CONVEY HEALTH SOLUTIONS HOLDINGS, INC.
You should read the following discussion of our financial condition and results
of operations in conjunction with our financial statements and the related notes
and other financial information included elsewhere in this Quarterly Report on
Form 10-Q ("Form 10-Q") and the final prospectus for the Company's IPO dated
June 15, 2021 and filed with the Securities and Exchange Commission ("SEC") on
June 17, 2021 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as
amended (the "Prospectus").
The following discussion and analysis also includes discussion of certain
non-GAAP financial measures. For a description and reconciliation of the
non-GAAP measures discussed in this section, see "Non-GAAP Financial Measures"
below.
This Form 10-Q contains "forward-looking statements". These statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements are neither historical facts nor
assurances of future performance. Instead, they are based on our current
beliefs, expectations and assumptions regarding the future of our business,
future plans and strategies and other future conditions. Such forward-looking
statements may include, without limitation, statements about future
opportunities for us and our products and services, our future operations,
financial or operating results, anticipated business levels, future earnings,
planned activities, anticipated growth, market opportunities, strategies,
competitions and other expectations and targets for future periods. In some
cases, you can identify forward-looking statements because they contain words
such as "anticipate," "believe," "estimate," "expect," "intend," "may,"
"predict," "project," "target," "potential," "seek," "will," "would," "could,"
"should," continue," contemplate," "plan" and other words and terms of similar
meaning. Forward-looking statements are subject to known and unknown risks and
uncertainties, many of which may be beyond our control. We caution you that
forward-looking statements are not guarantees of future performance or outcomes
and that actual performance and outcomes may differ materially from those made
in or suggested by the forward-looking statements contained in this Form 10-Q.
In addition, even if our results of operations, financial condition and cash
flows, and the development of the markets in which we operate, are consistent
with the forward-looking statements contained in this Form 10-Q, those results
or developments may not be indicative of results or developments in subsequent
periods. New factors emerge from time to time that may cause our business not to
develop as we expect, and it is not possible for us to predict all of them.
Factors that could cause actual results and outcomes to differ from those
reflected in forward-looking statements include, among others, the following:
our ability to retain our existing clients or attract new clients, and sell
additional solutions and services to our clients; our dependence on a small
number of clients for a substantial portion of our total revenue; limitations of
our clients' growth prospects, and the failure of the size of the total
addressable markets in which we compete or expect that we may compete in the
future to grow at rates currently expected; our ability to achieve or maintain
profitability; Federal reductions in Medicare Advantage funding; consolidation
in the healthcare industry, and decisions by clients to perform internally some
of the same solutions or services we offer; the limiting operating history we
have with certain of our solutions; a failure to deliver high-quality member
management services to our clients' members; the competition we face from
healthcare services and technology companies; acquisitions of other businesses
or technologies and other significant transactions; increases in labor costs,
including due to changing minimum wage laws, and an overall tightening of the
labor market; the long and unpredictable sales and integration cycles for our
solutions; an economic downturn or volatility, including as a result of the
ongoing COVID-19 pandemic; our ability to achieve market acceptance of new or
updated solutions and services; our reliance on third parties for certain
components of our business; fluctuations in our quarterly results of operations
due to seasonality; our ability to achieve or maintain adequate utilization and
suitable billing rates for our consultants, and our ability to deliver our
services to our clients; developments in the Medicare Advantage market or the
healthcare industry generally, including with respect to changing laws and
regulations; our ability to comply with applicable laws, regulations and
standards relating to data privacy and security; security breaches, failures or
other disruptions of the information technology systems used in our business
operations and of the sensitive information we collect, process, transmit, use
and store; disruptions in service, and other software and systems failures,
affecting us and our vendors; our ability to obtain, maintain, protect and
enforce our intellectual property and proprietary rights; our ability to operate
our business without infringing, misappropriating or otherwise violating the
intellectual property or proprietary rights of third parties; our substantial
indebtedness, and the restrictions imposed by our indebtedness on our
subsidiaries; material weaknesses in our internal control over financial
reporting and a failure to remediate material weaknesses, and the effectiveness
of our internal control over financial reporting; and the significant influence
our principal stockholder, TPG, has over us.
For a further discussion of these and other factors that could impact our future
results, performance or transactions, see Part II, Item 1A "Risk Factors" of
this Form 10-Q and our other filings with the SEC . Given these uncertainties,
you should not place undue reliance on these forward-looking statements.
Moreover, we operate in a very competitive and rapidly changing environment, and
new risks emerge from time to time. It is not possible for us to predict all
risks, nor can we assess the impact of all factors on our business or the extent
to which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statements we may
make. In light of these risks, uncertainties and assumptions, the future events
and trends discussed in this Form 10-Q may not occur and actual results could
differ materially
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and adversely from those anticipated or implied in the forward-looking
statements. In addition, statements that "we believe" and similar statements
reflect our beliefs and opinions on the relevant subject. These statements are
based upon information available to us as of the date of this Form 10-Q, and,
while we believe such information forms a reasonable basis for such statements,
such information may be limited or incomplete, and our statements should not be
read to indicate that we have conducted an exhaustive inquiry into, or review
of, all potentially available relevant information. We qualify all of the
forward-looking statements in this Form 10-Q by these cautionary statements.
Except as required by law, we undertake no obligation to publicly update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Overview
The Company is a leading healthcare platform that utilizes technology and
processes to improve government-sponsored health plans, including Medicare
Advantage ("MA") plans. We help health plans to grow membership and revenue as
well as operate more effectively and efficiently. We are a trusted
solutions-oriented partner to payors and deliver purpose-built technology and
services to enhance our clients' mission-critical workflows. Our solutions
address health plan needs, including product development and sales, member
experience management, clinical management, core operations, business
intelligence and analytics. Leveraging our technology and expert advisory
services, we serve as a unified and integrated extension of our clients' core
health plan operations. Our proprietary, modular technology and end-to-end
solutions replace or supplement our clients' existing systems and processes,
enabling us to help health plans attract and retain members, improve revenue
accuracy, drive cost savings, facilitate regulatory compliance, and enhance
operational effectiveness.
