SIGNIFY HEALTH, INC. The following discussion of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements as of and for the years endedDecember 31, 2022 , 2021 and 2020 and the notes thereto included elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs and that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in "Forward-Looking Statements" and "Item 1A. Risk Factors." The following discussion contains references to periods prior to the Reorganization Transactions which were effectiveFebruary 12, 2021 . Therefore, the financial results referenced for those periods relate to Cure TopCo and its consolidated subsidiaries. Any information related to periods subsequent to the Reorganization Transactions refer toSignify Health and its consolidated subsidiaries, including Cure TopCo.
Overview
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 build trusted relationships to make people healthier. We believe that we are a market leader in the value-based healthcare payment industry offering a suite of total cost of care enablement services, including, among others, in-home health evaluations ("IHEs") performed either within the patient's home, virtually or at a healthcare provider facility, diagnostic & preventive services, ACO enablement services, provider enablement services, 340B referrals and return to home services. 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 mobile network of providers completed evaluations for over 2.3 million individuals participating in Medicare Advantage and other managed care plans in 2022. ACOs are an alternative payment model where a range of providers take responsibility for the cost of a patient's healthcare over the course of a year with the goal of improving quality and operational efficiency and sharing in any savings achieved as a result of such coordination. Our ACO services are intended to help our clients generate and receive shared savings. These services include, but are not limited to, population health software, analytics, practice improvement, compliance, and governance. We provide our ACO services primarily throughCaravan Health, Inc. , which we acquired onMarch 1, 2022 . We believe that these core solutions 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 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. Our business model is aligned with our customers, as we generate revenue when we successfully engage members for our health plan customers and generate savings for our provider customers.
Recent Developments and 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
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forth below is a discussion of the key factors impacting our results of
operations. Unless otherwise specified, all amounts relate to our continuing
operations only.
Pending Acquisition
On September 2, 2022 , we entered into an Agreement and Plan of Merger (the
"Merger Agreement") with CVS Pharmacy, Inc. , a Rhode Island corporation
("Parent"), and Noah Merger Sub, Inc. , a Delaware corporation and wholly owned
subsidiary of Parent ("Merger Subsidiary"), pursuant to which, among other
things, Merger Subsidiary will merge with and into the Company and whereupon
Merger Subsidiary will cease to exist and the Company will be the surviving
corporation in the Merger (the "Surviving Corporation") and will continue as a
wholly-owned subsidiary of Parent (the "Merger").
At the effective time of the Merger (the "Effective Time"), each share of our
class A common stock (other than (i) common stock owned by the Company, Parent
or Merger Subsidiary or any subsidiary thereof and (ii) any shares of class A
common stock and our class B common stock owned by stockholders who properly
exercise appraisal rights under Delaware law), including each share of class A
common stock resulting from the exchange of LLC Units (as defined below),
outstanding immediately prior to the Effective Time, shall be canceled and
converted into the right to receive $30.50 per share in cash, without interest
(such per-share consideration, the "Per Share Consideration" and the aggregate
consideration, the "Merger Consideration").
Pursuant to the Merger Agreement, immediately prior to the Effective Time, in
accordance with the Merger Agreement, the Third Amended and Restated Limited
Liability Company Agreement of Cure TopCo LLC ("Cure TopCo"), dated as of
February 12, 2021 (the "Cure TopCo Amended LLC Agreement") and our certificate
of incorporation, (i) we will require each member of Cure TopCo (excluding the
Company and the Company Holding Subsidiary (as defined in the Merger Agreement),
but including Cure Aggregator, LLC ) to effectuate a redemption of all of such
Cure TopCo member's LLC Units (as defined in the Cure TopCo Amended LLC
Agreement) ("LLC Units"), pursuant to which such LLC Units will be exchanged for
shares of class A common stock on a one-for-one basis in accordance with the
provisions of the Cure TopCo Amended LLC Agreement and the Merger Agreement and
(ii) each share of class B common stock shall automatically be canceled
immediately upon the consummation of such redemptions, such that no shares of
class B common stock will remain outstanding immediately prior to the Effective
Time.
Consummation of the Merger is subject to certain conditions, including, but not
limited to, (i) our receipt of the approval of the Merger Agreement by
stockholders holding a majority of the voting power of the outstanding shares of
common stock, (ii) the expiration or early termination of the applicable waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, (iii) the
absence of any law or order prohibiting or making illegal the consummation of
the Merger, (iv) the absence of any Material Adverse Effect (as defined in the
Merger Agreement) on the Company and (v) the TRA Amendment (as defined below)
being in full force and effect in accordance with its terms and not having been
amended, repudiated, rescinded, or modified.
On
OnSeptember 19, 2022 , each of the Company and Parent filed its respective Notification and Report Form with theU.S. Department of Justice (the "DOJ") and theU.S. Federal Trade Commission (collectively, the "Agencies") under the HSR Act. OnOctober 19, 2022 , the Company and Parent each received a request for additional information and documentary materials (collectively, the "Second Request") from the DOJ in connection with the DOJ's review of the Merger. The effect of the Second Request is to extend the waiting period imposed 84 -------------------------------------------------------------------------------- Table of Contents under the HSR Act until the 30th day after substantial compliance by the Company and Parent with the Second Request, unless the waiting period is terminated earlier by the DOJ or extended by the parties to the Merger.
The Company has made customary representations and warranties in the Merger Agreement and has agreed to customary covenants regarding the operation of the business of the Company and its subsidiaries prior to the Effective Time.
The Merger Agreement contains certain termination rights for each of the Company and Parent. Upon termination of the Merger Agreement in accordance with its terms, under certain specified circumstances, the Company will be required to pay Parent a termination fee in an amount equal to$228.0 million , including if the Merger Agreement is terminated due to the Company accepting a superior proposal or due to the Company's Board changing its recommendation to the Company's stockholders to vote to approve the Merger Agreement. The Merger Agreement further provides that Parent will be required to pay the Company a termination fee in an amount equal to$380.0 million in the event the Merger Agreement is terminated under certain specified circumstances and receipt of antitrust approval has not been obtained by such time.
If the Merger is consummated, the Company will cease to be a publicly traded company and will become a wholly owned subsidiary of Parent, and our common stock will be delisted from the NYSE and deregistered under the Exchange Act.
We recorded approximately$18.2 million of transaction-related costs associated with the pending merger primarily related to banker fees, professional services fees and employee retention bonuses as transaction-related expenses in our Consolidated Statement of Operations during the year endedDecember 31, 2022 . The foregoing description of the Merger Agreement does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Merger Agreement, which was filed as Exhibit 2.1 to the Current Report on Form 8-K filed by the Company with theSEC onSeptember 6, 2022 and also attached as Annex A to the Definitive Proxy Statement.
Episodes of Care Restructuring and Exit
OnJuly 7, 2022 , our Board approved a restructuring plan to wind down our former episodes of care business. This decision was made in light of recent retrospective trend calculations released by theCenter for Medicare & Medicaid Innovation inJune 2022 that lowered target prices for episodes in the BPCI-A program, and which we believe have made the program unsustainable. The total cost of the restructuring plan was initially estimated to be approximately$25-$35 million comprised of severance and related employee costs, contract termination fees and professional service fees as well as facility closure costs. We recorded total restructuring expenses of$23.3 million during the year endedDecember 31, 2022 , which represents the majority of the restructuring plan costs. Total restructuring expenses during the year endedDecember 31, 2022 include$21.1 million related to and included in the loss on discontinued operations, net of tax and$2.1 million included as restructuring expenses on our Consolidated Statement of Operations. Total restructuring expenses for the year endedDecember 31, 2022 are comprised of$11.7 million for severance and related employee costs,$9.9 million in contract termination fees and$1.6 million for professional service fees. We also incurred approximately$1.0 million related to facility exit costs which are included in the loss on discontinued operations on our Consolidated Statement of Operations for the year endedDecember 31, 2022 . We expect to incur some additional costs in connection with the restructuring plan actions in the first quarter of 2023. 85 -------------------------------------------------------------------------------- Table of Contents Historically, there were approximately$85 million of annualized direct Episodes of Care costs which we eliminated by the end of 2022. In addition, there were approximately$60 million of annualized shared costs historically allocated to the former Episodes of Care Wind-down segment, of which we eliminated approximately$34 million in annualized costs by the end of 2022 as we ceased operations in our former Episodes of Care business. In addition, we expect to eliminate an additional$3 million in annualized shared costs by the end of the first half of 2023 as we complete the overall re-alignment of cost structures throughout the organization due to the exit of the episodes of care business. As a result of the elimination of these stranded costs, not all of which related directly to the discontinued operations, we expect a positive impact to 2023 results of operations.
As of
Caravan Health Acquisition
OnMarch 1, 2022 , we completed the acquisition ofCaravan Health for an initial purchase price of approximately$250.0 million , subject to certain customary adjustments, and included$190.0 million in cash and$60.0 million in our Class A common stock, comprised of 4,762,134 shares at$12.5993 per share, which represented the volume-weighted average price per share of our common stock for the five trading days ending three business days prior toMarch 1, 2022 . In connection with and concurrently with the entry into the Caravan Health Merger Agreement, we entered into support agreements with certain shareholders ofCaravan Health , pursuant to which such shareholders agreed that, other than according to the terms of their respective support agreement, they will not, subject to certain limited exceptions, transfer, sell or otherwise dispose of any Signify shares for a period of up to five years following closing of the merger. In addition to the initial purchase price, the transaction included contingent additional payments of up to$50.0 million based on certain future performance criteria ofCaravan Health , which if such criteria are met, would be paid in the second half of 2023. The initial fair value of the contingent consideration as of the acquisition date was estimated to be approximately$30.5 million . The contingent consideration is payable based on the achievement of certain performance criteria, one of which is revenue. Both performance criteria must be achieved for any payment to be due. As ofDecember 31, 2022 , the estimated fair value of contingent consideration has decreased since the acquisition date as the estimated revenue for 2022 is below the threshold to earn any of the payment due to new information received from CMS during the year endedDecember 31, 2022 and therefore the likelihood of the defined revenue criteria being achieved is unlikely. WhileCaravan Health revenue for 2022 will not be deemed final until receipt of the final reconciliation from CMS in the second half of 2023, the performance period to earn the payment ended as ofDecember 31, 2022 . Therefore, the value of the contingent consideration is estimated to be zero as ofDecember 31, 2022 . See "-Results of Operations." During the year endedDecember 31, 2022 , in accordance with the terms of the Caravan Health Merger Agreement we calculated the final net working capital adjustment to the initial purchase price which resulted in an additional$0.9 million cash consideration due to the sellers. This additional amount due was primarily related to adjustments of the estimated contract assets based on the final reconciliation received from CMS for the 2021 performance periods and updated income tax estimates. We paid the additional cash consideration in the fourth quarter of 2022. 86
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As part of theCaravan Health acquisition, we assigned preliminary values to the assets acquired and the liabilities assumed based upon their fair values at the acquisition date. We acquired$93.9 million of intangible assets, consisting primarily of customer relationships of$69.8 million (10-year useful life), acquired technology of$23.4 million (5-year useful life) and a tradename of$0.7 million (3-year useful life), which increased our amortization expense in 2022 and we expect will do so in future periods. As a result of theCaravan Health acquisition, we also recorded$199.5 million in goodwill, which represented the amount by which the purchase price exceeded the fair value of the identifiable net assets acquired. Pro forma results of operations related to this acquisition have not been presented as the acquisition did not meet the prescribed significance tests set forth in Regulation S-X requiring such disclosure. The financial results ofCaravan Health have been included in our Consolidated Financial Statements since the date of the acquisition. Due to the above factors, and in particular the increase in amortization expense, our results of operations for periods subsequent to the acquisition are not directly comparable to our results of operations for the periods prior to the acquisition date.
Impact of IHE volume and margins
Our revenue and profitability 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 Member List, including any increase or reduction in the number of members included in the Member List (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 Member Lists. The capacity of our mobile network is affected by our ability to recruit and retain providers in our contracted network. As overall healthcare utilization increases, demand for providers from other participants in the healthcare industry increases, which may make it more difficult for us to recruit new providers and retain existing providers. The capacity of our mobile network is also affected by factors such as the ability of providers to obtain necessary state licenses within a reasonable timeframe, the availability of pandemic-related waivers that allow providers to provider services in states in which they are not licensed, the willingness of providers to make more of their time available to us, and our ability to efficiently schedule appointments and route providers to maximize the number of IHEs they are able to complete in a day. We believe we will benefit from demographic trends in the coming years. As theU.S. population ages, the number of Medicare eligible individuals is increasing. Moreover, according to CMS, Medicare Advantage is growing faster than the Medicare Classic or FFS program. 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 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 difficult-to-reach or less densely populated areas. 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 he or she 87 -------------------------------------------------------------------------------- Table of Contents is 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 most costly 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. As previously indicated, as overall healthcare utilization increases, demand for providers from other participants in the healthcare industry is increasing, which may create pressure for us to increase provider compensation in certain geographic areas in order to recruit and retain providers in our network. This pressure may be exacerbated by rising inflation inthe United States . These and other factors may further impact the average cost of performing IHEs and our margins. During the year endedDecember 31, 2022 , we completed and sent to customers approximately 2.34 million IHEs, including vIHEs, compared to 1.91 million IHEs, including vIHEs, in the year endedDecember 31, 2021 . In 2022, the higher IHE volume was driven by increased customer demand partially offset by certain vendor technology issues.
