UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20222023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to
Commission File Number: 001-39289
Cano Health, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
9725 NW 117th Avenue, Miami, FL
(Address of principal executive offices)
98-1524224
(IRS Employer Identification No.)
33178
(Zip Code)
(855) 226-6633
(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 |
| Class A common stock, $0.0001 par value per share | | CANO | | The New York Stock Exchange |
| Warrants to purchase one share of Class A common stock, each at an exercise price of $11.50 per share | | CANO/WS | | The 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. Yes ☒ 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). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Non-accelerated filer ☐
Accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
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 ☒
As of November 4, 2022August 9, 2023 the registrant had 244,574,327285,474,630 shares of Class A common stock outstanding and 249,909,475253,208,965 shares of Class B common stock outstanding.
Table of Contents
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| PART I FINANCIAL INFORMATION |
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| PART II. OTHER INFORMATION |
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
CertainThis report contains forward-looking statements in this Quarterly Report on Form 10-Q may constitute “forward-looking statements” for purposeswithin the meaning of Section 27A of the federal securities laws. OurSecurities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements relate to future events and involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and could materially affect actual results, performance or achievements. Such forward-looking statements include, but are not limited to,without limitation, our anticipated performance, operations, financial strength, potential, and prospects for long-term shareholder value creation, our anticipated results of operations, including our business strategies, our projected costs, prospects and plans, and other aspects of our operations or operating results. These forward-looking 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, forecastsgenerally can be identified by phrases such as “will,” “expects,” “anticipates,” “believes,” “foresees,” “forecasts,” “plans,” “intends,” “estimates” or other characterizationswords or phrases of future events or circumstances,similar import, 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:without limitation:
•i.our ability to recognizeachieve or maintain profitability;
ii.our expectations regarding executing our business plan and strategies, such as (a) our long-term strategy to focus our business on Medicare Advantage and ACO Reach in markets that can deliver positive cash flow performance; (b) our plans to exit the benefitsCalifornia, New Mexico and Illinois markets by the fall of 2023; (c) our performing a strategic review of our medical centers located in Texas and Nevada and, to generate additional liquidity, we are reviewing the sale of all of our assets related to servicing our Medicaid members; (d) our plans to pursue a process to identify interest in the sale 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;Company or all or substantially all of its assets;
•
iii.our plans to achieve our expected business and financial results, including patient membership objectives, targeted medical claims expense ratios, estimated reimbursement rates, estimated revenues, estimated gross margins, and business performance, includingestimated cost levels, such as our abilityplans to realize expected results;significantly reduce our investments in de novo medical centers in 2023;
•changes in our strategy, future operations, financial position, estimated revenues, forecasts, projected costs, prospects and plans;
•iv.our expectations regarding the impact of changes in applicable laws, rules 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;
•
v.our abilityexpectations regarding our sources and uses of cash and liquidity, such as (a) our expectation that our existing cash position, along with our expected cash generation through operations and our CS Revolving Line of Credit will not be sufficient to realizefund our operating and capital expenditure requirements through at least the next 12 months from the date of issuance of our unaudited condensed consolidated financial statements included in this Form 10-Q; (b) our expectation that our net cash used in investing activities will be less in 2023 due to a significant reduction in spending on de novo medical centers; (c) our expectation that our interest expense will increase by approximately $18.0 million in 2023 driven by the 2023 Term Loan; (d) our reduction in expected results with respect to patient membership, revenuecapital expenditures; (e) our expectation that in 2023, we will incur approximately $81.0 million in cash interest payments (which excludes approximately $19.0 million of non-cash PIK interest under the 2023 Term Loan) and earnings;
•approximately $15.0 million in capital expenditures; and (f) our ability to grow market share in existing markets or enter into new markets and successexpectation that, having secured the 2023 Side-Car Amendment on August 10, 2023, we will repay a significant portion of acquisitions;
•our ability to predict and control our medical claims expense ratio;the CS Revolving Line of Credit by the end of September 2023;
•vi.our expectations regarding the riskoutcome of any pending legal or regulatory proceedings; such as our (a) expectation that we may not be ablehave meritorious defenses to procure sufficient space as we continue to grow and open additional medical centers;
•our predictions about the need for our wellness centers, 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 existingallegations in the market,lawsuit captioned Alberto Gonzalez v. Cano Health, Inc. f/k/a Jaws Acquisition Corp., et al. Alberto Gonzalez v. Cano Health, Inc. f/k/a Jaws Acquisition Corp., et al. (No. 1:22-cv-20827) and competitive factors including with respectour plans to technological capabilities, costvigorously defend against such action; and scalability;
•(b) our expectation that the impactresolution of the coronavirus disease (the "COVID-19 pandemic") or anyvarious other pandemic, epidemic or outbreak of an infectious diseaseasserted and unasserted potential claims encountered in the United States or worldwidenormal course of business will not have a material effect on our business,consolidated financial condition andposition, 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 debt, which may harm our liquidity and / or our ability to grow our business;cash flows;
•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 Medicare Advantage, Medicare Global and Professional Direct Contracting Entity ("DCE") and Medicare patients under Accountable Care Organizations ("ACO") programs 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
vii.our estimates and judgments regarding our various tax positions, including regarding our deferred tax assets, our belief that no tax uncertainties exist based on analyzing our filing positions in the Federal, State, local and foreign jurisdictions where we are required to file income tax returns for all open tax years and our belief that we have adequately provided for any reasonably foreseeable outcomes related to the IRS tax examination of our income tax return for the year ended December 31, 2020 and that any settlement related thereto will not have a material adverse effect on our consolidated financial statements;
viii.our expectations regarding the shift in our strategic direction, such as our plans to focus our membership base towards Medicare Advantage and ACO Reach; sell certain assets and operations and exiting California, New Mexico and Illinois markets by the fall of 2023; exit our Puerto Rico operations by January 1, 2024, conduct a strategic review of the Company's Medicaid business in Florida, medical centers located in Texas and Nevada, pharmacy assets and other specialty practices; consolidating underperforming owned medical centers; lowering third party medical costs through negotiations with payors; reducing operating expenses, including reduction of permanent staff; significantly reducing all other non-essential spending; and delaying renovations and other capital projects, including our belief that the Company will be better positioned to achieve positive financial performance upon completion of these initiatives, as well as our expectation to remain focused on driving growth through filling capacity in our planned remaining existing centers and delivering the same high-quality, healthcare to our members and delivering positive outcomes, while more effectively controlling costs; and
ix.our expectations regarding our plan to further restructure our operations to streamline and simplify the organization to improve efficiency and reduce costs, including workforce reductions, and the expected reduction in our selling, general and administrative costs in future periods compared to current levels, including reducing staffing by approximately 700 employees, or 17% of our workforce in the third quarter of 2023, with approximately 40% of the workforce reductions being attributable to exiting operations in certain markets, with the remainder attributable to other operating centers and our expectation that these actions are expected to yield approximately $50 million of annualized cost reductions beginning in the third quarter of 2023 and through the end of 2024, and result in our recording a restructuring charge in the third quarter of 2023 of approximately $4 million, the majority of which is expected to be paid in 2023 and a lesser amount in 2024, consisting primarily of employee-related costs, such as severance, retention and other contractual termination benefits.
These forward-looking statements are based on information available to us at the time of this Quarterly Report on Form 10-Qreport and our current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly,We derive many of our forward-looking statements should not be relied upon as representingfrom our views asoperating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known or unknown factors, and it is impossible for us to anticipate all factors that could affect our actual results. It is uncertain whether any subsequent date, and we do not undertake any obligation to updateof the events anticipated by our forward-looking statements will transpire or occur, or if any of them do, what impact they will have on our results of operations and financial condition. Important risks and uncertainties that could cause our actual results and financial condition to reflect eventsdiffer materially from those indicated in our forward-looking statements include, among others, changes in market or circumstances afterindustry conditions, changes in the date they were made, whether as a resultregulatory environment, competitive conditions, and/or consumer receptivity to our services; changes in our strategy, future operations, prospects and plans; developments and uncertainties related to the Direct Contracting Entity program; our ability to realize expected financial results, including with respect to patient membership, total revenue and earnings; our ability to predict and control our medical cost ratio; our ability to grow market share in existing markets and continue our growth; our ability to integrate our acquisitions and achieve desired synergies; our ability to maintain our relationships with health plans and other key payors; our future capital requirements and sources and uses of new information, future events cash, including funds to satisfy our liquidity needs; our ability to attract and retain members of management and our Board of Directors; and/or otherwise, except as may be required under applicable securities laws.our ability to recruit and retain qualified team members and independent physicians.
The outcome of the events described in these
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Actual results may also differ materially from such forward-looking statements is subject to known and unknown risks, uncertainties, and other factors. As a result offor a number of knownother reasons, including those set forth in our filings with the SEC, including, without limitation, the risk factors identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 15, 2023, as amended by our Annual Report on Form 10-K/A, filed with the SEC on April 7, 2023 (the “2022 Form 10-K”), as well as our Quarterly Reports on Form 10-Q and unknownCurrent Reports on Form 8-K that we have filed or will file with the SEC during 2023 (which may be viewed on the SEC’s website at http://www.sec.gov or on our website at http://www.investors.canohealth.com/ir-home), as well as reasons including, without limitation:
i.unexpected developments that adversely impact our ability to achieve or maintain profitability, such as due to (a) less than anticipated capacity utilization at our medical centers; (b) higher than expected costs and expenses; (c) less than anticipated growth in revenues, Adjusted EBITDA margins and/or cash flows; (d) difficulties and/or delays in improving our operational execution, enhancing our cost discipline, and/or achieving positive free cash flow, such as due to a broad recessionary economic environment, higher interest rates and/or a higher inflationary environment; (e) our inability to predict changes to the Medicare Advantage, ACO Realizing Equity, Access, and Community Health ("ACO REACH") and Medicare patients under Accountable Care Organizations ("ACO") programs as it relates to benchmarks and shared savings;
ii.unexpected developments that adversely impact our ability to execute our business plan and strategies, such as due to (a) unexpected changes in the payor mix of our patients and potential decreases in our reimbursement rates; (b) unexpected developments with respect to the renegotiation, non-renewal or termination of capitation agreements with health plans; (c) difficulties and/or delays in procuring sufficient space on terms that are acceptable to us or that the costs of procuring and outfitting such space becomes uneconomical, such as due to the prevailing difficult conditions in the global supply chain environment; (d) less than expected consumer acceptance of our services and offerings and/or less than expected member retention rates; (e) greater than anticipated competition in our industry, less than anticipated advantages of our services, products and technology over competing services, products and technology existing in the market, and other competitive factors, including with respect to technological capabilities, cost and scalability; (f) difficulties or delays in exiting certain market and/or selling the Company or all or substantially all of its assets, such as due to tightness in the credit markets, higher inflation or other factors, regulatory disruptions or delays and/or securing third party agreements and approvals; (g) unexpected developments that adversely impact our ability to execute our plan to identify opportunities to maximize shareholder value, including the sale of the Company, such as due to our inability to consummate one or more transactions, whether due to higher interest rates, regulatory restrictions or other market factors; and (h) possible actions that vendors and other third parties that we deal with may take to impose enhanced credit controls that effectively increase our cost base or make it difficult for us to maintain services and supplies required to conduct business;
iii.unexpected developments that adversely impact our ability to achieve our expected financial results, such as due to (a) unexpected changes in anticipated Medicare reimbursement rates or changes in the rules governing the Medicare program; (b) unexpected changes in reimbursements by third-party payors and payments by individuals; (c) unexpected changes in Medicare’s risk adjustment payment system; (d) unexpected developments with respect to our estimates of revenues and refund liabilities that we recognize under our risk agreements with health plans; (e) unexpected developments with respect to our estimates about our third-party medical costs (including incurred but not report medical service accruals), including our expectation that our third-party medical costs will increase given the healthcare spending trends within the Medicare population;
iv.unanticipated changes in laws, rules and/or regulations, such as those that result in less than expected payments from health plans and other payors;
v.less than anticipated sources of liquidity, such as due to (a) delays in or our inability to complete non-core asset sales, in whole or in part; (b) unanticipated demands on our available sources of cash; (c) tightness in the credit or M&A markets; (d) unexpected changes in our future capital requirements which depend on many factors, including our growth rate, medical expenses and/or our review of all aspects of our value-based care platform;
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vi.unexpected developments regarding the outcome of any pending legal or regulatory proceedings;
vii.unexpected developments impacting our tax positions, such as our deferred tax assets not being realized in future periods in expected amounts, which could result in adjustments to our valuation allowances and provision for income taxes and/or unexpected developments in our tax audit;
viii.unexpected developments with respect to the shift in our strategic direction that could adversely affect our plans to reduce our costs and expenses and/or generate additional sources of liquidity, such as, among other things, our inability, in whole or in part to complete one or more asset sales and/or negotiate for better payment terms and conditions, such that we are not unable to achieve positive financial performance on an acceptable timeline; and/or less than expected benefits from and/or higher than expected costs and expenses related to our restructuring program, such as delays in realizing or less than the expected cost reductions.
For a detailed discussion of other risks and uncertainties that could cause our actual results or performance may beto differ materially different from those expressed or implied by the forward-looking statements, please refer to our risk factor disclosure included in our filings with the SEC, including, without limitation, our 2022 Form 10-K. Investors should evaluate all forward-looking statements made in this report in the context of these forward-looking statements. Some factors thatrisks and uncertainties. Factors other than those listed above could also cause actualour results to differ include:materially from expected results. Forward-looking statements speak only as of the date they are made and, except as required by law, we undertake no obligation or duty to publicly update or revise any forward-looking statement, whether to reflect actual results of operations; changes in financial condition; changes in general U.S. or international economic, industry conditions; changes in estimates, expectations or assumptions; or other circumstances, conditions, developments or events arising after the issuance of this report. Additionally, the business and financial materials and any other statement or disclosure on or made available through our websites or other websites referenced herein shall not be incorporated by reference into this report.
•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, including as a result of higher interest rates, 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.
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CANO HEALTH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| | | | | | | | | | | | | | |
| (in thousands, except share and per share data) | | September 30, 2022 | | December 31, 2021 |
| Assets | | | | |
| Current assets: | | | | |
| Cash, cash equivalents and restricted cash | | $ | 24,097 | | | $ | 163,170 | |
| Accounts receivable, net of unpaid service provider costs | | 202,037 | | | 133,433 | |
| Prepaid expenses and other current assets | | 78,833 | | | 20,632 | |
| Total current assets | | 304,967 | | | 317,235 | |
| Property and equipment, net | | 125,513 | | | 85,261 | |
| Operating lease right-of-use assets | | 171,442 | | | 132,173 | |
| Goodwill | | 787,885 | | | 769,667 | |
| Payor relationships, net | | 565,213 | | | 576,648 | |
| Other intangibles, net | | 231,368 | | | 248,973 | |
| Other assets | | 9,751 | | | 13,582 | |
| Total assets | | $ | 2,196,139 | | | $ | 2,143,539 | |
| Liabilities and stockholders' equity | | | | |
| Current liabilities: | | | | |
| Accounts payable and accrued expenses (Related parties comprised $3,047 and $144 as of September 30, 2022 and December 31, 2021, respectively) | | $ | 110,301 | | | $ | 80,829 | |
| Current portion of notes payable | | 6,444 | | | 6,493 | |
| Current portion of finance lease liabilities | | 1,595 | | | 1,295 | |
| Current portion of contingent consideration | | 5,700 | | | 3,123 | |
| Current portions due to sellers | | 2,038 | | | 17,357 | |
| Current portion of operating lease liabilities | | 24,946 | | | 15,275 | |
| Other current liabilities | | 34,537 | | | 36,664 | |
| Total current liabilities | | 185,561 | | | 161,036 | |
| Notes payable, net of current portion and debt issuance costs | | 914,394 | | | 915,266 | |
| Long term portion of operating lease liabilities | | 160,479 | | | 122,935 | |
| Warrant liabilities | | 88,528 | | | 80,144 | |
| Long term portion of finance lease liabilities | | 3,139 | | | 2,181 | |
| | | | |
| Long term portion of contingent consideration | | 28,000 | | | 35,300 | |
| Other liabilities | | 33,004 | | | 28,109 | |
| Total liabilities | | 1,413,105 | | | 1,344,971 | |
| Stockholders’ Equity | | | | |
| Shares of Class A common stock $0.0001 par value (6,000,000,000 shares authorized and 241,646,505 and 180,113,551 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively) | | 24 | | | 18 | |
| Shares of Class B common stock $0.0001 par value (1,000,000,000 shares authorized and 250,093,479 and 297,385,981 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively) | | 25 | | | 30 | |
| Additional paid-in capital | | 544,106 | | | 397,443 | |
| Accumulated deficit | | (137,661) | | | (78,760) | |
| | | | |
| Total Stockholders' Equity before non-controlling interests | | 406,494 | | | 318,731 | |
| Non-controlling interests | | 376,540 | | | 479,837 | |
| Total Stockholders' Equity | | 783,034 | | | 798,568 | |
| Total Liabilities and Stockholders' Equity | | $ | 2,196,139 | | | $ | 2,143,539 | |
The accompanying Notes are an integral part of these Condensed Financial Statements
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CANO HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | | | | | |
| (in thousands, except share and per share data) | | 2022 | | 2021 | | 2022 | | 2021 | | |
| Revenue: | | | | | | | | | | |
| Capitated revenue (Related parties comprised $0 and $128,394, in the three months ended September 30, 2022 and 2021, respectively, and $0 and $307,684, in the nine months ended September 30, 2022 and 2021, respectively) | | $ | 625,895 | | | $ | 473,763 | | | $ | 1,955,739 | | | $ | 1,064,604 | | | |
| Fee-for-service and other revenue (Related parties comprised $0 and $631 in the nine months ended September 30, 2022 and 2021, respectively) | | 39,133 | | | 25,168 | | | 102,804 | | | 52,510 | | | |
| Total revenue | | 665,028 | | | 498,931 | | | 2,058,543 | | | 1,117,114 | | | |
| Operating expenses: | | | | | | | | | | |
| Third-party medical costs (Related parties comprised $0 and $249,819 in the nine months ended September 30, 2022 and 2021, respectively) | | 489,565 | | | 381,316 | | | 1,566,661 | | | 868,177 | | | |
| Direct patient expense (Related parties comprised $1,972 and $6, in the three months ended September 30, 2022 and 2021, respectively, and $6,490 and $1,502, in the nine months ended September 30, 2022 and 2021, respectively) | | 63,867 | | | 50,368 | | | 177,190 | | | 120,212 | | | |
| Selling, general, and administrative expenses (Related parties comprised $2,709 and $4,225, in the three months ended September 30, 2022 and 2021, respectively, and $6,913 and $9,814, in the nine months ended September 30, 2022 and 2021, respectively) | | 111,765 | | | 76,618 | | | 314,617 | | | 158,786 | | | |
| Depreciation and amortization expense | | 25,343 | | | 16,955 | | | 64,215 | | | 30,746 | | | |
| Transaction costs and other (Related parties comprised $0 and $1,483 in the nine months ended September 30, 2022 and 2021, respectively) | | 5,033 | | | 11,206 | | | 19,616 | | | 36,274 | | | |
| Change in fair value of contingent consideration | | 900 | | | (3,940) | | | (9,525) | | | (4,152) | | | |
| Total operating income (expenses) | | 696,473 | | | 532,523 | | | 2,132,774 | | | 1,210,043 | | | |
| Income (loss) from operations | | (31,445) | | | (33,592) | | | (74,231) | | | (92,929) | | | |
| Other income and expense: | | | | | | | | | | |
| Interest expense | | (16,451) | | | (16,023) | | | (42,868) | | | (36,363) | | | |
| Interest income | | 4 | | | 1 | | | 7 | | | 4 | | | |
| Loss on extinguishment of debt | | — | | | — | | | (1,428) | | | (13,225) | | | |
| | | | | | | | | | |
| Change in fair value of warrant liabilities | | (65,721) | | | (14,650) | | | (8,383) | | | 24,565 | | | |
| Other income (loss) | | 354 | | | (29) | | | 884 | | | (54) | | | |
| Total other income (loss) | | (81,814) | | | (30,701) | | | (51,788) | | | (25,073) | | | |
| Net income (loss) before income tax expense | | (113,259) | | | (64,293) | | | (126,019) | | | (118,002) | | | |
| Income tax expense (benefit) | | (1,248) | | | 547 | | | 641 | | | (762) | | | |
| Net income (loss) | | $ | (112,011) | | | $ | (64,840) | | | $ | (126,660) | | | $ | (117,240) | | | |
The accompanying Notes are an integral part of these Condensed Financial Statements
| | | | | | | | | | | | | | |
| (in thousands, except share and per share data) | | June 30, 2023 | | December 31, 2022 |
| Assets | | | | |
| Current assets: | | | | |
| Cash, cash equivalents and restricted cash | | $ | 27,721 | | | $ | 27,329 | |
| Accounts receivable, net of unpaid service provider costs | | 107,164 | | | 233,816 | |
| Prepaid expenses and other current assets | | 31,450 | | | 79,603 | |
| Total current assets | | 166,335 | | | 340,748 | |
| Property and equipment, net | | 129,330 | | | 131,325 | |
| Operating lease right-of-use assets | | 174,581 | | | 177,892 | |
| Goodwill | | 480,044 | | | 480,375 | |
| Payor relationships, net | | 551,913 | | | 567,704 | |
| Other intangibles, net | | 199,761 | | | 226,059 | |
| Other assets (net of allowance for credit losses of $62.0 million as of June 30, 2023) | | 5,358 | | | 4,824 | |
| Total assets | | $ | 1,707,322 | | | $ | 1,928,927 | |
| Liabilities and stockholders' equity | | | | |
| Current liabilities: | | | | |
| Accounts payable and accrued expenses (Related parties comprised $2,992 and $2,669 as of June 30, 2023 and December 31, 2022, respectively) | | $ | 124,821 | | | $ | 105,733 | |
| Current portion of notes payable, net of debt issuance costs | | 109,667 | | | 6,444 | |
| Current portion of finance lease liabilities | | 2,972 | | | 1,686 | |
| | | | |
| Current portions due to sellers | | 46,506 | | | 46,016 | |
| Current portion of operating lease liabilities | | 24,958 | | | 24,068 | |
| Other current liabilities | | 28,010 | | | 24,491 | |
| Total current liabilities | | 336,934 | | | 208,438 | |
| Notes payable, net of debt issuance costs | | 922,232 | | | 997,806 | |
| Long term portion of operating lease liabilities | | 163,972 | | | 166,347 | |
| Warrant liabilities | | 7,042 | | | 7,373 | |
| Long term portion of finance lease liabilities | | 7,770 | | | 3,364 | |
| Due to sellers, net of current portion | | 1,050 | | | 15,714 | |
| Long term portion of contingent consideration | | 1,400 | | | 2,800 | |
| Other liabilities | | 31,149 | | | 32,810 | |
| Total liabilities | | 1,471,549 | | | 1,434,652 | |
| Stockholders’ Equity | | | | |
| Shares of Class A common stock $0.0001 par value (6,000,000,000 shares authorized and 281,517,626 and 224,118,566 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively) | | 28 | | | 22 | |
| Shares of Class B common stock $0.0001 par value (1,000,000,000 shares authorized and 253,208,965 and 268,794,608 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively) | | 25 | | | 27 | |
| Additional paid-in capital | | 601,589 | | | 538,614 | |
| Accumulated deficit | | (454,935) | | | (286,032) | |
| | | | |
| Total Stockholders' Equity before non-controlling interests | | 146,707 | | | 252,631 | |
| Non-controlling interests | | 89,066 | | | 241,644 | |
| Total Stockholders' Equity | | 235,773 | | | 494,275 | |
| Total Liabilities and Stockholders' Equity | | $ | 1,707,322 | | | $ | 1,928,927 | |
5
CANO HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) attributable to non-controlling interests | | (57,783) | | | (41,602) | | | (67,759) | | | (98,559) | | | |
| Net income (loss) attributable to Class A common stockholders | | $ | (54,228) | | | $ | (23,238) | | | $ | (58,901) | | | $ | (18,681) | | | |
| | | | | | | | | | |
| Net income (loss) per share attributable to Class A common stockholders, basic | | $ | (0.23) | | | $ | (0.14) | | | $ | (0.28) | | | $ | (0.11) | | | |
| Net income (loss) per share attributable to Class A common stockholders, diluted | | $ | (0.23) | | | $ | (0.14) | | | $ | (0.28) | | | $ | (0.16) | | | |
| Weighted-average shares outstanding: | | | | | | | | | | |
| Basic | | 232,314,170 | | | 170,871,429 | | | 211,408,974 | | | 168,100,210 | | | |
| Diluted | | 232,314,170 | | | 477,255,983 | | | 211,408,974 | | | 169,312,258 | | | |
| | | | | | | | | | |
The accompanying Notes are an integral part of these Condensed Financial Statements
6
CANO HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY / MEMBERS' CAPITALOPERATIONS
(UNAUDITED)
Three Months Ended September 30, 2022 and 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except shares) | | Members' Capital | | Class A Shares | | Class B Shares | | Additional Paid-in Capital | | | | Accumulated Deficit | | Non-Controlling Interests | | Total Equity |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | | |
| BALANCE—June 30, 2022 | | — | | | $ | — | | | 218,028,952 | | | $ | 22 | | | 264,527,434 | | | $ | 27 | | | $ | 495,642 | | | | | $ | (83,433) | | | $ | 428,739 | | | $ | 840,997 | |
| Stock-based compensation expense | | — | | | — | | | — | | | — | | | — | | | — | | | 11,041 | | | | | — | | | — | | | 11,041 | |
| Issuance of Class A common stock upon vesting of restricted stock units | | — | | | — | | | 1,860,581 | | | — | | | — | | | — | | | (8,271) | | | | | — | | | 8,271 | | | — | |
| Issuance of Class A common stock for acquisitions | | — | | | — | | | 6,895,830 | | | — | | | — | | | — | | | 41,337 | | | | | — | | | — | | | 41,337 | |
| Exchange of Class B common stock for Class A common stock | | — | | | — | | | 14,433,955 | | | 2 | | | (14,433,955) | | | (2) | | | 24,557 | | | | | — | | | (24,557) | | | — | |
| Employee stock purchase plan issuance | | — | | | — | | | 427,187 | | | — | | | — | | | — | | | 1,670 | | | | | — | | | — | | | 1,670 | |
| Impact of transactions affecting non-controlling interests | | | | | | — | | | — | | | — | | | — | | | (21,870) | | | | | — | | | 21,870 | | | — | |
| Net income (loss) | | — | | | — | | | — | | | | | | | | | | | | | (54,228) | | | (57,783) | | | (112,011) | |
| BALANCE—September 30, 2022 | | — | | | $ | — | | | 241,646,505 | | | $ | 24 | | | 250,093,479 | | | $ | 25 | | | $ | 544,106 | | | | | $ | (137,661) | | | $ | 376,540 | | | $ | 783,034 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except shares) | | Members' Capital | | Class A Shares | | Class B Shares | | Additional Paid-in Capital | | Notes Receivable | | Accumulated Deficit | | Non-Controlling Interests | | Total Equity |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| BALANCE—June 30, 2021 | | — | | | — | | | 170,299,189 | | | 17 | | | 306,843,662 | | | 31 | | | 356,239 | | | (136) | | | (56,187) | | | 534,029 | | | 833,993 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Stock-based compensation expense | | — | | | — | | | — | | | — | | | — | | | — | | | 9,451 | | | — | | | — | | | — | | | 9,451 | |
| Issuance of Class A common stock for acquisitions | | — | | | — | | | 122,449 | | | — | | | — | | | — | | | 1,502 | | | — | | | — | | | — | | | 1,502 | |