Since our inception, we have created and continuously refined our technology
solutions to best serve government-sponsored health plans. Our clients are
primarily MA plans, Medicare Part D plans, including Employer Group Waiver
plans, and pharmacy benefit managers.
We foster long-term collaborative partnerships as evidenced by our average
relationship with our top 10 clients of over eight years, and we serve as a
partner to nine of the nation's top 10 MA payors by lives covered. We believe
that we have significant opportunity to grow within our existing client base as
the majority of our clients currently subscribe to only a subset of our overall
solutions and services. Moreover, we believe we have significant opportunity to
grow by winning new clients in the MA market, by selling more products to our
existing clients, by expanding into adjacent markets such as Medicaid and
commercial insurance, and through complementary strategic acquisitions.
Our clients face significant and constantly evolving challenges managing their
Medicare health plans:
•Increasingly Competitive Environment for Medicare Plans: Effective benefit
design and sales are critical to retaining and growing members during the
Medicare annual enrollment period. Once members are enrolled in a plan,
effective member engagement and supplemental benefits administration are
paramount to ensuring strong satisfaction and retention. Moreover, the
proliferation of value-based reimbursement models such as MA requires effective
member management and broad ecosystem coordination, which fall outside the core
competencies of many health plans.
•Compliance with Centers for Medicare and Medicaid Services ("CMS")
Requirements: Constantly evolving CMS and client requirements result in hundreds
of modifications per year that inhibit the operational effectiveness and
capabilities of health plans. Our purpose-built government sector technology
platform addresses these constantly evolving requirements.
•Complex and Highly Regulated Medicare Market: Many health plans enter the
government plan market by simply adapting their existing systems designed for
the commercial insurance market. As a result, the technology they employ often
lacks the sophistication and design needed to effectively maintain and
administer benefits tailored for the complex and highly regulated Medicare
market.
Health plans increasingly recognize the need for specialized solutions like ours
to help them overcome these challenges and drive superior performance. We
believe our proprietary technology and processes facilitate member engagement,
health plan growth, and operational efficiencies.
We operate in two segments: Technology Enabled Solutions ("TES") in which we
provide technology and support solutions to our clients, and Advisory Services
("Advisory") in which we provide project-based consulting services led by our
long-tenured subject matter experts. We believe that our combination of
technology and advisory solutions gives us a competitive advantage in the
government-sponsored health plan market. Our Technology Enabled Solutions and
Advisory teams collaborate effectively to combine a strong technology platform
with deep domain expertise to deliver best-in-class
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solutions to our clients. Furthermore, we leverage the Advisory team's industry
expertise to identify new opportunities as well as cross-sell our solutions
within existing clients.
We have a highly predictable and recurring revenue model with strong cash flow
from operations. We typically charge a recurring subscription or per-member fee
or a re-occurring utilization-based fee, which, coupled with our long-term
contracts and strong client retention, has historically provided us with strong
revenue visibility into estimated future revenue. Our Technology Enabled
Solutions business historically has been highly predictable as most of our
revenue in any given year is under contract or otherwise visible by the
beginning of that year due to the contract structures we employ.
Initial Public Offering
On June 18, 2021 , we closed the initial public offering ("IPO") of our common
stock through an underwritten sale of 13,333,334 shares of our common stock at a
price of $14.00 per share. In the offering, we sold 11,666,667 shares and a
selling stockholder sold 1,666,667 shares. The aggregate net proceeds to us from
the offering, after deducting underwriting discounts and commissions and other
offering expenses payable by us, were approximately $146.1 million . We used
approximately $131.5 million of the net proceeds from the IPO to repay
outstanding indebtedness under our credit agreement. We did not receive any of
the proceeds from the sale by the selling stockholder.
COVID-19 Pandemic
COVID-19 was declared a global pandemic by the World Health Organization on
March 11, 2020 . Governments at the national, state, and local level in the U.S. ,
and globally, have implemented aggressive actions to reduce the spread of the
virus, with such actions including lockdown and shelter in place orders,
limitations on non-essential gatherings of people, suspension of all
non-essential travel, and ordering certain businesses and governmental agencies
to cease non-essential operations at physical locations. While some of these
actions have recently been eased, escalating transmission rates (including of
the Delta variant of COVID-19), slowing and uneven vaccination rates and further
governmental guidance and orders may result in having to reimplement certain of
these measures or implementing new and additional ones. The spread of COVID-19
has also caused significant volatility in United States and international
markets and has had and continues to have widespread, rapidly evolving and
unpredictable impacts on global society, economies, financial markets and
business practices.
Our operations have been impacted by COVID-19 since March 2020 . During March and
April 2020 , we obtained approval from our clients for a work-at-home model,
though not all required our approval, and transitioned most of our employees to
the home environment so that they could work more safely. COVID-19 created a
hardship for many of our employees. We worked during 2020 to care for our
employees by periodically implementing temporary premium pay and temporary paid
sick leave programs which provided additional financial resources for our
employees, as well as partial pay for those employees who contracted the virus
or had to care for a family member who was affected. We also had provided
compensation to employees who worked with us for more than six months so that
they can take time off to be vaccinated. In addition, we increased cleaning
protocols throughout our facilities. Certain of these measures have resulted in
increased costs.
Due to significant volatility to the markets, as well as business and supply
chain disruptions, we incurred several additional expenses due to the COVID-19
pandemic, including the following:
•Higher Pricing from Vendors and Higher Shipping Costs: We experienced higher
costs to procure certain products included in the formulary available to
Medicare members. The price increases were due to supply chain disruptions and
product shortages caused by the COVID-19 pandemic. We quantified the pricing
increase by comparing the pre-pandemic prices for high demand products directly
attributable to the COVID-19 pandemic (e.g., masks and other similar high demand
products) to the prices to procure such products during the pandemic. Further,
we incurred additional costs due to expedited shipping fees as a result of new
inventory management practices put into place due to supply chain disruptions
and delays caused by COVID-19 in order to fulfill product demand.
