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 the 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 10-K for the fiscal year endedDecember 31, 2021 filed with theSecurities and Exchange Commission (the "SEC") onMarch 14, 2022 . 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" as well as Part I, Item 1A, "Risk Factors" in our Form 10-K for the year endedDecember 31, 2021 . Overview Description ofCano Health 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. 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 clinical outcomes, 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 theCenters for Medicare & Medicaid ("CMS") to health 29 --------------------------------------------------------------------------------
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 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 ("PMPM") 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 of March 31, 2022 , we employed approximately 400 providers (physicians, nurse
practitioners, physician assistants) across our 137 owned medical centers,
maintained affiliate relationships with over 1,000 physicians and approximately
800 clinical support employees focused on supporting physicians in enabling
patient care and experience. For the three months ended March 31, 2022 and 2021,
our total revenue was $704.3 million and $274.6 million , respectively. Our net
loss for the same periods was $0.1 million and $16.1 million , respectively.
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. We believe our high NPS speaks to our ability to
deliver high-quality care with superior member satisfaction.
Add New Members in Existing Centers
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Our ability to organically add new members is a key driver of our growth. We
have a large embedded growth opportunity within our existing medical center
base. 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 more convenient for our members.
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 Geographies
We operate in
•Medicare population density;
•underserved demographics;
•existing payor relationships; and
•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 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 lease the medical center 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. 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 ofMarch 31, 2022 , 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 acrossthe United States . We have established ourselves as a top quality provider across multiple Medicare and Medicaid health plans, including Humana, UnitedHealthcare and Anthem (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 31 -------------------------------------------------------------------------------- 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.
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. 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.
Acquisitions
We seek to supplement our organic growth through our 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. Our historical acquisitions have all been accounted for in accordance with ASC 805, "Business Combinations", 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 audited consolidated financial statements in our Form 10-K for the fiscal year endedDecember 31, 2021 filed with theSEC onMarch 14, 2022 . There were no significant acquisitions in the three months endedMarch 31, 2022 .
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 member acuity and quality metrics and may be adjusted to reflect actual member acuity and quality metrics.
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:
Capitated Revenue Per Member
Excluding the impact of large scale shifts in membership demographics or acuity, our Medicare Advantage PMPM will generally decline over the course of the year. As the year progresses, Medicare Advantage PMPM typically declines as new members join us with less complete or accurate documentation in the previous year (and therefore lower current year Medicare Risk Adjustment).
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 due to
influenza and other seasonal illnesses. Medical costs also depend upon the
number of business days in a period. Shorter periods will typically 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.
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--------------------------------------------------------------------------------Additionally, we generally accrue stop loss reimbursements from September through December (as patients reach stop loss thresholds) which can result in reduced medical expenses during the third and fourth quarter due to recoveries.
Organic Member Growth
We experience organic member growth throughout the year as existing Medicare
Advantage plan members choose our providers and during special enrollment
periods when certain eligible individuals can enroll in Medicare Advantage plans
midyear. We experience some seasonality with respect to organic enrollment,
which is generally higher during the first and fourth quarters, driven by
Medicare Advantage plan advertising and marketing campaigns and plan enrollment
selections made during the annual open enrollment period. We also grow through
serving new and existing traditional Medicare, Affordable Care Act (ACA),
Medicaid, and Commercial patients.
Key Performance Metrics
In addition to our 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.
March 31, 2022 December 31, 2021 March 31, 2021
Membership 269,333 227,005 116,895
Medical centers 137 130 72
Members
Members represent those Medicare, Medicaid, and Affordable Care Act ("ACA"), and
commercially insured 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
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 any new COVID-19 variants cannot be
predicted at this time, and could depend on numerous factors, including
vaccination and booster 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.
For additional information on the various risks posed by the COVID-19 pandemic,
please see the section entitled "Risk Factors" included in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2021 .