| Exchange of Class B common stock for Class A common stock | | | | | | 1,173,276 | | | | | (1,173,276) | | | | | 1,970 | | | | | | | (1,970) | | | — | |
| Impact of transactions affecting non-controlling interests | | — | | | — | | | — | | | — | | | — | | | — | | | (809) | | | — | | | — | | | 809 | | | — | |
| Notes receivable - related parties | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 136 | | | — | | | — | | | 136 | |
| Net income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (23,236) | | | (41,604) | | | (64,840) | |
| BALANCE—September 30, 2021 | | — | | | — | | | 171,594,914 | | | $ | 17 | | | 305,670,386 | | | $ | 31 | | | 368,353 | | | $ | — | | | $ | (79,423) | | | $ | 491,264 | | | $ | 780,242 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended June 30, |
| (in thousands, except share and per share data) | | 2023 | | 2022 | | 2023 | | 2022 | | |
| Revenue: | | | | | | | | | | |
| Capitated revenue | | $ | 743,324 | | | $ | 655,493 | | | $ | 1,584,397 | | | $ | 1,329,844 | | | |
| Fee-for-service and other revenue | | 23,422 | | | 33,880 | | | 49,258 | | | 63,671 | | | |
| Total revenue | | 766,746 | | | 689,373 | | | 1,633,655 | | | 1,393,515 | | | |
| Operating expenses: | | | | | | | | | | |
| Third-party medical costs | | 769,629 | | | 541,317 | | | 1,477,960 | | | 1,077,097 | | | |
| Direct patient expense (Related parties comprised $3,073 and $7,188 in the three months ended June 30, 2023 and 2022, respectively, and $3,064 and $4,518 in the six months ended June 30, 2023 and 2022, respectively) | | 56,757 | | | 52,647 | | | 125,184 | | | 113,323 | | | |
| Selling, general, and administrative expenses (Related parties comprised $1,452 and $2,496 in the three months ended June 30, 2023 and 2022, respectively, and $3,305 and $5,452 in the six months ended June 30, 2023 and 2022, respectively) | | 99,418 | | | 106,179 | | | 195,890 | | | 202,849 | | | |
| Depreciation and amortization expense | | 27,251 | | | 19,836 | | | 54,473 | | | 38,872 | | | |
| Transaction costs | | 9,125 | | | 6,207 | | | 19,211 | | | 14,583 | | | |
| Change in fair value of contingent consideration | | (11,800) | | | (5,764) | | | (15,900) | | | (10,425) | | | |
| | | | | | | | | | |
| Credit loss on other assets | | 62,000 | | | — | | | 62,000 | | | — | | | |
| Total operating expenses | | 1,012,380 | | | 720,422 | | | 1,918,818 | | | 1,436,299 | | | |
| Income (loss) from operations | | (245,634) | | | (31,049) | | | (285,163) | | | (42,784) | | | |
| Other income (expense): | | | | | | | | | | |
| Interest expense | | (26,719) | | | (13,134) | | | (50,224) | | | (26,418) | | | |
| Interest income | | 90 | | | 2 | | | 99 | | | 3 | | | |
| Loss on extinguishment of debt | | — | | | — | | | — | | | (1,428) | | | |
| Change in fair value of warrant liabilities | | (1,677) | | | 30,175 | | | 331 | | | 57,337 | | | |
| Other income (expense) | | 1,323 | | | 251 | | | 1,755 | | | 530 | | | |
| Total other income (expense) | | (26,983) | | | 17,294 | | | (48,039) | | | 30,024 | | | |
| Net income (loss) before income tax expense | | (272,617) | | | (13,755) | | | (333,202) | | | (12,760) | | | |
| Income tax expense (benefit) | | (1,872) | | | 809 | | | (1,872) | | | 1,889 | | | |
| Net income (loss) | | $ | (270,745) | | | $ | (14,564) | | | $ | (331,330) | | | $ | (14,649) | | | |
| Net income (loss) attributable to non-controlling interests | | (129,992) | | | (9,231) | | | (162,427) | | | (9,976) | | | |
| Net income (loss) attributable to Class A common stockholders | | $ | (140,753) | | | $ | (5,333) | | | $ | (168,903) | | | $ | (4,673) | | | |
| | | | | | | | | | |
| Net income (loss) per share attributable to Class A common stockholders, basic | | $ | (0.51) | | | $ | (0.03) | | | $ | (0.66) | | | $ | (0.02) | | | |
| Net income (loss) per share attributable to Class A common stockholders, diluted | | $ | (0.51) | | | $ | (0.03) | | | $ | (0.66) | | | $ | (0.03) | | | |
| Weighted-average shares outstanding: | | | | | | | | | | |
| Basic | | 274,640,987 | | | 210,053,037 | | | 257,317,776 | | | 200,783,129 | | | |
| Diluted | | 527,849,952 | | | 474,580,471 | | | 257,317,776 | | | 465,310,563 | | | |
| | | | | | | | | | |
The accompanying Notes are an integral part of these Condensed Financial Statements
7
CANO HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY / MEMBERS' CAPITAL
(UNAUDITED)
NineThree and Six Months Ended SeptemberJune 30, 20222023 and 20212022
| | (in thousands, except shares) | (in thousands, except shares) | | Members' Capital | | Class A Shares | | Class B Shares | | Additional Paid-in Capital | | | Accumulated Deficit | | Non-Controlling Interests | | Total Equity | (in thousands, except shares) | | | Class A Shares | | Class B Shares | | Additional Paid-in Capital | | Accumulated Deficit | | Non-Controlling Interests | | Total Equity |
| | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | Total Equity | | | Shares | | Amount | | Shares | | Additional Paid-in Capital | Accumulated Deficit | Non-Controlling Interests | Total Equity | |
| BALANCE—December 31, 2021 | | — | | | $ | — | | | 180,113,551 | | | $ | 18 | | | 297,385,981 | | | $ | 30 | | | $ | 397,443 | | | | $ | (78,760) | | | $ | 479,837 | | $ | 798,568 | | |
| Stock-based compensation expense | | — | | | — | | | — | | | — | | | — | | | — | | | 42,641 | | | | — | | | — | | | 42,641 | | |
| BALANCE—March 31, 2023 | | BALANCE—March 31, 2023 | | | 261,819,529 | | | $ | 26 | | | 263,638,069 | | | $ | 26 | | | $ | 594,994 | | | $ | (314,182) | | | $ | 223,537 | | | $ | 504,401 | |
| Stock-based compensation expense, net | | Stock-based compensation expense, net | | | — | | | — | | | — | | | — | | | 2,017 | | | — | | | — | | | 2,017 | |
| Issuance of Class A common stock upon vesting of restricted stock units | Issuance of Class A common stock upon vesting of restricted stock units | | — | | | — | | | 2,667,896 | | | 1 | | | — | | | — | | | (13,357) | | | | — | | | 13,356 | | | — | | Issuance of Class A common stock upon vesting of restricted stock units | | | 1,469,730 | | | — | | | — | | | — | | | (4,984) | | | — | | | 4,984 | | | — | |
| Issuance of common stock for acquisitions | Issuance of common stock for acquisitions | | — | | | — | | | 9,752,997 | | | — | | | — | | | — | | | 57,108 | | | | — | | | — | | | 57,108 | | Issuance of common stock for acquisitions | | | — | | | — | | | — | | | — | | | 99 | | | — | | | — | | | 99 | |
| Exchange of Class B common stock for Class A common stock | Exchange of Class B common stock for Class A common stock | | — | | | — | | | 47,292,502 | | | 5 | | | (47,292,502) | | | (5) | | | 76,322 | | | | — | | | (76,322) | | | — | | Exchange of Class B common stock for Class A common stock | | | 10,429,104 | | | 1 | | | (10,429,104) | | | (1) | | | 9,463 | | | — | | | (9,463) | | | — | |
| Employee stock purchase plan issuance | | — | | | — | | | 1,819,559 | | | — | | | — | | | — | | | 11,377 | | | | — | | | — | | | 11,377 | | |
| Impact of transactions affecting non-controlling interests | | — | | | — | | | — | | | — | | | — | | | — | | | (27,428) | | | | — | | | 27,428 | | | — | | |
| Warrants Exercised | | Warrants Exercised | | | 7,799,263 | | | 1 | | | — | | | — | | | — | | | — | | | — | | | 1 | |
| | Net income (loss) | Net income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | (58,901) | | | (67,759) | | | (126,660) | | Net income (loss) | | | — | | | — | | | — | | | — | | | — | | | (140,753) | | | (129,992) | | | (270,745) | |
| BALANCE—September 30, 2022 | | — | | | $ | — | | | 241,646,505 | | | $ | 24 | | | 250,093,479 | | | $ | 25 | | | $ | 544,106 | | | | $ | (137,661) | | | $ | 376,540 | | | $ | 783,034 | | |
| BALANCE—June 30, 2023 | | BALANCE—June 30, 2023 | | | 281,517,626 | | | $ | 28 | | | 253,208,965 | | | $ | 25 | | | $ | 601,589 | | | $ | (454,935) | | | $ | 89,066 | | | $ | 235,773 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except shares) | | | | Class A Shares | | Class B Shares | | Additional Paid-in Capital | | Accumulated Deficit | | Non-Controlling Interests | | Total Equity |
| | | | | | Shares | | Amount | | Shares | | Amount | | | | |
| BALANCE—March 31, 2022 | | | | | | 205,026,367 | | | $ | 20 | | | 276,722,704 | | | $ | 28 | | | $ | 464,262 | | | $ | (78,100) | | | $ | 451,567 | | | $ | 837,777 | |
| Stock-based compensation expense, net | | | | | | — | | | — | | | — | | | — | | | 17,783 | | | — | | | — | | | 17,783 | |
| Issuance of Class A common stock upon vesting of restricted stock units | | | | | | 807,315 | | | 1 | | | — | | | | | (5,086) | | | — | | | 5,085 | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| Exchange of Class B common stock for Class A common stock | | | | | | 12,195,270 | | | 1 | | | (12,195,270) | | | (1) | | | 18,682 | | | — | | | (18,682) | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | | | | | — | | | — | | | — | | | — | | | — | | | (5,333) | | | (9,231) | | | (14,564) | |
| BALANCE—June 30, 2022 | | | | | | 218,028,952 | | | $ | 22 | | | 264,527,434 | | | $ | 27 | | | $ | 495,642 | | | $ | (83,433) | | | $ | 428,739 | | | $ | 840,997 | |
The accompanying Notes are an integral part of these Condensed Financial Statements
8
CANO HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY / MEMBERS' CAPITAL
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except shares) | | Members' Capital | | Class A Shares | | Class B Shares | | Additional Paid-in Capital | | Notes Receivable | | Accumulated Deficit | | Non-Controlling Interests | | Total Equity |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | | |
| BALANCE—December 31, 2020 | | 14,629,533 | | | $ | 157,591 | | | — | | | $ | — | | | — | | | $ | — | | | $ | — | | | $ | (134) | | | $ | (107,832) | | | $ | — | | | $ | 49,625 | |
| Retrospective application of reverse recapitalization | | 292,214,129 | | | (157,560) | | | — | | | — | | | — | | | — | | | 157,560 | | | — | | | — | | | — | | | — | |
| ADJUSTED BALANCE—December 31, 2020 | | 306,843,662 | | | 31 | | | — | | | — | | | — | | | — | | | 157,560 | | | (134) | | | (107,832) | | | — | | | 49,625 | |
| Net income (loss) prior to business combination | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (65,213) | | | — | | | (65,213) | |
| Business combination | | (306,843,662) | | | (31) | | | 166,243,491 | | | 17 | | | 306,843,662 | | | 31 | | | 169,093 | | | — | | | 112,306 | | | 491,677 | | | 773,093 | |
| Stock-based compensation expense | | — | | | — | | | — | | | — | | | — | | | — | | | 13,131 | | | — | | | — | | | — | | | 13,131 | |
| Issuance of common stock for acquisitions | | — | | | — | | | 4,178,147 | | | — | | | — | | | — | | | 61,500 | | | — | | | — | | | — | | | 61,500 | |
| Exchange of Class B common stock for Class A common stock | | | | | | 1,173,276 | | | | | (1,173,276) | | | | | 1,970 | | | — | | | — | | | (1,970) | | | — | |
| Impact of transactions affecting non-controlling interests | | — | | | — | | | — | | | — | | | — | | | — | | | (34,901) | | | — | | | — | | | 34,901 | | | — | |
| Notes receivable - related parties | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 134 | | | — | | | | | 134 | |
| Net income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (18,684) | | | (33,344) | | | (52,028) | |
| BALANCE—September 30, 2021 | | — | | | $ | — | | | 171,594,914 | | | $ | 17 | | | 305,670,386 | | | $ | 31 | | | $ | 368,353 | | | $ | — | | | $ | (79,423) | | | $ | 491,264 | | | $ | 780,242 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except shares) | | | | Class A Shares | | Class B Shares | | Additional Paid-in Capital | | Accumulated Deficit | | Non-Controlling Interests | | Total Equity |
| | | | | | Shares | | Amount | | Shares | | Amount | | | | |
| BALANCE—December 31, 2022 | | | | | | 224,118,566 | | | 22 | | | 268,794,608 | | | 27 | | | 538,614 | | | (286,032) | | | 241,644 | | | $ | 494,275 | |
| Stock-based compensation expense, net | | | | | | — | | | — | | | — | | | — | | | 11,368 | | | — | | | — | | | 11,368 | |
| Issuance of Class A common stock upon vesting of restricted stock units | | | | | | 1,510,066 | | | — | | | — | | | | | (5,080) | | | — | | | 5,080 | | | — | |
| Issuance of common stock for acquisitions | | | | | | 9,724,852 | | | 1 | | | — | | | — | | | 14,401 | | | — | | | — | | | 14,402 | |
| Exchange of Class B common stock for Class A common stock | | | | | | 15,585,643 | | | 2 | | | (15,585,643) | | | (2) | | | 13,033 | | | — | | | (13,033) | | | — | |
| Warrants Exercised | | | | | | 29,420,204 | | | 3 | | | — | | | — | | | 214 | | | — | | | — | | | 217 | |
| Debt discount - warrants issued | | | | | | — | | | — | | | — | | | — | | | 45,698 | | | — | | | — | | | 45,698 | |
| Employee Stock Purchase Plan issuance | | | | | | 1,158,295 | | | — | | | — | | | — | | | 1,143 | | | — | | | — | | | 1,143 | |
| Impact of transactions affecting non-controlling interests | | | | | | — | | | — | | | — | | | — | | | (17,802) | | | — | | | 17,802 | | | — | |
| Net income (loss) | | | | | | — | | | — | | | — | | | — | | | — | | | (168,903) | | | (162,427) | | | (331,330) | |
| BALANCE—June 30, 2023 | | | | | | 281,517,626 | | | $ | 28 | | | 253,208,965 | | | $ | 25 | | | $ | 601,589 | | | $ | (454,935) | | | $ | 89,066 | | | $ | 235,773 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except shares) | | | | Class A Shares | | Class B Shares | | Additional Paid-in Capital | | Accumulated Deficit | | Non-Controlling Interests | | Total Equity |
| | | | | | Shares | | Amount | | Shares | | Amount | | | | |
| BALANCE—December 31, 2021 | | | | | | 180,113,551 | | | $ | 18 | | | 297,385,981 | | | $ | 30 | | | $ | 397,443 | | | $ | (78,760) | | | $ | 479,837 | | | $ | 798,568 | |
| Stock-based compensation expense, net | | | | | | — | | | — | | | — | | | — | | | 31,600 | | | — | | | — | | | 31,600 | |
| Issuance of Class A common stock upon vesting of restricted stock units | | | | | | 807,315 | | | 1 | | | — | | | — | | | (5,086) | | | — | | | 5,085 | | | — | |
| Issuance of common stock for acquisitions | | | | | | 2,857,167 | | | — | | | — | | | — | | | 15,771 | | | — | | | — | | | 15,771 | |
| Exchange of Class B common stock for Class A common stock | | | | | | 32,858,547 | | | 3 | | | (32,858,547) | | | (3) | | | 51,765 | | | — | | | (51,765) | | | — | |
| Employee Stock Purchase Plan issuance | | | | | | 1,392,372 | | | — | | | — | | | — | | | 9,707 | | | — | | | — | | | 9,707 | |
| Impact of transactions affecting non-controlling interests | | | | | | — | | | — | | | — | | | — | | | (5,558) | | | — | | | 5,558 | | | — | |
| Net income (loss) | | | | | | — | | | — | | | — | | | — | | | — | | | (4,673) | | | (9,976) | | | (14,649) | |
| BALANCE—June 30, 2022 | | | | | | 218,028,952 | | | $ | 22 | | | 264,527,434 | | | $ | 27 | | | $ | 495,642 | | | $ | (83,433) | | | $ | 428,739 | | | $ | 840,997 | |
The accompanying Notes are an integral part of these Condensed Financial Statements
9
CANO HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| | | Nine Months Ended
September 30, | | Six Months Ended June 30, |
| (in thousands) | (in thousands) | | 2022 | | 2021 | | (in thousands) | | 2023 | | 2022 | |
| Cash Flows from Operating Activities: | | | |
| Cash Flows (used in) from Operating Activities: | | Cash Flows (used in) from Operating Activities: | | | | | |
| Net loss | Net loss | | $ | (126,660) | | | $ | (117,240) | | | Net loss | | $ | (331,330) | | | $ | (14,649) | | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | |
| Adjustments to reconcile net loss to net cash (used in) from operating activities: | | Adjustments to reconcile net loss to net cash (used in) from operating activities: | | |
| Depreciation and amortization expense | Depreciation and amortization expense | | 64,215 | | | 30,746 | | | Depreciation and amortization expense | | 54,473 | | | 38,872 | | |
| Change in fair value of contingent consideration | Change in fair value of contingent consideration | | (9,525) | | | (4,152) | | | Change in fair value of contingent consideration | | (15,900) | | | (10,425) | | |
| | Change in fair value of warrant liabilities | Change in fair value of warrant liabilities | | 8,383 | | | (24,565) | | | Change in fair value of warrant liabilities | | (331) | | | (57,337) | | |
| | Loss on extinguishment of debt | Loss on extinguishment of debt | | 1,428 | | | 13,225 | | | Loss on extinguishment of debt | | — | | | 1,428 | | |
| Fixed asset abandonment | | Fixed asset abandonment | | 1,709 | | | — | | |
| Amortization of debt issuance costs | Amortization of debt issuance costs | | 2,743 | | | 4,162 | | | Amortization of debt issuance costs | | 2,560 | | | 1,570 | | |
| Non-cash lease expense | Non-cash lease expense | | 8,367 | | | — | | | Non-cash lease expense | | 1,642 | | | 3,642 | | |
| Class A shares issued for bonus award | | 2,194 | | | — | | | |
| Stock-based compensation | | 42,641 | | | 13,131 | | | |
| | | Stock-based compensation, net | | Stock-based compensation, net | | 11,368 | | | 31,600 | | |
| Paid in kind interest expense | | Paid in kind interest expense | | 7,380 | | | — | | |
| Credit loss on other assets | | Credit loss on other assets | | 62,000 | | | — | | |
| Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | | Changes in operating assets and liabilities: | | |
Accounts receivable, net (Related parties comprised $0and $(92) for the nine months ended September 30, 2022 and 2021, respectively) | | (75,913) | | | (25,494) | | | |
| Accounts receivable, net | | Accounts receivable, net | | 126,652 | | | (67,557) | | |
| Other assets | Other assets | | 10,885 | | | (9,874) | | | Other assets | | (649) | | | 7,158 | | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | | (47,492) | | | (22,603) | | | Prepaid expenses and other current assets | | 654 | | | (17,834) | | |
| Interest accrued due to sellers | Interest accrued due to sellers | | 100 | | | 1,208 | | | Interest accrued due to sellers | | — | | | 100 | | |
| Accounts payable and accrued expenses (Related parties comprised $3,047 and $(112) for the nine months ended September 30, 2022 and 2021, respectively) | | 30,955 | | | 40,620 | | | |
| Other liabilities (Related parties comprised $0 and $(92) for the nine months ended September 30, 2022 and 2021, respectively) | | 3,521 | | | 6,343 | | | |
| Net cash provided by (used in) operating activities | | (84,158) | | | (94,493) | | | |
| | Cash Flows from Investing Activities: | | | |
Purchase of property and equipment (Related parties comprised $0 and $5,697 for the nine months ended September 30, 2022 and 2021, respectively) | | (39,061) | | | (23,221) | | | |
| Accounts payable and accrued expenses (Related parties comprised $(295) and $1,331 for the six months ended June 30, 2023 and 2022, respectively) | | Accounts payable and accrued expenses (Related parties comprised $(295) and $1,331 for the six months ended June 30, 2023 and 2022, respectively) | | 28,289 | | | (9,362) | | |
| Other liabilities | | Other liabilities | | 6,528 | | | 10,621 | | |
| Net cash (used in) provided by operating activities | | Net cash (used in) provided by operating activities | | (44,955) | | | (82,173) | | |
| | Cash Flows (used in) from Investing Activities: | | Cash Flows (used in) from Investing Activities: | | |
| Purchase of property and equipment (Related parties comprised $766 and $3,567 for the six months ended June 30, 2023 and 2022, respectively) | | Purchase of property and equipment (Related parties comprised $766 and $3,567 for the six months ended June 30, 2023 and 2022, respectively) | | (11,270) | | | (20,431) | | |
| Acquisitions of subsidiaries including non-compete intangibles, net of cash acquired | Acquisitions of subsidiaries including non-compete intangibles, net of cash acquired | | (4,995) | | | (1,065,479) | | | Acquisitions of subsidiaries including non-compete intangibles, net of cash acquired | | — | | | (4,995) | | |
| Payments to sellers | Payments to sellers | | (4,097) | | | (24,148) | | | Payments to sellers | | (6,431) | | | (3,847) | | |
| | Net cash provided by (used in) investing activities | | (48,153) | | | (1,112,848) | | | |
| Net cash (used in) provided by investing activities | | Net cash (used in) provided by investing activities | | (17,701) | | | (29,273) | | |
| | Cash Flows from Financing Activities: | | | |
| Cash Flows (used in) from Financing Activities: | | Cash Flows (used in) from Financing Activities: | | |
| | Business combination and PIPE financing | | — | | | 935,362 | | | |
| | Payments of long-term debt | Payments of long-term debt | | (4,833) | | | (656,294) | | | Payments of long-term debt | | (3,223) | | | (3,222) | | |
| Debt issuance costs | Debt issuance costs | | (88) | | | (16,489) | | | Debt issuance costs | | (9,256) | | | (88) | | |
| Proceeds from long-term debt | Proceeds from long-term debt | | — | | | 1,120,000 | | | Proceeds from long-term debt | | 150,000 | | | — | | |
| Proceeds from revolving line of credit | | 25,000 | | | — | | | |
| Repayments of revolving line of credit | | (25,000) | | | — | | | |
| | Proceeds from CS Revolving Line of Credit | | Proceeds from CS Revolving Line of Credit | | 55,000 | | | — | | |
| Repayments of CS Revolving Line of Credit | | Repayments of CS Revolving Line of Credit | | (129,000) | | | — | | |
| Proceeds from insurance financing arrangements | Proceeds from insurance financing arrangements | | 2,529 | | | 1,702 | | | Proceeds from insurance financing arrangements | | 2,690 | | | 2,529 | | |
| Payments of principal on insurance financing arrangements | Payments of principal on insurance financing arrangements | | (2,070) | | | (1,419) | | | Payments of principal on insurance financing arrangements | | (1,467) | | | (1,380) | | |
| | Principal payments under finance leases | | (1,037) | | | (233) | | | |
| Repayment of equipment loans | | (385) | | | (316) | | | |
| Employee Stock Purchase Plan withholding tax payments | | (878) | | | — | | | |
| | Other | Other | | — | | | 134 | | | Other | | (1,696) | | | (1,716) | | |
| Net cash provided by (used in) financing activities | | (6,762) | | | 1,382,447 | | | |
| Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | | 63,048 | | | (3,877) | | |
| | Net increase (decrease) in cash, cash equivalents and restricted cash | | Net increase (decrease) in cash, cash equivalents and restricted cash | | 392 | | | (115,323) | | |
| Cash, cash equivalents and restricted cash at beginning of year | | Cash, cash equivalents and restricted cash at beginning of year | | 27,329 | | | 163,170 | | |
| Cash, cash equivalents and restricted cash at end of period | | Cash, cash equivalents and restricted cash at end of period | | $ | 27,721 | | | $ | 47,847 | | |
The accompanying Notes are an integral part of these Condensed Financial Statements
10
CANO HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| | | | | | | | | | | | | | | | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | | (139,073) | | | 175,106 | | | |
| Cash, cash equivalents and restricted cash at beginning of year | | 163,170 | | | 33,807 | | | |
| Cash, cash equivalents and restricted cash at end of period | | $ | 24,097 | | | $ | 208,913 | | | |
| | | | | | |
| Supplemental cash flow information: | | | | | | |
| Interest paid | | 38,233 | | | 28,075 | | | |
| Income taxes paid | | 82 | | | 1,150 | | | |
| | | | | | |
| Non-cash investing and financing activities: | | | | | | |
| Right-of-use assets obtained in exchange of lease liabilities | | 58,595 | | | — | | | |
| Issuance of class A common stock for acquisitions | | 54,914 | | | 61,500 | | | |
| | | | | | |
| Contingent consideration liability in connection with acquisitions | | 1,500 | | | 47,900 | | | |
| Contingent consideration assets in connection with acquisitions | | (5,600) | | | — | | | |
| Due to sellers in connection with acquisitions | | 1,530 | | | 1,295 | | | |
| Addition to construction in process funded through accounts payable | | 5,665 | | | — | | | |
| Humana Affiliate Provider clinic leasehold improvements | | 5,878 | | | 5,605 | | | |
| 2021 Employee Stock Purchase Plan issuance | | 11,377 | | | — | | | |
| Capital lease obligations entered into for property and equipment | | — | | | 225 | | | |
| Equipment loan obligations entered into for property and equipment | | — | | | 1,013 | | | |
| | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | |
| Supplemental cash flow information: | | | | | | |
| Interest paid | | 40,476 | | | 27,670 | | | |
| Income taxes paid | | — | | | 82 | | | |
| | | | | | |
| Non-cash investing and financing activities: | | | | | | |
| Right-of-use assets obtained in exchange of lease liabilities | | 16,558 | | | 50,297 | | | |
| Issuance of Class A common stock for acquisitions | | 14,402 | | | 15,771 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Due to sellers in connection with acquisitions | | — | | | 3,533 | | | |
| Addition to construction in process funded through accounts payable | | 906 | | | 3,580 | | | |
| Humana Affiliate Provider clinic leasehold improvements | | 363 | | | 2,928 | | | |
| Employee Stock Purchase Plan issuance | | 1,143 | | | 9,707 | | | |
| Warrants issued | | 45,698 | | | — | | | |
| | | | | | |
| | | | | | |
| | | | | | |
The accompanying Notes are an integral part of these Condensed Financial Statements
11
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. NATURE 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” or the "Seller"), provides value-based medical care for its members through a network of primary care physicians across the U.S. and Puerto Rico.members. The Company focuses on providing high-touch population health and wellness services to Medicare Advantage, Medicare GlobalAccountable Care Organization Realizing Equity, Access, and Professional Direct Contracting EntityCommunity Health ("DCE"ACO REACH"), Medicare patients under Accountable Care Organizations ("ACO")ACO and Medicaid capitated members, particularly in underserved communities by leveraging aour 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”)and the Seller (each as defined in the Business Combination Agreement). 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 69.0 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 17.25 million Class B ordinary shares owned by Jaws Sponsor, LLC (the "Sponsor"). In connection with the Business Combination, the Company issued 306.8 million shares of the Company’s Class B common stock to existing shareholdersstockholders of PCIH. The Company also issued 80.0 million shares of the Company’s Class A common stock in a private placement for $800.0 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 dependdepends 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 35.1% and 49.1%52.6% controlling ownership as of the Closing Date and Septemberas of June 30, 2022,2023, respectively. Certain members of PCIH who retained their common unit interests in PCIH held the remaining 64.9% and 50.9%47.4% non-controlling ownership interests as of the Closing Date and Septemberas of June 30, 2022,2023, respectively. These members hold an economic interest in PCIH through PCIH Common Units and a corresponding number of non-economic Class B common stock, which enablesentitles the holder to one 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.Units (as defined in the Business Combination Agreement). 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 $3,534.9 million, which consisted of (i) $466.5 million of cash and (ii) $3,068.4 million of Cano Health, Inc.'s common stock or 306.8 million shares of Class B common stock valued at $3,068.4 million based on a reference stock price of $10.00 per share.
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 theCano Health's unaudited condensed consolidated financial statements of Cano Health, Inc.statements. The Seller holds these indirect economic interests are held by the Seller in the form of PCIH Common Units that can be redeemedare redeemable for shares of Cano Health Class A common stock, together with the cancellation of an equal number of shares of Cano Health Class B common stock in Cano Health, Inc.stock. The non-controlling interests will decrease over time as shares of Class B common stock and PCIH Common Units are exchanged for shares of Cano Health's Class A common stock in Cano Health, Inc.stock.
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 Company's consolidated results of the Company are Cano Health Texas, PLLC, Cano Health Nevada, PLLC, Cano Health California, PC, CHC Provider Network, 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 September 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 effectFor additional information on the Company’s financial condition 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.
Basis of Presentation
These Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Stockholders' Equity for the three and nine months ended September 30, 2022 and 2021, the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021, and the Condensed Consolidated Balance Sheet at September 30, 2022 are unaudited and,risk factors, please see Item 1A, "Risk Factors,” included 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 notesCompany’s 2022 Form 10-K, as supplemented by Part II, Item 1A, “Risk Factors,” included in our Annualthe Company’s Quarterly Report on Form 10-K ("Form 10-K")10-Q filed with the U.S. SecuritiesSEC on May 9, 2023 (the “Q1 2023 Form 10-Q") and Exchange Commission (the "SEC")in this Quarterly Report 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 stockForm 10-Q 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
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.fiscal quarter ended June 30, 2023 (the “Q2 2023 Form 10-Q”).
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current year presentation. Such reclassifications impacted the classification of: accounts receivable, inventory, current and long-term portionrepayments of equipment loans, duerepayment of finance lease obligation and employee stock purchase plan contributions within the statement of cash flows. Additionally, there were reclassifications related to seller, accounts payablerevenue and accrued expenses and current and long-term deferred revenue.direct patient expense within variable interest entities. These reclassifications had no impact on net loss as previously presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company described its significant accounting policies in Note 2, to“Summary of Significant Accounting Policies,” included in the audited consolidated financial statements for the year ended December 31, 20212022 included in its 2022 Form 10-K. During the ninesix months ended SeptemberJune 30, 2022,2023, there were no significant changes to those accounting policies.
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 whenhas evaluated recent accounting forpronouncements through June 30, 2023 and believes that none of them will have a portion of the amendment to the term loan. The adoption did not impact net loss.material effect on our unaudited condensed consolidated financial statements.
3. REVENUE AND ACCOUNTS RECEIVABLEGOING CONCERN
The Company’s revenue streams foraccompanying unaudited condensed consolidated financial statements have been prepared assuming that the three and nineCompany will continue as a going concern. For the six months ended SeptemberJune 30, 20222023, the Company generated a net loss of $331.3 million and 2021 were as follows:used $45.0 million of cash from operations.
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | |
| | 2022 | | 2021 | | |
| (in thousands) | | Revenue $ | | Revenue % | | Revenue $ | | Revenue % | | | | |
| Capitated revenue | | | | | | | | | | | | |
| Medicare | | $ | 577,989 | | | 86.9 | % | | $ | 419,233 | | | 84.0 | % | | | | |
| Other capitated revenue | | 47,906 | | | 7.2 | % | | 54,530 | | | 10.9 | % | | | | |
| Total capitated revenue | | 625,895 | | | 94.1 | % | | 473,763 | | | 94.9 | % | | | | |
| Fee-for-service and other revenue | | | | | | | | | | | | |
| Fee-for-service | | 9,677 | | | 1.5 | % | | 8,176 | | | 1.6 | % | | | | |
| Pharmacy | | 12,910 | | | 1.9 | % | | 10,096 | | | 2.0 | % | | | | |
| Other | | 16,546 | | | 2.5 | % | | 6,896 | | | 1.5 | % | | | | |
| Total fee-for-service and other revenue | | 39,133 | | | 5.9 | % | | 25,168 | | | 5.1 | % | | | | |
| Total revenue | | $ | 665,028 | | | 100.0 | % | | $ | 498,931 | | | 100.0 | % | | | | |
Management has evaluated the significance of these relevant conditions in relation to the Company’s ability to meet its obligations and has concluded that there is substantial doubt about the Company’s ability to continue as going concern within one year after the date that the financial statements are issued.