•Sick Pay, Premium Pay and Hazard Pay : Temporary sick leave was paid to
employees if specific criteria related to the COVID-19 pandemic were met.
Incremental premium pay and hazard pay were paid to distribution and shipping
employees who worked their normal scheduled shifts. In addition, we paid a
one-time bonus to supervisors for working additional hours to support the
transition of our employees to a work-at-home model.
•Wages to Accommodate Social Distancing: In order to meet the annual enrollment
and quarterly volume requirements while properly socially distancing team
members who were required to work in-person at our distribution facilities, we
decreased the number of agents per training session and held training sessions
up to eight weeks in advance of normal requirements, creating an extended
training program with costs incremental to a standard operating training
schedule. In addition, individuals working at our distribution centers to
fulfill product delivery requirements were required to social distance and, as a
result, we were required to add shifts and increased headcount to accomplish
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the same productivity as experienced prior to the COVID-19 pandemic under our
normal operations. We quantified the incremental cost attributable to the
modified staffing put into place due to COVID-19 by comparing the cost of our
standard staffing with our actual incurred costs due to the changes.
•Work-at-Home Training: In response to the COVID-19 pandemic, we held
work-at-home remote training. To accomplish this transition, hourly new hire
employees were required to receive training regarding at-home information
technology ("IT") and telephony equipment setup. We paid the hourly new hire
employees four hours for these efforts at their regular hourly wage rate and
applicable fringe benefit rate.
•IT Expenses: Additional temporary IT resources were retained, and overtime
hours were incurred, for existing IT resources, in order to implement the new
remote working environment designed in response to the COVID-19 pandemic.
•Janitorial Costs: Due to the onset of the COVID-19 pandemic, we implemented an
enhanced sanitation policy. The enhanced sanitation policy included special deep
cleaning sessions in areas contacted by employees who had tested positive for
COVID-19 and enhanced sanitation sessions through our facilities compared to the
sanitation methods used prior to the COVID-19 pandemic.
We expect these costs to be phased out when the COVID-19 pandemic subsides.
See "Non-GAAP Financial Measures" for amounts related to the additional expenses
due to the COVID-19 pandemic (Cost of COVID-19).
The full extent to which the COVID-19 pandemic and the various responses to the
COVID-19 pandemic will impact our business, operations or financial condition
will depend on numerous evolving factors that we may not be able to accurately
predict, including, but not limited to, the duration, severity and scope of the
COVID-19 pandemic (including due to new variants such as Delta); actions by
governmental entities, businesses and individuals that have been and continue to
be taken in response to the pandemic; the effect on our clients and demand by
clients, clients and our clients' members for and ability to pay for our
solutions and services; and disruptions or restrictions on our employees'
ability to work and travel. The impact of these factors and others on our
suppliers and clients could persist for some time after governments ease their
restrictions and after the overall number of COVID-19 cases in the United States
decreases. We may continue to experience higher than usual costs as a result of
COVID-19 for the foreseeable future.
Non-GAAP Financial Measures
We present our financial results in accordance with GAAP. However, we use
certain non-GAAP financial measures to supplement financial information
presented on a GAAP basis. We believe that excluding certain items from our GAAP
results allows management to better understand our consolidated financial
performance from period to period and better project our future consolidated
financial performance as forecasts are developed at a level of detail different
from that used to prepare GAAP-based financial measures. Moreover, we believe
these non-GAAP financial measures provide investors with useful information to
help them evaluate our operating results by facilitating an enhanced
understanding of our operating performance and enabling them to make more
meaningful period to period comparisons. In particular, we use EBITDA and
Adjusted EBITDA to assess our financial performance and also for internal
planning and forecasting purposes. We believe EBITDA and Adjusted EBITDA provide
investors with useful information because such metrics offer a consistent and
comparable overview of our operations across historical financial periods. In
evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we
may incur expenses similar to those eliminated in the presentation. Non-GAAP
measures should be considered as a supplement to, and not as a substitute for,
or superior to, the corresponding measures calculated in accordance with GAAP.
There are limitations to the use of the non-GAAP financial measures presented in
this Form 10-Q. For example, our non-GAAP financial measures may not be
comparable to similarly titled measures of other companies. Other companies,
including companies in our industry, may calculate non-GAAP financial measures
differently than we do, limiting the usefulness of those measures for
comparative purposes.
The non-GAAP financial measures we present are not meant to be considered as
indicators of performance in isolation from or as a substitute for measures
prepared in accordance with GAAP, and should be read only in conjunction with
financial information presented on a GAAP basis. Reconciliations of each of
EBITDA and Adjusted EBITDA to the most directly comparable GAAP financial
measure, net income (loss), are presented below. We encourage you to review our
financial information in its entirety, not to rely on any single financial
measure and to view the reconciliations in conjunction with the presentation of
the non-GAAP financial measures for each of the periods presented. In future
periods, we may exclude such items, may incur income and expenses similar to
these excluded items, and include other expenses, costs, and non-recurring
items. The tables below provide reconciliations of EBITDA and Adjusted EBITDA to
net income (loss) on a consolidated basis for the periods indicated.
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We define EBITDA as net income (loss) less income (loss) from discontinued
operations adjusted for interest, net, income tax expense (benefit), and
depreciation and amortization expense. We define Adjusted EBITDA as EBITDA
further adjusted for certain items of a significant or unusual nature, including
but not limited to, change in fair value contingent consideration, COVID-19 cost
impacts, non-cash stock compensation, transaction related costs, acquisition
bonus expense, loss of extinguishment of debt, director and officer prior act
liability insurance policy and other costs. Other includes costs such as
contract termination fees, management and board of directors fees, and costs
associated with obtaining the incremental term loans.