Seasonality
Historically, there has been a seasonal pattern to our revenue generated by our IHE related services, 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 Member List, 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. In 2020, the COVID-19 pandemic led to a large number of in-person IHEs being conducted in the second half of the year, particularly in the fourth quarter, and as a result, for 2020, we did not see the historical seasonality we would normally expect with respect to IHE volume. In 2021 and 2022, we returned to a seasonality trend related to our IHE services more consistent with historical trends, with fewer IHEs being conducted in the fourth quarter, compared to the second and third quarters. However, any further developments with respect to timing of receiving member lists from our customers and/or customer demand may impact seasonality trends.
COVID-19
Our operations were significantly affected by the COVID-19 pandemic in early 2020 as we temporarily paused IHEs inMarch 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 inJuly 2020 . Despite the availability of vIHEs, many of our customers had postponed IHEs to the second half of 2020. Overall, we saw significant incremental 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 were IHEs, although we continued to perform vIHEs. Overall, IHE volume in 2021 was strong and increased 33% compared to 2020. Late in the fourth quarter of 2021 and into early 2022, there were once again COVID-19 surges across the country, particularly related to Omicron and other variants. While this did impact provider availability temporarily, we did not experience a significant decline in IHE volume or significant shift in mix from IHEs to vIHEs as a result of the various COVID-19 surges in late 2021 or throughout 2022. 88 -------------------------------------------------------------------------------- Table of Contents Equity-based compensation expense OnMarch 1, 2022 , our Board approved amendments to certain outstanding equity award agreements, subject to performance-based vesting criteria. The equity awards were amended with an effective date ofMarch 7, 2022 , and included 3,572,469 outstanding common units in Cure Aggregator (the "Incentive Units") and 817,081 outstanding stock options. The amendments added an alternative two-year service-vesting condition to the performance-vesting criteria, which, through the effective date of the amendment, were considered not probable of occurring and, therefore, we had not previously recorded any expense related to these awards. The amended equity awards will now vest based on the satisfaction of the earlier to occur of 1) a two year service condition, with 50% vesting in each ofMarch 2023 andMarch 2024 or 2) the achievement of the original performance vesting criteria. As a result of this amendment, which results in vesting that is considered probable of occurring, we began to record equity-based compensation expense for these amended equity awards inMarch 2022 . The equity-based compensation expense related to these amended awards is based on the fair value as of the effective date of the amended equity awards and will be recorded over the two year service period. The total fair value on the amendment date for theMarch 2022 amended Incentive Units was based on the closing stock price on the amendment date of$14.19 , resulting in total fair value of$50.7 million , of which we recorded$19.5 million in equity-based compensation expense during the year endedDecember 31, 2022 . Of this amount,$0.5 was related to discontinued operations. Subsequent to these amendments, as ofDecember 31, 2022 , there were 1,367,924 Incentive Units that remain outstanding that are subject only to performance-based vesting conditions that are not probable of occurring. The total fair value onMarch 7, 2022 , the amendment effective date, based on a Black-Scholes value of$8.49 , was$6.9 million for theMarch 2022 amended stock options as described above, of which we recorded$2.8 million during the year endedDecember 31, 2022 . Of this amount,$0.3 was related to discontinued operations. As a result of these amendments, there are no longer any stock options outstanding that are subject only to performance-based vesting conditions that are not probable of occurring. Additionally, inMarch 2022 , our Board and theCompensation & Talent Committee approved annual long-term incentive plan equity grants (the "2022 Annual LTIP Equity Grants") to certain employees. A total of 2,677,979 restricted stock units and 4,059,520 stock options with an exercise price of$14.19 were granted as part of this 2022 Annual LTIP Equity Grants. All awards granted as part of the 2022 Annual LTIP Equity Grants vest in equal annual installments over four years. The total grant date fair value related to the 2022 Annual LTIP Equity Grants was$68.8 million and will be recorded as equity-based compensation expense over the four year service period beginning inMarch 2022 . As a result of theMarch 2022 amendments to equity awards with performance-based vesting criteria and the 2022 Annual LTIP Equity Grants, our total equity-based compensation expense is expected to be significantly higher in 2022 and beyond as compared to historical periods.
Adoption of new accounting pronouncement - Leases
InFebruary 2016 , the FASB issued ASU 2016-02, Leases (ASC 842) which requires lessees to recognize leases on the balance sheet by recording a right-of-use asset and lease liability. We adopted this new guidance as ofJanuary 1, 2022 and applied the transition option, whereby prior comparative periods will not be retrospectively presented in the consolidated financial statements. We elected the package of practical expedients not to reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs and the lessee practical expedient to combine lease and non-lease components for all asset classes. We made a policy election to not recognize right-of-use assets and lease liabilities for short-term leases for all asset classes. See Note 9 to our 89
-------------------------------------------------------------------------------- Table of Contents audited Consolidated Financial Statements included in Item 8 elsewhere in this Annual Report on Form 10-K for further details. Upon adoption onJanuary 1, 2022 , we recognized right-of-use assets and lease liabilities for operating leases of$23.0 million and$35.6 million , respectively. The difference between the right-of-use asset and lease liability primarily represents the net book value of deferred rent and tenant improvement allowances recognized as ofDecember 31, 2021 , which was adjusted against the right-of-use asset upon adoption.
Non-controlling interest
The non-controlling interest ownership percentage changes as new shares of Class A common stock are issued and LLC units are exchanged for our Class A common stock. During the year endedDecember 31, 2022 , the change in the non-controlling interest percentage was primarily driven by the shares issued in connection with theCaravan Health acquisition as well as exchanges of LLC units into Class A common stock. As ofDecember 31, 2022 , we held approximately 75.6% of Cure TopCo's outstanding LLC Units and the remaining LLC Units of Cure TopCo are held by the Continuing Pre-IPO LLC Members.
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 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. In 2022, we announced our plans to open a technology center inIreland to expand our access to skilled technology resources in support of our growth strategy. Expanding internationally has resulted and will continue to result in additional infrastructure costs as well as increased risks. See "-Item 1A. Risk Factors-Risks related to our limited operating history, financial position and future growth-We may be subject to risks that arise from operating internationally."
Cost of being a public company
Our operating costs have increased in absolute terms as we develop, manage and
train management level and other employees to comply with ongoing public company
requirements and incur other expenses, including costs related to our public
reporting obligations, which includes increased professional fees for
accounting, legal, 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
with the TRA Parties and are required to make certain cash payments to them in
accordance with the terms of the Tax Receivable Agreement. See "-Liquidity and
capital resources-Tax Receivable Agreement."
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Effects of the reorganization on our corporate structure
Signify Health was formed for the purpose of the IPO, which was effective inFebruary 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 of profits interest 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 consolidated financial statements for periods subsequent to the Reorganization Transactions. Cure TopCo is currently taxed as a partnership for federal income tax purposes and, as a result, its members, including after the Reorganization Transactions and the IPO,Signify Health , pay taxes with respect to their allocable share of its net taxable income. We expect that redemptions and exchanges of 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 Tax Receivable Agreement 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 Tax Receivable Agreement will give rise to additional tax benefits and therefore additional payments under the Tax Receivable Agreement.
Components of our results of operations
Revenue
Our revenue is generated from contracts with our customers that contain various fee structures. We offer multiple solutions to our customers, including, among others, health evaluations performed either within the patient's home, virtually or at a healthcare provider facility, primarily to Medicare Advantage health plans, diagnostic & preventive services, ACO enablement services, a provider enablement platform, 340B referrals and return to home services, Revenue is recognized for IHE services 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 EAR agreements and a separate letter agreement (the "EAR Letter Agreement") 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 EAR agreements and EAR Letter Agreement. The total grant date fair value of the outstanding EAR agreements was$51.8 million and was recorded against revenue over their respective performance periods, both of which ended inDecember 2022 . The grant date fair value of the EAR Letter Agreement was estimated to be$76.2 million and is being recorded as a reduction of revenue throughJune 30, 2026 , coinciding with the service period as follows:$6.3 million in 2022,$20.0 million in 2023,$20.0 million in 2024,$19.9 million in 2025 and$10.0 million in 2026. See "-Liquidity and capital resources-Customer Equity Appreciation Rights Agreements." 91 -------------------------------------------------------------------------------- Table of Contents Our subsidiary,Caravan Health , enters into contracts with customers to provide multiple services around the management of the ACO model. These include, among others, population health software, analytics, practice improvement, compliance, and governance. The overall objective of the services provided is to help the customer receive shared savings from CMS.Caravan Health enters into arrangements with customers wherein we receive a contracted percentage of each customer's portion of shared savings if earned. We recognize shared savings revenue as performance obligations are satisfied over time, commensurate with the recurring ACO services provided to the customer over a 12-month calendar year period. The shared savings transaction price is variable, and therefore, we estimate an amount we expect to receive for each 12-month calendar year performance obligation period. In order to estimate this variable consideration, management initially uses estimates of historical performance of the ACOs. We consider inputs such as attributed patients, expenditures, benchmarks and inflation factors. We adjust our estimates at the end of each reporting period to the extent new information indicates a change is warranted. We apply a constraint to the variable consideration estimate in circumstances where we believe the data received is incomplete or inconsistent, so as not to have the estimates result in a significant revenue reversal in future periods. Although our estimates are based on the information available to us at each reporting date, new and material information may cause actual revenue earned to differ from the estimates recorded each period. These include, among others, Hierarchical Conditional Category ("HCC") coding information, quarterly reports from CMS with information on the aforementioned inputs, unexpected changes in attributed patients and other limitations of the program beyond our control. We receive final reconciliations from CMS and collect the cash related to shared savings earned annually in the third or fourth quarter of each year for the preceding calendar year. The remaining sources of ACO services revenue are recognized over time when, or as, the performance obligations are satisfied and are primarily based on a fixed fee or per member per month fee. Therefore, they do not require significant estimates and assumptions by management. See "-Critical accounting policies-Revenue recognition."
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 expense 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.
SG&A includes significant 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 the pending Merger, acquisitions and other
corporate development such as mergers and
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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.
•Restructuring expenses. Restructuring expenses primarily consist severance and
related employee costs, contract termination fees or professional services fees
incurred in connection with the restructuring plan announced in July 2022
associated with the decision to exit our former episodes of care business. These
restructuring expenses do not include severance and related employee costs,
contract termination fees or professional service fees directly relating to the
exit of our former Episodes of Care business, which are instead included in
discontinued operations.
•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 and acquired software.
Other expense, net
Other expense, net is composed of:
•Interest expense. Interest expense consists of accrued interest and related payments on outstanding long-term debt and revolving credit facilities, 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 consists of (1) changes in fair value of the customer EARs as measured at the end of each period, (2) adjustments to liabilities under our Tax Receivable Agreement and (3) interest and dividends on cash and cash equivalents.
Income tax 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 certain 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.
Loss attributable to the pre-Reorganization period
Loss attributable to the pre-Reorganization period relates to the loss incurred for the period that preceded the Reorganization Transactions onFebruary 12, 2021 , including the period fromJanuary 1, 2021 throughFebruary 12, 2021 .
Income (loss) attributable to non-controlling interest
Income (loss) attributable to non-controlling interest for the years ended
93
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TopCo. Non-controlling interest does not apply to the year ended December 31,
2020 , as that was prior to the Reorganization Transactions.