The Company is pursuing several initiatives to improve its profitability liquidity and net cash, such as controlling and reducing operating expenses, limiting capital expenditures, selling assets and operations and exiting certain markets. The Company’s efforts to reduce operating expenses include reducing permanent staff, lowering its third party medical costs through negotiations with payors, consolidating underperforming medical centers, delaying renovations and other capital projects and significantly reducing nonessential spending.
Other Company efforts to improve its liquidity include a strategic review of its Medicaid business in Florida, medical centers located in Texas and Nevada, pharmacy assets and other specialty practices.
The Company is in the process of closing medical centers and exiting markets in California, New Mexico and Illinois. The Company also plans to exit its Puerto Rico operations by January 1, 2024.
In addition to the above, the Company is pursuing a comprehensive process to identify and evaluate interest in a sale of the Company, or all or substantially all of its assets, consistent with the terms and conditions of the 2023 Side-Car Amendment, discussed below. The Company has engaged advisors to assist in the process. The Company has not set a timetable for the conclusion of this process and there is no assurance that the process will result in any transaction.
Additionally, as discussed in Note 12, “Debt,” the Side-Car Credit Agreement contains a financial maintenance covenant, requiring the Borrower to maintain a First Lien Net Leverage Ratio (i.e., total first lien senior secured net debt to Consolidated Adjusted EBITDA) not to exceed 5.80:1.00 on the last day of any four consecutive fiscal quarter period. Capitalized terms used, but not defined, in this Note are defined in Note 12, “Debt.” With a First Lien Leverage Ratio of approximately 12.00:1.00 at June 30, 2023, the Borrower was not in compliance with this financial maintenance covenant as of such date. Under the Side-Car Credit Agreement, the Borrower has a right to cure noncompliance with the financial maintenance covenant by obtaining sufficient equity proceeds, which may be sourced from equity or debt financings by the Company, that will be deemed added to the Borrower’s Consolidated Adjusted EBITDA for purposes of recalculating the financial maintenance covenant when such proceeds are contributed to the Borrower. The cure right may be exercised by the Borrower no more than 2 times in any 4 consecutive testing periods and no more than 5 times during the term of the Side-Car Credit Agreement. Accordingly, on July 28, 2023, the Borrower delivered to the 2023 Term Loan Administrative Agent a notice of its intent to cure such noncompliance by September 5, 2023, which would require the Company to raise approximately $71 million of new capital, which amount, if raised, would be contributed to the Borrower to consummate the cure.
Thereafter, on August 10, 2023, the Borrower obtained a waiver of such noncompliance and entered into an amendment of the Side-Car Credit Agreement (the “2023 Side-Car Amendment”) under which the Company will not be required to test compliance with the Side-Car Credit Agreement’s financial maintenance covenant until the fiscal quarter ending September 30, 2024. The 2023 Side-Car Amendment provides, among other modifications to the Side-Car Credit Agreement, that: (i) the Company will formally launch, announce and pursue a comprehensive process in an effort to yield one or more offers for a sale of all or substantially all of the assets or businesses of, or direct or indirect equity interests in, the Borrower and its subsidiaries with a purchase price that includes cash proceeds sufficient to pay the obligations under the Side-Car Credit Agreement, and will use its commercially reasonable efforts to promptly close such a transaction; (ii) the interest rate for the 2023 Term Loan will be increased to 16% during the payment-in-kind period ending on February 24, 2025; (iii) a premium
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | |
| | 2022 | | 2021 | | |
| (in thousands) | | Revenue $ | | Revenue % | | Revenue $ | | Revenue % | | | | |
| Capitated revenue | | | | | | | | | | | | |
| Medicare | | $ | 1,795,820 | | | 87.2 | % | | $ | 924,892 | | | 82.8 | % | | | | |
| Other capitated revenue | | 159,919 | | | 7.8 | % | | 139,712 | | | 12.5 | % | | | | |
| Total capitated revenue | | 1,955,739 | | | 95.0 | % | | 1,064,604 | | | 95.3 | % | | | | |
| Fee-for-service and other revenue | | | | | | | | | | | | |
| Fee-for-service | | 29,349 | | | 1.4 | % | | 17,113 | | | 1.5 | % | | | | |
| Pharmacy | | 37,185 | | | 1.8 | % | | 25,619 | | | 2.3 | % | | | | |
| Other | | 36,270 | | | 1.8 | % | | 9,778 | | | 0.9 | % | | | | |
| Total fee-for-service and other revenue | | 102,804 | | | 5.0 | % | | 52,510 | | | 4.7 | % | | | | |
| Total revenue | | $ | 2,058,543 | | | 100.0 | % | | $ | 1,117,114 | | | 100.0 | % | | | | |
| | | | | | | | | | | | |
Under the Credit Suisse Credit Agreement, if the Borrower was unable to obtain such waiver from the lenders under the 2023 Term Loan Agreement, or cure any such noncompliance by September 5, 2023, then the administrative agent under the Credit Suisse Credit Agreement would have been entitled to, and acting at the direction of the requisite lenders, could have, among other things, immediately terminated all commitments under the CS Term Loan and the CS Revolving Line of Credit and accelerated the maturity of all principal, interest and other amounts due thereunder. Under the Senior Notes, if (i) the Borrower was unable to obtain such waiver from the lenders under the 2023 Term Loan Agreement, or cure any such noncompliance by September 5, 2023; (ii) the lender under such facility or under the Credit Suisse Credit Agreement accelerated the maturity of $50 million or more of the amount outstanding thereunder; and (iii) the Borrower failed to pay such amount when due, then the trustee for the Senior Notes or the holders of at least 30% in principal amount of the Senior Notes would have been entitled to immediately accelerate the maturity of the Senior Notes, including all principal, interest and other amounts due thereon.
4. REVENUE AND ACCOUNTS RECEIVABLE
The Company’s revenue streams for the three and six months ended June 30, 2023 and 2022, respectively, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| | 2023 | | 2022 | | |
| (in thousands) | | Revenue $ | | Revenue % | | Revenue $ | | Revenue % | | | | |
| Capitated revenue | | | | | | | | | | | | |
| Medicare | | $ | 695,612 | | | 90.7 | % | | $ | 602,613 | | | 87.4 | % | | | | |
| Other capitated revenue | | 47,712 | | | 6.2 | % | | 52,880 | | | 7.6 | % | | | | |
| Total capitated revenue | | 743,324 | | | 96.9 | % | | 655,493 | | | 95.0 | % | | | | |
| Fee-for-service and other revenue | | | | | | | | | | | | |
| Fee-for-service | | 4,282 | | | 0.6 | % | | 9,701 | | | 1.4 | % | | | | |
| Pharmacy | | 15,559 | | | 2.0 | % | | 12,759 | | | 1.9 | % | | | | |
| Other | | 3,581 | | | 0.5 | % | | 11,420 | | | 1.7 | % | | | | |
| Total fee-for-service and other revenue | | 23,422 | | | 3.1 | % | | 33,880 | | | 5.0 | % | | | | |
| Total revenue | | $ | 766,746 | | | 100.0 | % | | $ | 689,373 | | | 100.0 | % | | | | |
| | | | | | | | | | | | |
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2023 | | 2022 | | |
| (in thousands) | | Revenue $ | | Revenue % | | Revenue $ | | Revenue % | | | | |
| Capitated revenue | | | | | | | | | | | | |
| Medicare | | $ | 1,489,240 | | | 91.2 | % | | $ | 1,217,831 | | | 87.5 | % | | | | |
| Other capitated revenue | | 95,157 | | | 5.8 | % | | 112,013 | | | 8.0 | % | | | | |
| Total capitated revenue | | 1,584,397 | | | 97.0 | % | | 1,329,844 | | | 95.5 | % | | | | |
| Fee-for-service and other revenue | | | | | | | | | | | | |
| Fee-for-service | | 15,975 | | | 1.0 | % | | 19,671 | | | 1.4 | % | | | | |
| Pharmacy | | 27,664 | | | 1.7 | % | | 24,274 | | | 1.7 | % | | | | |
| Other | | 5,619 | | | 0.3 | % | | 19,726 | | | 1.4 | % | | | | |
| Total fee-for-service and other revenue | | 49,258 | | | 3.0 | % | | 63,671 | | | 4.5 | % | | | | |
| Total revenue | | $ | 1,633,655 | | | 100.0 | % | | $ | 1,393,515 | | | 100.0 | % | | | | |
| | | | | | | | | | | | |
Accounts Receivable
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 SeptemberJune 30, 20222023 and December 31, 2021.2022.
| | | As of | | As of |
| (in thousands) | (in thousands) | | September 30, 2022 | | December 31, 2021 | (in thousands) | | June 30, 2023 | | December 31, 2022 |
| Accounts receivable | Accounts receivable | | $ | 374,456 | | | $ | 227,889 | | Accounts receivable | | $ | 459,633 | | | $ | 388,122 | |
| Medicare risk adjustment | Medicare risk adjustment | | 26,915 | | | 21,072 | | Medicare risk adjustment | | 24,868 | | | 49,586 | |
| Unpaid service provider costs | Unpaid service provider costs | | (199,334) | | | (115,528) | | Unpaid service provider costs | | (377,337) | | | (203,892) | |
| Accounts receivable, net | Accounts receivable, net | | $ | 202,037 | | | $ | 133,433 | | Accounts receivable, net | | $ | 107,164 | | | $ | 233,816 | |
Concentration of Risk
Contracts with three of theThree payors accounted for the following amounts:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Revenues | 61.3% | | 60.7% | | 63.8% | | 63.7% |
| | | | | | | | | | | | | |
| As of |
| September 30, 2022 | | December 31, 2021 | | |
| Accounts receivable | 47.2% | | 43.3% | | |
Payors that represented greater than 10% of our total revenue included four and three payors that represented approximately 71.3% and 63.8% of our total revenue for the three and ninesix months ended Septemberon each of June 30, 2022, respectively and three2023 and twoJune 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 | | |
| Revenues | 64.6% | | 64.7% | | 66.3% | | 64.9% | | |
Three payors that represented, approximately 60.7%in aggregate, the following percentages of accounts receivable as of June 30, 2023 and 55.7% of our total revenue for the three and nine months ended September 30, 2021,December 31, 2023, respectively.
| | | | | | | | | | | | | |
| As of |
| June 30, 2023 | | December 31, 2022 | | |
| Accounts receivable, net | 36.6% | | 56.3% | | |
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4.5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following as of SeptemberJune 30, 20222023 and December 31, 2021:2022, respectively:
| | (in thousands) | (in thousands) | | September 30, 2022 | | December 31, 2021 | (in thousands) | | June 30, 2023 | | December 31, 2022 |
| Third party receivables | Third party receivables | | $ | 57,800 | | $ | $ | — | | Third party receivables | | $ | — | | | $ | 60,400 | |
| | Contingent consideration asset | | Contingent consideration asset | | 14,500 | | | — | |
| Other | Other | | 21,033 | | | 20,632 | | Other | | 16,950 | | | 19,203 | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | | $ | 78,833 | | $ | $ | 20,632 | | Prepaid expenses and other current assets | | $ | 31,450 | | | $ | 79,603 | |
Third party receivables represent amounts due from MSP Recovery Inc. ("MSP") totaling $57.8 million. Included in other is $1.2 million of unregistered MSP Class A Common Stock owned by the Company as of September 30, 2022.. MSP provides healthcare claims reimbursement recovery services using data analytics to identify and recover improper payments made by Medicare, Medicaid and Commercial Health Insurerscommercial health insurers (each a “Health Plan”), and charged to the companyCompany under risk agreements, when the Health Plan is not the primary payerpayor under the Medicare Secondary Payer Act and other state and federal laws. MSP employs a team of data scientists and medical professionals who analyze historical medical claims data to identify recoverable opportunities, which MSP then aggregates and pursues. The Company has irrevocably assigned certain past claims data to MSP, which will becould have been paid byin either cash or equity at MSP's choice. The $57.8option. On July 7, 2023, the Company received 199,000,001 shares of MSP Class A common stock to settle certain receivables from MSP. As of June 30, 2023, the Company classified the receivables of $62.0 million from MSP in receivablesother assets due to the belief that at the balance sheet date the asset is payablenot expected to be realized into cash within the next 12 months.
On August 2, 2023, MSP announced that the SEC initiated an investigation of MSP on August 11, 2022. In addition, MSP announced that it received a subpoena on March 10, 2023 from the earlierU.S. Attorney's Office in the U.S. District Court for the Southern District of one business day before theFlorida. As a result of (i) these recent disclosures by MSP; (ii) MSP's delinquent filing of MSP's Annualits Quarterly Report on Form 10-K10-Q for the yearfiscal quarter ended DecemberMarch 31, 2022, or April 30,2023; and (iii) MSP's not being in compliance with the NASDAQ listing requirements, the Company decided to utilize a third-party valuation specialist to provide a market value analysis of the shares of Class A common stock that MSP issued to the Company on July 7, 2023. As of December 31, 2021, $10.0 millionJune 30, 2023, the Company has recognized an allowance for credit losses of MSP receivables were non-current and included in other assets in the consolidated balance sheet.$62.0 million.
Contingent consideration asset relates to a 2022 acquisition with various contingent consideration arrangements. The company may also receive and recognizecontingent consideration is valued based on the future performance of two acquired payor contracts using Monte-Carlo simulations. As of June 30, 2023, one of the plans was in a percentagedeficit resulting in a contingent consideration asset as the seller is required to pay the Company a multiple of claims recovered by MSP in excess of certain thresholds. These variable payments are recognized at the time of settlement. No such variable consideration has been received to date.2023 deficit.
5.6. UNPAID SERVICE PROVIDER COSTS
Activity in unpaid service provider costs for the ninesix months ended SeptemberJune 30, 20222023 and 20212022, respectively, is summarized below:
| | | | | | | | | | | | | | |
| (in thousands) | | 2023 | | 2022 |
| Balance as of January 1, | | $ | 318,554 | | | $ | 129,110 | |
| | | | |
| Incurred related to: | | | | |
| Current year | | 1,270,245 | | | 843,427 | |
| Prior years | | 2,317 | | | 2,576 | |
| | 1,272,562 | | | 846,003 | |
| Paid related to: | | | | |
| Current year | | 885,119 | | | 543,984 | |
| Prior years | | 286,528 | | | 120,997 | |
| | 1,171,647 | | | 664,981 | |
| Balance as of June 30, | | $ | 419,469 | | | $ | 310,132 | |
| | | | | | | | | | | | | | |
| (in thousands) | | 2022 | | 2021 |
| Balance as of January 1, | | $ | 129,110 | | | $ | 54,524 | |
| | | | |
| Incurred related to: | | | | |
| Current year | | 1,267,742 | | | 566,473 | |
| Prior years | | 11,319 | | | 3,526 | |
| | 1,279,061 | | | 569,999 | |
| Paid related to: | | | | |
| Current year | | 955,998 | | | 439,460 | |
| Prior years | | 132,475 | | | 58,051 | |
| | 1,088,473 | | | 497,511 | |
| Balance as of September 30, | | $ | 319,698 | | | $ | 127,012 | |
| | | | |
The foregoing reconciliation reflects an increase in our estimate during the nine months ended September 30, 2022 of $11.3 million and an increase in our estimate during the nine months ended September 30, 2021 of $3.5 million due to higher than expected utilization rates. $120.4 million and $32.8 million of the liabilities for medical services incurred but not reported
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
("IBNR")The foregoing reconciliation reflects an increase in our estimate of unpaid service provider costs during the six months ended June 30, 2023 of $2.3 million and an increase in our estimate of unpaid service provider costs during the six months ended June 30, 2022 of $2.6 million driven by higher than expected utilization. $20.9 million and $18.5 million of accounts receivable, net of $42.1 million and $32.7 million of the liabilities for unpaid service provider costs, were included in other current liabilities in the condensed consolidated balance sheet as theythese plans were in a net deficit position as of SeptemberJune 30, 20222023 and SeptemberJune 30, 2021,2022, 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 MSP for claims recovery as described in more detail in Note 4 above. Asmembers. As of both SeptemberJune 30, 2023 and June 30, 2022, and September 30, 2021, the Company’sCompany's excess loss insurance deductibledeductible was $0.1$0.2 million and maximum coverage was $2.0 million per member per calendar year. The Company recorded excess loss insurance premiums of $5.6$1.4 million and $10.6$2.4 million for the three and ninesix months ended SeptemberJune 30, 2022,2023, respectively, and reimbursement of $16.0$0.7 million and $23.1$1.4 million for the three and ninesix months ended SeptemberJune 30, 2022,2023, respectively. The Company recorded excess loss insurance premiums of $1.9$2.5 million and $5.4$4.9 million for the three and ninesix months ended SeptemberJune 30, 2021,2022, respectively, and reimbursements of $3.6$1.6 million and $5.4$3.6 million for the three and ninesix months ended SeptemberJune 30, 2021, respectively.2022. 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.
6. BUSINESS ACQUISITIONS7. GOODWILL
DuringActivity impacting the nineCompany's goodwill balance during the six months ended SeptemberJune 30, 2022, the Company completed seven asset acquisitions for a total purchase price of $41.7 million. The consideration included $5.0 million in cash, $1.5 million in deferred cash payments, and $39.3 million was issued in Class A common stock. These amounts were offset by $4.1 million in net contingent assets. Further, in the nine months ended September 30, 2022 the Company paid a deferred acquisition payment in Class A common stock for $15.8 million related to a prior year acquisition. 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 $18.2 million of goodwill and $21.8 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.2023 is summarized below:
In the prior year, the Company completed various acquisitions for a total purchase price of $1.1 billion. The most significant of these acquisitions were University Health Care and its Affiliates ("University") and Doctor’s Medical Center, LLC and Affiliates for $607.9 million and $300.7 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. | | | | | |
| (in thousands) | |
| Goodwill as of December 31, 2022 | $ | 480,375 | |
| Other | (331) | |
| |
| Goodwill as of June 30, 2023 | $ | 480,044 | |
WhileWe test goodwill for impairment annually on October 1st, or under certain circumstances, more frequently, such as when events or changes in circumstances indicate there may be an impairment. In the second quarter of 2023, due to the Company's significant losses, the Company uses its best estimates and assumptions as partdetermined there was a triggering event for a goodwill impairment test. With the assistance of a third-party specialist, management performed a quantitative assessment of the purchase price allocation processCompany's fair value using the Market Approach and the Income Approach. We are required to accuratelyimpair goodwill only when our assessment determines the Company’s carrying value assets acquiredexceeds its fair value as we operate as one reporting unit. It was determined that the Company's fair value exceeded the carrying value 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.no supplemental impairment was necessary.
7.
8. PAYOR RELATIONSHIPS AND OTHER INTANGIBLES, NET
As of SeptemberJune 30, 2022,2023, the Company’s total intangibles, net, consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Intangibles: | | | | | | | | |
| Trade names | | | | $ | 1,409 | | | $ | (1,024) | | | $ | 385 | |
| Brand names | | | | 183,877 | | | (43,612) | | | 140,265 | |
| Non-compete agreements | | | | 85,461 | | | (37,115) | | | 48,346 | |
| Customer relationships | | | | 880 | | | (257) | | | 623 | |
| Payor relationships | | | | 631,186 | | | (79,273) | | | 551,913 | |
| Provider relationships | | | | 19,842 | | | (9,700) | | | 10,142 | |
| Total intangibles, net | | | | $ | 922,655 | | | $ | (170,981) | | | $ | 751,674 | |
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Intangibles: | | | | | | |
| Trade names | | $ | 1,409 | | | $ | (905) | | | $ | 504 | |
| Brand names | | 183,568 | | | (21,952) | | | 161,616 | |
| Non-compete agreements | | 81,795 | | | (23,946) | | | 57,849 | |
| Customer relationships | | 880 | | | (221) | | | 659 | |
| Payor relationships | | 620,913 | | | (55,700) | | | 565,213 | |
| Provider relationships | | 16,142 | | | (5,402) | | | 10,740 | |
| Total intangibles, net | | $ | 904,707 | | | $ | (108,126) | | | $ | 796,581 | |
As of December 31, 2021,2022, the Company’s total intangibles, net consisted of the following:
| | (in thousands) | (in thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | (in thousands) | | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Intangibles: | Intangibles: | | | | | | | Intangibles: | | | | | | | |
| Trade names | Trade names | | $ | 1,409 | | | $ | (787) | | | $ | 622 | | Trade names | | | $ | 1,409 | | | $ | (945) | | | $ | 464 | |
| Brand names | Brand names | | 183,238 | | | (9,037) | | | 174,201 | | Brand names | | | 183,878 | | | (29,169) | | | 154,709 | |
| Non-compete agreements | Non-compete agreements | | 75,794 | | | (12,110) | | | 63,684 | | Non-compete agreements | | | 85,476 | | | (28,341) | | | 57,135 | |
| Customer relationships | Customer relationships | | 880 | | | (184) | | | 696 | | Customer relationships | | | 880 | | | (233) | | | 647 | |
| Payor relationships | Payor relationships | | 609,362 | | | (32,714) | | | 576,648 | | Payor relationships | | | 631,214 | | | (63,510) | | | 567,704 | |
| Provider relationships | Provider relationships | | 12,242 | | | (2,472) | | | 9,770 | | Provider relationships | | | 19,842 | | | (6,738) | | | 13,104 | |
| Total intangibles, net | Total intangibles, net | | $ | 882,925 | | | $ | (57,304) | | | $ | 825,621 | | Total intangibles, net | | | $ | 922,699 | | | $ | (128,936) | | | $ | 793,763 | |
The Company recorded amortization expense of $20.2$21.0 million and $14.2$42.1 million for the three and six months ended June 30, 2023, respectively, and $15.5 million and $30.6 million for the three and six months ended SeptemberJune 30, 2022, and 2021, respectively, and $50.8 million and $23.3 million for the nine months ended September 30, 2022 and 2021, respectively.
Expected amortization expense for the Company’s existing amortizable intangibles for the next five5 years, and thereafter, as of SeptemberJune 30, 20222023 is as follows:
| | Amount (in thousands) | |
| 2022 - remaining | $ | 56,069 | | |
| 2023 | | 58,317 | | |
| (in thousands) | | (in thousands) | | Amount |
| 2023 - remaining | | 2023 - remaining | $ | 40,835 | |
| 2024 | 2024 | | 56,703 | | 2024 | | 60,855 | |
| 2025 | 2025 | | 53,893 | | 2025 | | 57,166 | |
| 2026 | 2026 | | 44,658 | | 2026 | | 46,996 | |
| 2027 | | 2027 | | 40,230 | |
| Thereafter | Thereafter | | 526,941 | | Thereafter | | 505,592 | |
| Total | Total | $ | 796,581 | | Total | $ | 751,674 | |
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.
During the three months ended September 30, 2022, the Company decided to rebrand the University primary care facilities which resulted in the useful life of the brand intangibles decreasing from 20 years to 2.5 years, and an acceleration of
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
amortization expense during the third quarter. This change resulted in additional amortization expense of $3.2 million for the three and nine months ended September 30, 2022.
8.9. LEASES
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 1 year to 1015 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.
Future minimum lease payments under operating and finance leases as of SeptemberJune 30, 20222023 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Operating | | Finance | | Total |
| 2022 - remaining | | $ | 10,442 | | $ | 494 | | $ | 10,936 |
| 2023 | | 33,772 | | 1,729 | | 35,501 |
| 2024 | | 32,017 | | 1,449 | | 33,466 |
| 2025 | | 29,156 | | 1,023 | | 30,179 |
| 2026 | | 26,702 | | 460 | | 27,162 |
| Thereafter | | 106,162 | | 71 | | 106,233 |
| Total minimum lease payments | | 238,251 | | 5,226 | | 243,477 |
| Less: amount representing interest | | (52,826) | | (492) | | (53,318) |
| Lease liabilities | | $ | 185,425 | | $ | 4,734 | | $ | 190,159 |
| | | | | | |
| | | | | | |
Future minimum lease payments under operating and finance leases as of December 31, 2021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Operating | | Finance | | Total |
| 2022 | | $ | 23,051 | | $ | 1,485 | | $ | 24,536 |
| 2023 | | 24,577 | | 1,078 | | 25,655 |
| 2024 | | 22,561 | | 797 | | 23,358 |
| 2025 | | 20,489 | | 364 | | 20,853 |
| 2026 | | 18,424 | | 107 | | 18,531 |
| Thereafter | | 67,569 | | — | | 67,569 |
| Total minimum lease payments | | 176,671 | | 3,831 | | 180,502 |
| Less: amount representing interest | | (38,461) | | (355) | | (38,816) |
| Lease liabilities | | $ | 138,210 | | $ | 3,476 | | $ | 141,686 |
| | | | | | |
| | | | | | |
The Company recorded rent expense of $8.7 million and $6.9 million for the three months ended September 30, 2022 and 2021, respectively, and $24.1 million and $15.9 million for the nine months ended September 30, 2022 and 2021, respectively.
9. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following as of September 30, 2022 and December 31, 2021:
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | | | | |
| (in thousands) | | September 30, 2022 | | December 31, 2021 |
| Service fund liability | | $ | 18,668 | | | $ | 11,451 | |
| Acquired provider payments liability | | 10,255 | | | 10,255 | |
| 2021 Employee Stock Purchase Plan withholding liability | | 764 | | | 10,494 | |
| Other | | 4,850 | | | 4,464 | |
| Other current liabilities | | $ | 34,537 | | | $ | 36,664 | |
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Operating | | Finance | | Total |
| 2023 - remaining | | $ | 19,121 | | $ | 2,075 | | $ | 21,196 |
| 2024 | | 36,796 | | 3,941 | | 40,737 |
| 2025 | | 33,984 | | 3,515 | | 37,499 |
| 2026 | | 31,232 | | 2,922 | | 34,154 |
| 2027 | | 28,651 | | 801 | | 29,452 |
| Thereafter | | 99,961 | | — | | 99,961 |
| Total minimum lease payments | | 249,745 | | 13,254 | | 262,999 |
| Less: amount representing interest | | (60,815) | | (2,512) | | (63,327) |
| Lease liabilities | | $ | 188,930 | | $ | 10,742 | | $ | 199,672 |
| | | | | | |
| | | | | | |
The Company recorded rent expense of $9.7 million and $19.3 million for the three and six months ended June 30, 2023, respectively, and $8.2 million and $15.4 million for the three and six months ended June 30, 2022, respectively.
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following as of June 30, 2023 and December 31, 2022, respectively:
10.
| | | | | | | | | | | | | | |
| (in thousands) | | June 30, 2023 | | December 31, 2022 |
| Service fund liability1 | | $ | 20,934 | | | $ | 16,652 | |
| Other | | 7,076 | | | 7,839 | |
| Other current liabilities | | $ | 28,010 | | | $ | 24,491 | |
1The balance reflected in service fund liability related to service funds in a deficit position and reflects the net amount of medical services incurred but not reported ("IBNR") and accounts receivable. The IBNR and accounts receivable reclassified to other current liabilities was $42.1 million and $21.2 million, respectively, as of June 30, 2023 and $114.7 million and $98.0 million, respectively, as of December 31, 2022.
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. CONTRACT LIABILITIES
As further explained in Note 14,15, “Related Party Transactions”,Transactions,” in these unaudited condensed consolidated financial statements, 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 $6.9$5.1 million and $6.1$6.5 million as of SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively. The short-term portion was recorded in other current liabilities and the long-term portion was recorded in other liabilities. The Company recognized $0.7 million and $1.9$1.4 million in revenue from contract liabilities recorded during the three and ninesix months ended SeptemberJune 30, 2023, respectively, and $0.7 million and $1.3 million in the three and six months ended June 30, 2022, respectively.
A summary of significant changes in the contract liabilities balance during the period is as follows:
| | | | | | | | |
| (in thousands) | | For the three months ended September 30, 2022 |
| | |
| | |
| | |
| Balance at June 30, 2022 | $ | 7,537 |
| | |
| | |
| | |
| Increases due to amounts collected | | — |
| Decreases due to revenue recognized | | (657) | |
| Balance at September 30, 2022 | $ | 6,880 | |
| | |
| | |
| | | | | | | | |
| (in thousands) | | For the three months ended June 30, 2023 |
| Balance at March 31, 2023 | $ | 5,786 | |
| | |
| Revenues recognized from current period increases | | (675) | |
| Balance at June 30, 2023 | $ | 5,111 | |
| | | | | | | | |
| (in thousands) | | For the ninesix months ended SeptemberJune 30, 20222023 |
| Balance at December 31, 2022 | $ | |
| 6,461 | |
| | |
| Revenues recognized from current period increases | | (1,350) | |
Balance at December 31, 2021June 30, 2023 | $ | 6,0595,111 | |
| | |
| | |
| | |
Increases due to amounts collected | | 2,750 | |
Decreases due to revenue recognized | | (1,929) | |
Balance at September 30, 2022 | $ | 6,880 | |
| | |
| | |
Of the SeptemberJune 30, 20222023 contract liabilities balance, the Company expects to recognize the following amounts as revenue in the succeeding years:
| | Years ended December 31, | Years ended December 31, | | Amount (in thousands) | Years ended December 31, | | Amount (in thousands) |
| 2022 - remaining | $ | 657 | |
| 2023 | | 2,628 | |
| 2023 - remaining | | 2023 - remaining | $ | 1,349 |
| 2024 | 2024 | | 2,442 | 2024 | | 2,514 |
| 2025 | 2025 | | 1,111 | 2025 | | 1,183 |
| 2026 | 2026 | | 42 | 2026 | | 65 |
| | Total | Total | $ | 6,880 | Total | $ | 5,111 |
11.12. DEBT
The Company’sAt June 30, 2023, and December 31, 2022, the Company's current notes payable were as follows asfollows:.
| | | | | | | | | | | | | | |
| Current Notes Payable | | As of, |
| (in thousands) | | June 30, 2023 | | December 31, 2022 |
| | | | |
| | | | |
2023 Term Loan1 | | 157,380 | | | — | |
| Current portion of CS term loan | | 6,444 | | | 6,444 | |
| | 163,824 | | | 6,444 | |
| Less: Debt issuance costs | | (54,157) | | | — | |
| Current notes payable, net of debt issuance costs | | $ | 109,667 | | | $ | 6,444 | |
1.Includes $7.4 million of SeptemberPaid-in-Kind ("PIK") interest that was incurred under the 2023 Term Loan through June 30, 2022 and December 31, 2021:2023.