In addition, we measure the performance of our individual segments using Segment
Adjusted EBITDA. Segment Adjusted EBITDA is the financial measure by which
management allocates resources and analyzes the performance of the reportable
segments. The main difference between Segment Adjusted EBITDA and Adjusted
EBITDA is that Segment Adjusted EBITDA includes add backs for sales and use tax,
lower consultant utilization due to COVID-19, executive recruitment and
severance costs, certain revenue adjustments, contract termination costs, and
severance.
The following table presents a reconciliation of net income (loss) to EBITDA and
Adjusted EBITDA for the periods presented:
For the Three For the Three For the Nine For the Nine
Months Ended Months Ended Months Ended Months Ended
September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
(in thousands)
Net income (loss) $ 3,686 $ (1,652) $ (10,391) $ (14,564)
Less income (loss) from discontinued
operations, net of tax - (6) - 37
Net income (loss) from continuing operations 3,686 (1,646) (10,391) (14,601) Interest, net 3,283 4,561 15,144 13,471 Income tax expense (benefit) 1,131 (472) (5,042)
(3,272)
Depreciation and amortization expense 7,473 6,918 22,667 20,710 EBITDA 15,573 9,361 22,378 16,308 Change in fair value of contingent consideration(1) - - 96 - Cost of Covid-19(2) 746 3,254 3,057 7,772 Non-cash stock compensation expense(3) 1,093 1,745 3,166 5,671 Transaction related costs(4) 328 80 2,969 277 Acquisition bonus expense - HealthScape and Pareto acquisition(5) 192 481 481
1,476
Loss on extinguishment of debt(6) - - 5,015
-
Director and officer prior act liability insurance policy(7) - - 7,861 - Other(8) 338 124 4,316 673 Adjusted EBITDA $ 18,270 $ 15,045 $ 49,339 $ 32,177 ________________________ (1)Change in fair value of contingent consideration is composed of two components: earn-out liability and holdback liability. The earn-out liability resulted from theHealthScape Advisors and Pareto Intelligence acquisition that closed onNovember 16, 2018 . The holdback liability resulted from the merger with TPG that closed onSeptember 4, 2019 . The earn-out liability and holdback liability were re-measured to fair value at each reporting date until the contingency was resolved. During the nine months endedSeptember 30, 2021 , we made a final payment of$13.1 million related to the holdback liability and a$7.5 million final payment related to the earn-out liability due toHealthScape Advisors . (2)Due to significant volatility to the markets, as well as business and supply chain disruptions, we incurred several additional expenses due to the COVID-19 pandemic, including: (i) higher pricing from vendors due to supply chain disruptions, product shortages and increases in shipping costs, (ii) higher employee costs due to premium pay and hazard pay for our employees and enhanced sick pay due to illness and quarantine protocols, (iii) costs related to early hiring of employees due to social distancing and work at home protocols (in 2020), (iv) COVID-19 training costs, (v) overtime costs for IT personnel to setup eligible employees to work from home and temporary resources, (vi) IT costs 33 -------------------------------------------------------------------------------- Table of Contents due to the change in the work environment and (vii) janitorial costs due to enhanced COVID-19 protocols. The expenses are included in cost of services and cost of products on our statements of operations and comprehensive income (loss). See "COVID-19 Pandemic" above for additional information related to these expenses. During 2021, to a lesser extent, we have continued to incur these expenses. (3)Represents non-cash stock-based compensation expense in connection with the stock awards that have been granted to employees and non-employees. It is included in selling, general and administrative expenses on our statements of operations and comprehensive income (loss). (4)Transaction related expenses primarily consist of public company readiness costs as well as expenses for corporate development, such as mergers and acquisitions activity that did not proceed. (5)In conjunction with theHealthScape Advisors and Pareto Intelligence acquisitions, the previous shareholders set aside funds for an incentive compensation plan for employeeswho remained post acquisition. The costs are expensed on a monthly basis and funded through an escrow account which was established on the closing date and is included in restricted cash on our consolidated balance sheets. The expense is included in selling, general and administrative expenses on our statements of operations and comprehensive income (loss). (6)The loss on extinguishment of debt was recognized for the prepayment of outstanding indebtedness. (7)In connection with the IPO, we made a$7.9 million one-time payment on a 3-year director and officer prior act liability insurance policy. We deemed this policy to be a retroactive insurance policy and in accordance with ASC 720-20-25, "Retrospective Contracts", we expensed the premium of$7.9 million inJune 2021 . (8)Other includes other individual adjustments related to legal fees associated with obtaining the incremental loans, severance costs incurred as a result of eliminating certain positions, management service agreement termination fee and management fees. All costs are included in selling, general and administrative expenses on our statements of operations and comprehensive income (loss). Components of Results of Operations Revenue We generate revenue from contracts with our clients within our two operating segments: Technology Enabled Solutions and Advisory Services. Through our Technology Enabled Solutions segment, we primarily provide technology solutions and services to assist our clients with workflows across product development, member experience, clinical management, core operations, business intelligence, and analytics. Through our Advisory Services segment, we provide fixed or variable fee arrangements to assist clients in the design and management of government and commercial health plans. Our revenue includes both product revenue and service arrangements. Products revenue consists of technology enabled solutions for supplemental benefits to members through their Medicare Advantage plans. These include supplemental benefit products, administration, fulfillment, and shipment of eligible product, as well as catalog development and distribution. Revenue is derived from supplemental benefit membership, supplemental benefit dollars, and member utilization of the benefits. Services revenue consists of: •Technology-based Medicare plan administration services including eligibility and enrollment processing, member services, premium billing and payment processing, reconciliation and other related services. Our solutions are primarily priced on recurring per member per month (PMPM) fees, annual software license fees, and transaction-based fees. •Value based payment assurance solutions, including payment tools and data analytics, that improve revenue accuracy and gaps in quality, clinical care, and compliance. Our