SIGNIFY HEALTH, INC.
We have made statements in this Quarterly Report on Form 10-Q, including matters
discussed under Part I, Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations, Part II, Item 1. Legal
Proceedings, Part II, Item 1A. Risk Factors, and in other sections of this
Quarterly Report on Form 10-Q, that are forward-looking statements. All
statements other than statements of historical fact included in this Quarterly
Report on Form 10-Q are forward-looking statements. These statements may be
preceded by, followed by or include the words "may," "might," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue," the negative of these terms and other comparable
terminology. These forward-looking statements, which are subject to risks,
uncertainties and assumptions about us, may include projections of our future
financial performance, our anticipated growth strategies and anticipated trends
in our business, our ability to realize synergies in our businesses and our plan
to utilize the proceeds from our initial public offering ("IPO") to expand our
investment in value-based payment programs and in our product portfolio. These
statements are only predictions based on our current expectations and
projections about future events. There are important factors that could cause
our actual results, level of activity, performance or achievements to differ
materially from the results, level of activity, performance or achievements
expressed or implied by the forward-looking statements, including those factors
discussed under Part II, Item 1A. Risk Factors and Part I, Item 1A. Risk Factors
of our 2020 Annual Report on Form 10-K.
Although we believe the expectations reflected in the forward-looking statements
are reasonable, we cannot guarantee future results, level of activity,
performance or achievements. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of any of these forward-looking
statements. Some of the factors that could cause actual results to differ
materially from those expressed or implied by the forward-looking statements
include:
•the COVID-19 pandemic and whether the pandemic will continue to subside in
2021;
•our dependence upon a limited number of key customers;
•our dependence on certain key government programs;
•our failure to maintain and grow our network of high-quality providers;
•our failure to continue to innovate and provide services that are useful to
customers and achieve and maintain market acceptance;
•our limited operating history with certain of our solutions;
•our failure to compete effectively;
•the length and unpredictability of our sales cycle;
•failure of our existing customers to continue or renew their contracts with us;
•failure of service providers to meet their obligations to us;
•seasonality that may cause fluctuations in our sales, cash flows and results of
operations;
•our failure to achieve or maintain profitability;
•our revenue not growing at the rates they historically have, or at all;
•our failure to successfully execute on our growth initiatives, business
strategies, or operating plans, including growth in our non-BPCI-A episodes of
care business;
•our failure to successfully launch new products;
•our failure to diversify sources of revenues and earnings;
•inaccurate estimates and assumptions used to determine the size of our total
addressable market;
•changes in accounting principles applicable to us;
•incorrect estimates or judgments relating to our critical accounting policies;
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•our failure to effectively adapt to changes in the healthcare industry,
including changes in the rules and regulations governing Medicare or other
federal healthcare programs, or a potential shift toward total cost of care
payment models;
•our failure to adhere to complex and evolving governmental laws and
regulations;
•our failure to comply with current and future federal and state privacy,
security and data protection laws, regulations or standards;
•our employment of and contractual relationships with our providers subjecting
us to licensing or other regulatory risks, including recharacterization of our
contracted providers as employees;
•adverse findings from inspections, reviews, audits and investigations from
health plans or government agencies;
•inadequate investment in or maintenance of our operating platform and other
information technology and business systems;
•our ability to develop and/or enhance information technology systems and
platforms to meet our changing customer needs;
•higher than expected investments in our business, including, but not limited
to, investments in our technology and operating platform, which could reduce our
profitability;
•security breaches or incidents, loss or misuse of data, a failure in or breach
of our operational or security systems or other disruptions;
•disruptions in our disaster recovery systems or management continuity planning;
•our ability to comply with, and changes to, laws, regulations and standards
relating to privacy or data protection;
•our ability to obtain, maintain, protect and enforce our intellectual property;
•our dependence on distributions from Cure TopCo, LLC , our operating subsidiary,
to fund dividend payments, if any, and to pay our taxes and expenses, including
payments under the TRA;
•the control certain equityholders have over us and our status as a controlled
company;
•our ability to realize any benefit from our organizational structure;
•risk associated with acquiring other businesses including our ability to
effectively integrate the operations and technologies of the acquired
businesses;
•risks associated with an increase in our indebtedness; and
•the other risk factors described under Part II, Item 1A. Risk Factors and in
Part I, Item 1A. Risk Factors of our 2020 Annual Report on Form 10-K.
All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the foregoing cautionary
statements. In addition, all forward-looking statements speak only as of the
date of this Quarterly Report on Form 10-Q. We undertake no obligations to
update or revise publicly any forward-looking statements, whether as a result of
new information, future events or otherwise other than as required under the
federal securities laws.
Overview
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our Condensed Consolidated
Financial Statements and the related notes and other financial information
included elsewhere in this Quarterly Report on Form 10-Q. In addition to
historical consolidated financial information, the following discussion contains
forward-looking statements that reflect our plans, estimates, and beliefs. Our
actual results may differ materially from those discussed in the forward-looking
statements as a result of various factors, including those set forth under "Risk
Factors" in our Annual Report on Form 10-K for the year ended December 31, 2020
and Note Regarding Forward-Looking Statements included in this Quarterly Report
on Form 10-Q.
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The following discussion contains references to the three and nine months ended
September 30, 2020 , which was prior to the Reorganization Transactions that
Signify Health, Inc. (referred to herein as "we", "our", "us", "Signify Health "
or the "Company") and Cure TopCo, LLC ("Cure TopCo") entered into in connection
with the IPO (the "Reorganization Transactions"), which were effective February
12, 2021 . Therefore, the financial results referenced for those periods relate
to Cure TopCo and its consolidated subsidiaries for the three and nine months
ended September 30, 2020 . Any information related to periods prior to the
Reorganization Transactions refer to Cure TopCo and its consolidated
subsidiaries and any information related to periods subsequent to the
Reorganization Transactions refer to Signify Health and its consolidated
subsidiaries, including Cure TopCo.
Signify Health is a leading healthcare platform that leverages advanced
analytics, technology, and nationwide healthcare provider networks to create and
power value-based payment programs. Our mission is to transform how care is paid
for and delivered so that people can enjoy more healthy, happy days at home. Our
customers include health plans, governments, employers, health systems and
physician groups. We believe that we are a market leader in two fast-growing
segments of the value-based healthcare payment industry: (1) payment models
based on individual episodes of care and (2) in-home health evaluations
("IHEs"). Payment models based on individual episodes of care organize, or
"bundle", payments for all, or a substantial portion of, services received by a
patient in connection with an episode of care, such as a surgical procedure,
particular condition or other reason for a hospital stay. IHEs are health
evaluations performed by a clinician in the home to support payors'
participation in Medicare Advantage and other government-run managed care plans.
Our episode payment platform managed $5.21 billion and $6.14 billion of spend in
2020 and 2019, respectively. In 2020, our mobile network of providers completed
evaluations for over 1.4 million unique individuals participating in Medicare
Advantage and other managed care plans. We believe that these core businesses
have enabled us to become integral to how health plans and healthcare providers
successfully participate in value-based payment programs, and that our platform
lessens the dependence on facility-centric care for acute and post-acute
services and shifts more services towards alternate sites of care and, most
importantly, the home.
Our solutions support value-based payment programs by aligning financial
incentives around outcomes, providing tools to health plans and healthcare
organizations designed to assess and manage risk and identify actionable
opportunities for improved patient outcomes, coordination and cost-savings.
Through our platform, we coordinate what we believe is a holistic suite of
clinical, social, and behavioral services to address an individual's healthcare
needs and prevent adverse events that drive excess cost, all while shifting
services towards the home. Our business model is aligned with our customers as
we generate revenue only when we successfully engage members for our health plan
customers and generate savings through our provider customers.
Factors affecting our results of operations
As a result of a number of factors, our historical results of operations may not
be comparable to our results of operations in future periods, and our results of
operations may not be directly comparable from period to period. Set forth below
is a discussion of the key factors impacting our results of operations.
Seasonality
Historically, there has been a seasonal pattern to the revenue in our Home &
Community Services segment with the revenues in the fourth quarter of each
calendar year generally lower than the other quarters. Each year, our IHE
customers provide us with a target member list ("TML"), which may be
supplemented or amended during the year. Our customers generally limit the
number of times we may attempt to contact their members. Throughout the year, as
we complete IHEs and attempt to contact members, the number of members who have
not received an IHE and whom we are still able to contact declines, typically
resulting in fewer IHEs scheduled during the fourth quarter. As a precautionary
measure in response to the COVID-19 pandemic, we temporarily paused IHEs in
March 2020 . Shortly following the suspension of in-home visits, we were able to
expand our business model to perform virtual IHEs ("vIHEs") and made up for some
of the lost IHE volume through vIHEs. We resumed in-home visits beginning in
July 2020 . Overall we saw significant incremental IHE volume in the second half
of 2020, particularly in the fourth quarter, as certain customers increased the
volumes they placed with us and in-home IHEs represented the majority of those
IHEs. As a result, for 2020, we did not see the historical seasonality we would
normally expect with respect to IHE volume. During the nine months ended
September 30, 2021 , the vast majority of our evaluations were IHEs although we
continued to perform vIHEs. Overall, IHE volume has been more in line with
historical
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trends during 2021 and we expect this historical seasonality trend to continue
for the remainder of 2021 in our Home & Community Services segment as any
potential negative impact from a spike in COVID-19 would reduce fourth quarter
volume. However, any further developments with respect to the COVID-19 pandemic
in the future may continue to impact seasonality trends.
Revenue in our Episodes of Care Services segment generally is higher in the
second and fourth quarters although this can still be influenced by negative
changes in assumptions about savings rates and program size. We recognize the
revenue attributable to episodes reconciled during each 6-month episode
performance measurement period over a 13-month performance obligation period
that commences in the second or fourth quarter of each year, depending on the
relevant contract with our provider partners. The 13-month performance
obligation period begins at the start of the relevant episodes of care and
extends through the receipt from CMS or generation of the semiannual
reconciliation for the relevant performance measurement period, as well as the
provision and explanation of statements of performance to each of our customers.
As a result, during the first and third quarters of each year, we recognize
three months of revenue for each of two overlapping performance obligation
periods (i.e., three months of revenue from one performance obligation period,
and three months of revenue from a second, overlapping performance obligation
period). In contrast, during the second and fourth quarters of each year, we
recognize revenue relating to three overlapping performance obligation
periods-three months of revenue from one performance obligation period, three
months of revenue from a second, overlapping performance obligation period, and
one month of revenue from a third, overlapping performance obligation period
(representing the thirteenth month of the third performance obligation period).