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 ofDecember 31, 2022 , we held approximately 75.6% 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 years ended
The following is a discussion of our consolidated results of operations for the
year ended
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The following table summarizes our results of operations for the periods
presented:
Year ended December 31, % Change
2022 2021 2022 v 2021
(in millions)
Revenue $ 805.5 $ 653.1 23.3 %
Operating expenses:
Service expense 440.4 351.5 25.3 %
Selling, general and administrative expense 202.3 173.8 16.5 %
Transaction-related expense 23.8 9.9 141.3 %
Restructuring expense 2.1 - NM
Loss on impairment 3.3 - NM
Depreciation and amortization 53.8 41.8 28.7 %
Total operating expenses 725.7 577.0 25.8 %
Income from continuing operations 79.8 76.1 4.8 %
Interest expense 20.6 21.7 (5.0) %
Loss on extinguishment of debt - 5.0 (100.0) %
Other expense 195.8 2.8 NM
Other expense, net 216.4 29.5 NM
(Loss) income from continuing operations before
income taxes (136.6) 46.6 NM
Income tax (benefit) expense (6.2) 13.7 NM
Net (loss) income from continuing operations (130.4) 32.9 NM
Loss on discontinued operations, net of tax (653.3) (23.0) NM
Net (loss) income (783.7) 9.9 NM
Net loss attributable to pre-Reorganization
period - (17.2) (100.0) %
Net (loss) income attributable to non-controlling
interest (206.9) 7.4 NM
Net (loss) income attributable to Signify Health,
Inc. $ (576.8) $ 19.7 NM
Revenue
The following table summarizes the revenue for the periods presented:
Year ended December 31, % Change
2022 % of Total 2021 % of Total 2022 v 2021
(in millions)
Revenue
Evaluations $ 770.3 95.6 % $ 645.7 98.9 % 19.3 %
Value-based Care Services 32.6 4.0 % - - % NM
Other 2.6 0.4 % 7.4 1.1 % (64.0) %
Total revenue $ 805.5 100.0 % $ 653.1 100.0 % 23.3 %
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Our total revenue was$805.5 million for the year endedDecember 31, 2022 , representing an increase of$152.4 million , or 23.3%, from$653.1 million for the year endedDecember 31, 2021 . This increase was primarily driven by Evaluations revenue, which increased by$124.6 million . The higher Evaluations revenue was driven by increased IHE volume, including more diagnostic and preventative screenings, 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 grant date fair value of the outstanding customer EARs and EAR Letter Agreement of$26.0 million and$19.7 million during the years endedDecember 31, 2022 and 2021, respectively. Revenue for Value-based Care Services was$32.6 million for the year endedDecember 31, 2022 . We did not have any value-based care services in 2021 because we acquiredCaravan Health , through which we provide these services, in 2022. Other revenue decreased by$4.8 million , primarily due to a decrease in revenue from our biopharmaceutical services which we exited in 2021 and standalone sales of our social determinants of health community product, which we made the decision to exit in 2022.
Operating expenses
Our total operating expenses were$725.7 million for the year endedDecember 31, 2022 , representing an increase of$148.7 million , or 25.8%, from$577.0 million for the year endedDecember 31, 2021 . This increase was driven by the following: •Service expense - Our total service expense was$440.4 million for the year endedDecember 31, 2022 , representing an increase of$88.9 million , or 25.3%, from$351.5 million for the year endedDecember 31, 2021 . This increase was primarily driven by expenses related to our network of providers, which increased by$51.4 million as compared to the year endedDecember 31, 2021 , driven by the overall higher IHE volume as well as a higher mix of in-person IHEs compared to vIHEs, which have a lower cost per evaluation. Compensation-related expenses increased by$31.1 million , primarily driven by additional headcount, including the incremental employees retained as part of theCaravan Health acquisition and higher benefits expense. Additionally, the following expenses increased during the year endedDecember 31, 2022 , primarily driven by the overall higher IHE volume:$3.3 million in other variable costs;$2.6 million in the costs of providing other diagnostic and preventive services, including certain laboratory and testing fees;$1.8 million in member outreach services and other related expenses, and$0.3 million in travel related costs. The impact of COVID-19 was less in 2022, resulting in a decrease of approximately$1.6 million in pandemic-related expenses during 2022 as compared to 2021, including lower costs related to COVID-19 tests for our providers and lower costs for personal protective equipment used by our providers while conducting IHEs. •SG&A expense - Our total SG&A expense was$202.3 million for the year endedDecember 31, 2022 , representing an increase of$28.5 million , or 16.5%, from$173.8 million for the year endedDecember 31, 2021 . This increase was primarily driven by equity-based compensation which increased$31.0 million primarily due to additional equity grants and the amendment of awards with performance-based vesting to include a time-based vesting condition. Compensation-related expenses increased by$23.2 million due to additional headcount to support the overall growth in our business including incremental employees as part of theCaravan Health acquisition and higher benefits costs. Additionally, information technology-related expenses, including infrastructure and software costs, increased$5.4 million , employee travel and entertainment expenses increased$2.3 million as COVID-19 imposed travel restrictions eased, and facilities related expenses increased$1.9 million driven by new locations and expenses related to the early exit of certain locations in connection with our approved restructuring activities. These increases were offset by a decrease of$30.5 million in the remeasurement of contingent consideration in 2022 related to potential payments in connection with our acquisition ofCaravan Health inMarch 2022 . The estimated fair 96
-------------------------------------------------------------------------------- Table of Contents value of the contingent consideration decreased since the acquisition date primarily due to the lowerCaravan Health shared savings revenue estimates for 2022, which is one of the performance criteria needed to achieve payment. Professional service fees also decreased$4.0 million primarily due to higher costs in 2021 as a result of being a newly public company and other variable costs decreased$0.8 million in 2022. •Transaction-related expenses - Our total transaction-related expenses were$23.8 million for the year endedDecember 31, 2022 , representing an increase of$13.9 million , or 141.3%, from$9.9 million for the year endedDecember 31, 2021 . In 2022, the transaction-related expenses consisted primarily of legal, consulting, professional services expenses and employee related costs in connection with the pending Merger and consulting and other professional services incurred in connection with general corporate development activities, including theCaravan Health acquisition. In addition, transaction-related expenses in 2022 included certain integration-related expenses, including compensation expenses and consulting and other professional services expenses, following theCaravan Health acquisition. In 2021, the transaction-related expenses consisted primarily of consulting and other professional services, as well as compensation expenses, incurred in connection with our IPO and general corporate development activities, including potential acquisitions that did not proceed. •Restructuring expenses - Our total restructuring expenses were$2.1 million for the year endedDecember 31, 2022 . We did not have any restructuring expenses for the year endedDecember 31, 2021 . The restructuring expense in 2022 included severance and related employee costs, contract termination fees and professional services fees due to the overall restructuring and cost realignment in connection with the wind-down and exit of our former Episodes of Care business. See "-Recent Developments and Factors Affecting Our Results of Operations -Episodes of Care Restructuring". •Loss on impairment - Our total loss on impairment was$3.3 million for the year endedDecember 31, 2022 . We did not record a loss on impairment for the year endedDecember 31, 2021 . We recorded a loss on impairment during the year endedDecember 31, 2022 in connection with the decision to end our community service offering and therefore the carrying value of the underlying intangible assets exceeded the estimated fair value. The loss on impairment included a$3.0 million impairment of acquired technology and a$0.3 million impairment of customer relationships. •Depreciation and amortization - Our total depreciation and amortization expense was$53.8 million for the year endedDecember 31, 2022 , representing an increase of$12.0 million , or 28.7%, from$41.8 million for the year endedDecember 31, 2021 . This increase in depreciation and amortization expense was primarily driven by a net increase in amortization expense of$11.3 million , primarily due to the$93.9 million in intangible assets acquired in connection with theCaravan Health acquisition inMarch 2022 and additional capital expenditures related to internally-developed software over the past year partially offset by asset impairments over the past year. Additionally, there was an increase in depreciation expense of$0.7 million , primarily driven by additional capital expenditures over the past year.
Other expense, net
Other expense, net total was
Interest expense was
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outstanding term loan principal balance following our June 2021 refinancing of
the 2021 Credit Agreement, partially offset by higher overall interest rates.
In 2021, we recorded a loss on extinguishment of debt of
Other (income) expense was$195.8 million for the year endedDecember 31, 2022 , representing an increase of$193.0 million from$2.8 million for the year endedDecember 31, 2021 . This increase was primarily driven by the remeasurement of the fair value of the outstanding customer EAR liabilities, which resulted in expense of$202.1 million for year endedDecember 31, 2022 , representing an increase of$194.8 million from expense of$7.3 million for the year endedDecember 31, 2021 . The fair value of the outstanding customer EAR liabilities increased due to our higher equity value and a revised estimate of the time to liquidity as a result of the pending Merger. This increase in net expense was partially offset by a$5.8 million increase in interest income earned on higher excess cash balances and rising interest rates during the year endedDecember 31, 2022 . Additionally, during the year endedDecember 31, 2021 , we recorded a$4.0 million adjustment to our liability under the TRA; there was no adjustment to the TRA liability in 2022. Income tax (benefit) expense Income tax benefit from continuing operations was$6.2 million for the year endedDecember 31, 2022 , compared to income tax expense from continuing operations of$13.7 million for the year endedDecember 31, 2021 . The continuing operations effective tax rate for the year endedDecember 31, 2022 was 4.6% compared to 29.6% for the year endedDecember 31, 2021 . The effective tax rate in 2022 is lower than theU.S. federal statutory rate of 21% primarily due to a change in valuation allowance and the impact of non-controlling interest. The effective tax rate in 2021 was higher than theU.S. federal statutory rate of 21% primarily due to unrealizable net operating losses which require a valuation allowance and the impact of state taxes.
Loss on discontinued operations, net of tax
Discontinued operations includes the results of operations, financial position and cash flows for the former Episodes of Care business. Loss on discontinued operations, net of tax, was$653.3 million in 2022, representing an increase of$630.3 million from a loss of$23.0 million in 2021. This loss was primarily due to an increase in loss on impairment of$508.7 million related to the write-off of goodwill and intangible assets triggered by the decision to exit the business and a decrease of$158.7 million in revenue due to the negative impact of CMS imposed pricing adjustments resulting in lower savings estimates and the reversal of revenue previously recorded. These decreases were partially offset by lower compensation and employee-related costs in connection with the wind-down of operations associated with the approved restructuring activities in 2022.
For the years ended
The following is a discussion of our consolidated results of operations for the
year ended
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The following table summarizes our results of operations for the periods
presented:
Year ended December 31, % Change
2021 2020 2021 v. 2020
(in millions)
Revenue $ 653.1 $ 450.6 44.9 %
Operating expenses:
Service expense 351.5 265.0 32.7 %
Selling, general and administrative expense 173.8 145.1 19.8 %
Transaction-related expense 9.9 11.4 (13.4) %
Loss on impairment - 0.8 (95.2) %
Depreciation and amortization 41.8 35.8 16.7 %
Total operating expenses 577.0 458.1 26.0 %
Income (loss) from continuing operations 76.1 (7.5) NM
Interest expense 21.7 22.2 (2.6) %
Loss on extinguishment of debt 5.0 - 100.0 %
Other expense (income), net 2.8 9.0 (69.4) %
Other expense, net 29.5 31.2 (6.1) %
Income (loss) from continuing operations before
income taxes 46.6 (38.7) NM
Income tax expense 13.7 0.9 NM
Net income (loss) from continuing operations 32.9 (39.6) NM
(Loss) income from discontinued operations, net
of tax (23.0) 25.1 NM
Net income (loss) 9.9 (14.5) NM
Net loss attributable to pre-Reorganization
period (17.2) (14.5) 18.5 %
Net income (loss) attributable to non-controlling
interest 7.4 - NM
Net income (loss) attributable to Signify Health,
Inc. $ 19.7 $ - NM
99-------------------------------------------------------------------------------- Table of Contents Revenue
The following table summarizes the revenue for the periods presented:
Year ended December 31, % Change
2021 % of Total 2020 % of Total 2021 v 2020
(in millions)
Revenue
Evaluations $ 645.7 98.9 % $ 441.4 98.0 % 46.4 %
Other 7.4 1.1 % 9.2 2.0 % (19.5) %
Total revenue $ 653.1 100.0 % $ 450.6 100.0 % 44.9 %
Our total revenue was $653.1 million for the year ended December 31, 2021 ,
representing an increase of $202.5 million , or 44.9%, from $450.6 million for
the year ended December 31, 2020 . This increase was primarily driven by
Evaluations revenue, which increased by $204.3 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 $19.7 million and $12.4 million during the
years ended December 31, 2021 and 2020, respectively. Other revenue decreased by
$1.8 million , primarily due to a decrease in standalone sales of our social
determinants of health product.
