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(Exact name of registrant as specified in its charter)
iDelaware
i84-2099378
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i100 SE 3rd Avenue, 26th Floor, iFort
Lauderdale, iFlorida
i33394
(Address of Principal Executive Offices)
(Zip
Code)
(i800) i559-9358
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, $0.01 par value per share
iCNVY
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes ☒ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☐
iNon-accelerated
filer
☒
Smaller reporting company
i☐
Emerging growth company
i☒
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. i☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No i☒
As
of April 29, 2022, the registrant had i73,194,171 shares of common stock, $0.01 par value per share, outstanding.
Operating
lease liabilities, net of current portion
i18,623
i—
Finance
leases obligations, net of current portion
i440
i528
Deferred
taxes, net
i35,094
i25,992
Term
loans, net of current portion
i264,483
i189,643
Other
long-term liabilities
i2,475
i5,595
Total
liabilities
i378,689
i292,154
Commitments
and contingencies (Note 15)
i
i
Shareholders’ equity
Preferred
stock, $ii0.01/ par value; i25,000,000
shares authorized and iiiiino////
shares issued or outstanding as of March 31, 2022 and iiiiino////
shares authorized, issued or outstanding as of December 31, 2021
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. iBUSINESS
AND BASIS OF PRESENTATION
Business
Convey Health Solutions Holdings, Inc. (collectively with its subsidiaries, which includes our main operating subsidiary, Convey Health Solutions, Inc., “we”, “us”, “our”, “Convey” or the “Company”) provides technology enabled solutions to payors within the large and growing government sponsored health plan market. Our platform combines proprietary modular technology and end-to-end solutions to serve as an extension of our clients’ operations and core systems. Our clients are primarily Medicare Advantage, Medicare Part D and Employer Group Waiver Plans, as well as Pharmacy Benefit Managers. Convey is a United States (“U.S.”) based holding company incorporated in Delaware. Our principal executive offices are
located in Fort Lauderdale, Florida.
Acquisition
On February 1, 2022, Convey’s indirect wholly-owned subsidiary, D-M-S Holdings Parent, LLC (f/k/a Dragon Holdings Parent, LLC), a Delaware limited liability company, acquired all of the issued and outstanding capital stock of D-M-S Holdings, Inc. d/b/a HealthSmart International, a Delaware corporation (“HealthSmart”). HealthSmart provides a diverse portfolio of health, wellness and diagnostic products centered on home based care outcomes. See Note 4. Acquisitions for additional information.
Stock Split
Prior to the IPO (as defined below), in June 2021, Convey’s Board of Directors (the “Board”) and stockholders approved a forward split
of shares of Convey’s common stock, par value $ii0.01/ per
share, on a i126-for-1 basis (the “Stock Split”), which became effective as of June 4, 2021. Prior to the Stock Split, we were authorized to issue i1,000,000
shares of common stock of which (i) i915,000 shares were designated as voting common stock and (ii) i85,000 shares were designated as non-voting common stock. In connection
with the Stock Split, the total number of authorized shares of common stock was proportionately increased and the par value of the common stock was not adjusted as a result of the Stock Split. In addition, all authorized shares of common stock were designated voting common stock. All references to common stock, options to purchase common stock, per share data and related information contained in our condensed consolidated financial statements have been retrospectively adjusted to reflect the effect of the Stock Split.
Initial Public Offering
On June 18, 2021, we closed our initial public offering (“IPO”) of our common stock through an underwritten sale of i13,333,334
shares of our common stock at a price of $i14.00 per share. In the offering, we sold i11,666,667 shares and a selling stockholder sold i1,666,667
shares. The aggregate net proceeds to us from the offering after deducting underwriting discounts and commissions and other offering expenses payable by us, were approximately $i146.1 million. We used approximately $i131.5 million
of the net proceeds from the IPO to repay outstanding indebtedness under our credit agreement. We did not receive any of the proceeds from the sale by the selling stockholder.
Prior to the closing of the IPO, on June 17, 2021, our Second Amended and Restated Certificate of Incorporation (the “Charter”) and our Second Amended and Restated Bylaws, became effective. The Charter, among other things, provides that our authorized capital stock consists of ii500,000,000/
shares of common stock, par value $ii0.01/ per share and
i25,000,000 shares of preferred stock, par value $ii0.01/
per share.
i
Basis of Presentation and Consolidation
The accompanying condensed consolidated financial statements are unaudited and include the accounts of Convey and our wholly-owned subsidiaries. They have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP” or “GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for
interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Our condensed consolidated statements of operations and comprehensive income (loss), shareholders’ equity, and cash flows for the three months ended March 31, 2022, and 2021, and the condensed consolidated balance sheet as of March 31, 2022, reflect all adjustments that are of a normal recurring nature and that are considered necessary for a fair statement of the results for the periods shown.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
iOur condensed consolidated balance sheet as of December 31, 2021, has been derived from our audited consolidated financial statements as of that date. Our condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 31, 2021, which include a complete set of footnote disclosures, including
our significant accounting policies, and are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 23, 2022 (“Form 10-K”). The results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year or for any other future period. All significant intercompany balances and transactions have been eliminated in consolidation.
COVID-19 Pandemic
During the first quarter ended March 31, 2020, concerns related to the spread of novel coronavirus (“COVID-19”) began to create global business disruptions as well as disruptions
in our operations. COVID-19 was declared a global pandemic by the World Health Organization on March 11, 2020. Governments at the national, state and local level in the U.S., and globally, have implemented varying measures in an effort to contain the virus, including social distancing, travel restrictions, border closures, limitations on public gatherings of people, work from home and supply chain logistical changes. While some of these actions have eased, escalating transmission rates (including of the Delta and Omicron variants of COVID-19), uneven vaccination and vaccination booster rates and further governmental guidance and orders may result in having to reimplement certain of these measures or implementing new and additional ones. The spread of COVID-19 has also caused significant volatility in the U.S. and international markets and has had and continues to have widespread, rapidly evolving and unpredictable impacts
on global society, economics, financial markets and business practices. The impact of COVID-19 on our business has resulted in elongated sales cycles, postponement of customer contract renewals, and slower implementation of software solutions for our clients, as well as a reduction in billable hours in one of our reportable segments, the Advisory Services segment.
The full extent to which the COVID-19 pandemic and the various responses to the COVID-19 pandemic continues to impact our business, operations or financial condition will depend on numerous evolving factors that we may not be able to accurately predict, including, but not limited to, the duration, severity and scope of the COVID-19 pandemic (including due to new variants, such as Delta and Omicron); actions by governmental entities, businesses and individuals that have been
and continue to be taken in response to the pandemic; the effect on our clients and demand by clients, clients and our clients’ members for and ability to pay for our solutions and services; and disruptions or restrictions on our employees’ ability to work and travel. The impact of these factors and others on our suppliers and clients could persist for some time after governments ease their restrictions and after the overall number of COVID-19 cases in the United States decreases.
We have assessed various accounting estimates and other matters, including those that require consideration of forecasted financial information, in context with the unknown future impacts of COVID-19 using information that is reasonably available to us at this time. While our current assessment of our estimates did not have a material impact on our condensed consolidated financial statements as of and for the three months ended March 31,
2022, as additional information becomes available to us, our future assessment of our estimates, including our expectations at the time regarding the duration, scope and severity of the pandemic, as well as other factors, could materially and adversely impact our consolidated financial statements in future reporting periods.
NOTE 2. iSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
i
Use
of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. These estimates and judgments are based on historical information currently available to us and based on various other assumptions that we conclude to be reasonable under the circumstances. While management concludes that such estimates are reasonable when considered in conjunction with our condensed consolidated balance sheets and statements of operations and comprehensive income (loss) taken as a whole, actual results could differ materially from those estimates.
i
Acquisitions
We
allocate the purchase consideration to the identifiable net assets acquired, including intangible assets and liabilities assumed, based on estimated fair values at the date of the acquisition. The excess of the fair value of the purchase consideration over the fair value of the identifiable assets and liabilities, if any, is recorded as goodwill. During the measurement period, which is up to one year from the acquisition date, we may adjust provisional amounts that were recognized at the acquisition
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
date
to reflect new information obtained about facts and circumstances that existed as of the acquisition date. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to the condensed consolidated statements of operations and comprehensive income (loss).
Determining the fair value of assets acquired and liabilities assumed requires significant judgment, including the selection of valuation methodologies which techniques include the royalty method, the multi-period excess earnings method, the cost approach, the market approach, and the probability weighted assessment method as considered necessary. Significant assumptions used in those methodologies include, but are not limited to, growth rates, discount rates, customer attrition rates, expected levels of revenues, earnings, cash flows and tax rates. The use of different valuation methodologies and assumptions is highly subjective and inherently uncertain
and, as a result, actual results may differ materially from estimates.
i
Customer Concentrations
i
Revenue and Accounts receivable from our major customers are as follows:
Our
customer base is highly concentrated. Revenue may significantly decline if we were to lose one or more of our major customers. However, our risk is reduced due to our significant customers having multiple product delivery solutions under separate contracts.
/i
Contingent Consideration
We
recognized an earn-out liability in connection with the November 2018 acquisition of HealthScape Advisors, LLC (“HealthScape Advisors”) and Pareto Intelligence LLC (“Pareto Intelligence”), which represented contingent consideration.
The initial fair value of the earn-out liability was determined by employing a Monte-Carlo simulation model. The underlying simulated variable was adjusted revenue discounted by the market price of risk embedded in the revenue metrics. The revenue volatility estimate was based on a study of historical asset volatility and implied volatility for a set of comparable public companies, adjusted by our operating leverage. The earn-out payments were calculated based on simulated revenue metrics and payment thresholds as set forth in the HealthScape Advisors and Pareto Intelligence purchase agreement. The calculated payments were further discounted back to present value using cost of debt
reflecting our credit risk. The fair value of the earn-out liability at each reporting date subsequent to the acquisition was measured using a probability weighted approach. Any change in fair value was recognized in the condensed consolidated statements of operations and comprehensive income (loss).
On September 4, 2019, Cannes Parent, Inc. (“Cannes”), a direct subsidiary of Convey, entered into an agreement to acquire all of the outstanding stock of Convey Health Solutions, Inc. through the merger of Cannes Merger Sub, Inc. (“Merger Sub”) and Convey Health Parent, Inc. (“Parent”) (the “Merger”) with Parent surviving as a direct subsidiary of Cannes. The Merger principally occurred through an investment from TPG Cannes Aggregation, L.P., which is primarily funded by partners of TPG Partners VIII, L.P. and TPG Healthcare Partners, L.P. or any parallel
fund or their alternative investment vehicles (collectively, “TPG”). In connection with the Merger, we recognized a holdback liability, which represented contingent consideration. The
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
initial fair value of the holdback liabilities and at each subsequent reporting date was measured using a probability weighted approach. Any change in fair value was recognized in the consolidated statements of operations and comprehensive income (loss).
In
connection with the acquisition of HealthSmart in February 2022, we recognized an earn-out liability which represented contingent consideration. The initial fair value of the earn-out liability was determined by employing a Black-Scholes Merton model. The earn-out payments were calculated based on projected revenue metrics and payment thresholds as set forth in the HealthSmart purchase agreement. The calculated payments were further discounted back to present value using the cost of debt reflecting our credit risk.
i
The
following table provides a reconciliation of our Level 3 earn-out and holdback liabilities for the three months ended March 31, 2022:
Basic income (loss) per share is computed by dividing net income (loss) attributable to common shareholders (the numerator) by the weighted average number of common shares outstanding for the period (the denominator). Diluted net income (loss) per common share attributable to common shareholders is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period adjusted for the dilutive effects of common stock equivalents. In periods when losses from operations are reported, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.
i
For
the Three Months Ended March 31,
(in thousands, except per share data)
2022
2021
Net income (loss) attributable to common shareholders
Net income (loss)
$
(i1,154)
$
(i934)
Net
income (loss) attributable to common shareholders
$
(i1,154)
$
(i934)
Weighted-average
common shares outstanding:
Basic and diluted
ii73,194,171/
ii61,321,424/
Net
income (loss) per share:
Basic and diluted
$
(ii0.02/)
$
(ii0.02/)
/
For
the three months ended March 31, 2022, and 2021, i9,534,119 and i5,690,664
of potentially dilutive share-based awards outstanding, respectively, were excluded from the computation of diluted net income (loss) per share related to common shareholders as their effect was anti-dilutive. See Note 11. Share-Based Compensation.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
i
Recent
Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which supersedes the previous guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases except those which meet the definition of a short-term lease. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or financing. Classification is based on criteria that are similar to those applied in previous lease accounting, but without explicit bright lines. The recognition of these lease assets and lease liabilities represents a change from previous U.S. GAAP requirements, which did not require lease
assets and lease liabilities to be recognized for most leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee, have not significantly changed from previous U.S. GAAP requirements. The Company adopted the provisions of Topic 842 on January 1, 2022, using the modified retrospective approach. All comparative periods prior to January 1, 2022 are not adjusted and continue to be reported in accordance with Topic 840.