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | | | | |
| | |
| (in thousands) | | 2022 | | 2021 |
| Term loan | | $ | 639,599 | | | $ | 644,432 | |
| | | | |
| | | | |
| Senior Notes | | 300,000 | | | 300,000 | |
| Less: Current portion of notes payable | | (6,444) | | | (6,493) | |
| | 933,155 | | | 937,939 | |
| Less: Debt issuance costs | | (18,761) | | | (22,673) | |
| Notes payable, net of current portion and debt issuance costs | | $ | 914,394 | | | $ | 915,266 | |
Term Loan | | | | | | | | | | | | | | | | | |
| Long-Term Notes Payable | | As of, |
| (in thousands) | | June 30, 2023 | | December 31, 2022 | |
| CS Term Loan | | $ | 628,322 | | | $ | 631,544 | | |
| CS Revolving Line of Credit | | 10,000 | | | 84,000 | | |
| | | | | |
| | | | | |
| Senior Notes | | 300,000 | | | 300,000 | | |
| | 938,322 | | | 1,015,544 | | |
| Less: Debt issuance costs | | (16,090) | | | (17,738) | | |
| Long-term notes payable, net of debt issuance costs | | $ | 922,232 | | | $ | 997,806 | | |
Credit Suisse Credit Agreement
Pursuant to athe Credit Suisse Credit Agreement, with Credit Suisse and the other lenders party thereto (the “Credit Agreement”), the Company, through its wholly owned operating subsidiary, Cano Health, LLC (the “Borrower”), has a senior secured term loan (together with(as amended, the “CS Term Loan”) and a revolving linecredit facility (as amended, the “CS Revolving Line of credit, the "Credit Facilities"Credit”). The Obligations under the Credit FacilitiesSuisse Credit Agreement are secured by substantially all of the Company’sBorrower’s assets. The Credit Facilities containSuisse Credit Agreement contains a financial maintenance covenant (which is for the benefit of the lenders under the revolving lineCS Revolving Line of creditCredit only), requiring the CompanyBorrower to not exceed a total first lien secured net debt to earnings before interest, taxes, depreciation and amortization ("EBITDA")Consolidated Adjusted EBITDA (as defined therein) ratio, which is tested quarterly only if the CompanyBorrower has exceeded a certain amount drawn under its revolvingthe CS Revolving Line of Credit, which is approximately 35% of the total commitment under the CS Revolving Line of Credit, or approximately $42 million. As of June 30, 2023, the available balance on the CS Revolving Line of Credit was $110 million, and as of August 10, 2023 such line of credit. Ascredit was fully drawn to ensure that the Company had access to liquidity while it was negotiating the 2023 Side-Car Amendment, discussed under “2023 Term Loan Agreement;” provided, however, having secured the 2023 Side-Car Amendment on August 10, 2023, the Company currently expects to repay a significant portion of such line of credit by the end of September 2023. Accordingly, as of June 30, 2022,2023, the Company was not required to test its compliance with the financial maintenance covenant under the Credit Suisse Credit Agreement. Please see the discussion below regarding the Company’s noncompliance with the financial maintenance covenant under the Side-Car Credit Agreement as of June 30, 2023 and the Company’s receipt of a waiver of such noncompliance on August 10, 2023.
While the Company currently believes that the Borrower will not be required to test the financial maintenance covenant under the Credit Suisse Credit Agreement for the testing period ending September 30, 2023, if it were required to test such financial maintenance covenant and if, at such time, it is not in compliance with the financial maintenance covenant.covenant, the Borrower would be required to cure or seek a waiver of such noncompliance from the requisite revolving lenders under the Credit Suisse Credit Agreement by December 6, 2023. Under the Credit Suisse Credit Agreement, the Borrower has a right to cure any such noncompliance by obtaining sufficient equity proceeds, which may be sourced from equity or debt financings by the Company, that would be deemed added to the Borrower’s Consolidated Adjusted EBITDA for purposes of recalculating the financial maintenance covenant when such proceeds are contributed to the Borrower. The cure right may be exercised by the Borrower no more than 2 times in any 4 consecutive testing periods and no more than 5 times during the term of the Credit Suisse Credit Agreement. If the Borrower is unable to obtain a waiver of, or to cure, any such noncompliance, then the administrative agent under the Credit Suisse Credit Agreement would be entitled to, and acting at the direction of the requisite lenders could, among other things, immediately terminate the CS Term Loan and CS Revolving Line of Credit commitments and accelerate the maturity of all principal, interest and other amounts due under such facilities. If such circumstances were to arise, the Company can provide no assurances that the Borrower would be able to obtain such waiver or timely consummate such cure or repay or refinance any accelerated principal, interest and other amounts that may become due, if any.
The term loanUnder the Side-Car Credit Agreement, if the Borrower becomes required to test the financial maintenance covenant under the Credit Suisse Credit Agreement and if, at such time, the Borrower is subjectnot in compliance with such financial maintenance covenant and was unable to principal amortization repayments due onobtain a waiver of, or cure, any such noncompliance by December 6, 2023, then the last business day of each calendar quarter equal2023 Term Loan Administrative Agent would be entitled to, 0.25%and acting at the direction of the initialrequisite lenders, could, among other things, immediately terminate all commitments under the 2023 Term Loan and accelerate the maturity of all principal, interest and other amounts due thereunder. Under the Senior Notes, if (i) the Borrower becomes required to test the financial maintenance covenant
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
under the Credit Suisse Credit Agreement and if, at such time, the Borrower is not in compliance with such financial maintenance covenant and was unable or obtain a waiver of, or cure, any such noncompliance by December 6, 2023; (ii) the lender under such facility or under the Side-Car Credit Agreement accelerates the maturity of $50 million or more of the amount outstanding thereunder; and (iii) the Borrower fails to pay such amount when due, then the trustee for the Senior Notes or the holders of at least 30% in principal amount as applicable, based onof 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 onSenior Notes would be entitled to immediately accelerate the maturity date of November 23, 2027. the Senior Notes, including all principal, interest and other amounts due thereon.
Prior to the CS Term Loan’s maturity date, the CompanyBorrower 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 SeptemberJune 30, 2022, the available balance on our revolving line of credit was $120.0 million. As of September 30, 20222023 and December 31, 2021, two health plans required2022, the Company to maintainBorrower maintains restricted letters of credit for an aggregate amount of $5.7 million and $7.2 million, respectively. As of June 30, 2023 and $3.5December 31, 2022, the Borrower had $13.0 million (of its total cash of $27.7 million) and $4.4 million (of its total cash of $27.3 million), respectively, whichof cash held as collateral and letters of credit related to the ACO REACH program, respectively. The letters of credit and the collateral are both presented within the Company's cash, cash equivalents and restricted cash.
On January 14, 2022, the Company entered into an amendment to the Credit Agreement,Suisse Credit Agreement, pursuant to which the outstanding principal amount of term loansthe CS Term Loan was replaced with an equivalent amount of new term loansloan having substantially similar terms, except with a lower interest rate margin applicable to the new term loan. The amendment of the Credit Suisse Credit Agreement implemented a forward-looking term rate based on the secured overnight financing rate (“SOFR”) as the replacement offor LIBOR as the benchmark interest rate for borrowings under the term loanCS Term Loan and revolving lineCS Revolving Line of credit,Credit, and certain other provisions. The new interest rate applicable to the term loanCS Term Loan and borrowingborrowings under the revolving lineCS Revolving Line of creditCredit was revised to 4.00%, plus the greater of SOFR and the applicable credit spread adjustment or 0.50%; provided that if the CompanyBorrower achieves a public corporate rating from S&P of at least B"B" and a public rating from Moody's of at least B2,"B2", then for as long as such ratings remainremained in effect, a margin of 3.75% shallwould be applicable.applicable. The CompanyBorrower has not reached thethese applicable corporate ratings. The amendment represented a partial extinguishment and resulted in a write-off of deferred issuance costs of $1.3$1.4 million, which was recorded as a loss on extinguishment of debt for the ninesix months ended SeptemberJune 30, 2022. During the threesix months ended SeptemberJune 30, 2022,2023, the SOFR exceeded the credit spread adjustment of 0.50%, resulting in monthly variable interest rates for the quarter. As of SeptemberJune 30, 2022,2023, the effective interest rate of the CS Term Loan was 9.76%.
2023 Term Loan Agreement
On February 24, 2023 (the “2023 Term Loan Closing Date”), the Company, through the Borrower and Primary Care (ITC) Intermediate Holdings, LLC (“Holdings”), entered into a Credit Agreement (the “Side-Car Credit Agreement”) with certain lenders and JP Morgan Chase Bank, N.A., as administrative agent (the “2023 Term Loan Administrative Agent”), pursuant to which the lenders provided a senior secured term loan (the “2023 Term Loan”) to the Borrower in the aggregate principal amount of $150 million, the full amount of which was 7.61%funded on the 2023 Term Loan Closing Date.
The Side-Car Credit Agreement contains a financial maintenance covenant, requiring the Borrower to maintain a First Lien Net Leverage Ratio (i.e., total first lien senior secured net debt to Consolidated Adjusted EBITDA) not to exceed 5.80:1.00 on the last day of any four consecutive fiscal quarter period. With a First Lien Leverage Ratio of approximately 12.00:1.00 at June 30, 2023, the Borrower was not in compliance with this financial maintenance covenant as of such date. Under the Side-Car Credit Agreement, the Borrower has a right to cure noncompliance with the financial maintenance covenant by obtaining sufficient equity proceeds, which may be sourced from equity or debt financings by the Company, that will be deemed added to the Borrower’s Consolidated Adjusted EBITDA for purposes of recalculating the financial maintenance covenant when such proceeds are contributed to the Borrower. The cure right may be exercised by the Borrower no more than 2 times in any 4 consecutive testing periods and no more than 5 times during the term of the Side-Car Credit Agreement. Accordingly, on July 28, 2023, the Borrower delivered to the 2023 Term Loan Administrative Agent a notice of its intent to cure such noncompliance by September 5, 2023, which would require the Company to raise approximately $71 million of new capital, which amount, if raised, would be contributed to the Borrower to consummate the cure.
Thereafter, on August 10, 2023, the Borrower obtained a waiver of such noncompliance and entered into the 2023 Side-Car Amendment under which the Company will not be required to test compliance with the Side-Car Credit Agreement’s
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
financial maintenance covenant until the fiscal quarter ending September 30, 2024. The 2023 Side-Car Amendment provides, among other modifications to the Side-Car Credit Agreement, that: (i) the Company will formally launch, announce and pursue a comprehensive process in an effort to yield one or more offers for a sale of all or substantially all of the assets or businesses of, or direct or indirect equity interests in, the Borrower and its subsidiaries with a purchase price that includes cash proceeds sufficient to pay the obligations under the Side-Car Credit Agreement, and will use its commercially reasonable efforts to promptly close such a transaction; (ii) the interest rate for the 2023 Term Loan will be increased to 16% during the payment-in-kind period ending on February 24, 2025; (iii) a premium payment of 5% of the outstanding principal amount of the 2023 Term Loan will be paid in kind by capitalizing such payment to the principal amount of the 2023 Term Loan; (iv) the applicable prepayment premium will be required in connection with any voluntary or mandatory prepayment or repayment of the 2023 Term Loan; and (v) the lenders will have participation rights in certain new debt financings incurred by the Borrower or any of its subsidiaries. Absent such waiver, the 2023 Term Loan Administrative Agent, acting at the direction of the lead lender, and at the requisite lenders request, could have immediately terminated all commitments under the 2023 Term Loan and accelerated the maturity of all principal, interest and other amounts due thereon. Pursuant to the terms of the 2023 Side-Car Amendment, the Borrower will not be required to pursue its cure right. Based on the conditions present within the Side-Car Amendment, amounts outstanding pertaining to the 2023 Term Loan Agreement have been classified within current notes payable.
Under the Credit Suisse Credit Agreement, if the Borrower was unable to obtain such waiver from the lenders under the 2023 Term Loan Agreement, or cure any such noncompliance by September 5, 2023, then the administrative agent under the Credit Suisse Credit Agreement would have been entitled to, and acting at the direction of the requisite lenders, could have, among other things, immediately terminated all commitments under the CS Term Loan and the CS Revolving Line of Credit and accelerated the maturity of all principal, interest and other amounts due thereunder. Under the Senior Notes, if (i) the Borrower was unable to obtain such waiver from the lenders under the 2023 Term Loan Agreement, or cure any such noncompliance by September 5, 2023; (ii) the lender under such facility or under the Credit Suisse Credit Agreement accelerated the maturity of $50 million or more of the amount outstanding thereunder; and (iii) the Borrower failed to pay such amount when due, then the trustee for the Senior Notes or the holders of at least 30% in principal amount of the Senior Notes would have been entitled to immediately accelerate the maturity of the Senior Notes, including all principal, interest and other amounts due thereon.
Pursuant to the Side-Car Credit Agreement, the 2023 Term Loan bears interest at a rate equal to: (i) on or prior to the date that is the second anniversary of the closing date, 14% per annum, payable quarterly either (at the Borrower’s election) in cash or in kind by adding such amount to the principal balance of the 2023 Term Loan (provided that pursuant to the 2023 Side-Car Amendment, the interest rate for the 2023 Term Loan will be increased to 16% during the payment-in-kind period ending on February 24, 2025); and (ii) thereafter, 13% per annum, payable quarterly in cash. The Borrower has elected to satisfy interest due on the 2023 Term Loan through the second anniversary in kind. The 2023 Term Loan is scheduled to mature on November 23, 2027. The 2023 Term Loan will not amortize.
Prior to the Side-Car Credit Agreement’s maturity date, the Borrower may elect to prepay the 2023 Term Loan, in whole or in part, subject to the applicable prepayment premium. If the Borrower voluntarily prepays the 2023 Term Loan, or if the 2023 Term Loan is accelerated, including in connection with a bankruptcy or insolvency proceeding, then the 2023 Term Loan will be subject to an applicable prepayment premium. If the prepayment, repayment or acceleration occurs during the period from and after the Closing Date up to (but not including) the date that is the 18-month anniversary of the initial funding date, the prepayment premium shall be an amount equal to: (i) the aggregate amount of interest which would otherwise have been payable on the principal amount of the 2023 Term Loan prepaid, repaid or accelerated from the date of the occurrence of the trigger event until the date that is the 18-month anniversary of the initial funding date, discounted at the then-applicable treasury rate plus 0.50%, plus (ii) an amount equal to the premium that would otherwise be payable as if such prepayment, repayment or acceleration had occurred on the day after the 18-month anniversary of the initial funding date (the “Make-Whole Amount”). If the prepayment, repayment or acceleration occurs during the period from and after the 18-month anniversary of the initial funding date up to (but not including) the date that is the 30-month anniversary of the initial funding date, the prepayment premium shall be an amount equal to 3% of the principal amount of the 2023 Term Loan prepaid, repaid or accelerated on such date in cash. If the prepayment, repayment or acceleration occurs during the period from and after the 30-month anniversary of the initial funding date up to (but not including) the date that is the 42-month anniversary of the initial funding date, the prepayment premium shall be an amount equal to 2% of the principal amount of the 2023 Term Loan prepaid, repaid or accelerated on such date in cash. There is no prepayment premium from and after the 42-month anniversary of the initial funding date. In addition, the 2023 Term Loan must be prepaid with the net cash proceeds of any material asset sale (subject to
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
reinvestment rights) or casualty or condemnation event or any incurrence of debt not permitted by the Side-Car Credit Agreement. The Side-Car Credit Agreement also provides for annual excess cash flow mandatory prepayments. The mandatory prepayments under the Side-Car Credit Agreement are substantially consistent with the Credit Suisse Credit Agreement. Mandatory prepayments of the 2023 Term Loan and the CS Term Loan must be offered pro rata to the lenders thereof.
The Side-Car Credit Agreement contains certain other representations and warranties, events of default and covenants, which are qualified by certain exceptions and baskets, that are customary for a transaction of this type, including, among other things, covenants that restrict the ability of the Borrower and its subsidiaries to incur certain additional indebtedness, create or prevent certain liens on assets, engage in certain mergers or consolidations, engage in asset dispositions, declare or pay dividends and make equity redemptions or restrict the ability of its subsidiaries to do so, make loans and investments, enter into transactions with affiliates, or make voluntary payments, amendments or modifications to subordinated or junior indebtedness.
The 2023 Term Loan is guaranteed, jointly and severally by Holdings and each domestic wholly-owned material subsidiary of the Borrower’s current and future direct and indirect domestic wholly-owned material subsidiaries, with certain exceptions in accordance with the terms of the Side-Car Credit Agreement. The 2023 Term Loan is secured on a first lien basis by substantially all the assets of the Borrower and the guarantors. The obligations under the Side-Car Credit Agreement and the Credit Suisse Credit Agreement are secured by the same collateral on a ratable basis.
In connection with and as consideration for entering into the Side-Car Credit Agreement, on February 24, 2023, the Company granted the lenders warrants to purchase, in the aggregate, up to 29.5 million shares of the Company’s Class A common stock at an exercise price of $0.01 per share, of which 21.6 million warrants were exercised on March 8, 2023 and the remaining 7.9 million warrants were exercised on April 24, 2023.
During the six months ended June 30, 2023, the Company paid customary fees and expenses to the 2023 Term Loan Administrative Agent and the lenders in connection with the Side-Car Credit Agreement.
Senior Notes
On September 30, 2021, the Company issued senior unsecured notes for a principal amount of $300.0 million (the "Senior Notes") in a private offering. The Senior Notes bear interest at 6.25% per annum, payable semi-annually on April 1st and October 1st of each year, which interest commenced on April 1, 2022. As of SeptemberJune 30, 2022,2023, the effective interest rate of the Senior Notes was 6.66%. Principal on the Senior Notes is scheduled to become due in full on October 1, 2028. The Senior Notes are not subject to any amortization payments.
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 100% 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 40% of the aggregate principal amount of the notes with the net cash proceeds of certain equity offerings, at a redemption price of 106.25%, 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 100% to 103.13%, plus accrued and unpaid interest, depending on the date that the Senior Notes are redeemed.
Future Principal Payments on Term LoanLoans and Senior Notes
The following table sets forth the Company’s future principal payments as of SeptemberJune 30, 20222023, assuming mandatory prepayment does not occur:acceleration of principal and capitalized paid-in-kind interest related to the 2023 Term Loan into calendar year 2024 :
| | | | | | | | |
| (in thousands) | | |
| Year ending December 31, | | Amount |
| 2022 - remainder | $ | 1,611 |
| 2023 | | 6,444 |
| 2024 | | 6,444 |
| 2025 | | 6,444 |
| 2026 | | 6,444 |
| Thereafter | | 912,212 |
| Total | $ | 939,599 |
CANO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | |
| (in thousands) | | |
| Year ending December 31, | | Amount |
| 2023 | $ | 3,222 |
| 2024 | | 163,824 |
| 2025 | | 6,444 |
| 2026 | | 6,444 |
| 2027 | | 622,212 |
| Thereafter | | 300,000 |
| Total | $ | 1,102,146 |
As of SeptemberJune 30, 20222023 and December 31, 2021,2022, the balance of debt issuance costs totaled $19.5totaled $70.8 million and 23.3$18.4 million, respectively,, and areis being amortized into interest expense over the lifeterm of the loanloans using the effective interest method. Of the balance as of SeptemberJune 30, 2022,2023, $18.870.2 million was related to the term loanCS Term Loan, the 2023 Term Loan and the indebtedness under the Senior Notes, reflected as a direct reduction to the long-term debt balances, while the remaining $0.7$0.3 million and $0.3 million was related to the revolving lineCS Revolving Line of credit,Credit, and reflected in prepaid expenses and other current assets.assets and other assets, respectively.
TheThe Company recognized interest expense of $16.5$26.7 million (including $5.3 million of PIK interest under the 2023 Term Loan) and $50.2 million (including $7.4 million of PIK interest under the 2023 Term Loan) for the three and six months ended June 30, 2023, respectively, compared to $13.1 million and $16.0$26.4 million for the three and six months ended SeptemberJune 30, 2022, respectively. From the interest expense, approximately $0.5 million and 2021,$1.6 million were recognized related to the amortization expense for the three and six months ended June 30, 2023, respectively, and $42.9$0.9 million and $36.4 million for the nine months ended September 30, 2022 and 2021, respectively, of which $1.1 million and $4.0$1.6 million for the three and six months ended SeptemberJune 30, 2022 and 2021, respectively and $2.7 million and $4.2 million for the nine months ended September 30, 2022 and 2021, respectively, were related to the amortization of debt issuance costs.
12.13. FAIR 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 three3 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.
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
If the asset or liability has a specified (contractual)(i.e., 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 of the assets or liabilities 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 $902.9 $882.2 million and $945.0and $745.9 million as of SeptemberJune 30, 20222023 and December 31, 2021,2022, respectively.
CANO HEALTH, INC.
The following is a description of the valuation methodology used for liabilities measured at fair value.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Contingent ConsiderationDue to seller: 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 requirements were completed.
On August 11, 2021, the Company issued 2,720,966 shares of its 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 $30.0 million purchase price divided by the average share price of the CompanyCompany's Class A common stock during the twenty20 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 0% to 100% 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. As of June 30, 2023, the seller has met the 2022 performance metrics to earn a 100% payout and the liability is classified in current portions due to sellers on the consolidated balance sheet at a fair value of $28.7 million. The liability will continue to be fair valued until paid as it will be settled in a variable amount of shares of the Company's Class A common stock.
On August 5, 2022, the Company entered into a purchase agreement in connection with an acquisition. The transaction was financed, in part, through the issuance of shares of the Company's Class A sharescommon stock and various contingent consideration arrangementsarrangements. The contingent consideration is valued using different valuation models. Pursuant to the purchase agreement, the seller may exercise its put right and sell the shares to the Company at a set price by delivering written notice of such exercise to the Company by November 3, 2022 if the Company’s Class A common stock as of the trading day immediately preceding the exercise date is less than the put price per share. Conversely, the Company may exercise its call right and buy the shares that were issued to the seller at a set price by delivering written notice of such exercise to the seller at any time if the Company’s Class A common stock is more than the call price per share. The put and call options described above are valued using the Black-Scholes model. Further, the purchase price is based on the future performance of the assetstwo acquired in the acquisition which are valuedpayor contracts using Monte-Carlo simulations. As of September 30, 2022, the total of such contingent consideration was an asset of $9.1 million of which, $5.7 million was classified in other assets in the condensed consolidated balance sheets, while $3.4 million was classified in prepaid expenses and other current assets in the consolidated balance sheet.
On November 3, 2022, the Company entered into an agreement that, along with other provisions, cancelled these put and call rights.
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: There was a different fair value measurement at the reporting date.
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
There was a$15.9 million decrease of $9.5 million in the fair value of the net contingent consideration liability during the ninesix months ended SeptemberJune 30, 20222023, which was recorded in change in fair value of contingent consideration in the condensed consolidated statement of operations. A gain of $2.1 million related to anThis amount owed for an acquisitionrepresent gains 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 nine months ended September 30, 2022. Additionally, a gain of $2.9 million was recorded, as described above, related to derecognizing University's contingent consideration from the balance sheet as of September 30, 2022. Further, a gain of $4.5 million waswere recorded related to the acquisition which was completed on August 5, 2022, as described above, resultingabove. The gains resulted from a change in the fair value of the put and call options and future performance of the assets acquiredacquired.
On December 9, 2022, the Company entered into an asset acquisition agreement requiring future payments in shares of the Company's Class A common stock. As of June 30, 2023, $16.7 million of the liability was classified as current portions due to sellers in the acquisitions.condensed consolidated balance sheet. The liability will continue to be fair valued until paid, as it will be settled in a variable amount of shares of the Company's Class A common stock. The Company issued 9.7 million Class A common stock on January 31, 2023, to settle a portion of the purchase price.
Warrant Liabilities: As of June 3, 2021, the Closing Date of the Business Combination, and as of SeptemberJune 30, 2022,2023, there were 23.0 million public warrants ("Public Warrants") and 10.5 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"Hedges,", under which the Public Warrants and the Private Placement Warrants do not meet the criteria for equity treatment and therefore 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 the fair value of the 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 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 SeptemberJune 30, 20222023 and December 31, 2021.2022.
As discussed in Note 12 "Debt", the Company granted the lenders to the 2023 Term Loan warrants to purchase, in the aggregate, up to 29.4 million shares of the Company’s Class A common stock at an exercise price of $0.01 per share. The warrants meet the criteria for equity classification and are presented in the warrant debt discount line in the statement of shareholders' equity. The warrants were recorded at fair value upon issuance using the closing price of shares of the Company's Class A common stock on the issuance date of February 24, 2023, less $0.01. 21.6 million of these warrants were exercised on March 8, 2023 and the remaining warrants were exercised on April 24, 2023.
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
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
The following table provides quantitative information regarding the Level 3 inputs used for the fair value measurements of the warrant liabilities:
| | | As of | | As of |
| Unobservable Input | Unobservable Input | | September 30, 2022 | | | December 31, 2021 | Unobservable Input | | June 30, 2023 | | | December 31, 2022 |
| Exercise price | Exercise price | | $11.50 | | | $11.50 | Exercise price | | $11.50 | | | $11.50 |
| Stock price | Stock price | | $8.67 | | | $8.91 | Stock price | | $1.39 | | | $1.37 |
| Term (years) | Term (years) | | 3.7 | | | 4.4 | Term (years) | | 2.9 | | | 3.4 |
| | Risk free interest rate | Risk free interest rate | | 4.1% | | | 1.2% | Risk free interest rate | | 4.5% | | | 4.1% |
| Dividend yield | Dividend yield | | None | | | None | Dividend yield | | None | | | None |
| Public warrant price | Public warrant price | | $2.64 | | | $2.39 | Public warrant price | | $0.21 | | | $0.22 |
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 SeptemberJune 30, 20222023:
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | (in thousands) | (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) | (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 and assets measured at fair value on a recurring basis: | Liabilities and assets measured at fair value on a recurring basis: | | | | | | | | | Liabilities and assets measured at fair value on a recurring basis: | | | | | | | | |
| Contingent consideration liability, net | | $ | 24,600 | | | $ | — | | | $ | — | | | $ | 24,600 | | |
| Contingent consideration liability | | Contingent consideration liability | | $ | 1,400 | | | $ | — | | | $ | — | | | $ | 1,400 | |
| Contingent consideration asset | | Contingent consideration asset | | (14,500) | | | — | | | — | | | (14,500) | |
| Due to sellers liabilities | | Due to sellers liabilities | | 45,122 | | | 45,122 | | | — | | | — | |
| Public Warrant Liabilities | Public Warrant Liabilities | | 60,720 | | | 60,720 | | | — | | | — | | Public Warrant Liabilities | | 4,830 | | | 4,830 | | | — | | | — | |
| Private Placement Warrant Liabilities | Private Placement Warrant Liabilities | | 27,808 | | | — | | | — | | | 27,808 | | Private Placement Warrant Liabilities | | 2,212 | | | — | | | — | | | 2,212 | |
| Total liabilities measured at fair value | | $ | 113,128 | | | $ | 60,720 | | | $ | — | | | $ | 52,408 | | |
| Total liabilities and assets measured at fair value | | Total liabilities and assets measured at fair value | | $ | 39,064 | | | $ | 49,952 | | | $ | — | | | $ | (10,888) | |
There was an increasea decrease of $5.8$0.2 million in the fair value of the Public Warrant Liabilities during the ninesix months ended SeptemberJune 30, 2022,2023, and an increasea decrease of $2.6$0.1 million in the fair value of the Private Placement Warrant Liabilities during the ninesix months ended SeptemberJune 30, 2022.2023. 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.As of September 30, 2022, $5.7 million of the contingent consideration was in an asset position and classified in other assets in the condensed consolidated balance sheets, while $3.4 million was in an asset position and classified in prepaid expenses and other current assets in the consolidated balance sheet.