We also recognize Episodes of Care Services revenue based on our estimates of
savings realized. The semiannual reconciliations for each performance
measurement period under our Episodes programs are received or generated in the
second and fourth quarters of each year, and indicate the actual savings
realized. In addition, due to the semiannual reconciliations for our Episodes
programs, and Bundled Payments for Care Improvement - Advanced Initiative
("BPCI-A") in particular, we typically receive cash during the first and third
quarters of each year, which can cause our liquidity to fluctuate from quarter
to quarter. See "-Liquidity and Capital Resources."
Customer mix
Our customer mix can affect our revenue and profitability in both of our
segments. For example, due to the different contractual arrangements we have
with different health plans, health plan mix during the period can affect our
average per-visit fee, the geographic mix of plan members we are visiting, the
mix of members we see that are covered by Medicare versus Medicaid and the
selection of IHE, vIHE or IHE+ solutions, each of which has a different price
point and cost structure, and can affect the conversion rate associated with the
number of members who agree to receive IHEs, the total number of IHEs completed
and the number and type of ancillary services selected.
The amounts we receive for our services in our Episodes of Care Services segment
are similarly determined by customer mix, as the amount of our administrative
fee, our share of episode savings and risk for episode losses and the payors'
and providers' share of savings, as well as the overall program size, customer
bundle selections and the savings rate generated under each managed episode vary
by customer.
Impact of IHE volume and margins
Our revenue and profitability in our Home & Community Services segment are
affected by the number of IHEs we complete during a period and how cost
effectively we are able to complete them. The number of IHEs we are able to
complete during a period can be affected by a variety of factors. For example,
decisions by our customers with respect to the TML, including any increase or
reduction in the number of members included in the TML (or the member list from
which it is derived), may impact our IHE completion rate and, as a result, our
revenue. Similarly, our ability to complete IHEs is affected by the level of
member engagement. In our experience, members of existing customers are more
likely to have had an IHE from us in the past and are more likely to be
responsive to our outreach. In contrast, for new customers, their members are
often just getting to know us and may have never had an IHE before, which can
make it harder to successfully contact them and obtain their consent to an IHE.
Our ability to complete IHEs is also affected by the capacity of our mobile
network of providers, which impacts our ability to efficiently reach all of the
members on our TML.
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We believe we will benefit from demographic trends in the coming years. As the
U.S. population ages, the number of Medicare eligible individuals is increasing.
Moreover, Medicare Advantage is growing faster than the Medicare Classic or
fee-for-service program according to the Centers for Medicare and Medicaid
Services ("CMS"). We believe we are well positioned to capture the growth in
Medicare Advantage enrollment in the coming years and further increase the
number of members to whom we provide IHEs.
Our long-term profitability in the Home & Community Services segment is also
impacted by how cost-effectively we are able to complete IHEs. For example, it
tends to be less costly for us to perform IHEs in densely populated urban areas
and more costly for us to perform IHEs in more difficult-to-reach jurisdictions.
Our ability to cost-effectively perform IHEs is also affected by how efficiently
we are able to schedule a provider's day to maximize the number of IHEs they are
able to complete in a day. The mix of providers we use may also impact our
costs. We use a mix of physicians, nurse practitioners and physicians
assistants, with physicians being the costliest to contract with for IHEs. If we
increase or decrease our usage of a particular type of provider, it impacts the
average cost of performing IHEs and our margins.
In the three and nine months ended September 30, 2021 , we completed and invoiced
to customers approximately 488 thousand and 1.447 million IHEs, including vIHEs,
respectively, compared to approximately 361 thousand and 961 thousand IHEs in
the three and nine months ended September 30, 2020 , respectively.
Impact of program size and savings rate
Our revenue and profitability in our Episodes of Care Services segment are
affected by the program size of our episodes programs and the savings rates we
are able to achieve under these programs. Program size for a particular customer
represents the number of episodes we managed for that customer during a period
multiplied by the respective baseline price of each episode, which represents
the benchmark price set by the relevant program prior to any discounts. Our
program size grows by increasing the number of episodes we manage. In connection
with our episodes offerings, we receive an administrative fee that is based on
the program size we manage for a customer.
The BPCI-A program, in its current form, expires at the end of 2023, and as of
the end of 2020, participation in the BPCI-A program was fixed, meaning that new
healthcare providers cannot enter the program, and participating healthcare
providers cannot choose to participate in any additional episode types.
Accordingly, our ability to grow our revenue under the BPCI-A program going
forward will require us to maximize savings rate and if healthcare utilization
increases and other COVID-related impacts on program size subside, we would
expect our program size to increase. See "Changes to the BPCI program" and
"COVID-19."
Revenue in our Episodes of Care Services segment is also affected by the savings
rate we are able to achieve. Under our contracts with our provider partners in
our episodes programs, we receive a share of any savings generated by the
relevant provider for each episode managed. The savings rate and our estimates
thereof, during each period, affects our revenue period to period. The savings
rate during each period is affected by a variety of factors, including how
quickly new customers are able to integrate with our technology and data
analytics tools, how long provider partners have been participating in an
episode program and their resulting level of familiarity with the program and
the degree of implementation of care redesign, as well as the prices we are able
to negotiate with providers. The savings rate also varies by the type of
solution we offer, and as a result, the savings rate will fluctuate depending on
the number of episodes we manage under one type of program, such as BPCI-A,
versus another program, such as our Commercial Episodes of Care programs.
Our ability to increase overall program size and savings rate will depend on a
number of factors, including the effectiveness of our advanced data analytics
capabilities and operating platform, market adoption of our solutions and the
adoption of care redesign and bundled payment models overall.
As a result of COVID-19, CMS allowed for certain provider elections to change
episodes being managed by us and also implemented other changes that temporarily
reduced program size beginning in 2020, the impact of which initially was
partially offset by a higher savings rate achieved from certain underperforming
episodes being dropped. See "COVID-19."
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Due to the nature of the timing of reconciliations, we measure program size and
savings rate on an annual basis and not on a quarterly basis. Weighted average
program size declined in 2020 as a result of the COVID-19 implications described
elsewhere in this quarterly report. We would expect these limitations and
restrictions to end later in 2021 and therefore for our program size to return
to pre-2020 levels in the future.
The semi-annual BPCI-A reconciliation we received during the second quarter of
2021 from CMS indicated a lower than expected savings rate and program size. We
believe the results from this reconciliation, particularly the lower than
expected savings rate, were driven by two primary factors, both of which are
related to the COVID-19 pandemic and the governmental and societal response to
it. The first factor relates to higher cost next sites of care being used,
driving actual costs higher and in turn lowering our savings. During the early
stages of the COVID-19 pandemic, the use of skilled nursing facilities was
extremely limited, and therefore patients requiring a next site of care were
forced to use higher cost inpatient rehabilitation facilities. The second factor
relates to the patient case mix adjustment, which is one of the variables used
to determine the final target price for each episode of care set by CMS. The
patient case mix adjustment adjusts the target price to take into consideration
the higher expected cost of treating patients who have certain co-morbidities.
These co-morbidities are generally chronic conditions which will likely lead to
future complications (e.g. diabetes). These co-morbidities must be diagnosed
prior to an episode being initiated, which generally occurs during annual
physicals or routine visits to the doctor's office. In turn, CMS will apply a
patient case mix adjustment which increases the target price for the member.
During the COVID-19 pandemic, many individuals have foregone in-person annual
physicals and routine appointments, resulting in a reduced diagnosis rate for
co-morbidities, and the target prices not being adjusted accordingly. However,
if the undiagnosed condition existed during an episode, complications likely
arose and drove the actual costs up, resulting in higher costs and less savings.
We would expect the impact of these two factors on the savings rate to decrease
once the COVID-19 pandemic subsides.
Changes to the BPCI program
Revenue generated by our BPCI solutions represented approximately 13% of our
total revenue and approximately 90% of our Episodes of Care Services segment
revenue in the third quarter of 2021. Our revenue and profitability are affected
by changes to the BPCI program. Under our BPCI-A contracts, we earn an
administrative fee, which is based on the size of the relevant provider's
program, and also share in the savings or losses generated in conjunction with
our provider partners as compared to BPCI-A's benchmark episode price for a
particular episode. Significant changes to the BPCI-A program can lead to a
decline in the program size and/or savings rates we are able to achieve in
conjunction with our provider partners under the program.
In August 2021 , CMS announced changes to BPCI-A for 2022. These changes include
an adjustment to the baseline period during which clinical episode prices are
calculated, such that prices for 2022 will be calculated on the basis of
historical experience that includes the first two years of the BPCI-A program
and the beginning of the COVID-19 impacted period. As a result, benchmark
episode prices could be lower than in prior years because BPCI-A care redesign
and savings measures will be reflected in a portion of the benchmark period. In
addition, CMS announced changes to the pricing methodology by which benchmark
episode prices will be calculated. CMS also made changes to the patient case mix
methodology, which should mitigate some of the pricing effects previously
reported. The impact of these changes and other changes is not yet known, as
this information is only provided to us on the semi-annual reconciliations
received from CMS. The initial impact of these changes should be included in the
reconciliation expected in the fourth quarter of 2022. Lastly, in 2022, CMS is
excluding from the BPCI-A program all episodes where the individual is diagnosed
with COVID-19 during the episode.
Additionally, CMS recently announced a change to the period in which they will
pay funds related to expirations. This change will result in delayed payment for
one period, which will have a temporary adverse impact on our cash flows as the
cash expected to be received in early 2022 following the receipt of our next
semi-annual reconciliation will reflect this change.
Finally, the BPCI-A program is scheduled to expire in 2023 and it is not clear
in what form, if any, CMS will renew the program. In October 2021 , Center for
Medicare and Medicaid Innovation ("CMMI") indicated at an Alliance for Health
Policy briefing that they are actively engaged in exploring bundled payments
that go beyond post-acute care to move up-stream to engage specialists in
managing patients to avoid and/or reduce acute events. We believe this focus
dovetails with our non-BPCI-A episodes of care, where we can support not only
procedure-
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based bundles, but also conditions such as maternity, diabetes, and substance
abuse. However, if CMS does not renew the program, or makes significant changes
in any successor program, it may have an impact on the number of episodes we are
able to manage, our savings rate and, consequently, revenue, profitability and
cash flows in future periods.