The Company elected to utilize the package of practical expedients permitted within the new standard, which among other things, allowed the
Company not to reassess prior conclusions about lease identification, classification and initial direct costs of existing leases as of the date of adoption. The Company made an accounting policy election to keep leases with an initial term of 12 months or less off of the Company’s condensed consolidated balance sheet which resulted in recognizing those lease payments in the condensed consolidated statements of operations on a straight-line basis over the lease term.
Adoption of the new standard resulted in the recording of right-of-use assets and corresponding lease liabilities of $i14.7 million
and $i20.7 million, respectively, as of January 1, 2022. The difference between the right-of-use assets and the lease liabilities was recorded to eliminate existing deferred rent balances and remaining balances of lease incentives recorded under Topic 840. The adoption of the new standard did not materially impact the Company's condensed consolidated statements of operations and had no impact on the
Company's condensed consolidated statements of cash flows. See Note 18. Leases for further information.
Accounting Pronouncements Issued Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) (“ASU 2016-13”). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments. Entities will be required to use a model that will result in the earlier recognition of allowances for losses for trade and other receivables, held-to-maturity debt securities, loans, and other instruments. For available-for-sale debt securities with unrealized losses, the losses will be recognized as allowances rather than as reductions in the amortized cost of the securities. ASU 2016-13, as subsequently amended for various
technical issues, is effective for emerging growth companies following private company adoption dates for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. We are currently evaluating the new guidance to determine the impact it will have on our consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”), subsequently clarified in January 2021 by ASU 2021-01, Reference Rate Reform (Topic 848) (“ASU 2021-01”). The main provisions of this update provide optional expedients and exceptions for contracts, hedging relationships, and other
transactions that reference the London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. The guidance in ASU 2020-04 and ASU 2021-01 was effective upon issuance and, once adopted, may be applied prospectively to contract modifications and hedging relationships through December 31, 2022. We are currently evaluating the new guidance to determine the impact ASU 2020-04 and ASU 2021-01 will have on our consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805) (“ASU 2021-08”). The new guidance creates an exception to the general recognition and measurement principle for contract
assets and contract liabilities from contracts with customers acquired in a business combination. Under this exception, an acquirer applies Topic 606 to recognize and measure contract assets and contract liabilities on the acquisition date. Topic 805 generally requires the acquirer in a business combination to recognize and measure the assets it acquires and liabilities it assumes at fair value on the acquisition date. This generally will result in companies recognizing contract assets and contract
liabilities at amounts consistent with those recorded by the acquiree immediately before the acquisition date. This new guidance is effective for emerging growth companies following private business adoption dates, for the fiscal years beginning after December 15, 2023, with early adoption permitted. We are currently evaluating the new guidance to determine the impact it will have on our consolidated financial statements.
We provide technology enabled solutions and advisory services to assist our clients with workflows across product developments, sales, member experience,
clinical management, core operations and business intelligence and analytics. We generate our revenues through our itwo reporting segments: (i) Technology Enabled Solutions and (ii) Advisory Services.
Technology Enabled Solutions
We help health plans grow membership and revenue as well as operate more effectively and efficiently. We also assist our clients in managing the compliance and administrative requirements imposed under government sponsored health plans. Our technology
solutions are primarily delivered through a web-based customizable application. This application is used to identify, track, and administer contractual services, or benefits provided under a client’s plan to its Medicare and Medicaid beneficiaries. We also provide analytics over healthcare data to capture and assess gaps in risk documentation, quality, clinical care, and compliance. With our technology enabled solutions, we offer the following services:
•Health Plan Management provides technology-enabled plan administration services for government-sponsored health plans. Our service encompasses eligibility and enrollment processing, member services, premium billing, payment processing, reconciliation and other related services. In addition, we provide technology enabled services to manage supplemental benefits provided to members through their Medicare Advantage plans. Our services
include benefit design and administration, member eligibility and engagement, analytics and reporting.
•Software Services provide additional services to our clients for ad hoc enhancements on their existing software solutions.
•Data Analytics provide payment tools and data analytics to improve revenue accuracy and identify gaps in quality, clinical care and compliance. Increasingly we are combining these analytics capabilities with our Health Plan Management offerings.
•Supplemental Benefit Services include product fulfillment, as well as catalog development and product distribution. Many of these services are provided through our technology enabled solutions.
Advisory
Services
We provide Advisory Services that complement our technology enabled solutions, including sales and marketing strategies, provider network strategies, compliance, Star ratings, quality, clinical, pharmacy, analytics and risk adjustment.
Revenue Recognition
We recognize revenue under ASC Topic 606, Revenue from Contracts with Customers. We recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for contracts that are within the scope of the standard, we perform the following
five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
Disaggregation of revenue
i
The
following tables present disaggregated revenue by reporting segment:
The
revenue recognition pattern, point in time or over time, is consistent within all revenue categories with the exception of Data Analytics which includes revenue recognized on both a point in time and over time basis. The amount of point in time revenue within Data Analytics was $i0.6 million and $i1.4
million during the three months ended March 31, 2022, and 2021, respectively.
The timing of our revenue recognition, invoicing, and cash collections results in billed accounts receivable, unbilled receivables, and deferred revenue. Accounts receivable includes unbilled receivable balances of $i17.4
million and $i7.0 million as of March 31, 2022, and December 31, 2021, respectively.
Deferred revenue represents payments received from our customers in advance of recognition of revenue. Deferred revenue that will be recognized during the succeeding i12
months is recognized as current deferred revenue and the remaining portion is recognized as non-current deferred revenue within Other long-term liabilities. Revenue recognized during the three months ended March 31, 2022, and 2021 that was included in the deferred revenue balance at the beginning of the period was $i4.4 million and $i3.9
million, respectively.
Remaining Performance Obligations
Transaction price allocated to remaining performance obligations (“RPO”) represents contracted revenue that has not yet been recognized, which includes contract liabilities and non-cancelable amounts that will be invoiced and recognized as revenue in future periods.
The timing and amount of revenue recognition for our remaining performance obligations are influenced by several factors and therefore the amount of remaining obligations may not be a meaningful indicator of future results. Total RPO equaled $i8.4
million as of March 31, 2022, of which we expect to recognize approximately $i4.2 million over the next i12
months. The remaining $i4.2 million is expected to be recognized in fiscal years 2023, 2024, 2025, 2026 and 2027 by $i3.0 million, $i1.1
million, $i0.1 million, $i7.5 thousand and $i7.5
thousand, respectively.
NOTE 4. iACQUISITIONS
On January 9, 2022, Convey’s indirect wholly-owned subsidiary, D-M-S Holdings Parent, LLC (f/k/a Dragon Holdings Parent, LLC), a Delaware limited liability company (“Buyer”), entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Briggs
Medical Service Company, a Delaware corporation (“Seller”), and D-M-S Holdings, Inc. d/b/a HealthSmart International, a Delaware corporation (“Target”), pursuant to which, on the terms and subject to the conditions set forth in the Purchase Agreement, Buyer agreed to acquire from Seller all of the issued and outstanding capital stock of Target (the acquisition of such capital stock, the “Acquisition”). Target provides a diverse portfolio of health, wellness and diagnostic products centered on home based care outcomes, and the Company intends to leverage the Target’s supply chain and logistics expertise to get high quality products to members faster and at a lower cost.
On February 1, 2022, Buyer completed its acquisition of all of the issued and outstanding capital stock
of the Target. The Acquisition was consummated pursuant to the Purchase Agreement.
Pursuant to the terms set forth in the Purchase Agreement, at closing Buyer paid to Seller cash in an amount equal to $i74.7 million, subject to certain adjustments for, among other things, Target’s cash, indebtedness and net working capital (the “Closing Purchase Price”). If the Target achieves certain amounts of net revenue in calendar year 2022, Buyer will pay to Seller cash up to an additional $i15 million.
A portion of the Closing Purchase Price was deposited into an escrow account held by an
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
escrow agent and will be released to Buyer or Seller, as applicable, following the final determination of any purchase price adjustment.
In connection with the Purchase Agreement, CHS obtained a first lien incremental term loan facility under CHS’s existing First Lien Credit Agreement in an aggregate principal amount of $i78 million,
for the purpose of financing the Acquisition and paying fees and expenses related thereto. See Note 9. Credit Facility for additional information related to the incremental term loan facility.
The Acquisition was accounted for using the acquisition method of accounting under which assets and liabilities of the Target were recorded at their respective fair values including an amount for goodwill representing the difference between the acquisition consideration and the fair value of the identifiable net assets. A deferred tax liability has been recorded for the excess of financial statement basis over tax basis of the acquired assets and assumed liabilities with a corresponding increase to goodwill. The goodwill attributable to the Acquisition has been recorded as a non-current asset and is not amortized, but is subject to an annual review for impairment. Such goodwill, which is
non-deductible for income tax purposes, is part of the Technology Enabled Solutions segment.
The Acquisition price was allocated to the tangible and identified intangible assets acquired and liabilities assumed as of the closing date. The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The estimated fair values of assets acquired and liabilities assumed are considered preliminary and are based on the most recent information available. The Company believes that the information provides a reasonable basis for assigning the fair values of assets acquired and liabilities assumed. Thus, the provisional measurements of fair value set forth below are subject to change. The
Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.
i
The following table summarizes the Acquisition date fair value of the allocation of the purchase consideration assigned to each major class of assets acquired and liabilities assumed as of February 1, 2022, the acquisition date:
Estimated
Fair Value
(in thousands)
ASSETS ACQUIRED
Cash
$
i112
Accounts
receivable
i6,481
Inventories
i22,879
Prepaid
expenses and other current assets
i1,840
Property
and equipment
i1,269
Operating
lease right-of-use-assets
i4,908
Total identifiable assets acquired
i37,489
Fair
value of intangible assets
Trade names
i8,600
Customer
relationships
i25,500
Total
fair value of intangible assets acquired
i34,100
Total assets acquired
$
i71,589
LIABILITIES
ASSUMED
Accounts payable
$
i2,937
Accrued
expenses
i3,895
Operating
lease liabilities, current portion
i1,003
Deferred taxes
i10,222
Operating
lease liabilities, net of current portion
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Indications of fair value of the intangible assets acquired in connection with the Acquisition were determined using either the income, market or replacement cost methodologies. The intangible assets are being amortized over periods which reflect the pattern in which economic benefits of the assets are expected to be realized. The trade names and customer relationships are being amortized on a straight-line basis over an estimated useful life of itwenty
years and iseventeen years, respectively. The goodwill recognized is primarily attributable to synergies of the business and the acquisition of workforce knowledgeable of product development and supply chain expertise in the healthcare industry.
i
The
following table summarizes the purchase consideration transferred in connection with the Acquisition and consists of the following:
Included
in the condensed consolidated statement of operations and comprehensive income (loss) for the three months ended March 31, 2022, are net sales of $i7.2 million and net loss of $i1.6 million,
related to the Target’s operations since the acquisition date of February 1, 2022.
