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11: R1 Cover HTML 84K
12: R2 Condensed Consolidated Balance Sheets HTML 147K
13: R3 Condensed Consolidated Balance Sheets HTML 38K
(Parenthetical)
14: R4 Condensed Consolidated Statements of Operations HTML 133K
15: R5 Condensed Consolidated Statements of Operations HTML 36K
(Parenthetical)
16: R6 Condensed Consolidated Statements of Stockholders' HTML 132K
Equity / Members' Capital
17: R7 Condensed Consolidated Statements of Cash Flows HTML 145K
18: R8 Condensed Consolidated Statements of Cash Flows HTML 32K
(Parenthetical)
19: R9 Nature of Business and Operations HTML 45K
20: R10 Summary of Significant Accounting Policies HTML 28K
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23: R13 Business Acquisitions HTML 29K
24: R14 Payor Relationships and Other Intangibles, Net HTML 62K
25: R15 Leases HTML 88K
26: R16 Other Current Liabilities HTML 34K
27: R17 Contract Liabilities HTML 42K
28: R18 Debt HTML 51K
29: R19 Fair Value Measurements HTML 100K
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32: R22 Stock-Based Compensation HTML 87K
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36: R26 Segment Information HTML 31K
37: R27 Subsequent Events HTML 27K
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50: R40 Nature of Business and Operations - Additional HTML 79K
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Revenue (Details)
52: R42 Revenue and Accounts Receivable - Summary of HTML 33K
Account Receivable Balance (Details)
53: R43 Revenue and Accounts Receivable - Concentration of HTML 38K
Risk (Details)
54: R44 Unpaid Service Provider Costs - Summary of HTML 37K
Activity in Unpaid Service Provider Cost For The
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55: R45 Unpaid Service Provider Costs - Additional HTML 40K
Information (Details)
56: R46 Business Acquisitions - Additional Information HTML 46K
(Details)
57: R47 Payor Relationships and Other Intangibles, Net - HTML 49K
Summary of Total Intangible, Net (Details)
58: R48 Payor Relationships and Other Intangibles, Net - HTML 28K
Additional Information (Details)
59: R49 Payor Relationships and Other Intangibles, Net - HTML 41K
Summary of Expected Amortization Expense of The
Intangible Assets (Details)
60: R50 Leases - Additional Information (Details) HTML 35K
61: R51 Leases - Schedule of Lease Maturity (Details) HTML 83K
62: R52 Other Current Liabilities (Details) HTML 34K
63: R53 Contract Liabilities - Additional Information HTML 32K
(Details)
64: R54 Contract Liabilities - Summary of Significant HTML 31K
Changes In The Contract Liabilities (Details)
65: R55 Contract Liabilities - Revenue, Remaining HTML 42K
Performance Obligation, Expected Timing of
Satisfaction (Details)
66: R56 Debt - Schedule of Notes Payable (Details) HTML 43K
67: R57 Debt - Additional Information (Details) HTML 92K
68: R58 Debt - Schedule of Maturities of Long-Term Debt HTML 45K
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69: R59 Fair Value Measurements - Additional Information HTML 65K
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70: R60 Fair Value Measurements - Schedule of Quantitative HTML 42K
Information Regarding Level 3 Fair Value
Measurements Warrant Liability (Details)
71: R61 Fair Value Measurements - Schedule of Financial HTML 56K
Assets and Liabilities Measured at Fair Value on
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72: R62 Fair Value Measurements - Summary of Liabilities HTML 42K
Measured At Fair Value Using Significant
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74: R64 Related Party Transactions - Additional HTML 86K
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Restricted Stock Units Activity (Details)
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82: R72 Net Income (Loss) Per Share - Additional HTML 33K
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Net Loss Per Share (Details)
84: R74 Segment Information - Additional Information HTML 26K
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(Exact name of registrant as specified in its charter)
__________________________________________
iDelaware
(State or other jurisdiction of incorporation or organization)
i9725
NW 117th Avenue, iMiami, iFL
(Address of principal executive offices)
i98-1524224
(IRS
Employer Identification No.)
i33178
(Zip Code)
(i855) i226-6633
(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
iClass A common stock, $0.0001 par value per share
iCANO
iThe
New York Stock Exchange
iWarrants to purchase one share of Class A common stock, each at an exercise price of $11.50 per share
iCANO/WS
iThe
New 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.
iLarge accelerated filer ☒
Non-accelerated filer ☐
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. ☐
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 August 5,
2022the registrant had i231,917,186 shares of Class A common stock outstanding and i253,974,171
shares of Class B common stock outstanding.
Certain statements in this Quarterly Report on Form 10-Q may constitute “forward-looking statements” for purposes of the federal securities laws. Our forward-looking statements include, but are not limited to, statements regarding our or our management team’s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,”“believe,”“contemplate,”“continue,”“could,”“estimate,”“expect,”“intends,”“may,”“might,”“plan,”“possible,”“potential,”“predict,”“project,”“should,”“will,”“would”
and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this report may include, for example, statements about:
•our ability to recognize the benefits of the Business Combination (as defined herein) and our other recent acquisitions, which may be affected by, among other things, competition and our ability to grow and manage growth profitability;
•our financial and business performance;
•changes in our strategy, future operations, financial position, estimated revenues, forecasts, projected costs, prospects and plans;
•changes in applicable laws
or regulations, including with respect to health plans and payors and our relationships with such plans and payors, and provisions that impact Medicare and Medicaid programs;
•our ability to realize expected results with respect to patient membership, revenue and earnings;
•our ability to grow market share in existing markets or enter into new markets and success of acquisitions;
•our ability to predict and control our medical claims expense ratio;
•the risk that we may not be able to procure sufficient space as we continue to grow and open additional medical centers;
•our predictions about the need
for our wellness centers after the coronavirus disease 2019 ("COVID-19 pandemic"), including the attractiveness of our offerings and member retention rates;
•competition in our industry, the advantages of our products and technology over competing products and technology existing in the market, and competitive factors including with respect to technological capabilities, cost and scalability;
•the impact of the COVID-19 pandemic or any other pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide on our business, financial condition and results of operations and the actions we may take in response thereto;
•our future capital requirements and sources and uses of cash;
•our
business, expansion plans and opportunities;
•our ability to access new capital through sales of shares of our Class A common stock or issuance of indebtedness, which may harm our liquidity and / or our ability to grow our business;
•anticipated financial performance, including gross margin, and the expectation that our future results of operations will fluctuate on a quarterly basis for the foreseeable future;
•our expected capital expenditures, cost of revenue and other future expenses, and the sources of funds to satisfy liquidity needs;
•our ability to maintain proper and effective internal controls;
•our
ability to predict changes to the DCE and ACO program as it relates to benchmarks and shared savings;
•our ability to implement remediation plans to address the material weaknesses that are described in Part I, Item 4. of this Quarterly Report on Form 10-Q; and
•the outcome of any known and unknown litigation and regulatory proceedings.
ii
These forward-looking statements are based on information available to us at the time of this Quarterly Report on Form 10-Q and current
expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties, and other factors. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factors that could cause actual results to differ include:
•the
ability to maintain the listing of our Class A common stock and warrants on the New York Stock Exchange ("NYSE");
•the price of our securities may be volatile due to a variety of factors, including the volatility in capital markets, changes in the competitive and highly regulated industries in which we operate, variations in performance across competitors, changes in laws and regulations affecting our business and changes in our capital structure;
•the risk of downturns in the economy and the possibility of rapid change in the highly competitive industry in which we operate;
•the risk that we will need to raise additional capital to execute our business plan, which may not be available on acceptable terms or at all; and
•the
risk that we experience difficulties in managing our growth and expanding operations.
Accounts
receivable, net of unpaid service provider costs
i200,990
i133,433
Prepaid
expenses and other current assets
i38,466
i20,632
Total
current assets
i287,303
i317,235
Property
and equipment, net
i106,198
i85,261
Operating
lease right-of-use assets
i168,554
i132,173
Goodwill
i777,163
i769,667
Payor
relationships, net
i561,733
i576,648
Other
intangibles, net
i234,127
i248,973
Other
assets
i6,327
i13,582
Total
assets
$
i2,141,405
$
i2,143,539
Liabilities
and stockholders' equity
Current liabilities:
Current portion of notes payable
$
i6,444
$
i6,493
Current
portion of finance lease liabilities
i1,561
i1,295
Current
portion of contingent consideration
i198
i3,123
Accounts
payable and accrued expenses (Related parties comprised $i1,475 and $i144 as of June
30, 2022 and December 31, 2021, respectively)
i69,419
i80,829
Current
portions due to sellers
i4,317
i17,357
Current
portion of operating lease liabilities
i20,726
i15,275
Other
current liabilities
i39,390
i36,664
Total
current liabilities
i142,055
i161,036
Notes
payable, net of current portion and debt issuance costs
i914,890
i915,266
Long
term portion of operating lease liabilities
i157,408
i122,935
Warrant
liabilities
i22,807
i80,144
Long
term portion of finance lease liabilities
i2,923
i2,181
Contingent
consideration
i27,800
i35,300
Other
liabilities
i32,525
i28,109
Total
liabilities
i1,300,408
i1,344,971
Stockholders’
Equity
Shares of Class A common stock $ii0.0001/
par value (ii6,000,000,000/ shares authorized
and ii218,028,952/ and ii180,113,551/
shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively)
i22
i18
Shares
of Class B common stock $ii0.0001/ par value (ii1,000,000,000/
shares authorized and ii264,527,434/ and ii297,385,981/
shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively)
i27
i30
Additional
paid-in capital
i495,642
i397,443
Accumulated
deficit
(i83,433)
(i78,760)
Total
Stockholders' Equity before non-controlling interests
i412,258
i318,731
Non-controlling
interests
i428,739
i479,837
Total
Stockholders' Equity
i840,997
i798,568
Total
Liabilities and Stockholders' Equity
$
i2,141,405
$
i2,143,539
The
accompanying Notes are an integral part of these Condensed Financial Statements
4
CANO HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three
Months Ended June 30,
Six Months Ended June 30,
(in thousands, except share and per share data)
2022
2021
2022
2021
Revenue:
Capitated
revenue (Related parties comprised $i0 and $i128,394, in the three months ended June 30, 2022 and 2021,
respectively, and $i0 and $i308,204, in the six months ended June 30, 2022 and 2021, respectively)
$
i655,493
$
i329,484
$
i1,329,844
$
i590,841
Fee-for-service
and other revenue (Related parties comprised $i0 and $i219, in the three months ended June 30, 2022 and 2021,
respectively, and $i0 and $i631, in the six months ended June 30, 2022 and 2021,
respectively)
i33,880
i14,097
i63,671
i27,342
Total
revenue
i689,373
i343,581
i1,393,515
i618,183
Operating
expenses:
Third-party medical costs (Related parties comprised $i0 and $i115,975,
in the three months ended June 30, 2022 and 2021, respectively, and $i0 and $i249,819, in the six months ended June
30, 2022 and 2021, respectively)
i541,317
i291,816
i1,077,097
i486,862
Direct
patient expense (Related parties comprised $i3,064 and $i58, in the three months ended June 30, 2022 and 2021,
respectively, and $i4,518 and $i1,488, in the six months ended June 30, 2022 and 2021,
respectively)
i52,647
i35,607
i113,323
i69,844
Selling,
general, and administrative expenses (Related parties comprised $i3,305 and $i1,840, in
the three months ended June 30, 2022 and 2021, respectively, and $i5,452 and $i3,763,
in the six months ended June 30, 2022 and 2021, respectively)
i106,179
i47,159
i202,849
i82,168
Depreciation
and amortization expense
i19,836
i7,945
i38,872
i13,791
Transaction
costs and other (Related parties comprised $i0, $i1,465, in the three months ended June 30, 2022 and 2021,
respectively, and $i0 and $i1,483, in the six months ended June 30, 2022 and 2021,
respectively)
i6,207
i16,114
i14,583
i25,068
Change
in fair value of contingent consideration
(i5,764)
(i496)
(i10,425)
(i211)
Total
operating expenses
i720,422
i398,145
i1,436,299
i677,522
Income
(loss) from operations
(i31,049)
(i54,564)
(i42,784)
(i59,339)
Other
income and expense:
Interest expense
(i13,134)
(i9,714)
(i26,418)
(i20,340)
Interest
income
i2
i1
i3
i2
Loss
on extinguishment of debt
i—
(i13,225)
(i1,428)
(i13,225)
Change
in fair value of warrant liabilities
i30,175
i39,215
i57,337
i39,215
Other
income (expenses)
i251
(i25)
i530
(i25)
Total
other income
i17,294
i16,252
i30,024
i5,627
The
accompanying Notes are an integral part of these Condensed Financial Statements
5
CANO HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Net
income (loss) before income tax expense
(i13,755)
(i38,312)
(i12,760)
(i53,712)
Income
tax expense (benefit)
i809
(i2,023)
i1,889
(i1,309)
Net
income (loss)
$
(i14,564)
$
(i36,289)
$
(i14,649)
$
(i52,403)
Net
income (loss) attributable to non-controlling interests
(i9,231)
(i40,844)
(i9,976)
(i56,958)
Net
income (loss) attributable to Class A common stockholders
$
(i5,333)
$
i4,555
$
(i4,673)
$
i4,555
Net
income (loss) per share attributable to Class A common stockholders, basic
$
(i0.03)
$
i0.03
$
(i0.02)
$
i0.03
Net
income (loss) per share attributable to Class A common stockholders, diluted
$
(i0.03)
$
(i0.06)
$
(i0.03)
$
(i0.06)
Weighted-average
shares outstanding:
Basic
i210,053,037
i167,134,853
i200,783,129
i166,691,634
Diluted
i474,580,471
i168,884,315
i465,310,563
i167,571,198
The
accompanying Notes are an integral part of these Condensed Financial Statements
6
CANO HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY / MEMBERS' CAPITAL
The
accompanying Notes are an integral part of these Condensed Financial Statements
9
CANO HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six
Months Ended June 30,
(in thousands)
2022
2021
Cash Flows from Operating Activities:
Net loss
$
(i14,649)
$
(i52,403)
Adjustments
to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense
i38,872
i13,791
Change
in fair value of contingent consideration
(i10,425)
(i211)
Change
in fair value of warrant liabilities
(i57,337)
(i39,215)
Loss
on extinguishment of debt
i1,428
i13,225
Amortization
of debt issuance costs
i1,570
i8,541
Non-cash
lease expense
i3,642
i—
Stock-based
compensation
i31,600
i3,680
Changes
in operating assets and liabilities:
Accounts receivable, net
(i67,557)
(i6,441)
Other
assets
i7,158
(i5,925)
Prepaid
expenses and other current assets
(i17,834)
(i16,341)
Interest
accrued due to sellers
i100
i957
Accounts
payable and accrued expenses (Related parties comprised $i1,331 and $i111 for the six months ended
June 30, 2022 and 2021, respectively)
(i9,362)
i14,426
Other
liabilities (Related parties comprised $i0 and $i1,242 for the six months ended June 30,
2022 and 2021, respectively)
i10,621
i7,816
Net
cash provided by (used in) operating activities
(i82,173)
(i58,100)
Cash
Flows from Investing Activities:
Purchase of property and equipment (Related parties comprised $i3,567 and $i2,864
for the six months ended June 30, 2022 and 2021, respectively)
(i20,431)
(i7,730)
Acquisitions
of subsidiaries including non-compete intangibles, net of cash acquired
(i4,995)
(i614,394)
Payments
to sellers
(i3,847)
(i23,963)
Net
cash provided by (used in) investing activities
(i29,273)
(i646,087)
Cash
Flows from Financing Activities:
Business combination and PIPE financing
i—
i935,362
Payments
of long-term debt
(i3,222)
(i402,572)
Debt
issuance costs
(i88)
(i11,274)
Proceeds
from long-term debt
i—
i295,000
Proceeds
from delayed draw term loan
i—
i175,000
Repayments
of delayed draw term loan
i—
(i2,350)
Proceeds
from insurance financing arrangements
i2,529
i1,702
Payments
of principal on insurance financing arrangements
(i1,380)
(i993)
Principal
payments under finance leases
(i679)
(i64)
Repayment
of equipment loans
(i261)
(i154)
Employee
stock purchase plan withholding tax payments
(i776)
i—
Net
cash provided by (used in) financing activities
(i3,877)
i989,657
Net
increase (decrease) in cash, cash equivalents and restricted cash
(i115,323)
i285,470
Cash,
cash equivalents and restricted cash at beginning of year
i163,170
i33,807
Cash,
cash equivalents and restricted cash at end of period
$
i47,847
$
i319,277
The
accompanying Notes are an integral part of these Condensed Financial Statements
10
CANO HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Supplemental
cash flow information:
Interest paid
i27,670
i11,925
Income
taxes paid
i82
i—
Non-cash
investing and financing activities:
Right-of-use assets obtained in exchange of lease liabilities
i50,297
i—
Issuance
of class A common stock for acquisitions
i15,771
i60,000
Contingent
consideration in connection with acquisitions
i—
i9,600
Due
to sellers in connection with acquisitions
i3,533
i295
Addition
to construction in process funded through accounts payable
i3,580
i—
Humana
Affiliate Provider clinic leasehold improvements
i2,928
i2,864
Employee
stock purchase plan issuance
i9,707
i—
Capital
lease obligations entered into for property and equipment
i—
i52
Equipment
loan obligations entered into for property and equipment
i—
i183
The
accompanying Notes are an integral part of these Condensed Financial Statements
11
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. iNATURE
OF BUSINESS AND OPERATIONS
Nature of Business
Cano Health, Inc. (“Cano Health”, or the “Company”), formerly known as Primary Care (ITC) Intermediate Holdings, LLC (“PCIH”), provides value-based medical care for its members through a network of primary care physicians across the U.S. and Puerto Rico. The Company focuses on providing high-touch population health and wellness services to Medicare Advantage, Medicare Global and Professional Direct Contracting Entity ("DCE"), Medicare patients under Accountable Care Organizations ("ACO") and Medicaid capitated members, particularly in underserved communities by leveraging a proprietary technology platform to deliver
high-quality health care services. The Company also operates pharmacies in the network for the purpose of providing a full range of managed care services to its members.