COVID-19
Our operations in our Home & Community Services segment were significantly
affected by the COVID-19 pandemic earlier in 2020 as we temporarily paused IHEs
in March 2020 and shortly thereafter expanded our business model to perform
vIHEs in order to make up for some of the lost IHE volume. We resumed in-person
visits beginning in July 2020 . Despite the availability of vIHEs, many of our
customers had postponed IHEs to the second half of 2020. Overall, we saw
significant incremental in-person IHE volume in the second half of 2020,
particularly in the fourth quarter, related to this catch-up and additionally as
certain customers increased the overall volumes they placed with us. In order to
meet this volume growth, we onboarded additional providers into our network
which resulted in proportionally higher expenses.
In 2021, the vast majority of our evaluations have been in-person IHEs, although
we continue to perform vIHEs. Overall, IHE volume has been robust in the first
nine months of 2021, indicating the direct impact of COVID-19 on the Home &
Community Services segment has subsided considerably. During the remainder of
2021, we expect seasonality trends in our Home & Community Services segment to
be more consistent with historical trends, which have typically seen a lower
number of IHEs performed in the fourth quarter.
Our Episodes of Care Services segment has also been negatively impacted by the
COVID-19 pandemic. At certain times during the pandemic, governmental
authorities recommended, and in certain cases required, that elective, specialty
and other procedures and appointments, including certain acute and post-acute
care services, be suspended or canceled to avoid non-essential patient exposure
to medical environments and potential infection with the COVID-19 virus. In
addition, the temporary suspension or cancellation of services was put in place
to focus limited resources and personnel capacity toward the prevention of, and
care for patients with, COVID-19. This resulted in fewer elective procedures and
a general reduction in individuals seeking medical care starting at the end of
the first quarter of 2020, which contributed to a substantially lower number of
episodes being managed in 2020. The overall reduction in healthcare utilization
also reduced the number of episodes being managed in 2021. Due to the nature of
the BPCI-A program, however, there is a significant lag between when we perform
our services and when CMS reconciles those services, and we recognize revenue
across a 13 month period encompassing both of those points in time. As such,
there was no immediate impact to our revenues in early 2020. The specific impact
of those lower volumes on our program size and revenues was more evident later
in 2020 as evidenced by our 2020 annual weighted average program size and, as
described below, the impact of lower volumes carried forward into 2021.
In the third quarter of 2020 and in response to the COVID-19 pandemic, CMS announced that healthcare providers could either (i) continue in the BPCI-A program with no change or (ii) as an exception to previous program rules, healthcare providers could choose between the following two options for 2020:
•eliminate upside and downside risk by excluding all episodes from reconciliation; or •exclude from reconciliation those episodes with a COVID-19 diagnosis during the episode. Healthcare providers made their elections bySeptember 25, 2020 . The results of those elections reduced the total number of episodes we managed during 2020 and also for 2021, and therefore, reduced program size. While these provider elections have temporarily reduced program size in the near term, this impact was at least initially partially offset by a higher savings rate achieved due to a combination of improved performance by some of our partners, as well as certain partners that were underperforming choosing to exclude some or all of their episodes from reconciliation in 2020. Subsequently, CMS announced that all episodes in 2021 with a COVID-19 diagnosis would be automatically excluded from reconciliation, which will further reduce program size for all of 2021. The reconciliation results received from CMS during the second quarter of 2021 negatively impacted our savings rate. This result was driven primarily by the following factors: 40 -------------------------------------------------------------------------------- •missing comorbidity diagnosis codes that did not properly reflect patient acuity, thereby impacting patient case mix adjustments and reducing episode pricing. There is a 90-day period prior to an acute episode being triggered that CMS incorporates for diagnoses coding which ultimately adjusts an episode's target pricing. During the pandemic, Medicare patients were avoiding routine healthcare visits and, as a result, comorbidities were not being diagnosed and coded, and •patients being discharged during the pandemic from an acute care facility to inpatient rehabilitation facilities and other high-cost next sites of care when lower-cost skilled nursing facilities were facing COVID-19 outbreaks and staffing shortages. Due to the passage of time between when we perform our services and the confirmation of results and subsequent cash settlement by CMS, COVID-19 did not have an impact on the cash we received from CMS during 2020 as payments we received related to pre-COVID-19 performance. The cash received from CMS in the first quarter of 2021 reflected the initial impact of COVID-19 as described more fully above, and the cash receipt received in the third quarter of 2021 was also negatively impacted by COVID-19. Because our administrative fee is calculated as a percentage of program size and we receive a portion of the savings achieved in management of an episode, the decrease in episodes and related reduction in overall program size have had, and we expect will continue to have, a negative effect on our revenue. Some of these measures and challenges will likely continue for the duration of the COVID-19 pandemic and will harm the results of operations, liquidity and financial condition of our provider partners and our business. Lastly, our representatives may be prohibited from entering hospitals, skilled nursing facilities and other post-acute facilities as a result of the pandemic, which affects our ability to manage post-acute care and could have a material impact on the savings rate being generated by the program. We continue to monitor trends related to COVID-19, including the Delta variant, the ongoing federal vaccine rollout, changes inCDC recommendations and their impact on results of operations and financial condition on both of our segments. Investment in growth and technology We continue to invest in sustaining significant growth, expanding our suite of solutions and being able to support a larger customer base over time. Achievement of our growth strategy will require additional investments and will result in higher expenses and higher cash outflows being incurred, particularly in developing new solutions, as well as in technology and human resources, as we aim to achieve this growth without diluting or decreasing the level and quality of services we provide. Developing new solutions can be time- and resource-intensive, and even once we launch a new solution, it can take a significant amount of time to contract with customers, provide them with our suite of technology and data analytics tools and have them actually begin generating revenue. This may increase our costs for one or more periods before we begin generating revenue from new solutions. In addition to developing new solutions, we are making significant investments in developing our existing solutions and increasing capacity. We will continue to invest in our technology platform and human resources to empower our providers and our customers to further improve results and optimize efficiencies. However, our investments may be more capital intensive or take longer to develop than we expect and may not result in operational efficiencies. Cost of being a public company To operate as a public company, we have been and will be required to continue to implement changes in certain aspects of our business and to develop, manage and train management level and other employees to comply with ongoing public company requirements. We will also incur new expenses as a public company, including costs related to our public reporting obligations, which includes increased professional fees for accounting, compliance with Sarbanes-Oxley Act, proxy statements and stockholder meetings, equity plan administration, stock exchange fees and transfer agent fees. In addition, we are party to the Tax Receivable Agreement (the "TRA") with the Continuing Pre-IPO LLC Members, the Reorganization Parties, Optionholders (as defined in the TRA) of certain entities treated as corporations forU.S. tax purposes that hold LLC Units (individually, a "Blocker Company " and together, the "Blocker Companies") at the time of the "Mergers", holders of synthetic equity units and any future party to the TRA (collectively, the "TRA Parties") and are required to make certain cash distributions to them in accordance with the terms of the TRA. See "-Liquidity and capital resources-Tax Receivable Agreement." 41 --------------------------------------------------------------------------------
Effects of the reorganization on our corporate structure
Signify Health was formed for the purpose of the IPO, which was effectiveFebruary 2021 and had no activities of its own prior to such date. We are a holding company and our sole material asset is a controlling ownership in Cure TopCo. All of our business is conducted through Cure TopCo and its consolidated subsidiaries and affiliates, and the financial results of Cure TopCo and its consolidated subsidiaries are included in our Condensed Consolidated Financial Statements. Cure TopCo is currently taxed as a partnership for federal income tax purposes and, as a result, its members, includingSignify Health , pay taxes with respect to their allocable share of its net taxable income. We expect that redemptions and exchanges of non-voting common units of Cure TopCo (the "LLC Units") will result in increases in the tax basis in our share of the tangible and intangible assets of Cure TopCo that otherwise would not have been available. These increases in tax basis may reduce the amount of tax that we would otherwise be required to pay in the future. The TRA requires us to pay to the TRA Parties 85% of the amount of cash savings, if any, inU.S. federal, state and local income tax or franchise tax that we actually realize from these tax basis increases and other tax attributes discussed herein. Furthermore, payments under the TRA will give rise to additional tax benefits and therefore additional payments under the TRA. Components of our results of operations Revenue Our revenue is generated from contracts with our customers within our two operating segments, Home & Community Services and Episodes of Care Services, under contracts that contain various fee structures. Through our Home & Community Services segment, we offer IHEs, performed either within the patient's home, virtually or at a healthcare provider facility, primarily to Medicare Advantage health plans (and to some extent Medicaid). Additionally, we offer certain diagnostic screening and other ancillary services and, through ourSignify Community solution, services to address healthcare concerns related to social determinants of health ("SDOH"). Through our Episodes of Care Services segment, we primarily provide services designed to improve the quality and efficiency of healthcare delivery by developing and managing episodic payment programs in partnership with healthcare providers primarily under the BPCI-A program with CMS. In our Home & Community Services segment, we primarily generate revenue through IHEs. Revenue is recognized when the IHEs are submitted to our customers on a daily basis. Submission to the customer occurs after the IHEs are completed and coded, a process which may take one to several days after completion of the evaluation. We are paid a flat fee for each completed IHE regardless of the member's location or the outcome of an IHE. We earn a separate fee for any additional diagnostic screenings the health plan elects to provide for the relevant member. Revenue is recognized when the additional screening occurs. We have entered into two Equity Appreciation Rights ("EAR") agreements with one of our customers. Revenue generated under the underlying customer contracts includes an estimated reduction in the transaction price for IHEs associated with the initial grant date fair value of the outstanding customer EARs. The total grant date fair value of the outstanding EAR agreements was$51.8 million and will be recorded against revenue throughDecember 2022 . See "-Liquidity and capital resources-Customer Equity Appreciation Rights agreements." In our Episodes of Care Services segment, we primarily generate revenue through episodes of care under the BPCI-A program. We participate as a "convener participant" under the BPCI-A program. As a convener participant, we hold a contract directly with CMS and are responsible for developing and monitoring a BPCI-A episode of care program in partnership with healthcare providers. We enter into back-to-back contracts with provider partners interested in participating in BPCI-A episode of care programs through which we assist with compliance with CMS rules and program requirements and provide a suite of analytic, technology and post-acute management services. Under the BPCI-A program, we recognize the revenue attributable to episodes reconciled during each six-month episode performance measurement period over a 13-month performance obligation period that commences in the second or fourth quarter of each year, depending on the relevant contract with our provider partners. The 13-month performance obligation period begins at the start of the relevant episodes of care and extends through the receipt or generation of the semiannual reconciliation for the relevant performance measurement period, as well as the 42 -------------------------------------------------------------------------------- provision and explanation of statements of performance to each of our customers. We are generally paid an administrative fee, which is paid out of savings, and also share in the savings or losses generated by our provider partners as compared to BPCI-A's benchmark episode price for a particular episode. The transaction price is 100% variable, and therefore we estimate the amount which we expect to be entitled to receive for each episode performance measurement period over a 13-month performance obligation period. In making this estimate, we consider inputs such as the overall program size, which is defined by the historic cost and the frequency of occurrence of defined episodes of care. Additionally, we estimate rates for shared savings or losses by using data sources such as historical trend analysis together with indicative data of the current volume of episodes. Although our estimates are based on the information available to us at each reporting date, several factors may cause actual revenue earned to differ from the estimates recorded in each period. These include, among others, limited historical experience, as the current BPCI-A program only commenced in the fourth quarter of 2018 and has been affected by the COVID-19 pandemic in 2020, and other limitations of the program beyond our control. Within our Episodes of Care Services segment, we also generate revenue through our Commercial Episodes of Care program. After we sign up payor customers to sponsor an episode program, we do not begin to generate any revenue until we have helped them design the programs, signed up provider partners to participate in the program and initiated episodes. Revenues under our Commercial Episodes of Care program are also driven by program size and savings rate. Completed episodes are retrospectively reconciled following semi-annual performance measurement periods, and after a defined period, our entire administrative fee is at risk, meaning if a customer generates losses in one performance measurement period, we cannot recoup that through savings in a subsequent performance measurement period.