Unaudited Supplemental Pro Forma Information
i
The following table presents the unaudited pro forma combined results of operations of the Company and Target for the three months ended March 31, 2022 and 2021,
as if the acquisition had occurred on January 1, 2021. The pro forma information presented is for informational purposes only and is not indicative of results of operations that would have been achieved had the Acquisition taken place at the beginning of the period.
For the Three Months Ended March 31
(in thousands)
2022
2021
Net
revenue
i101,174
i97,567
Net
income (loss)
i205
(i299)
/
NOTE
5. iPREPAID EXPENSES AND OTHER CURRENT ASSETS
i
Prepaid expenses and other current assets consist of the following:
Depreciation
expense for the three months ended March 31, 2022, and 2021 totaled $i1.5 million and $i1.4 million, respectively.
We
lease various equipment and software under finance leases. The depreciation expense associated with the assets under finance leases for the three months ended March 31, 2022, and 2021, totaled $i89 thousand and $i0.1 million,
respectively. iAssets held under finance leases are included in property and equipment as follows:
The carrying amount of goodwill by reporting unit as of March 31, 2022 is $i88.9
million for Advanced Plan Administration (“APA”), $i190.2 million for Supplemental Benefits Administration (“SBA”), $i138.2 million for Value Based Payment Assurance (“VBPA”), $i37.9
million for Advisory Services (“Advisory”) and $i27.4 million for HealthSmart acquisition, respectively.
The goodwill allocated to the Technology Enabled Solutions and Advisory Services reportable segments is $i444.7
million and $i37.9 million, respectively as of March 31, 2022. Goodwill is assessed for impairment on an annual basis (on October 1 of each year) and on an interim basis when indicators of impairment exist.
As a result of the decline in our stock price since December 31, 2021, we performed an interim impairment test for goodwill for APA, SBA, VBPA and Advisory reporting units using the quantitative approach as of March 31, 2022.
Since HealthSmart was recently acquired, no impairment test was performed on that reporting unit. Based on our evaluation performed, we determined the fair value of each of the reporting units exceeded its respective carrying amount, and therefore, we determined that goodwill was not impaired at any of our reporting units as of March 31, 2022. We define “headroom” as the percentage difference between the fair value of a reporting unit and its carrying value. For the interim impairment test, the headroom for the reporting units ranged between ieight
percent to isixty-five percent. Our SBA reporting unit and our VBPA reporting unit have headroom at the low-end of that range (i8.4%
for SBA and i12.5% for VBPA) and could experience
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
impairment
in the future if we do not achieve our profitability projections, there is a change in key assumptions underlying the valuation or if we continue to experience a substantial decrease in our stock price.
Evaluation of goodwill for impairment requires judgment, including the identification of reporting units, assignment of assets, liabilities and goodwill to reporting units and determination of the fair value of each reporting unit. We estimate the fair value of our reporting units using a combination of an income approach, utilizing a discounted cash flow analysis, and a market approach, using market multiples. Under the income approach, we estimate projected future cash flows, the timing of such cash flows and long-term growth rates, and determine the appropriate discount rate that reflects the risk inherent in the projected future cash flows. The discount rate used is based on a market participant weighted-average cost of
capital and may be adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting unit’s ability to execute on the projected future cash flows. Under the market approach, we estimate fair value based on market multiples of revenues and earnings derived from comparable publicly-traded companies with characteristics similar to the reporting unit. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions and other factors. The assumptions and estimates used in determining the fair values of the reporting units contain uncertainties, and any changes to these assumptions and estimates could have a negative impact and result in a future impairment.
i
The
carrying value of identifiable intangible assets consisted of the following as of March 31, 2022:
(in thousands)
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Amortized
intangible assets
Trade names
$
i35,900
$
(i3,830)
$
i32,070
Customer
relationships
i214,500
(i44,636)
i169,864
Technology
i47,800
(i12,348)
i35,452
Capitalized
software development costs
i13,026
(i2,419)
i10,607
Total
intangible assets
$
i311,226
$
(i63,233)
$
i247,993
The
carrying value of identifiable intangible assets consisted of the following as of December 31, 2021:
(in thousands)
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Amortized
intangible assets
Trade names
$
i27,300
$
(i3,395)
$
i23,905
Customer
relationships
i189,000
(i40,091)
i148,909
Technology
i47,800
(i11,153)
i36,647
Capitalized
software development costs
i12,454
(i1,901)
i10,553
Total
intangible assets
$
i276,554
$
(i56,540)
$
i220,014
/
Amortization
expense for Trade names, Customer relationships and Technology for the three months ended March 31, 2022, and 2021, totaled $i6.2 million and $i5.9 million,
respectively.
Amortization expense for Capitalized software development costs for the three months ended March 31, 2022, and 2021, totaled $i0.5 million and $i0.1 million,
respectively.
On September 4, 2019, we entered into the First Lien Credit Agreement (the “Credit Agreement”). The Credit Agreement provides for senior secured credit facilities consisting of (i) a $i225.0 million
closing date term loan (the “Term Facility”) and loans thereunder (the “Term Loans”) and (ii) a $i40.0 million revolving credit facility (the “Revolving Facility”) (collectively, the “Credit Facility”). The Term Facility has a iseven-year
term which expires on September 4, 2026 and the Revolving Facility has a ifive-year term which expires on September 4, 2024. We paid debt issuance costs of approximately $i6.1 million
on the closing date of the Credit Facility, $i5.2 million is being amortized over the life of the Term Facility (i84 months) and $i0.9 million
is being amortized over the term of the Revolving Facility (i60 months) on a straight-line method. The Revolving Facility includes a letter of credit sub-facility (subject to a sublimit not to exceed $i10.0 million)
and a swing line loan sub-facility (subject to a sublimit not to exceed $i10.0 million).
On April 8, 2020, we amended the Credit Agreement to establish an incremental loan facility in an aggregate principal amount equal to $i25.0 million
for an incremental term loan request (the “2020 Incremental Term Loan”) bearing interest at the Eurodollar Rate (as defined in the Credit Agreement) expiring September 4, 2026. We capitalized debt issuance costs of approximately $i1.1 million on the closing date of the 2020 Incremental Term Loan.
On February 12, 2021, we amended the Credit Agreement to establish an incremental term loan in an aggregate principal amount equal to
$i78.0 million (the “2021 Incremental Term Loan”) bearing interest at the Eurodollar Rate (as defined in the Credit Agreement) expiring September 4, 2026. We capitalized debt issuance costs of approximately $i2.4 million
on the closing date of the 2021 Incremental Term Loan.
On February 1, 2022, we further amended the Credit Agreement to establish an incremental term loan in an aggregate principal amount equal to $i78.0 million (the “2022 Incremental Term Loan”) bearing interest at the Eurodollar Rate (as defined in the Credit Agreement) expiring September 4, 2026. We capitalized debt issuance costs of approximately $i2.6 million
on the closing date of the 2022 Incremental Term Loan, which is being amortized over the life of the 2022 Incremental Term Loan. The proceeds of the term loans borrowed under the 2022 Incremental Term Loan were used to finance the HealthSmart acquisition (see Note 4) and pay fees and expenses related thereto. The 2022 Incremental Term Loan was accounted for as a debt modification.
The Credit Agreement includes an uncommitted incremental facility, which provides that we have the right at any time to request term loan increases, additional term loan facilities, revolving commitment increases and/or additional revolving credit facilities, in an aggregate principal amount, together with the aggregate principal amount of permitted incremental equivalent debt under the Credit Agreement, not to exceed (a) the sum of the greater of (i) $i46.9
million and (ii) i100.0% of Consolidated EBITDA (as defined in the Credit Agreement) of CHS and its restricted subsidiaries for the most recently ended period of four consecutive fiscal quarters of CHS (calculated on a pro forma basis), plus (b) certain additional amounts, including an unlimited amount subject to pro forma compliance with a leverage ratio test.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Interest Rate and Fees
Borrowings under the Credit Agreement (other than borrowings of swing line loans) bear interest at a rate per annum equal to, at our election, either (i) the LIBOR for the relevant interest period (subject to a floor of i1.00% per annum) plus an applicable margin, as
defined in the Credit Agreement, or (ii) a base rate plus an applicable margin, as defined in the Credit Agreement. We elected to use the LIBOR rate for the Term Loans and the Revolving Facility. The Credit Agreement provides for the replacement of LIBOR with a successor or alternative index rate in the event LIBOR is phased-out.
In addition to paying interest on the outstanding principal of the Credit Facility, we are required to pay a commitment fee in respect of any unused commitments under the Revolving Facility at a rate that is subject to adjustment based upon the First Lien Net Leverage Ratio, as defined in the Credit Agreement (maximum debt to Earnings Before Interest, Income Tax, Depreciation and Amortization (“EBITDA”), as defined in the Credit Agreement) at such time and ranges from i0.375%
to i0.500% per annum. We are also required to pay customary letter of credit fees and certain other agency fees.
On July 12, 2021, CHS entered into Amendment No. 4 to the Credit Agreement (“Amendment No. 4”). Amendment No. 4 amends the Credit Agreement to provide for, among other things, (i) the reduction of the Applicable Rate (as defined in the Credit Agreement) for Eurodollar Rate Loans (as defined in the Credit Agreement) from i5.25%
to i4.75% and, for Base Rate Loans (as defined in the Credit Agreement), from i4.25% to i3.75%,
and (ii) the reduction of the floor for the Eurodollar Rate (as defined in the Credit Agreement) from i1.00% to i0.75% for the Closing Date Term Loans (as defined
in the Credit Agreement). Amendment No. 4 was accounted for as a debt modification.
Covenants
The Credit Facility contains a financial covenant that requires us to maintain as of the last day of each period of four consecutive quarters of the Company, a First Lien Net Leverage Ratio not to exceed i7.4 to 1.0 if, as of the last day of any fiscal quarter of the Company,
there are outstanding revolving loans and letters of credit (excluding (i) undrawn letters of credit in an aggregate face amount up to $i10.0 million and (ii) letters of credit (whether drawn or undrawn) to the extent reimbursed, cash collateralized or backstopped on terms reasonably acceptable to the applicable issuing bank on or prior to the date that is three business days following the end of the applicable period of four consecutive fiscal quarters of CHS in an aggregate principal amount exceeding 35% of the aggregate principal amount of the Revolving Facility at such time.
We were in compliance with our debt covenants at March 31, 2022.
Prepayments and Mandatory Prepayment
Under the terms of the Credit Agreement, we are permitted to voluntarily prepay outstanding loans or commitments in whole or part without premium or penalty other than certain exceptions described in the Credit Agreement; however, the Credit Agreement requires us to prepay outstanding term loans, subject to certain exceptions and limitations with (i) i50% of
our annual excess cash flow, subject to certain step-downs based upon the First Lien Net Leverage Ratio; (ii) i100% of the net cash proceeds of certain asset sales or casualty events; and (iii) i100%
of the net cash proceeds of certain incurrences or issuances of indebtedness. We were not required to prepay outstanding term loans based on our 2021 results.
Scheduled Repayments
In connection with the prepayment noted under the “Extinguishment of Debt” below, no additional scheduled installments of principal are required on the Term Facility.
We are required to make scheduled quarterly payments on the 2022 Incremental Term Loan. We are required to make quarterly payments commencing with the quarter ending June 30, 2022, in an amount equal to i0.25%
of the aggregate principal amount of the 2022 Incremental Term Loan outstanding on February 1, 2022 with the balance due upon maturity date.
Guarantees and Collateral
All obligations under the Credit Agreement are unconditionally guaranteed by Parent and certain subsidiaries. All obligations under the Credit Agreement are secured, subject to permitted liens and other exceptions and limitations, by first priority security interests in substantially all the assets of the Company and each guarantor (including all the equity interests of CHS).
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Extinguishment of Debt
On June 18, 2021, $i131.5 million from the IPO proceeds (see Note 1) were used to repay the principal balance, accrued but unpaid interest, and prepayment premium under the Credit Agreement. The 2020 Incremental
Term Loan and the 2021 Incremental Term Loan were repaid in full and the remainder of the proceeds were used to repay a portion of the Term Facility. The prepayment for the Term Facility was applied to the remaining scheduled installments of principal.