Operating expenses
Our total operating expenses were$577.0 million for the year endedDecember 31, 2021 , representing an increase of$118.9 million , or 26.0%, from$458.1 million for the year endedDecember 31, 2020 . This increase was driven by the following: •Service expense - Our total service expense was$351.5 million for the year endedDecember 31, 2021 , representing an increase of$86.5 million , or 32.7%, from$265.0 million for the year endedDecember 31, 2020 . This increase was primarily driven by expenses related to our network of providers, which increased by$45.9 million , driven by the higher IHE volume and a return to a more traditional mix of in-person IHEs compared to vIHEs. In 2020, as a result of COVID-19, a higher proportion of evaluations were performed as vIHE, which have a lower cost per evaluation. Compensation-related expenses increased by$25.9 million primarily driven by additional headcount and higher incentive pay to support growth. Additionally, the following expenses increased during the year endedDecember 31, 2021 , primarily driven by the overall higher IHE volume: an increase of$9.5 million in the costs of providing other ancillary services, including certain laboratory and testing fees; an increase of approximately$4.1 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 an increase of approximately$0.2 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. •SG&A expense - Our total SG&A expense was$173.8 million for the year endedDecember 31, 2021 , representing an increase of$28.7 million , or 19.8%, from$145.1 million for the year endedDecember 31, 2020 . This increase was primarily driven by an increase of$12.0 million in professional and consulting fees, primarily related to increased costs associated with being a public company as well as higher legal expenses. Compensation-related expenses increased by$5.4 million due to additional headcount to support the overall growth in our business and a related increase in incentive compensation. Other costs also 100 -------------------------------------------------------------------------------- Table of Contents increased, including an increase of$6.5 million in information technology-related expenses, including infrastructure and software costs, a$2.8 million increase in facilities-related expenses, including rent expense under our operating leases, an increase of$1.2 million in other variable costs and an increase of$1.0 million in employee travel and entertainment expenses as COVID-19 imposed travel restrictions eased. These increases were partially offset by a decrease of$0.2 million related to remeasurement of contingent consideration in 2020. •Transaction-related expenses - Our total transaction-related expenses were$9.9 million for the year endedDecember 31, 2021 , representing a decrease of$1.5 million , or 13.4%, from$11.4 million for the year endedDecember 31, 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 were incurred in connection with general corporate development activities, including potential acquisitions that did not proceed, as well as costs incurred in connection with our IPO. These transaction-related expenses consisted primarily of consulting expenses. •Loss on impairment - We did not record a loss on impairment for the year endedDecember 31, 2021 . Our total loss on impairment was$0.8 million for the year endedDecember 31, 2020 which resulted from the discontinued use of certain software assets. •Depreciation and amortization - Our total depreciation and amortization expense was$41.8 million for the year endedDecember 31, 2021 , representing an increase of$6.0 million , or 16.7%, from$35.8 million for the year endedDecember 31, 2020 . This increase in depreciation and amortization expense was primarily driven by a net increase in amortization expense of$4.6 million , primarily 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$1.4 million , primarily driven by additional capital expenditures over the past year. Other expense, net
Other expense, net was
Interest expense was$21.7 million for the year endedDecember 31, 2021 , representing a decrease of$0.5 million from$22.2 million for the year endedDecember 31, 2020 . This decrease was primarily driven by the lower outstanding principal balance and lower interest rates following ourJune 2021 refinancing.
In 2021, we recorded a loss on extinguishment of debt of
Other expense was$2.8 million for the year endedDecember 31, 2021 , representing a decrease of$6.2 million from$9.0 million for the year endedDecember 31, 2020 . This decrease was primarily driven by a$4.0 million adjustment to our liability under the Tax Receivable Agreement in 2021. The remeasurement of the fair value of the outstanding customer EAR liabilities resulted in expense of$7.3 million for the year endedDecember 31, 2021 , representing a decrease of$1.9 million from expense of$9.2 million for the year endedDecember 31, 2020 . The fair value of the outstanding customer EAR liabilities decreased in 2021 due to the lower equity value at the end of 2021 partially offset of the accretion of the liability over the performance period. Additionally, the decrease in other 101 -------------------------------------------------------------------------------- Table of Contents expense was partially offset by an increase of$0.3 million interest income earned on higher excess cash balances and rising interest rates during the year endedDecember 31, 2021 . Income tax expense Income tax expense from continuing operations was$13.7 million for the year endedDecember 31, 2021 , representing an increase of$12.8 million from$0.9 million in income tax expense from continuing operations for the year endedDecember 31, 2020 . As a result of the Reorganization Transactions, we are now subject to corporate income taxes on our share of the total net income (loss). Prior to the Reorganization Transactions, we were not subject to corporate income taxes, as Cure TopCo is a partnership forU.S. tax purposes. The effective tax rate for 2021 was 29.6%, which is higher than theU.S. federal tax rate of 21% primarily due to unrealizable net operating losses which require a valuation allowance and the impact of the state taxes.
(Loss) income on discontinued operations, net of tax
Discontinued operations includes the results of operations, financial position and cash flows for the former Episodes of Care business. Loss on discontinued operations, net of tax, was$23.0 million in 2021, representing a decrease of$48.1 million from income of$25.1 million in 2020. This loss was primarily due to a decrease of$39.7 million in revenue. This decrease in revenue was primarily driven by the adverse effects of COVID-19 on program size and savings rate, including lower healthcare utilization, the exclusion of episodes of care with a COVID-19 diagnosis and the impact of the patient case mix adjustment and inpatient rehabilitation center utilization on savings rate. Additionally, SG&A expenses increased by$7.8 million and we recorded a loss on impairment of$11.2 million in 2021. SG&A expenses were higher in 2021 primarily driven by higher employee related costs and the asset impairment related to a technology intangible asset acquired through the PatientBlox acquisition, which was considered impaired due to a delay in the launch of a new episodes product utilizing such technology.
Quarterly Results of Operations
The following table sets forth unaudited statement of operations data for each
of the quarters presented. We have prepared the quarterly statement of
operations data on a basis consistent with the audited consolidated financial
statements included elsewhere in this Annual Report on Form 10-K. In the opinion
of management, the financial information reflects all adjustments, consisting of
normal recurring adjustments, which we consider necessary for a fair
presentation of this data. This information should be read in conjunction with
the consolidated financial statements and related notes included elsewhere in
this Annual Report on Form 10-K. The results of historical periods are not
necessarily indicative of the results for any future period.
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Three months ended (unaudited)
March 31, June 30, September 30, December 31, March 31,
2021 2021 2021 2021 2022 June 30, 2022 2022 2022
(in millions)
Revenue $ 152.4 $ 175.4 $ 169.1 $ 156.2 $ 190.2 $ 224.1 $ 207.5 $ 183.7
Operating expenses:
Service expense 88.6 93.1 89.5 80.3 102.8 116.9 113.7 107.0
Selling, general and
administrative expense 40.3 44.7 47.1 41.7 49.9 65.8 43.5 43.1
Transaction-related expense 5.6 1.0 2.9 0.4 3.2 1.7 9.6 9.3
Restructuring expenses - - - - - - 1.5 0.6
Loss on impairment - - - - - - 3.3 -
Depreciation and
amortization 9.8 10.1 10.3 11.6 11.6 13.7 14.3 14.2
Total operating expenses 144.3 148.9 149.8 134.0 167.5 198.1 185.9 174.2
Income from continuing
operations 8.1 26.5 19.3 22.2 22.7 26.0 21.6 9.5
Interest expense 6.8 6.5 4.2 4.2 4.0 4.6 6.0 6.0
Loss on extinguishment of
debt - 5.0 - - - - - -
Other expense (income), net 56.7 14.3 (27.4) (40.8) 28.8 (27.4) 181.1 13.3
Other expense, net 63.5 25.8 (23.2) (36.6) 32.8 (22.8) 187.1 19.3
(Loss) income from
continuing operations
before income taxes (55.4) 0.7 42.5 58.8 (10.1) 48.8 (165.5) (9.8)
Income tax expense
(benefit) (7.6) 0.1 17.4 3.8 (2.1) 37.7 (41.2) (0.6)
Net income (loss) from
continuing operations (47.8) 0.6 25.1 55.0 (8.0) 11.1 (124.3) (9.2)
Loss on discontinued
operations, net of tax (3.9) (0.7) 4.2 (22.6) (8.3) (501.1) (100.7) (43.2)
Net income (loss) $ (51.7) $ (0.1) $ 29.3 $ 32.4 $ (16.3) $ (490.0) $ (225.0) $ (52.4) 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 when pursued and other 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 our existing cash and cash equivalents, cash provided by operating activities and borrowings under our 2021 Credit Agreement, including borrowing capacity under our Revolving Facility (as defined below). As ofDecember 31, 2022 , we had unrestricted cash and cash equivalents of$466.1 million . Our total indebtedness was$345.6 million as ofDecember 31, 2022 . InJune 2021 , we entered into a credit agreement with a secured lender syndicate (the "2021 Credit Agreement"). 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 ofDecember 31, 2022 , we had available borrowing capacity under the Revolving Facility of$172.8 million , as the borrowing capacity is reduced by outstanding letters of credit of$12.2 million . Our principal liquidity needs are working capital and general corporate expenses, debt service, capital expenditures, obligations under the Tax Receivable Agreement, income taxes, acquisitions and other investments to help achieve our growth strategy. InMarch 2022 , we acquiredCaravan Health , using approximately$189.6 million in cash, net of the cash acquired fromCaravan Health . We paid an additional$0.9 million to the sellers ofCaravan Health in the fourth quarter 2022 related to the working capital adjustment as defined in the purchase agreement. In 103
-------------------------------------------------------------------------------- Table of Contents addition, we issued approximately$60.0 million of our Class A common stock, comprised of 4,762,134 shares at$12.5993 per share, which represented the volume-weighted average price per share of our common stock for the five trading days ending three business days prior toMarch 1, 2022 . Under the terms of the Caravan Health Merger Agreement, there could be a contingent payment made to the sellers ofCaravan Health in 2023 of up to$50 million if certain milestones are achieved. However, based on total estimated revenue recognized forCaravan Health in 2022, we do not expect to make any contingent payments. See Note 14 to our audited consolidated financial statements included in Item 8 elsewhere in this Annual Report on Form 10-K. Payment of the outstanding customer EAR liabilities would be triggered by the consummation of the Merger, which we expect to occur within the next 12 months. See "-Recent Developments and Factors Affecting Our Results of Operations -Pending Acquisition." As ofDecember 31, 2022 , the total estimated fair value of the outstanding EAR agreements was$276.7 million . Our capital expenditures for property and equipment to support growth in the business were$8.0 million and$6.7 million for the year endedDecember 31, 2022 and 2021, respectively. OnJuly 7, 2022 , our Board approved a restructuring plan to wind down our former Episodes of Care Services segment. See "-Recent Developments and Factors Affecting Our Results of Operations -Episodes of Care Wind-down Restructuring." The total cost of the restructuring plan is estimated to be approximately$25-$35 million and will consist of severance and related employee costs, contract termination fees and professional service fees as well as facility closure costs. We recorded total restructuring expenses of$23.3 million during the year endedDecember 31, 2022 , which represents the majority of the restructuring plan costs. However, there are some costs associated with the restructuring plan actions to be completed in the first half of 2023. Our liquidity has historically fluctuated on a quarterly basis due to our agreements with CMS under the BPCI-A program and will be further impacted due to our exit of the BPCI-A program and our Episodes of Care business. See "-Recent Developments and Factors Affecting Our Results of Operations -Episodes of Care Wind-down Restructuring." Although our operations in the former Episodes of Care business ceased byDecember 31, 2022 , cash receipts and disbursements under these contracts are subject to semiannual reconciliation cycles, which historically occurred in the second and fourth quarters of each year and will continue to be received through the fourth quarter of 2024 when we expect to receive the reconciliation for our final results under the BPCI-A program. Cash receipts and disbursements under these contracts were typically received and paid in the quarter subsequent to the receipt of the reconciliation, or during the first and third quarters of each year, which has resulted and will continue to cause our liquidity position to fluctuate from quarter to quarter until the final reconciliations are received and ongoing disputes with CMS are resolved when these will no longer be sources or uses of cash. Due to our dispute of the pricing adjustment in the semiannual reconciliation received from CMS during the second quarter of 2022, the cash we typically would have received in the third quarter of 2022 was delayed until CMS issued a final reconciliation for that period inDecember 2022 and are expected to be received during the first quarter of 2023. In addition,Caravan Health's participation in the CMS MSSP ACO program will also result in fluctuations in liquidity from period to period, as this is a calendar year program, with annual shared savings reconciled and distributed approximately nine months after the calendar year program ends. For example, we received the shared savings funds from CMS in the fourth quarter of 2022 related to the 2021 ACO plan year and expect to receive the 2022 ACO plan year shared savings in the third or fourth quarter of 2023. 104 -------------------------------------------------------------------------------- Table of Contents We also have historically experienced seasonality patterns in IHE volume as described in "-Recent Developments and Factors affecting our results of operations" above. In 2022, our quarterly seasonality returned to the pre-COVID-19 seasonality patterns. Generally, we experience the highest volumes in the second quarter of each year with the lowest volumes in the first and fourth quarter of each year, thus creating a seasonality effect on liquidity. Additionally, liquidity was temporarily impacted by delayed collections on IHEs during the first half of 2022 from certain clients where we experienced significant expansion. We experienced improved collections during the third quarter of 2022 as we continuously worked with our clients to resolve some of the temporary delays; however, collections were again delayed in the fourth quarter of 2022. In the first quarter of 2022, we announced the development of a technology center in Galway,Ireland to support our operations inthe United States . We hired our first employees there in 2022. EffectiveApril 1, 2022 , we entered into a lease agreement for a facility in Galway,Ireland . The lease term is 15 years with an option to terminate after 10 years. It is not reasonably certain that we will not exercise the option to terminate after 10 years; therefore, the total lease payments are expected to be approximately$7.0 million over 10 years. This foreign denominated lease and ongoing development of this new technology center as well as the continued hiring of employees has resulted and will continue to require capital funding and expose us to currency risk. We believe that our cash flows from operations, capacity under our Revolving Facility 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 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 "Part I-Item 1A. 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.