Operating expenses
Operating expenses are composed of:
•Service expense. Service expense represents direct costs associated with
generating revenue. These costs include fees paid to providers for performing
IHEs, provider travel expenses and the total cost of payroll, related benefits
and other personnel expenses for employees in roles that serve to provide direct
revenue generating services to customers. Additionally, service expense also
includes costs related to the use of certain professional service firms, member
engagement expenses, coding expenses and certain other direct costs.
•Selling, general and administrative expense ("SG&A"). SG&A includes the total
cost of payroll, related benefits and other personnel expenses for employees who
do not have a direct role associated with revenue generation. SG&A includes all
general operating costs including, but not limited to, rent and occupancy costs,
telecommunications costs, information technology infrastructure and operations
costs, software licensing costs, advertising and marketing expenses, recruiting
expenses, costs associated with developing new service offerings and expenses
related to the use of certain subcontractors and professional services firms. We
expect to incur significant additional legal, accounting and other expenses
associated with being a public company, including, among others, costs
associated with our compliance with the Sarbanes-Oxley Act and other regulatory
requirements.
•Transaction-related expenses. Transaction-related expenses primarily consist of
expenses incurred in connection with acquisitions and other corporate
development such as mergers and acquisitions activity that did not proceed,
strategic investments and similar activities, including consulting expenses,
compensation expenses and other integration-type expenses. Additionally,
expenses associated with the IPO are included in transaction-related expenses.
•Asset impairment. Asset impairment includes charges resulting from the
impairment of long-lived assets when it is determined that the carrying value
exceeds the estimated fair value of the asset.
•Depreciation and amortization. Depreciation expense includes depreciation of
property and equipment, including leasehold improvements, computer equipment,
furniture and fixtures and software. Amortization expense includes amortization
of capitalized internal-use software and software development costs, customer
relationships, acquired software and certain trade names.
43
--------------------------------------------------------------------------------Other expense, net
Other expense, net is composed of:
•Interest expense. Interest expense consists of accrued interest and related payments on our outstanding long-term debt and Revolving Credit Facility, as well as the amortization of debt issuance costs. •Loss on extinguishment of debt. Loss on extinguishment of debt consists of certain fees paid and write-offs of unamortized debt issuance costs and original issue discount in connection with theJune 2021 refinancing of our long-term debt. •Other (income) expense, net. Other (income) expense, net primarily consists of changes in fair value of the customer EARs as measured at the end of each period. Interest and dividends on cash and cash equivalents are also included in other (income) expense, net.
Income tax (benefit) expense
Our business was historically operated through Cure TopCo, a limited liability company treated as a partnership forU.S. federal income tax purposes, which is generally not subject toU.S. federal or state income taxes. In connection with the Reorganization Transactions and the IPO, we acquired LLC Units in Cure TopCo. Accordingly, we are now subject toU.S. federal and state income tax with respect to our allocable share of the income of Cure TopCo.
Noncontrolling interest
In connection with the Reorganization Transactions, we were appointed as the sole managing member of Cure TopCo pursuant to the Amended LLC Agreement. Because we manage and operate the business and control the strategic decisions and day-to-day operations of Cure TopCo and also have a substantial financial interest in Cure TopCo, we consolidate the financial results of Cure TopCo, and a portion of our net income (loss) is allocated to the noncontrolling interest to reflect the entitlement of the Continuing Pre-IPO LLC Members to a portion of Cure TopCo's net income (loss). As ofSeptember 30, 2021 , we held approximately 75.1% of Cure TopCo's outstanding LLC Units and the remaining LLC Units of Cure TopCo are held by the Continuing Pre-IPO LLC Members. Results of Operations for the three months endedSeptember 30, 2021 and 2020 The following is a discussion of our consolidated results of operations for the three months endedSeptember 30, 2021 and 2020. A discussion of the results by each of our two operating segments, Home & Community Services and Episodes of Care Services, follows the discussion of our consolidated results. 44 --------------------------------------------------------------------------------
The following table summarizes our results of operations for the three months
ended
Three months ended September 30, % Change
2021 2020 2021 v. 2020
(in millions)
Revenue $ 199.2 $ 154.7 28.7 %
Operating expenses:
Service expense 100.4 83.4 20.4 %
Selling, general and administrative expense 65.8 50.4 30.6 %
Transaction-related expense 2.9 6.8 (57.4) %
Depreciation and amortization 17.6 15.8 11.4 %
Total operating expenses 186.7 156.4 19.4 %
Income (loss) from operations 12.5 (1.7) NM
Interest expense 4.2 5.1 (19.8) %
Other (income) expense (27.4) 6.3 NM
Other (income) expense, net (23.2) 11.4 NM
Income (loss) before income taxes 35.7 (13.1) NM
Income tax expense 6.4 0.2 NM
Net income (loss) 29.3 (13.3) NM
Net income (loss) attributable to
pre-Reorganization period - (13.3) NM
Net income (loss) attributable to non-controlling
interest 9.1 - NM
Net income (loss) attributable to Signify Health,
Inc. $ 20.2 $ - NM
Revenue
Our total revenue was $199.2 million for the three months ended September 30,
2021 , representing an increase of $44.5 million , or 28.7%, from $154.7 million
for the three months ended September 30, 2020 . This increase was primarily
driven by a $54.3 million increase in revenue from our Home & Community Services
segment offset by a $9.8 million decrease in revenue from our Episodes of Care
Services segment. See "Segment results" below.
Operating expenses
Our total operating expenses were$186.7 million for the three months endedSeptember 30, 2021 , representing an increase of$30.3 million , or 19.4%, from$156.4 million for the three months endedSeptember 30, 2020 . This increase was driven by the following: •Service expense-Our total service expense was$100.4 million for the three months endedSeptember 30, 2021 , representing an increase of$17.0 million , or 20.4%, from$83.4 million for the three months endedSeptember 30, 2020 . This increase was primarily driven by expenses related to our network of providers, which increased by$10.7 million driven by the higher IHE volume and the shift in the mix which has returned to a majority of in-person IHE. In 2020, as a result of COVID-19, more evaluations were performed as vIHE, which have a lower cost per evaluation. Compensation-related expenses increased by$6.0 million primarily driven by headcount and incentive pay to support the overall current and future growth in both segments. Additionally, the following expenses increased during the three months endedSeptember 30, 2021 primarily driven by the overall higher IHE volume: the costs of providing other ancillary services, including certain laboratory and testing fees, increased by$1.2 million and travel and 45 -------------------------------------------------------------------------------- entertainment expenses increased$0.3 million due to a reduction in COVID-19 imposed travel restrictions in 2021. These increases were partially offset by a decrease of$0.5 million in other variable costs; a decrease of$0.3 million in COVID-19 pandemic related costs, including tests for our providers and incremental costs for personal protective equipment used by our providers while conducting IHEs during the pandemic as restrictions subsided in 2021; and a decrease of$0.4 million in member outreach and other related expenses. •Selling, general and administrative expense-Our total SG&A expense was$65.8 million for the three months endedSeptember 30, 2021 , representing an increase of$15.4 million , or 30.6%, from$50.4 million for the three months endedSeptember 30, 2020 . This increase was primarily driven by compensation-related expenses, which increased by$8.8 million due to additional headcount to support the overall growth in our business and a proportionate increase in incentive compensation. Other costs also increased, including an increase of$4.8 million in professional and consulting fees primarily related to increased costs associated with being a public company, an increase of$0.9 million in travel and entertainment expenses as COVID-imposed travel restrictions eased, an increase of$0.6 million in information technology-related expenses, including infrastructure and software costs, and an increase of$0.4 million in other variable costs. These increases were partially offset by a$0.1 million decrease in facilities-related expenses, including rent expense under our operating leases. •Transaction-related expenses-Our total transaction-related expenses were$2.9 million for the three months endedSeptember 30, 2021 , representing a decrease of$3.9 million , or 57.4%, from$6.8 million for the three months endedSeptember 30, 2020 . In 2021, the transaction-related expenses consisted primarily of costs incurred in connection with general corporate development activities, including potential acquisitions that did not proceed. These transaction-related expenses in 2021 consisted primarily of consulting and other professional services expenses. In 2020, the transaction-related expenses related to potential acquisitions and other corporate development activities that did not proceed. These transaction-related expenses in 2020 consisted primarily of consulting, compensation and integration-type expenses. •Depreciation and amortization-Our total depreciation and amortization expense was$17.6 million for the three months endedSeptember 30, 2021 , representing an increase of$1.8 million , or 11.4%, from$15.8 million for the three months endedSeptember 30, 2020 . This increase in depreciation and amortization was primarily driven by a net increase in amortization expense of$1.5 million due to additional capital expenditures related to internally-developed software over the past year, partially offset by certain intangible assets becoming fully amortized in 2020. Additionally, there was an increase in depreciation expense of$0.3 million driven by additional capital expenditures.