Key Components of Results of Operations
Revenue
33-------------------------------------------------------------------------------- Capitated revenue. Our capitated revenue is derived from medical services provided at our medical centers or affiliated practices under capitation arrangements made directly with various health plans or CMS. Capitated revenue consists of a PMPM amount paid 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. 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. 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 includes pharmacy and ancillary fees earned under contracts with certain care organizations for the provision of care coordination and other services. With respect to 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 patients 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 incurred by the health plans or CMS (contractually on behalf ofCano Health ) including costs for inpatient and hospital care, specialists, and certain pharmacy purchases, net of rebates and other recoveries. 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 and adjusted for current experience. These estimates are continually reviewed and updated, and we retain the services of an independent actuary to review IBNR on a quarterly basis. We expect our third-party medical costs to increase given the healthcare spending trends within the Medicare population, which is also consistent with what we receive under our payor contracts. 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 clinical support staff, medical supplies, purchased medical services, drug costs for pharmacy sales, and payments to affiliated providers. Selling, general, and administrative expenses. 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. Our selling, general, and administrative expenses increased in 2021 following the closing of the Business Combination, and we expect our selling, general, and administrative expenses to continue to increase over time 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. 34 -------------------------------------------------------------------------------- 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 in connection with acquisition activity).
Change in fair value of contingent consideration. Adjustments in contingent consideration due to acquisitions.
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 financing are amortized and shown as a component of interest expense.
Interest income. Interest income primarily 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 our term loan in connection with our financing arrangements.
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.
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Results of Operations
The following table sets forth our consolidated statements of operations data
for the periods indicated:
Three Months Ended
March 31,
($ in thousands) 2022 2021
Revenue:
Capitated revenue $ 674,351 $ 261,357
Fee-for-service and other revenue 29,986 13,245
Total revenue 704,337 274,602
Operating expenses:
Third-party medical costs 535,779 195,046
Direct patient expense 60,677 34,237
Selling, general, and administrative expenses 96,587 35,009
Depreciation and amortization expense 19,036
5,846
Transaction costs and other 8,375
8,954
Change in fair value of contingent consideration (4,661) 285 Total operating expenses 715,793 279,377 Loss from operations (11,456) (4,775) Other income and expense: Interest expense (13,284) (10,626) Interest income 1 1 Loss on extinguishment of debt (1,428)
-
Change in fair value of warrant liabilities 27,162
-
Total other income (expense) 12,451
(10,625)
Net income (loss) before income tax expense 995 (15,400) Income tax expense 1,080 714 Net loss (85) (16,114) Net loss attributable to non-controlling interests (745)
-
Net income attributable to Class A common stockholders
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--------------------------------------------------------------------------------The following table sets forth our consolidated statements of operations data expressed as a percentage of total revenues for the periods indicated:
Three Months Ended
March 31,
(% of revenue) 2022 2021
Revenue:
Capitated revenue 95.7 % 95.2 %
Fee-for-service and other revenue 4.3 % 4.8 %
Total revenue 100.0 % 100.0 %
Operating expenses:
Third-party medical costs 76.1 % 71.0 %
Direct patient expense 8.6 % 12.5 %
Selling, general, and administrative expenses 13.7 % 12.7 %
Depreciation and amortization expense 2.7 % 2.1 %
Transaction costs and other 1.2 % 3.3 %
Change in fair value of contingent consideration (0.7) % 0.1 %
Total operating expenses 101.5 % 101.7 %
Loss from operations (1.5) % (1.7) %