On June 3, 2021 (the “Closing Date”), Jaws Acquisition, Corp. (“Jaws”), consummated the previously announced business combination (the “Business Combination”) pursuant to the terms of the Business Combination Agreement, dated as of November 11, 2020 (as amended, the “Business Combination Agreement”) by and among Jaws, Jaws Merger Sub, LLC, a Delaware limited liability company (“Merger Sub”), PCIH, and PCIH’s sole member, Primary Care (ITC) Holdings, LLC (“Seller”). Upon
the closing of the Business Combination, Jaws was reincorporated in the State of Delaware and changed its name to "Cano Health, Inc."
Unless the context requires, "the Company", "we", "us", and "our" refer, for periods prior to the completion of the Business Combination, to PCIH and its consolidated subsidiaries, and for periods upon or after the completion of the Business Combination, to Cano Health, Inc. and its consolidated subsidiaries, including PCIH, and its subsidiaries.
Pursuant
to the Business Combination Agreement, on the Closing Date, Jaws contributed cash to PCIH in exchange for i69.0 million common limited liability company units of PCIH ("PCIH Common Units") equal to the number of shares of Jaws' Class A ordinary shares outstanding on the Closing Date as well as i17.25 million
Class B ordinary shares owned by Jaws Sponsor, LLC (the "Sponsor"). In connection with the Business Combination, the Company issued i306.8 million shares of the Company’s Class B common stock to existing shareholders of PCIH. The Company also issued i80.0 million
shares of the Company’s Class A common stock in a private placement for $i800.0 million (the "PIPE Investors").
Following the consummation of the Business Combination, substantially all of the Company’s assets and operations are held and conducted by PCIH and its subsidiaries.
As the Company is a holding company with no material assets other than its ownership of PCIH Common Units and its managing member interest in PCIH, the Company has no independent means of generating revenue or cash flow. The Company’s ability to pay taxes and pay dividends depend on the financial results and cash flows of PCIH and the distributions it receives from PCIH. The Company’s only assets are equity interests in PCIH, which represented a i35.1%
and i45.2% controlling ownership as of the Closing Date and June 30, 2022, respectively. Certain members of PCIH who retained their common unit interests in PCIH held the remaining i64.9%
and i54.8% non-controlling ownership interests as of the Closing Date and June 30, 2022, respectively. These members hold economic interest in PCIH through PCIH Common Units and a corresponding number of non-economic Class B common stock, which enables the holder to ione
vote per share.
Our organizational structure following the completion of the Business Combination is commonly referred to as an umbrella partnership-C (or Up-C) corporation structure. This organizational structure allowed the Seller, the former sole owner and managing member of PCIH, to retain its equity ownership in PCIH, an entity that is classified as a partnership for U.S. federal income tax purposes, in the form of PCIH Common Units. The former stockholders of Jaws and the PIPE Investors who, prior to the Business Combination, held Class A ordinary shares or Class B ordinary shares of Jaws, by contrast, received equity ownership in Cano Health, Inc., a Delaware corporation that is a domestic corporation for U.S. federal income tax purposes.
Subject to the terms and conditions set forth in the Business
Combination Agreement, the Seller and its equity holders received aggregate consideration with a value equal to $i3,534.9 million, which consisted of (i) $i466.5
million of cash and (ii) $i3,068.4 million of Cano Health, Inc.'s common stock or i306.8
million shares of Class B common stock based on a reference stock price of $i10.00 per share.
12
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Following the closing of the Business Combination, Class A stockholders owned direct
controlling interests in the combined results of PCIH and Cano Health, Inc. while the Seller as the sole Class B stockholder owned indirect economic interests in PCIH shown as non-controlling interests in the unaudited condensed consolidated financial statements of Cano Health, Inc. The indirect economic interests are held by the Seller in the form of PCIH Common Units that can be redeemed for Class A common stock together with the cancellation of an equal number of shares of Class B common stock in Cano Health, Inc. The non-controlling interests will decrease over time as shares of Class B common stock and PCIH Common Units are exchanged for shares of Class A common stock in Cano Health, Inc.
i
Principles
of Consolidation
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The portion of an entity not wholly-owned by the Company is presented as non-controlling interests. All significant intercompany balances and transactions are eliminated in consolidation. The financial statements of the Company’s subsidiaries are prepared using accounting policies consistent with those of
the Company.
The Company has interests in various entities and considers itself to control an entity if it is the majority owner of or has voting control over such entity. The Company also assesses control through means other than voting rights (“variable interest entities” or “VIEs”) and determines which business entity is the primary beneficiary of the VIE. The Company consolidates VIEs when it is determined that the Company is the primary
beneficiary of the VIE. Included in the consolidated results of the Company are Cano Health Texas, PLLC, Cano Health Nevada, PLLC, Cano Health California, PC and Cano Health Illinois, PLLC (collectively, the "Physicians Groups"), which the Company has concluded are VIEs. All material intercompany accounts and transactions have been eliminated in consolidation.
Risks and Uncertainties
As of June 30, 2022, the Company’s coverage area is primarily in the
State of Florida. Given this concentration, the Company is subject to adverse economic, regulatory, or other developments in the State of Florida that could have a material adverse effect on the Company’s financial conditions and operations. In addition, federal, state and local laws and regulations concerning healthcare affect the healthcare industry. The Company’s long-term success is dependent on the ability to successfully generate revenues; maintain or reduce operating costs; obtain additional funding when needed; and ultimately, achieve profitable operations.The Company is not able to predict
the content or impact of future changes in laws and regulations affecting the healthcare industry; however, management believes that its existing cash position, along with expected cash generation through operations and revolving line of credit, will be sufficient to fund operating and capital expenditure requirements through at least twelve months from the date of issuance of these unaudited condensed consolidated financial statements.
i
Basis of Presentation
These
Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Stockholders' Equity for the three and six months ended June 30, 2022 and 2021, the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021, and the Condensed Consolidated Balance Sheet at June 30, 2022 are unaudited and, in the opinion of our management, contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation. Our interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K ("Form 10-K") filed with
the U.S. Securities and Exchange Commission (the "SEC") on March 14, 2022.
The Company was deemed the accounting acquirer in the Business Combination of Jaws based on an analysis of the criteria outlined in Accounting Standards Codification ("ASC") Topic 805, "Business Combinations" ("ASC 805"),as the Company’s former owner retained control after the Business Combination. Refer to Note 1, "Nature of Business", for details surrounding the Business Combination. Accordingly, for accounting
purposes, the Business Combination was treated as the equivalent of the Company issuing stock for the net assets of Jaws, accompanied by a recapitalization. The net assets of Jaws were stated at historical cost, with no goodwill or other intangible assets recorded.
While Jaws was the legal acquirer in the Business Combination, because the Company was deemed the accounting acquirer, the historical financial statements of PCIH became the historical financial statements of the combined company upon
13
CANO HEALTH, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the consummation of the Business Combination. As a result, the unaudited condensed consolidated financial statements reflect the historical operating results of PCIH prior to the Business Combination, the combined results of Jaws and the Company following the close of the Business Combination, the assets and liabilities of the Company at their historical cost, and the Company’s equity structure for all periods presented.
i
Reclassifications
Certain
prior year amounts have been reclassified for consistency with the current year presentation. Such reclassifications impacted the classification of: inventory, current and long-term portion of equipment loans, due to seller, accounts payable and accrued expenses and current and long-term deferred revenue. These reclassifications had no impact on net loss as previously presented.
2. iSUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
The Company described its significant accounting policies in Note 2 to the audited consolidated financial statements for the year ended December 31, 2021 included in its Form 10-K. During the six months ended June 30, 2022, there were no significant changes to those accounting policies.
i
Recent
Accounting Pronouncements
Adoption of New Accounting Standards
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The guidance provides optional expedients and exceptions related to certain contract modifications and hedging relationships that reference the London Interbank Offered Rate ("LIBOR") or another rate that is expected to be discontinued. The guidance was effective upon issuance and generally can be applied to applicable contract modifications and hedge relationships prospectively through
December 31, 2022. The Company elected to use the practical expedients within the standard when accounting for a portion of the amendment to the term loan. The adoption did not impact net income.
The Company's accounts receivable balances are summarized for the periods indicated below. The Company’s accounts receivable are presented net of the unpaid service provider costs. A right of offset exists when all of the following conditions are met: 1) each of the two parties owed the other determinable amounts; 2) the reporting party has the right to offset
the amount owed with the amount owed to the other party; 3) the reporting party intends to offset; and 4) the right of offset is enforceable by law. The Company believes all of the aforementioned conditions existed as of June 30, 2022 and December 31, 2021.
Payors
that represented greater than 10% of our total revenue included three payors that represented approximately i64.7% and i64.9% of our total revenue for the three and six months ended June
30, 2022, respectively and two payors that represented approximately i60.3% and i56.1% of our total revenue for the three and six months ended June 30, 2021,
respectively.
15
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. iUNPAID
SERVICE PROVIDER COSTS
i
Activity in unpaid service provider costs for the six months ended June 30, 2022 and 2021 is summarized below:
(in
thousands)
2022
2021
Balance as of January 1,
$
i129,110
$
i54,524
Incurred
related to:
Current year
i843,427
i305,665
Prior
years
i2,576
(i519)
i846,003
i305,146
Paid
related to:
Current year
i543,984
i224,825
Prior
years
i120,997
i54,005
i664,981
i278,830
Balance
as of June 30,
$
i310,132
$
i80,840
/
The
foregoing reconciliation reflects an increase in our estimate during the six months ended June 30, 2022 of $i2.6 million due to higher utilization rates and a decrease in our estimate during the six months ended June 30, 2021 of $i0.5 million
due to lower than expected utilization rates. $i32.7 million and $i14.3 million
of the liabilities for medical services incurred but not reported ("IBNR") were included in other current liabilities in the consolidated balance sheet as they were in a net deficit position as of June 30, 2022 and June 30, 2021, respectively.
The Company maintains a provider excess loss insurance policy to protect against claim expenses exceeding certain levels that are incurred by the Company on behalf of members and uses a third-party cost recovery firm which specialize in care coordination charges. As of both June 30, 2022 and June 30,
2021, the Company’s excess loss insurance deductible was $ii0.1/ million
and maximum coverage was $ii2.0/ million
per member per calendar year. The Company recorded excess loss insurance premiums of $i2.5 million and $i4.9 million
for the three and six months ended June 30, 2022, respectively, and cost recovery reimbursement of $i1.6 million and $i3.6 million
for the three and six months ended June 30, 2022, respectively. The Company recorded excess loss insurance premiums of $i1.8 million and $i3.5 million
for the three and six months ended June 30, 2021,respectively, and reimbursements of $i0.8 million and $i1.8 million
for the three and six months ended June 30, 2021, respectively. The Company recorded these amounts on a net basis in the caption third-party medical costs in the accompanying unaudited condensed consolidated statements of operations. The Company records excess loss insurance recoveries in accounts receivable and third-party cost recoveries in long term other assets on the accompanying unaudited condensed consolidated balance sheets. As of June 30, 2022 and December 31, 2021, the Company recorded
insurance recoverables and amounts due from a third party for other cost recoveries of $i30.1 million and $i15.2 million, respectively.