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 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 long-term 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 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 105 -------------------------------------------------------------------------------- Table of Contents eurocurrency rate loans and for base rate loans. InJuly 2022 , our corporate credit rating was upgraded by S&P to B+, which per the terms of the 2021 Credit Agreement, reduced the applicable rate for the 2021 Term Loan by 25 basis points effectiveJuly 2022 . However, rising interest rates have offset this reduction. Borrowings under the Revolving Facility initially bore 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%. Since the delivery of financial statements for the first full quarter afterJune 22, 2021 , the interest rate for borrowings under the Revolving Facility is based on the consolidated first lien net leverage ratio pricing grids below. In addition, upon 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 the Revolving Facility and letter of credit fees shall be permanently reduced by 0.25% at each pricing level in the pricing grids below InJuly 2022 , our corporate credit rating was upgraded by S&P to B+, which per the terms of the 2021 Credit Agreement, reduced the applicable rate with respect to the Revolving Facility and letter of credit fees by 25 basis points effectiveJuly 2022 . However, rising interest rates have offset this reduction. Consolidated First Lien 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 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.
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--------------------------------------------------------------------------------Table of Contents Comparative cash flows
The following table sets forth our cash flows for the periods indicated:
Year ended December 31,
2022 2021 2020
(in millions)
Net cash provided by operating activities
from continuing operations $ 98.0 $ 77.8 $ 24.2
Net cash used in investing activities from
continuing operations (219.1) (26.7) (28.4)
Net cash provided by financing activities
from continuing operations 1.2 524.4 33.1
Operating activities
Net cash provided by operating activities from continuing operations was $98.0
million in 2022, an increase of $20.2 million , compared to net cash provided by
operating activities from continuing operations of $77.8 million in 2021.
Net loss from continuing operations was $130.4 million in 2022, as compared to
net income of $32.9 million in 2021. The net loss in 2022 was primarily due to
the remeasurement of the outstanding customer EAR liabilities which increased in
value due to our higher stock price since the announcement of the Merger value
partially offset by revenue growth including the impact of the Caravan Health
acquisition. Non-cash items were $275.6 million in 2022 as compared to $83.3
million in 2021. The increase in non-cash net expense items included in net loss
was primarily driven by the remeasurement of the outstanding customer EAR
liabilities in 2022 compared to 2021.
Changes in operating assets and liabilities resulted in a cash decrease of $47.2
million in 2022, as compared to a cash decrease of $38.4 million in 2021. The
change in operating assets and liabilities was primarily driven by the
following:
•a net increase in accounts receivable of $37.7 million in 2022 compared to a
net increase in accounts receivable of $29.8 million in 2021. The increase in
accounts receivable in 2022 was primarily driven by higher IHE volume in 2022
and delayed collections for certain large clients at the end of 2022. Accounts
receivable fluctuate from period to period as a result of seasonality and
periodically slower client collections, particularly related to our IHE services
as we and our clients reconcile claims and resolve any temporary claims
processing delays; and
•a net increase of $15.3 million in contract assets in 2022 compared to a net
increase in contract assets of $1.5 million in 2021. The increase in contract
assets in 2022 was primarily driven by the estimated shared savings under our
participation in the MSSP ACO program, which we began participating in as part
of our acquisition of Caravan Health in March 2022 . Additionally, contract
assets in 2022 include management's estimate of amounts to be received from
clients as a result of certain variable consideration discounts over an extended
contract term for a large client; and
•a net increase in prepaid expenses and other current assets of $12.2 million in
2022 compared to no significant change in prepaid expenses and other current
assets in 2021. The increase in prepaid expenses and other current assets in
2022 was primarily driven by an income tax receivable related to tax refunds due
to us; partially offset by
107-------------------------------------------------------------------------------- Table of Contents •a net increase in accounts payable and accrued expenses of$27.9 million in 2022 compared to a net decrease in accounts payable and accrued expenses of$9.3 million in 2021. The increase in accounts payable and accrued expenses in 2022 was primarily driven by amounts due to certain MSSP ACO customers related to the 2023 ACO payment mechanism in which we have an offsetting amount held as restricted cash, and higher accrued expenses at the end of 2022 related to transaction expenses related to the Merger, accrued restructuring expenses and provider related costs associated with higher IHE volumes.
Net cash provided by operating activities was
Net income from continuing operations was 32.9 million in 2021, as compared to a net loss from continuing operations of$39.6 million in 2020. The increase in net income was primarily due to growth in Evaluations revenue partially offset by an increase in operating expenses to support the future growth in the overall business. Non-cash items were$83.3 million in 2021 as compared to$71.3 million in 2020. The increase in non-cash items included in net income was primarily due to increased amortization expense due to additional capital expenditures related to internally-developed software over the year and loss on extinguishment of debt in connection with theJune 2021 refinancing of our credit agreement partially offset by adjustments to the Tax Receivable Agreement liability. Changes in operating assets and liabilities resulted in a cash decrease of$38.4 million in 2021, as compared to a cash decrease of$5.7 million in 2020. The change in operating assets and liabilities was primarily driven by a net increase in accounts receivable of$29.8 million in 2021 compared to a net increase in accounts receivable of$44.3 million in 2020. The increase in accounts receivable as ofDecember 31, 2021 as compared toDecember 31, 2020 primarily as a result of the increase in in-person IHE volumes in 2021. The net impact of changes in contract assets and liabilities during 2021 was a$2.3 million increase in cash for the year endedDecember 31, 2021 as compared to a$1.4 million increase in cash for the year endedDecember 31, 2020 . The increase in net contract liabilities is due to management's estimate of potential refund liabilities due to certain clients as a result of certain service levels not being achieved during the contractual periods. 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$219.1 million in 2022, an increase of$192.4 million , compared to net cash used in investing activities of$26.7 million in 2021. The primary use of cash from investing activities in 2022 was the cash consideration, net of cash acquired, for theCaravan Health acquisition of$190.5 million . Capital expenditures for property and equipment were$8.0 million in 2022 compared to$6.7 million in 2021. The$1.3 million increase in capital expenditures for property and equipment was primarily driven by computer equipment purchases. Capital expenditures for internal-use software development were$20.3 million in 2022 compared to$15.0 million in 2021. The$5.3 million increase in capital expenditures for internal-use software development was primarily driven by additional investments in our technology platforms to support future growth. Investing activities also included a$0.3 million equity investment inAloeCare Health in 2022 and a$5.0 million equity investment inMedalogix, Inc. in 2021. Net cash used in investing activities was$26.7 million in 2021, a decrease of$1.7 million , compared to net cash used in investing activities of$28.4 million in 2020. Capital expenditures for property and equipment were$6.7 108 -------------------------------------------------------------------------------- Table of Contents million in 2021 compared to$13.9 million in 2020. The$7.2 million decrease in capital expenditures for property and equipment was primarily driven by investments in certain facilities in 2020 and other requirements to support the future growth in the business. Capital expenditures for internal-use software development were$15.0 million in 2021 compared to$13.5 million in 2020. The$1.5 million increase in capital expenditures for internal-use software development was primarily driven by additional investments in our technology platforms to support future growth. Investing activities also included a$5.0 million equity investment inMedalogix, Inc. in 2021 and a$1.0 million equity investment in CenterHealth in 2020.
Financing activities
Net cash provided by financing activities was$1.2 million in 2022, a decrease of$523.2 million , compared to net cash provided by financing activities of$524.4 million in 2021. The source of cash in 2022 was primarily due to$11.7 million related to the issuance of common stock in connection with the exercise of stock options partially offset by$6.5 million in tax distributions on behalf of the non-controlling interest and scheduled principal payments under our 2021 Credit Agreement of$3.5 million . The primary source of cash from financing activities in 2021 was$604.5 million in net proceeds from our IPO after deducting underwriting discounts and commissions and other issuance costs. Additionally, we received$5.9 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 of our credit agreement as well as scheduled principal payments on long-term debt of$1.9 million . Additionally, we paid approximately$13.0 million in tax distributions on behalf of the non-controlling interest and$9.2 million in debt issuance costs in connection with theJune 2021 refinancing. Net cash provided by financing activities was$33.1 million in 2020. The primary source of cash provided by financing activities in 2020 was proceeds of$140.0 million from the issuance of the long-term debt. Additionally, we received approximately$1.0 million in net income tax refunds on behalf ofNew Remedy Corp. and$2.9 million in proceeds related to the issuance of common stock under stock plans. These sources of cash in 2020 were partially offset by the repurchase of CureTopCo and Cure Aggregator member units for$56.9 million , payment of contingent consideration of$38.2 million related to a 2017 acquisition, tax distributions to members of Cure Aggregator and Cure TopCo of$8.2 million , payment of debt issuance costs of$5.1 million and scheduled principal payments on long-term debt under our then outstanding credit agreement of$2.8 million . 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, Tax Receivable Agreement payments and expenses (any such portion, an "excess distribution") will be made at the sole discretion of our Board. Our Board may change our dividend policy at any time. See "Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities ." Tax Receivable Agreement We are a party to the Tax Receivable Agreement 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, inU.S. federal, state and local income tax that we actually realize as a result of (i) certain favorable tax attributes we acquired from certain entities treated as corporations forU.S. tax purposes that held LLC Units (the "Blocker Companies") in connection with each of their mergers with and into a merger subsidiary created by us (and which survived such merger as a wholly owned 109 -------------------------------------------------------------------------------- Table of Contents subsidiary ofSignify Health ), after which eachBlocker Company immediately merged intoSignify Health (with each such merger intoSignify Health having occurred simultaneously) (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 contribution of LLC Units in exchange for shares of Class A common stock byNew Mountain Partners V (AIV-C), LP and (z) certain payments made under the Tax Receivable Agreement and (iii) deductions in respect of interest and certain compensatory payments made under the Tax Receivable Agreement. These payment obligations are our obligations and not obligations of Cure TopCo. Our obligations under the Tax Receivable Agreement also apply with respect to any person who is issued LLC Units in the future and who becomes a party to the Tax Receivable Agreement. We do not anticipate making payments under the Tax Receivable Agreement until after the 2021 tax return has been finalized. The Company, Cure TopCo and certain other parties thereto entered into a Tax Receivable Agreement and LLC Agreement Amendment, dated as ofSeptember 2, 2022 (the "TRA Amendment") which (i) amends (x) the Tax Receivable Agreement among the Company, Cure TopCo and certain other parties thereto and (y) the Cure TopCo Amended LLC Agreement and (ii) provides for certain covenants regarding tax reporting and tax-related actions. The TRA Amendment provides for (i) the termination of all payments under the TRA from and after the Effective Time of the Merger Agreement, (ii) the payment of any amounts due under the TRA prior to the Effective Time (other than payments resulting from an action taken by any party to the TRA after the date of the TRA Amendment, which will be suspended), in accordance with the terms of the TRA, which payments will be paid no earlier than 185 days following the filing of theU.S. federal income tax return of the Company, (iii) a prohibition on the Company terminating the TRA or accelerating obligations under the TRA after the date of the TRA Amendment and (iv) the termination of the TRA effective as of immediately prior to and contingent upon the occurrence of the Effective Time (including termination of all of the Company's obligations thereunder and the obligation to make any of the foregoing suspended payments). The TRA Amendment also includes agreements among the parties thereto regarding the preparation of tax returns and limits actions that may be taken by the Company, Cure TopCo and certain of their controlled affiliates after the Effective Time. The TRA Amendment also (i) suspends all tax distributions under the Cure TopCo Amended LLC Agreement from and after the Effective Time, and (ii) provides that from and after the Effective Time, no person or entity shall have any further payment or other obligation under the TRA or any obligation to make or pay tax distributions under the Cure TopCo Amended LLC Agreement. In the event the Merger Agreement is terminated in accordance with its terms, (i) the TRA Amendment will become null and void ab initio (provided that any payments suspended as described above are required to be made), (ii) the TRA and the Cure TopCo Amended LLC Agreement will continue in full force and effect as if the TRA Amendment had never been executed (provided that any suspended payments as described above are required to be made), and (iii) all of the Company's obligations under the Cure TopCo Amended LLC Agreement will continue in full force and effect as if the TRA Amendment had never been executed. The foregoing description of the TRA Amendment does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the TRA Amendment which was filed as Exhibit 99.2 to the Current Report on Form 8-K filed with theSEC onSeptember 6, 2022 . 110 --------------------------------------------------------------------------------
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Customer Equity Appreciation Rights ("EAR") Agreements
In each ofDecember 2019 andSeptember 2020 , we entered into EAR agreements with one of our customers. Pursuant to the agreements, certain revenue targets were established for the customer to meet in the following three years. If they met those targets, they would retain the EAR. If they did not meet such targets, they would forfeit all or a portion of the EAR. Each EAR agreement allows the customer to participate in the 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 with the consent ofNew 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 theDecember 2019 EAR and 4.5% in the case of theSeptember 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. OnDecember 31, 2021 , we entered into an amendment of theDecember 2019 EAR and theSeptember 2020 EAR (collectively, the "EAR Amendments"). The EAR Amendments provide, among other things, that the customer may exercise any unexercised, vested and non-forfeited portion of each EAR upon the sale of our Class A common stock byNew Mountain Capital , our sponsor, subject to certain terms and conditions. These terms and conditions include, among others, that the customer has met its revenue targets under each EAR for 2022 and thatNew Mountain Capital has sold our Class A common stock above a certain threshold as set forth in each amendment. We have the option to settle any portion of the EARs so exercised in cash or in Class A common stock, provided that the aggregate amount of any cash payments do not exceed$25.0 million in any calendar quarter (with any amounts exceeding$25.0 million to be paid in the following quarter or quarters). We and our customer also agreed to extend our existing commercial arrangements through the middle of 2026 and established targets for the minimum number of IHEs to be performed on behalf of the customer each year (the "Volume Targets"). The EAR Amendments did not result in any incremental expense as the fair value at the time of modification did not exceed the fair value of the originalDecember 2019 EAR andSeptember 2020 EAR immediately prior to the modification. Accordingly, we continued to recognize the original grant date fair value of the 2019 EAR and 2020 EAR awards as a reduction to revenue. We also entered into the EAR Letter Agreement with the customer that provides that, in the event of a change in control of the Company or certain other corporate transactions, and subject to achievement of the Volume Targets, if the aggregate amount paid under the EARs prior to and in connection with such event (the "Aggregate EAR Value") is less than$118.5 million , then the customer will be paid the difference between$118.5 million and the Aggregate EAR Value. The EAR Letter Agreement was determined to be a separate equity-linked instrument, independent from the original EARs, as amended. The grant date fair value was determined based on an option pricing model. Similar to the original EARs, we recorded the initial grant date fair value as a reduction to revenue over the performance period. Estimated changes in fair market value are recorded each accounting period based on management's current assumptions related to the underlying valuation approaches as other (income) expense, net on 111 -------------------------------------------------------------------------------- Table of Contents the Consolidated Statement of Operations. The grant date fair value of the EAR Letter Agreement was estimated to be$76.2 million and will be recorded as a reduction of revenue throughJune 30, 2026 , coinciding with the service period. The EAR Letter Agreement was executed onDecember 31, 2021 and, therefore, there was no material impact on our results of operations in 2021. As ofDecember 31, 2022 , due to the change in control and liquidity provisions of each EAR, cash settlement of the EARs is expected to occur following the close of the pending Merger and will be paid based on the$30.50 per share defined in the Merger Agreement. The grant date fair value of theDecember 2019 EAR was estimated to be$15.2 million and was recorded as a reduction of revenue throughDecember 31, 2022 , coinciding with the three-year performance period. The grant date fair value of theSeptember 2020 EAR was estimated to be$36.6 million and was recorded as a reduction of revenue throughDecember 31, 2022 , coinciding with the 2.5-year performance period. As ofDecember 31, 2022 , the total combined estimated fair market value of the EARs, as amended, and EAR Letter Agreement was approximately$276.7 million . As ofDecember 31, 2022 , the original customer EAR agreements were both fully earned, with no forfeiture having occurred.