Other income and expense:
Interest expense (1.9) % (3.9) %
Interest income 0.0 % 0.0 %
Loss on extinguishment of debt (0.2) % 0.0 %
Change in fair value of embedded derivative 0.0 % 0.0 %
Change in fair value of warrant liabilities 3.9 % 0.0 %
Other expenses 0.0 % 0.0 %
Total other income (expense) 1.8 % (3.9) %
Net income (loss) before income tax expense 0.1 % (5.6) %
Income tax expense 0.2 % 0.3 %
Net loss 0.0 % (5.3) %
Net loss attributable to non-controlling interests (0.1) % - %
Net income attributable to Class A common stockholders 0.1 % - %
The following table sets forth the Company's disaggregated revenue for the periods indicated:
Three Months Ended March 31,
2022 2021
($ in thousands) Revenue $ Revenue % Revenue $ Revenue %
Capitated revenue
Medicare $ 615,217 87.3 % $ 220,178 80.2 %
Other capitated revenue 59,134 8.4 % 41,179 15.0 %
Total capitated revenue 674,351 95.7 % 261,357 95.2 %
Fee-for-service and other revenue
Fee-for-service 9,970 1.4 % 4,548 1.7 % Pharmacy 11,515 1.6 % 7,306 2.7 % Other 8,501 1.3 % 1,391 0.4 % Total fee-for-service and other revenue 29,986 4.3 % 13,245 4.8 % Total revenue$ 704,337 100.0 %$ 274,602 100.0 % 37
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The following table sets forth the Company's member and member month figures for
the periods indicated:
Three Months Ended
March 31,
2022 2021 % Change
Members:
Medicare Advantage 119,105 75,488 57.8 %
Medicare DCE 41,201 - - %
Medicaid 67,982 21,801 211.8 %
ACA 41,045 19,606 109.3 %
Total members 269,333 116,895 130.4 %
Member months:
Medicare Advantage 354,415 224,830 57.6 %
Medicare DCE 125,089 - - %
Medicaid 202,197 62,908 221.4 %
ACA 121,911 56,037 117.6 %
Total member months 803,612 343,775 133.8 %
Per Member Per Month ("PMPM"):
Medicare Advantage $ 1,249 $ 979 27.6 %
Medicare DCE $ 1,379 $ - - %
Medicaid $ 257 $ 615 (58.2) %
ACA $ 58 $ 44 31.8 %
Total PMPM $ 839 $ 760 10.4 %
Owned medical centers 137 72
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Comparison of the Three Months Ended March 31, 2022 and 2021
Revenue
Three Months Ended March 31,
($ in thousands) 2022 2021 $ Change % Change
Revenue:
Capitated revenue $ 674,351 $ 261,357 $ 412,994 158.0 %
Fee-for-service and other revenue 29,986 13,245 16,741 126.4 %
Total revenue $ 704,337 $ 274,602 $ 429,735
Capitated revenue. Capitated revenue was $674.4 million for the three months
ended March 31, 2022 , an increase of $413.0 million , or 158.0%, compared to
$261.4 million for the three months ended March 31, 2021 . The increase was
primarily driven by a 133.8% increase in the total member months and a 10.4%
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 at new and existing
centers and our acquisitions, primarily University in June 2021 , and DMC in July
2021 , which resulted in the addition of new members in Florida .
Fee-for-service and other revenue. Fee-for-service and other revenue was
$30.0 million for the three months ended March 31, 2022 , an increase of $16.7
million , or 126.4%, compared to $13.2 million for the three months ended March
31, 2021 . The increase in fee-for-service revenue was primarily attributable to
an increase in patients served across existing centers.
Operating Expenses
Three Months Ended
March 31,
($ in thousands) 2022 2021 $ Change % Change
Operating expenses:
Third-party medical costs $ 535,779 $ 195,046 $ 340,733 174.7 %
Direct patient expense 60,677 34,237 26,440 77.2 %
Selling, general, and administrative
expenses 96,587 35,009 61,578 175.9 %
Depreciation and amortization expense 19,036 5,846 13,190 225.6 %
Transaction costs and other 8,375 8,954 (579) -6.5 %
Change in fair value of contingent
consideration (4,661) 285 (4,946) -1735.4 %
Total operating expenses $ 715,793 $ 279,377 $ 436,416
Third-party medical costs. Third-party medical costs were $535.8 million for the
three months ended March 31, 2022 , an increase of $340.7 million , or 174.7%,
compared to $195.0 million for the three months ended March 31, 2021 . The
increase was driven by a 133.8% increase in total member months, the addition of
Direct Contracting Entity ("DCE") members with higher medical costs, and higher
utilization of third-party medical services as utilization normalized in 2022
from lower levels in 2021 related to the COVID-19 pandemic.
Direct patient expense. Direct patient expense was $60.7 million for the three
months ended March 31, 2022 , an increase of $26.4 million , or 77.2%, compared to
$34.2 million for the three months ended March 31, 2021 . The increase was
primarily driven by increases in payroll and benefits of $15.5 million , provider
payments of $5.3 million and pharmacy drugs of $4.0 million .