Other Information
As of March 31, 2022, and December 31, 2021, unamortized deferred financing costs for the Term Loans totaled $i5.4
million and $i3.0 million, respectively. Amortization of deferred financing costs for the three months ended March 31, 2022, and 2021, totaled $i0.3
million and $i0.9 million, respectively.
As of March 31, 2022, and December 31, 2021, unamortized deferred financing costs associated with the Revolving Facility totaled $ii0.5/
million for each period, and were included in Other assets in the condensed consolidated balance sheets. Amortization of deferred financing costs was approximately $ii50/
thousand for each of the three months ended March 31, 2022, and 2021.
Amortization of deferred financing costs is included within Interest expense in the condensed consolidated statement of operations and comprehensive income (loss).
For the three months ended March 31, 2022, and 2021, the average interest rate for the Term Facility was i5.5%
and i6.3%, respectively. As of March 31, 2022, and December 31, 2021, the aggregate principal balance was $ii192.6/
million for each period.
For the three months ended March 31, 2022, the average interest rate for the 2022 Incremental Term Loan was i5.5%. As of March 31, 2022, the aggregate principal balance was $i78.0
million.
For the three months ended March 31, 2022, and 2021, the average interest rate for the Revolving Facility was ii2.75/%
for each period. As of March 31, 2022, and December 31, 2021, the available balance was $ii39.4/
million. On January 23, 2020, we established an irrevocable transferable letter of credit (“LOC”) in the favor of a lessor totaling $i0.5 million. The LOC expired on January 31, 2021, however, per the terms of the agreement, the LOC automatically extends for a ione
year period upon the expiration date and each anniversary thereafter, unless at least 60 days prior to such expiration date or anniversary written notice is provided that we elect not to extend the LOC. The LOC was automatically extended for a ione year period on January 31, 2022.
As of March 31, 2022, we are authorized to issue i500,000,000 shares of common stock, par value $i0.01
per share and i25,000,000 shares of preferred stock, par value $i0.01 per share. See Note 1 for additional information related to the Stock Split and IPO.
In
February 2021, our Board, through a unanimous written consent, adopted a written resolution declaring a special dividend of $i1.18 per share of common stock totaling $i74.5 million in cash (“Special Dividend”)
ultimately to be distributed to the shareholders of Convey. Of the Special Dividend, $i72.2 million was paid to existing shareholders and $i2.3 million was paid to outstanding and vested stock option
holders. The Special Dividend was paid out during the three months ended March 31, 2021.
NOTE 11. iSHARE-BASED COMPENSATION
On September 4, 2019, our Board adopted the Cannes Holding Parent, Inc. 2019 Equity
Incentive Plan (the “2019 Equity Plan”). The 2019 Equity Plan was terminated and replaced and superseded by the 2021 Plan (as defined below) on the effective date of the 2021 Plan and no further grant of awards under the 2019 Equity Plan have been made since such effective date. Outstanding awards granted under the 2019 Equity Plan remain in effect pursuant to their terms.
On June 4, 2021, in connection with the IPO, the Company adopted the Convey Holding Parent, Inc. 2021 Omnibus Incentive Compensation Plan (the “2021 Plan”). The 2021 Plan has a term of iten
years.
In March 2021, pursuant to the 2019 Equity Plan, Convey issued option awards to acquire i69,300 shares of Convey’s common stock with an exercise price of $i9.92
per share and a term of ten (i10) years. The awards were comprised of time-vesting options which vest i25%
on each anniversary date from the vesting commencement date.
In June 2021, in connection with the IPO and pursuant to the 2021 Plan, Convey issued option awards to acquire i497,321 shares of Convey’s common stock with an exercise price of $i14.00
per share and a term of ten (i10) years. In addition, Convey issued i198,929
restricted stock units (“RSUs”) with a grant date fair value of $i13.00 per unit. The option awards and RSUs are time-vesting awards which vest i25%
on the first anniversary of the commencement date, and the remainder will vest in 12 equal 3-month installments over the following ithree years.
In August 2021, pursuant to the 2021 Plan, Convey issued option awards to acquire i20,380
shares of Convey’s common stock with an exercise price of $i9.20 per share and a term of five (i5)
years. In addition, Convey issued i8,152 RSUs with a grant date fair value of $i9.20
per unit. The option awards and RSUs were fully vested as of the date of the grant.
In March 2022, pursuant to the 2021 Plan, the Company issued i2,500,459 RSUs and i1,243,220
performance restricted stock units (“PSUs”) with a grant date fair value of $ii6.70/
per unit. The grants are time-vesting awards which vest ii25/%
on the first anniversary of the commencement date, and the remainder will vest in i12 equal i3-month installments over
the following three years. The PSUs have a performance condition that affects vesting and is subject to the Company meeting certain annual Adjusted Earnings Before Interest, Income Tax, Depreciation and Amortization (“Adjusted EBITDA”) target.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
i
The
following table summarizes the total share-based compensation expense included in the condensed consolidated statements of operations and comprehensive income (loss):
For the Three Months Ended March 31,
(in thousands)
2022
2021
Selling,
general and administrative
$
i1,264
$
i990
Total
stock-based compensation expense
$
i1,264
$
i990
/
Stock
Option Modification
On February 15, 2021, our Board approved a stock option award modification (the “Modification”) whereby the exercise price of certain previously granted and still outstanding unvested stock option awards held by current employees and certain executives were reduced by $i1.18 per award, which
represented the cash payment made for the vested awards as part of the Special Dividend. No other terms of the repriced stock options were modified, and the modified stock options will continue to vest according to their original vesting schedules and will retain their original expiration dates. As a result of the Modification, i3,653,837 unvested stock options outstanding with an original exercise price of $i7.94
were modified.
There was no incremental stock-based compensation expense as there was no incremental fair value generated as a result of the Modification.
Stock Option Grants
i
Stock option activity and information about stock options outstanding are summarized in the following table:
Stock
Option Awards
Weighted Average Exercise Price
Weighted Average Remaining Contractual Life (Years)
The
stock options are equity-based awards and their aggregate intrinsic value outstanding and exercisable at March 31, 2022, is $iii0//.
As
of March 31, 2022, there was approximately $i9.4 million total unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted average period of i2.11
years.
We estimate the fair value of the time-vesting stock option awards on the date of grant using the Black-Scholes Merton model. The time-vesting options have a service condition. Option valuation models, including the Black-Scholes Merton model, require the input of certain assumptions that involve judgment. Changes in the input assumptions can materially affect the fair value estimates and, ultimately, how much we recognize as stock-based compensation expense.
iOne
RSU gives the right to one share of the Company’s common stock. RSUs that vest based on service are measured based on the fair value of the underlying stock on the date of grant. Compensation with respect to RSU awards is expensed on a straight-line basis over the vesting period.
As of March 31, 2022, there was approximately $i26.6 million
total unrecognized compensation cost related to non-vested RSUs, which is expected to be recognized over a weighted average period of i3.88 years.
Long-Term Incentive Awards
In March 2020, Convey issued fifty-six (i56)
Long-Term Incentive (LTI) awards with a total grant-date fair value of $i1.1 million to employees. These awards vest upon satisfaction of the performance condition as determined by our Board at its sole discretion, subject to the participants continued employment or service. The performance condition is satisfied by TPG meeting a certain multiple-of-money return,
on a scale, prior to or upon (i) TPG in the aggregate beneficially owning less than 20% of the voting equity securities of the Company or (ii) the date on which a change in control occurs. The awards contain a market condition with an implicit performance condition. iNo awards have vested as of March 31,
2022, as such events did not occur during the three months ended March 31, 2022. iiNo/
awards have been granted or cancelled during the three months ended March 31, 2022. The awards do not expire. On the date the performance condition is met, any unvested awards will be forfeited.
Settlement of the award can be made, as determined by our Board at its sole
discretion, (i) in cash, (ii) common stock, or (iii) in other property acceptable to our Board. The LTIs are treated as liability-based awards under Accounting Standards Codification (“ASC”) Topic 718, Compensation — Stock Compensation, (“ASC 718”) and the Company shall recognize compensation expense for the LTIs upon the liquidity event occurring.
NOTE 12. iEMPLOYEE
SAVINGS PLAN
We offer our employees a savings plan pursuant to Section 401(k) of the Internal Revenue Code (the “Code”), whereby employees may contribute a percentage of their compensation, not to exceed the maximum amount allowable under the Code. At the discretion of our Board, we may elect to make matching or other contributions into the savings plan. We made matching contributions of $i0.9 million and $i0.7 million
for the three months ended March 31, 2022, and 2021, respectively, to our employee savings plan, which is included within Selling, general and administrative expenses, Cost of services and Cost of products in the condensed consolidated statement of operations and comprehensive income (loss).
NOTE 13. iTAXES
Our
tax provision or benefit from income taxes for interim periods is determined using an estimate of our global annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter we update our estimate of the annual effective tax rate, and if our estimated tax rate changes, we make a cumulative adjustment.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Our quarterly tax provision, and our quarterly estimate of our annual effective tax rate, is subject to change resulting from
several factors, including variability in forecasting our pre-tax and taxable income and loss due to external changes in market conditions, changes in statutes, regulations and administrative practices, principles, and interpretations related to tax. Our effective tax rate can be more or less volatile based on the amount of pre-tax income or loss. For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower.
Our income tax (expense) benefit for the three months ended March 31, 2022, and 2021, was $i0.7
million and $i1.0 million, respectively. For the three months ended March 31, 2022, our effective tax rate of i37.0%,
before discrete items, was above the U.S. statutory rate of 21.0% primarily due to foreign taxes, state taxes and non-deductible compensation for covered employees. For the three months ended March 31, 2021, our effective tax rate of i22.5%, before discrete items, was slightly above the U.S. statutory rate of 21.0% primarily due to foreign taxes, state taxes, tax on Global Intangible Low-Taxed Income, disallowed wage expense and fringe benefits and certain other non-deductible items. We did not have any unrecognized
tax benefits as a result of tax positions taken during a prior period or during the current period. No interest or penalties were recorded as a result of tax uncertainties.
NOTE 14. iTRANSACTION RELATED COSTS
i
The
following table represents the components of Transaction related costs as reported in the condensed consolidated statements of operations and comprehensive income (loss):
For the Three Months Ended March 31,
(in thousands)
2022
2021
Mergers
and acquisitions related costs
$
i640
$
i30
Public
company readiness costs
i—
i1,056
Total
$
i640
$
i1,086
/
NOTE
15. iCOMMITMENTS AND CONTINGENCIES
Employment Agreements
We have employment agreements with various executives. The agreements have open-ended terms providing that employment shall continue until terminated by either party in accordance with the agreement. In addition to salary, bonuses, and benefits, the agreements also provide for termination benefits if the agreements are terminated by us for reasons other than cause or by the executives for good reason.
Inventory
Purchases
As of March 31, 2022 and December 31, 2021, we have contractual commitments to purchase inventory from certain manufacturers totaling $i3.1 million and $i5.2 million,
respectively.
Legal Proceedings
We are involved in various lawsuits, claims, inquiries, and other regulatory and compliance matters, most of which are routine to the nature of our business. When it is probable that a loss will be incurred and where a range of the loss can be reasonably estimated, the best estimate within the range is accrued. When the best estimate within the range cannot be determined, the low end of the range is accrued. The ultimate resolution of these claims could affect future results of operations should our exposure be materially different from our estimates or should liabilities be incurred that were not previously accrued. Potential insurance reimbursements are not offset against potential liabilities.