Other (income) expense, net
Other (income) expense, net was$(23.2) million for the three months endedSeptember 30, 2021 , representing an increase of$34.6 million from$11.4 million in expense for the three months endedSeptember 30, 2020 . This increase was primarily driven by an increase in other (income) expense of$33.7 million as well as a decrease in interest expense of$0.9 million . The change from other expense to other income was primarily driven by$27.3 million in unrealized gains related to the quarterly remeasurement of the fair value of the outstanding customer EAR liabilities in 2021 due to a decrease in the total equity value at the end of the third quarter 2021 compared to the prior quarter (thereby reducing the estimated future amount payable) compared to$6.3 million in expense in 2020. Income tax expense Income tax expense was$6.4 million for the three months endedSeptember 30, 2021 , representing an increase of$6.2 million from$0.2 million in income tax expense for the three months endedSeptember 30, 2020 . The income tax expense in 2021 was primarily driven by the increase in income before income taxes and the change to our corporate structure as a result of the Reorganization, with the Company now subject to corporate income taxes.
Income (loss) attributable to the pre-Reorganization period
46
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Income (loss) attributable to the pre-Reorganization period relates to the
income incurred in 2020 prior to the Reorganization that occurred in February
2021 . Income (loss) attributable to the pre-Reorganization period does not apply
to the three months ended September 30, 2021 as the entire period was subsequent
to the Reorganization Transactions.
Income (loss) attributable to non-controlling interest
Income (loss) attributable to non-controlling interest for the three months
ended
Segment results
We evaluate the performance of each of our two operating segments based on segment revenue and segment adjusted EBITDA. Service expense for each segment is based on direct expenses associated with the revenue generating activities of each segment. We allocate SG&A expenses to each segment primarily based on the relative proportion of direct employees. The following table summarizes our segment revenue and segment adjusted EBITDA and the percentage of total consolidated revenue and consolidated adjusted EBITDA, respectively, for the three months endedSeptember 30, 2021 and 2020: Three months ended September 30, % Change 2021 % of Total 2020 % of Total 2021 v 2020 (in millions) Revenue Home & Community Services Evaluations$ 167.1 83.9 %$ 112.5 72.8 % 48.4 % Other 2.0 1.0 % 2.2 1.4 % (9.1) % Total Home & Community Services revenue 169.1 84.9 % 114.7 74.2 % 47.3 % Episodes of Care Services Episodes 27.8 14.0 % 37.5 24.1 % (25.8) % Other 2.3 1.1 % 2.5 1.7 % (5.3) % Total Episodes of Care Services revenue 30.1 15.1 % 40.0 25.8 % (24.5) % Segment Adjusted EBITDA Home & Community Services 49.9 118.9 % 20.8 72.3 % 139.7 % Episodes of Care Services (7.9) (18.9) % 7.9 27.7 % NM Home & Community Services revenue was$169.1 million for the three months endedSeptember 30, 2021 , representing an increase of$54.4 million , or 47.3%, from$114.7 million for the three months endedSeptember 30, 2020 . This increase was primarily driven by Evaluations revenue, which increased by$54.6 million . The higher Evaluations revenue was driven by increased IHE volume and a reduction in the proportion of IHEs conducted as vIHEs, which are performed at a lower price per evaluation compared to in-person IHEs. Evaluations revenue included a reduction associated with the outstanding customer EARs of$5.0 million and$4.9 million during the three months endedSeptember 30, 2021 and 2020, respectively. Other revenue decreased by$0.2 million , primarily due to a decrease in our standalone social determinants of health product. Episodes of Care Services revenue was$30.1 million for the three months endedSeptember 30, 2021 , representing a decrease of$9.9 million , or 24.5%, from$40.0 million for three months endedSeptember 30, 2020 . This decline was driven by a decrease of$9.7 million in Episodes revenue, primarily due to the adverse impact of 47 -------------------------------------------------------------------------------- COVID-19 on program size and savings rate. Additionally, approximately$9.2 million of revenue recorded during the three months endedSeptember 30, 2020 as a result of positive changes in estimates based on new information received during the third quarter of 2020 primarily related to the impact of COVID-19 on program size and related options CMS offered to providers that had an overall beneficial impact on savings rates. Other revenue decreased$0.2 million primarily driven by lower membership in our complex care management services product offering. Home & Community Services Adjusted EBITDA was$49.9 million for the three months endedSeptember 30, 2021 , representing an increase of$29.1 million , or 139.7%, from$20.8 million for the three months endedSeptember 30, 2020 . This increase was primarily driven by the higher IHE volume, coupled with the return to a more traditional mix of in-home IHEs compared to vIHEs, as described above, and was partially offset by higher operating expenses as a result of investments to support our growth and technology. Episodes of Care Services Adjusted EBITDA was a loss of($7.9) million for the three months endedSeptember 30, 2021 , representing a decrease of$15.8 million from income of$7.9 million for the three months endedSeptember 30, 2020 . This decrease was primarily driven by the lower revenue as described above and higher operating expenses as a result of investments to support our growth and technology. Results of Operations for the nine months endedSeptember 30, 2021 and 2020 The following is a discussion of our consolidated results of operations for the nine months endedSeptember 30, 2021 and 2020. A discussion of the results by each of our two operating segments, Home & Community Services and Episodes of Care Services, follows the discussion of our consolidated results.
The following table summarizes our results of operations for the nine months
ended
Nine months ended September 30, % Change
2021 2020 2021 v. 2020
(in millions)
Revenue $ 592.0 $ 417.1 41.9 %
Operating expenses:
Service expense 303.0 203.4 48.9 %
Selling, general and administrative expense 188.0 148.5 26.6 %
Transaction-related expense 9.5 10.8 (11.7) %
Depreciation and amortization 51.6 46.0 12.3 %
Total operating expenses 552.1 408.7 35.1 %
Income from operations 39.9 8.4 376.5 %
Interest expense 17.5 16.2 7.9 %
Loss on extinguishment of debt 5.0 - NM
Other expense (income) 43.6 6.9 535.5 %
Other expense, net 66.1 23.1 186.2 %
Loss before income taxes (26.2) (14.7) 78.0 %
Income tax (benefit) expense (3.7) 0.5 NM
Net loss (22.5) (15.2) 48.3 %
Net loss attributable to pre-Reorganization
period (17.2) (15.2) NM
Net loss attributable to non-controlling interest (2.3) - NM
Net loss attributable to Signify Health, Inc. $ (3.0) $ - NM
48--------------------------------------------------------------------------------
Revenue
Our total revenue was$592.0 million for the nine months endedSeptember 30, 2021 , representing an increase of$174.9 million , or 41.9%, from$417.1 million for the nine months endedSeptember 30, 2020 . This increase was primarily driven by a$195.0 million increase in revenue from our Home & Community Services segment partially offset by a$20.1 million decrease in revenue from our Episodes of Care Services segment. See "Segment results" below.
Operating expenses
Our total operating expenses were$552.1 million for the nine months endedSeptember 30, 2021 , representing an increase of$143.4 million , or 35.1%, from$408.7 million for the nine months endedSeptember 30, 2020 . This increase was driven by the following: •Service expense-Our total service expense was$303.0 million for the nine months endedSeptember 30, 2021 , representing an increase of$99.6 million , or 48.9%, from$203.4 million for the nine months endedSeptember 30, 2020 . This increase was primarily driven by expenses related to our network of providers, which increased by$55.8 million driven by the higher IHE volume and a return to a more traditional mix of in-person IHEs compared to vIHEs. Compensation-related expenses increased by$28.4 million primarily driven by additional headcount and higher incentive pay to support the overall current and future growth in both segments. Additionally, the following expenses increased during the nine months endedSeptember 30, 2021 , primarily driven by the overall higher IHE volume: an increase of$10.6 million in the costs of providing other ancillary services, including certain laboratory and testing fees; an increase of approximately$3.8 million in member outreach and other related expenses; and an increase of$0.8 million in other variable costs. The impact of COVID-19 resulted in approximately$0.5 million in expenses, including costs related to COVID-19 tests for our providers and incremental costs for personal protective equipment used by our providers while conducting IHEs during the pandemic, which were partially offset by a decrease of$0.3 million in travel and entertainment costs for both segments resulting from COVID-19 imposed travel restrictions. •Selling, general and administrative expense-Our total SG&A expense was$188.0 million for the nine months endedSeptember 30, 2021 , representing an increase of$39.5 million , or 26.6%, from$148.5 million for the nine months endedSeptember 30, 2020 . This increase was primarily driven by compensation-related expenses, which increased by$24.8 million due to additional headcount to support the overall growth in our business and a related increase in incentive compensation. Other costs also increased, primarily to support the growth in our business, including: an increase of$10.2 million in professional and consulting fees, an increase of$3.1 million in information technology-related expenses, including infrastructure and software costs, an increase of$1.9 million in loss on contingent consideration, and an increase of$0.3 million in employee travel and entertainment expenses as COVID-19 imposed restrictions eased. These increases were partially offset by a$0.7 million decrease in facilities-related expenses, including rent expense under our operating leases, and a decrease of$0.1 million in other variable costs. •Transaction-related expenses-Our total transaction-related expenses were$9.5 million for the nine months endedSeptember 30, 2021 , representing a decrease of$1.3 million , or 11.7%, from$10.8 million for the nine months endedSeptember 30, 2020 . In 2021, the transaction-related expenses consisted primarily of consulting and other professional services expenses, as well as compensation expenses, incurred in connection with our IPO and general corporate development activities, including potential acquisitions that did not proceed. In 2020, the transaction-related expenses consisted primarily of consulting, compensation and integration-type expenses related to the Remedy Partners Combination at the end of 2019 and potential acquisitions and other corporate development activities that did not proceed. •Depreciation and amortization-Our total depreciation and amortization expense was$51.6 million for the nine months endedSeptember 30, 2021 , representing an increase of$5.6 million , or 12.3%, from$46.0 million for the nine months endedSeptember 30, 2020 . This increase in depreciation and amortization expense was primarily driven by a net increase in amortization expense of$4.9 million due to additional 49 --------------------------------------------------------------------------------
capital expenditures related to internally-developed software over the past
year, partially offset by certain intangible assets becoming fully amortized in
2020. Additionally, there was an increase in depreciation expense of
Other expense, net
Other expense, net was$66.1 million for the nine months endedSeptember 30, 2021 , representing an increase of$43.0 million from$23.1 million for the nine months endedSeptember 30, 2020 . This increase was primarily driven by an increase in other expense (income), net of$36.7 million , loss on extinguishment of debt of$5.0 million , as well as an increase in interest expense of$1.3 million . The increase in other expense (income), net was driven by$44.0 million in expense related to the quarterly remeasurement of the fair value of the outstanding customer EAR liabilities in 2021 as a result of the increased equity value of the Company following the IPO. The expense related to the remeasurement of the fair value of the outstanding customer EAR liabilities in 2020 was$7.0 million . The$5.0 million loss on extinguishment of debt was driven by theJune 2021 refinancing impact on the underlying debt issuance costs. The increase in interest expense was primarily driven by our higher principal balance outstanding in early 2021, prior to theJune 2021 refinancing which reduced our overall indebtedness and interest rate. Income tax (benefit) expense Income tax benefit was$3.7 million for the nine months endedSeptember 30, 2021 , representing a beneficial change of$4.2 million from$0.5 million in income tax expense for the nine months endedSeptember 30, 2020 . As a result of the Reorganization Transactions, we are subject to corporate income taxes on our share of the total net loss. The benefit in 2021 was primarily driven by net tax benefits related to stock-based compensation expense as a result of stock option exercises during the period.