value-based solutions are primarily priced on an annual subscription fee, shared savings or fee-based engagement. Advisory (consulting) services that support health plan operations and drive business model evolution. Our Advisory services are priced on a fixed-fee or time and materials basis. Operating Expenses 34 -------------------------------------------------------------------------------- Table of Contents Costs of products consist of the value of supplemental benefit products, shipping and handling costs to acquire and to deliver the product to our clients; personnel costs including salaries, wages, overtime, benefits; facility costs and overhead allocation covering information technology, telecommunications costs, and other costs specifically identified to the shipment of our products. Costs of services consist of all costs directly attributable to service revenue generation activities as outlined in contracts with our clients. Our largest components in costs of services are personnel costs, including salaries, wages, overtime, benefits, and discretionary bonus; facility costs and overhead allocation covering information technology, telecommunications costs, and other costs needed in the delivery of our services. Selling, general and administrative expenses ("SG&A") include corporate management and governance functions comprised of general management, legal, accounting, financial reporting, human resource, sales, marketing, and other costs not directly associated with revenue generation activities, including those involved with developing new service offerings. SG&A includes salaries, bonuses, and related benefits. SG&A also includes all general operating expenses, including, but not limited to, rent and occupancy costs for non-revenue generating activities, telecommunications costs, information technology infrastructure, and operations costs, including software licensing costs, advertising and marketing expenses, insurance expenses, professional services and consulting expenses. Depreciation and amortization includes depreciation expense of property and equipment, including leasehold improvements, computer equipment, furniture and fixtures and software and amortization expense of capitalized internal-use software and software development costs, customer relationships, acquired software and certain trade names. Transaction related costs primarily consist of professional services incurred in connection with public company readiness costs, as well as expenses for corporate development such as mergers and acquisitions activity. Other Income (Expense) Other Income (expense) is primarily composed of: •Interest income. Interest income consists of interest on cash and cash equivalents. •Interest expense. Interest expense consists of accrued interest and related payments on our outstanding term loans and revolving loans, as well as the amortization of debt issuance costs associated with our debt. Interest expense also includes interest on our sales tax accrual. •Loss on extinguishment of debt. Loss on extinguishment of debt includes unamortized financing costs and a prepayment premium in connection with the prepayment of outstanding indebtedness. 35 -------------------------------------------------------------------------------- Table of Contents Results of Operations Comparison of the Three Months EndedSeptember 30, 2021 , and 2020 The following table sets forth our results of operations for the periods indicated: For the Three Months Ended September 30, Change 2021 2020 $ % Net revenues: Services$ 44,191 $ 37,207 $ 6,984 19 % Products 38,220 32,321 5,899 18 % Net revenues 82,411 69,528 12,883 19 % Operating expenses: Cost of services 20,993 20,077 916 5 % Cost of products 24,221 21,226 2,995 14 % Selling, general and administrative 21,296 18,784 2,512 13 % Depreciation and amortization 7,473 6,918 555 8 % Transaction related costs 328 80 248 310 % Change in fair value of contingent consideration - - - - % Total operating expenses 74,311 67,085 7,226 11 % Operating income 8,100 2,443 5,657 232 % Other income (expense): Interest income - - - - % Loss on extinguishment of debt - - - - % Interest expense (3,283) (4,561) 1,278 (28) % Total other expense, net (3,283) (4,561) 1,278 (28) % Income (loss) from continuing operations before income taxes 4,817 (2,118) 6,935 (327) % Income tax (expense) benefit (1,131) 472 (1,603) (340) % Net income (loss) from continuing operations 3,686 (1,646) 5,332 (324) % Income (loss) from discontinued operations, net of tax - (6) 6 (100) % Net income (loss)$ 3,686 $ (1,652) $ 5,338 (323) % Net Revenues Services Revenue Services revenue was$44.2 million and$37.2 million for the three months endedSeptember 30, 2021 , andSeptember 30, 2020 , respectively. The$7.0 million increase is driven by$3.3 million attributable to our Technology Enabled Solutions segment largely due to increased support to our existing clients; and$3.7 million attributable to our Advisory Services segment due to strong sales and higher consultant utilization. Products Revenue Products revenue was$38.2 million and$32.3 million for the three months endedSeptember 30, 2021 , andSeptember 30, 2020 , respectively. The increase of$5.9 million was primarily attributable to an increase in the total benefit amount provided by our health plan clients and increase in new members. Operating Expenses Cost of Services Cost of services was$21.0 million and$20.1 million for the three months endedSeptember 30, 2021 , andSeptember 30, 2020 , respectively. The increase of$0.9 million is primarily attributable to higher staffing levels to handle increased support to our existing clients. 36 -------------------------------------------------------------------------------- Table of Contents Cost of Products Cost of products was$24.2 million and$21.2 million for the three months endedSeptember 30, 2021 , andSeptember 30, 2020 , respectively. The increase of$3.0 million was mainly attributable to the additional costs incurred to service the growth in new members, higher product costs, and additional labor costs due to higher staffing levels to handle increased interactions with members. Selling, General and Administrative Selling, general and administrative was$21.3 million and$18.8 million for the three months endedSeptember 30, 2021 , andSeptember 30, 2020 , respectively. The increase of$2.5 million was primarily due to additional resources to support being a public company and growth, including investments in IT and higher insurance costs for public company related insurance policies. Depreciation and Amortization Depreciation and amortization was$7.5 million and$6.9 million for the three months endedSeptember 30, 2021 , andSeptember 30, 2020 , respectively. The increase of$0.6 million in depreciation and amortization expense is due to the addition of property and equipment and capitalization of software development costs. Transaction Related Costs Transaction related costs were$0.3 million and$0.1 million for the three months endedSeptember 30, 2021 , andSeptember 30, 2020 , respectively. The increase of$0.2 million in transaction related