Because of the uncertainties associated with claims resolution and litigation, future losses to resolve these
matters could be higher than the liabilities we have accrued; however, we are unable to reasonably estimate a range of potential losses. If new information were to become available that allowed us to reasonably estimate a range of potential losses in an amount higher or lower than what we have accrued, we would adjust our accrued liabilities accordingly. Based upon current information, we concluded that the impact of the resolution of these matters would not be, individually or in the aggregate, material to our financial position, results of operations or cash flows. Additional lawsuits, claims, inquiries, and other regulatory and compliance matters could arise in the future. The range of losses for resolving any future matters would be assessed as they arise.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Sales Tax Accrual
ASC Topic 450, Contingencies, (“ASC 450”) requires an estimated loss to be accrued by a charge to income if it is probable that a liability has been incurred at the date of the financial statements and the amount of the liability can be reasonably estimated. We recognized liabilities for contingencies related to state sales and use tax deemed probable and estimable totaling $i6.4
million and $i6.9 million at March 31, 2022, and December 31, 2021, respectively. These are included in accrued liabilities in our condensed consolidated balance sheets.
NOTE 16. iRELATED
PARTY TRANSACTIONS
TPG Management Service Agreement
On September 4, 2019, in connection with the Merger, we had entered into a management services agreement (“MSA”) with TPG. Under the MSA, TPG agreed to provide certain financial, strategic advisory services, and consulting services in exchange for (i) reimbursement of certain expenses incurred by TPG and (ii) an aggregate annual retainer fee of i1% based on our previous year’s consolidated
EBITDA determined by our Board. Additional services may be provided in exchange for the fees structured within the MSA. During the three months ended March 31, 2022, and 2021, we paid management and consulting fees of $i0 and $i0.2 million,
respectively. Also, during the three months ended March 31, 2022, and 2021, we paid TPG a fee of $i1.0 million and $i1.0 million
for services provided in connection with establishing: (i) the 2022 Incremental Term Loan and (ii) the 2021 Incremental Term Loan, respectively.
In the event the MSA was terminated by an IPO or business combination and TPG continues to hold at least i10% of equity of the Company upon closing of such transaction, we were required to pay TPG the net present value of the remaining portion of management and consulting fees that would have been incurred
until ithree years after the date of such termination, as well as certain other expenses of TPG. In connection with the IPO completed in June 2021, the MSA was terminated and we paid TPG a $i2.3 million
termination fee. The termination fee is included within Selling, general and administrative expenses in the condensed consolidated statement of operations and comprehensive income (loss). There were ino amounts payable to TPG as of March 31, 2022, or December 31, 2021.
EIR Partners Consulting Agreement
We have a Consulting Agreement with EIR Partners, LLC (“EIR”), a former member
of our Board, and a current shareholder. Under the terms of the Consulting Agreement, EIR provides consulting services for the purpose of analyzing and reviewing potential sellers in the marketplace for the benefit of the Company as agreed to from time-to-time. As compensation for service, the Company remits to EIR $i10 thousand monthly, plus reasonable out-of-pocket
expenses incurred in the performance of the duties under the Consulting Agreement. The Consulting Agreement may be terminated by either party upon providing 10 days advance written notice and unless terminated, automatically renews for additional terms of ione year. For the three months ended March 31, 2022, and 2021, $i20 thousand
and $i30 thousand were paid for services rendered, respectively. The Consulting Agreement is still active with the Company.
NOTE 17. iSEGMENT
INFORMATION
ASC 280 establishes the standards for reporting information about segments in financial statements. In applying the criteria set forth in ASC 280, we have determined that we have itwo reportable segments: Technology Enabled Solutions and Advisory Services. These reportable segments reflect the manner in which the Chief Operating Decision Maker (“CODM”) group assesses information for decision-making purposes. The CODM group consists of our Chief Executive Officer and Chief Financial Officer.
The
key factors used to identify these reportable segments are the organization and alignment of our internal operations and the nature of our products and services. This reflects how the CODM group monitors performance, allocates resources, and makes strategic and operational decisions.
In addition to the reportable segments, we have the “Unallocated” classification which includes those profit and loss items not allocated to either reportable segment. Unallocated includes corporate costs, primarily relating to group wide functions, including but not limited to, finance, tax and legal.
We present reportable segment revenue and Segment Adjusted EBITDA. Segment Adjusted EBITDA is the financial measure by which management and the CODM group allocate resources and analyze the performance of the reportable segments.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Segment Adjusted EBITDA represents each segment’s earnings before interest, tax, depreciation and amortization and is further adjusted to exclude certain items of a significant or unusual nature, including but not limited to, COVID-19 cost impacts, sales and use tax, non-cash stock compensation expense, transaction related costs, acquisition bonus expense, inventory step-up and other costs. Other includes costs such as management and board of directors fees and fees associated with obtaining the incremental term loans.
We do not report assets by reportable segment, as this metric is not used by the CODM group to allocate resources to the segments.
i
Presented
in the tables below is revenue and Segment Adjusted EBITDA by reportable segment:
Adjustments
to reconcile to U.S. GAAP net income (loss)
Depreciation and amortization
(i8,252)
(i7,372)
Interest,
net
(i3,719)
(i5,467)
Income
tax provision
i676
i1,007
Cost
of COVID-19(2)
(i274)
(i1,185)
Sales
and use tax
i—
(i1,498)
Non-cash
stock compensation expense
(i1,264)
(i990)
Transaction
related costs
(i640)
(i1,086)
Acquisition
bonus expense
(i58)
(i192)
Inventory
step-up(3)
(i1,892)
i—
Other(4)
(i1,047)
(i1,748)
Net
income (loss)
$
(i1,154)
$
(i934)
________________________
(1)Represents
certain corporate costs associated with the executive compensation, legal, accounting, finance and other costs not specifically attributable to the segments.
(2)Expenses incurred due to the COVID-19 pandemic are primarily related to higher pricing from vendors due to supply chain disruptions and product shortages and higher employee costs due to hazard pay for our employees. While we had
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
previously
expected that these costs would not be an adjustment in the calculation of Segment Adjusted EBITDA after 2021, the COVID-19 pandemic has not subsided and during 2022, to a lesser extent, we have continued to incur higher product costs due to higher pricing from vendors for certain items (e.g., masks and other similar high demand products). We now expect that these expenses will not be an adjustment in the calculation of Segment Adjusted EBITDA after 2022.
(3)Incremental cost of products associated with the step-up of inventory recognized in purchase accounting for the HealthSmart acquisition.
(4)These adjustments include individual adjustments related to management and board of directors fees and fees associated with obtaining the incremental term loans.
NOTE
18. iiLEASES/
We lease office
space, warehouse and distribution space, and equipment under non-cancelable operating and finance leases expiring at various dates through 2029.
We determine whether an arrangement is a lease at inception, based on the (1) conveyed rights to obtain substantially all economic benefits from using the asset and (2) the right to direct the uses to which the asset is put.
Our lease population does not include any residual value guarantees, and therefore none were considered in the calculation of the lease balances. We have leases with variable payments, most commonly in the form of common area maintenance charges which are based on actual costs incurred. These variable payments were excluded from the right-of-use asset and lease liability balances since they are not fixed or in-substance fixed payments. We have lease agreements with lease and non-lease components. We elected the practical
expedient to account for lease and non-lease components as a single lease component.
For leases with terms greater than 12 months, right-of-use assets and lease liabilities are recognized at the implementation date of Topic 842 or lease commencement date based on the present value of the future lease payments over the lease term. The discount rate used to determine the commencement date present value of lease payments is the interest rate implicit in the lease, or when that is not readily determinable, we utilize our incremental borrowing rate. Our lease agreements generally do not provide a readily determinable implicit rate nor is it available to us from our lessors. Instead, we estimate our incremental borrowing rate based on information available at either the implementation date of Topic 842 or at lease commencement for leases entered into thereafter in determining the present value of future payments. Lease expense for
net present value of payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less with purchase options or extension options that are not reasonably certain to be exercised are not recorded on the condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
ii
The table
below summarizes our scheduled future minimum lease payments under operating and finance leases, recorded on the condensed consolidated balance sheet as of March 31, 2022:
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our financial condition and results of operations in conjunction with our financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q (“Form 10-Q”) and the Form 10-K.
The following discussion and analysis also includes discussion of certain non-GAAP financial measures. For a description and reconciliation of the non-GAAP measures discussed in this section, see “Non-GAAP Financial Measures” below.
This Form 10-Q contains “forward-looking statements”. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies and other future conditions. Such forward-looking statements may include, without limitation, statements about future opportunities for us and our products and services, our future operations, financial or operating results, anticipated business levels, future earnings, planned activities, anticipated growth, market opportunities, strategies, competitions and other expectations and targets for future periods. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,”“believe,”“estimate,”“expect,”“intend,”“may,”“predict,”“project,”“target,”“potential,”“seek,”“will,”“would,”“could,”“should,” continue,” contemplate,” “plan” and other words and terms of similar meaning. Forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control. We caution you that forward-looking statements are not guarantees of future performance or outcomes and that actual performance and outcomes may differ materially from those made in or suggested by the forward-looking statements contained in this Form 10-Q. In addition, even if our results of operations, financial condition and cash flows, and the development of the markets in which we operate, are consistent with the forward-looking statements contained in this Form 10-Q, those results or developments may not be indicative of results or developments in subsequent periods. New factors emerge from time to time that may cause our business not to develop as we expect, and it is not possible for us to predict all of them. Factors that
could cause actual results and outcomes to differ from those reflected in forward-looking statements include, among others, the following: our ability to retain our existing clients or attract new clients, and sell additional solutions and services to our clients; our dependence on a small number of clients for a substantial portion of our total revenue; limitations of our clients’ growth prospects, and the failure of the size of the total addressable markets in which we compete or expect that we may compete in the future to grow at rates currently expected; our ability to achieve or maintain profitability; Federal reductions in Medicare Advantage funding; significant consolidation in the healthcare industry, and decisions by clients to perform internally some of the same solutions or services we offer; the limited operating history we have with certain of our solutions; a failure to deliver high-quality member management services to our clients’ members; the competition
we face from healthcare services and technology companies; risks related to acquisitions of other businesses or technologies and other significant transactions; increases in labor costs, including due to changing minimum wage laws, and an overall tightening of the labor market; the long and unpredictable sales and integration cycles for our solutions; an economic downturn or volatility, including as a result of the ongoing COVID-19 pandemic; our ability to achieve market acceptance of new or updated solutions and services; our reliance on third parties for certain components of our business; significant fluctuations in our quarterly results of operations due to seasonality; our ability to achieve or maintain adequate utilization and suitable billing rates for our consultants, and our ability to deliver our services to our clients; recent and future developments in the Medicare Advantage market or the healthcare industry generally, including with respect to changing laws
and regulations; our ability to comply with applicable laws, regulations and standards relating to data privacy and security; security breaches or incidents, failures and other disruptions of the information technology systems used in our business operations and of the sensitive information we collect, process, transmit, use and store; disruptions in service, and other software and systems failures, affecting us and our vendors; our ability to obtain, maintain, protect and enforce our intellectual property and proprietary rights; our ability to operate our business without infringing, misappropriating or otherwise violating the intellectual property or proprietary rights of third parties; our substantial indebtedness, and the restrictions imposed by our indebtedness on our subsidiaries; identified material weaknesses in our internal control over financial reporting and a failure
to remediate these material weaknesses, and the effectiveness of our internal control over financial reporting; and the significant influence our principal stockholder, TPG, has over us.
For a further discussion of these and other factors that could impact our future results, performance or transactions, see Part I, Item 1A "Risk Factors" of our Form 10-K and our other filings with the SEC. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties
and assumptions, the future events and trends discussed in this Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information
available to us as of the date of this Form 10-Q, and, while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry
into, or review of, all potentially available relevant information. We qualify all of the forward-looking statements in this Form 10-Q by these cautionary statements. Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
The Company is a leading healthcare platform that utilizes technology and processes to improve government-sponsored health plans, including Medicare Advantage (“MA”) plans. We help health plans to grow membership and revenue as well as operate more effectively and efficiently. We are a trusted solutions-oriented partner to payors
and deliver purpose-built technology and services to enhance our clients’ mission-critical workflows. Our solutions address health plan needs, including product development and sales, member experience management, clinical management, core operations, business intelligence and analytics. Leveraging our technology and expert advisory services, we serve as a unified and integrated extension of our clients’ core health plan operations. Our proprietary, modular technology and end-to-end solutions replace or supplement our clients’ existing systems and processes, enabling us to help health plans attract and retain members, improve revenue accuracy, drive cost savings, facilitate regulatory compliance, and enhance operational effectiveness.