Loss attributable to the pre-Reorganization period
Loss attributable to the pre-Reorganization period relates to the loss incurred for the periods that preceded the Reorganization Transactions onFebruary 12, 2021 , including the period fromJanuary 1, 2021 throughFebruary 12, 2021 .
Loss attributable to non-controlling interest
Loss attributable to non-controlling interest for the nine months ended
Segment results
We evaluate the performance of each of our two operating segments based on segment revenue and segment adjusted EBITDA. Service expense for each segment is based on direct expenses associated with revenue generating activities of each segment. We allocate SG&A expenses to each segment primarily based on the relative proportion of direct employees.
The following table summarizes our segment revenue and segment adjusted EBITDA
and the percentage of total consolidated revenue and consolidated adjusted
EBITDA, respectively, for the nine months ended
50
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Nine months ended September 30, % Change
2021 % of Total 2020 % of Total 2021 v 2020
(in millions)
Revenue
Home & Community Services
Evaluations $ 490.6 82.9 % $ 294.9 70.7 % 66.3 %
Other 6.3 1.0 % 6.9 1.7 % (8.9) %
Total Home & Community Services
revenue 496.9 83.9 % 301.8 72.4 % 64.6 %
Episodes of Care Services
Episodes 88.5 15.0 % 107.2 25.7 % (17.4) %
Other 6.6 1.1 % 8.1 1.9 % (17.8) %
Total Episodes of Care Services
revenue 95.1 16.1 % 115.3 27.6 % (17.5) %
Segment Adjusted EBITDA
Home & Community Services 146.8 112.0 % 65.8 76.6 % 122.9 %
Episodes of Care Services (15.8) (12.0) % 20.2 23.4 % NM
Home & Community Services revenue was $496.9 million for the nine months ended
September 30, 2021 , representing an increase of $195.1 million , or 64.6%, from
$301.8 million for the nine months ended September 30, 2020 . This increase was
primarily driven by Evaluations revenue, which increased by $195.7 million . The
higher Evaluations revenue was driven by increased IHE volume and a reduction in
the proportion of IHEs conducted as vIHEs, which are performed at a lower price
per evaluation compared to in-person IHEs. Evaluations revenue included a
reduction associated with the outstanding customer EARs of $14.8 million and
$7.5 million during the nine months ended September 30, 2021 and 2020,
respectively. Other revenue decreased by $0.6 million , primarily due to a
decrease in standalone sales of our social determinants of health product.
Episodes of Care Services revenue was $95.1 million for the nine months ended
September 30, 2021 , representing a decrease of $20.2 million , or 17.5%, from
$115.3 million for the nine months ended September 30, 2020 . This decrease was
primarily driven by a decrease of $18.7 million in Episodes revenue due to the
adverse effects of COVID-19 on program size and savings rate, including lower
healthcare utilization and the impact of the patient case mix adjustment and
inpatient rehabilitation center utilization on savings rate described in
"COVID-19" above. Additionally, approximately $9.2 million of revenue was
recorded during the nine months ended September 30, 2020 as a result of positive
changes in estimates based on new information received during the third quarter
of 2020 primarily related to the impact of COVID-19 on program size and related
options CMS offered to providers that had an overall beneficial impact on
savings rates. Other revenue decreased by $1.5 million primarily driven by a
decrease in our complex care management services product offering.
Home & Community Services Adjusted EBITDA was $146.8 million for the nine months
ended September 30, 2021 , representing an increase of $81.0 million , or 122.9%,
from $65.8 million for the nine months ended September 30, 2020 . This increase
was primarily driven by the increase in revenue as described above partially
offset by higher operating expenses as a result of the investments to support
our growth and technology.
Episodes of Care Services Adjusted EBITDA was a loss of $15.8 million for the
nine months ended September 30, 2021 , representing a decrease of $36.0 million
from positive Adjusted EBITDA of $20.2 million for the nine months ended
September 30, 2020 . This decrease was primarily driven by the lower revenue as
described above and higher operating expenses as a result of the investments to
support our growth and technology.
Liquidity and capital resources
Liquidity describes our ability to generate sufficient cash flows to meet the
cash requirements of our business operations, including working capital needs to
meet operating expenses, debt service, acquisitions and other
51
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commitments and contractual obligations. We consider liquidity in terms of cash
flows from operations and their sufficiency to fund our operating and investing
activities.
Our primary sources of liquidity are proceeds from our IPO, our existing cash
and cash equivalents, cash provided by operating activities and borrowings under
our Credit Agreement. We received net proceeds of $609.7 million in connection
with the IPO. As of September 30, 2021 , we had unrestricted cash and cash
equivalents of $678.8 million . Our total indebtedness was $350.0 million as of
September 30, 2021 .
In June 2021 , we refinanced the previously existing credit facility and entered
into a new credit agreement (the "2021 Credit Agreement") with a secured lender
syndicate, which, among other things, reduced our total debt outstanding by
approximately $61.4 million , lowered the interest rate, increased our borrowing
capacity under the revolving facility and extended the maturity. The 2021 Credit
Agreement includes a term loan of $350.0 million (the "2021 Term Loan") and a
revolving credit facility (the "Revolving Facility") with a $185.0 million
borrowing capacity. See "Indebtedness" below. As of September 30, 2021 , we had
available borrowing capacity under the Revolving Facility of $172.8 million as
the borrowing capacity is reduced by outstanding letters of credit.
We believe that our primary sources of liquidity will be sufficient to fund our
working capital requirements and to meet our commitments for at least the next
12 months.
Our principal liquidity needs have been working capital and general corporate
expenses, debt service, capital expenditures and acquisitions to help achieve
our growth strategy. Our capital expenditures for property and equipment to
support growth in the business were $3.7 million and $13.0 million for the nine
months ended September 30, 2021 and 2020, respectively. The higher capital
expenditures during 2020 were driven by an expansion at one of our office
locations to support our growth. In addition to these historical liquidity
needs, we expect our future liquidity needs will also be comprised of (i)
providing capital to facilitate the organic and inorganic growth of the
business, (ii) making payments under our TRA and (iii) paying income taxes.
Our liquidity may fluctuate on a quarterly basis due to our agreements with CMS
under the BPCI-A program. Cash receipts generated under these contracts, which
represents the majority of revenue in our Episodes of Care Services segment, are
subject to a semiannual reconciliation cycle, which occurs in the second and
fourth quarters of each year. We typically receive cash receipts under these
contracts in the quarter subsequent to the receipt of the reconciliation, or
during the first and third quarters of each year, which can cause our liquidity
position to fluctuate from quarter to quarter.
During 2020, the COVID-19 pandemic led to a deviation from the historical
seasonality trend we generally experience in our Home & Community Services
segment, whereby the fourth quarter IHE volume and revenue are generally lower
than the other quarters. As a result, and due to the shift to vIHEs during our
temporary suspension of IHEs in March 2020 due to COVID-19, our liquidity trends
were negatively impacted during certain periods in 2020. During the first nine
months of 2021, the vast majority of our evaluations were performed on an
in-person basis, although we continued to perform vIHEs as an ongoing product
offering. Additionally, the phasing of the overall IHE volume in the first nine
months of 2021 was more in line with historical trends in the Home & Community
Services segment, albeit at higher absolute volumes, and therefore we currently
anticipate 2021 liquidity to be more consistent with historical seasonality
trends. In our Episodes of Care Services segment, the lower number of episodes
managed in 2020 and the lower than expected savings rate, primarily driven by
the effects of COVID-19 and CMS' response thereto, impacted the semiannual
reconciliation we received during the second quarter of 2021. We received the
cash related to this reconciliation in the third quarter of 2021, which was a
significantly lower amount than that received from the prior reconciliation.
Recently, CMS announced a change to the period in which they will pay funds
related to expirations. This change will result in a delayed payment for one
period, which will have a temporary adverse impact on the cash expected to be
received in early 2022 following the receipt of our next semi-annual
reconciliation.
We believe that our cash flow from operations, capacity under our 2021 Credit
Agreement and available cash and cash equivalents on hand 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
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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." Accordingly, we cannot
assure you that our business will generate sufficient cash flow from operations
or that future borrowings will be available from additional indebtedness or
otherwise to meet our liquidity needs. If we decide to pursue one or more
significant acquisitions, we may incur additional debt or sell or issue
additional equity to finance such acquisitions, which could possibly result in
additional expenses or dilution.
Comparative cash flows
The following table sets forth our cash flows for the periods indicated:
Nine months ended September 30,
2021 2020
(in millions)
Net cash provided by (used in) operating activities $ 123.4 $ 40.7
Net cash used in investing activities (26.2) (28.7)
Net cash provided by financing activities 511.7 30.1
Net increase in cash, cash equivalents and restricted cash
608.9 42.1
Cash, cash equivalents and restricted cash - beginning of year
77.0 50.2
Cash, cash equivalents and restricted cash - end of
period $ 685.9 $ 92.3
Operating activities
Net cash provided by operating activities was
Net loss was$22.5 million for the nine months endedSeptember 30, 2021 , as compared to$15.2 million for the nine months endedSeptember 30, 2020 . The increase in net loss was primarily due to the remeasurement of the outstanding customer EARs partially offset by growth in our Home & Community Services segment. Non-cash items were$120.5 million for the nine months endedSeptember 30, 2021 as compared to$72.1 million for the nine months endedSeptember 30, 2020 . The increase in net non-cash expense items is primarily driven by the significant increase in the fair value adjustment of the customer EARs following the IPO and the loss on extinguishment of debt partially offset by a deferred tax benefit. Changes in operating assets and liabilities resulted in a cash increase of$27.3 million for the nine months endedSeptember 30, 2021 , as compared to a decrease of$14.4 million for the nine months endedSeptember 30, 2020 . The change in operating assets and liabilities is primarily driven by changes in working capital needs of which the primary driver are changes in accounts receivable. The reduction in accounts receivable in 2021 was primarily driven by collections in the Episodes of Care Services segment together with the impact of COVID-19 leading to a reduction in program size. This was partially offset by growth in accounts receivable as a result of the increase in in-person IHE volumes in 2021. In 2020, we experienced a temporary backlog in collections in our Home & Community Services segment due to the switch to vIHEs. An increase in operating expenses as a result of the investments to support our growth and technology has further impacted our working capital needs. Accounts receivable, contract assets and contract liabilities fluctuate from period to period as a result of periodically slower client collections and the results of the semi-annual reconciliations in our Episodes of Care Services segment.