Selling, general, and administrative expenses. Selling, general, and
administrative expenses were $97 million for the three months ended March 31,
2022 , an increase of $61.6 million , or 175.9%, compared to $35.0 million for the
three months ended March 31, 2021 . The increase was primarily driven by higher
salaries and benefits of $23.2 million , stock-based compensation of
$13.7 million , occupancy costs of $7.0 million , legal and professional services
of $6.4 million and marketing expenses of $4.0 million . These increases were
incurred to support the continued growth of our business and expansion into
other states.
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Depreciation and amortization expense. Depreciation and amortization expense was
$19.0 million for the three months ended March 31, 2022 , an increase of $13.2
million , or 225.6%, compared to $5.8 million for the three months ended March
31, 2021 . 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 brand names, non-compete agreements, and payor relationships from our
2021 and 2022 acquisitions.
Transaction costs and other. Transaction costs and other were $8.4 million for
the three months ended March 31, 2022 , a decrease of $0.6 million , or 6.5%,
compared to $9.0 million for the three months ended March 31, 2021 .
Change in fair value of contingent consideration. Contingent consideration
generated a gain of $4.7 million for the three months ended March 31, 2022 . The
gain relates to an amount owed related to an acquisition that will be paid in
Class A common stock. The decrease in the liability and corresponding gain is a
result of our stock price decreasing during the quarter.
Other Income (Expense)
Three Months Ended
March 31,
($ in thousands) 2022 2021 $ Change % Change
Other income and expense:
Interest expense $ (13,284) $ (10,626) $ (2,658) 25.0 %
Interest income 1 1 - 0.0 %
Loss on extinguishment of debt (1,428) - (1,428) 0.0 %
Change in fair value of warrant liabilities 27,162 - 27,162 0.0 %
Total other income (expense) $ 12,451 Interest expense. Interest expense was$13.3 million for the three months endedMarch 31, 2022 , an increase of$2.7 million , or 25.0%, compared to$10.6 million for the three months endedMarch 31, 2021 . The increase was primarily driven by interest incurred on our higher outstanding borrowings. Loss on extinguishment of debt. Loss on extinguishment of debt was$1.4 million for the three months endedMarch 31, 2022 related to the amendment to the Credit Agreement inJanuary 2022 . See Note 10 - "Debt" for more details of the extinguishment. Change in fair value of warrant liabilities. Change in fair value of warrant liabilities was$27.2 million for the three months endedMarch 31, 2022 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
We have financed our operations principally through the Business Combination and debt and borrowings from financial institutions. As ofMarch 31, 2022 andDecember 31, 2021 , we had cash, cash equivalents and restricted cash of$113.1 million and$163.2 million , respectively. As ofMarch 31, 2022 andDecember 31, 2021 , borrowings under the revolving credit facility had an available balance of$119.0 million . 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$78.1 million as ofMarch 31, 2022 and negative cash flows from operations. We expect to generate operating losses and minimal 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. 40 -------------------------------------------------------------------------------- SinceDecember 31, 2021 , we did not raise any capital through debt financing or borrow from our revolving line of credit. We completed three acquisitions for a total purchase price of$3.6 million in the three months endedMarch 31, 2022 . Upon the completion of the Business Combination,Cano Health, Inc. became a party to the Tax Receivable Agreement ("TRA"). Under the terms of that agreement,Cano Health, Inc. generally will be 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, thatCano Health, Inc. is deemed to realize in certain circumstances as a result of certain tax attributes that exist following the Business Combination and that are created thereafter, including as a result of payments made under the Tax Receivable Agreement. See further discussion related to the TRA agreement in Note 16, "Income Taxes" in our unaudited condensed consolidated financial statements. We believe that our cash, cash equivalents and restricted cash along with our revolving line of credit 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 capital 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.