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, 2021:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (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 liability | $ | 38,423 | | $ | — | | $ | — | | $ | 38,423 | |
| Public Warrant Liabilities | | 54,970 | | | 54,970 | | | — | | | — | |
| Private Placement Warrant Liabilities | | 25,174 | | | — | | | — | | | 25,174 | |
| Total liabilities measured at fair value | $ | 118,567 | | $ | 54,970 | | $ | — | | $ | 63,597 | |
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (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 and assets measured at fair value on a recurring basis: | | | | | | | | |
| Contingent consideration liability | $ | 2,800 | | $ | — | | $ | — | | $ | 2,800 | |
| Due to sellers liabilities | | 56,940 | | | 56,940 | | | — | | | — | |
| Public Warrant Liabilities | | 5,060 | | | 5,060 | | | — | | | — | |
| Private Placement Warrant Liabilities | | 2,313 | | | — | | | — | | | 2,313 | |
| Total liabilities and assets measured at fair value | $ | 67,113 | | $ | 62,000 | | $ | — | | $ | 5,113 | |
The following table includes a roll forward of the amounts for the three and ninesix months ended SeptemberJune 30, 20222023 and 20212022 and for liabilities measured at fair value:
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | | | | |
| | Fair Value Measurements for the Three Months Ended September 30, |
| | 2022 | | 2021 |
| Original Balance as of July 1, | $ | 50,805 | | $ | 136,190 | |
| | | | |
| Change in fair value of contingent consideration | | 900 | | | (3,940) | |
| Contingent consideration recognized due to acquisitions | | (4,100) | | | 38,300 | |
| Change in fair value of warrants | | 65,720 | | | 14,649 | |
| Contingent consideration write off | | (197) | | | — | |
| Closing Balance as of September 30, | $ | 113,128 | | $ | 185,199 | |
| | | | | | | | | | | | | | |
| | Fair Value Measurements for the Three Months Ended June 30, |
| (in thousands) | | 2023 | | 2022 |
| Balance as of March 31, | | $ | 46,865 | | | $ | 86,744 | |
| | | | |
| | | | |
| | | | |
| Change in fair value of contingent consideration | | (11,800) | | | (5,764) | |
| | | | |
| | | | |
| Change in fair value of warrants | | 1,677 | | | (30,175) | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Change in fair value of due to sellers | | 2,322 | | | — | |
| | | | |
| Balance as of June 30, | | $ | 39,064 | | | $ | 50,805 | |
| | | | | | | | | | | | | | |
| | Fair Value Measurements for the Nine Months Ended September 30, |
| | 2022 | | 2021 |
| Original Balance as of January 1, | $ | 118,567 | | $ | 5,172 | |
| Change in fair value of contingent consideration | | (9,525) | | | (4,152) | |
| Contingent consideration recognized due to acquisitions | | (4,100) | | | 47,900 | |
| Warrants acquired in the Business Combination | | — | | | 163,058 | |
| Change in fair value of warrants | | 8,383 | | | (24,565) | |
| Contingent consideration write off | | (197) | | | — | |
| Contingent consideration payments | | — | | | (2,214) | |
| Closing Balance as of September 30, | $ | 113,128 | | $ | 185,199 | |
| | | | | | | | | | | | | | | | |
| | Fair Value Measurements for the Six Months Ended June 30, |
| (in thousands) | | 2023 | | 2022 | | |
| Balance as of January 1, | | $ | 67,113 | | | $ | 118,567 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Change in fair value of contingent consideration | | (15,900) | | | (10,425) | | | |
| | | | | | |
| | | | | | |
| Change in fair value of warrants | | (331) | | | (57,337) | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Change in fair value of due to sellers | | 3,461 | | | — | | | |
| Due to seller payments | | (15,279) | | | — | | | |
| Balance as of June 30, | | $ | 39,064 | | | $ | 50,805 | | | |
13.14. VARIABLE 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 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
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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)(i) the power to direct the activities that most significantly impact the Physicians Groups’ economic performance and ii)(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 whichthat 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.
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The table below illustrates the aggregated VIE assets and liabilities and performance for the Physicians Groups:
| | | | | | | | | | | | | | |
| (in thousands) | | September 30, 2022 | | December 31, 2021 |
| Total Assets | | $ | 129,242 | | | $ | 80,445 | |
| Total Liabilities | | $ | 95,160 | | | $ | 59,988 | |
| | | | | | | | | | | | | | |
| (in thousands) | | June 30, 2023 | | December 31, 2022 |
| Total Assets1 | | $ | 21,832 | | | $ | 16,247 | |
Total Liabilities1 | | $ | 32,370 | | | $ | 19,445 | |
| | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (in thousands) | (in thousands) | 2022 | | 2021 | | 2022 | | 2021 | | (in thousands) | 2023 | | 2022 | | 2023 | | 2022 | |
| Total revenue | Total revenue | $ | 17,784 | | | $ | 12,321 | | | $ | 56,856 | | | $ | 14,621 | | | Total revenue | $ | 21,369 | | | $ | 24,754 | | | $ | 49,030 | | | $ | 39,072 | | |
| Operating expenses: | | | |
| Operating expenses:2 | | Operating expenses:2 | | |
| Third-party medical costs | Third-party medical costs | 10,372 | | | 8,582 | | | 35,795 | | | 8,582 | | | Third-party medical costs | 18,748 | | | 18,792 | | | 37,000 | | | 25,423 | | |
| Direct patient expense | Direct patient expense | 6,483 | | | 2,413 | | | 19,913 | | | 5,203 | | | Direct patient expense | 7,381 | | | 7,666 | | | 14,768 | | | 13,430 | | |
| Selling, general and administrative expenses | 6,082 | | | 7,277 | | | 26,835 | | | 12,540 | | | |
| Depreciation and amortization expense | 1,672 | | | 353 | | | 3,564 | | | 860 | | | |
| Transaction and other costs | 460 | | | — | | | 1,322 | | | — | | | |
| | Total operating expenses | Total operating expenses | 25,069 | | | 18,625 | | | 87,429 | | | 27,185 | | | Total operating expenses | 26,129 | | | 26,458 | | | 51,768 | | | 38,853 | | |
| | Net loss | $ | (7,285) | | | $ | (6,304) | | | $ | (30,573) | | | $ | (12,564) | | | |
| Net income | | Net income | $ | (4,760) | | | $ | (1,704) | | | $ | (2,738) | | | $ | 219 | | |
There are no restrictions on the Physicians Groups' assets or on the settlement of their liabilities. The assets of the Physicians GroupGroups can be used to settle obligations of the Company.Company's obligations. The Physicians Groups are included in the Company’s creditor group; thus, creditors of the CompanyCompany's creditors 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.
2Amounts exclude selling, general and administrative expenses from the Company spent to support the operations of the VIE's which were approximately $13.2 million and $26.3 million for the three and six months ended June 30, 2023, respectively and $9.1 million and $20.8 million for the three and six months ended June 30, 2022, respectively. Additionally, amounts exclude depreciation and amortization expenses incurred by the Company to support the VIEs' operations which were approximately $2.0 million and $3.9 million for the three and six months ended June 30, 2023, respectively, and $1.1 million and $1.9 million for the three and six months ended June 30, 2022, respectively.
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
14.15. RELATED PARTY TRANSACTIONS
Significant Shareholder Relationship
On March 8, 2023, the Company issued an aggregate of 21,620,941 shares of Class A common stock to funds affiliated with Diameter Capital Partners LP (collectively, “Diameter”) and on April 24, 2023 the Company issued an additional 7,862,160 shares of Class A common stock to Rubicon Credit Holdings LLC ("Rubicon") upon the exercise of the warrants that were issued in connection with the consummation of the 2023 Term Loan to Diameter and Rubicon pursuant to the Warrant Agreement, dated as of February 24, 2023, by and between the Company and Continental Stock Transfer & Trust Company, as warrant agent and transfer agent. See Note 12, “Debt,” for important information on the 2023 Term Loan, which bears interest at a rate equal to (i) on or prior to February 24, 2025, 14% per annum, payable quarterly either (at the Company’s election) in cash or in kind by adding such amount to the principal balance of the term loan and (ii) thereafter, 13% per annum, payable quarterly in cash. During the three and six months ended June 30, 2023, the Company paid in kind $5.3 million and $7.4 million of interest expense, respectively, which was compounded into the principal, and paid $9.2 million in cash for debt issuance costs.
MedCloud Depot, LLC Relationship
On August 1, 2022, the Company appointed aBob Camerlinck as Chief Operating Officer ("COO"(the "COO"). The COO owns 20% 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 whichto MedCloud that amounted to $0.6approximately $1.2 million and $0.3$2.0 million for the three and six months ended June 30, 2023, respectively, and $0.8 million and $1.2 million for three and six months ended SeptemberJune 30, 2022, and 2021, respectively, and $1.8 million and $0.9 million for nine months ended September 30, 2022 and 2021, respectively, which were recorded within the caption selling, general and administrative expenses. Theexpenses in the condensed consolidated financial statements. As of June 30, 2023 the Company did not owe MedCloud any amounts as of September 30, 2022.owed $0.6 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 formerlywho at the time of the acquisition was owned by the spouse of Dr. Marlow Hernandez, the Company's former Chief Executive Officer who remains a member of the Company’s Board of Directors ("CEO"Dr. Hernandez"), and Onsite Dental entered into a dental services agreement with the Company. TheDr. Hernandez’ spouse of the CEO became a minority shareholder of Onsite Dental upon closing of the acquisition.acquisition and she serves as a Board observer at Onsite Dental's board meetings. Dr. Hernandez’ brother and mother are employed as dentists at Onsite Dental.
The Company has various sublease agreements with Onsite Dental. TheFor such space, the Company recognized sublease income of approximately $0.7$0.2 million and $0.4 million during the three and six months ended June 30, 2023, respectively, and $0.2 million and $0.3 million during the ninethree and six months ended SeptemberJune 30, 2022, and 2021, respectively, and $0.2 million and $0.1 million during the three months ended September 30, 2022 and 2021, respectively, which was recorded
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
within the caption "Other Income (Expense)" in the accompanying unaudited condensed consolidated statements of operations. As of SeptemberJune 30, 2022,2023, 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 $1.5 million and $3.2 million during the nine months ended September 30, 2022 and 2021, respectively, andexpenses of an immaterial amount and $2.5$1.5 million during the three and six months ended SeptemberJune 30, 2022, and 2021.respectively, which was recorded within the caption "Direct Patient Expense". As of SeptemberJune 30, 2022,2023, no balance was due to DEP. Subsequent to Onsite Dental acquiring DEP on April 14, 2022, the Company entered into a new dental services administration agreement with Onsite Dental to provide dental services for the Company's managed care members and terminated the prior contract with DEP. The Company paid in respect of the Company. The Company recognized expensesdental services provided to Cano Health's members by Onsite Dental in the amount of approximately $2.0$2.4 million and $5.0$6.4 million for the three and ninesix months ended SeptemberJune 30, 2023, respectively, and $3.1 million for the three and six months ended June 30, 2022. As of SeptemberJune 30, 2022, no balance was2023, the Company owed $2.2 million to Onsite Dental.
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 $60.0 million. The note accrued interest at a rate of 8.0% per annum through March 2020 and 10.0% 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 nine months ended September 30, 2022, Humana was not a related party due to the repayment of the note.
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 $0.3 million and $0.5 million in operating lease expense related to its use of Humana clinics during the three and nine months ended September 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 $128.4 million for the nine months ended September 30, 2021, respectively. The Company recognized third-party medical expenses of $249.8 million for the nine months ended September 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 $0.1 million and $0.7 million for the three
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company indirectly leased a medical space from the Company's COO. The Company paid approximately $0.2 million and $0.3 million for the three and six months ended SeptemberJune 30, 20222023 to Humana, Inc., a managed care organization with whom the Company has entered into multi-year agreements (“Humana”), and 2021, respectively,in turn, Humana paid the Company's COO $0.1 million and $0.2 million for the three and $2.1six months ended June 30, 2023, respectively. In addition, the Company paid $0.2 million and $0.2 million to the Humana and Humana paid the Company's COO $0.1 million and $0.2 million for the ninethree and six months ended SeptemberJune 30, 2022, respectively. The Company's COO leased three other properties directly to the Company and 2021,was paid $0.1 million and $0.2 million for the three and six months ended June 30, 2023 and $0.1 million and $0.1 million for the three and six months ended June 30, 2022, respectively.
General Contractor Agreements
As of December 31, 2018, theThe Company has entered into various general contractor agreements with Cano Builders, USA, Inc. ("Cano Builders"), a company that is controlled by Jose Hernandez, the father of the CEO of the CompanyDr. Hernandez, pursuant to performwhich Cano Builders performs leasehold improvements at various Company locations, as well as performing various repairs and related maintenance as deemed necessary.maintenance. Payments made to Cano Builders pursuant to thethese general contractor agreements, as well as amounts paid for repairs and maintenance, to this related party totaled approximately $2.6$0.3 million and $3.2$0.8 million for the three and six months ended SeptemberJune 30, 2022 and 2021,2023, respectively, and $6.2$1.9 million and $5.6$3.6 million for the ninethree and six months, ended SeptemberJune 30, 2022, respectively. As of June 30, 2023, the Company owed $0.2 million to Cano Builders.
Other
Dr. Hernandez' sister-in-law is employed at the Company as its director of payroll and 2021, respectively,her annualized cash compensation is approximately $135,000.
15.16. STOCK-BASED COMPENSATION
2021 Stock Option and Incentive Plan
At the Company’s special meeting of stockholders held on June 2, 2021, the stockholders approvedThe Company maintains the 2021 Stock Option and Incentive Plan (the “2021 Stock 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 and align their interests with those of the Company. The aggregate number of shares authorized for issuance under the 2021 Stock Plan will not exceed 52.0 million shares of stock. The aggregate number of shares authorized for issuance under the 2021 ESPP will not exceed 4.7 million, plus onmillion. On January 1 2022, andof each January 1 thereafteryear 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 lessorlesser of (i) 15.0 million shares of Class A common stock, (ii) one percent 1.0% 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 as determined by the administrator appointed byCompensation Committee, which is the Board of Directors.plan administrator.
The 2021 Stock 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 the Company's employees, directors and consultants of the Company.consultants.
Stock Options
On June 3, 2021, in connection with the closing of the Business Combination, the Company granted 12.8 million stock options with market conditions (“Market Condition Awards”) to several of the Company's executive officers and directors of the Company.directors. The Market Condition Awards are eligible to vest when the Company’s stock price meets specified hurdle prices and stays above those prices for 20 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 50% on each of the first and second anniversaries, so long assubject to the optionee staysremaining employed. The unrecognized compensation cost of the Market Condition Awards as of SeptemberJune 30, 20222023 was $23.0$8.5 million, which is expected to be recognized over the weighted average remaining service period of 1.7 years.1.1 years.
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Further, on March 15, 2022, March 31, 2023 and April 11, 2023, in connection with achieving certain performance metrics, the Company granted 0.4a total of 2.3 million stock options with service conditions ("Service Condition Awards") to several executive officers of the Company.Company's executive officers. The Service ConditionsCondition Awards vest over four4 years, with 25% of the shares underlying the award vesting on March 15, 2023, and 25% of the shares underlying the award at the end of each successive one-year1-year period thereafter, so long assubject to the optionee staysremaining employed. The unrecognized compensation cost of the Service Condition Awards as of SeptemberJune 30, 20222023 was $1.3$1.7 million, which is expected to be recognized over the weighted average remaining service period of 2.01.9 years.
Stock Option Valuation
The Company uses two valuation methods to determine the fair value of the stock options.options granted under the 2021 Stock Plan. 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 regardingThe fair values were calculated using the Monte-Carlo model with the following assumptions as of the June 3, 2021 grant date:
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the key assumptions, refer to Note 15, "Stock-Based Compensation" on the Company's Form 10-K for the fiscal year ended December 31, 2021. | | | | | |
| As of June 3, 2021 |
| |
| Closing Cano Health share price as of valuation date | $ | 14.75 |
| Risk-free interest rate | 1.68% - 2.0% |
| Expected volatility | 45.0% |
| Expected dividend yield | 0.0% |
| Expected cost of equity | 9.0% |
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.options. The fair values of the Service Condition Awards were calculated using the following assumptions as of the grant date on March 15, 2022:2022, March 31, 2023 and April 11, 2023 grant dates:
| | | | | | | | | | |
| | | | As of March 15, 2022 |
| | | | |
| Strike price | | | | $ | 6.03 |
| Risk-free interest rate | | | | 2.1% |
| Expected volatility | | | | 70.0% |
| Expected dividend yield | | | | 0.0% |
| Expected term | | | | 6.25 |
| | | | | | | | | | |
| | | | As of March 31, 2023 |
| | | | |
| Strike price | | | | $ | 0.91 |
| Risk-free interest rate | | | | 3.5% |
| Expected volatility | | | | 100.0% |
| Expected dividend yield | | | | 0.0% |
| Expected term | | | | 6.25 |
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | |
| | | | As of April 11, 2023 |
| | | | |
| Strike price | | | | $ | 1.50 |
| Risk-free interest rate | | | | 3.5% |
| Expected volatility | | | | 100.0% |
| Expected dividend yield | | | | 0.0% |
| Expected term | | | | 6.25 |
A summary of the status of unvested options granted under the 2021 Stock Plan through SeptemberJune 30, 20222023 is presented below:
| | | Market-Based Stock Options | | Service-Based Stock Options | | Market-Based Stock Options | | Service-Based Stock Options |
| | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
| Balance, December 31, 2020 | | — | | | — | | | — | | | — | | |
| Granted | | 12,831,184 | | | $ | 4.23 | | | — | | | — | | |
| Vested | | — | | | — | | | — | | | — | | |
| Forfeitures | | (97,486) | | | 4.23 | | | — | | | — | | |
| Balance, September 30, 2021 | | 12,733,698 | | | $ | 4.23 | | | | | — | | |
| | Balance, December 31, 2021 | Balance, December 31, 2021 | | 12,703,698 | | | $ | 4.23 | | | Balance, December 31, 2021 | | 12,703,698 | | | $ | 4.23 | | | — | | | — | |
| Granted | Granted | | — | | | — | | | 435,141 | | $ | 3.88 | | Granted | | — | | | — | | | 435,141 | | | $ | 3.88 | |
| Vested | | — | | | — | | | — | | | — | | |
| | Forfeitures | Forfeitures | | (1,929,940) | | | 4.23 | | | (28,865) | | | 3.88 | | Forfeitures | | (262,146) | | | 4.23 | | | — | | | — | |
| Balance, September 30, 2022 | | 10,773,758 | | | $ | 4.23 | | | 406,276 | | $ | 3.88 | | |
| Balance, June 30, 2022 | | Balance, June 30, 2022 | | 12,441,552 | | | $ | 4.23 | | | 435,141 | | | $ | 3.88 | |
| | Balance, December 31, 2022 | | Balance, December 31, 2022 | | 10,634,998 | | | $ | 4.23 | | | 405,652 | | | $ | 3.88 | |
| Granted | | Granted | | — | | | — | | | 1,864,628 | | | 0.84 | |
| | Forfeitures | | Forfeitures | | (904,906) | | | 4.23 | | | (16,393) | | | 1.22 | |
| Balance, June 30, 2023 | | Balance, June 30, 2023 | | 9,730,092 | | | $ | 4.23 | | | 2,253,887 | | | $ | 1.38 | |
Restricted Stock Units
On May 31, 2023, the Company granted certain executives 4.9 million performance-based RSU's ("PRSU's") that allow the executives to earn 50% to 150% of their target award, subject to achieving a performance condition based on the Company's 3-year cumulative Adjusted EBITDA for the performance period starting on January 1, 2023 and ending on December 31, 2025. The fair value of the PRSU's was computed using the closing price of the Company's Class A common stock on May 31, 2023. As of June 30, 2023, while the performance condition has not been earned, the Company is recording expense at 100% of the overall target awards and will adjust the expense based on the Company's performance going forward. In addition, the Company granted 11.1 million service based RSU's during the quarter.
The fair value of the 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 outstanding RSUs as of SeptemberJune 30, 20222023 was $78.8$49.8 million for service based awards and $3.4$5.2 million for performance based awards, which are performance-adjusted restricted stock units that link granted equity compensation value to the achievement of critical financial objectives.PRSUs. The RSUs and performance-adjusted restricted stock unitsPRSUs are expected to be recognized over the weighted average remaining service period of 1.41.7 years and 1.21.7 years, respectively. A majority of the RSUs vest in equal annual installments over a period of four4 years from the date of grant.grant date. Certain executives of the CompanyCompany's executives received RSUs which vest over a period of two years in equal annual installments.installments over a 2-year period. Further, RSUs granted to non-employee members of the Board of Directors vest over the lesser of one year or upon the next annual shareholderstockholders' meeting.
A summary of the status of unvested RSUs granted under the 2021 Stock Plan through SeptemberJune 30, 20222023 is presented below:
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | Restricted-Stock Units | | Performance - Restricted-Stock Units | | Restricted Stock Units | | Performance - Restricted Stock Units |
| Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | |
| Balance, December 31, 2020 | | — | | | — | | | — | | | — | | |
| Granted | | 4,133,693 | | | $ | 14.75 | | | 706,751 | | | $ | 13.37 | | |
| Vested | | — | | | — | | | — | | | — | | |
| Forfeitures | | (16,750) | | | — | | | — | | | — | | |
| Balance, September 30, 2021 | | 4,116,943 | | | $ | 14.75 | | | 706,751 | | | $ | 13.37 | | |
| | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
| Balance, December 31, 2021 | Balance, December 31, 2021 | | 4,460,772 | | | $ | 14.43 | | | 706,750 | | | $ | 12.73 | | Balance, December 31, 2021 | | 4,460,772 | | | $ | 14.43 | | | 706,750 | | | $ | 12.73 | |
| Granted | Granted | | 11,793,758 | | | 5.40 | | — | | | — | Granted | | 11,326,599 | | | 5.38 | | | — | | | — | |
| Vested | Vested | | (2,517,378) | | | 9.75 | | | (176,688) | | | 13.37 | | Vested | | (717,138) | | | 12.44 | | | (93,493) | | | 13.37 | |
| Forfeitures | Forfeitures | | (1,771,518) | | | 7.97 | | — | | — | Forfeitures | | (293,538) | | | 7.62 | | | — | | | — | |
| Balance, September 30, 2022 | | 11,965,634 | | | $ | 7.47 | | | 530,062 | | | $ | 12.52 | | |
| Balance, June 30, 2022 | | Balance, June 30, 2022 | | 14,776,695 | | | $ | 7.73 | | | 613,257 | | | $ | 12.63 | |
| | Balance, December 31, 2022 | | Balance, December 31, 2022 | | 10,672,574 | | | $ | 7.64 | | | 280,477 | | | $ | 13.36 | |
| Granted | | Granted | | 11,174,399 | | | 1.33 | | | 4,900,598 | | | 1.36 | |
| Vested | | Vested | | (1,416,575) | | | 7.10 | | | (93,493) | | | 13.37 | |
| Forfeitures | | Forfeitures | | (1,550,430) | | | 4.83 | | | — | | | — | |
| Balance, June 30, 2023 | | Balance, June 30, 2023 | | 18,879,968 | | | $ | 4.18 | | | 5,087,582 | | | $ | 1.80 | |
The Company recorded compensation expenses related to stock options and RSUs of $10.7$1.7 million and $9.5$10.6 million for the three and six months ended SeptemberJune 30, 20222023, respectively, and 2021, respectively, $41.3$17.4 million and $13.1$30.6 million for the ninethree and six months ended SeptemberJune 30, 2022, and 2021, respectively. The Company recorded compensation expense related to the 2021 ESPP of $0.4 million and $1.4$0.7 million for the three and ninesix months ended SeptemberJune 30, 2022.2023, respectively, and $0.4 million and $1.0 million for the three and six months ended June 30, 2022, respectively.
On June 16, 2023, Dr. Marlow Hernandez, the Company’s former CEO, resigned from such position (while remaining a member of the Company’s Board of Directors), in connection with which the Company and Dr. Hernandez entered into a previously disclosed Letter Agreement dated June 18, 2023, which resulted in the modification of Dr. Hernandez’ previously issued equity grants. The modifications resulted in the Company allowing continued vesting of his unvested stock-based compensation awards after cessation of his employment with the Company. This resulted in reversal of previously recognized compensation cost of $12.7 million and the issuance of the modified award resulted in recognition of $5.9 million in additional compensation cost.
The total stock-based compensation expense related to all the stock-based awards granted by the Company is reported in the Company's condensed consolidated statement of operations as compensation expense within the selling, general and administrative expense caption.
16.17. COMMITMENTS 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 90 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 $0.8 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 theour acquisition of University acquisition,Health Care and its affiliates (“University”) in June 2021, 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 JulyDecember 2023, contains a provision that requires average monthly net purchases of $0.6 million, and if the minimum is not met, the vendor may adjust the pricing of goods.
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Management believes for the nine months ended September 30, 2022 and 2021,it has satisfied the minimum requirements of these agreements for the agreements in place were met.six months ended June 30, 2023 and 2022.
Legal Matters
On March 18, 2022, a purported stockholder of the Company filed a complaint seekingputative class action statuslawsuit in the United StatesU.S. District Court for the Southern District of Florida against the Company, certain current officers and certain current and former officers.officers of Jaws, captioned Alberto Gonzalez v. Cano Health, Inc. f/k/a Jaws Acquisition Corp., et al. (No. 1:22-cv-20827). An amended complaint was filed on February 21, 2023. Defendants moved to dismiss the amended complaint on April 7, 2023. The lawsuit alleges inter alia, violationviolations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 against all defendants for
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
failure to disclose that “(i) Cano overstated its due diligence effortsin connection with allegedly false and expertise with respect to acquiring target businesses; (ii) accordingly, Cano performed inadequate due diligence into whethermisleading statements made by the Company post-Business Combination, could properly account forregarding compliance with GAAP and the timing of its revenue recognition as prescribed by ASC 606, particularly with respect tofrom 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. Advantage contracts in 2021. The lawsuit seeks, among other things, certification of a class action and unspecified compensatory damages for purchasers of the Company’s common stock between May 7, 2021 and February 25, 2022, as well as costs, interestattorneys’ fees and attorneys’ fees.costs. 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.
On April 28, 2023, three former directors of the Company (Barry Sternlicht and Elliot Cooperstone and Dr. Lewis Gold), filed a lawsuit in the Court of Chancery of the State of Delaware, captioned Sternlicht et al. v. Hernandez et al., C.A. No. 2023-0477-PAF, against the Company and its Board of Directors. The lawsuit claimed a breach of fiduciary duties by the Board and sought to re-open the Company’s advance-notice nomination window for stockholder notice of director candidate nominations and business proposals for the Company’s 2023 annual stockholders’ meeting. On June 14, 2023, the Court denied the plaintiffs’ motion for a preliminary injunction of the Company’s 2023 annual stockholders’ meeting, and that meeting went forward on June 15, 2023, as previously disclosed in a Current Report on Form 8-K filed with the SEC on June 22, 2023. On August 3, 2023, the plaintiffs voluntarily dismissed, without prejudice, their remaining claims.
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.
17.18. INCOME TAXES
OurThe Company generated a $1.9 million tax benefit for the three and six months ended June 30, 2023, resulting in an effective tax rate of 0.7% and 0.6%, respectively, as compared to an effective tax rate of (5.9)% and (14.8)% for the ninethree and six months ended SeptemberJune 30, 2022 was (0.5)% compared to 0.6% for the nine months ended September 30, 2021.2022. The effective tax rate for the periods presented differs from the statutory U.S. tax rate. This israte primarily becauseas a portionresult of the income is allocated to non-controlling interests includingand the valuation allowance recorded against the Company’s fulldeferred tax assets. The Company evaluates the realizability of its deferred tax assets on a quarterly basis and adjusts the valuation allowance position.when it is more-likely-than-not that all or a portion of the deferred tax assets may not be realized.
The Company does not have any uncertain tax positions (UTPs)("UTPs") as of SeptemberJune 30, 2022.2023. 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, 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 2019. In addition, the Puerto Rico subsidiary group is subject to U.S. Federal, state and foreign tax examinations for tax years starting in 2018. The Company does not currently have any ongoingInternal Revenue Service ("IRS") commenced an examination of PCIH’s income tax examinationsreturn for the year ended December 31, 2020 in the first quarter of 2023. The Company believes that it has adequately provided for any of its jurisdictions.reasonably foreseeable outcomes related to the tax examination and that any settlement related thereto will not have a material adverse effect on the Company’s consolidated financial statements; however, there can be no assurances as to the ultimate outcome until the examination is completed. 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.
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 beis 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. To the extent payments are made pursuant to the Tax Receivable Agreement, Cano Health Inc. generally will beis 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 of 0.15 and the denominator of 0.85. As a result of the payments to the TRA Party and Sponsor Party we generally will beare 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’sHealth's historical loss position and other factors that make it difficult to rely on forecasts, we
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
have not recorded the Tax Receivable Agreement liability as of SeptemberJune 30, 2022.2023. We will continue to evaluate this on a quarterly basis which may result in an adjustment infuture adjustments to the future.treatment.
18.19. NET INCOME (LOSS) PER SHARE
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) | 2023 | | 2022 | | 2023 | | 2022 | | |
| Numerator: | | | | | | | | | |
| Net income (loss) | $ | (270,745) | | | $ | (14,564) | | | $ | (331,330) | | | $ | (14,649) | | | |
| Less: net income (loss) attributable to non-controlling interests | (129,992) | | | (9,231) | | | (162,427) | | | (9,976) | | | |
| Net income (loss) attributable to Class A common stockholders | (140,753) | | | (5,333) | | | (168,903) | | | (4,673) | | | |
| Dilutive effect of RSU's | — | | | — | | | — | | | — | | | |
| Dilutive effect of Class B common stock | (129,992) | | | (9,231) | | | — | | | (9,976) | | | |
| | | | | | | | | |
| Net income (loss) attributable to Class A common stockholders - Diluted | $ | (270,745) | | | $ | (14,564) | | | $ | (168,903) | | | $ | (14,649) | | | |
| Basic and Diluted Earnings Per Share denominator: | | | | | | | | | |
| Weighted average common stock outstanding - basic | 274,640,987 | | | 210,053,037 | | | 257,317,776 | | | 200,783,129 | | | |
| Net income (loss) per share - basic | $ | (0.51) | | | $ | (0.03) | | | $ | (0.66) | | | $ | (0.02) | | | |
| Diluted Earnings Per Share: | | | | | | | | | |
| Dilutive effect of RSU's | — | | | — | | | — | | | — | | | |
| Dilutive effect of Class B common stock on weighted average common stock outstanding | 253,208,965 | | | 264,527,434 | | | — | | | 264,527,434 | | | |
| | | | | | | | | |
| Weighted average common stock outstanding - diluted | 527,849,952 | | | 474,580,471 | | | 257,317,776 | | | 465,310,563 | | | |
| Net income (loss) per share - diluted | $ | (0.51) | | | $ | (0.03) | | | $ | (0.66) | | | $ | (0.03) | | | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| (in thousands, except shares and per share data) | 2022 | | 2021 | | 2022 | | 2021 | | |
| Numerator: | | | | | | | | | |
| Net income (loss) | $ | (112,011) | | | $ | (64,840) | | | $ | (126,660) | | | $ | (117,240) | | | |
| Less: net loss attributable to non-controlling interests | (57,783) | | | (41,602) | | | (67,759) | | | (98,559) | | | |
| Net income (loss) attributable to Class A common stockholders | (54,228) | | | (23,238) | | | (58,901) | | | (18,681) | | | |
| Dilutive effect of warrants on net income to Class A common stockholders | — | | | — | | | — | | | (8,780) | | | |
| Dilutive effect of Class B common stock | — | | | (41,602) | | | — | | | — | | | |
| Net loss attributable to Class A common stockholders - Diluted | $ | (54,228) | | | $ | (64,840) | | | $ | (58,901) | | | $ | (27,461) | | | |
| Basic and Diluted Earnings Per Share denominator: | | | | | | | | | |
| Weighted average common stock outstanding - basic | 232,314,170 | | | 170,871,429 | | | 211,408,974 | | | 168,100,210 | | | |
| Net income (loss) per share - basic | $ | (0.23) | | | $ | (0.14) | | | $ | (0.28) | | | $ | (0.11) | | | |
| Diluted Earnings Per Share: | | | | | | | | | |
| Dilutive effect of warrants on weighted average common stock outstanding | — | | | — | | | — | | | 1,212,048 | | | |
| Dilutive effect of Class B common stock on weighted average common stock outstanding | — | | | 306,384,554 | | | — | | | — | | | |
| Weighted average common stock outstanding - diluted | 232,314,170 | | | 477,255,983 | | | 211,408,974 | | | 169,312,258 | | | |
| Net loss per share - diluted | $ | (0.23) | | | $ | (0.14) | | | $ | (0.28) | | | $ | (0.16) | | | |
| | | | | | | | | |
CANO HEALTH, INC.