5. iBUSINESS
ACQUISITIONS
During the six months ended June 30, 2022, the Company completed ifour asset acquisitions for a total purchase price of $i8.5 million.
The consideration transferred included $i5.0 million in cash, $i0.7 million in deferred
cash payments, and the remaining $i2.8 million was recorded as a liability to issue registered shares prior to September 30, 2022 or to be settled in cash. The acquisitions were each accounted for as business combinations. The Company does not consider these acquisitions to be material, individually or in aggregate, to the
Company’s unaudited condensed consolidated financial statements. The purchase price allocations substantially resulted in $i7.5 million of goodwill and $i0.8 million
of acquired identifiable intangible assets related to brand names, non-compete agreements, and payor relationships valued using the income method. Acquisition-related costs were not material and were expensed as incurred in the unaudited condensed consolidated statements of operations.
16
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In the prior year, the Company completed various acquisitions for a total purchase price of $i1.1 billion.
The most significant of these acquisitions were University Health Care and Affiliates and Doctor’s Medical Center, LLC and Affiliates for $i607.9 million and $i300.7 million,
respectively. For further details refer to Note 3 “Business Acquisitions” in the Company’s Form 10-K for the fiscal year ended December 31, 2021.
While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the asset acquisition date, the estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the asset acquisition date, the Company records adjustments to the assets
acquired and liabilities assumed, with the corresponding offset to goodwill. For changes in the valuation of intangible assets between the preliminary and final purchase price allocation, the related amortization is adjusted in the period it occurs. Subsequent to the measurement period, any adjustment to assets acquired or liabilities assumed is included in operating results in the period in which the adjustment is identified. Transaction costs that are incurred in connection with an asset acquisition, other than costs associated with the issuance of debt or equity securities, are expensed as incurred.
6. iPAYOR
RELATIONSHIPS AND OTHER INTANGIBLES, NET
The
Company recorded amortization expense of $i15.5 million and $i5.5 million for the three months
ended June 30, 2022 and 2021, respectively, and $i30.6 million and $i9.1 million
for the six months ended June 30, 2022 and 2021, respectively.
iExpected amortization expense for the Company’s existing amortizable intangibles for the next five years, and thereafter, as of June 30,
2022 was as follows:
17
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Amount (in thousands)
2022 - remaining
$
i31,712
2023
i58,351
2024
i56,346
2025
i54,713
2026
i46,612
Thereafter
i548,126
Total
$
i795,860
We
periodically assess our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Changes or consolidation of the use of any of our brand names could result in a reduction in their remaining estimated economic lives, which could lead to increased amortization expense.
7. iiLEASES
/
The Company leases offices, operating medical centers, vehicles and medical equipment. Leases consist of finance and operating leases, and have a remaining lease term of ii1/
year to ii10/ years. The Company elected the practical expedient,
which allows the Company to exclude leases with a lease term less than 12 months from being recorded on the balance sheet. The Company adopted the practical expedient related to the combining of lease and non-lease components, which allows us to account for the lease and non-lease components as a single lease component.
ii
Future
minimum lease payments under operating and finance leases as of June 30, 2022 were as follows (in thousands):
Operating
Finance
Total
2022
- remaining
$
i14,822
$
i956
$
i15,778
2023
i32,204
i1,536
i33,740
2024
i30,027
i1,256
i31,283
2025
i27,173
i822
i27,995
2026
i24,898
i311
i25,209
Thereafter
i99,714
i43
i99,757
Total
minimum lease payments
i228,838
i4,924
i233,762
Less:
amount representing interest
(i50,704)
(i440)
(i51,144)
Lease
liabilities
$
i178,134
$
i4,484
$
i182,618
Future
minimum lease payments under operating and capital leases as of December 31, 2021 were as follows (in thousands):
Operating
Finance
Total
2022
$
i23,051
$
i1,485
$
i24,536
2023
i24,577
i1,078
i25,655
2024
i22,561
i797
i23,358
2025
i20,489
i364
i20,853
2026
i18,424
i107
i18,531
Thereafter
i67,569
i—
i67,569
Total
minimum lease payments
i176,671
i3,831
i180,502
Less:
amount representing interest
(i38,461)
(i355)
(i38,815)
Lease
liabilities
$
i138,210
$
i3,476
$
i141,687
//
The
Company recorded rent expense of $i8.2 million and $i4.9 million for the three months ended June 30, 2022 and 2021,
respectively, and $i15.4 million and $i9.0 million for the six months ended June 30, 2022 and 2021,
respectively.
18
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As further explained in Note 13, “Related Party Transactions”, the Company entered into certain agreements with Humana, Inc. ("Humana") under which the Company receives administrative payments in exchange for providing care coordination services at certain clinics licensed to the Company over the term of such agreements. The Company’s contract liabilities balance related to these payments from Humana was $i7.5 million
and $i6.1 million as of June 30, 2022 and December 31, 2021, respectively. The short-term portion was recorded in other current liabilities and the long-term portion was recorded in other liabilities. The Company recognized $i0.7
million and $i1.3 million in revenue from contract liabilities recorded during the three and six months ended June 30, 2022, respectively.
i
A
summary of significant changes in the contract liabilities balance during the period is as follows:
Notes
payable, net of current portion and debt issuance costs
$
i914,890
$
i915,266
/
Term
Loan
Pursuant to a Credit Agreement with Credit Suisse and the other lenders party thereto (the “Credit Agreement”), the Company has a senior secured term loan (together with the revolving line of credit, the "Credit Facilities"). Obligations under the Credit Facilities are secured by substantially all of the Company’s assets. The Credit Facilities contain a financial maintenance covenant (which is for the benefit of the lenders under the revolving line of credit only), requiring the Company to not exceed a total first lien secured net debt to earnings before interest, taxes, depreciation and amortization ("EBITDA")
ratio, which is tested quarterly only if the Company has exceeded a certain amount drawn under its revolving line of credit. As of June 30, 2022, the Company was in compliance with the financial maintenance covenant.
The term loan is subject to principal amortization repayments due on the last business day of each calendar quarter equal to i0.25%
of the initial principal amount, as applicable, based on the funding dates. Amortization payments commenced on March 31, 2021. The outstanding amount of unpaid principal and interest associated with the term loan is due on the maturity date of November 23, 2027. Prior to the maturity date, the Company may elect to prepay, in whole or in part at any time without premium or penalty, other than in connection with certain repricing transactions and customary breakage costs.
As of June 30, 2022, the available balance on our revolving line of credit was $i120.0
million. As of June 30, 2022 and December 31, 2021, iitwo/
health plans required the Company to maintain restricted cash balances for an aggregate amount of $i7.2 million and $i3.5 million,
respectively, which are presented within cash, cash equivalents and restricted cash.
On January 14, 2022, the Company entered into an amendment to the Credit Agreement, pursuant to which the outstanding principal amount of term loans was replaced with an equivalent amount of new term loans having substantially similar terms, except with a lower interest rate margin applicable to the new term loan. The amendment of the Credit Agreement implemented a forward-looking term rate based on the secured overnight financing rate (“SOFR”) as the replacement of LIBOR as the benchmark interest rate for borrowings under the term loan and revolving line of credit, and certain other provisions. The new interest rate applicable to the term loan and borrowing
under the revolving line of credit was revised to i4.00% plus the greater of SOFR and the applicable credit spread adjustment or i0.50%; provided that if the
Company achieves a public corporate rating from S&P of at least B and a public rating from Moody's of at least B2, then for as long as such ratings remain in effect, a margin of i3.75% shall be applicable. The Company has not reached the applicable ratings. The amendment represented a partial extinguishment and resulted in a write-off of deferred issuance costs of $i1.3 million
and has been recorded as a loss on extinguishment of debt for the six months ended June 30, 2022.
Senior Notes
On September 30, 2021, the Company issued senior unsecured notes for a principal amount of $i300.0 million
(the "Senior Notes") in a private offering. The Senior Notes bear interest at i6.25% per annum, payable semi-annually on April 1st and October 1st of each year, which interest commenced on April 1, 2022. As of June 30, 2022, the effective interest rate of the Senior Notes was i6.66%.
Principal on the Senior Notes is due in full on October 1, 2028. The Senior Notes are not subject to any amortization payments.
20
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Prior to October 1, 2024, the Company may redeem some or all of the Senior Notes at a price equal to i100%
of the principal amount redeemed, plus accrued and unpaid interest, plus a make-whole premium. Prior to October 1, 2024, the Company may also redeem up to i40% of the aggregate principal amount of the notes with the net cash proceeds of certain equity offerings, at a redemption price of i106.25%,
plus accrued and unpaid interest. On or after October 1, 2024, the Company may redeem some or all of the Senior Notes at a redemption price of i100% to i103.13%,
plus accrued and unpaid interest, depending on the date that the Senior Notes are redeemed.
Future Principal Payments on Term Loan and Senior Notes
i
The following table sets forth the Company’s future principal payments as of June 30, 2022, assuming mandatory
prepayment does not occur:
(in thousands)
Year ending December 31,
Amount
2022 - remainder
$
i3,222
2023
i6,444
2024
i6,444
2025
i6,444
2026
i6,444
Thereafter
i912,213
Total
$
i941,211
/
As
of June 30, 2022 and December 31, 2021, the balance of debt issuance costs totaled $i20.7 million and i23.3
million, respectively, and are being amortized into interest expense over the life of the loan using the effective interest method. Of the balance as of June 30, 2022, $i19.9 million was related to the term loan and the Senior Notes reflected as a direct reduction to the long-term debt balances, while the remaining $i0.8 million
was related to the revolving line of credit, and reflected in prepaid expenses and other current assets.
The Company recognized interest expense of $i13.1 million and $i9.7 million
for the three months ended June 30, 2022 and 2021, respectively, and $i26.4 million and $i20.3 million for the six
months ended June 30, 2022 and 2021, respectively, of which $i0.9 million and $i1.1 million
for the three months ended June 30, 2022 and 2021, respectively and $i1.6 million and $i3.3 million
for the six months ended June 30, 2022 and 2021, respectively, were related to the amortization of debt issuance costs.
11. iFAIR VALUE MEASUREMENTS
ASC 820, "Fair
Value Measurements and Disclosures", provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy under the accounting standard are described as follows:
•Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical
assets or liabilities in active markets that the
Company has the ability to access.
•Level 2 Inputs to the valuation methodology include:
•quoted prices for similar assets or liabilities in active markets;
•quoted prices for identical or similar assets or liabilities in inactive markets;
•inputs other than quoted prices that are observable for the asset or liability;
•inputs that are derived principally from or corroborated by observable market data by correlation or other means.
21
CANO
HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
•Level 3 Inputs to the valuation methodology are unobservable and significant to the fair
value measurement.
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs
and minimize the use of unobservable inputs. The carrying amounts of financial instruments including cash, accounts receivable, accounts payable, accrued liabilities, due to sellers, short-term borrowings and equity investments. approximate fair value due to the short maturities of such instruments. The fair value of the Company’s debt using Level 2 inputs was approximately $i837.6 million and $i945.0 million
as of June 30, 2022 and December 31, 2021, respectively.
The following is a description of the valuation methodology used for liabilities measured at fair value.
Contingent Consideration: On June 11, 2021, we entered into a purchase agreement with University Health Care and its affiliates (“University”). The transaction was financed, in part, through contingent consideration which University would have been entitled to from acquisition add-ons based on additional acquired entities. The consideration was valued at fair value applying
a Scenario Based method. The liability balance related to the University contingent consideration was derecognized from the balance sheet in June 2022 as no additional acquisition add-ons were completed.
On August 11, 2021, the Company issued i2,720,966 shares of Class A common stock (the “escrowed shares”)
to the escrow agent, on behalf of the seller, as part of the consideration in connection with an acquisition. The amount of shares was based on a $i30.0 million purchase price divided by the average share price of the Company during the itwenty
consecutive trading days preceding the closing date of the transaction. The shares were deposited in escrow and will be released to the seller upon the satisfaction of certain performance metrics in 2022 and 2023. The final number of escrowed shares will be calculated by multiplying the initial share amount by an earned share percentage ranging from i0% to i100%
in accordance with the purchase agreement and subtracting any forfeited indemnity shares. The fair value of this contingent consideration is determined using a Monte-Carlo simulation model. These inputs are used to calculate the pay-off amount per the agreement which is then discounted to present value using the risk-free rate and the Company’s cost of debt.
The preceding methods described may produce fair value calculations that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value
of certain financial instruments could result in a different fair value measurement at the reporting date.
There was a decrease of $i10.4 million in the fair value of the contingent consideration during the six months ended June
30, 2022, recorded in change in fair value of contingent consideration in the consolidated statement of operations. The gain of $i7.6 million related to an amount owed for an acquisition that will be paid in Class A common stock where the decrease in the liability and corresponding gain was a result of our stock price decreasing during the six months ended June 30, 2022. Additionally,
a gain of $i2.8 million was recorded, as described above, related to derecognizing University contingent consideration from the balance sheet as of June 30, 2022.
Warrant Liabilities: As of June 3,
2021, the Closing Date of the Business Combination, and as of June 30, 2022, there were i23.0 million public warrants ("Public Warrants") and i10.5 million
private placement warrants ("Private Placement Warrants") outstanding. The Company accounts for the Public Warrants and Private Placement Warrants in accordance with the guidance contained in ASC 815, "Derivatives and Hedges", under which the Public Warrants and the Private Placement Warrants do not meet the criteria for equity treatment and must be recorded as liabilities.Accordingly, the Company classifies the Public Warrants and the Private Placement Warrants as liabilities and adjusts them to fair value at each reporting period. This liability is subject to remeasurement at each balance sheet date until exercised, and any changes in fair value of warrant liabilities is recognized in
the Company’s consolidated statements of operations. The Company’s valuation of the warrant liabilities utilize a binomial lattice in a risk-neutral framework (a special case of the Income Approach). The fair value of the Public Warrants and
22
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Private Placement Warrants utilized Level 1 and 3 inputs, respectively. The Private Placement Warrants are based on significant inputs not observable in the market as of December
31, 2021 and June 30, 2022.