Non-GAAP financial measures
Adjusted EBITDA and Adjusted EBITDA Margin are not measures of financial performance under 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 (loss) income before interest expense, loss from discontinued operations, 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, restructuring expenses, equity-based compensation, remeasurement of contingent consideration, SEU expense 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. Adjusted EBITDA is a key metric used by management and our Board 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;
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•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$41.9 million , or 25.9%, to$203.6 million for the year endedDecember 31, 2022 from$161.7 million for the year endedDecember 31, 2021 . Adjusted EBITDA increased by$94.4 million , or 140.4%, to$161.7 million for the year endedDecember 31, 2021 from$67.3 million for the year endedDecember 31, 2020 . The increase in both periods was primarily driven by the growth in IHE volume. We define Adjusted EBITDA Margin as Adjusted EBITDA divided by revenue. We believe that Adjusted EBITDA Margin is helpful to investors in measuring the profitability of our operations on a consolidated basis. Adjusted EBITDA Margin increased approximately 50 basis points to 25.3% for the year endedDecember 31, 2022 from 24.8% for the year endedDecember 31, 2021 . Adjusted EBITDA Margin increased approximately 980 basis points to 24.8% for the year endedDecember 31, 2021 from 14.9% for the year endedDecember 31, 2020 . The following table shows a reconciliation of net (loss) income to Adjusted EBITDA for the periods presented: Year ended December 31, 2022 2021 2020 Net (loss) income$ (783.7) $ 9.9 $ (14.5) (Loss) income from discontinued operations, net of tax 653.3 23.0 (25.1) Interest expense 20.6 21.7 22.2 Loss on extinguishment of debt - 5.0 - Income tax (benefit) expense (6.2) 13.7 0.9 Depreciation and amortization 53.8 41.8 35.8 Loss on impairment(a) 3.3 - 0.8 Other (income) expense(b) 195.8 2.8 9.0 Transaction-related expenses(c) 23.8 9.9 11.4 Restructuring expenses(d) 2.1 - - Equity-based compensation(e) 43.5 11.1 10.8 Customer equity appreciation rights(f) 26.0 19.7 12.4 Remeasurement of contingent consideration(g) (30.5) - 0.2 SEU Expense(h) 0.8 1.4 - Non-recurring expenses(i) 1.0 1.7 3.4 Adjusted EBITDA$ 203.6 $ 161.7 $ 67.3 (a) Loss on impairment is primarily related to assets acquired in a 2019 acquisition that underlie ourSignify Community platform that we made the decision in 2022 to no longer offer. (b) Represents other non-operating (income) expense that consists primarily of the quarterly remeasurement of fair value of the outstanding customer EARs and EAR Letter Agreement as well as interest and dividends earned on cash and cash equivalents. 113
-------------------------------------------------------------------------------- Table of Contents (c) Represents transaction-related expenses that consist primarily of expenses incurred in connection with acquisitions and other corporate development activities, including the pending Merger and theCaravan Health acquisition and related integration expenses as well as potential acquisitions that did not proceed, 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 in 2021. (d) Represents restructuring expense related to our exit of our former Episodes of Care Wind-down segment. Restructuring expense includes severance and related employee costs, contract termination fees and professional services fees. (e) Represents expense related to equity incentive awards, including incentive units, stock options and RSUs, 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. (f) 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 , as amended and the EAR Letter Agreement we entered into inDecember 2021 . (g) Represents remeasurement of contingent consideration in 2022 related to potential payments due upon completion of certain performance targets in connection with theCaravan Health acquisition. As ofDecember 31, 2022 , the estimated fair value of the potential contingent consideration related toCaravan Health was reduced to zero as the estimated revenue, one of the two performance criteria required for achievement of the contingent consideration, was below the minimum threshold. In 2020, represents the remeasurement of contingent consideration due to the selling shareholders ofCenseo Health , a business acquired in 2017, pending the resolution of anIRS tax matter. The matter was resolved in 2020. (h) Represents compensation expense related to awards of synthetic equity units ("SEUs") subject to time-based vesting. A limited number of SEUs were granted in 2020 and 2021 at the time of the IPO; no future grants of SEUs have been 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. (i) Represents certain gains and expenses incurred that are not expected to recur, including those associated with the closure of certain facilities, one-time employee termination benefits and the early termination of certain contracts as well as one-time expenses associated with the COVID-19 pandemic.
Contractual Obligations and Commitments
Our material cash requirements include non-cancelable purchase commitments, lease obligations, debt and debt service, payments under the TRA and settlement of the outstanding customer EARs, among others. See Note 13 Long-Term Debt and Note 21 Commitments and Contingencies to our audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K , and "-Indebtedness" and "-Customer Equity Appreciation Rights Agreements" for further details. In addition, as ofDecember 31, 2022 we have approximately$23.9 million in non-cancelable commitments for the purchase of software, goods and services, of which$20.1 million is due within the next 12 months.
As of
As of
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December 31, 2022 , reflecting our expectation that the Merger will close within
the next 12 months, which would result in payment of the EAR liabilities.
The Tax Receivable Agreement became effective in connection with the
Reorganization Transactions in February 2021 . As of December 31, 2022 , the
estimated liability under the Tax Receivable Agreement was $59.1 million , and is
expected to increase as LLC units are exchanged for shares of Class A common
stock in the future. We anticipate making payments under the Tax Receivable
Agreement during the first half of 2023, as we have finalized the 2021 corporate
tax return, with payments being spread over at least a 15 year period.
We are obligated as a lessee under certain non-cancellable operating leases for
several office and other facility locations, with expected total cash
commitments over the remaining lease terms of $38.6 million as of December 31,
2022 , of which $8.3 million is due within the next 12 months.
In February 2021 , in connection with the IPO, the outstanding synthetic equity
units were converted to synthetic common units and are eligible for a cash
payment upon each vesting date based on the preceding 30-trading day average
stock price of our Class A common stock. As of December 31, 2022 , we expect to
make payments to the employee holders of the synthetic equity units of
approximately $2.4 million over the next 2 years based on the 30-day average
price of our Class A common stock at December 31, 2022 .
The Merger Agreement contains certain termination rights, whereby we may be
obligated to pay Parent a termination fee. See "-Recent Developments and Factors
Affecting Our Results of Operations -Pending Acquisition". If the Merger
Agreement were terminated in accordance with its terms, under certain specified
circumstances, we would be required to pay Parent a termination fee in an amount
equal to $228.0 million , including if the Merger Agreement is terminated due to
our accepting a superior proposal or due to the Board changing its
recommendation to our stockholders to vote to approve the Merger Agreement.
Additionally, we have entered into agreements with certain banks that provide
that, upon closing of the Merger, we are obligated to pay an aggregate advisory
fee of approximately $78.1 million . If the Merger is not consummated, we are
obligated in certain circumstances to pay a breakage fee of approximately $36.5
million .
Customer Equity Appreciation Rights
Based on the acquisition value of the pending Merger and our current stock price, the value of the outstanding EAR agreements exceeded the minimum value established in the EAR Letter Agreement. As ofDecember 31, 2022 , the estimated customer EAR liability was included in current liabilities, reflecting our expectation that the Merger will close within the next 12 months, which would result in payment of the EAR liabilities. Upon closing of the Merger, we expect to make full payment of the EAR liability, which was approximately$276.7 million as ofDecember 31, 2022 .
Amendment to Tax Receivable Agreement
The Tax Receivable Agreement became effective in connection with the Reorganization Transactions inFebruary 2021 . The Company, Cure TopCo and certain other parties thereto entered into a Tax Receivable Agreement and LLC Agreement Amendment, dated as ofSeptember 2, 2022 (the "TRA Amendment") which (i) amends (x) the Tax Receivable Agreement among the Company, Cure TopCo and certain other parties thereto and (y) the Cure TopCo Amended LLC Agreement and (ii) provides for certain covenants regarding tax reporting and tax-related actions. 115
-------------------------------------------------------------------------------- Table of Contents The TRA Amendment provides for (i) the termination of all payments under the TRA from and after the Effective Time of the Merger Agreement, (ii) the payment of any amounts due under the TRA prior to the Effective Time (other than payments resulting from an action taken by any party to the TRA after the date of the TRA Amendment, which will be suspended), in accordance with the terms of the TRA, which payments will be paid no earlier than 185 days following the filing of theU.S. federal income tax return of the Company, (iii) a prohibition on the Company terminating the TRA or accelerating obligations under the TRA after the date of the TRA Amendment and (iv) the termination of the TRA effective as of immediately prior to and contingent upon the occurrence of the Effective Time (including termination of all of the Company's obligations thereunder and the obligation to make any of the foregoing suspended payments). The TRA Amendment also includes agreements among the parties thereto regarding the preparation of tax returns and limits actions that may be taken by the Company, Cure TopCo and certain of their controlled affiliates after the Effective Time. The TRA Amendment also (i) suspends all tax distributions under the Cure TopCo Amended LLC Agreement from and after the Effective Time, and (ii) provides that from and after the Effective Time, no person or entity shall have any further payment or other obligation under the TRA or any obligation to make or pay tax distributions under the Cure TopCo Amended LLC Agreement. In the event the Merger Agreement is terminated in accordance with its terms, (i) the TRA Amendment will become null and void ab initio (provided that any payments suspended as described above are required to be made), (ii) the TRA and the Cure TopCo Amended LLC Agreement will continue in full force and effect as if the TRA Amendment had never been executed (provided that any suspended payments as described above are required to be made), and (iii) all of the Company's obligations under the Cure TopCo Amended LLC Agreement will continue in full force and effect as if the TRA Amendment had never been executed. As ofDecember 31, 2022 , the estimated liability under the Tax Receivable Agreement was$59.1 million . The foregoing description of the TRA Amendment does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the TRA Amendment which was filed as Exhibit 99.2 to the Current Report on Form 8-K filed by the Company with theSEC onSeptember 6, 2022 .