Three Months Ended
March 31,
($ in thousands) 2022 2021
Net cash used in operating activities $ (37,203) $ (14,688)
Net cash used in investing activities (13,457) (9,699)
Net cash provided by (used in) financing activities 542 (2,818)
Net decrease in cash, cash equivalents and restricted cash (50,118) (27,205)
Cash, cash equivalents and restricted cash at beginning of year 163,170 33,807
Cash, cash equivalents and restricted cash at end of period $
113,052$ 6,602 Operating Activities For the three months endedMarch 31, 2022 , net cash used in operating activities was$37.2 million , an increase of$22.5 million in cash outflows compared to net cash used in operating activities of$14.7 million for the three months endedMarch 31, 2021 . Significant changes impacting net cash used in operating activities were as follows: •Net income after adjusting for non-cash items for three months endedMarch 31, 2022 was$4.8 million compared to a net loss for the three months endedMarch 31, 2021 of$7.7 million ; •Increases in accounts receivable, net was$58.3 million for the three months endedMarch 31, 2022 compared to$6.9 million for the three months endedMarch 31, 2021 due to overall growth in the business; •Increase in prepaid expenses and other current and non-current assets of$1.3 million for the three months endedMarch 31, 2022 compared to an increase of$7.4 million for the three months endedMarch 31, 2021 due to higher prepaid insurance payments and prepaid bonus incentives; and
•Increase in accounts payable of
41
--------------------------------------------------------------------------------payments related to the Company's acquisitions and an increase in accrued salaries, accrued interest, and accruals relates to various professional services.
Investing Activities For the three months endedMarch 31, 2022 , net cash used in investing activities was$13.5 million , an increase of$3.8 million in cash outflows compared to net cash used in investing activities of$9.7 million for the three months endedMarch 31, 2021 due primarily to an increase in capital expenditures and cash used for acquisitions of subsidiaries offset by a decrease in payment to sellers.
Financing Activities
Net cash provided by financing activities was$542.0 thousand during the three months endedMarch 31, 2022 , a change of$3.4 million compared to net cash used in financing activities of$2.8 million during the Three months endedMarch 31, 2021 primarily due to transaction costs related to the Business Combination for the three months endedMarch 31, 2021 . 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 GAAP because it excludes earnings components that are required under GAAP. Other companies may define non-GAAP financial measures differently and, as a result, our non-GAAP financial measures may not be directly comparable to those of other companies. These non-GAAP financial metrics should be used as a supplement to, and not as an alternative to, the Company's GAAP financial results. By definition, EBITDA consists of net income (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 costs associated with the ramp up of new medical centers and losses incurred for the twelve months after the opening of a new facility), acquisition transaction costs (consisting of transaction costs and corporate development payroll costs), fair value adjustments in contingent consideration, restructuring and other charges, loss on extinguishment of debt 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 Company. 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 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) the change in the fair value of our warrant liabilities; (4) the change in the fair value of contingent consideration or (5) 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. 42 --------------------------------------------------------------------------------
Because of these and other limitations, you should consider Adjusted EBITDA along with other GAAP-based financial performance measures, including net loss, cash flow metrics and our GAAP financial results.
The following table provides a reconciliation of net loss to non-GAAP financial
information:
Three Months Ended
March 31,
($ in thousands) 2022 2021
Net loss $ (85) $ (16,114)
Interest income (1) (1)
Interest expense 13,284 10,626
Income tax expense 1,080 714
Depreciation and amortization expense 19,036 5,846
EBITDA $ 33,314 $ 1,071
Stock-based compensation 13,816 71
De novo losses (1) 15,816 5,839
Transaction costs (2) 9,871 9,818
Restructuring and other 2,585 411
Change in fair value of contingent consideration (4,661) 285
Loss on extinguishment of debt 1,428
-
Change in fair value of warrant liabilities (27,162) - Adjusted EBITDA$ 45,007 $ 17,495
(1) De novo losses include those costs associated with the ramp up of new medical centers and losses incurred after the opening of a new facility. These costs collectively are higher than comparable expenses incurred once such a facility has been opened and is generating revenue, and would not have been incurred unless a new facility was being opened.
(2) Acquisition transaction costs included
We experienced a 3,010.6% increase in EBITDA and a 157.3% increase in Adjusted EBITDA between the three months endedMarch 31, 2022 and 2021. The increase in EBITDA and adjusted EBITDA primarily relates to increased profitability as the business matures. Critical Accounting Policies and Estimates Our condensed consolidated financial statements and accompanying notes have been prepared in accordance withU.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. 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. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected. For a description of our policies regarding our critical accounting policies, see "Critical Accounting Policies" in our Form 10-K for the year endedDecember 31, 2021 . There have been no significant changes in our critical accounting estimate policies or methodologies to our condensed consolidated financial statements.
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