(UNAUDITED)
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 basic net loss per share calculation. The Class B common stock was dilutive for the three months ended June 30, 2023.
On August 11, 2021, the Company issued 2,720,966 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 $30.0 million purchase price divided by the average share price of the CompanyCompany's Class A common stock during the twenty20 consecutive trading days preceding the transaction's closing date of the transaction. Thedate. These 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
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
with the purchase agreement and subtracting any forfeited indemnity shares. The dilutive effects of these shares were excluded from the three and nine months ended September 30, 2022 diluted earnings per share calculation for the six months ended June 30, 2023 because they were antidilutive.anti-dilutive.
No securities were dilutive for the three and nine months ended September 30, 2022. The table below presents the Company’s potentially dilutive securities:
| | | | | |
| As of SeptemberJune 30, 20222023 |
| Class B common stock | 250,093,479253,208,965 | |
| Public Warrants | 22,999,900 | |
| Private Placement Warrants | 10,533,292 | |
| |
| Restricted Stock Units | 12,495,69723,967,551 | |
| Stock Options | 11,180,03411,983,979 | |
| Contingent Shares Issued in Connection with Acquisitions | 2,720,966 | |
2021 ESPP Shares | 611,1831,345,325 | |
| Potential Common Stock Equivalents | 310,634,551326,759,978 | |
19.20. SEGMENT INFORMATION
The Company organizes its operations into one 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 qualityhigh-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 StatesU.S., including Puerto Rico, and all of the Company’s long livedlong-lived assets were located in the United States.
20.21. SUBSEQUENT EVENTS
TheExcept as set forth in Note 12, "Debt," 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,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.'sHealth'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 (the "Form 10-Q"), as well as the audited financial statements and the accompanying notes, as well as the “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, 20212022 filed with the Securities and Exchange Commission (the "SEC") on March 15, 2023, as amended (the "2022 Form 10-K"), as such risk factors have been supplemented by Part II, Item 1A, “Risk Factors,” included in the Company’s Quarterly Report on Form 10-Q filed with the SEC on March 14, 2022.May 9, 2023 (the “Q1 2023 Form 10-Q").
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"Statements," as well as Part I, Item 1A, “Risk Factors” in our 2022 Form 10-K for, as supplemented by Part II, Item 1A, “Risk Factors,” included in the year ended December 31, 2021.Company’s Q1 2023 Form 10-Q.
Executive Overview
DescriptionDuring the six months ended June 30, 2023, our operating results have performed below historical levels, with the majority of Cano Healththe decline arising from a 15.6% decrease in capitated revenue per member per month compared to the six months ended June 30, 2022 with only a 2.8% decrease in third party medical costs per member per month for the six months ended June 30, 2022.
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:In June 2023, we decided to improve patient health by delivering superior primary care medical services, while forging life-long bonds with our members. Our vision is clear: to becomeshift the national leader in primary care by improvingCompany's strategic direction, which primarily includes 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:following measures:
•PatientsFocusing our membership base towards Medicare Advantage and ACO Reach;
•: Our members are offered servicesSelling certain assets and operations and exiting California, New Mexico and Illinois markets by the fall of 2023;
•Exiting its Puerto Rico operations by January 1, 2024;
•Conducting a strategic review of the Company's Medicaid business in modern, clean, and contemporaryFlorida, medical centers located in Texas and Nevada, pharmacy assets and other specialty practices;
•Consolidating underperforming owned medical centers;
•Lowering third party medical costs through negotiations with same or next day appointments, integrated virtual care, wellness services, ancillary services (such as physiotherapy), home services, transportation, telemedicinepayors;
•Reducing operating expenses, including reduction of permanent staff;
•Significantly reducing all other non-essential spending; 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
•Delaying renovations 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.other capital projects.
•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 receivethe above, the Company is pursuing a bonus based upon clinical outcomes, among other metrics.comprehensive process to identify and evaluate interest in a sale of the Company, or all or substantially all of its assets, consistent with the terms and conditions of the 2023 Side-Car Amendment. The Company has engaged advisors to assist in the process. The Company has not set a timetable for the conclusion of this process and there is no assurance that the process will result in any transaction.
•Payors: Payors want three things: high-quality care, membership growthThese strategic and effective medical cost management. We have a multi-yearoperational steps are critical to improving our financial performance, generating greater efficiency, 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 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 September 30, 2022, we employed approximately 400 providers (physicians, nurse practitioners, physician assistants) across our 151 owned medical centers, maintained affiliate relationships with over 1,500 physicians and approximately 900 clinical support employees focused on supporting physicians in enabling patient care and experience. For the nine months ended September 30, 2022 and 2021, our total revenue was $2.1 billion and $1.1 billion, respectively. Our net loss for the nine months ended September 30, 2022 and 2021 was $126.7 million and $117.2 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 September 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.
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 September 30, 2022, we provided services to over 1,500 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.
Contracts with Payors
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. Furthermore, to effectively manageensure the cost of care for our members, we utilize a third-party healthcare claims reimbursement recovery service provider. This provider uses data analytics to identify and recover improper payments made by Medicare, Medicaid and Commercial Health Insurers that should have been paid by others.
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 December 31, 2021 filed with the SEC on March 14, 2022.
Member Acuity and Quality Metrics
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.organization’s long-term success.
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.
| | | | | | | | | | | |
| June 30, 2023 | December 31, 2022 | June 30, 2022 |
| Membership | 381,066 | 309,590 | 281,525 |
| Medical centers | 169 | 172 | 143 |
| | | | | | | | | | | |
| September 30, 2022 | December 31, 2021 | September 30, 2021 |
| Membership | 294,596 | 227,005 | 210,663 |
| Medical centers | 151 | 130 | 113 |
Members
Members represent those Medicare, Medicaid, and Affordable Care Act ("ACA"),ACA, and commercially insured patients for whom we receive a fixed per-member-per-monthPMPM 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 DCEACO REACH program and ACO's may be adjusted based on current year utilization.
Generally, we enter into three3 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 fill their prescriptions with a third-party pharmacy of their choice. Other revenue also includes fixed amounts due from a third-party healthcare claims reimbursement recovery service provider for claims which have been irrevocably assigned to them related to these ancillary services. The companyWe also may receive and recognize a percentage of these claims recovered in excess of certain thresholds. These variable payments are recognized at the time of settlement. No such variable considerationpayment has been received to date.
Operating Expenses
Third-party medical costs. Third-party medical costs primarily consist of 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 whatfunding rates we receive under our payor contracts. Third-party medical costs also include fixed amounts due from a third-party healthcare claims reimbursement recovery service provider for claims which have been irrevocably assigned to them related to third-party medical costs. The companyWe also may receive and recognize a percentage of these claims recovered in excess of certain thresholds. These variable payments are recognized at the time of settlement. No such variable consideration has been received to date.
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)time, and, if determinable, the center where the expense was incurred. The Company has developed a plan to further restructure its operations to streamline and simplify the organization to improve efficiency and reduce costs. These actions include workforce reductions, which are expected to reduce our selling, general and administrative costs in future periods compared to current levels. In connection with its restructuring plan, in the third quarter of 2023, the Company expects to reduce staffing by approximately 700 employees, or 17% of its workforce. Approximately 40% of the workforce reductions will be attributable to exiting operations in certain markets, with the remainder attributable to other operating centers. These actions are expected to yield approximately $50 million of annualized cost reductions beginning in the third quarter of 2023 and through the end of 2024. The Company expects to record a restructuring charge in the third quarter of 2023 of approximately $4 million, the majority of which will be paid in 2023 and a lesser amount in 2024, consisting primarily of employee-related costs, such as severance, retention and other contractual termination benefits.
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 deferred acquisition costs, due diligence, integration, legal, internal staff, and other professional fees, incurred in connection with acquisition activity).
Change in fair value of contingent consideration. AdjustmentsChange in fair value of contingent consideration consists of adjustments in contingent consideration due to acquisitions.
Credit losses on other assets. On August 2, 2023, MSP announced that the SEC initiated an investigation of MSP on August 11, 2022. In addition, MSP announced that it received a subpoena on March 10, 2023 from the U.S. Attorney's Office in the U.S. District Court for the Southern District of Florida. As a result of (i) these recent disclosures by MSP; (ii) MSP's delinquent filing of its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2023; and (iii) MSP's not being in compliance with the NASDAQ listing requirements, the Company decided to utilize a third-party valuation specialist to provide a market value analysis of the shares of Class A common stock that MSP issued to the Company on July 7, 2023. As of June 30, 2023, the Company has recognized an allowance for credit losses of $62.0 million.
Other Income (Expense)
Interest expense. Interest expense primarily consists of interest incurred on our outstanding borrowings under our notes payable related to our equipment loansCredit Suisse Credit Agreement, Senior Notes, and credit facility.2023 Term Loan, including Paid-in-Kind interest ("PIK"). See “Liquidity and Capital ResourcesResources.”. Costs incurred to obtain debt financing are amortized and shown as a component of interest expense.
Interest income. Interest income primarily consists of interest earned through a loan agreement with an affiliated company.
Loss on extinguishment of debt. Loss on extinguishment of debt primarily consists of unamortized debt issuance costs related to our term loanCredit Suisse Credit Agreement in connection with our financing arrangements.
Change in fair value of warrant liabilities. Change in fair value of warrant liabilities consists primarily of changes to the public warrants and private placement warrants assumed upon the consummation of the Business Combination. The liabilities are revalued at each reporting period.
Other income (expense). Other income (expense) primarily relates to sublease income and legal settlement fees.income.
Results of Operations
The following table sets forth our consolidated statements of operations data for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended
September 30, |
| ($ in thousands) | 2022 | | 2021 | | 2022 | | 2021 | | |
| Revenue: | | | | | | | | | |
| Capitated revenue | $ | 625,895 | | | $ | 473,763 | | | $ | 1,955,739 | | | $ | 1,064,604 | | | |
| Fee-for-service and other revenue | 39,133 | | | 25,168 | | | 102,804 | | | 52,510 | | | |
| Total revenue | 665,028 | | | 498,931 | | | 2,058,543 | | | 1,117,114 | | | |
| Operating expenses: | | | | | | | | | |
| Third-party medical costs | 489,565 | | | 381,316 | | | 1,566,661 | | | 868,177 | | | |
| Direct patient expense | 63,867 | | | 50,368 | | | 177,190 | | | 120,212 | | | |
| Selling, general, and administrative expenses | 111,765 | | | 76,618 | | | 314,617 | | | 158,786 | | | |
| Depreciation and amortization expense | 25,343 | | | 16,955 | | | 64,215 | | | 30,746 | | | |
| Transaction costs and other | 5,033 | | | 11,206 | | | 19,616 | | | 36,274 | | | |
| Change in fair value of contingent consideration | 900 | | | (3,940) | | | (9,525) | | | (4,152) | | | |
| Total operating expenses | 696,473 | | | 532,523 | | | 2,132,774 | | | 1,210,043 | | | |
| Loss from operations | (31,445) | | | (33,592) | | | (74,231) | | | (92,929) | | | |
| Other income and expense: | | | | | | | | | |
| Interest expense | (16,451) | | | (16,023) | | | (42,868) | | | (36,363) | | | |
| Interest income | 4 | | | 1 | | | 7 | | | 4 | | | |
| Loss on extinguishment of debt | — | | | — | | | (1,428) | | | (13,225) | | | |
| | | | | | | | | |
| Change in fair value of warrant liabilities | (65,721) | | | (14,650) | | | (8,383) | | | 24,565 | | | |
| Other income (expenses) | 354 | | | (29) | | | 884 | | | (54) | | | |
| Total other income (expense) | (81,814) | | | (30,701) | | | (51,788) | | | (25,073) | | | |
| Net income (loss) before income tax expense | (113,259) | | | (64,293) | | | (126,019) | | | (118,002) | | | |
| Income tax expense (benefit) | (1,248) | | | 547 | | | 641 | | | (762) | | | |
| Net income (loss) | (112,011) | | | (64,840) | | | (126,660) | | | (117,240) | | | |
| Net income (loss) attributable to non-controlling interests | (57,783) | | | (41,602) | | | (67,759) | | | (98,559) | | | |
| Net income (loss) attributable to Class A common stockholders | $ | (54,228) | | | $ | (23,238) | | | $ | (58,901) | | | $ | (18,681) | | | |
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 September 30, | | Nine Months Ended
September 30, |
| (% of revenue) | 2022 | | 2021 | | 2022 | | 2021 | | |
| Revenue: | | | | | | | | | |
| Capitated revenue | 94.1 | % | | 95.0 | % | | 95.0 | % | | 95.3 | % | | |
| Fee-for-service and other revenue | 5.9 | % | | 5.0 | % | | 5.0 | % | | 4.7 | % | | |
| Total revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | |
| Operating expenses: | | | | | | | | | |
| Third-party medical costs | 73.6 | % | | 76.4 | % | | 76.1 | % | | 77.7 | % | | |
| Direct patient expense | 9.6 | % | | 10.1 | % | | 8.6 | % | | 10.8 | % | | |
| Selling, general, and administrative expenses | 16.8 | % | | 15.4 | % | | 15.3 | % | | 14.2 | % | | |
| Depreciation and amortization expense | 3.8 | % | | 3.4 | % | | 3.1 | % | | 2.8 | % | | |
| Transaction costs and other | 0.8 | % | | 2.2 | % | | 1.0 | % | | 3.2 | % | | |
| Change in fair value of contingent consideration | 0.1 | % | | (0.8) | % | | (0.5) | % | | (0.4) | % | | |
| Total operating expenses | 104.7 | % | | 106.7 | % | | 103.6 | % | | 108.3 | % | | |
| Loss from operations | (4.7) | % | | (6.7) | % | | (3.6) | % | | (8.3) | % | | |
| Other income and expense: | | | | | | | | | |
| Interest expense | (2.5) | % | | (3.2) | % | | (2.1) | % | | (3.3) | % | | |
| Interest income | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | |
| Loss on extinguishment of debt | 0.0 | % | | 0.0 | % | | (0.1) | % | | (1.2) | % | | |
| | | | | | | | | |
| Change in fair value of warrant liabilities | (9.9) | % | | (2.9) | % | | (0.4) | % | | 2.2 | % | | |
| Other expenses | 0.1 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | |
| Total other income (expense) | (12.3) | % | | (6.2) | % | | (2.6) | % | | (2.3) | % | | |
| Net income (loss) before income tax expense | (17.0) | % | | (12.9) | % | | (6.2) | % | | (10.6) | % | | |
| Income tax expense (benefit) | (0.2) | % | | 0.1 | % | | 0.0 | % | | (0.1) | % | | |
| Net income (loss) | (16.8) | % | | (12.8) | % | | (6.2) | % | | (10.5) | % | | |
| Net income (loss) attributable to non-controlling interests | (8.7) | % | | (8.3) | % | | (3.3) | % | | (8.8) | % | | |
| Net income (loss) attributable to Class A common stockholders | (8.1) | % | | (4.4) | % | | (2.9) | % | | (1.8) | % | | |
| | | | | | | | | |
The following table sets forth the Company’s disaggregated revenue for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2022 | | 2021 | | |
| ($ in thousands) | | Revenue $ | | Revenue % | | Revenue $ | | Revenue % | | | | |
| Capitated revenue | | | | | | | | | | | | |
| Medicare | | $ | 577,989 | | | 86.9 | % | | $ | 419,233 | | | 84.0 | % | | | | |
| Other capitated revenue | | 47,906 | | | 7.2 | % | | 54,530 | | | 10.9 | % | | | | |
| Total capitated revenue | | 625,895 | | | 94.1 | % | | 473,763 | | | 94.9 | % | | | | |
| Fee-for-service and other revenue | | | | | | | | | | | | |
| Fee-for-service | | 9,677 | | | 1.5 | % | | 8,176 | | | 1.6 | % | | | | |
| Pharmacy | | 12,910 | | | 1.9 | % | | 10,096 | | | 2.0 | % | | | | |
| Other | | 16,546 | | | 2.5 | % | | 6,896 | | | 1.5 | % | | | | |
| Total fee-for-service and other revenue | | 39,133 | | | 5.9 | % | | 25,168 | | | 5.1 | % | | | | |
| | | | | | | | | | | | |
| Total revenue | | $ | 665,028 | | | 100.0 | % | | $ | 498,931 | | | 100.0 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2022 | | 2021 | | |
| ($ in thousands) | | Revenue $ | | Revenue % | | Revenue $ | | Revenue % | | | | |
| Capitated revenue | | | | | | | | | | | | |
| Medicare | | $ | 1,795,820 | | | 87.2 | % | | $ | 924,892 | | | 82.8 | % | | | | |
| Other capitated revenue | | 159,919 | | | 7.8 | % | | 139,712 | | | 12.5 | % | | | | |
| Total capitated revenue | | 1,955,739 | | | 95.0 | % | | 1,064,604 | | | 95.3 | % | | | | |
| Fee-for-service and other revenue | | | | | | | | | | | | |
| Fee-for-service | | 29,349 | | | 1.4 | % | | 17,113 | | | 1.5 | % | | | | |
| Pharmacy | | 37,185 | | | 1.8 | % | | 25,619 | | | 2.3 | % | | | | |
| Other | | 36,270 | | | 1.8 | % | | 9,778 | | | 0.9 | % | | | | |
| Total fee-for-service and other revenue | | 102,804 | | | 5.0 | % | | 52,510 | | | 4.7 | % | | | | |
| | | | | | | | | | | | |
| Total revenue | | $ | 2,058,543 | | | 100.0 | % | | $ | 1,117,114 | | | 100.0 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| ($ in thousands) | 2023 | | 2022 | | 2023 | | 2022 | | |
| Revenue: | | | | | | | | | |
| Capitated revenue | $ | 743,324 | | | $ | 655,493 | | | $ | 1,584,397 | | | $ | 1,329,844 | | | |
| Fee-for-service and other revenue | 23,422 | | | 33,880 | | | 49,258 | | | 63,671 | | | |
| Total revenue | 766,746 | | | 689,373 | | | 1,633,655 | | | 1,393,515 | | | |
| Operating expenses: | | | | | | | | | |
| Third-party medical costs | 769,629 | | | 541,317 | | | 1,477,960 | | | 1,077,097 | | | |
| Direct patient expense | 56,757 | | | 52,647 | | | 125,184 | | | 113,323 | | | |
| Selling, general, and administrative expense | 99,418 | | | 106,179 | | | 195,890 | | | 202,849 | | | |
| Depreciation and amortization expense | 27,251 | | | 19,836 | | | 54,473 | | | 38,872 | | | |
| Transaction costs | 9,125 | | | 6,207 | | | 19,211 | | | 14,583 | | | |
| Change in fair value of contingent consideration | (11,800) | | | (5,764) | | | (15,900) | | | (10,425) | | | |
| | | | | | | | | |
| Credit loss on other assets | 62,000 | | | — | | | 62,000 | | | — | | | |
| Total operating expenses | 1,012,380 | | | 720,422 | | | 1,918,818 | | | 1,436,299 | | | |
| Loss from operations | (245,634) | | | (31,049) | | | (285,163) | | | (42,784) | | | |
| Other income and expense: | | | | | | | | | |
| Interest expense | (26,719) | | | (13,134) | | | (50,224) | | | (26,418) | | | |
| Interest income | 90 | | | 2 | | | 99 | | | 3 | | | |
| Loss on extinguishment of debt | — | | | — | | | — | | | (1,428) | | | |
| Change in fair value of warrant liabilities | (1,677) | | | 30,175 | | | 331 | | | 57,337 | | | |
| Other income (expense) | 1,323 | | | 251 | | | 1,755 | | | 530 | | | |
| Total other income (expense) | (26,983) | | | 17,294 | | | (48,039) | | | 30,024 | | | |
| Net income (loss) before income tax expense | (272,617) | | | (13,755) | | | (333,202) | | | (12,760) | | | |
| Income tax expense (benefit) | (1,872) | | | 809 | | | (1,872) | | | 1,889 | | | |
| Net income (loss) | $ | (270,745) | | | (14,564) | | | $ | (331,330) | | | $ | (14,649) | | | |
| Net income (loss) attributable to non-controlling interests | (129,992) | | | (9,231) | | | (162,427) | | | (9,976) | | | |
| Net income (loss) attributable to Class A common stockholders | $ | (140,753) | | | $ | (5,333) | | | $ | (168,903) | | | $ | (4,673) | | | |
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) | 2023 | | 2022 | | 2023 | | 2022 | | |
| Revenue: | | | | | | | | | |
| Capitated revenue | 96.9 | % | | 95.1 | % | | 97.0 | % | | 95.4 | % | | |
| Fee-for-service and other revenue | 3.1 | % | | 4.9 | % | | 3.0 | % | | 4.6 | % | | |
| Total revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | |
| Operating expenses: | | | | | | | | | |
| Third-party medical costs | 100.4 | % | | 78.5 | % | | 90.5 | % | | 77.3 | % | | |
| Direct patient expense | 7.4 | % | | 7.6 | % | | 7.7 | % | | 8.1 | % | | |
| Selling, general, and administrative expense | 13.0 | % | | 15.4 | % | | 12.0 | % | | 14.6 | % | | |
| Depreciation and amortization expense | 3.6 | % | | 2.9 | % | | 3.3 | % | | 2.8 | % | | |
| Transaction costs | 1.2 | % | | 0.9 | % | | 1.2 | % | | 1.0 | % | | |
| Change in fair value of contingent consideration | (1.5) | % | | (0.8) | % | | (1.0) | % | | (0.7) | % | | |
| | | | | | | | | |
| Credit loss on other assets | 8.1 | % | | 0.0 | % | 0.0 | % | 3.8 | % | 0.0 | % | 0.0 | % | | |
| Total operating expenses | 132.2 | % | | 104.5 | % | | 117.5 | % | | 103.1 | % | | |
| Loss from operations | (32.2) | % | | (4.5) | % | | (17.5) | % | | (3.1) | % | | |
| Other income and expense: | | | | | | | | | |
| Interest expense | (3.5) | % | | (1.9) | % | | (3.1) | % | | (1.9) | % | | |
| Interest income | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | |
| Loss on extinguishment of debt | 0.0 | % | | 0.0 | % | | 0.0 | % | | (0.1) | % | | |
| Change in fair value of warrant liabilities | (0.2) | % | | 4.4 | % | | 0.0 | % | | 4.1 | % | | |
| Other income (loss) | 0.2 | % | | 0.0 | % | | 0.1 | % | | 0.0 | % | | |
| Total other income (loss) | (3.5) | % | | 2.5 | % | | (3.0) | % | | 2.2 | % | | |
| Net income (loss) before income tax expense | (35.7) | % | | (2.0) | % | | (20.5) | % | | (0.9) | % | | |
| Income tax expense (benefit) | (0.2) | % | | 0.1 | % | | (0.1) | % | | 0.1 | % | | |
| Net income (loss) | (35.4) | % | | (2.1) | % | | (20.4) | % | | (0.8) | % | | |
| Net income (loss) attributable to non-controlling interests | (17.0) | % | | (1.3) | % | | (9.9) | % | | (0.7) | % | | |
| Net income (loss) attributable to Class A common stockholders | (18.4) | % | | (0.8) | % | | (10.4) | % | | (0.1) | % | | |
| | | | | | | | | |
The following table sets forth the Company’s disaggregated revenue for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| | 2023 | | 2022 | | |
| ($ in thousands) | | Revenue $ | | Revenue % | | Revenue $ | | Revenue % | | | | |
| Capitated revenue | | | | | | | | | | | | |
| Medicare | | $ | 695,612 | | | 90.7 | % | | $ | 602,613 | | | 87.4 | % | | | | |
| Other capitated revenue | | 47,712 | | | 6.2 | % | | 52,880 | | | 7.6 | % | | | | |
| Total capitated revenue | | 743,324 | | | 96.9 | % | | 655,493 | | | 95.0 | % | | | | |
| Fee-for-service and other revenue | | | | | | | | | | | | |
| Fee-for-service | | 4,282 | | | 0.6 | % | | 9,701 | | | 1.4 | % | | | | |
| Pharmacy | | 15,559 | | | 2.0 | % | | 12,759 | | | 1.9 | % | | | | |
| Other | | 3,581 | | | 0.5 | % | | 11,420 | | | 1.7 | % | | | | |
| Total fee-for-service and other revenue | | 23,422 | | | 3.1 | % | | 33,880 | | | 5.0 | % | | | | |
| | | | | | | | | | | | |
| Total revenue | | $ | 766,746 | | | 100.0 | % | | $ | 689,373 | | | 100.0 | % | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2023 | | 2022 | | |
| (in thousands) | | Revenue $ | | Revenue % | | Revenue $ | | Revenue % | | | | |
| Capitated revenue | | | | | | | | | | | | |
| Medicare | | $ | 1,489,240 | | | 91.2 | % | | $ | 1,217,831 | | | 87.5 | % | | | | |
| Other capitated revenue | | 95,157 | | | 5.8 | % | | 112,013 | | | 8.0 | % | | | | |
| Total capitated revenue | | 1,584,397 | | | 97.0 | % | | 1,329,844 | | | 95.5 | % | | | | |
| Fee-for-service and other revenue | | | | | | | | | | | | |
| Fee-for-service | | 15,975 | | | 1.0 | % | | 19,671 | | | 1.4 | % | | | | |
| Pharmacy | | 27,664 | | | 1.7 | % | | 24,274 | | | 1.7 | % | | | | |
| Other | | 5,619 | | | 0.3 | % | | 19,726 | | | 1.4 | % | | | | |
| Total fee-for-service and other revenue | | 49,258 | | | 3.0 | % | | 63,671 | | | 4.5 | % | | | | |
| | | | | | | | | | | | |
| Total revenue | | $ | 1,633,655 | | | 100.0 | % | | $ | 1,393,515 | | | 100.0 | % | | | | |
| | | | | | | | | | | | |
The following table sets forth the Company’s member and member month figures for the periods indicated:
| | | Three Months Ended
September 30, | | | Three Months Ended
June 30, | |
| 2022 | | 2021 | | % Change | |
| (in thousands) | | (in thousands) | | 2023 | | 2022 | | % Change |
| Members: | Members: | | | | | | | Members: | | | | | | |
| Medicare Advantage | Medicare Advantage | | 128,731 | | | 112,309 | | | 14.6 | % | Medicare Advantage | | 140,535 | | | 123,768 | | | 13.5 | % |
| Medicare DCE | | 39,615 | | | 7,777 | | | 409.4 | % | |
| Medicare ACO REACH | | Medicare ACO REACH | | 65,161 | | | 40,179 | | | 62.2 | % |
| Total Medicare | Total Medicare | | 168,346 | | | 120,086 | | | 40.2 | % | Total Medicare | | 205,696 | | | 163,947 | | | 25.5 | % |
| Medicaid | Medicaid | | 73,865 | | | 63,871 | | | 15.6 | % | Medicaid | | 77,290 | | | 70,254 | | | 10.0 | % |
| ACA | ACA | | 52,385 | | | 26,706 | | | 96.2 | % | ACA | | 98,080 | | | 47,324 | | | 107.3 | % |
| Total members | Total members | | 294,596 | | | 210,663 | | | 39.8 | % | Total members | | 381,066 | | | 281,525 | | | 35.4 | % |
| | Member months: | Member months: | | Member months: | |
| Medicare Advantage | Medicare Advantage | | 383,645 | | | 337,724 | | | 13.6 | % | Medicare Advantage | | 424,145 | | | 364,565 | | | 16.3 | % |
| Medicare DCE | | 119,936 | | | 22,715 | | | 428.0 | % | |
| Medicare ACO REACH | | Medicare ACO REACH | | 198,614 | | | 122,301 | | | 62.4 | % |
| Total Medicare | Total Medicare | | 503,581 | | | 360,439 | | | 39.7 | % | Total Medicare | | 622,759 | | | 486,866 | | | 27.9 | % |
| Medicaid | Medicaid | | 218,807 | | | 187,212 | | | 16.9 | % | Medicaid | | 245,260 | | | 206,630 | | | 18.7 | % |
| ACA | ACA | | 149,872 | | | 81,437 | | | 84.0 | % | ACA | | 296,652 | | | 139,355 | | | 112.9 | % |
| Total member months | Total member months | | 872,260 | | | 629,088 | | | 38.7 | % | Total member months | | 1,164,671 | | | 832,851 | | | 39.8 | % |
| | ($ in thousands) | | ($ in thousands) | | | | | |
| Per Member Per Month ("PMPM"): | Per Member Per Month ("PMPM"): | | Per Member Per Month ("PMPM"): | |
| Medicare Advantage | Medicare Advantage | $ | 1,127 | | $ | 1,151 | | | (2.1) | % | Medicare Advantage | | $ | 1,027 | | | $ | 1,196 | | | (14.1) | % |
| Medicare DCE | $ | 1,215 | | $ | 1,349 | | | (9.9) | % | |
| Medicare ACO REACH | | Medicare ACO REACH | | $ | 1,309 | | | $ | 1,362 | | | (3.9) | % |
| Total Medicare | Total Medicare | $ | 1,148 | | $ | 1,163 | | | (1.3) | % | Total Medicare | | $ | 1,117 | | | $ | 1,283 | | | (12.9) | % |
| Medicaid | Medicaid | $ | 191 | | $ | 271 | | | (29.5) | % | Medicaid | | $ | 164 | | | $ | 223 | | | (26.5) | % |
| ACA | ACA | $ | 40 | | $ | 47 | | | (14.9) | % | ACA | | $ | 26 | | | $ | 48 | | | (45.8) | % |
| Total PMPM | Total PMPM | $ | 718 | | $ | 753 | | | (4.6) | % | Total PMPM | | $ | 638 | | | $ | 787 | | | (18.9) | % |
| | Medical centers | Medical centers | | 151 | | | 113 | | Medical centers | | 169 | | | 143 | |
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
| | 2022 | | 2021 | | % Change |
| Members: | | | | | | |
| Medicare Advantage | | 128,731 | | | 112,309 | | | 14.6 | % |
| Medicare DCE | | 39,615 | | | 7,777 | | | 409.4 | % |
| Total Medicare | | 168,346 | | | 120,086 | | | 40.2 | % |
| Medicaid | | 73,865 | | | 63,871 | | | 15.6 | % |
| ACA | | 52,385 | | | 26,706 | | | 96.2 | % |
| Total members | | 294,596 | | | 210,663 | | | 39.8 | % |
| | | | | | |
| Member months: | | | | | | |
| Medicare Advantage | | 1,102,625 | | | 820,881 | | | 34.3 | % |
| Medicare DCE | | 367,326 | | | 46,639 | | | 687.6 | % |
| Total Medicare | | 1,469,951 | | | 867,520 | | | 69.4 | % |
| Medicaid | | 627,634 | | | 321,581 | | | 95.2 | % |
| ACA | | 411,138 | | | 195,290 | | | 110.5 | % |
| Total member months | | 2,508,723 | | | 1,384,391 | | | 81.2 | % |
| | | | | | |
| Per Member Per Month ("PMPM"): | | | | | | |
| Medicare Advantage | | $ | 1,189 | | | $ | 1,053 | | | 12.9 | % |
| Medicare DCE | | $ | 1,320 | | | $ | 1,283 | | | 2.9 | % |
| Total Medicare | | $ | 1,222 | | | $ | 1,066 | | | 14.6 | % |
| Medicaid | | $ | 223 | | | $ | 414 | | | (46.1) | % |
| ACA | | $ | 48 | | | $ | 36 | | | 33.3 | % |
| Total PMPM | | $ | 780 | | | $ | 769 | | | 1.4 | % |
| | | | | | |
| Medical centers | | 151 | | | 113 | | |
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended
June 30, | | |
| (in thousands) | | 2023 | | 2022 | | % Change |
| Members: | | | | | | |
| Medicare Advantage | | 140,535 | | | 123,768 | | | 13.5 | % |
| Medicare ACO REACH | | 65,161 | | | 40,179 | | | 62.2 | % |
| Total Medicare | | 205,696 | | | 163,947 | | | 25.5 | % |
| Medicaid | | 77,290 | | | 70,254 | | | 10.0 | % |
| ACA | | 98,080 | | | 47,324 | | | 107.3 | % |
| Total members | | 381,066 | | | 281,525 | | | 35.4 | % |
| | | | | | |
| Member months: | | | | | | |
| Medicare Advantage | | 840,921 | | | 718,980 | | | 17.0 | % |
| Medicare ACO REACH | | 401,297 | | | 247,390 | | | 62.2 | % |
| Total Medicare | | 1,242,218 | | | 966,370 | | | 28.5 | % |
| Medicaid | | 487,909 | | | 408,827 | | | 19.3 | % |
| ACA | | 580,613 | | | 261,266 | | | 122.2 | % |
| Total member months | | 2,310,740 | | | 1,636,463 | | | 41.2 | % |
| ($ in thousands) | | | | | | |
| Per Member Per Month ("PMPM"): | | | | | | |
| Medicare Advantage | | $ | 1,103 | | | $ | 1,222 | | | (9.7) | % |
| Medicare ACO REACH | | $ | 1,400 | | | $ | 1,371 | | | 2.1 | % |
| Total Medicare | | $ | 1,199 | | | $ | 1,260 | | | (4.9) | % |
| Medicaid | | $ | 173 | | | $ | 240 | | | (27.9) | % |
| ACA | | $ | 18 | | | $ | 53 | | | (66.0) | % |
| Total PMPM | | $ | 686 | | | $ | 813 | | | (15.6) | % |
| | | | | | |
| Medical centers | | 169 | | | 143 | | |
Comparison of the Three Months Ended SeptemberJune 30, 20222023 and 20212022
Revenue
| | | Three Months Ended September 30, | | | Three Months Ended June 30, | |
| ($ in thousands) | ($ in thousands) | | 2022 | | 2021 | | | $ Change | | % Change | ($ in thousands) | | 2023 | | 2022 | | | $ Change | | % Change |
| Revenue: | Revenue: | | | | | | | | | | Revenue: | | | | | | | | | |
| Capitated revenue | Capitated revenue | | $ | 625,895 | | | $ | 473,763 | | | | $ | 152,132 | | | 32.1 | % | Capitated revenue | | $ | 743,324 | | | $ | 655,493 | | | | $ | 87,831 | | | 13.4 | % |
| Fee-for-service and other revenue | Fee-for-service and other revenue | | 39,133 | | | 25,168 | | | | 13,965 | | | 55.5 | % | Fee-for-service and other revenue | | 23,422 | | | 33,880 | | | | (10,458) | | | -30.9 | % |
| Total revenue | Total revenue | | $ | 665,028 | | | $ | 498,931 | | | | $ | 166,097 | | | Total revenue | | $ | 766,746 | | | $ | 689,373 | | | | $ | 77,373 | | |
Capitated revenue. Capitated revenue was $625.9$743.3 million for the three months ended SeptemberJune 30, 2022,2023, an increase of $152.1$87.8 million, or 32.1%13.4%, compared to $473.8$655.5 million for the three months ended SeptemberJune 30, 2021.2022. The increase was primarily driven by a 38.7%$191.4 million increase in the total member months slightlyrelated to additional members driven by organic growth and certain acquisitions, partially offset by a 4.6%$83.6 million decrease in total capitated revenue per member per month driven by decreased pricing("PMPM") and $20.0 million related to membership mix. The decrease in the DCE business. The increasecapitated revenue PMPM included a decrease of approximately $70.3 million in member months was due to an increase in the total number of members served at new and existing centers and certain acquisitions.Medicare Risk Adjustments.