costs is due to costs associated with the public company readiness. Other Income (Expense) Interest Expense Interest expense was$3.3 million and$4.6 million for the three months endedSeptember 30, 2021 , andSeptember 30, 2020 , respectively. The decrease of$1.3 million was primarily due to the prepayment of outstanding indebtedness inJune 2021 and the impact of lower interest rates due to theJuly 2021 amendment to the Credit Agreement. The Company used approximately$131.5 million of the net proceeds from the IPO to repay outstanding indebtedness under its credit agreement. Segment Information Our reportable segments have been determined in accordance with Accounting Standards Codification Topic 280, Segment Reporting. We have two reportable segments: Technology Enabled Solutions and Advisory Services. We evaluate the performance of each of our two operating segments based on segment revenue and Segment Adjusted EBITDA. Segment Adjusted EBITDA represents each segment's earnings before interest, tax, depreciation and amortization and is further adjusted to exclude certain items of a significant or unusual nature, including but not limited to, COVID-19 cost impacts, sales and use tax, non-cash stock compensation, transaction related costs, acquisition bonus expense, loss on extinguishment of debt, director and officer prior act liability insurance policy, and other costs. Other includes costs such as contract termination fees, management and board of directors fees, and costs associated with obtaining the incremental term loans. See Note 17. Segment Information, to the notes accompanying our financial statements. The segment measurements provided to and evaluated by the chief operating decision maker group are described in the notes to our financial statements. These results should be considered in addition to, and not as a substitute for, results reported in accordance with GAAP. 37
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For the Three Months Ended
September 30, Change
(in thousands) 2021 2020 $ %
Revenue
Technology Enabled Solutions $ 69,248 $ 60,056 $ 9,192 15 %
Advisory Services 13,163 9,472 3,691 39 %
Total $ 82,411 $ 69,528 $ 12,883 19 %
Segment Adjusted EBITDA
Technology Enabled Solutions $ 19,786 $ 19,088 $ 698 4 %
Advisory Services 4,559 1,799 2,760 153 %
Total $ 24,345 $ 20,887 $ 3,458 17 %
Segment Revenues
Technology Enabled Solutions revenue was $69.2 million and $60.1 million for the
three months ended September 30, 2021 , and 2020, respectively. The increase of
$9.2 million was mainly driven by: (i) $3.3 million of health plan management,
software solutions and data analytics solutions revenues, and (ii) $5.9 million
of product revenue as a result of an increase in the total benefit amount
provided by our health plan clients and increase in new members.
Advisory revenue was $13.2 million and $9.5 million for the three months ended
September 30, 2021 and 2020, respectively. The increase of $3.7 million was
driven by higher demand for our consulting services compared to previous
quarters which were more negatively impacted by COVID-19.
Segment Adjusted EBITDA
Technology Enabled Solutions Segment Adjusted EBITDA was $19.8 million and $19.1
million for the three months ended September 30, 2021 , and 2020, respectively.
The increase of $0.7 million was primarily due to the flow through of increased
revenue offset in part by higher personnel costs to ensure service levels and
higher product costs as a result of increased pricing from suppliers.
Advisory Segment Adjusted EBITDA was $4.6 million and $1.8 million for the
three months ended September 30, 2021 , and 2020, respectively. The increase of
$2.8 million was attributable to flow through of consulting services demand and
higher utilization of our consultants.
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Table of Contents Comparison of the Nine Months EndedSeptember 30, 2021 , and 2020 The following table sets forth our results of operations for the periods indicated: For the Nine Months Ended September 30, Change 2021 2020 $ % Net revenues: Services$ 130,002 $ 104,814 $ 25,188 24 % Products 110,288 91,019 19,269 21 % Net revenues 240,290 195,833 44,457 23 % Operating expenses: Cost of services 65,799 59,719 6,080 10 % Cost of products 73,047 60,643 12,404 20 % Selling, general and administrative 70,986 58,886 12,100 21 % Depreciation and amortization 22,667 20,710 1,957 9 % Transaction related costs 2,969 277 2,692 972 % Change in fair value of contingent consideration 96 - 96 100 % Total operating expenses 235,564 200,235 35,329 18 % Operating income (loss) 4,726 (4,402) 9,128 (207) % Other income (expense): Interest income - 7 (7) (100) % Loss on extinguishment of debt (5,015) - (5,015) 100 % Interest expense (15,144) (13,478) (1,666) 12 % Total other expense, net (20,159) (13,471) (6,688) 50 % Loss from continuing operations before income taxes (15,433) (17,873) 2,440 (14) % Income tax benefit 5,042 3,272 1,770 54 % Net loss from continuing operations (10,391) (14,601) 4,210 (29) % Income from discontinued operations, net of tax - 37 (37) (100) % Net loss$ (10,391) $ (14,564) $ 4,173 (29) % Net Revenues Services Revenue Services revenue was$130.0 million and$104.8 million for the nine months endedSeptember 30, 2021 , andSeptember 30, 2020 , respectively. The$25.2 million increase is driven by$14.1 million attributable to our Technology Enabled Solutions segment largely due to increased support to our existing clients; and$11.1 million attributable to our Advisory Services segment due to strong sales and higher consultant utilization. Products Revenue Products revenue was$110.3 million and$91.0 million for the nine months endedSeptember 30, 2021 , andSeptember 30, 2020 , respectively. The increase of$19.3 million in products revenue was primarily attributable to an increase in the total benefit amount provided by our health plan clients and an increase in total members. Operating Expenses Cost of Services Cost of services was$65.8 million and$59.7 million for the nine months endedSeptember 30, 2021 , andSeptember 30, 2020 , respectively. The increase of$6.1 million is primarily attributable to higher staffing levels to handle increased support to our existing clients. 