Investing activities
Net cash used in investing activities was$26.2 million for the nine months endedSeptember 30, 2021 , a decrease of$2.5 million , compared to net cash used in investing activities of$28.7 million for the nine months endedSeptember 30, 2020 . Capital expenditures for property and equipment were$3.7 million for the nine months 53 -------------------------------------------------------------------------------- endedSeptember 30, 2021 compared to$13.0 million for the nine months endedSeptember 30, 2020 . The$9.3 million decrease in capital expenditures for property and equipment was primarily driven by investments in certain facilities and other requirements to support the growth of the business in early 2020. Capital expenditures for internal-use software development were$17.1 million for the nine months endedSeptember 30, 2021 compared to$15.7 million for the nine months endedSeptember 30, 2020 . The$1.4 million increase in capital expenditures for internal-use software development was primarily driven by additional investments in our technology platforms to support future growth. During the nine months endedSeptember 30, 2021 , we released$0.4 million in restricted cash to the sellers of PatientBlox, in accordance with the purchase agreement related to the PatientBlox acquisition that was completed in the fourth quarter of 2020. Investing activities also included a$5.0 million equity investment inMedalogix, Inc. during the nine months endedSeptember 30, 2021 .
Financing activities
Net cash provided by financing activities was$511.7 million for the nine months endedSeptember 30, 2021 , an increase of$481.6 million , compared to$30.1 million for the nine months endedSeptember 30, 2020 . The primary source of cash provided by financing activities for the nine months endedSeptember 30, 2021 was the net proceeds of$604.8 million related to our IPO after deducting underwriter commissions and other issuance costs. Additionally, we received$2.7 million in proceeds related to the issuance of common stock in connection with the exercise of stock options. These cash inflows in 2021 were partially offset by the net reduction in long-term debt of$61.5 million in connection with theJune 2021 refinancing as well as scheduled principal payments on long-term debt of$1.0 million . Additionally, we paid approximately$9.2 million in debt issuance costs in connection with theJune 2021 refinancing,$13.1 million related to the completion of the first milestone associated with the 2020 PatientBlox acquisition and$10.6 million in tax distributions to the non-controlling interest members of Cure TopCo. The primary source of cash provided by financing activities for the nine months endedSeptember 30, 2020 was a net$77.0 million in borrowings under the then outstanding revolving credit facility drawn as a precautionary measure related to the emergence of the COVID-19 pandemic. This was partially offset by a$38.2 million payment of contingent consideration to the sellers of a business acquired in 2017 as a result of the closure of an outstanding tax matter. Indebtedness OnJune 22, 2021 , our subsidiaries, Cure Intermediate 3, LLC, as "Holdings," andSignify Health, LLC , as "Borrower," entered into a credit agreement (the "2021 Credit Agreement") with Barclays Bank PLC as administrative agent and collateral agent (the "Administrative Agent"), the guarantors party thereto from time to time and the lenders party thereto from time to time, consisting of term loans in an aggregate principal amount of$350.0 million (the "2021 Term Loan") and a revolving credit facility in an aggregate principal amount of$185.0 million (the "Revolving Credit Facility"). The obligations under the 2021 Credit Agreement are secured by substantially all of the assets of Holdings, the Borrower and its wholly-owned domestic subsidiaries (subject to customary exceptions and exclusions), including a pledge of the equity of each of its subsidiaries. The 2021 Credit Agreement replaced all previously outstanding indebtedness. The 2021 Term Loan amortizes at 1.00% per annum in quarterly installments of 0.25% commencing with the first payment inDecember 2021 , and will mature onJune 22, 2028 . The Revolving Credit Facility matures onJune 22, 2026 . The 2021 Term Loan bears interest at a rate of the base rate plus 2.25% for base rate loans or the eurocurrency rate plus 3.25% for eurocurrency rate loans, provided that upon and any time after the public corporate credit rating of the Borrower is first rated "B+" or higher byStandards and Poors' Rating Agency ("S&P") followingJune 22, 2021 , the applicable rate with respect to the 2021 Terms Loan shall be permanently reduced by 0.25% for both eurocurrency rate loans and for base rate loans. Borrowings under the Revolving Credit Facility initially bear interest at a rate of the base rate plus 1.75% for base rate loans or the eurocurrency rate plus 2.75% for eurocurrency rate loans and letter of credit fees and, undrawn commitment fees equal to 0.25%. Following the delivery of financial statements for the first full quarter afterJune 22, 2021 , the interest rate for borrowings under the Revolving Credit Facility will be based on the consolidated first lien net leverage ratio pricing grids below. Provided that upon 54 -------------------------------------------------------------------------------- and any time after the public corporate credit rating of the Borrower is first rated B+ or higher by S&P subsequent toJune 22, 2021 , the Applicable Rate with respect to Revolving Credit Loans and Letter of Credit fees shall be permanently reduced by 0.25% at each Pricing Level in the pricing grids below. Consolidated FirstLien Net Eurocurrency
Rate Loans and
Pricing Level Leverage Ratio Letter of
Credit Fees Base Rate Loans
1 >2.00:1.00 3.25% 2.25%
2 ?2.00:1.00 and >1.50:1.00 3.00% 2.00%
3 ?1.50:1.00 2.75% 1.75%
Pricing Level Consolidated First Lien Net Leverage Ratio Commitment Fee
1 >2.25:1.00 0.50%
2 ?2.25:1.00 and >2.00:1.00 0.375%
3 ?2.00:1.00 0.250%
In addition, the 2021 Credit Agreement contains covenants that, among other
things, restrict the ability of the Borrower and its restricted subsidiaries to
make certain restricted payments, incur additional debt, engage in certain asset
sales, mergers, acquisitions or similar transactions, create liens on assets,
engage in certain transactions with affiliates, change its business, make
investments and may limit or restrict the Borrower's ability to make dividends
or other distributions to us. In addition, the 2021 Credit Agreement contains a
springing financial covenant requiring the Borrower to maintain its Consolidated
First Lien Net Leverage Ratio (as defined in the 2021 Credit Agreement) at or
below 4.50:1.00 as of the last day of any fiscal quarter in which the principal
amount of all revolving loans and letters of credit (other than undrawn letters
of credit) exceed 35% of the revolving credit commitments at such time.
Dividend Policy
Assuming Cure TopCo makes distributions to its members in any given year, the
determination to pay dividends, if any, to our Class A common stockholders out
of the portion, if any, of such distributions remaining after our payment of
taxes, TRA payments and expenses (any such portion, an "excess distribution")
will be made at the sole discretion of our Board of Directors. Our Board of
Directors may change our dividend policy at any time.
Tax Receivable Agreement
We are a party to the TRA with the TRA Parties, under which we generally are
required to pay to the TRA Parties 85% of the amount of cash savings, if any, in
U.S. federal, state and local income tax that we actually realize as a result of
(i) certain favorable tax attributes we acquired from the Blocker Companies in
the Mergers (including net operating losses, the Blocker Companies' allocable
share of existing tax basis and refunds of taxes attributable to pre-Merger tax
periods), (ii) increases in our allocable share of existing tax basis and tax
basis adjustments that may result from (x) future redemptions or exchanges of
LLC Units by Continuing Pre-IPO LLC Members for cash or Class A common stock,
(y) the IPO Contribution and (z) certain payments made under the TRA and (iii)
deductions in respect of interest and certain compensatory payments made under
the TRA. These payment obligations are our obligations and not obligations of
Cure TopCo. Our obligations under the TRA also apply with respect to any person
who is issued LLC Units in the future and who becomes a party to the TRA. We do
not anticipate making payments under the TRA until after the 2021 tax return has
been finalized.
Customer Equity Appreciation Rights Agreements
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In each of December 2019 and September 2020 , we entered into EAR agreements with
one of our customers. Pursuant to the agreements, certain revenue targets are
established for the customer to meet in the next three years. If they meet those
targets, they retain the EAR. If they do not meet such targets, they forfeit all
or a portion of the EAR. Each EAR agreement allows the customer to participate
in the future growth in the fair market value of our equity and can only be
settled in cash (or, under certain circumstances, in whole or in part with a
replacement agreement containing substantially similar economic terms as the
original EAR agreement) upon a change-in-control of us, other liquidity event,
or upon approval of our Board of Directors with the consent of New Mountain
Capital subject to certain terms and conditions. Each EAR will expire 20 years
from the date of grant, if not previously settled.
Pursuant to the terms of the EAR agreements, the value of the EARs will be
calculated as an amount equal to the non-forfeited portion of a defined
percentage (3.5% in the case of the December 2019 EAR and 4.5% in the case of
the September 2020 EAR) of the excess of (i) the aggregate fair market value of
the Reference Equity (as defined below) as of the applicable date of
determination over (ii) a base threshold equity value defined in each agreement.
Pursuant to the terms of each agreement, the "Reference Equity" is the Class A
common stock of the Company and the aggregate fair market value of the Reference
Equity will be determined by reference to the volume-weighted average trading
price of the Company's Class A common stock (assuming all of the holders of LLC
Units redeemed or exchanged their LLC Units for a corresponding number of newly
issued shares of Class A common stock) over a period of 30 calendar days. In
addition, following the IPO, the base threshold equity value set forth in each
agreement was increased by the aggregate offering price of the IPO.
As defined in each EAR, a change in control will be deemed to have occurred if
any person or group of persons other than New Mountain Capital shall
beneficially own 35% or more of the total voting power of Signify Health, LLC or
New Mountain Capital ceases to have the right, directly or indirectly, to elect
or designate for election at least a majority of the board of directors of
Signify Health, LLC . New Mountain Capital holds a majority of our total voting
power and has the right, both by voting power and contractually, to designate
for election at least a majority of the board of directors of Signify Health,
LLC , and as a result, the Reorganization Transactions and the IPO did not affect
the EAR agreements or impact the manner in which the value of each EAR is
calculated except as set forth above.