The preceding methods described may produce fair value calculations that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
i
The
following table provides quantitative information regarding the Level 3 inputs used for the fair value measurements of the warrant liabilities:
The
following table sets forth by level, within the fair value hierarchy, the Company’s liabilities measured at fair value on a recurring basis as of June 30, 2022:
(in
thousands)
Carrying Value
Quoted Prices in Active Markets for Identical Items (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Liabilities measured at fair value on a recurring basis:
Contingent
consideration
$
i27,998
$
i—
$
i—
$
i27,998
Public
Warrant Liabilities
i15,640
i15,640
i—
i—
Private
Placement Warrant Liabilities
i7,167
i—
i—
i7,167
Total
liabilities measured at fair value
$
i50,805
$
i15,640
$
i—
$
i35,165
/
There
was a decrease of $i39.3 million in the fair value of the Public Warrant Liabilities during the six months ended June 30, 2022, and a decrease of $i18.0 million
in the fair value of the Private Placement Warrant Liabilities during the six months ended June 30, 2022. The change in fair value of the warrant liabilities is reflected in our condensed consolidated statements of operations under the caption change in fair value of warrant liabilities.
23
CANO HEALTH, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table sets forth by level, within the fair value hierarchy, the Company’s liabilities measured at fair value on a recurring basis as of December 31, 2021:
(in
thousands)
Carrying Value
Quoted Prices in Active Markets for Identical Items (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Liabilities measured at fair value on a recurring basis:
Contingent
consideration
$
i38,423
$
i—
$
i—
$
i38,423
Public
Warrant Liabilities
i54,970
i54,970
i—
i—
Private
Placement Warrant Liabilities
i25,174
i—
i—
i25,174
Total
liabilities measured at fair value
$
i118,567
$
i54,970
$
i—
$
i63,597
i
The
following table includes a roll forward of the amounts for the three and six months ended June 30, 2022 and 2021 and for liabilities measured at fair value:
Fair Value Measurements for the Three Months Ended June 30,
2022
2021
Original
Balance as of April 1,
$
i86,744
$
i5,457
Change
in fair value of contingent consideration
(i5,764)
(i496)
Warrants
acquired in the Business Combination
i—
i163,058
Change
in fair value of warrants
(i30,175)
(i39,215)
Additions
to contingent considerations
i—
i9,600
Contingent
consideration payments
i—
(i2,214)
Closing
Balance as of June 30,
$
i50,805
$
i136,190
Fair
Value Measurements for the Six Months Ended June 30,
2022
2021
Original Balance as of January 1,
$
i118,567
$
i5,172
Change
in fair value of contingent consideration
(i10,425)
(i211)
Warrants
acquired in the Business Combination
i—
i163,058
Change
in fair value of warrants
(i57,337)
(i39,215)
Additions
to contingent considerations
i—
i9,600
Contingent
consideration payments
i—
(i2,214)
Closing
Balance as of June 30,
$
i50,805
$
i136,190
/
12.
iVARIABLE INTEREST ENTITIES
The Physicians Groups were established to employ healthcare providers to contract with managed care payors, and to deliver healthcare services to patients in the markets that the Company serves. The
Company evaluated whether it has a variable interest in the Physicians Groups, whether the Physicians Groups are VIEs, and whether the Company has a controlling financial
24
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
interest in the Physicians Groups. The Company concluded that it has variable interests in the Physicians Groups on the basis of each respective Master Service Agreement (“MSA”), which provides office space, consulting services, managerial
and administrative services, billing and collection, personnel services, financial management, licensing, permitting, credentialing, and claims processing in exchange for a service fee and performance bonuses payable to the Company. Each respective MSA transfers substantially all the residual risks and rewards of ownership to the Company. The Physicians Groups’ equity at risk, as defined by GAAP, is insufficient to finance its activities without additional support, and therefore, the Physicians Groups are considered VIEs, and are not affiliates of the Company.
In order to determine whether the
Company has a controlling financial interest in the Physicians Groups, and thus, whether the Company is the primary beneficiary, the Company considered whether it has i) the power to direct the activities that most significantly impact the Physicians Groups’ economic performance and ii) the obligation to absorb losses of the entities that could potentially be significant to it or the right to receive benefits from the Physicians Groups that could potentially be significant to it. The Company concluded that it may unilaterally remove the physician owners of the Physicians Groups at its discretion and is therefore considered to hold substantive kick-out rights over the decision maker of the Physicians Groups.
Under each MSA, the Company is entitled to a management fee and a performance bonus that entitle the Company to substantially all of the residual returns or losses and is exposed to economics which could be significant to it. As a result, the Company concluded that it is the primary beneficiary of the Physicians Groups and therefore, consolidates the balance sheets, results of operations, and cash flows of these entities. The Company performs a qualitative assessment on an ongoing basis to determine if it continues to be the primary beneficiary.
i
The
table below illustrates the aggregated VIE assets and liabilities and performance for the Physicians Groups:
There
are no restrictions on the Physicians Groups' assets or on the settlement of their liabilities. The assets of the Physicians Group can be used to settle obligations of the Company. The Physicians Groups are included in the Company’s creditor group; thus, creditors of the Company have recourse to the assets owned by the Physicians Groups. There are no liabilities for which creditors of the Physicians Groups do not have recourse to the general credit of the Company. There are no restrictions placed on the retained earnings or net income of the Physicians Groups with respect to potential future distributions.
25
CANO
HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. iRELATED PARTY TRANSACTIONS
MedCloud Depot, LLC Relationship
On August 1, 2022, the
Company appointed a Chief Operating Officer ("COO"). The COO owns i20% of MedCloud Depot, LLC ("MedCloud"), a Florida-based software development firm that specializes in health information technology and data warehousing. The Company has a license agreement with MedCloud pursuant to which MedCloud has granted the Company a non-exclusive, non-transferable license to use their software. The
Company recorded payments which amounted to $i0.8 million and $i0.3 million for three
months ended June 30, 2022 and 2021, respectively, and $i1.2 million and $i0.7 million
for six months ended June 30, 2022 and 2021, respectively, which were recorded within the caption selling, general and administrative expenses. Additionally, as of June 30, 2022the Company owed $i0.3 million to MedCloud.
Dental
Excellence and Onsite Dental Relationships
On April 14, 2022, CD Support, LLC ("Onsite Dental") acquired Dental Excellence Partners, LLC ("DEP"), a company formerly owned by the spouse of the Chief Executive Officer ("CEO"), and entered into a dental services agreement with the Company. The spouse of the CEO became a minority shareholder of Onsite Dental upon closing of the acquisition.
The Company has various sublease agreements with Onsite Dental. The Company recognized sublease
income of approximately $i0.3 million and $i0.2 million, during the six months ended June 30, 2022 and 2021,
respectively, and $i0.2 million and $i0.1 million during the three months ended June 30, 2022 and 2021,
respectively, which was recorded within the caption "Other Income (Expense)" in the accompanying unaudited condensed consolidated statements of operations. As of June 30, 2022, an immaterial amount was due to the Company in relation to these agreements and recorded in the caption accounts receivable.
On October 9, 2020, the Company entered into a dental services agreement with DEP pursuant to which DEP agreed to provide dental services for managed care members of the Company. The
Company recognized approximately $i1.5 million and $i1.9 million
during the six months ended June 30, 2022 and 2021, respectively, and an immaterial amount and $i1.2 million during the three months Ended June 30, 2022 and 2021. As of June 30, 2022, no balance was due to DEP. Subsequent to Onsite Dental
acquiring DEP, the Company entered into a new dental services administration agreement with Onsite Dental to provide dental services for managed care members of the Company. The Company recognized expenses in the amount of approximately $ii3.1/ million
for the three and six months ended June 30, 2022. As of June 30, 2022, $i0.7 million was due to Onsite.
Humana Relationship
In 2020, the Company entered into multi-year
agreements with Humana, a managed care organization, agreeing that Humana will be the exclusive health plan for Medicare Advantage products in certain centers in San Antonio and Las Vegas but allowing services to non-Humana members covered by original Medicare, Medicaid, and commercial health plans in those centers. Pursuant to the agreements, Humana is obligated to pay the Company an administrative payment in exchange for the Company providing certain care coordination services. The care coordination payments are refundable to Humana on a pro-rata basis if the Company ceases to provide services at the centers within the specified contract
term. The Company identified one performance obligation per center to stand-ready to provide care coordination services to patients and recognizes revenue ratably over the contract term. Care coordination revenue is included in other revenue along with other ancillary healthcare revenues.
In addition, in 2020, the Company and Primary Care (ITC), LLC entered into multi-year agreements with Humana and its affiliates whereby Primary Care (ITC) Holdings, LLC entered into a note purchase agreement with Humana for a convertible note due October 2022 with an aggregate principal amount of $i60.0 million.
The note accrued interest at a rate of i8.0% per annum through March 2020 and i10.0% per annum thereafter, payable in kind. The note was convertible to Class A-4 units of Primary
Care (ITC) Holdings, LLC at the option of Humana in the event Primary Care (ITC) Holdings, LLC and affiliates seek to consummate a sale transaction and could be settled in cash at the option of Humana. While the multi-year agreement still exists between the Company and Humana, the note was converted and settled in cash upon the consummation of the Business Combination on June 3, 2021. As such, as of December 31, 2021 and for the six months ended June 30, 2022, Humana was not a related party due to the repayment of the note.
26
CANO HEALTH,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The multi-year agreements also contain an arrangement for a license fee that is payable by the Company to Humana for the Company’s use of certain Humana owned or leased medical centers to provide health care services. The license fee is a reimbursement to Humana for its costs of owning or leasing and maintaining the clinics, including rental payments, maintenance or repair expenses, equipment expenses, special assessments, cost of upgrades, taxes, leasehold improvements, and other expenses identified by Humana. The
Company recorded $i0.5 million and $i0.3 million in operating lease expense related to its use of Humana clinics during the three and six months ended June
30, 2021, respectively..
Prior to entering into the agreements, the Company had existing payor relationships with Humana related to existing revenue arrangements within the Company. The Company recognized in its consolidated statements of operations revenue from Humana, including its subsidiaries, of $i128.4
million and $i308.2 million for the three and six months ended June 30, 2021. respectively. The Company recognized third-party medical expenses of $i116.0
million and $i249.8 million for the three and six months ended June 30, 2021, respectively.
In addition, we have entered into expansion agreements with Humana which provide a roadmap to opening new Humana-funded medical centers in the southwestern U.S. by 2024. Humana may decline to fund additional medical centers, which would have an adverse effect on
our growth and future prospects.
Operating Leases
The Company leased several offices and medical spaces from an employee of the company who is a beneficial shareholder of the Company. Monthly rent expense in aggregate totaled approximately $i0.1 million
and $i0.7 million for the three months ended June 30, 2022 and 2021, respectively, and $i0.1 million
and $i1.4 million for the six months ended June 30, 2022 and 2021, respectively.
General Contractor Agreements
As of December 31, 2018, the
Company has entered into various general contractor agreements with a company that is controlled by the father of the CEO of the Company to perform leasehold improvements at various Company locations as well as various repairs and related maintenance as deemed necessary. Payments made pursuant to the general contractor agreements as well as amounts paid for repairs and maintenance to this related party totaled approximately $i1.9 million and
$i1.2 million for the three months ended June 30, 2022 and 2021, respectively and $i3.6 million
and $i2.4 million for the six months ended June 30, 2022 and 2021, respectively,
14. iSTOCK-BASED
COMPENSATION
2021 Stock Option and Incentive Plan
At the Company’s special meeting of stockholders held on June 2, 2021, the stockholders approved the 2021 Stock Option and Incentive Plan (the “2021 Plan”) and the 2021 Employee Stock Purchase Plan (“2021 ESPP”) to encourage and enable the current and future officers, employees, directors, and consultants of the Company and its affiliates to obtain ownership in the Company. The aggregate number of shares authorized for issuance
under the 2021 Plan will not exceed i52.0 million shares of stock. The aggregate number of shares authorized for issuance under the 2021 ESPP will not exceed i4.7 million,
plus on January 1, 2022, and each January 1 thereafter through January 1, 2031 the number of shares of Class A common stock reserved and available for issuance under the 2021 ESPP shall be cumulatively increased by the lessor of (i) i15.0 million shares of Class A common stock, (ii) one percent i1.0%
of the number of shares of Class A common stock issued and outstanding on the immediately preceding December 31st, or (iii) such lesser number of shares determined by the administrator appointed by the Board of Directors.
The 2021 Plan provides for the grant of incentive and nonqualified stock option, restricted stock units (“RSUs”), restricted share awards, stock appreciation awards, unrestricted stock awards, and cash-based awards to employees, directors, and consultants of the Company.
Stock Options
27
CANO
HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On June 3, 2021, in connection with the closing of the Business Combination, the Company granted i12.8
million stock options with market conditions (“Market Condition Awards”) to several executive officers and directors of the Company. The Market Condition Awards are eligible to vest when the Company’s stock price meets specified hurdle prices and stays above those prices for i20 consecutive days after June 3, 2021 and before June
3, 2024 (i.e., the period from grant to the end date of the performance period). Once the market condition is satisfied, the applicable percentage of the Market Condition Awards will vest i50% on each of the first and second anniversaries so long as the optionee stays employed. The unrecognized compensation cost of the Market Condition Awards as of June 30, 2022 was $i31.4
million, which is expected to be recognized over the weighted average remaining service period of i2.0 years.
Further, on March 15, 2022, in connection with certain performance metrics, the Company granted i0.4 million
stock options with service conditions ("Service Condition Awards") to several executive officers of the Company. The Service Conditions Awards vest over ifour years, with i25%
of the shares underlying the award vesting on March 15, 2023, and i25% of the shares underlying the award at the end of each successive one-year period thereafter so long as the optionee stays employed. The unrecognized compensation cost of the Service Condition Awards as of June 30, 2022 was $i1.5 million,
which is expected to be recognized over the weighted average remaining service period of i2.2 years.
Stock Option Valuation
The Company uses two valuation methods to determine the fair value of the stock options. The Monte-Carlo simulation model is
used to estimate the fair value of the Market Condition Awards. The Monte-Carlo simulation model calculates multiple potential outcomes for an award and establishes a fair value based on the most likely outcome. For further information regarding the key assumptions, refer to Note 14, "Stock-Based Compensation" on the Company's Form 10-K for the fiscal year ended December 31, 2021.