On February 1, 2022, Convey’s indirect wholly-owned subsidiary, D-M-S Holdings Parent, LLC (f/k/a Dragon Holdings Parent, LLC), a Delaware limited
liability company, acquired all of the issued and outstanding capital stock of D-M-S Holdings, Inc. d/b/a HealthSmart International, a Delaware corporation (“HealthSmart”). HealthSmart provides a diverse portfolio of health, wellness and diagnostic products centered on home based care outcomes. The acquisition of HealthSmart supports Convey's vision to empower health plans to excel by delivering a more diverse healthcare product portfolio to their members while streamlining logistics, resulting in a better healthcare consumer experience. The acquisition will combine Convey's best-in-class supplemental benefits administration technology and services solution with HealthSmart's market leading abilities as a trusted supplier of quality consumer healthcare products. Convey will extend the solutions serving the MA supplemental benefits business through a broader set of consumer healthcare products and expertise that serves many of the top health plans in the U.S.
Since
our inception, we have created and continuously refined our technology solutions to best serve government-sponsored health plans. Our clients are primarily MA plans, Medicare Part D plans, including Employer Group Waiver plans, and pharmacy benefit managers.
We foster long-term collaborative partnerships as evidenced by our average relationship with our top 10 clients of over eight years, and we serve as a partner to nine of the nation’s top 10 MA payors by lives covered, in each case as of December 31, 2021. We believe that we have significant opportunity to grow within our existing client base as the majority of our clients currently subscribe to only a subset of our overall solutions and services. Moreover, we believe we have significant opportunity to grow by winning new clients in the MA market, by selling more products to our existing clients, by expanding into adjacent
markets such as Medicaid and commercial insurance, and through complementary strategic acquisitions.
Our clients face significant and constantly evolving challenges managing their Medicare health plans:
•Increasingly Competitive Environment for Medicare Plans: Effective benefit design and sales are critical to retaining and growing members during the Medicare annual enrollment period. Once members are enrolled in a plan, effective member engagement and supplemental benefits administration are paramount to ensuring strong satisfaction and retention. Moreover, the proliferation of value-based reimbursement models such as MA requires effective member management and broad ecosystem coordination, which fall outside the core competencies of many health plans.
•Compliance with
Centers for Medicare and Medicaid Services (“CMS”) Requirements: Constantly evolving CMS and client requirements result in hundreds of modifications per year that inhibit the operational effectiveness and capabilities of health plans. Our purpose-built government sector technology platform addresses these constantly evolving requirements.
•Complex and Highly Regulated Medicare Market: Many health plans enter the government plan market by simply adapting their existing systems designed for the commercial insurance market. As a result, the technology they employ often lacks the sophistication and design needed to effectively maintain and administer benefits tailored for the complex and highly regulated Medicare market.
Health plans increasingly recognize the need for specialized solutions like ours to help them overcome these challenges and drive superior performance. We believe our proprietary technology and processes facilitate member engagement, health plan growth, and operational efficiencies.
We operate in two segments: Technology Enabled Solutions (“TES”) in which we provide technology and support solutions to our clients, and Advisory Services (“Advisory”) in which we provide project-based consulting services led by our long-tenured subject matter experts. We believe that our combination of technology and advisory solutions gives us a competitive advantage in the government-sponsored health plan market. Our Technology Enabled Solutions and Advisory teams collaborate effectively to combine a strong technology platform with deep domain expertise to deliver
best-in-class solutions to our clients. Furthermore, we leverage the Advisory team’s industry expertise to identify new opportunities as well as cross-sell our solutions within existing clients.
We have a highly predictable and recurring revenue model with strong cash flow from operations. We typically charge a recurring subscription or per-member fee or a re-occurring utilization-based fee, which, coupled with our long-term contracts and strong client retention, has historically provided us with strong revenue visibility into estimated future revenue. Our Technology Enabled Solutions business historically has been highly predictable as most of our revenue in any given year is under contract or otherwise visible by the beginning of that year due
to the contract structures we employ.
Initial Public Offering
On June 18, 2021, we closed the initial public offering (“IPO”) of our common stock through an underwritten sale of 13,333,334 shares of our common stock at a price of $14.00 per share. In the offering, we sold 11,666,667 shares and a selling stockholder sold 1,666,667 shares. The aggregate net proceeds to us from the offering, after deducting underwriting discounts and commissions and other offering expenses payable by us, were approximately $146.1 million. We used approximately $131.5 million of the net proceeds from the IPO to repay outstanding indebtedness under our First Lien Credit Agreement (as amended, the “Credit Agreement”). We did not receive any of the
proceeds from the sale by the selling stockholder.
COVID-19 Pandemic
COVID-19 was declared a global pandemic by the World Health Organization on March 11, 2020. Governments at the national, state, and local level in the U.S., and globally, have implemented varying measures in an effort to contain the virus, including social distancing, travel restrictions, border closures, limitations on public gatherings of people, work from home and supply chain logistical changes. While some of these actions have eased, escalating transmission rates (including of the Delta and Omicron variants of COVID-19), uneven vaccination and vaccination booster rates and further governmental guidance and orders may result in having to reimplement certain of these measures or implementing new and additional ones. The spread of COVID-19 has also caused significant
volatility in United States and international markets and has had and continues to have widespread, rapidly evolving and unpredictable impacts on global society, economies, financial markets and business practices.
Our operations have been impacted by COVID-19 since March 2020. During March and April 2020, we obtained approval from our clients for a work-at-home model, though not all required our approval, and transitioned most of our employees to the home environment so that they could work more safely. COVID-19 created a hardship for many of our employees. We worked during 2020 to care for our employees by periodically implementing temporary premium pay and temporary paid sick leave programs which provided additional financial resources for our employees, as well as partial pay for those employees who contracted the virus or had to care for a family member who was affected. We also had provided compensation to employees who
worked with us for more than six months so that they can take time off to be vaccinated. In addition, we increased cleaning protocols throughout our facilities. Certain of these measures have resulted in increased costs.
Due to significant volatility to the markets, as well as business and supply chain disruptions, we incurred several additional expenses due to the COVID-19 pandemic, including the following:
•Higher Pricing from Vendors and Higher Shipping Costs: We experienced higher costs to procure certain products included in the formulary available to Medicare members. The price increases were due to supply chain disruptions and product shortages caused by the COVID-19 pandemic. We quantified the pricing increase by comparing the pre-pandemic prices for high demand products directly attributable to the COVID-19 pandemic (e.g.,
masks and other similar high demand products) to the prices to procure such products during the pandemic. Further, we incurred additional costs due to expedited shipping fees as a result of new inventory management practices put into place due to supply chain disruptions and delays caused by COVID-19 in order to fulfill product demand.
•Sick Pay, Premium Pay and Hazard Pay: Temporary sick leave was paid to employees if specific criteria related to the COVID-19 pandemic were met. Incremental premium pay and hazard pay were paid to distribution and shipping
employees
who worked their normal scheduled shifts. In addition, we paid a one-time bonus to supervisors for working additional hours to support the transition of our employees to a work-at-home model.
•Work-at-Home Training: In response to the COVID-19 pandemic, we held work-at-home remote training. To accomplish this transition, hourly new hire employees were required to receive training regarding at-home information technology (“IT”) and telephony equipment setup. We paid the hourly new hire employees four hours for these efforts at their regular hourly wage rate and applicable fringe benefit rate.
•IT Expenses: Additional temporary IT resources were retained, and overtime hours were incurred, for existing IT resources, in order to implement the remote working environment designed in
response to the COVID-19 pandemic.
•Janitorial Costs: Due to the onset of the COVID-19 pandemic, we implemented an enhanced sanitation policy. The enhanced sanitation policy included special deep cleaning sessions in areas contacted by employees who had tested positive for COVID-19 and enhanced sanitation sessions through our facilities compared to the sanitation methods used prior to the COVID-19 pandemic.
See “Non-GAAP Financial Measures” for amounts related to the additional expenses due to the COVID-19 pandemic (Cost of COVID-19). While we had previously expected that these costs would not be an adjustment in the calculation of Adjusted EBITDA after 2021, the COVID-19 pandemic has not subsided and during 2022, to a lesser extent, we have continued to incur higher product costs due to higher pricing from vendors for certain
items (e.g., masks and other similar high demand products). We now expect that these expenses will not be an adjustment in the calculation of Adjusted EBITDA after 2022.
The full extent to which the COVID-19 pandemic and the various responses to the COVID-19 pandemic will impact our business, operations or financial condition continues to depend on numerous evolving factors that we may not be able to accurately predict, including, but not limited to, the duration, severity and scope of the COVID-19 pandemic (including due to new variants such as Delta and Omicron); actions by governmental entities, businesses and individuals that have been and continue to be taken in response to the pandemic; the effect on our clients and demand by clients, clients and our clients’ members for and ability to pay for our solutions and services; and disruptions or restrictions on our employees’ ability to work and travel. The impact of these
factors and others on our suppliers and clients could persist for some time after governments ease their restrictions and after the overall number of COVID-19 cases in the United States decreases. We may continue to experience higher than usual costs as a result of COVID-19 for the foreseeable future.
Non-GAAP Financial Measures
We present our financial results in accordance with GAAP. However, we use certain non-GAAP financial measures to supplement financial information presented on a GAAP basis. We believe that excluding certain items from our GAAP results allows management to better understand our consolidated financial performance from period to period and better project our future consolidated financial performance as forecasts are developed at a level of
detail different from that used to prepare GAAP-based financial measures. Moreover, we believe these non-GAAP financial measures provide investors with useful information to help them evaluate our operating results by facilitating an enhanced understanding of our operating performance and enabling them to make more meaningful period to period comparisons. In particular, we use EBITDA and Adjusted EBITDA to assess our financial performance and also for internal planning and forecasting purposes. We believe EBITDA and Adjusted EBITDA provide investors with useful information because such metrics offer a consistent and comparable overview of our operations across historical financial periods. In evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we may incur expenses similar to those eliminated in the presentation. Non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, the corresponding measures
calculated in accordance with GAAP. There are limitations to the use of the non-GAAP financial measures presented in this Form 10-Q. For example, our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.
The non-GAAP financial measures we present are not meant to be considered as indicators of performance in isolation from or as a substitute for measures prepared in accordance with GAAP, and should be read only in conjunction with financial information presented on a GAAP basis. Reconciliations of each of EBITDA and Adjusted EBITDA to the most directly comparable GAAP financial measure, net income (loss), are presented below. We encourage you to review our financial information in its entirety,
not to rely on any single financial measure and to view the reconciliations in conjunction with the presentation of the non-GAAP financial measures for each of the periods presented. In future periods, we may exclude such items, may incur income and expenses similar to these excluded items, and include other expenses, costs, and non-recurring items. The tables below provide reconciliations of EBITDA and Adjusted EBITDA to net income (loss) on a consolidated basis for the periods indicated.
We define EBITDA as net income (loss) adjusted for interest, net, income tax expense (benefit), and depreciation and amortization expense. We define Adjusted EBITDA as
EBITDA further adjusted for certain items of a significant or unusual nature, including but not limited to, COVID-19 cost impacts, non-cash stock compensation expense, transaction related costs, acquisition bonus expense, inventory step-up and other costs. Other includes costs such as management fees and fees associated with obtaining the incremental term loans.
In addition, we measure the performance of our individual segments using Segment Adjusted EBITDA. Segment Adjusted EBITDA is the financial measure by which management allocates resources and analyzes the performance of the reportable segments. The main difference between Segment Adjusted EBITDA and Adjusted EBITDA is that Segment Adjusted EBITDA includes add backs for sales and use tax and board of directors fees.