As of September 30, 2021 , cash settlement was not considered probable, due to
the change in control and liquidity provisions of each EAR. The grant date fair
value of the December 2019 customer EAR was estimated to be $15.2 million and is
being recorded as a reduction of revenue through December 31, 2022 , coinciding
with the three-year performance period. The grant date fair value of the
September 2020 customer EAR was estimated to be $36.6 million and is being
recorded as a reduction of revenue through December 31, 2022 , coinciding with
the 2.5-year performance period. As of September 30, 2021 , the total estimated
fair market value of the outstanding EAR agreements was approximately $148.1
million .
Non-GAAP financial measures
Adjusted EBITDA and Adjusted EBITDA Margin are not measures of financial
performance under accounting principles generally accepted in the United States
of America ("GAAP") and should not be considered substitutes for GAAP measures,
including net income or loss, which we consider to be the most directly
comparable GAAP measure. Adjusted EBITDA and Adjusted EBITDA Margin have
limitations as analytical tools, and when assessing our operating performance,
you should not consider these non-GAAP financial measures in isolation or as
substitutes for net income or loss or other consolidated income statement data
prepared in accordance with GAAP. Other companies may calculate Adjusted EBITDA
and Adjusted EBITDA Margin differently than we do, limiting its usefulness as a
comparative measure.
We define Adjusted EBITDA as net income (loss) before interest expense, loss on
extinguishment of debt, income tax expense, depreciation and amortization and
certain items of income and expense, including asset impairment, other (income)
expense, net, transaction-related expenses, equity-based compensation,
compensation expense related to synthetic equity units, remeasurement of
contingent consideration and non-recurring expenses. We believe that Adjusted
EBITDA provides a useful measure to investors to assess our operating
performance because it eliminates the impact of expenses that do not relate to
ongoing business performance, and that the presentation of this measure enhances
an investor's understanding of the performance of our business.
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Adjusted EBITDA is a key metric used by management and our board of directors to
assess the performance of our business. We believe that Adjusted EBITDA provides
a useful measure to investors to assess our operating performance because it
eliminates the impact of expenses that do not relate to ongoing business
performance, and that the presentation of this measure enhances an investor's
understanding of the performance of our business. We believe that Adjusted
EBITDA Margin is helpful to investors in measuring the profitability of our
operations on a consolidated level.
Our use of the terms Adjusted EBITDA and Adjusted EBITDA Margin may vary from
the use of similar terms by other companies in our industry and accordingly may
not be comparable to similarly titled measures used by other companies. Adjusted
EBITDA and Adjusted EBITDA Margin have important limitations as analytical
tools. For example, Adjusted EBITDA and Adjusted EBITDA Margin:
•do not reflect any cash capital expenditure requirements for the assets being
depreciated and amortized that may have to be replaced in the future;
•do not reflect changes in, or cash requirements for, our working capital needs;
•do not reflect the impact of certain cash charges resulting from matters we
consider not to be indicative of our core operations;
•do not reflect the interest expense or the cash requirements necessary to
service interest or principal payments on our debt; and
•do not reflect equity-based compensation expense and other non-cash charges;
and exclude certain tax payments that may represent a reduction in cash
available to us.
Adjusted EBITDA increased by $13.3 million , or 45.7%, to $42.0 million in the
three months ended September 30, 2021 from $28.7 million in the three months
ended September 30, 2020 . Adjusted EBITDA increased by $45.0 million , or 52.4%,
to $131.0 million in the nine months ended September 30, 2021 from $86.0 million
in the nine months ended September 30, 2020 .
We define Adjusted EBITDA Margin as Adjusted EBITDA divided by revenue. We
believe that Adjusted EBITDA Margin is helpful to investors in measuring the
profitability of our operations on a consolidated level. Adjusted EBITDA Margin
increased by 250 basis points to 21.1% in the three months ended September 30,
2021 from 18.6% in the three months ended September 30, 2020 . Adjusted EBITDA
Margin increased by 150 basis points to 22.1% in the nine months ended September
30, 2021 from 20.6% in the nine months ended September 30, 2020 .
57
--------------------------------------------------------------------------------The following table shows a reconciliation of net income (loss) to Adjusted EBITDA for the periods presented:
Three months ended September 30, Nine months ended September 30,
2021 2020 2021 2020
(in millions) (in millions)
Net income (loss) $ 29.3 $ (13.3) $ (22.5) $ (15.2)
Interest expense 4.2 5.1 17.5 16.2
Loss on extinguishment of debt - - 5.0 -
Income tax expense (benefit) 6.4 0.2 (3.7) 0.5
Depreciation and amortization 17.6 15.8 51.6 46.0
Other expense (income), net(a) (27.4) 6.3 43.6 6.9
Transaction-related expenses(b) 2.9 6.8 9.5 10.8
Equity-based compensation(c) 3.7 2.1 9.5 10.0
Customer equity appreciation rights(d) 5.0 4.9 14.8 7.5
Remeasurement of contingent
consideration(e) - - 2.2 0.2
SEU Expense(f) 0.2 - 2.0 -
Non-recurring expenses(g) 0.1 0.8 1.5 3.1 Adjusted EBITDA $ 42.0$ 28.7 $ 131.0$ 86.0 (a) Represents other non-operating (income) expense that consists primarily of the quarterly remeasurement of fair value of the outstanding customer EARs, as well as interest and dividends earned on cash and cash equivalents. (b) Represents transaction-related expenses that consist primarily of expenses incurred in connection with acquisitions and other corporate development activities, such as potential mergers and acquisitions activity, strategic investments and similar activities. Expenses incurred in connection with our IPO, which cannot be netted against proceeds, are also included in transaction-related expenses. (c) Represents expense related to equity incentive awards, including incentive units, stock options and restricted stock units, granted to certain employees, officers and non-employee directors as long-term incentive compensation. We recognize the related expense for these awards ratably over the vesting period or as achievement of performance criteria become probable. (d) Represents the reduction of revenue related to the grant date fair value of the customer EARs granted pursuant to the customer EAR agreements we entered into inDecember 2019 andSeptember 2020 . (e) Represents remeasurement of contingent consideration in 2021 related to potential payments due upon completion of certain milestone events in connection with our acquisition of PatientBlox. In 2020, represents the remeasurement of contingent consideration to the selling shareholders ofCenseo Health , a business acquired in 2017, pending the resolution of an Internal Revenue Service ("IRS") tax matter. The matter was resolved in 2020. (f) Represents compensation expense related to outstanding synthetic equity awards subject to time-based vesting. A limited number of synthetic equity units were granted in 2021 at the time of the IPO; no future grants will be made. Compensation expense related to these awards is tied to the 30-trading day average price of our Class A common stock, and therefore is subject to volatility and may fluctuate from period to period until settlement occurs. (g) Represents certain gains and expenses incurred that are not expected to recur, including those associated with one-time costs related to the COVID-19 pandemic, the closure of certain facilities, the sale of certain assets and the early termination of certain contracts. 58 -------------------------------------------------------------------------------- Contractual Obligations and Commitments As ofSeptember 30, 2021 , there have been no material changes from the contractual obligations and commitments previously disclosed in our 2020 Annual Report on Form 10-K other than the refinancing of our long-term debt inJune 2021 . See Note 10, "Long-term Debt" to our Condensed Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q. EffectiveOctober 1, 2021 , we entered into a new lease agreement for a facility inOklahoma City, OK. The lease term is 7.25 years, with two 5-year options to renew, and total lease payments are expected to be approximately$4.2 million . Off-balance sheet arrangements Except for operating leases and certain letters of credit entered into in the normal course of business, we do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. Critical accounting policies The discussion and analysis of our financial condition and results of operations is based upon our Condensed 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. There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our 2020 Form 10-K. Recent accounting pronouncements For more information on recently issued accounting pronouncements, see Note 2 to our Condensed Consolidated Financial Statements covered under Part I, Item 1 of this Quarterly Report on Form 10-Q. Emerging growth company status We are an "emerging growth company" as defined in the JOBS Act of 2012. We will remain an emerging growth company until the earlier of (1) the last day of our fiscal year (a) following the fifth anniversary of the completion of our IPO, (b) in which we have total annual gross revenue of at least$1.07 billion , or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds$700.0 million as of the last business day of our most recently completed second fiscal quarter, and (2) the date on which we have issued more than$1.0 billion in non-convertible debt securities during the prior three-year period. 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 59 --------------------------------------------------------------------------------
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. Item 3. Quantitative and qualitative disclosures about market risks.
In the ordinary course of our business activities, we are exposed to market risks that are beyond our control and which may have an adverse effect on the value of our financial assets and liabilities, future cash flows and earnings. The market risks that we are exposed to primarily relate to changes in interest rates associated with our long-term debt obligations and cash and cash equivalents. AtSeptember 30, 2021 , we had total variable rate debt outstanding under our Credit Agreement of$350.0 million . If the effective interest rate of our variable rate debt outstanding as ofSeptember 30, 2021 were to increase by 100 basis points (1%), our annual interest expense would increase by approximately$3.5 million . AtSeptember 30, 2021 , our total unrestricted cash and cash equivalents were$678.7 million . Throughout the year, we invest any excess cash in short-term investments, primarily money market accounts, where returns effectively reflect current interest rates. As a result, market interest rate changes may impact our interest income. The impact will depend on variables such as the magnitude of rate changes and the level of excess cash balances. We do not consider this risk to be material. We manage such risk by continuing to evaluate the best investment rates available for short-term, high-quality investments. Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in theSEC's rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and President, Chief Financial and Administrative Officer, as appropriate, to allow timely decisions regarding required disclosure. In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of our management, including the Chief Executive Officer and President, Chief Financial and Administrative Officer of the effectiveness of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and President, Chief Financial and Administrative Officer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified inSEC rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and President, Chief Financial and Administrative Officer, as appropriate to allow timely decisions regarding required disclosure. We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Due to the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures is also based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. 60 -------------------------------------------------------------------------------- An audit of our internal control over financial reporting as of any balance sheet date or for any period reported in our financial statements has not been required throughSeptember 30, 2021 . Our independent public registered accounting firm will first be required to attest to the effectiveness of our internal controls over financial reporting once we are no longer an "emerging growth company." In addition, as a newly public company, our management will be required to perform an annual assessment of the effectiveness of our internal controls over financial reporting in our second Annual Report on Form 10-K which is for the year endingDecember 31, 2021 .
Changes in Internal Control over Financial Reporting
There have been no changes in the Company's internal controls over financial reporting during the three months endedSeptember 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 61
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