The Black-Scholes valuation method is used to determine the fair value of the Service Condition Awards. The Black-Scholes valuation model requires the input of assumptions regarding the expected term, expected volatility, dividend yield and risk-free interest to estimate the fair value of the stock option. iThe
fair values of the Service Condition Awards were calculated using the following assumptions as of the grant date on March 15, 2022:
The fair value of RSUs is based on the closing price of the Company’s Class A common stock on the grant date. The unrecognized compensation cost of the RSUs as of June 30, 2022 was $i96.7 million
for service based awards and $i4.0 million for performance based awards, which are expected to be recognized over the weighted average remaining service period of i1.7
years and i1.4 years, respectively. A majority of RSUs vest in equal annual installments over a period of ifour
years from the date of grant. Certain executives of the Company received RSUs which vest over a period of itwo years in equal annual installments. Further, RSUs granted to non-employee members of the Board of Directors vest over the lesser of ione
year or upon the next annual shareholder meeting.
i
A summary of the status of unvested RSUs granted under the 2021 Plan through June 30, 2022 is presented below:
The
Company recorded compensation expenses related to stock options and RSUs of $i17.4 million and $i3.6 million for
the three months ended June 30, 2022 and 2021, respectively, $i30.6 million and $i3.7
million for the six months ended June 30, 2022 and 2021, respectively. The Company recorded compensation expense related to the ESPP of $i0.4 million and $i1.0 million
for the three and six months ended June 30, 2022.
29
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The total stock-based compensation expense related to all the stock-based awards granted by the Company is reported in the consolidated statement of operations as compensation expense within the selling, general and administrative expense caption.
15. iCOMMITMENTS
AND CONTINGENCIES
Vendor Agreements
The Company, through its subsidiaries Comfort Pharmacy, LLC, Comfort Pharmacy 2, LLC, and Belen Pharmacy Group, LLC, entered into a multi-year Prime Vendor Agreement ("PVA") with a pharmaceutical wholesaler, effective November 1, 2020, that continues through October 31, 2023. This agreement extends on a month-to-month basis thereafter until either party gives i90
days' written notice to terminate. The pharmaceutical wholesaler serves as the Company’s primary wholesale supplier for branded and generic pharmaceuticals. The agreement contains a provision that requires average monthly net purchases of $i0.8 million, and if the minimum is not met, the vendor may adjust the pricing of goods. A Joinder Agreement was entered into on December 1, 2020, which amended the PVA to include IFB Pharmacy,
LLC, a fully consolidated subsidiary, under the agreement as of this date.
As a result of the University acquisition, the Company assumed the vendor agreement in 2021 that University, through its subsidiary University Health Care Pharmacy, Inc., had with a second pharmaceutical vendor. The agreement, effective through July 2023, contains a provision that requires average monthly net purchases of $i0.6
million, and if the minimum is not met, the vendor may adjust the pricing of goods.
Management believes for the six months ended June 30, 2022 and 2021, the minimum requirements of the agreements in place were met.
Legal Matters
On March 18, 2022, a purported stockholder of the Company filed a complaint seeking class action status in the United States District Court for the Southern District of Florida against the
Company and certain current and former officers. The lawsuit alleges, inter alia, violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 against all defendants for failure to disclose that “(i) Cano overstated its due diligence efforts and expertise with respect to acquiring target businesses; (ii) accordingly, Cano performed inadequate due diligence into whether the Company, post-Business Combination, could properly account for the timing of revenue recognition as prescribed by ASC 606, particularly with respect to Medicare risk adjustments; (iii) as a result, the Company misstated its capitated revenue, direct patient expense, accounts receivable, net of unpaid service provider costs, and accounts payable and accrued
expenses; (iv) accordingly, the Company was at an increased risk of failing to timely file one or more of its periodic financial reports.” These omissions, according to Plaintiff, made the Company’s earlier statements materially misleading. The lawsuit seeks, among other things, certification of a class action and unspecified compensatory damages, as well as costs, interest and attorneys’ fees. The Company believes it has meritorious defenses and intends to vigorously defend against the allegations. A possible loss cannot be reasonably estimated at this time.
The
Company is exposed to various other asserted and unasserted potential claims encountered in the normal course of business. Management believes that the resolution of these matters will not have a material effect on the Company’s consolidated financial position, results of their operations or cash flows.
16. iINCOME
TAXES
Our effective tax rate for the six months ended June 30, 2022 was (i14.8)% compared to i2.4%
for the six months ended June 30, 2021. The effective tax rate for the periods presented differs from the statutory U.S. tax rate. This is primarily because a portion of income is allocated to non-controlling interests, including the Company’s full valuation allowance position.
30
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company does not have any unrecognized tax
positions (UTPs) as of June 30, 2022. While the Company currently does not have any UTPs, it is foreseeable that the calculation of the Company’s tax liabilities may involve dealing with uncertainties in the application of complex tax laws and regulations in multiple jurisdictions across the Company’s operations.
The Company files income tax returns in the U.S. with Federal and State and local agencies, and in Puerto Rico. The
Company, and its subsidiaries are subject to U.S. Federal, state and local tax examinations for tax years starting in 2018. In addition, the Puerto Rico subsidiary group is subject to U.S. Federal, state and foreign tax examinations for tax years starting in 2017. The Company does not currently have any ongoing income tax examinations in any of its jurisdictions. The Company has analyzed filing positions in the Federal, State, local and foreign jurisdictions where it is required to file income tax returns for all open tax years and does not believe any tax uncertainties exist.
Tax Receivable Agreement
Upon
the completion of the Business Combination, Cano Health, Inc. became a party to the Tax Receivable Agreement ("TRA"). Under the terms of that agreement, Cano Health, Inc. generally will be required to pay to the Seller and to each other person from time to time that becomes a “TRA Party” under the Tax Receivable Agreement, i85% of the tax savings, if any, that Cano Health, Inc. is deemed to realize in certain circumstances as a result of certain tax attributes that exist following the Business Combination and that
are created thereafter, including as a result of payments made under the Tax Receivable Agreement. To the extent payments are made pursuant to the Tax Receivable Agreement, Cano Health, Inc. generally will be required to pay to the Sponsor and to each other person from time to time that becomes a “Sponsor Party” under the Tax Receivable Agreement such Sponsor Party’s proportionate share of, an amount equal to such payments multiplied by a fraction with the numerator 0.15 and the denominator 0.85. As a result of the payments to the TRA Party and Sponsor Party we generally will be required to pay an amount equal to but not in excess of the tax benefit realized from the tax attributes subject to the Tax Receivable Agreement. The term of the Tax Receivable Agreement will continue until all such tax benefits have been utilized or expired unless Cano Health, Inc. exercises its right to terminate the Tax Receivable Agreement for an amount representing the present value
of anticipated future tax benefits under the Tax Receivable Agreement or certain other acceleration events occur. The Tax Receivable Agreement liability is determined and recorded under ASC 450, “Contingencies”, as a contingent liability; therefore, we are required to evaluate whether the liability is both probable and the amount can be estimated. Since the Tax Receivable Agreement liability is payable upon cash tax savings and we have determined that positive future taxable income is not probable based on Cano Health, Inc’s historical loss position and other factors that make it difficult to rely on forecasts, we have not recorded the Tax Receivable Agreement liability as of June 30, 2022. We will evaluate this on a quarterly basis which may result in an adjustment in the future.
31
CANO
HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
17. iNET INCOME (LOSS) PER SHARE
i
The
following table sets forth the net income (loss) and the computation of basic and diluted per common stock for the periods indicated:
Three Months Ended June 30,
Six Months Ended June 30,
(in
thousands, except shares and per share data)
2022
2021
2022
2021
Numerator:
Net income (loss)
$
(i14,564)
$
(i36,289)
$
(i14,649)
$
(i52,403)
Less:
net loss attributable to non-controlling interests
(i9,231)
(i40,844)
(i9,976)
(i56,958)
Net
income (loss) attributable to Class A common stockholders
(i5,333)
i4,555
(i4,673)
i4,555
Dilutive
effect of warrants on net income to Class A common stockholders
i—
(i13,999)
i—
(i13,999)
Dilutive
effect of Class B common stock
(i9,231)
i—
(i9,976)
i—
Net
loss attributable to Class A common stockholders - Diluted
$
(i14,564)
$
(i9,444)
$
(i14,649)
$
(i9,444)
Basic
and Diluted Earnings Per Share denominator:
Weighted average common stock outstanding - basic
i210,053,037
i167,134,853
i200,783,129
i166,691,634
Net
income (loss) per share - basic
$
(i0.03)
$
i0.03
$
(i0.02)
$
i0.03
Diluted
Earnings Per Share:
Dilutive effect of warrants on weighted average common stock outstanding
i—
i1,749,462
i—
i879,564
Dilutive
effect of Class B common stock on weighted average common stock outstanding
i264,527,434
i—
i264,527,434
i—
Weighted
average common stock outstanding - diluted
i474,580,471
i168,884,315
i465,310,563
i167,571,198
Net
loss per share - diluted
$
(i0.03)
$
(i0.06)
$
(i0.03)
$
(i0.06)
/
The
outstanding Company’s Class B common stock does not represent economic interests in the Company, and as such, is not included in the denominator of the net loss per share calculation.
On August 11, 2021, the Company issued i2,720,966
shares of Class A common stock (the “escrowed shares”) to the escrow agent, on behalf of the seller, as part of the consideration in connection with an acquisition. The amount of shares was based on a $i30.0 million purchase price divided by the average share price of the Company during the itwenty
consecutive trading days preceding the closing date of the transaction. The shares were deposited in escrow and will be released to the seller upon the satisfaction of certain performance metrics during 2022 and 2023. The final number of shares to be issued to the seller, if any, from the escrow account will be calculated by multiplying the initial share amount by an earned share percentage in accordance with the purchase agreement and subtracting any forfeited indemnity shares. The dilutive effects of these shares were excluded from the three and six months ended June 30, 2022 diluted earnings per share calculation because they were antidilutive.
The Company’s dilutive securities are derived from the
Company’s shares of Class B common stock. The shares of Class B common stock were included in the three and six months ended June 30, 2022 dilutive earnings per share calculations. RSUs, stock options, ESPP shares, warrants and contingent shares were excluded from the dilutive earning per share calculation as they had an anti-dilutive effect for the periods presented. iThe table below presents
the Company’s potentially dilutive securities:
32
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Contingent
Shares Issued in Connection with Acquisitions
i2,720,966
ESPP Shares
i705,570
Potential
Common Stock Equivalents
i329,753,808
18. iSEGMENT
INFORMATION
The Company organizes its operations into ione reportable segment. The Chief Executive Officer, who is our Chief Operating Decision Maker (“CODM”), reviews financial information and makes decisions about resource allocation based on the Company’s responsibility to deliver high
quality primary medical care services to the Company’s patient population. For the periods presented, all of the Company’s revenues were earned in the United States including Puerto Rico, and all of the Company’s long lived assets were located in the United States.
19. iSUBSEQUENT
EVENTS
The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q, and determined that there have been no events that have occurred that would require adjustments to our disclosures in the unaudited condensed consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise indicated or the context otherwise requires, references in this section to "the
Company,""Cano Health,”“we,”“us,”“our,” and other similar terms refer, for periods prior to the completion of the Business Combination, to PCIH and its subsidiaries, and for periods upon or after the completion of the Business Combination, to the consolidated operations of Cano Health, Inc. and its subsidiaries, including PCIH and its subsidiaries. The following discussion and analysis is intended to help the reader understand our business, results of operations, financial condition, liquidity and capital resources. This discussion should be read in conjunction with Cano Health, Inc.'s unaudited condensed consolidated financial statements and related notes
presented here in Part I, Item 1 included elsewhere in this Quarterly Report on Form 10-Q as well as the audited financial statements and the accompanying notes as well as “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Cano Health” included in our Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on March 14, 2022.
The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Quarterly
Report on Form 10-Q, particularly in the sections entitled "Forward-Looking Statements" as well as Part I, Item 1A, “Risk Factors” in our Form 10-K for the year ended December 31, 2021.
33
Overview
Description of Cano Health
We are a primary care-centric, technology-powered healthcare delivery and population health management platform designed with a focus on clinical excellence. Our mission is simple: to improve patient health by delivering superior primary care medical services, while forging life-long bonds with our members. Our vision is clear: to become the national leader in primary care by improving the health, wellness and quality of life of the communities we serve, while reducing healthcare costs.
We are one of the largest and most sophisticated independent primary care platforms in the U.S., but still maintain significant growth runway. We have sought to address the fundamental problems with traditional healthcare payment models by leveraging our technology solutions and proven business
model to align incentives among patients, payors and providers:
•Patients: Our members are offered services in modern, clean, and contemporary medical centers, with same or next day appointments, integrated virtual care, wellness services, ancillary services (such as physiotherapy), home services, transportation, telemedicine and a 24/7 urgency line, all without additional cost to them. This broad-based care model is critical to our success in delivering care to members of low-income communities, including large minority and immigrant populations, with complex care needs, many of whom previously had very limited or no access to quality healthcare. We are proud of the impact we have made in these underserved communities.
•Providers:
We believe that providers want to be clinicians. Our employed physicians enjoy a collegial, near-academic environment and the tools and multi-disciplinary support they need to focus on medicine, their patients and their families rather than administrative matters like pre-authorizations, referrals, billing and coding. Our physicians receive ongoing training through regular clinical meetings to review the latest findings in primary care medicine. Furthermore, we offer above-average pay and no hospital call requirements. In addition, our physicians are eligible to receive a bonus based upon clinical outcomes, among other metrics.
•Payors: Payors want three things: high-quality care, membership growth and effective medical cost management. We have a multi-year and multi-geography track record of delivering on all three. Our proven track record
of high-quality ratings increases the premiums paid by the Centers for Medicare & Medicaid ("CMS") to health plans, increases our quality primary-care-driven membership growth, and increases our scaled, highly professional value-based provider group that delivers quality care.
CanoPanorama, our proprietary population health management technology-powered platform, powers our efforts to deliver superior clinical care. Our platform provides the healthcare providers at our medical centers with a 360-degree view of their members, along with actionable insights to empower better care decisions and drive high member engagement. We leverage our technology to risk-stratify members and apply a highly personalized approach to primary care, chronic care, preventive care and members’ broader healthcare needs. We believe our model is well-positioned to capitalize on the large and growing
opportunity being driven by the marketplace’s shift to value-based care, demographic tailwinds in the market and the increased focus on improving health outcomes, care quality and the patient experience.