39 -------------------------------------------------------------------------------- Table of Contents Cost of Products Cost of products was$73.0 million and$60.6 million for the nine months endedSeptember 30, 2021 , andSeptember 30, 2020 , respectively. The increase of$12.4 million was attributable to the additional costs incurred to service the growth in new members, including costs incurred in providing current product availability information to members, additional labor costs to develop and implement technology enhancements, as well as higher staffing levels to handle increased interactions with members. Further, labor costs increased due to certain state-mandated increases in the minimum wage and continued market wage pressures. Selling, General and Administrative Selling, general and administrative was$71.0 million and$58.9 million for the nine months endedSeptember 30, 2021 , andSeptember 30, 2020 , respectively. The increase of$12.1 million was primarily due to a$7.9 million one-time payment on a 3-year director and officer prior act liability insurance policy in connection with the IPO. We deemed this policy to be a retroactive insurance policy and in accordance with ASC 720-20-25, "Retrospective Contracts", we expensed the premium of$7.9 million inJune 2021 . In addition, the increase was due to: (i) higher management fees for TPG as a result of the one-time termination fee of the management service agreement and the fee to arrange the 2021 incremental loan and theJuly 2021 amendment to the Credit Agreement, and (ii) higher personnel costs due to additional resources to support being a public company. Depreciation and Amortization Depreciation and amortization was$22.7 million and$20.7 million for the nine months endedSeptember 30, 2021 , andSeptember 30, 2020 , respectively. The increase of$2.0 million in depreciation and amortization expense is due to the addition of property and equipment and capitalization of software development costs. Transaction Related Costs Transaction related costs were$3.0 million and$0.3 million for the nine months endedSeptember 30, 2021 , andSeptember 30, 2020 , respectively. The increase of$2.7 million in transaction related costs is due to costs associated with the public company readiness. Other Income (Expense) Interest Income Interest income consists primarily of bank interest and was de minimis for the periods presented. Loss on extinguishment of debt The loss on extinguishment of debt of$5.0 million was recognized for the prepayment of outstanding indebtedness. The Company used approximately$131.5 million of the net proceeds from the IPO to repay outstanding indebtedness under its credit agreement. The loss included unamortized financing costs of$3.4 million and prepayment premium of$1.6 million . Interest Expense Interest expense was$15.1 million and$13.5 million for the nine months endedSeptember 30, 2021 , andSeptember 30, 2020 , respectively. The increase of$1.7 million was due to net incremental borrowings under our increased credit facility offset in part by the impact of lower interest rates due to theJuly 2021 amendment to the Credit Agreement . Segment Information Our reportable segments have been determined in accordance with Accounting Standards Codification Topic 280, Segment Reporting. We have two reportable segments: Technology Enabled Solutions and Advisory Services. We evaluate the performance of each of our two operating segments based on segment revenue and Segment Adjusted EBITDA. Segment Adjusted EBITDA represents each segment's earnings before interest, tax, depreciation and amortization and is further adjusted to exclude certain items of a significant or unusual nature, including but not limited to, COVID-19 cost impacts, sales and use tax, non-cash stock compensation, transaction related costs, acquisition bonus expense, loss on extinguishment of debt, director and officer prior act liability insurance policy, and other costs. Other includes costs such as 40 -------------------------------------------------------------------------------- Table of Contents contract termination fees, management and board of directors fees, and costs associated with obtaining the incremental term loans. See Note 17. Segment Information, to the notes accompanying our financial statements. The segment measurements provided to and evaluated by the chief operating decision maker group are described in the notes to our financial statements. These results should be considered in addition to, and not as a substitute for, results reported in accordance with GAAP. For the Nine Months Ended September 30, Change (in thousands) 2021 2020 $ % Revenue Technology Enabled Solutions$ 200,196 $ 166,850 $ 33,346 20 % Advisory Services 40,094 28,983 11,111 38 % Total$ 240,290 $ 195,833 $ 44,457 23 % Segment Adjusted EBITDA Technology Enabled Solutions$ 52,038 $ 44,196 $ 7,842 18 % Advisory Services 13,159 4,068 9,091 223 % Total$ 65,197 $ 48,264 $ 16,933 35 % Segment Revenues Technology Enabled Solutions revenue was$200.2 million and$166.9 million for the nine months endedSeptember 30, 2021 , and 2020, respectively. The increase of$33.3 million was mainly driven by: (i)$14.1 million of health plan management, software solutions and data analytics solutions revenues, and (ii)$19.2 million of product revenue as a result of an increase in the total benefit amount provided by our health plan clients and increase in new members. Advisory revenue was$40.1 million and$29.0 million for the nine months endedSeptember 30, 2021 , and 2020, respectively. The increase of$11.1 million was driven by higher demand for our consulting services and higher consultant utilization compared to previous quarters which were more negatively impacted by COVID-19. Segment Adjusted EBITDA Technology Enabled Solutions Segment Adjusted EBITDA was$52.0 million and$44.2 million for the nine months endedSeptember 30, 2021 , and 2020, respectively. The increase of$7.8 million was primarily due to the flow through of increased revenue offset in part by higher personnel costs to ensure service levels and higher product costs as a result of increased pricing from suppliers. Advisory Segment Adjusted EBITDA was$13.2 million and$4.1 million for the nine months endedSeptember 30, 2021 , and 2020, respectively. The increase of$9.1 million was attributable to flow through of consulting services demand and higher utilization of our consultants. Liquidity and Capital Resources Overview Our primary sources of liquidity are our existing cash and cash equivalents, cash provided by operating activities and borrowings available under our Credit Agreement. As ofSeptember 30, 2021 , we had unrestricted cash and cash equivalents of$36.4 million , and as ofSeptember 30, 2021 , our total indebtedness was$192.6 million . We are a holding company that transacts substantially all of our business through our operating subsidiaries. Consequently, our ability to pay dividends to stockholders, meet debt payment obligations, and pay taxes and operating expenses is largely dependent on dividends or other distributions from our subsidiaries, whose ability to pay such distributions to us is restricted, subject to certain exceptions, pursuant to the terms of the Credit Agreement. Covenants contained in the Credit Agreement may restrict our operating subsidiaries from issuing dividends and other distributions to us. Our principal liquidity needs have been, and we expect them to continue to be, working capital and general corporate needs, debt service, capital expenditures and potential acquisitions. Our capital expenditures for property and equipment to 41 -------------------------------------------------------------------------------- Table of Contents support growth in the business were$5.5 million and$3.6 million for the nine months endedSeptember 30, 2021 , and 2020, respectively. Additional expenditures for software development were$4.5 million and$3.5 million for the nine months endedSeptember 30, 2021 , and 