Off-balance sheet arrangements
Except for certain letters of credit entered into in the normal course of
business and certain unconsolidated variable interest entities ("VIEs") related
to Caravan Health as described in Note 6, Variable Interest Entities in the
audited consolidated financial statements, 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 audited 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. We believe the following critical accounting policies
could potentially produce materially different results if we were to change
underlying assumptions, estimates or judgments. See Note
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2 Significant Accounting Policies to our audited consolidated financial
statements included in Item 8 of this Annual Report on Form 10-K for a summary
of our significant accounting policies.
Revenue recognition
We recognize revenue as the control of promised services is transferred to our
customers and we generate all of our revenue from contracts with customers. The
amount of revenue recognized reflects the consideration to which we expect to be
entitled in exchange for these services. The measurement and recognition of
revenue requires us to make certain judgments and estimates.
We apply the five-step model to recognize revenue from customer contracts. The
five-step model requires us to (i) identify the contract with the customer, (ii)
identify the performance obligations in the contract, (iii) determine the
transaction price, including variable consideration to the extent that it is
probable that a significant future reversal will not occur, (iv) allocate the
transaction price to the respective performance obligations in the contract, and
(v) recognize revenue when, or as, we satisfy the performance obligation.
The unit of measure for revenue recognition is a performance obligation, which
is a promise in a contract to transfer a distinct or series of distinct goods or
services to the customer. A contract's transaction price is allocated to each
distinct performance obligation and recognized as revenue when, or as, the
performance obligation is satisfied.
Our customer contracts have either (1) a single performance obligation as the
promise to transfer services is not separately identifiable from other promises
in the contracts and is, therefore, not distinct; (2) a series of distinct
performance obligations; or (3) multiple performance obligations, most commonly
due to the contract covering multiple service offerings. For contracts with
multiple performance obligations, the contract's transaction price is allocated
to each performance obligation on the basis of the relative standalone selling
price of each distinct service in the contract.
Revenue generated from IHEs relates to the assessments performed either within
the patient's home, virtually or at a healthcare provider facility as well as
certain in-home clinical evaluations performed by our mobile network of
providers. 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. The pricing for the IHEs is generally based on a fixed transaction
fee, which is directly linked to the usage of the service by the customer during
a distinct service period. Customers are invoiced for evaluations performed each
month and remit payment accordingly. Each IHE represents a single performance
obligation for which revenue is recognized at a point in time when control is
transferred to the customer upon submission of the completed and coded
evaluation. Evaluations revenue also includes revenue related to diagnostic and
preventative services we provide. Revenue from these services is primarily based
on a fixed fee for such services and is recognized over time as the performance
obligations are satisfied. Therefore, this revenue does not require significant
estimates and assumptions by management.
The transaction price for certain of our IHEs is reduced by the grant date fair
value of outstanding customer EARs. See "-Critical accounting policies-Customer
Equity Appreciation Rights."
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Revenue generated from value-based care services primarily consists of revenue
generated by our Caravan Health subsidiary through the provision of ACO
enablement services, Caravan Health has multiple product and service offerings
for customers around the management of the ACO model. These include, but are not
limited to, population health software, analytics, practice improvement,
compliance, and governance. The overall objective of the services provided is to
help the customer receive shared savings from CMS. Caravan Health enters into
arrangements with customers wherein we receive a contracted percentage of each
customer's portion of shared savings if earned. We recognize shared savings
revenue as performance obligations are satisfied over time, commensurate with
the recurring ACO services provided to the customer over a 12-month calendar
year period. The shared savings transaction price is variable, and therefore, we
estimate an amount we expect to receive for each 12-month calendar year
performance obligation period.
In order to estimate this variable consideration, management initially uses
estimates of historical performance of the ACOs. We consider inputs such as
attributed patients, expenditures, benchmarks and inflation factors. We adjust
our estimates at the end of each reporting period to the extent new information
indicates a change is needed. We apply a constraint to the variable
consideration estimate in circumstances where we believe the data received is
incomplete or inconsistent, so as not to have the estimates result in a
significant revenue reversal in future periods. Although our estimates are based
on the information available to us at each reporting date, new and material
information may cause actual revenue earned to differ from the estimates
recorded each period. These include, among others, Hierarchical Conditional
Category ("HCC") coding information, quarterly reports from CMS with information
on the aforementioned inputs, unexpected changes in attributed patients and
other limitations of the program beyond our control. We receive final
reconciliations from CMS and collect the cash related to shared savings earned
annually in the third or fourth quarter of each year for the preceding calendar
year.
The remaining sources of ACO enablement services revenue are recognized over
time when, or as, the performance obligations are satisfied and are primarily
based on a fixed fee or per member per month fee. Therefore, they do not require
significant estimates and assumptions by management. See Note 7 Revenue
Recognition to our audited consolidated financial statements included in Item 8
of this Annual Report on Form 10-K for further details regarding our revenue
recognition policies.
Allowance for doubtful accounts
We continuously monitor collections and payments from our customers. We maintain an allowance for doubtful accounts based on the best facts available to us. We consider historical realization data, accounts receivable aging trends and other operational trends to estimate the collectability of receivables. After all reasonable attempts are made to collect a receivable, the receivable is written off against the allowance for doubtful accounts. As ofDecember 31, 2022 , we had an allowance for doubtful accounts of$8.8 million , which represented 5.6% of total accounts receivable, net. We continue to assess our receivable portfolio and collections in light of the current economic environment and its impact on our estimation of the adequacy of the allowance for doubtful accounts. 118 --------------------------------------------------------------------------------
Table of Contents Equity-based compensation We recognize equity-based compensation for all equity-based awards granted to employees based on the grant date fair value of the award. The resulting compensation expense is generally recognized on a straight-line basis over the requisite service period. Forfeitures are recognized as they occur. Following our IPO inFebruary 2021 , equity awards have been issued to certain employees and our Board in the form of RSUs and/or stock options. RSUs are subject to time-based vesting and vest either on the one-year anniversary of the grant date or ratably over four years. The grant date fair value of RSUs is based on the closing stock price of our Class A common stock on the date of grant and is recognized as equity-based compensation expense over the vesting period. Stock options are subject to time-based vesting and vest ratably over three or four years. The grant date fair value of stock options is measured using a Black-Scholes model and is recognized as equity-based compensation expense over the vesting period. Inputs to the Black-Scholes model include the closing stock price of our Class A common stock on date of grant, as well as assumptions for expected term, expected volatility, expected dividend yield and risk-free interest rate. The expected term of the option represents the period the stock-based awards are expected to be outstanding. We use the simplified method for estimating the expected term of the options since we have limited historical experience to estimate expected term behavior. Since our Class A common shares were not publicly traded untilFebruary 2021 and were rarely traded privately, at the time of each grant, there has been insufficient volatility data available. Accordingly, we calculate expected volatility using comparable peer companies with publicly traded shares over a term similar to the expected term of the options issued. We do not intend to pay dividends on our common shares, therefore, the dividend yield percentage is zero. The risk-free interest rate is based on theU.S. Treasury constant maturity interest rate whose term is consistent with the expected life of our stock options.
We used the weighted average assumptions to estimate the fair value of stock options granted for the periods presented as follows.
Year ended
December 31, 2022 December 31, 2021
Expected term (years) 6.25 6.10
Expected volatility 55.3 % 51.6 %
Expected dividend yield - -
Weighted average risk-free interest rate 1.90 % 0.80 %
Weighted average grant date fair value $ 7.75 $ 11.95
Equity-based compensation prior to the IPO included awards that were profits
interest units for federal income tax purposes. The profits interest units had
time-based and performance-based vesting criteria. Awards with time-based
vesting generally vest over time, with a portion of the awards vesting on the
grant date anniversary and other awards vesting on December 31 of each year. In
connection with the IPO, the profits interest units were reclassified into
common units and remain subject to the same time-based and performance-based
vesting criteria as per the terms of the original awards.
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The grant date fair value of the profits interests was measured using a Monte
Carlo option pricing model and is being recognized for awards subject to
time-based vesting as equity-based compensation expense over the requisite
service period. For those awards with performance-based vesting, the total cash
on cash return of the private equity owners as defined in the award agreement
must exceed certain multiples set forth in the award agreement in order to vest,
and is also generally dependent upon the participant's continued employment. The
criteria associated with the performance-vesting criteria has not been probable
to date. As such, we have not recorded any equity-based compensation expense
related to the equity-based awards that are subject to performance-based vesting
criteria only. In March 2022 , 3,572,469 then outstanding Incentive Units subject
to performance-based vesting criteria were amended to add an alternative
two-year service-vesting condition to the performance-vesting criteria, which,
through the effective date of the amendment, were considered not probable of
occurring and therefore we had not previously recorded any expense related to
these awards. The amended equity awards will now vest based on the satisfaction
of the earlier to occur of 1) a two year service condition, with 50% vesting in
each of March 2023 and March 2024 or 2) the achievement of the original
performance vesting criteria. As a result of this amendment, which resulted in
vesting that is considered probable of occurring, we began to record
equity-based compensation expense for these amended equity awards in March 2022 .
The equity-based compensation expense related to these amended awards is based
on the fair value as of the effective date of the amended equity awards and will
be recorded over the two year service period.
The total equity value of Cure TopCo at the time of grant represented a key
input for determining the fair value of the underlying common units. Prior to
the IPO, a discount for lack of marketability was applied to the per unit fair
value to reflect increased risk arising from the inability to readily sell our
common units.
In order to estimate the fair value of our common units prior to the IPO, we
used a combination of the market approach and the income approach. We used a
combination of these standard valuation techniques rather than picking just one
overall approach, as we believe that the market approach on its own provides a
less reliable evaluation of the fair value than an income approach because such
an approach relies solely on data and trends of companies in similar market
segments with similar characteristics. By contrast, the income approach
incorporates management's best estimates of future performance based on both
company and industry-specific factors and incorporates management's long-term
strategy for positioning and operating the business.
For the market approach, we utilized the guideline company method by selecting
certain companies that we considered to be the most comparable to us in terms of
size, growth, profitability, risk and return on investment, among others. We
then used these guideline companies to develop relevant market multiples and
ratios. The market multiples and ratios were applied to our financial
projections based on assumptions at the time of the valuation in order to
estimate our total enterprise value. Since there is not an active market for our
common units, a discount for lack of marketability was then applied to the
resulting value.
For the income approach, we performed discounted cash flow analyses utilizing
projected cash flows, which were discounted to the present value in order to
arrive at an enterprise value. The key assumptions used in the income approach
include management's financial projections which are based on highly subjective
assumptions as of the date of valuation, a discount rate, and a long-term growth
rate.
The Monte Carlo simulation also requires additional inputs to estimate the grant
date fair value of an award, including an assumption for expected volatility,
expected dividend yield, risk-free rate and an expected life. Since we were
historically privately held, we calculated expected volatility using comparable
peer companies with publicly traded shares over a term similar to the expected
term of the underlying award. At the time of grant, we had no intention to pay
dividends on our common units, and therefore, the dividend yield percentage was
zero. The risk-
120-------------------------------------------------------------------------------- Table of Contents free interest rate was based on theU.S. Treasury constant maturity interest rate whose term is consistent with the expected life of the profits interests.