Fee-for-service and other revenue. Fee-for-service and other revenue was $39.1$23.4 million for the three months ended SeptemberJune 30, 2022, an increase2023, a decrease of $14.0$10.5 million, or 55.5%30.9%, compared to $25.2$33.9 million for the three months ended SeptemberJune 30, 2021. The increase2022, primarily due to a decrease in fee-for-service and other revenue was primarily attributable to an increase in patients served across existing centers as well as a $1.1 million benefit from claims irrevocably assigned to MSP.volume of services provided.
Operating Expenses
| | | Three Months Ended September 30, | | | Three Months Ended June 30, | |
| ($ in thousands) | ($ in thousands) | | 2022 | | 2021 | | $ Change | | % Change | ($ in thousands) | | 2023 | | 2022 | | $ Change | | % Change |
| Operating expenses: | Operating expenses: | | | | | | | | | Operating expenses: | | | | | | | | |
| Third-party medical costs | Third-party medical costs | | $ | 489,565 | | | $ | 381,316 | | | $ | 108,249 | | | 28.4 | % | Third-party medical costs | | $ | 769,629 | | | $ | 541,317 | | | $ | 228,312 | | | 42.2 | % |
| Direct patient expense | Direct patient expense | | 63,867 | | | 50,368 | | | 13,499 | | | 26.8 | % | Direct patient expense | | 56,757 | | | 52,647 | | | 4,110 | | | 7.8 | % |
| Selling, general, and administrative expenses | Selling, general, and administrative expenses | | 111,765 | | | 76,618 | | | 35,147 | | | 45.9 | % | Selling, general, and administrative expenses | | 99,418 | | | 106,179 | | | (6,761) | | | -6.4 | % |
| Depreciation and amortization expense | Depreciation and amortization expense | | 25,343 | | | 16,955 | | | 8,388 | | | 49.5 | % | Depreciation and amortization expense | | 27,251 | | | 19,836 | | | 7,415 | | | 37.4 | % |
| Transaction costs and other | | 5,033 | | | 11,206 | | | (6,173) | | | -55.1 | % | |
| Transaction costs | | Transaction costs | | 9,125 | | | 6,207 | | | 2,918 | | | 47.0 | % |
| Change in fair value of contingent consideration | Change in fair value of contingent consideration | | 900 | | | (3,940) | | | 4,840 | | | N/A | Change in fair value of contingent consideration | | (11,800) | | | (5,764) | | | (6,036) | | | 104.7 | % |
| Credit loss on other assets | | Credit loss on other assets | | 62,000 | | | $ | — | | | $ | 62,000 | | | — | % |
| Total operating expenses | Total operating expenses | | $ | 696,473 | | | $ | 532,523 | | | $ | 163,950 | | | Total operating expenses | | $ | 1,012,380 | | | $ | 720,422 | | | $ | 229,958 | | |
Third-party medical costs. Third-party medicalmedical costs were $489.6$769.6 million for the three months ended September 30, 2022, an increase of $108.2 million, or 28.4%, compared to $381.3 million for the three months ended September 30, 2021. The increase was primarily driven by a 38.7% 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. During the three months ended SeptemberJune 30, 2022, $34.32023, an increase of $228.3 million, was recognized as a reduction in third-party medical costs relatedor 42.2%, compared to claims irrevocably assigned to MSP. This amount was offset by $11.0$541.3 million that was reversed during the period related to certain of the claims assigned to MSP, which the Company was previously independently pursuing from a third-party payor. Duringfor the three months ended SeptemberJune 30, 2021, $1.82022. The increase was driven by a $154.4 million was recognized asincrease related to additional members driven by organic growth and certain acquisitions, a reduction$59.9 million increase related to third partyhigher third-party medical cost PMPM and a $14.0 million increase related to membership mix. The higher third-party medical cost PMPM included $38.5 million in additional over-the-counter medical costs related to the third-party payor.and increased claims utilization.
Direct patient expense. Direct patient expense was $63.9$56.8 million for the three months ended SeptemberJune 30, 2022,2023, an increase of $13.5$4.1 million, or 26.8%7.8%, compared to $50.4$52.6 million for the three months ended SeptemberJune 30, 2021.2022. The increase was primarily driven by increases in payroll and benefits of $11.2 million,and pharmacy drugs of $1.4 million and medical supplies of $1.3 million.costs, offset by a reduction in provider payments.
Selling, general, and administrative expenses. Selling, general, and administrative expenses were $111.8$99.4 million for the three months ended SeptemberJune 30, 2022, an increase 2023, a decrease of $35.1$6.8 million, or 45.9%6.4%, compared to $76.6$106.2 million for the three months ended SeptemberJune 30, 2021.2022. The increasedecrease was primarily driven by higher salariesa decrease in stock-based compensation of $15.8 million due to a one-time benefit related to a modification related to the vesting of the former CEO's stock-based awards, which was approved in connection with his resignation, and benefitsa decrease in marketing costs of $14.6$3.6 million, offset by increases in legal and professional services of $6.2 million, which included a one-time fee to MSP of $5.0 million related to a professional services agreement, payable in either cash or common stock at the Company's choice by no later than May 31, 2023, occupancy costs of
$5.8services of $3.8 million, marketing expensesoccupancy costs of $3.6$2.4 million, higher salaries and benefits of $2.4 million, and stock-based compensationinformation technology expense of $1.6$2.2 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 $25.3$27.3 million for the three months ended SeptemberJune 30, 2022,2023, an increase of $8.4$7.4 million, or 49.5%37.4%, compared to $17.0$19.8 million for the three months ended SeptemberJune 30, 2021.2022. The increase was driven by purchasesthe opening of new propertyde novos medical centers and equipmentcenter expansion to support the growth of our business during the periodin prior periods, 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.costs. Transaction costs and other were $5.0$9.1 million for the three months ended SeptemberJune 30, 2022, a decrease2023, an increase of $6.2$2.9 million, or 55.1%47.0%, compared to $11.2$6.2 million for the three months ended SeptemberJune 30, 2021. The decrease2022.The increase related to a decrease in acquisitions in 2022.certain non-recurring legal costs related to the proxy contest with the 3 former directors.
Change in fair value of contingent consideration. Contingent consideration generated a lossgain of $0.9$11.8 million for the three months ended SeptemberJune 30, 2022 primarily2023 due to ourthe performance of certain acquired plans and the related contingent payments.
Allowance for credit losses on other assets. On August 2, 2023, MSP announced that the SEC initiated an investigation of MSP on August 11, 2022. In addition, MSP announced that it received a subpoena on March 10, 2023 from the U.S. Attorney's Office in the U.S. District Court for the Southern District of Florida. As a result of (i) these recent disclosures by MSP; (ii) MSP's delinquent filing of its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2023; and (iii) MSP's not being in compliance with the NASDAQ listing requirements, the Company decided to utilize a third-party valuation specialist to provide a market value analysis of the shares of Class A common stock price increasing in value.that MSP issued to the Company on July 7, 2023. As of June 30, 2023, the Company has recognized an allowance for credit losses of $62.0 million.
Other Income (Expense)
| | | Three Months Ended September 30, | | | Three Months Ended June 30, | |
| ($ in thousands) | ($ in thousands) | | 2022 | | 2021 | | $ Change | | % Change | ($ in thousands) | | 2023 | | 2022 | | $ Change | | % Change |
| Other income and expense: | Other income and expense: | | | | | | | | | Other income and expense: | | | | | | | | |
| Interest expense | Interest expense | | $ | (16,451) | | | $ | (16,023) | | | $ | (428) | | | 2.7 | % | Interest expense | | $ | (26,719) | | | $ | (13,134) | | | $ | (13,585) | | | 103.4 | % |
| Interest income | Interest income | | 4 | | | 1 | | | 3 | | | 300.0 | % | Interest income | | 90 | | | 2 | | | 88 | | | 4400.0 | % |
| | Change in fair value of warrant liabilities | Change in fair value of warrant liabilities | | (65,721) | | | (14,650) | | | (51,071) | | | 348.6 | % | Change in fair value of warrant liabilities | | (1,677) | | | 30,175 | | | (31,852) | | | -105.6 | % |
| Other income (expense) | Other income (expense) | | 354 | | | (29) | | | 383 | | | N/A | Other income (expense) | | 1,323 | | | 251 | | | 1,072 | | | 427.1 | % |
| Total other income (expense) | Total other income (expense) | | $ | (81,814) | | | $ | (30,701) | | | $ | (51,113) | | | Total other income (expense) | | $ | (26,983) | | | $ | 17,294 | | | $ | (44,277) | | |
|
Interest expense. Interest expense was $16.5$26.7 million for the three months ended SeptemberJune 30, 2022,2023, an increase of $0.4$13.6 million, or 2.7%103.4%, compared to $16.0$13.1 million for the three months ended SeptemberJune 30, 2021.2022. The increase was primarily driven by higher interest rates during the period on outstanding long-term debt.debt and additional borrowing under the 2023 Term Loan.
Change in fair value of warrant liabilities. Change in fair value of warrant liabilities was $65.7$1.7 million for the three months ended SeptemberJune 30, 20222023 as a result of a change in the fair value of the public warrants and private placement warrants assumed in connection with the Business Combination.
Comparison of the NineSix Months Ended SeptemberJune 30, 20222023 and 20212022
Revenue
| | | Nine Months Ended September 30, | | | Six Months Ended June 30, | |
| ($ in thousands) | ($ in thousands) | | 2022 | | 2021 | | | $ Change | | % Change | ($ in thousands) | | 2023 | | 2022 | | | $ Change | | % Change |
| Revenue: | Revenue: | | | | | | | | | | Revenue: | | | | | | | | | |
| Capitated revenue | Capitated revenue | | $ | 1,955,739 | | | $ | 1,064,604 | | | $ | 891,135 | | | 83.7 | % | Capitated revenue | | $ | 1,584,397 | | | $ | 1,329,844 | | | $ | 254,553 | | | 19.1 | % |
| Fee-for-service and other revenue | Fee-for-service and other revenue | | 102,804 | | | 52,510 | | | | 50,294 | | | 95.8 | % | Fee-for-service and other revenue | | 49,258 | | | 63,671 | | | | (14,413) | | | -22.6 | % |
| Total revenue | Total revenue | | $ | 2,058,543 | | | $ | 1,117,114 | | | $ | 941,429 | | | Total revenue | | $ | 1,633,655 | | | $ | 1,393,515 | | | $ | 240,140 | | |
Capitated revenue. Capitated revenue was $2.0$1.6 billion for the ninesix months ended SeptemberJune 30, 2022,2023, an increase of $891.1$254.6 million, or 83.7%19.1%, compared to $1.1$1.3 billion for the ninesix months ended SeptemberJune 30, 2021.2022. The increase was primarily driven by a 81.2%$395.9 million increase in the total member months and a 1.4% increase in total revenue per member per month. The increase in member months was duerelated to an increase in the total number ofadditional members served at new and existing centers due todriven by organic growth and ascertain acquisitions, partially offset by a result$114.9 million decrease in total capitated revenue PMPM and $26.4 million related to membership mix. The decrease in capitated revenue PMPM included a decrease of certain acquisitions.approximately $98.6 million in Medicare Risk Adjustments.
Fee-for-service and other revenue. Fee-for-service and other revenue was $102.8$49.3 million for the ninesix months ended SeptemberJune 30, 2022,2023, an increasedecrease of $50.3$14.4 million, or 95.8%22.6%, compared to $52.5$63.7 million for the ninesix months ended SeptemberJune 30, 2022, primarily due to a decrease in volume of services provided.
2021. The increase in fee-for-service and other revenue was primarily attributable to an increase in patients served across existing centers as well as a $8.0 million benefit from claims irrevocably assigned to MSP.
Operating Expenses
| | | Nine Months Ended September 30, | | | Six Months Ended June 30, | |
| ($ in thousands) | ($ in thousands) | | 2022 | | 2021 | | $ Change | | % Change | ($ in thousands) | | 2023 | | 2022 | | $ Change | | % Change |
| Operating expenses: | Operating expenses: | | | | | | | | | Operating expenses: | | | | | | | | |
| Third-party medical costs | Third-party medical costs | $ | 1,566,661 | | $ | 868,177 | | $ | 698,484 | | | 80.5 | % | Third-party medical costs | $ | 1,477,960 | | $ | 1,077,097 | | $ | 400,863 | | | 37.2 | % |
| Direct patient expense | Direct patient expense | | 177,190 | | | 120,212 | | | 56,978 | | | 47.4 | % | Direct patient expense | | 125,184 | | | 113,323 | | | 11,861 | | | 10.5 | % |
| Selling, general, and administrative expenses | Selling, general, and administrative expenses | | 314,617 | | | 158,786 | | | 155,831 | | | 98.1 | % | Selling, general, and administrative expenses | | 195,890 | | | 202,849 | | | (6,959) | | | -3.4 | % |
| Depreciation and amortization expense | Depreciation and amortization expense | | 64,215 | | | 30,746 | | | 33,469 | | | 108.9 | % | Depreciation and amortization expense | | 54,473 | | | 38,872 | | | 15,601 | | | 40.1 | % |
| Transaction costs and other | | 19,616 | | | 36,274 | | | (16,658) | | | -45.9 | % | |
| Transaction costs | | Transaction costs | | 19,211 | | | 14,583 | | | 4,628 | | | 31.7 | % |
| Change in fair value of contingent consideration | Change in fair value of contingent consideration | | (9,525) | | | (4,152) | | | (5,373) | | | N/A | Change in fair value of contingent consideration | | (15,900) | | | (10,425) | | | (5,475) | | | 52.5 | % |
| | Credit loss on other assets | | Credit loss on other assets | | 62,000 | | | — | | | 62,000 | | | — | % |
| Total operating expenses | Total operating expenses | $ | 2,132,774 | | $ | 1,210,043 | | $ | 922,731 | | | Total operating expenses | $ | 1,918,818 | | $ | 1,436,299 | | $ | 420,519 | | |
Third-party medical costs. Third-party medical costs were $1.6$1.5 billion for the ninesix months ended SeptemberJune 30, 2022,2023, an increase of $698.5$400.9 million, or 80.5%37.2%, compared to $868.2 million$1.1 billion for the ninesix months ended SeptemberJune 30, 2021.2022. The increase was driven by a 81.2%$323.2 million increase related to additional members driven by organic growth and certain acquisitions, a $60.4 million increase related to higher third-party medical costs PMPM and a $17.3 million increase related to membership mix. The higher third-party medical costs PMPM included $39.4 million in total member months, the addition of Direct Contracting Entity ("DCE") members with higheradditional over-the-counter medical costs and the trending shift toward proportionately more higher acuity patients across service lines. Further, in the nine months ended September 30, 2022 there was $6 million of unfavorable prior yearincreased claims development for the Company's Medicare DCE program. During the nine months ended September 30, 2022, $41.0 million was recognized as a reduction in third-party medical costs related to claims irrevocably assigned to MSP for recovery. This amount was offset by $7.3 million that was recognized during the twelve months ended December 31, 2021 related to certain of the claims assigned to MSP which the Company was previously independently pursuing from a third-party payor. During the nine months ended September 30, 2021 $5.4 million was recognized as a reduction to third party medical costs related to the third-party payor.and utilization.
Direct patient expense. Direct patient expense was $177.2$125.2 million for the ninesix months ended SeptemberJune 30, 2022,2023, an increase of $57.0$11.9 million, or 47.4%10.5%, compared to $120.2$113.3 million for the ninesix months ended SeptemberJune 30, 2021.2022. The increase was primarily driven by increases in payroll and benefits of $42.4$5.9 million, pharmacy drugs of $8.4 million, provider payments of $0.8$3.9 million and ancillary medical suppliesservices of $4.3$3.2 million.
Selling, general, and administrative expenses. Selling, general, and administrative expenses were $314.6$195.9 million for the ninesix months ended SeptemberJune 30, 2022, an increase2023, a decrease of $155.8$7.0 million, or 98.1%3.4%, compared to $158.8$202.8 million for the ninesix months ended SeptemberJune 30, 2021.2022. The increasedecrease was primarily driven by a decrease in stock-based compensation of $20.2 million due to a one-time
benefit related to a modification related to the vesting of the former CEO's stock-based awards, which was approved in connection with his resignation, and a decrease in marketing costs of $7.7 million, offset by increases in occupancy costs of $5.9 million, higher salaries and benefits of $62.2$5.1 million, stock-based compensationan increase in information technology expense of $29.5$4.4 million, occupancy costs of $20.6 million,an increase in legal and professional services of $17.6 million, which included a one-time fee to MSP of $5.0 million related to a professional services agreement, and marketing expenses of $11.0$1.9 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 $64.2$54.5 million for the ninesix months ended SeptemberJune 30, 2022,2023, an increase of $33.5$15.6 million, or 108.9%40.1%, compared to $30.7$38.9 million for the ninesix months ended SeptemberJune 30, 2021.2022. The increase was driven by purchases of new property and equipment to support the growth of our business during the periodprior periods, as well as the addition of several brand names, non-compete agreements, and payor relationships from our 2021 andcertain 2022 acquisitions.
Transaction costs and other.costs. Transaction costs and other were $19.6$19.2 million for the ninesix months ended SeptemberJune 30, 2022, a decrease2023, an increase of $16.7$4.6 million, or 45.9%31.7%, compared to $36.3$14.6 million for the ninesix months ended SeptemberJune 30, 2021.2022. The decreaseincrease related to higher than usual transactionsfinancing costs in 2021for the 2023 Term Loan and certain non-recurring legal costs related to the Business Combination and a decrease in acquisitions in 2022.proxy contest with the 3 former directors.
Change in fair value of contingent consideration. Contingent consideration generated a gain of $9.5$15.9 million for the ninesix months ended SeptemberJune 30, 2023 due to the performance of certain acquired plans and the related contingent payments.
Allowance for credit losses on other assets. On August 2, 2023, MSP announced that the SEC initiated an investigation of MSP on August 11, 2022. A gainIn addition, MSP announced that it received a subpoena on March 10, 2023 from the U.S. Attorney's Office in the U.S. District Court for the Southern District of $2.1 million relatedFlorida. As a result of (i) these recent disclosures by MSP; (ii) MSP's delinquent filing of its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2023; and (iii) MSP's not being in compliance with the NASDAQ listing requirements, the Company decided to an amount owed for an acquisition that will be paid inutilize a third-party valuation specialist to provide a market value analysis of the shares of Class A common stock wherethat MSP issued to the decrease inCompany on July 7, 2023. As of June 30, 2023, the liability and corresponding gain was a resultCompany has recognized an allowance for credit losses of our stock price decreasing during the nine months ended September 30, 2022. Additionally, a gain of $2.9 million was recorded related to derecognizing University's contingent consideration from the balance sheet as of September 30, 2022. Further, a gain of $4.5 million was recorded related to an acquisition completed on August 5, 2022, as described above, resulting from a change in the fair value of a put and call option and performance of the assets acquired in the acquisition.
Other Income (Expense)
| | | Nine Months Ended September 30, | | | Six Months Ended June 30, | |
| ($ in thousands) | ($ in thousands) | | 2022 | | 2021 | | $ Change | | % Change | ($ in thousands) | | 2023 | | 2022 | | $ Change | | % Change |
| Other income and expense: | Other income and expense: | | | | | | | | | Other income and expense: | | | | | | | | |
| Interest expense | Interest expense | $ | (42,868) | | $ | (36,363) | | $ | (6,505) | | | 17.9 | % | Interest expense | | $ | (50,224) | | | $ | (26,418) | | | $ | (23,806) | | | 90.1 | % |
| Interest income | Interest income | | 7 | | | 4 | | | 3 | | | 75.0 | % | Interest income | | 99 | | | 3 | | | 96 | | | 3200.0 | % |
| Loss on extinguishment of debt | Loss on extinguishment of debt | | (1,428) | | | (13,225) | | | 11,797 | | | -89.2 | % | Loss on extinguishment of debt | | — | | | (1,428) | | | 1,428 | | | -100.0 | % |
| | Change in fair value of warrant liabilities | Change in fair value of warrant liabilities | | (8,383) | | | 24,565 | | | (32,948) | | | -134.1 | % | Change in fair value of warrant liabilities | | 331 | | | 57,337 | | | (57,006) | | | -99.4 | % |
| Other income (expense) | Other income (expense) | | 884 | | | (54) | | | 938 | | | N/A | Other income (expense) | | 1,755 | | | 530 | | | 1,225 | | | N/A |
| Total other income (expense) | Total other income (expense) | $ | (51,788) | | $ | (25,073) | | $ | (26,715) | | | Total other income (expense) | | $ | (48,039) | | | $ | 30,024 | | | $ | (78,063) | | |
Interest expense. Interest expense was $42.9$50.2 million for the ninesix months ended SeptemberJune 30, 2022,2023, an increase of $6.5$23.8 million, or 17.9%90.1%, compared to $36.4$26.4 million for the ninesix months ended SeptemberJune 30, 2021.2022. The increase was primarily driven by interest incurred on our higher outstanding borrowings.borrowings and a higher interest rate on the term loan under our Credit Suisse Credit Agreement due to SOFR, exceeding the floor rate as well as additional interest expense related to the 2023 Term Loan.
Loss on extinguishment of debt. Loss on extinguishment of debt was $1.4 million for the ninesix months ended SeptemberJune 30, 2022 related to the amendment to the Credit Suisse Credit Agreement in January 2022. There have been no comparable amendments in the six months ended June 30, 2023. See Note 11 -13, "Debt," foin our audited consolidated financial statements included in Item 8 of Part II of our 2022 Form 10-K for more details.r more details of the extinguishment.
Change in fair value of warrant liabilities. Change in fair value of warrant liabilities was $8.4$1.8 million for the ninesix months ended SeptemberJune 30, 2023, compared to $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. The gain recorded for the six months ended June 30, 2022 was driven by a decrease in the Company's share price.
Liquidity and Capital Resources
General
We have financed our operations principally through the Business Combination and debt securities and borrowings. As of SeptemberJune 30, 20222023 and December 31, 2021,2022, we had cash, cash equivalents and restricted cash of $24.1$27.7 million and $163.2$27.3 million, respectively. As of SeptemberJune 30, 20222023 and December 31, 2021, borrowings under 2022, the revolvingCompany had $13.0 million (of its total cash of $27.3 million) and $4.4 million (of its total cash of $27.3 million), respectively, of cash held as collateral and letters of credit facility had anrelated to the ACO REACH program, respectively. These letters of credit and the collateral are both presented within cash, cash equivalents and restricted cash.
As of June 30, 2023, the available balance on the CS Revolving Line of $120.0 million. Credit was $110 million, and as of August 9, 2023 such line of credit was fully drawn to ensure that the Company had access to liquidity while it was negotiating the 2023 Side-Car Amendment, discussed under “2023 Term Loan Agreement;” provided, however, having secured the 2023 Side-Car Amendment on August 10, 2023, the Company currently expects to repay a significant portion of such line of credit by the end of September 2023. As of June 30, 2023 and December 31, 2022, the Borrower maintains restricted letters of credit for an aggregate amount of $5.7 million and $7.2 million, respectively. As of June 30, 2023 and December 31, 2022, the Borrower had $13.0 million (of its total cash of $27.7 million) and $4.4 million (of its total cash of $27.3 million), respectively, of cash held as collateral and letters of credit related to the ACO REACH program, respectively. The letters of credit and the collateral are both presented within the Company's cash, cash equivalents and restricted cash. 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 deficitdeficit of $137.7$423.5 million as of SeptemberJune 30, 2022 and2023 and negative cash flows from operations.