The following table presents a reconciliation of net income (loss) to EBITDA and Adjusted EBITDA for the periods
presented:
(1)Due to significant volatility to the markets, as well as business and supply chain disruptions, we incurred several additional expenses due to the COVID-19 pandemic, including: (i) higher pricing from vendors due to supply chain disruptions, product shortages and increases in shipping costs, (ii) higher employee costs due to premium pay and hazard pay for our employees and enhanced sick pay due to illness and
quarantine protocols, (iii) COVID-19 training costs, (iv) overtime costs for IT personnel to setup eligible employees to work from home and temporary resources and (v) janitorial costs due to enhanced COVID-19 protocols. The expenses are included in cost of services and cost of products on our statements of operations and comprehensive income (loss). See “COVID-19 Pandemic” above for additional information related to these expenses. While we had previously expected that these costs would not be an adjustment in the calculation of Adjusted EBITDA after 2021, the COVID-19 pandemic has not subsided and during 2022, to a lesser extent, we have continued to incur higher product costs due to higher pricing from vendors for certain items (e.g., masks and other similar high demand products). We now expect that these expenses will not be an adjustment in the calculation of Adjusted EBITDA after 2022.
(2)Represents
non-cash stock-based compensation expense in connection with the stock awards that have been granted to employees and non-employees. The expense is included in selling, general and administrative expenses on our statements of operations and comprehensive income (loss).
(3)Transaction related costs primarily consist of public company readiness costs, expenses for corporate development, such as mergers and acquisitions activity, and due diligence costs.
(4)Incremental cost of products associated with the step-up of inventory recognized in purchase accounting for the HealthSmart acquisition.
(5)Other includes other individual adjustments related to management fees and fees associated with obtaining the incremental term loans. All costs are included in selling, general and administrative expenses on our statements of operations and comprehensive income (loss).
Components of Results of Operations
Revenue
We generate revenue from contracts with our clients within our two operating segments: Technology Enabled Solutions and Advisory Services.
Through our Technology Enabled Solutions segment,
we primarily provide technology solutions and services to assist our clients with workflows across product development, member experience, clinical management, core operations, business intelligence, and analytics. Through our Advisory Services segment, we provide fixed or variable fee arrangements to assist clients in the design and management of government and commercial health plans. Our revenue includes both product revenue and service arrangements.
Products revenue consists of technology enabled solutions for supplemental benefits to members through their Medicare Advantage plans. These include supplemental benefit products, administration, fulfillment, and shipment of eligible product, as well as catalog development and distribution. Revenue is derived from supplemental benefit membership, supplemental benefit dollars, member utilization of the benefits and, as a result of the HealthSmart acquisition,
health, wellness and diagnostic products sold through the retail channel.
Services revenue consists of:
•Technology-based Medicare plan administration services including eligibility and enrollment processing, member services, premium billing and payment processing, reconciliation and other related services. Our solutions are primarily priced on recurring per member per month fees, annual software license fees, and transaction-based fees.
•Value based payment assurance solutions, including payment tools and data analytics, that improve revenue accuracy and gaps in quality, clinical care, and compliance. Our value-based solutions are primarily priced on an annual subscription fee, shared savings or fee-based engagement. Advisory (consulting) services that support health
plan operations and drive business model evolution. Our Advisory services are priced on a fixed-fee or time and materials basis.
Operating Expenses
Costs of products consist of the value of supplemental benefit products, the value of health, wellness and diagnostic products, shipping and handling costs to acquire and to deliver the product to our clients; personnel costs including salaries, wages, overtime, benefits; facility costs and overhead allocation covering information technology, telecommunications costs, and other costs specifically identified to the shipment of our products.
Costs of services consist of all costs directly attributable to service revenue generation activities as outlined in contracts
with our clients. Our largest components in costs of services are personnel costs, including salaries, wages, overtime, benefits, and discretionary bonus; facility costs and overhead allocation covering information technology, telecommunications costs, and other costs needed in the delivery of our services.
Selling, general and administrative expenses (“SG&A”) include corporate management and governance functions comprised of general management, legal, accounting, financial reporting, human resource, sales, marketing, and other costs not directly associated with revenue generation activities, including those involved with developing new service offerings. SG&A includes salaries, bonuses, and related benefits. SG&A also includes all general operating expenses, including, but not limited to, rent and occupancy costs for non-revenue generating activities, telecommunications costs, information
technology infrastructure, and operations costs, including software licensing costs, advertising and marketing expenses, insurance expenses, professional services and consulting expenses.
Depreciation and amortization includes depreciation expense of property and equipment, including leasehold improvements, computer equipment, furniture and fixtures and software and amortization expense of capitalized internal-use software and software development costs, customer relationships, acquired software and certain trade names.
Transaction related costs primarily consist of professional services incurred in connection with public company readiness costs, expenses for corporate development such as mergers and acquisitions activity and due diligence costs.
•Interest income. Interest income consists of interest on cash and cash equivalents.
•Interest expense. Interest expense consists of accrued interest and related payments on our outstanding term loans and revolving loans, as well as the amortization of debt issuance costs associated with our debt. Interest expense also includes interest on our sales tax accrual.
The following table sets forth our results of operations for the periods indicated:
For the Three Months Ended March 31,
Change
(in
thousands, except for percentages)
2022
2021
$
%
Net revenues:
Services
$
46,480
$
43,527
$
2,953
7
%
Products
50,228
39,104
11,124
28
%
Net
revenues
96,708
82,631
14,077
17
%
Operating expenses:
Cost of services
25,477
24,021
1,456
6
%
Cost
of products
37,236
26,527
10,709
40
%
Selling, general and administrative
23,214
20,099
3,115
15
%
Depreciation
and amortization
8,252
7,372
880
12
%
Transaction related costs
640
1,086
(446)
(41)
%
Total
operating expenses
94,819
79,105
15,714
20
%
Operating income
1,889
3,526
(1,637)
(46)
%
Other
income (expense):
Interest expense
(3,719)
(5,467)
1,748
(32)
%
Total
other expense, net
(3,719)
(5,467)
1,748
(32)
%
Income (loss) before income taxes
(1,830)
(1,941)
111
(6)
%
Income
tax (expense) benefit
676
1,007
(331)
(33)
%
Net
income (loss)
$
(1,154)
$
(934)
$
(220)
24
%
Net Revenues
Services Revenue
Services revenue was $46.5 million and $43.5 million for the three months ended March 31, 2022, and March 31, 2021, respectively.
The $3.0 million increase is driven by $1.9 million attributable to customer membership base increase and $1.7 million by net new consulting projects. This is offset by a decrease of $0.4 million in implementation related fees and $0.2 million in lower data analytics contracts.
Products Revenue
Products revenue was $50.2 million and $39.1 million for the three months ended March 31, 2022, and March 31, 2021, respectively. The increase of $11.1 million is driven by $7.2 million attributable to the acquisition of HealthSmart and $3.9 million for net new clients and existing client growth of memberships.
Cost of services was $25.5 million and $24.0 million for the three months ended March 31, 2022, and March 31, 2021, respectively. The increase of $1.5 million is primarily attributable to higher staffing levels to handle increased support to our existing clients, wage increases and incentives paid to agents to handle increased call volumes.
Cost of Products
Cost of products was $37.2 million and $26.5 million for the three months ended March 31, 2022, and March 31, 2021, respectively. The increase
of $10.7 million is driven by $5.2 million attributable to product costs associated with HealthSmart, $1.9 million of purchase accounting inventory step-up for HealthSmart, $2.1 million due to higher volume and $1.5 million due to higher rates and shipping costs due to supply chain constraints.
Selling, General and Administrative
Selling, general and administrative was $23.2 million and $20.1 million for the three months ended March 31, 2022, and March 31, 2021, respectively. The increase of $3.1 million is driven by $1.0 million attributable to the acquisition of HealthSmart and $2.1 million driven by higher IT, accounting, HR and operational costs, offset by lower expected management incentive bonus.
Depreciation and Amortization
Depreciation
and amortization was $8.3 million and $7.4 million for the three months ended March 31, 2022, and March 31, 2021, respectively. The increase of $0.9 million in depreciation and amortization expense is due to the addition of property and equipment and capitalization of software development costs.
Transaction Related Costs
Transaction related costs were $0.6 million and $1.1 million for the three months ended March 31, 2022, and March 31, 2021, respectively. The decrease of $0.4 million in transaction related costs is due to the costs associated with readiness for last year’s IPO, offset by costs incurred in 2022 related to the acquisition of HealthSmart.
Other
Income (Expense)
Interest Expense
Interest expense was $3.7 million and $5.5 million for the three months ended March 31, 2022, and March 31, 2021, respectively. The decrease of $1.7 million is mainly attributable to lower outstanding balances due to the pay down of the term loan from IPO proceeds; offset by the incremental term loan entered into to finance the HealthSmart acquisition. Furthermore, lower interest rates for both the term loan and the incremental term loan were also a factor.
Segment Information
Our reportable segments have been determined in accordance with Accounting Standards Codification Topic 280, Segment Reporting. We have two
reportable segments: Technology Enabled Solutions and Advisory Services. We evaluate the performance of each of our two operating segments based on segment revenue and Segment Adjusted EBITDA.
Segment Adjusted EBITDA represents each segment’s earnings before interest, tax, depreciation and amortization and is further adjusted to exclude certain items of a significant or unusual nature, including but not limited to, COVID-19 cost impacts, sales and use tax, non-cash stock compensation expense, transaction related costs, acquisition bonus expense, inventory step-up and other costs. Other includes costs such as management and board of directors fees and fees associated with obtaining the incremental term loans.
See Note 17. Segment Information, to the notes accompanying our financial statements.
The
segment measurements provided to and evaluated by the chief operating decision maker group are described in the notes to our financial statements. These results should be considered in addition to, and not as a substitute for, results reported in accordance with GAAP.
Technology Enabled Solutions revenue was $83.2 million and $69.6 million for the three months ended March 31, 2022, and 2021, respectively. The increase of $13.6 million was mainly attributable to: (i) revenue from the acquisition of HealthSmart, and (ii) existing client growth of membership base accounts.
Advisory revenue was $13.5 million and $13.0 million for the three months ended March 31, 2022 and 2021, respectively. The increase of $0.5 million was primarily driven by new projects within our existing client base.
Segment Adjusted EBITDA
Technology Enabled Solutions Segment Adjusted
EBITDA was $12.4 million and $16.3 million for the three months ended March 31, 2022, and 2021, respectively. The decrease of $3.9 million was primarily attributable to higher staffing levels to handle increased support to our existing clients, wage increases, higher incentives paid to agents to handle increased call volumes and higher shipping costs due to supply chain constraints. The decrease is offset by the contribution from the HealthSmart acquisition, higher volume and projected lower bonus payments.
Advisory Segment Adjusted EBITDA was $5.3 million and $3.3 million for the three months ended March 31, 2022, and 2021, respectively. The increase of $2.0 million was attributable to flow through of consulting services demand,
higher utilization of our consultants and lower projected bonus payments.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are our existing cash and cash equivalents, cash provided by operating activities and borrowings available under our Credit Agreement. As of March 31, 2022, we had unrestricted cash and cash equivalents of $20.9 million, and as of March 31, 2022, our total indebtedness was $270.6 million.
We are a holding company that transacts substantially all of our business through our operating subsidiaries.
Consequently, our ability to pay dividends to stockholders, meet debt payment obligations, and pay taxes and operating expenses is largely dependent on dividends or other distributions from our subsidiaries, whose ability to pay such distributions to us is restricted, subject to certain exceptions, pursuant to the terms of the Credit Agreement. Covenants contained in the Credit Agreement may restrict our operating subsidiaries from issuing dividends and other distributions to us.
Our principal liquidity needs have been, and we expect them to continue to be, working capital and general corporate needs, debt service, capital expenditures and potential acquisitions. Our capital expenditures for property and equipment to support growth in the business
were $1.8 million and $3.1 million for the three months ended March 31, 2022, and 2021, respectively. Additional expenditures for software development were $1.1 million and $1.3 million for the three months ended March 31, 2022, and 2021, respectively.