We predominantly enter into capitated contracts with the nation’s largest health plans to provide holistic, comprehensive healthcare. We predominantly recognize recurring per-member-per-month ("PMPM") capitated revenue, which, in the case of health plans, is a pre-negotiated percentage of the premium that the health plan receives from the CMS. We also provide practice management and administrative support services to independent physicians and group practices that we do not own through our managed services organization relationships, which we refer to as our affiliate relationships. Our
contracted recurring revenue model offers us highly predictable revenue and rewards us for providing high-quality care rather than driving a high volume of services. In this capitated arrangement, our goals are well-aligned with payors and patients alike — the more we improve health outcomes, the more profitable we will be over time.
Our capitated revenue is generally a function of the pre-negotiated percentage of the premium that the health plan receives from CMS as well as our ability to accurately and appropriately document member acuity and achieve quality metrics. Under this capitated contract structure, we are responsible for all members’ medical costs inside and outside of our medical centers. Keeping members healthy is our primary objective. When they need medical care, delivery of the
right care in the right setting can greatly impact outcomes. Through members’ engagement with our entire suite of services, including high-frequency primary care and access to ancillary services like our wellness programs, Cano Life and Cano@Home, we aim to reduce the
34
number of occasions that members need to seek specialty care in higher-cost environments. When care outside of our medical centers is needed, our primary care physicians control referrals to specialists and other third-party care, which are typically paid by us on a fee-for-service basis. This allows us to proactively manage members’ health within our medical centers first, prior to resorting to more costly care settings.
As
of June 30, 2022, we employed approximately 400 providers (physicians, nurse practitioners, physician assistants) across our 143 owned medical centers, maintained affiliate relationships with over 1,000 physicians and approximately 800 clinical support employees focused on supporting physicians in enabling patient care and experience. For the six months ended June 30, 2022 and 2021, our total revenue was $1.4 billion and $618.2 million, respectively. Our net loss for the six months ended June 30, 2022 and 2021 was $14.6 million and $52.4 million, respectively.
Key
Factors Affecting Our Performance
Our historical financial performance has been, and we expect our financial performance in the future to be, driven by our ability to:
Build Long-Term Relationships with our Existing Members
We focus on member satisfaction in order to build long-term relationships. Our members enjoy highly personalized value-based care and their visits to our medical centers cover primary care and ancillary programs such as pharmacy and dental services, in addition to wellness and social services, which lead to healthier and happier members. By integrating member engagement and the Cano Life wellness program within the CanoPanorama platform, we also help foster long-term relationships with members. Resulting word-of-mouth referrals contribute
to our high organic growth rates. Patient satisfaction can also be measured by a provider’s Net Promoter Score ("NPS"), which measures the loyalty of customers to a company. We believe our high NPS speaks to our ability to deliver high-quality care with superior member satisfaction.
Add New Members in Existing Centers
Our ability to organically add new members is a key driver of our growth. We have a large embedded growth opportunity within our existing medical center base. In medical centers that are approaching full capacity, we are able to augment our footprint by expanding our existing medical centers, opening de novo centers or acquiring centers that are more convenient for our members. Additionally, as we add members to our existing
medical centers, we expect these members to contribute significant incremental economics as we leverage our fixed cost base at each medical center.
Our payor partners also direct members to our medical centers by either assigning patients who have not yet selected a primary care provider or through insurance agents who inform their clients about our services. We believe this often results in the patient selecting us as their primary care provider when they select a Medicare Advantage plan. Due to our care delivery model’s patient-centric focus, we have been able to consistently help payors manage their costs while raising the quality of their plans, affording them quality bonuses that increase their revenue. We believe that we represent an attractive opportunity for payors to meaningfully improve their overall membership growth in a given market without assuming any financial downside.
Expand
our Medical Center Base within Existing and New Geographies
We operate in Florida, Texas, Nevada, New Jersey, New York, New Mexico, Illinois, California, Arizona and Puerto Rico as of June 30, 2022. When entering a new market, we tailor our entry strategy to the characteristics of the specific market and provide a customized solution to meet that market’s needs. When choosing a market to enter, we look at various factors including:
•Medicare population density;
•underserved demographics;
•existing payor
relationships; and
•specialist and hospital access/capacity.
35
We typically choose a location that is highly visible and accessible and work to enhance brand development pre-entry. Our flexible medical center design allows us to adjust to local market needs by building medical centers that range from approximately 7,000 to 20,000 square feet that may include ancillary services such as pharmacies and dental services. We seek to grow member engagement through targeted multi-channel marketing, community outreach and use of mobile clinics to expand our reach. When entering
a new market, based on its characteristics and economics, we decide whether to buy existing medical centers, build de novo medical centers or to help manage members’ health care via affiliate relationships. This highly flexible model enables us to choose the right solution for each market.
When building or buying a medical center is the right solution, we lease the medical center and employ physicians. In our medical centers, we receive per-member-per-month capitated revenue, which, in the case of health plans, is a pre-negotiated percentage of the premium that the health plan receives from CMS.
Alternatively, our affiliate relationships allow us to partner with independent physicians and group practices that we do not own and to provide them access to components of our population health management
platform. As of June 30, 2022, we provided services to over 1,000 providers. As in the case of our owned medical centers, we receive per-member-per-month capitated revenue and a pre-negotiated percentage of the premium that the health plan receives from CMS. We pay the affiliate a primary care fee and a portion of the surplus of premium in excess of third-party medical costs. The surplus portion paid to affiliates is recorded as direct patient expense. This approach is extremely capital efficient as the costs of managing affiliates are minimal. Further, the affiliate model is an important growth avenue as it serves as a feeder into our acquisition pipeline, enabling us to evaluate and target affiliated practices for acquisition based on our operational experience with them.
Our economic model relies on our capitated partnerships with payors, which manage Medicare members across the United States. We have established ourselves as a top quality provider across multiple Medicare and Medicaid health plans, including Humana, UnitedHealthcare and Anthem (or their respective affiliates). Our relationships with our payor partners go back as many as ten years and are generally evergreen in nature. We are viewed as a critical distributor of effective healthcare with market-leading clinical outcomes (led by primary care), and as such we believe our payor relationships will continue to be long-lasting and enduring. These plans and others are seeking further opportunities to expand their relationship with us beyond our current markets. Having payor relationships in place reduces the risk of entering into new markets. Maintaining, supporting and growing these relationships, particularly as we enter
new geographies, is critical to our long-term success. Health plans look to achieve three goals when partnering with a provider: membership growth, clinical quality and medical cost management. We are capable of delivering all three based on our care coordination strategy, differentiated quality metrics and strong relationships with members. We believe this alignment of interests and our highly effective care model will ensure continued success with our payor partners.
Effectively Manage the Cost of Care for Our Members
The capitated nature of our contracting with payors requires us to invest in maintaining our members’ health while prudently managing the medical costs of our members. Our care model focuses on maintaining health and leveraging the primary care setting as a means of avoiding costly downstream healthcare costs. Our members, however,
retain the freedom to seek care at emergency rooms or hospitals without the need for referrals; we do not restrict their access to care. Therefore, we are liable for potentially large medical claims should we not effectively manage our members’ health. To mitigate this exposure, we utilize stop-loss insurance for our members, protecting us from medical claims per episode in excess of certain levels.
Acquisitions
We seek to supplement our organic growth through our acquisition strategy. We have a successful acquisition and integration track record. We have established a rigorous data-driven approach and the necessary infrastructure to identify, acquire and quickly integrate targets.
Our historical acquisitions have all been accounted for in accordance with ASC
805, "Business Combinations", and the operations of the acquired entities are included in our historical results for the periods following the closing of the acquisition. See Note 3, “Business Acquisitions” in our audited consolidated financial statements in our Form 10-K for the fiscal year ended
Medicare pays capitation using a risk-adjusted
model, which compensates payors based on the health status, or acuity, of each individual member. Payors with higher acuity members receive a higher payment and those with lower acuity members receive a lower payment. Moreover, some of our capitated revenues also include adjustments for performance incentives or penalties based on the achievement of certain clinical quality metrics as contracted with payors. Our capitated revenues are recognized based on member acuity and quality metrics and may be adjusted to reflect actual member acuity and quality metrics.
Seasonality to Our Business
Our operational and financial results experience some variability depending upon the time of year in which they are measured. This variability is most notable in the following areas:
Capitated
Revenue Per Member
Excluding the impact of large scale shifts in membership demographics or acuity, our Medicare Advantage PMPM will generally decline over the course of the year. As the year progresses, Medicare Advantage PMPM typically declines as new members join us with less complete or accurate documentation in the previous year (and therefore lower current year Medicare Risk Adjustment). Revenue may also increase or decrease for our DCE and ACO members based on CMS adjustments to the benchmark.
Medical Costs
Medical costs vary seasonally depending on a number of factors. Typically, we experience higher utilization levels during the first half of the year due to influenza and other seasonal illnesses as well as the increase in new higher acuity
members. Medical costs also depend upon the number of business days in a period. Shorter periods will typically have lesser medical costs due to fewer business days. Business days can also create year-over-year comparability issues if one year has a different number of business days compared to another. Additionally, we generally accrue stop loss reimbursements from September through December (as patients reach stop loss thresholds) which can result in reduced medical expenses during the third and fourth quarter due to recoveries.
Organic Member Growth
We experience organic member growth throughout the year as existing Medicare Advantage plan members choose our providers and during special enrollment periods when certain eligible individuals can enroll in Medicare Advantage plans midyear.We
experience some seasonality with respect to organic enrollment, which is generally higher during the first and fourth quarters, driven by Medicare Advantage plan advertising and marketing campaigns and plan enrollment selections made during the annual open enrollment period. We also experience growth through voluntary alignment of traditional Medicare patients in our DCE (American Choice Healthcare). Lastly, we experience growth through attribution of Medicaid, Affordable Care Act (ACA), and commercial capitated lives.
Key Performance Metrics
In addition to our GAAP and non-GAAP financial information, we review a number of operating and financial metrics, including the following key metrics, to evaluate our business, measure
our performance, identify trends affecting our business, formulate business plans and make strategic decisions.
Members represent those Medicare, Medicaid, and Affordable Care Act ("ACA"), and commercially insured patients for whom we receive a fixed per-member-per-month fee under capitation arrangements as of the end of a particular period.
Owned Medical Centers
We define our medical centers as those primary care
medical centers open for business and attending to members at the end of a particular period in which we own the medical operations and the physicians are our employees.
Impact of COVID-19
The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, future results of operations and financial condition will depend on future factors that are highly uncertain and cannot be accurately predicted. These factors include, but are not limited to, new information that may emerge concerning COVID-19, the scope and duration of business closures and restrictions, government-imposed or recommended suspensions of elective procedures, and expenses required for supplies
and personal protective equipment. Additionally, the impact of any new COVID-19 variants cannot be predicted at this time, and could depend on numerous factors, including vaccination and booster rates among the population, the effectiveness of the COVID-19 vaccines against the variants, and the response by the governmental bodies and regulators. Due to these and other uncertainties, we cannot estimate the length or severity of the impact of the pandemic on our business. Additionally, because of our business model, the full impact of the COVID-19 pandemic may not be fully reflected in our results of operations and overall financial condition until future periods. We will continue to closely evaluate and monitor the nature and extent of these potential impacts to our business, results of operations and liquidity.
For additional information on the various risks posed by the COVID-19 pandemic,
please see the section entitled "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Key Components of Results of Operations
Revenue
Capitated revenue. Our capitated revenue is derived from medical services provided at our medical centers or affiliated practices under capitation arrangements made directly with various health plans or CMS. Capitated revenue consists of a PMPM amount paid for the delivery of healthcare services, and our rates are determined as a percent of the premium that the health plans receive from the CMS for our
at-risk members. Those premiums are based upon the cost of care in a local market and the average utilization of services by the members enrolled. Medicare pays capitation using a “risk adjustment model,” which compensates providers based on the health status (acuity) of each individual patient. Groups with higher acuity patients receive more, and those with lower acuity patients receive less. Under the risk adjustment model, capitated premium is paid based on the acuity of members enrolled for the preceding year and subsequently adjusted once current year data is compiled. The amount of capitated revenue may be affected by certain factors outlined in the agreements with the health plans, such as administrative fees paid to the health plans and risk adjustments to premiums. Moreover, the capitated revenue benchmark for our DCE and ACO's may be adjusted based on current year utilization.
Generally,
we enter into three types of capitation arrangements: non-risk arrangements, limited risk arrangements, and full risk arrangements. Under our non-risk arrangements, we receive monthly capitated payments without regard to the actual amount of services provided. Under our limited risk arrangements, we assume partial financial risk for covered members. Under our full risk arrangements, we assume full financial risk for covered members.
Fee-for-service and other revenue. We generate fee-for-service revenue from providing primary care services to patients in our medical centers and affiliates when we bill the member or their insurance plan on a fee-for-service basis as medical services are rendered. While substantially all of our patients are members, we occasionally also provide care to non-members. Fee-for-service amounts are recorded based on agreed-upon fee
schedules determined within each contract.
Other revenue includes pharmacy and ancillary fees earned under contracts with certain care organizations for the provision of care coordination and other services. With respect to our pharmacies, we contract with an administrative services organization to collect and remit payments on our behalf from the sale of prescriptions and medications. We have pharmacies at some of our medical centers, where patients may fill prescriptions and retrieve their medications. Patients also have the option to
38
fill
their prescriptions with a third-party pharmacy of their choice.
Operating Expenses
Third-party medical costs. Third-party medical costs primarily consist of all medical expenses incurred by the health plans or CMS (contractually on behalf of the Company) including costs for inpatient and hospital care, specialists, and certain pharmacy purchases, net of rebates and other recoveries. Provider costs are accrued based on the date of service to members, based in part on estimates, including an accrual for medical services incurred but not reported (“IBNR”). Liabilities for IBNR are estimated and adjusted for current experience. These estimates are continually reviewed and updated, and we
retain the services of an independent actuary to review IBNR on a quarterly basis. We expect our third-party medical costs to increase given the healthcare spending trends within the Medicare population, which is also consistent with what we receive under our payor contracts.