Profits interest awards granted during the year ended
December 31, 2020 Expected volatility 41.6 % Expected dividend yield - Risk-free interest rate 1.3 % Expected life (years) 2.90 In addition,Remedy Partners historically maintained an equity incentive plan whereby certain employees and directors were granted stock options. InNovember 2019 , at the conclusion of the Remedy Partners Acquisition, outstandingRemedy Partners stock options were converted to stock options inNew Remedy Corp. No additional stock option grants were made following theRemedy Partners Acquisition until the 2021 LTIP was adopted in connection with our IPO. In connection with the IPO, these former stock options inNew Remedy Corp. were converted into stock options inSignify Health, Inc. The conversion of the outstanding stock options did not result in any incremental expense as the number of stock options outstanding and the exercise price were both adjusted on a proportionate basis, and therefore, the fair value of the new award did not exceed the fair value of the previous award immediately prior to the modification. Except as described below with respect to the amended stock options,the outstanding stock options remain subject to their original vesting schedules and contractual terms. Accordingly, for those stock options we continue to recognize the original grant date fair value of these converted stock options. The original grant date fair value of the outstanding stock options was estimated using a Black-Scholes option-pricing model, which required the input of subjective assumptions, including estimated share price, volatility over the expected term of the awards, expected term, risk free interest rate and expected dividends, as described above. Expected volatility, expected dividend yield and risk-free interest rate were all calculated in similar ways for theRemedy Partners stock options as described above for the valuation of the profits interests. The expected term of the stock options represents the period the stock options were expected to be outstanding. We used the simplified method for estimating the expected term of the stock options. As noted above, onMarch 1, 2022 our Board approved amendments to certain outstanding equity awards subject to performance-based vesting criteria. The equity awards were amended with an effective date ofMarch 7, 2022 , and included 817,081 then outstanding stock options (which were originally granted byRemedy Partners ). The amendments added an alternative two-year service-vesting condition to the performance-vesting criteria, which, through the effective date of the amendment, were considered not probable of occurring and therefore we had not previously recorded any expense related to these awards. The amended equity awards will now vest based on the satisfaction of the earlier to occur of (1) a two year service condition, with 50% vesting in each ofMarch 2023 andMarch 2024 or (2) the achievement of the original performance vesting criteria. As a result of this amendment, which results in vesting that is considered probable of occurring, we began to record equity-based compensation expense for these amended equity awards inMarch 2022 . The equity-based compensation expense related to these amended awards is based on the Black-Scholes value as of the effective date of the amended equity awards, which was calculated as described above, and will be recorded over the two year service period. We continue to record equity-based compensation expense related to the convertedRemedy Partners stock options that remain outstanding over the remaining vesting periods, to the extent the former Remedy Partners employees who received the stock option grants remain our employees. 121 --------------------------------------------------------------------------------
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Customer Equity Appreciation Rights
InDecember 2019 andSeptember 2020 , we entered into EAR agreements with one of our customers. OnDecember 31, 2021 , we entered into amendments of the 2019 and 2020 EAR agreements, as well as the EAR Letter Agreement. See "-Liquidity and capital resources-Customer Equity Appreciation Rights agreements." The initial grant date fair values of the EARs were each estimated in a similar manner, subject to the same management assumptions, as described for equity-based compensation as the EARs are a form of equity-based award. However, since the EARs are granted to a customer, they are also subject to accounting guidance for revenue recognition. Accordingly, their initial grant date fair values are recorded as a reduction to the transaction price over the service period for the associated customer's IHE services. Estimated changes in fair market value are recorded each accounting period based on management's current assumptions related to the underlying valuation approaches. These changes in fair market value are recorded in other expense (income), net on the consolidated statement of operations. The methodology for measuring the fair value of the customer equity appreciation rights and the EAR Letter Agreement was changed from an option pricing model to a discounted time value model as ofDecember 31, 2022 as a result of the pending Merger, see Note 3 Pending Acquisition to our audited consolidated financial statements included in Item 8 to this Annual Report on Form 10-K. The key assumptions in the valuation are the time to liquidity, which is estimated to be between three and five months based on the expected timing of the regulatory approvals of the transaction, and the annualized cost of debt discount rate, which we estimate to be 5.5% as ofDecember 31, 2022 . Based on the current equity value, the estimated fair value of the customer equity appreciation rights significantly exceeds the minimum value established in the EAR Letter Agreement, resulting in a de minimis value for the EAR Letter Agreement as ofDecember 31, 2022 . As ofDecember 31, 2022 , the full value of the EARs have been earned and no forfeitures have occurred. Due to the change in control and liquidity provisions of each outstanding customer equity appreciation right, the customer EAR liabilities are classified as a current liability as cash settlement of the customer equity appreciation rights is expected to occur following the close of the pending Merger.
Business combinations
We account for business combinations under the acquisition method of accounting, which requires the acquiring entity in a business combination to recognize the fair value of all assets acquired, liabilities assumed and any noncontrolling interest in the acquiree, and establishes the acquisition date as the fair value measurement point. Accordingly, we recognize assets acquired and liabilities assumed in business combinations, including contingent assets and liabilities and noncontrolling interests in the acquiree, based on fair value estimates as of the date of acquisition. Discounted cash flow models are typically used in these valuations if quoted market prices are not available, and the models require the use of significant estimates and assumptions including, but not limited to (1) estimating future revenue, expenses and cash flows expected to be collected; and (2) developing appropriate discount rates, long-term growth rates and probability rates. Our estimates of fair value are based upon assumptions believed to be reasonable, but we recognize that the assumptions are inherently uncertain. We recognize and measure goodwill, if any, as of the acquisition date, as the excess of the fair value of the consideration paid over the fair value of the identified net assets acquired. The primary drivers that generate goodwill are the value of synergies with our existing operations, ability to grow in the market, and estimates of market share at the date of purchase.Goodwill recorded in an acquisition is assigned to applicable reporting units based on expected revenues or expected cash flows. Identifiable intangible assets with finite lives are amortized over their useful lives. 122 --------------------------------------------------------------------------------
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Acquisition-related contingent consideration is initially measured and recorded at its estimated fair value as an element of consideration paid in connection with an acquisition. Subsequent adjustments are recognized in SG&A expense in the consolidated statements of operations. We determine the initial fair value of acquisition-related contingent consideration, and any subsequent changes in fair value using a discounted probability weighted approach or a Black-Scholes option pricing model depending on the nature and terms of the contingent consideration. Both of these valuation approaches take into consideration certain unobservable inputs. The unobservable inputs include long-term financial forecasts, expected term until payout, volatility, discount rate, credit spread, and risk-free rate. The expected volatility and discount rate were calculated using comparable peer companies, adjusted, if needed for the acquired company's operational leverage. The risk-free interest rate is based on theU.S. Treasury rates that are commensurate with the term of the contingent consideration. The contingent consideration related to theCaravan Health acquisition is payable based on the achievement of certain performance criteria, one of which is revenue. Both performance criteria must be achieved for any payment to be due. As ofDecember 31, 2022 , the estimated fair value of contingent consideration decreased since the acquisition date as the estimated revenue for 2022 is below the threshold to earn any of the payment and therefore the likelihood of the defined revenue criteria being achieved is unlikely, see Note 14 to our audited consolidated financial statements included elsewhere in Item 8 of this Annual Report on Form 10-K for further information. While Caravan revenue for 2022 will not be deemed final until receipt of the final reconciliation from CMS in the second half of 2023, the performance period to earn the payment ended as ofDecember 31, 2022 . Therefore, no valuation technique was used, and based on observable inputs, the value of the contingent consideration is estimated to be zero as ofDecember 31, 2022 .
Recoverability of goodwill, intangible assets, and other long-lived assets subject to amortization
Goodwill is an asset which represents the future economic benefits which arise from the excess of the purchase price over the fair value of acquired net assets in a business combination, including the amount assigned to identifiable intangible assets.Goodwill is not amortized, but rather is tested for impairment annually, or more frequently whenever there are triggering events or changes in circumstances which indicate that the carrying value of the asset may not be recoverable and an impairment loss may have been incurred. As ofDecember 31, 2022 , we had goodwill of approximately$369.9 million , which represented 21.2% of our consolidated total assets. As ofDecember 31, 2021 , we had goodwill of approximately$170.4 million , which represented 8.0% of our consolidated total assets. We assess goodwill for impairment at least annually, during the fourth quarter, and more frequently if indicators of impairment exist. Impairment testing for goodwill is performed at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment if the component constitutes a business for which discrete financial information is available, and management regularly reviews the operating results of that component. As ofDecember 31, 2022 , we have a single reporting unit. We perform an assessment of goodwill utilizing either a qualitative or quantitative impairment test. The qualitative impairment test assesses several factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If management concludes it is more likely than not that the fair value of the reporting unit is less than its carrying amount, a quantitative fair value test is performed. In a quantitative impairment test, management assesses goodwill by comparing the carrying amount of each reporting unit to its fair value. We estimate the fair value of each of our reporting units using either an income approach, a market valuation approach, a transaction valuation approach or a blended approach. 123 -------------------------------------------------------------------------------- Table of Contents If the fair value exceeds the carrying value of a reporting unit, goodwill is not considered impaired. If the carrying value of a reporting unit exceeds its fair value, goodwill is considered impaired and we would recognize an impairment loss equal to the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. We perform discounted cash flow analyses which utilize projected cash flows as well as a residual value, which is discounted to the present value in order to arrive at a reporting unit fair value. The determination of whether or not goodwill has become impaired involves a significant level of judgment in the assumptions and estimates underlying the approach used to determine the value of our reporting units. Actual results could differ from management's estimates, and such differences could be material to our consolidated financial position and results of operations. See "Item 1A. Risk factors." Given the significant cushion between the fair value and carrying value in the prior year, we performed a qualitative assessment in 2022 for goodwill and concluded that it is more likely than not that the fair value of the remaining reporting unit is greater than its carrying value amount. We review the carrying value of other long-lived assets or groups of assets, including property and equipment, internally developed software costs and other intangible assets, to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Intangible assets with definite lives subject to amortization include customer relationships, acquired and capitalized software, and trade names. Acquired intangible assets are initially recorded at fair value and are amortized on a basis consistent with the timing and pattern of expected cash flows used to value the intangible asset, generally on a straight-line basis over the estimated useful life. Capitalized software is recorded for certain costs incurred for the development of internal-use software. These costs are amortized on a straight-line basis over the expected economic life of the software. We assess the recoverability of an asset or group of assets by determining whether the carrying value of the asset or group of assets exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the asset or the primary asset in the group of assets. If such testing indicates the carrying value of the asset or group of assets is not recoverable, we estimate the fair value of the asset or group of assets using various valuation methodologies, including discounted cash flow models and quoted market values, as necessary. If the fair value of those assets or groups of assets is less than carrying value, we record an impairment loss equal to the excess of the carrying value over the estimated fair value. During the year endedDecember 31, 2022 , we recorded an asset impairment charge of$3.3 million as a result of the decision to end our community service offering. We recorded an asset impairment of$0.8 million related to certain capitalized software during the year endedDecember 31, 2020 as a result of the discontinued use of certain software.
Income taxes
We are organized as aC Corporation and own a controlling interest in Cure TopCo which is organized as a partnership for tax purposes. In addition, Cure TopCo wholly owns C Corporations, and other C Corporations are consolidated for GAAP purposes pursuant to the variable interest entity rules. For partnership and disregarded entities, taxable income and the resulting liabilities are allocated among the owners of the entities and reported on the tax filings for those owners. We record income tax (benefit) expense, deferred tax assets, and deferred tax liabilities only for the items for which we are responsible for making payments directly to the relevant tax authority. 124 --------------------------------------------------------------------------------
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In evaluating the Company's ability to realize its deferred tax assets, management considers whether it is more likely than not that some or all of the deferred tax assets will be realized and, when necessary, a valuation allowance is established. Management also considers the projected reversal of deferred tax liabilities and projected future taxable income in making this assessment. Based upon this assessment, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of valuation allowance.
Recent accounting pronouncements
Below is a description of certain recent accounting pronouncements that have had or may have an impact on our financial statements. See Note 2 to our audited consolidated financial statements included elsewhere in Item 8 of this Annual Report on Form 10-K for further information. InFebruary 2016 , the FASB issued ASU 2016-02, Leases ("ASC 842") which requires lessees to recognize leases on the balance sheet by recording a right-of-use asset and lease liability. This guidance was effective for non-public entities (as well as public entities that were emerging growth companies, like us) for annual reporting periods beginning afterDecember 15, 2021 . We adopted this new guidance as ofJanuary 1, 2022 and applied the transition option, whereby prior comparative periods are not retrospectively presented in the consolidated financial statements. We elected the package of practical expedients not to reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs and the lessee practical expedient to combine lease and non-lease components for all asset classes. We made a policy election to not recognize right-of-use assets and lease liabilities for short-term leases for all asset classes. See Note 9 to our audited consolidated financial statements included elsewhere in Item 8 of this Annual Report on Form 10-K for further information. InOctober 2021 , the FASB issued ASU 2021-08, Business Combinations (Topic 805) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ("ASU 2021-08") which requires that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. ASU 2021-08 is effective for public entities for fiscal years beginning afterDecember 15, 2022 , including interim periods within those fiscal years, and should be applied prospectively to business combinations occurring on or after the effective date of the amendments. We elected to early adopt this new guidance for interim periods in 2022 beginning with theCaravan Health acquisition onMarch 1, 2022 . We measured the acquired contract assets and liabilities in accordance with Topic 606. See Note 5 to our audited consolidated financial statements included elsewhere in Item 8 of this Annual Report on Form 10-K for further information. InNovember 2021 , the FASB issued ASU 2021-10, Government Assistance (Topic 832) Disclosures by Business Entities about Government Assistance ("ASU 2021-10") which requires annual disclosures that increase the transparency of transactions with a government accounted for by applying a grant or contribution accounting model, including (1) the types of transactions, (2) the accounting for those transactions, and (3) the effect of those transactions on an entity's financial statements. ASU 2021-10 was effective for all entities for fiscal years beginning afterDecember 31, 2021 . We adopted this new guidance as ofJanuary 1, 2022 . See Note 21 to our audited consolidated financial statements included elsewhere in Item 8 of this Annual Report on Form 10-K for further information. InJune 2016 , the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) ("ASU 2016-13") which introduced the current expected credit losses methodology for estimating allowances for credit losses. ASU 2016-13 applies to all financial instruments carried at amortized cost and off-balance-sheet credit exposures not accounted for as insurance, including loan commitments, standby letters of credit, and financial guarantees. The new accounting standard does not apply to trading assets, loans held for sale, financial assets for 125
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Table of Contents which the fair value option has been elected, or loans and receivables between entities under common control. ASU 2016-13 is effective for non-public entities (as well as public entities that were emerging growth companies, like us) for fiscal years beginning afterDecember 15, 2022 , including interim periods within those fiscal years. We will adopt this guidance as ofJanuary 1, 2023 with no significant impact to our financial statements.
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