We believe that our primary sources of liquidity, including our cash and cash equivalents, cash provided by operating activities and borrowing capacity under our Credit Agreement, will be sufficient to meet our liquidity needs for at least the next 12 months. We anticipate that to the extent that we require additional liquidity, it will be funded through the incurrence of additional indebtedness, the issuance of additional equity, or a combination thereof. We cannot assure you that
we will be able to obtain this additional liquidity on reasonable terms, or at all. Additionally, our liquidity and our ability to meet our
obligations and fund our capital requirements are also dependent on our future financial performance, which is subject to general economic, financial, and other factors that are beyond our control.
Cash Flows Information
The following table presents a summary of cash flows for the periods presented:
Net cash (used in) provided by operating activities
$
(15,660)
$
(12,626)
Net cash used in investing activities
$
(77,554)
$
(4,350)
Net
cash provided by financing activities
$
75,283
$
515
Operating Activities
Net cash used in operating activities for the three months ended March 31, 2022, was $15.7 million compared to $12.6 million of net cash used in operating activities for the three months ended March 31, 2021.
Net loss was $1.2 million for the three months ended March 31, 2022, as compared to $0.9 million net loss for the three months
ended March 31, 2021. The net loss for the three months ended March 31, 2022 is attributable to costs incurred for the HealthSmart acquisition including a $1.9 million purchase accounting inventory step-up and $0.6 million of additional transaction related costs, higher labor costs and higher freight costs driven by supply chain constraints. Non-cash items were $12.2 million for the three months ended March 31, 2022, as compared to $8.5 million for the three months ended March 31, 2021.
The effect of changes in operating assets and liabilities was a cash decrease of $26.7 million for the three months ended March 31, 2022, as compared to a cash decrease of $20.2 million for the three months
ended March 31, 2021. The most significant drivers contributing to this net decrease of $6.5 million relate to the following:
•Decrease of accrued expenses mainly driven by higher incentive bonus accrued for as of December 31, 2021;
•An increase in accounts receivable when compared to the prior period; and
•Lower cash used on inventory purchases when compared to the prior period.
Investing Activities
Net cash used in investing activities for the three months ended March 31, 2022, was $77.6 million compared to $4.3 million for the three months
ended March 31, 2021. During the three months ended March 31, 2022, net cash used in investing activities was primarily attributable to the HealthSmart acquisition.
Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2022, was $75.3 million compared to $0.5 million for the three months ended March 31, 2021. During the three months ended March 31, 2022, net cash provided by financing activities was primarily attributable to net proceeds from the incremental loan established in February 2022 to finance the HealthSmart acquisition and pay fees and expenses related thereto.
Contractual
Obligations and Commitments
The following table summarizes our contractual obligations as of March 31, 2022. The principal commitments consisted of obligations under outstanding operating leases for office facilities, capital leases related to copy machines, our long-term debt, and purchase commitments. The amount of the obligations presented in the following table summarizes as of March 31, 2022, the commitments to settle contractual obligations in cash for the periods presented.
(1)Includes
the term loan under our Credit Agreement.
Off-Balance Sheet Arrangements
During the periods presented, we did not have any off-balance sheet arrangements, as defined in Regulation S-K promulgated by the SEC.
Critical Accounting Policies and Use of Estimates
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make judgments, estimates, and assumptions that affect the reported
amounts of assets, liabilities, income, and expenses and related disclosures of contingent assets and liabilities. We base these estimates on our historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results experienced may vary materially and adversely from our estimates. Revisions to estimates are recognized prospectively.
During the three months ended March 31, 2022, there were no material changes to our critical accounting policies and use of estimates from those described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Use of Estimates” included in our Form 10-K for the year ended December 31, 2021. The following discussion supplements our Critical Accounting Policies
and Use of Estimates Policy for Goodwill as it relates to the interim goodwill impairment test performed as of March 31, 2022.
As a result of the decline in our stock price since December 31, 2021, we performed an interim impairment test for goodwill for APA, SBA, VBPA and Advisory reporting units using the quantitative approach as of March 31, 2022. Since HealthSmart was recently acquired, no impairment test was performed on that reporting unit. Based on our evaluation performed, we determined the fair value of each of the reporting units exceeded its respective carrying amount, and therefore, we determined that goodwill was not impaired at any of our reporting units as of March 31, 2022. We define “headroom” as the percentage
difference between the fair value of a reporting unit and its carrying value. For the interim impairment test, the headroom for the reporting units ranged between eight percent to 65 percent. Our SBA reporting unit and our VBPA reporting unit have headroom at the low-end of that range (8.4% for SBA and 12.5% for VBPA) and could experience impairment in the future if we do not achieve our profitability projections, there is a change in key assumptions underlying the valuation or if we continue to experience a substantial decrease in our stock price.
Evaluation of goodwill for impairment requires judgment, including the identification of reporting units, assignment of assets, liabilities and goodwill to reporting units and determination of the fair value of each reporting unit. We estimate the fair value of our reporting units using a combination of an income approach, utilizing a discounted cash flow analysis, and a market approach,
using market multiples. Under the income approach, we estimate projected future cash flows, the timing of such cash flows and long-term growth rates, and determine the appropriate discount rate that reflects the risk inherent in the projected future cash flows. The discount rate used is based on a market participant weighted-average cost of capital and may be adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting unit’s ability to execute on the projected future cash flows. Under the market approach, we estimate fair value based on market multiples of revenues and earnings derived from comparable publicly-traded companies with characteristics similar to the reporting unit. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions and other factors. The assumptions and estimates used in determining the fair values of the
reporting units contain uncertainties, and any changes to these assumptions and estimates could have a negative impact and result in a future impairment.
See Note 2 to our unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information.
Emerging
Growth Company Status
Pursuant to the JOBS Act, an emerging growth company is provided the option to adopt new or revised accounting standards that may be issued by FASB or the SEC either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies. We intend to take advantage of the exemption for complying with new or revised accounting standards within the same time periods as private companies. Accordingly, the information contained herein may be different than the information you receive from other public companies.
We also intend to take advantage of some of the reduced regulatory and reporting requirements of emerging growth companies pursuant to the JOBS Act so long as we qualify as an emerging growth company, including, but not limited to, not being required to comply with the auditor attestation
requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute payments.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of business, we are subject to market risks. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Financial instruments that are exposed to concentrations of credit risk primarily consist of accounts receivable. We do not require collateral or other security for receivables, but believe the potential for collection issues with any clients was
minimal as of March 31, 2022, based on the lack of collection issues in the past and the high financial standards we require of clients. As of March 31, 2022, two clients accounted for 11.2% and 16.1% of total accounts receivable.
Interest Rate Risk
As of March 31, 2022, we had cash of $20.9 million deposited in non-interest bearing accounts at a major bank with limited to no interest rate risk. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage interest rate risk exposure.
The current administrator of LIBOR will cease to publish the overnight and 1, 3, 6 and 12 months USD LIBOR settings immediately following
the LIBOR publication on June 30, 2023 and has ceased to publish all other LIBOR settings, including the 1 week and 2 months USD LIBOR settings, since December 31, 2021. The discontinuation, reform, or replacement of LIBOR may result in fluctuating interest rates, or higher interest rates, which could have a material adverse effect on our interest expense.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March
31, 2022. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
Based on the evaluation of our disclosure controls and procedures
as of March 31, 2022, our Chief Executive Officer and Chief Financial Officer concluded that, as a result of the material weaknesses in our internal control over financial reporting described below, our disclosure controls and procedures were not effective as of March 31, 2022.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. As previously disclosed in our Form 10-K for the year ended December 31, 2021, we identified the following material weaknesses in our internal control over financial reporting:
•We did not design and maintain an effective control environment commensurate with the financial reporting requirements of an SEC registrant. Additionally, we did not design control activities to adequately address identified
risks or operate at a sufficient level of precision that would identify material misstatements to our financial statements and did not design and maintain formal documentation of accounting policies and procedures nor did we maintain sufficient evidence to support the operation of key control procedures. Specifically, we did not design and maintain controls to ensure (i) the appropriate segregation of duties within our financial reporting function, including the preparation and review of journal entries and (ii) account reconciliations and balance sheet and income statement fluctuation analyses were reviewed at the appropriate level of precision.
•We also did not design and maintain effective controls over IT general controls for information systems that are relevant to the preparation of our financial statements. Specifically, we did not design and maintain: (i) program change management controls to
ensure that information technology program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately; and (ii) user access controls to ensure appropriate segregation of duties and that adequately restrict user and privilege access to financial applications, programs, and data to appropriate Company personnel.
These IT deficiencies did not result in a material misstatement to the financial statements, however, the deficiencies, when aggregated, could impact maintaining effective segregation of duties, as well as the effectiveness of IT-dependent controls (such as automated controls that address the risk of material misstatement to one or more assertions, along with the IT controls and underlying data that support the effectiveness of system-generated data and reports) that could result in misstatements potentially impacting all financial
statement accounts and disclosures that would not be prevented or detected on a timely basis. Accordingly, management has determined these deficiencies in the aggregate constitute material weaknesses.
These material weaknesses resulted in adjustments in our 2019 and 2020 financial statements primarily related to revenues recognized from contracts with customers that were recognized in the improper periods, the accrual of certain compensation related costs, and the misstatement of income tax benefit related to the treatment of certain deferred tax positions. The material weaknesses described above could result in misstatements of our account balances or disclosures that would result in a material misstatement of our annual or interim financial statements that would not be prevented or detected on a timely basis.
Remediation
Efforts to Address Material Weaknesses
With the oversight of the Audit Committee of our Board of Directors, we have designed and are implementing a remediation plan to remediate the material weaknesses described above. Accordingly, our remediation activities include the following measures:
•We implemented in the first quarter of 2022 a new Enterprise Resource Planning (“ERP”) system, Workday, to replace legacy and decentralized financial reporting systems. We have also standardized our account reconciliation and analysis process and will leverage our ERP implementation to centralize our controls over journal entries. In addition, we are in the process of refining appropriate segregation of duties and system access within our ERP and other relevant supporting systems.
•We have formalized
several of our financial reporting policies and procedures and will continue to reflect evolution of business and the impact of the new ERP.
•Provide ongoing training for individuals involved with internal control over financial reporting.
We continue to monitor the effectiveness of our remediation efforts and will refine our remediation plan as appropriate. In addition, we report the progress and status of the above remediation efforts to the Audit Committee on a periodic basis. While we believe these efforts will improve our internal control over financial reporting and address the underlying causes of the material weaknesses, such material weaknesses will not be remediated until our remediation plan has been fully implemented, and we have concluded that our controls are operating effectively for a sufficient period of time.
Changes in Internal Control Over Financial Reporting
Other than the updates noted above under Remediation Efforts to Address Material Weaknesses, there were no changes to our internal control over financial reporting during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
From time to time we are a party to various legal proceedings incidental to the conduct of our business. The results of legal proceedings are inherently unpredictable and uncertain. We are not presently party to any legal proceedings that we believe would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operation, cash flows or capital levels. We periodically reexamine our estimates of probable liabilities and any associated expenses and receivables and make appropriate adjustments to such estimates based on experience and developments in litigation. As a result, the current estimates of the potential impact on our business, prospects, financial condition, liquidity,
results of operation, cash flows or capital levels for the proceedings and claims described in the notes to our condensed consolidated financial statements could change in the future.
Regardless of the outcome, legal proceedings have the potential to have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A, Risk Factors, in our Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on March 23, 2022.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
Amendment
No. 5 to First Lien Credit Agreement, dated as of February 1, 2022, by and among Convey Health Solutions, Inc., as borrower, Ares Capital Corporation, as administrative agent and collateral agent, and the term lenders party thereto (Incorporated by reference to Exhibit 10.1 of Form 8-K, filed by Convey Health Solutions Holdings, Inc. on February 1, 2022 (File No. 001-40506)).
Certification
of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Cover
Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document (included in Exhibit 101).
Pursuant
to the requirements of the Securities Act of 1934, as amended, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
