an impairment loss. We considered the effect of the COVID-19 pandemic on our business and the overall economy and resulting impact on goodwill. There was no impairment to goodwill during the nine months endedSeptember 30, 2021 and 2020. Our intangibles consist of trade names, brands, non-compete agreements, and customer, payor, and provider relationships. We amortize intangibles using the straight-line method over the estimated useful lives of the intangible, which range from 1 to 20 years. Intangible assets are reviewed for impairment in conjunction with long-lived assets. The determination of fair values and useful lives requires us to make significant estimates and assumptions. These estimates include, but are not limited to, future expected cash flows from acquired capitation arrangements from a market participant perspective, discount rates, industry data and management's prior experience. Unanticipated events or circumstances may occur that could affect the accuracy or validity of such assumptions, estimates or actual results. Equity-Based Compensation ASC 718, "Compensation-Stock Compensation" requires the measurement of the cost of the employee services received in exchange for an award of equity instruments based on the grant-date fair value or, in certain circumstances, the calculated value of the award. Under our unit-based incentive plan, we may reward employees with various types of awards, including but not limited to profits interests on a service-based or performance-based schedule. These awards may also contain market conditions. We have elected to account for forfeitures as they occur. We use the Black-Scholes pricing option model to estimate the fair value of each award as of the grant date.
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