Direct patient expense. Direct patient expense primarily consists of costs incurred in the treatment of our patients, at our medical centers and affiliated practices, including the compensation related to medical service providers and clinical support staff, medical supplies, purchased medical services, drug costs for pharmacy sales, and payments to affiliated providers.
Selling, general, and administrative expenses.
Selling, general, and administrative expenses include employee-related expenses, including salaries and benefits, technology infrastructure, operations, clinical and quality support, finance, legal, human resources, and corporate development departments. In addition, selling, general, and administrative expenses include all corporate technology and occupancy costs. Our selling, general, and administrative expenses increased in 2021 following the closing of the Business Combination, and we expect our selling, general, and administrative expenses to continue to increase over time due to the additional legal, accounting, insurance, investor relations and other costs that we incur as a public company, as well as other costs associated with continuing to grow our business.However, we anticipate that these expenses will decrease as a percentage of revenue over the long term, although they may fluctuate as a percentage of revenue
from period to period due to the timing and amount of these expenses. For purposes of determining center-level economics, we allocate a portion of our selling, general, and administrative expenses to our medical centers and affiliated practices. The relative allocation of these expenses to each center depends upon a number of metrics, including (i) the number of centers open during a given period of time; (ii) the number of clinicians at each center at a given period of time; or (iii) if determinable, the center where the expense was incurred.
Depreciation and amortization expense. Depreciation and amortization expenses are primarily attributable to our capital investment and consist of fixed asset depreciation and amortization of intangibles considered to have finite lives.
Transaction costs and other. Transaction costs and other
primarily consist of deal costs (including due diligence, integration, legal, internal staff, and other professional fees, incurred in connection with acquisition activity).
Change in fair value of contingent consideration. Adjustments in contingent consideration due to acquisitions.
Other Income (Expense)
Interest expense.Interest expense primarily consists of interest incurred on our outstanding borrowings under our notes payable related to our equipment loans and credit facility. See “Liquidity and Capital Resources”. Costs incurred to obtain debt financing are amortized and shown as a component of interest expense.
Interest
income. Interest income primarily consists of interest earned through a loan agreement with an affiliated company.
Loss on extinguishment of debt. Loss on extinguishment of debt primarily consists of unamortized debt issuance costs related to our term loan in connection with our financing arrangements.
Change in fair value of warrant liabilities. Change in fair value of warrant liabilities consists primarily of changes to the public warrants and private placement warrants assumed upon the consummation of the Business Combination. The liabilities are revalued at each reporting period.
Other income (expense). Other income (expense) primarily relates to sublease income and legal settlement fees.
39
Results
of Operations
The following table sets forth our consolidated statements of operations data for the periods indicated:
Three Months Ended June 30,
Six Months Ended June 30,
($
in thousands)
2022
2021
2022
2021
Revenue:
Capitated revenue
$
655,493
$
329,484
$
1,329,844
$
590,841
Fee-for-service
and other revenue
33,880
14,097
63,671
27,342
Total revenue
689,373
343,581
1,393,515
618,183
Operating
expenses:
Third-party medical costs
541,317
291,816
1,077,097
486,862
Direct patient expense
52,647
35,607
113,323
69,844
Selling,
general, and administrative expenses
106,179
47,159
202,849
82,168
Depreciation and amortization expense
19,836
7,945
38,872
13,791
Transaction
costs and other
6,207
16,114
14,583
25,068
Change in fair value of contingent consideration
(5,764)
(496)
(10,425)
(211)
Total
operating expenses
720,422
398,145
1,436,299
677,522
Loss from operations
(31,049)
(54,564)
(42,784)
(59,339)
Other
income and expense:
Interest expense
(13,134)
(9,714)
(26,418)
(20,340)
Interest income
2
1
3
2
Loss
on extinguishment of debt
—
(13,225)
(1,428)
(13,225)
Change in fair value of warrant liabilities
30,175
39,215
57,337
39,215
Other
income (expenses)
251
(25)
530
(25)
Total other income (expense)
17,294
16,252
30,024
5,627
Net
income (loss) before income tax expense
(13,755)
(38,312)
(12,760)
(53,712)
Income tax expense (benefit)
809
(2,023)
1,889
(1,309)
Net
loss
(14,564)
(36,289)
(14,649)
(52,403)
Net loss attributable to non-controlling interests
(9,231)
(40,844)
(9,976)
(56,958)
Net
income (loss) attributable to Class A common stockholders
$
(5,333)
$
4,555
$
(4,673)
$
4,555
40
The
following table sets forth our consolidated statements of operations data expressed as a percentage of total revenues for the periods indicated:
Three Months Ended June 30,
Six Months Ended June 30,
(%
of revenue)
2022
2021
2022
2021
Revenue:
Capitated revenue
95.1
%
95.9
%
95.4
%
95.6
%
Fee-for-service
and other revenue
4.9
%
4.1
%
4.6
%
4.4
%
Total revenue
100.0
%
100.0
%
100.0
%
100.0
%
Operating
expenses:
Third-party medical costs
78.5
%
84.9
%
77.3
%
78.8
%
Direct
patient expense
7.6
%
10.4
%
8.1
%
11.3
%
Selling, general, and administrative expenses
15.4
%
13.7
%
14.6
%
13.3
%
Depreciation
and amortization expense
2.9
%
2.3
%
2.8
%
2.2
%
Transaction costs and other
0.9
%
4.7
%
1.0
%
4.0
%
Change
in fair value of contingent consideration
(0.8)
%
(0.1)
%
(0.7)
%
0.0
%
Total operating expenses
104.5
%
115.9
%
103.1
%
109.6
%
Loss
from operations
(4.5)
%
(15.9)
%
(3.1)
%
(9.6)
%
Other income and expense:
Interest
expense
(1.9)
%
(2.8)
%
(1.9)
%
(3.3)
%
Interest income
0.0
%
0.0
%
0.0
%
0.0
%
Loss
on extinguishment of debt
0.0
%
(3.8)
%
(0.1)
%
(2.1)
%
Change in fair value of embedded derivative
0.0
%
0.0
%
0.0
%
0.0
%
Change
in fair value of warrant liabilities
4.4
%
11.4
%
4.1
%
6.3
%
Other expenses
0.0
%
0.0
%
0.0
%
0.0
%
Total
other income (expense)
2.5
%
4.7
%
2.1
%
0.9
%
Net income (loss) before income tax expense
(2.0)
%
(11.2)
%
(0.9)
%
(8.7)
%
Income
tax expense (benefit)
0.1
%
(0.6)
%
0.1
%
(0.2)
%
Net income (loss)
(2.1)
%
(11.7)
%
(0.8)
%
(8.9)
%
Net
income (loss) attributable to non-controlling interests
(1.3)
%
(11.9)
%
(0.7)
%
(9.2)
%
Net income (loss) attributable to Class A common stockholders
(0.7)
%
0.1
%
(0.1)
%
0.3
%
41
The
following table sets forth the Company’s disaggregated revenue for the periods indicated:
Capitated
revenue. Capitated revenue was $655.5 million for the three months ended June 30, 2022, an increase of $326.0 million, or 98.9%, compared to $329.5 million for the three months ended June 30, 2021. The increase was primarily driven by a 102.4% increase in the total member months slightly offset by a 1.7% decrease in total revenue per member per month. The increase in member months was due to an increase in the total number of members served at new and existing centers and our acquisitions, primarily University in June 2021, and DMC in July 2021, which resulted in the addition of new members in Florida.
Fee-for-service and other revenue. Fee-for-service and other revenue
was $33.9 million for the three months ended June 30, 2022, an increase of $19.8 million, or 140.3%, compared to $14.1 million for the three months ended June 30, 2021. The increase in fee-for-service revenue was primarily attributable to an increase in patients served across existing centers.
Operating Expenses
Three Months
Ended June 30,
($ in thousands)
2022
2021
$ Change
% Change
Operating expenses:
Third-party medical costs
$
541,317
$
291,816
$
249,501
85.5
%
Direct
patient expense
52,647
35,607
17,040
47.9
%
Selling, general, and administrative expenses
106,179
47,159
59,020
125.2
%
Depreciation
and amortization expense
19,836
7,945
11,891
149.7
%
Transaction costs and other
6,207
16,114
(9,907)
-61.5
%
Change
in fair value of contingent consideration
(5,764)
(496)
(5,268)
N/A
Total operating expenses
$
720,422
$
398,145
$
322,277
Third-party
medical costs. Third-party medical costs were $541.3 million for the three months ended June 30, 2022, an increase of $249.5 million, or 85.5%, compared to $291.8 million for the three months ended June 30, 2021. The increase was primarily driven by a 102.4% increase in total member months, the addition of Direct Contracting Entity ("DCE") members with higher medical costs, and the trending shift toward proportionately more higher acuity patients across service lines. Further, in the three months ended June 30, 2022 there was $6 million of unfavorable prior year claims development for the
Company's Medicare DCE program.
Direct patient expense. Direct patient expense was $52.6 million for the three months ended June 30, 2022, an increase of $17.0 million, or 47.9%, compared to $35.6 million for the three months ended June 30, 2021. The increase was primarily driven by increases in payroll and benefits of $15.8 million, pharmacy drugs of $3.0 million and medical supplies of $1.5 million.
Selling, general, and administrative expenses. Selling, general, and administrative expenses were $106.2 million for the three months ended June 30, 2022, an
increase of $59.0 million, or 125.2%, compared to $47.2 million for the three months ended June 30, 2021. The increase was primarily driven by higher salaries and benefits of $25.7 million, stock-based compensation of $14.2 million, occupancy costs of $7.6 million, legal and professional services of $4.6 million and marketing expenses of $3.5 million. These increases were incurred to support the continued growth of our business and expansion into other states.
45
Depreciation
and amortization expense. Depreciation and amortization expense was $19.8 million for the three months ended June 30, 2022, an increase of $11.9 million, or 149.7%, compared to $7.9 million for the three months ended June 30, 2021. The increase was driven by purchases of new property and equipment to support the growth of our business during the period as well as the addition of several brand names, non-compete agreements, and payor relationships from our 2021 and 2022 acquisitions.
Transaction costs and other. Transaction costs and other were
$6.2 million for the three months ended June 30, 2022, a decrease of $9.9 million, or 61.5%, compared to $16.1 million for the three months ended June 30, 2021. The decrease related to higher than usual transactions costs in 2021 related to the Business Combination and a decrease in acquisitions in 2022.
Change in fair value of contingent consideration. Contingent consideration generated a gain of $5.8 million for the three months ended June 30, 2022. The gain related to an amount owed related to an acquisition
that will be paid in Class A common stock. The decrease in the liability and corresponding gain was a result of our stock price decreasing during the quarter.
Other Income (Expense)
Three Months Ended June 30,
($
in thousands)
2022
2021
$ Change
% Change
Other income and expense:
Interest expense
$
(13,134)
$
(9,714)
$
(3,420)
35.2
%
Interest
income
2
1
1
100.0
%
Loss on extinguishment of debt
—
(13,225)
13,225
-100.0
%
Change
in fair value of warrant liabilities
30,175
39,215
(9,040)
-23.1
%
Other income (expense)
251
(25)
276
N/A
Total
other income (expense)
$
17,294
$
16,252
$
1,042
Interest
expense. Interest expense was $13.1 million for the three months ended June 30, 2022, an increase of $3.4 million, or 35.2%, compared to $9.7 million for the three months ended June 30, 2021. The increasewas primarily driven by interest incurred on our higher outstanding borrowings.
Loss on extinguishment of debt. There was no loss on extinguishment of debt for the three months ended June 30, 2022. There was
a loss on extinguishment of debt of $13.2 million for the three months ended June 30, 2021 related to the partial extinguishment of the term loan following the closing of the Business Combination in 2021.
Change in fair value of warrant liabilities. Change in fair value of warrant liabilities was $30.2 million for the three months ended June 30, 2022 as a result of a change in the fair value of the public warrants and private placement warrants assumed in connection with the Business Combination.
Capitated
revenue. Capitated revenue was $1.3 billion for the six months ended June 30, 2022, an increase of $739.0 million, or 125.1%, compared to $590.8 million for the six months ended June 30, 2021. The increase was primarily driven by a 116.7% increase in the total member months and a 4.0% increase in total revenue per member per month. The increase in member months was due to an increase in the total number of members served at new and existing centers and our acquisitions, primarily University in June 2021, and DMC in July 2021, which resulted in the addition of new members in Florida.
46
Fee-for-service
and other revenue. Fee-for-service and other revenue was $63.7 million for the six months ended June 30, 2022, an increase of $36.3 million, or 132.9%, compared to $27.3 million for the six months ended June 30, 2021. The increase in fee-for-service revenue was primarily attributable to an increase in patients served across existing centers.
Operating Expenses
Six
Months Ended June 30,
($ in thousands)
2022
2021
$ Change
% Change
Operating expenses:
Third-party medical costs
$
1,077,097
$
486,862
$
590,235
121.2
%
Direct
patient expense
113,323
69,844
43,479
62.3
%
Selling, general, and administrative expenses
202,849
82,168
120,681
146.9
%
Depreciation
and amortization expense
38,872
13,791
25,081
181.9
%
Transaction costs and other
14,583
25,068
(10,485)
-41.8
%
Change
in fair value of contingent consideration
(10,425)
(211)
(10,214)
N/A
Total operating expenses
$
1,436,299
$
677,522
$
758,777
Third-party
medical costs. Third-party medical costs were $1.1 billion for the six months ended June 30, 2022, an increase of $590.2 million, or 121.2%, compared to $486.9 million for the six months ended June 30, 2021. The increase was driven by a 116.7% increase in total member months, the addition of Direct Contracting Entity ("DCE") members with higher medical costs, and the trending shift toward proportionately more higher acuity patients across service lines. Further, in the six months ended June 30, 2022 there was $6 million of unfavorable prior year claims development for the
Company's Medicare DCE program.
Direct patient expense. Direct patient expense was $113.3 million for the six months ended June 30, 2022, an increase of $43.5 million, or 62.3%, compared to $69.8 million for the six months ended June 30, 2021. The increase was primarily driven by increases in payroll and benefits of $31.3 million, pharmacy drugs of $7.0 million and provider payments of $1.7 million.
Selling, general, and administrative expenses. Selling, general, and administrative expenses were $202.8 million for the six months ended June 30, 2022, an increase of $120.7 million, or 146.9%, compared to
$82.2 million for the six months ended June 30, 2021. The increase was primarily driven by higher salaries and benefits of $50.0 million, stock-based compensation of $27.9 million, occupancy costs of $14.8 million, legal and professional services of $11.4 million and marketing expenses of $7.5 million. These increases were incurred to support the continued growth of our business and expansion into other states.