2020, respectively. We believe that our primary sources of liquidity, including our cash and cash equivalents, cash provided by operating activities and borrowing capacity under our Credit Agreement, will be sufficient to meet our liquidity needs for at least the next 12 months. We anticipate that to the extent that we require additional liquidity, it will be funded through the incurrence of additional indebtedness, the issuance of additional equity, or a combination thereof. We cannot assure you that we will be able to obtain this additional liquidity on reasonable terms, or at all. Additionally, our liquidity and our ability to meet our obligations and fund our capital requirements are also dependent on our future financial performance, which is subject to general economic, financial, and other factors that are beyond our control. See "Risk Factors." Cash Flows Information The following table presents a summary of cash flows for the periods presented: For the Nine For the Nine Months Ended Months Ended (in thousands) September 30, 2021 September 30, 2020 Net cash (used in) provided by operating activities $ (4,823) $ 24,315 Net cash used in investing activities $ (8,764) $ (10,103) Net cash provided by financing activities $ 4,542 $ 10,956 Operating Activities Net cash used in operating activities for the nine months endedSeptember 30, 2021 , was$4.8 million compared to$24.3 million of net cash provided by operating activities for the nine months endedSeptember 30, 2020 . Net loss was$(10.4) million for the nine months endedSeptember 30, 2021 , as compared to$(14.6) million for the nine months endedSeptember 30, 2020 . The net loss for the nine months endedSeptember 30, 2021 , included$7.9 million for director and officer prior acts insurance premium,$5.0 million of expense related to theJune 2021 extinguishment of debt and$2.3 million related to the one-time termination of a management service agreement with TPG. Non-cash items were$27.5 million for the nine months endedSeptember 30, 2021 , as compared to$23.1 million for the nine months endedSeptember 30, 2020 . The effect of changes in operating assets and liabilities was a cash decrease of$21.9 million for the nine months endedSeptember 30, 2021 , as compared to a cash increase of$15.8 million for the nine months endedSeptember 30, 2020 . The most significant drivers contributing to this net decrease of$37.7 million relate to the following: •Final contingent consideration payments of$10.3 million related to the holdback liability associated with the TPG merger (see Note 2 for details); and •A net decrease related to accounts payable and accrued expenses of$25.6 million primarily due to a reduction in our days payable outstanding and payments related to public readiness costs and ERP implementation costs. Investing Activities Net cash used in investing activities for the nine months endedSeptember 30, 2021 , was$8.8 million compared to$10.1 million for the nine months endedSeptember 30, 2020 . Financing Activities Net cash provided by financing activities for the nine months endedSeptember 30, 2021 , was$4.5 million compared to$11.0 million for the nine months endedSeptember 30, 2020 . During the nine months endedSeptember 30, 2021 , net cash provided by financing activities was primarily attributable to net IPO proceeds of$146.1 million , net proceeds from issuance of debt of$75.9 million , and proceeds from the exercise of vested stock options of$1.4 million , offset in part by$74.5 million special dividend paid inFebruary 2021 ,$133.9 million repayment of term loans and associated prepayment premiums, and$10.3 million contingent consideration payments related to the holdback liability associated with the TPG and the earn-out liability associated withHealthScape Advisors . During the nine months endedSeptember 30, 2020 , net cash provided by financing activities was primarily attributable to net proceeds from issuance of debt of$23.9 million offset in part by$1.8 42 -------------------------------------------------------------------------------- Table of Contents million repayment of term loan, and$11.0 million contingent consideration payments related to the earn-out liability associated withHealthScape Advisors and Pareto Intelligence. Contractual Obligations and Commitments The following table summarizes our contractual obligations as ofSeptember 30, 2021 . The principal commitments consisted of obligations under outstanding operating leases for office facilities, capital leases related to copy machines, our long-term debt, and purchase commitments. The amount of the obligations presented in the following table summarizes as ofSeptember 30, 2021 , the commitments to settle contractual obligations in cash for the periods presented. Payments Due by Period Less than 1 More than (in thousands) Total year 1-3 Years 4-5 Years 5 years Operating lease obligations$ 36,188 $ 2,258 $ 14,914 $ 11,087 $ 7,929 Capital lease obligations 1,223 81 931 211 - Long-term debt obligations(1) 192,631 - - 192,631 - Purchase commitments 3,316 3,316 - - - Total contractual obligations$ 233,358 $ 5,655 $ 15,845 $ 203,929 $ 7,929 ________________________ (1)Includes the term loan under our Credit Agreement. Off-Balance Sheet Arrangements During the periods presented, we did not have any off-balance sheet arrangements, as defined in Regulation S-K promulgated by theSEC . Critical Accounting Policies and Use of Estimates The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make judgments, estimates, and assumptions that affect the reported amounts of assets, liabilities, income, and expenses and related disclosures of contingent assets and liabilities. We base these estimates on our historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results experienced may vary materially and adversely from our estimates. Revisions to estimates are recognized prospectively. During the nine months endedSeptember 30, 2021 , there were no material changes to our critical accounting policies and use of estimates from those described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Use of Estimates" in the Prospectus. Recent Accounting Pronouncements See Note 2 to our unaudited interim condensed financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information. Emerging Growth Company Status Pursuant to the JOBS Act, an emerging growth company is provided the option to adopt new or revised accounting standards that may be issued by FASB or theSEC either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies. We intend to take advantage of the exemption for complying with new or revised accounting standards within the same time periods as private companies. Accordingly, the information contained herein may be different than the information you receive from other public companies. We also intend to take advantage of some of the reduced regulatory and reporting requirements of emerging growth companies pursuant to the JOBS Act so long as we qualify as an emerging growth company, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute payments. 43
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