Depreciation and amortization expense. Depreciation and amortization expense was $38.9 million for the six months ended June 30, 2022, an increase of $25.1 million, or 181.9%, compared to $13.8 million for the six months ended June
30, 2021. The increase was driven by purchases of new property and equipment to support the growth of our business during the period as well as the addition of several brand names, non-compete agreements, and payor relationships from our 2021 and 2022 acquisitions.
Transaction costs and other. Transaction costs and other were $14.6 millionfor the six months ended June 30, 2022, a decrease of $10.5 million, or 41.8%, compared to $25.1 million for the six months ended June 30, 2021. The decrease related to higher than usual transactions costs
in 2021 related to the Business Combination and a decrease in acquisitions in 2022.
Change in fair value of contingent consideration. Contingent consideration generated a gain of $10.4 million for the six months ended June 30, 2022. The gain related to an amount owed for an acquisition that will be paid in Class A common stock. The decrease in the liability and corresponding gain was a result of our stock price decreasing during the quarter. Additionally, a gain was recorded related to removing the University contingent consideration from the balance sheet.
47
Other
Income (Expense)
Six Months Ended June 30,
($ in thousands)
2022
2021
$
Change
% Change
Other income and expense:
Interest expense
$
(26,418)
$
(20,340)
$
(6,078)
29.9
%
Interest
income
3
2
1
50.0
%
Loss on extinguishment of debt
(1,428)
(13,225)
11,797
-89.2
%
Change
in fair value of warrant liabilities
57,337
39,215
18,122
46.2
%
Other income (expense)
530
(25)
555
N/A
Total
other income (expense)
$
30,024
$
5,627
$
24,397
Interest expense. Interest expense was $26.4 million for the six months ended June 30, 2022, an increase of $6.1 million, or 29.9%,
compared to $20.3 million for the six months ended June 30, 2021. The increasewas primarily driven by interest incurred on our higher outstanding borrowings.
Loss on extinguishment of debt. Loss on extinguishment of debt was $1.4 million for the six months ended June 30, 2022 related to the amendment to the Credit Agreement in January 2022. See Note 10 - "Debt" for more details of the extinguishment.
Change in fair value of warrant liabilities. Change in fair value of warrant liabilities was $57.3 million for the
six months ended June 30, 2022 as a result of a change in the fair value of the public warrants and private placement warrants assumed in connection with the Business Combination.
Liquidity and Capital Resources
General
We have financed our operations principally through the Business Combination and debt securities and borrowings. As of June 30, 2022 and December 31, 2021, we had cash, cash equivalents and restricted cash of $47.8 million and $163.2
million, respectively. As of June 30, 2022 and December 31, 2021, borrowings under the revolving credit facility had an available balance of $120.0 million. Our cash, cash equivalents and restricted cash primarily consist of highly liquid investments in money market funds and cash. Since our inception, we have generated significant operating losses from our operations, as reflected in our accumulated deficit of $83.4 million as of June 30, 2022 and negative cash flows from operations.
We expect to generate operating losses and minimal cash flows from operations for the foreseeable future due to the investments we intend to continue to make in
acquisitions, expansion of operations, and due to additional selling, general, and administrative costs we expect to incur in connection with operating as a public company. As a result, we may require additional capital resources to execute strategic initiatives to grow our business.
Since December 31, 2021, we did not raise any capital through debt financing or borrow from our revolving line of credit. We completed four acquisitions for total cash consideration of $5.0 million in the six months ended June 30, 2022.
Upon the completion of the Business Combination, Cano Health, Inc. became a party to the Tax Receivable Agreement ("TRA"). Under the terms of that agreement, Cano Health, Inc. generally
will be required to pay to the Seller and to each other person from time to time that becomes a “TRA Party” under the Tax Receivable Agreement, 85% of the tax savings, if any, that Cano Health, Inc. is deemed to realize in certain circumstances as a result of certain tax attributes that exist following the Business Combination and that are created thereafter, including as a result of payments made under the Tax Receivable Agreement. See further discussion related to the TRA agreement in Note 16, "Income Taxes" in our unaudited condensed consolidated financial statements.
We believe that our cash, cash equivalents and restricted cash along with our expected cash generation through operations and revolving line of credit will be sufficient to fund our operating and capital needs for at least the next 12 months from the date of issuance of these unaudited condensed consolidated
financial statements. Our assessment of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and
48
uncertainties. Our actual results could vary because of, and our future capital requirements will depend on, many factors, including our growth rate, medical expenses, and the timing and extent of our expansion into new markets. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. In the event that additional
capital is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations, and financial condition would be adversely affected.
Cash Flows
The following table presents a summary of our consolidated cash flows from operating, investing and financing activities for the periods indicated.
Six
Months Ended June 30,
($ in thousands)
2022
2021
Net cash provided by (used in) operating activities
$
(82,173)
$
(58,100)
Net cash provided by (used in) investing activities
(29,273)
(646,087)
Net
cash provided by (used in) financing activities
(3,877)
989,657
Net Increase (decrease) in cash, cash equivalents and restricted cash
(115,323)
285,470
Cash, cash equivalents and restricted cash at beginning of year
163,170
33,807
Cash,
cash equivalents and restricted cash at end of period
$
47,847
$
319,277
Operating Activities
For the six months ended June 30, 2022, net cash used in operating activities was $82.2 million, an increase of $24.1 million in cash outflows compared to net cash used in operating activities of $58.1 million for the six months ended June 30, 2021. Significant changes impacting net cash used in operating activities were as follows:
•Increase
in accounts receivable, net was $67.6 million for the six months ended June 30, 2022 compared to $6.4 million for the six months ended June 30, 2021 due to overall growth in the business;
•Increase in prepaid expenses and other current and non-current assets of $10.7 million for the six months ended June 30, 2022 compared to an increase of $22.3 million for the six months ended June 30, 2021 due to higher prepaid insurance payments and prepaid bonus incentives; and
•Decrease in accounts payable of $9.4 million for the six months ended June 30, 2022 compared to an increase of $14.4 million
for the six months ended June 30, 2021 due to an increase in accrued salaries, accrued interest, and accruals related to various professional services.
Investing Activities
For the six months ended June 30, 2022, net cash used in investing activities was $29.3 million, a decrease of $616.8 million in cash outflows compared to net cash used in investing activities of $646.1 million for the six months ended June 30, 2021 due primarily to a decrease in cash used for acquisitions slightly offset by increased capital expenditures.
Financing Activities
Net
cash used in financing activities was $3.9 million during the six months ended June 30, 2022, a decrease of $993.5 million compared to net cash provided by financing activities of $989.7 million during the six months ended June 30, 2021 primarily due to proceeds received in the Business Combination in June of 2021.
49
Non-GAAP Financial Metrics
The
following discussion includes references to EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. A non-GAAP financial measure is a performance metric that departs from GAAP because it excludes earnings components that are required under GAAP. Other companies may define non-GAAP financial measures differently and, as a result, our non-GAAP financial measures may not be directly comparable to those of other companies. These non-GAAP financial metrics should be used as a supplement to, and not as an alternative to, the Company's GAAP financial results.
By definition, EBITDA consists of net income (loss) before interest, income taxes, depreciation and amortization. Adjusted EBITDA is EBITDA adjusted to add back the effect of certain expenses, such as stock-based compensation expense, de novo
losses (consisting of costs associated with the ramp up of new medical centers and losses incurred for the twelve months after the opening of a new facility), acquisition transaction costs (consisting of transaction costs and corporate development payroll costs), restructuring and other charges, fair value adjustments in contingent consideration, loss on extinguishment of debt and changes in fair value of warrant liabilities. Adjusted EBITDA is a key measure used by our management to assess the operating and financial performance of our Company.
The presentation of non-GAAP financial measures also provides additional information to investors regarding our results of operations and is useful for trending, analyzing and benchmarking the performance and value of our business. By excluding certain expenses
and other items that may not be indicative of our core business operating results, these non-GAAP financial measures:
•allow investors to evaluate our performance from management’s perspective, resulting in greater transparency with respect to supplemental information used by us in our financial and operational decision making;
•provide better transparency as to the measures used by management and others who follow our industry to estimate the value of our company; and
•allow investors to view our financial performance and condition in the same manner that our significant lenders and landlords require us to report financial information to them in connection with determining
our compliance with financial covenants.
Our use of EBITDA and Adjusted EBITDA have limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are as follows:
•although depreciation and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
•Adjusted EBITDA does not reflect: (1) changes in, or cash requirements for, our working capital needs; (2) the potentially dilutive impact of non-cash stock-based compensation;
(3) the change in the fair value of our warrant liabilities; (4) the change in the fair value of contingent consideration or (5) net interest expense/income; and
•other companies, including companies in our industry, may calculate EBITDA and/or Adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure.
Because of these and other limitations, you should consider Adjusted EBITDA along with other GAAP-based financial performance measures, including net loss, cash flow metrics and our GAAP financial results.
The following table provides a reconciliation of net loss to non-GAAP financial information:
50
Three
Months Ended June 30,
Six Months Ended June 30,
($ in thousands)
2022
2021
2022
2021
Net loss
$
(14,564)
$
(36,289)
$
(14,649)
$
(52,403)
Interest
income
(2)
(1)
(3)
(2)
Interest expense
13,134
9,714
26,418
20,340
Income
tax expense (benefit)
809
(2,023)
1,889
(1,309)
Depreciation and amortization expense
19,836
7,945
38,872
13,791
EBITDA
$
19,213
$
(20,654)
$
52,527
$
(19,583)
Stock-based compensation
17,783
3,609
31,600
3,680
De
novo (1)
19,469
8,543
35,285
14,383
Transaction costs (2)
7,842
16,976
17,713
26,794
Restructuring
and other
1,016
2,811
3,602
3,222
Change in fair value of contingent consideration
(5,764)
(496)
(10,425)
(211)
Loss
on extinguishment of debt
—
13,225
1,428
13,225
Change in fair value of warrant liabilities
(30,175)
(39,215)
(57,337)
(39,215)
Adjusted
EBITDA
$
29,384
$
(15,201)
$
74,393
$
2,295
(1) De novo losses include those costs associated with the ramp up of new medical centers and losses incurred after the opening of a new facility. These costs collectively are
higher than comparable expenses incurred once such a facility has been opened and is generating revenue, and would not have been incurred unless a new facility was being opened.
(2) Acquisition transaction costs included $1.6 million and $0.9 million for the three months ended June 30, 2022 and 2021, respectively, and $2.6 million and $1.7 million for the six months ended June 30, 2022 and 2021, respectively, of corporate development payroll costs. Corporate development payroll costs include those expenses directly related to the additional staff needed to support our acquisition activity.
We experienced a
significant increase in EBITDA and Adjusted EBITDA for the three and six months ended June 30, 2022 compared to June 30, 2021. The increases in EBITDA and Adjusted EBITDA relate to increased profitability as the business matures.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. We base our estimates on historical experience
and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. The future effects of the COVID-19 pandemic on our results of operations, cash flows and financial position are unclear, however, we believe we have made reasonable estimates and assumptions in preparing the financial statements. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.
For a description of our policies regarding our critical accounting policies, see “Critical Accounting Policies” in our Form 10-K for the year ended December 31, 2021. There have been no significant changes in our critical accounting estimate policies or methodologies
to our condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
There have been no material changes to our quantitative and qualitative disclosures about market risk that we disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
51
Item
4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining adequate internal controls over financial reporting. Our management, with the participation of our Chief Executive Officer and the Chief Financial Officer, under the oversight of the Board, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that information required to be disclosed by us 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 and to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures were not effective as a result of the material weaknesses discussed in our Form 10-K for the year ended December 31, 2021.
The material weaknesses pertain to (i) our failure to establish controls to ensure the completeness and accuracy of information used to estimate and record certain accruals or make other closing adjustments
in the financial statement close process, (ii) our failure in the process of accounting for business combinations related to the design and operation of controls to record and measure the identifiable assets acquired, the liabilities assumed and any non-controlling interest recognized as part of a business combination, and (iii) our failure to have a sufficient complement of personnel with an appropriate level of knowledge, experience and oversight commensurate with their financial reporting requirements to ensure proper selection and application of GAAP.
The material weaknesses have not been remediated as of the date of the filing of this Quarterly Report on Form 10-Q. See “Part II. Other Information, Item 1A. Risk Factors − Risks Related to Being a Public Company − Our independent registered public accountants have identified a number of material weaknesses in our internal
control over financial reporting. If we are unable to remediate the material weaknesses, or if other control deficiencies are identified, we may not be able to report our financial results accurately, prevent fraud or file our periodic reports as a public company in a timely manner" to our Form 10-K for the fiscal year ended December 31, 2021.
Our management is actively engaged in the implementation of remediation plans to address existing material weaknesses. These plans include implementation of enhanced documentation of policies and procedures, along with the allocation of resources dedicated to training and monitoring these policies and procedures and recruiting personnel with appropriate levels of skills commensurate with their roles.
As a result
of these efforts, as of the date of the filing of this Quarterly Report on Form 10-Q, our management believes we have made progress toward remediating the underlying causes of the material weaknesses. Although we believe our remediation efforts will be effective in remediating the material weaknesses, there can be no assurance as to when the remediation plans will be fully implemented, or that the plans, as currently designed, will adequately remediate the material weaknesses. The material weaknesses will not be considered fully addressed until the enhanced policies and procedures over documentation have been in operation for a sufficient period of time for our management to conclude that the material weaknesses have been fully remediated.
Notwithstanding these identified material weaknesses, as of the date of the filing of this Quarterly Report on Form 10-Q, our management, including
our Chief Executive Officer and Chief Financial Officer, believes that the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods and such financial statements are presented in conformity with GAAP.
52
PART II. OTHER INFORMATION
Item
1. Legal Proceedings
From time to time, we may be involved in litigation incidental to the conduct of our business that arise in the ordinary course of business.
For a description of our legal proceedings, please see the description set forth in the “Legal Matters” section in Note 15 "Commitments and Contingencies" in the notes to the unaudited condensed consolidated financial statements in Item 1 of Part I of this Quarterly Report.
Item 1A. Risk Factors
There have been no material changes in the risk factors disclosed
under Part I, Item 1A "Risk Factors" in our Form 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.