2023 Term Loan Agreement
On February 24, 2023 (the “2023 Term Loan Closing Date”), the Company, through its wholly owned operating subsidiary, Cano Health, LLC (the “Borrower”), and Primary Care (ITC) Intermediate Holdings, LLC (“Holdings”), entered into a Credit Agreement (the “Side-Car Credit Agreement”) with certain lenders and JP Morgan Chase Bank, N.A., as administrative agent (the “2023 Term Loan Administrative Agent”), pursuant to which the lenders provided a senior secured term loan (the “2023 Term Loan”) to the Borrower in the aggregate principal amount of $150 million, the full amount of which was funded on the 2023 Term Loan Closing Date.
The Side-Car Credit Agreement contains a financial maintenance covenant, requiring the Borrower to maintain a First Lien Net Leverage Ratio (i.e., total first lien senior secured net debt to Consolidated Adjusted EBITDA) not to exceed 5.80:1.00 on the last day of any four consecutive fiscal quarter period. With a First Lien Leverage Ratio of approximately 12.00:1.00 at June 30, 2023, the Borrower was not in compliance with this financial maintenance covenant as of such date. Under the Side-Car Credit Agreement, the Borrower has a right to cure noncompliance with the financial maintenance covenant by obtaining sufficient equity proceeds, which may be sourced from equity or debt financings by the Company, that will be deemed added to the Borrower’s Consolidated Adjusted EBITDA for purposes of recalculating the financial maintenance covenant when such proceeds are contributed to the Borrower. The cure right may be exercised by the Borrower no more than 2 times in any 4 consecutive testing periods and no more than 5 times during the term of the Side-Car Credit Agreement. Accordingly, on July 28, 2023, the Borrower delivered to the 2023 Term Loan Administrative Agent a notice of its intent to cure such noncompliance by September 5, 2023, which would require the Company to raise approximately $71 million of new capital, which amount, if raised, would be contributed to the Borrower to consummate the cure.
Thereafter, on August 10, 2023, the Borrower obtained a waiver of such noncompliance and entered into an amendment of the Side-Car Credit Agreement (the “2023 Side-Car Amendment”) under which the Company will not be required to test compliance with the Side-Car Credit Agreement’s financial maintenance covenant until the fiscal quarter ending September 30, 2024. The 2023 Side-Car Amendment provides, among other modifications to the Side-Car Credit Agreement, that: (i) the Company will formally launch, announce and pursue a comprehensive process in an effort to yield one or more offers for a sale of all or substantially all of the assets or businesses of, or direct or indirect equity interests in, the Borrower and its subsidiaries with a purchase price that includes cash proceeds sufficient to pay the obligations under the Side-Car Credit Agreement, and will use its commercially reasonable efforts to promptly close such a transaction; (ii) the interest rate for the 2023 Term Loan will be increased to 16% during the payment-in-kind period ending on February 24, 2025; (iii) a premium
payment of 5% of the outstanding principal amount of the 2023 Term Loan will be paid in kind by capitalizing such payment to the principal amount of the 2023 Term Loan; (iv) the applicable prepayment premium will be required in connection with any voluntary or mandatory prepayment or repayment of the 2023 Term Loan; and (v) the lenders will have participation rights in certain new debt financings incurred by the Borrower or any of its subsidiaries. Absent such waiver, the 2023 Term Loan Administrative Agent, acting at the direction of the lead lender, and at the requisite lenders request, could have immediately terminated all commitments under the 2023 Term Loan and accelerated the maturity of all principal, interest and other amounts due thereon. Pursuant to the terms of the 2023 Side-Car Amendment, the Borrower will not be required to pursue its cure right.
Under the Credit Suisse Credit Agreement, if the Borrower was unable to obtain such waiver from the lenders under the 2023 Term Loan Agreement, or cure any such noncompliance by September 5, 2023, then the administrative agent under the Credit Suisse Credit Agreement would have been entitled to, and acting at the direction of the requisite lenders, could have, among other things, immediately terminated all commitments under the CS Term Loan and the CS Revolving Line of Credit and accelerated the maturity of all principal, interest and other amounts due thereunder. Under the Senior Notes, if (i) the Borrower was unable to obtain such waiver from the lenders under the 2023 Term Loan Agreement, or cure any such noncompliance by September 5, 2023; (ii) the lender under such facility or under the Credit Suisse Credit Agreement accelerated the maturity of $50 million or more of the amount outstanding thereunder; and (iii) the Borrower failed to pay such amount when due, then the trustee for the Senior Notes or the holders of at least 30% in principal amount of the Senior Notes would have been entitled to immediately accelerate the maturity of the Senior Notes, including all principal, interest and other amounts due thereon.
Pursuant to the Side-Car Credit Agreement, the 2023 Term Loan bears interest at a rate equal to: (i) on or prior to the date that is the second anniversary of the closing date, 14% per annum, payable quarterly either (at the Borrower’s election) in cash or in kind by adding such amount to the principal balance of the 2023 Term Loan (provided that pursuant to the 2023 Side-Car Amendment, the interest rate for the 2023 Term Loan will be increased to 16% during the payment-in-kind period ending on February 24, 2025); and (ii) thereafter, 13% per annum, payable quarterly in cash. The Borrower has elected to satisfy interest due on the 2023 Term Loan through the second anniversary in kind. The 2023 Term Loan is scheduled to mature on November 23, 2027. The 2023 Term Loan will not amortize.
Prior to the Side-Car Credit Agreement’s maturity date, the Borrower may elect to prepay the 2023 Term Loan, in whole or in part, subject to the applicable prepayment premium. If the Borrower voluntarily prepays the 2023 Term Loan, or if the 2023 Term Loan is accelerated, including in connection with a bankruptcy or insolvency proceeding, then the 2023 Term Loan will be subject to an applicable prepayment premium. If the prepayment, repayment or acceleration occurs during the period from and after the Closing Date up to (but not including) the date that is the 18-month anniversary of the initial funding date, the prepayment premium shall be an amount equal to: (i) the aggregate amount of interest which would otherwise have been payable on the principal amount of the 2023 Term Loan prepaid, repaid or accelerated from the date of the occurrence of the trigger event until the date that is the 18-month anniversary of the initial funding date, discounted at the then-applicable treasury rate plus 0.50%, plus (ii) an amount equal to the premium that would otherwise be payable as if such prepayment, repayment or acceleration had occurred on the day after the 18-month anniversary of the initial funding date (the “Make-Whole Amount”). If the prepayment, repayment or acceleration occurs during the period from and after the 18-month anniversary of the initial funding date up to (but not including) the date that is the 30-month anniversary of the initial funding date, the prepayment premium shall be an amount equal to 3% of the principal amount of the 2023 Term Loan prepaid, repaid or accelerated on such date in cash. If the prepayment, repayment or acceleration occurs during the period from and after the 30-month anniversary of the initial funding date up to (but not including) the date that is the 42-month anniversary of the initial funding date, the prepayment premium shall be an amount equal to 2% of the principal amount of the 2023 Term Loan prepaid, repaid or accelerated on such date in cash. There is no prepayment premium from and after the 42-month anniversary of the initial funding date. In addition, the 2023 Term Loan must be prepaid with the net cash proceeds of any material asset sale (subject to reinvestment rights) or casualty or condemnation event or any incurrence of debt not permitted by the Side-Car Credit Agreement. The Side-Car Credit Agreement also provides for annual excess cash flow mandatory prepayments. The mandatory prepayments under the Side-Car Credit Agreement are substantially consistent with the Credit Suisse Credit Agreement. Mandatory prepayments of the 2023 Term Loan and the CS Term Loan must be offered pro rata to the lenders thereof.
We expectCredit Suisse Credit Agreement
Pursuant to generate operating lossesthe Credit Suisse Credit Agreement, the Company, through the Borrower, has a senior secured term loan (as amended, the “CS Term Loan”) and minimal cash flows from operationsa revolving credit facility (as amended, the “CS Revolving Line of Credit”). The Obligations under the Credit Suisse Credit Agreement are secured by substantially all of the Borrower’s assets. The Credit Suisse Credit Agreement contains a financial maintenance covenant (which is for the foreseeable future duebenefit of the lenders under the CS Revolving Line of Credit only), requiring the Borrower to not exceed a total first lien secured net debt to Consolidated Adjusted EBITDA (as defined therein) ratio, which is tested quarterly only if the Borrower has exceeded a certain amount drawn under the CS Revolving Line of Credit, which is approximately 35% of the total commitment under the CS Revolving Line of Credit, or approximately $42 million. As of June 30, 2023, the available balance on the CS Revolving Line of Credit was $110 million, and as of August 10, 2023 such line of credit was fully drawn to ensure that the Company had access to liquidity while it was negotiating the 2023 Side-Car Amendment, discussed under “2023 Term Loan Agreement;” provided, however, having secured the 2023 Side-Car Amendment on August 10, 2023, the Company currently expects to repay a significant portion of such line of credit by the end of September 2023. Accordingly, as of June 30, 2023, the Company was not required to test its compliance with the financial maintenance covenant under the Credit Suisse Credit Agreement. Please see the discussion in this 2Q Form 10-Q regarding the Company’s noncompliance with the financial maintenance covenant under the Side-Car Credit Agreement as of June 30, 2023 and the Company’s receipt of a waiver of such noncompliance on August 10, 2023.
While the Company currently believes that the Borrower will not be required to test the financial maintenance covenant under the Credit Suisse Credit Agreement for the testing period ending September 30, 2023, if it were required to test such financial maintenance covenant and if, at such time, it is not in compliance with the financial maintenance covenant, the Borrower would be required to cure or seek a waiver of such noncompliance from the requisite revolving lenders under the Credit Suisse Credit Agreement by December 6, 2023. Under the Credit Suisse Credit Agreement, the Borrower has a right to cure any such noncompliance by obtaining sufficient equity proceeds, which may be sourced from equity or debt financings by the Company, that would be deemed added to the investments we intendBorrower’s Consolidated Adjusted EBITDA for purposes of recalculating the financial maintenance covenant when such proceeds are contributed to continuethe Borrower. The cure right may be exercised by the Borrower no more than 2 times in any 4 consecutive testing periods and no more than 5 times during the term of the Credit Suisse Credit Agreement. If the Borrower is unable to makeobtain a waiver of, or to cure, any such noncompliance, then the administrative agent under the Credit Suisse Credit Agreement would be entitled to, and acting at the direction of the requisite lenders could, among other things, immediately terminate the CS Term Loan and CS Revolving Line of Credit commitments and accelerate the maturity of all principal, interest and other amounts due under such facilities. If such circumstances were to arise, the Company can provide no assurances that the Borrower would be able to obtain such waiver or timely consummate such cure or repay or refinance any accelerated principal, interest and other amounts that may become due, if any.
Under the Side-Car Credit Agreement, if the Borrower becomes required to test the financial maintenance covenant under the Credit Suisse Credit Agreement and if, at such time, the Borrower is not in acquisitions, expansioncompliance with such financial maintenance covenant and was unable to obtain a waiver of, operations,or cure, any such noncompliance by December 6, 2023, then the 2023 Term Loan Administrative Agent would be entitled to, and acting at the direction of the requisite lenders, could, among other things, immediately terminate all commitments under the 2023 Term Loan and accelerate the maturity of all principal, interest and other amounts due thereunder. Under the Senior Notes, if (i) the Borrower becomes required to additional selling, general,test the financial maintenance covenant under the Credit Suisse Credit Agreement and administrative costs we expectif, at such time, the Borrower is not in compliance with such financial maintenance covenant and was unable or obtain a waiver of, or cure, any such noncompliance by December 6, 2023; (ii) the lender under such facility or under the Side-Car Credit Agreement accelerates the maturity of $50 million or more of the amount outstanding thereunder; and (iii) the Borrower fails to incurpay such amount when due, then the trustee for the Senior Notes or the holders of at least 30% in principal amount of the Senior Notes would be entitled to immediately accelerate the maturity of the Senior Notes, including all principal, interest and other amounts due thereon.
The CS Term Loan is subject to principal amortization repayments, due on the last business day of each calendar quarter equal to 0.25% 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 CS Term Loan is scheduled to become due on the maturity date of November 23, 2027.
Prior to the CS Term Loan’s maturity date, the Borrower may elect to prepay, in whole or in part at any time without premium or penalty, other than 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.certain repricing transactions and customary breakage costs.
Since December 31, 2021, we did
On January 14, 2022, the Company entered into an amendment to the Credit Suisse Credit Agreement, pursuant to which the outstanding principal amount of the CS Term Loan was replaced with an equivalent amount of new term loan having substantially similar terms, except with a lower interest rate margin applicable to the new term loan. The amendment of the Credit Suisse Credit Agreement implemented a forward-looking term rate based on the secured overnight financing rate (“SOFR”) as the replacement for LIBOR as the benchmark interest rate for borrowings under the CS Term Loan and CS Revolving Line of Credit, and certain other provisions. The new interest rate applicable to the CS Term Loan and borrowings under the CS Revolving Line of Credit was revised to 4.00%, plus the greater of SOFR and the applicable credit spread adjustment or 0.50%; provided that if the Borrower 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 remained in effect, a margin of 3.75% would be applicable. The Borrower has not raise any capital throughreached these applicable corporate ratings. The amendment represented a partial extinguishment and resulted in a write-off of deferred issuance costs of $1.4 million, which was recorded as a loss on extinguishment of debt financing. We completed seven acquisitions for total cash consideration of $5.0 million in the ninesix months ended June 30, 2022. During the six months ended June 30, 2023, the SOFR exceeded the credit spread adjustment of 0.50%, resulting in monthly variable interest rates for the quarter. As of June 30, 2023, the effective interest rate of the CS Term Loan was 9.76%.
Senior Notes
On September 30, 20222021, the Company issued senior unsecured notes for a principal amount of $300.0 million (the "Senior Notes") in a private offering. The Senior Notes bear interest at 6.25% per annum, payable semi-annually on April 1st and have deferred paymentsOctober 1st of $1.5 million and issued $39.3 millioneach year, which interest commenced on April 1, 2022. As of June 30, 2023, the effective interest rate of the Senior Notes was 6.66%. Principal on the Senior Notes is scheduled to become due in equity.full on October 1, 2028. The Senior Notes are not subject to any amortization payments.
Upon the completion of the Business Combination, Cano Health, Inc.the Company became a party to the Tax Receivable Agreement ("TRA"). Under the terms of that agreement, Cano Health, Inc.the Company 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. the Company 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 17, "Income Taxes"Taxes," in our unaudited condensed consolidated financial statements.statements of this Form 10-Q.
In 2023, we expect to incur approximately $81.0 million in cash interest payments (which excludes approximately $19.0 million of non-cash PIK interest under the 2023 Term Loan) and approximately $15.0 million in capital expenditures.
We believe that our existing cash, cash equivalents and restricted cash along with our expected cash generation through operations (See Note 3, "Going Concern," in our unaudited condensed consolidated financial statements in this Form 10-Q) and revolving lineCS Revolving Line of creditCredit will not be sufficient to fund our operating and capital needs for at least the next 12 months from the date of issuance of thesethe unaudited condensed consolidated financial statements. Our assessment of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties. Our actual results could vary because of, and our future capital requirements will depend on, many factors, including our growth rate, medical expenses, and the timing and extent of our expansion into new markets. We maystatements included in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. In the event that additional capital is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations, and financial condition would be adversely affected.Form 10-Q.
Cash Flows
The following table presents a summary of our consolidated cash flows from operating, investing and financing activities for the periods indicated.
| | | Nine Months Ended
September 30, | | Six Months Ended June 30, |
| ($ in thousands) | ($ in thousands) | | 2022 | | 2021 | ($ in thousands) | | 2023 | | 2022 |
| Net cash provided by (used in) operating activities | $ | (84,158) | | $ | (94,493) | | |
| Net cash provided by (used in) investing activities | | (48,153) | | | (1,112,848) | | |
| Net cash provided by (used in) financing activities | | (6,762) | | | 1,382,447 | | |
| Net cash (used in) provided by operating activities | | Net cash (used in) provided by operating activities | $ | (44,955) | | $ | (82,173) | |
| Net cash (used in) provided by investing activities | | Net cash (used in) provided by investing activities | | (17,701) | | | (29,273) | |
| Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | | 63,048 | | | (3,877) | |
| Net Increase (decrease) in cash, cash equivalents and restricted cash | Net Increase (decrease) in cash, cash equivalents and restricted cash | | (139,073) | | | 175,106 | | Net Increase (decrease) in cash, cash equivalents and restricted cash | | 392 | | | (115,323) | |
| Cash, cash equivalents and restricted cash at beginning of year | Cash, cash equivalents and restricted cash at beginning of year | | 163,170 | | | 33,807 | | Cash, cash equivalents and restricted cash at beginning of year | | 27,329 | | | 163,170 | |
| Cash, cash equivalents and restricted cash at end of period | Cash, cash equivalents and restricted cash at end of period | $ | 24,097 | | $ | 208,913 | | Cash, cash equivalents and restricted cash at end of period | $ | 27,721 | | $ | 47,847 | |
Operating Activities
For the ninesix months ended SeptemberJune 30, 2022,2023, net cash used in operating activities was $84.2$45.0 million, a decrease of $10.3$37.2 million in cash outflows, compared to net cash used in operating activities of $94.5$82.2 million for the ninesix months ended SeptemberJune 30, 2021.2022. Significant changes impacting net cash used in operating activities were as follows:
An increaseA decrease in cash of $78.5$201.1 million related to net loss and non-cash charges and credits, primarily related to the following:
•Increase in net losses of $9.4 million$316.7 million;
•Decrease in stock-based compensation expense of $20.2 million; and
•Decrease in non-cash loss on extinguishment of debt of $11.8$1.4 million,
Offset by the following non-cash items:
•Increase in depreciation and amortization of $33.5 million,$15.6 million; and
•IncreaseDecrease in lossgain related to the change in the fair value of warrant liabilities of $32.9 million,
•Increase in stock-based compensation expense of $29.5 million.$57.0 million;
A decreaseAn increase in cash of $68.1$238.3 million related to operating assets and liabilities primarily resulting from:
•Changes in accounts receivable due to the timing of collections and the growth in membership;
•Changes in liability for unpaid claims due to the growth in membership; and
•Changes in accounts payable and accrued expenses due to the timing of payments.
Investing Activities
For the ninesix months ended SeptemberJune 30, 2022,2023, net cash used in investing activities was $48.2$17.7 million, a decrease of $1.1 billion$11.6 million in cash outflows, compared to net cash used in investing activities of $1.1 billion$29.3 million for the ninesix months ended SeptemberJune 30, 20212022, primarily due primarily to a decrease in cash used for acquisitions slightly offset by increasedand capital expenditures. The Company expects the net cash used in investing activities to be less in 2023 due to a significant reduction in spending on de novo medical centers and acquisitions.
Financing Activities
Net cash provided by financing activities was $63.0 million during the six months ended June 30, 2023, an increase of $66.9 million, compared to net cash used in financing activities was $6.8of $3.9 million during the ninesix months ended SeptemberJune 30, 2022 a decrease of $1.4 billion compared to net cash provided by financing activities of $1.4 billion during the nine months ended September 30, 2021 primarily due to $141.8 million of net proceeds received infrom the Business Combination in June2023 Term Loan, partially offset by the $74.0 million repayment of 2021.the December 31, 2022 balance of the CS Revolving Line of Credit.
Non-GAAP Financial Metrics
The following discussion includes references to EBITDA and Adjusted EBITDA, which are non-GAAP financial measures.measures, which are reconciled below to net income/net loss, their most directly comparable GAAP measure. 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), 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.liabilities, and credit loss on other assets. 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 underlying 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;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;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 certain 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 considerationconsideration; 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 our other GAAP-based financial performance measures, including net loss, cash flow metrics and our GAAP financial results.
The following table provides a reconciliation of EBITDA and Adjusted EBITDA to net loss, the most directly comparable GAAP measure to these non-GAAP financial information:measures:
| | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| ($ in thousands) | ($ in thousands) | | 2022 | | 2021 | | 2022 | | 2021 | | ($ in thousands) | | 2023 | | 2022 | | 2023 | | 2022 | |
| Net loss | Net loss | $ | (112,011) | | $ | (64,840) | | $ | (126,660) | | $ | (117,240) | | | Net loss | | $ | (270,745) | | | (14,564) | | | $ | (331,330) | | | $ | (14,649) | | |
| Interest income | Interest income | | (4) | | | (1) | | | (7) | | | (4) | | | Interest income | | (90) | | | (2) | | | (99) | | | (3) | | |
| Interest expense | Interest expense | | 16,451 | | | 16,023 | | | 42,868 | | | 36,363 | | | Interest expense | | 26,719 | | | 13,134 | | | 50,224 | | | 26,418 | | |
| Income tax expense (benefit) | Income tax expense (benefit) | | (1,248) | | | 547 | | | 641 | | | (762) | | | Income tax expense (benefit) | | (1,872) | | | 809 | | | (1,872) | | | 1,889 | | |
| Depreciation and amortization expense | Depreciation and amortization expense | | 25,343 | | | 16,955 | | | 64,215 | | | 30,746 | | | Depreciation and amortization expense | | 27,251 | | | 19,836 | | | 54,473 | | | 38,872 | | |
| EBITDA | EBITDA | $ | (71,469) | | $ | (31,316) | | $ | (18,943) | | $ | (50,897) | | | EBITDA | | $ | (218,737) | | | 19,213 | | | $ | (228,604) | | | $ | 52,527 | | |
| Stock-based compensation | Stock-based compensation | | 11,041 | | | 9,451 | | | 42,641 | | | 13,130 | | | Stock-based compensation | | 2,017 | | | 17,783 | | | 11,368 | | | 31,600 | | |
| De novo (1) | | 24,282 | | | 10,178 | | | 59,567 | | | 24,561 | | | |
| Transaction costs (2) | | 6,733 | | | 12,503 | | | 24,445 | | | 39,297 | | | |
| Restructuring and other (3) | | 5,245 | | | 2,123 | | | 8,846 | | | 5,513 | | | |
| | Transaction costs (1) | | Transaction costs (1) | | 9,516 | | | 7,842 | | | 20,087 | | | 17,713 | | |
| Restructuring and other | | Restructuring and other | | 5,650 | | | 1,016 | | | 6,683 | | | 3,602 | | |
| Change in fair value of contingent consideration | Change in fair value of contingent consideration | | 900 | | | (3,940) | | | (9,525) | | | (4,152) | | | Change in fair value of contingent consideration | | (11,800) | | | (5,764) | | | (15,900) | | | (10,425) | | |
| Loss on extinguishment of debt | Loss on extinguishment of debt | | — | | | — | | | 1,428 | | | 13,225 | | | Loss on extinguishment of debt | | — | | | — | | | — | | | 1,428 | | |
| | Change in fair value of warrant liabilities | Change in fair value of warrant liabilities | | 65,721 | | | 14,650 | | | 8,383 | | | (24,565) | | | Change in fair value of warrant liabilities | | 1,677 | | | (30,175) | | | (331) | | | (57,337) | | |
| Credit loss on other assets | | Credit loss on other assets | | 62,000 | | | — | | | 62,000 | | | — | | |
| Adjusted EBITDA | Adjusted EBITDA | $ | 42,453 | | $ | 13,649 | | $ | 116,842 | | $ | 16,112 | | | Adjusted EBITDA | | $ | (149,677) | | | $ | 9,915 | | $ | $ | (144,697) | | | $ | 39,108 | | |
(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) Transaction costs included $1.7included $0.4 million and $1.3$1.6 million of corporate development payroll costs for the three months ended SeptemberJune 30, 20222023 and 2021,2022, respectively, and $4.3$0.9 million and $3.0$2.6 million for the nine months ended September 30, 2022 and 2021, respectively, of corporate development payroll costs.costs for the six months ended June 30, 2023 and 2022, respectively. Corporate development payroll costs include those expenses directly related to the additional staff needed to support our acquisitiontransaction activity.
(3) Restructuring and other included a one-time fee from MSP of $5.0 million related to a professional service agreement for the three and nine months ended September 30, 2022.
We experienced an increase in EBITDA and Adjusted EBITDA has been adjusted to exclude $19.5 million and $35.3 million for the respective three and ninesix months ended SeptemberJune 30, 2022 comparedin de novo losses, as the Company plans to September 30, 2021. The increasessignificantly reduce its investments in EBITDAde novo medical centers
in 2023 and, accordingly, modified its definition of Adjusted EBITDA relatebeginning January 1, 2023 to growthno longer include de novo losses in the overall business of the Company.calculating Adjusted EBITDA.
Critical Accounting Policies and Estimates
Our unaudited 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, weWe believe we have made reasonable estimates and assumptions in preparing thethese 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 2022 Form 10-K for the year ended December 31, 2021.10-K. 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 on2022 Form 10-K for the year ended December 31, 2021.10-K.
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. OurAs required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), our management, with the participation of our Interim Chief Executive Officer and the Chief Financial Officer, underevaluated the oversight of the Board, conducted an evaluation of the effectivenessdesign and operation 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 suchthis evaluation, our management, including ourInterim 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.June 30, 2023.
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 adjustmentsChanges 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.Internal Control over Financial Reporting
The material weaknesses have not been remediated as ofThere was no significant change in internal control over financial reporting that occurred during the date of the filing of this Quarterly Report on Form 10-Q. See “Part II. Other Information, Item 1A. Risk Factors − Risks Relatedthree and six months ended June 30, 2023 that has materially affected, or is reasonably likely to Being a Public Company − Our independent registered public accountants have identified a number of material weaknesses inmaterially affect, 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.
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 1617, "Commitments and Contingencies"Contingencies," in the notes to the unaudited condensed consolidated financial statements in Item 1 of Part I of this Quarterly Report.Form 10-Q.
Item 1A. Risk Factors
There have been no material changes inRefer to the risk factors disclosed underset forth in Part I,1, Item 1A "Risk Factors"of our 2022 Form 10-K and Part 2, Item 1A of our Q1 2023 Form 10-Q and Q2 2023 Form 10-Q. The following risk factor supplements those risk factors:
Our capital requirements, liquidity and financial condition raise significant risks as to our ability to continue as a going concern.
The Company’s current liquidity as of August 9, 2023 was approximately $101.5 million, consisting of cash and cash equivalents (excluding restricted cash of approximately $14.1 million). The Company currently believes that this amount of liquidity is not sufficient to cover the Company’s operating, investing and financing cash uses for the next 12 months. The Company is also not in compliance with the financial maintenance covenant in one of its existing debt agreement (as more fully described in Note 12, "Debt"). Management has evaluated the significance of these relevant conditions in relation to the Company’s ability to meet its obligations and has concluded that there is substantial doubt about the Company’s ability to continue as going concern within one year after the date that the financial statements are issued. For additional information, see Note 3, “Going Concern.”
The Company is pursuing several initiatives to improve its liquidity and net cash, such as reducing operating expenses, selling assets and operations and exiting certain markets. The Company’s efforts to reduce operating expenses include reducing permanent staff, lowering its third-party medical costs through negotiations with payors, consolidating underperforming medical centers, delaying renovations and other capital projects and significantly reducing nonessential spending. Other Company efforts to improve its liquidity include a strategic review of its Medicaid business in Florida, medical centers located in Texas and Nevada, pharmacy assets and other specialty practices. The Company is also in the process of closing medical centers and exiting markets in California, New Mexico and Illinois and also plans to exit its Puerto Rico operations by January 1, 2024,
Notwithstanding these initiatives, if we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our financial statements, and it is likely that investors will lose all or a part of their investment. Further, the perception that we may be unable to continue as a going concern may impede our ability to pursue strategic opportunities or operate our business due to concerns regarding our ability to discharge our contractual obligations. In addition, if there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding to us on commercially reasonable terms, or at all. Any failure or delay to secure additional financing, or our ability to access our existing cash, cash equivalents and investments, could force us to delay, limit or terminate our operations, make further reductions in our Form 10-K forworkforce, liquidate all or a portion of our assets and/or seek protection, or Bankruptcy Protection, under Chapters 7 or 11 of the year ended December 31, 2021.United States Bankruptcy Code.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
On August 16, 2022,April 26, 2023, the Company issued 5,859,4387,799,263 shares of Class A commons stock to Belen Health,Rubicon Credit Holdings, LLC, pursuant to an asset purchasea warrant agreement dated as of August 5, 2022, by and among Cano Health, Inc., Cano Health, LLC, Belen Health, LLC and Enrique Zamora.February 24, 2023. These shares were not registered at the time of issuance under the Securities Act in reliance upon the exemption provided in Section 4(a)(2) of the Securities Act.
On August 16, 2022, the Company issued 281,629Act; however, such shares of Class A common stock to Joel Lago pursuant to a transaction sourcing agreement, dated as of January 1, 2021, by and between Cano Health, LLC and Joel Lago. These shares were not registered under the Securities Act in reliance upon the exemption provided in Section 4(a)(2) of the Securities Act.
On August 22, 2022, the Company issued 104,522 shares of Class A common stock to Aida E. Castro, M.D. P.A. pursuant to an asset purchase agreement, dated as of August 12, 2022, by and among Aida Castro MD, PA., Aida Castro, MD and Cano Health, LLC. These shares were not registered under the Securities Act in reliance upon the exemption provided in Section 4(a)(2) of the Securities Act.
On September 1, 2022, the Company issued 527,542 shares of Class A common stock to Ricardo Martinez pursuant to an asset purchase agreement, dated as of June 6, 2022, by and among Cano Health, LLC, Centro Medico Latino Americano De West Palm Beach, Corp., Ricardo Martinez and Gloria Arango. These shares were not registered under the Securities Act in reliance upon the exemption provided in Section 4(a)(2) of the Securities Act.
On September 1, 2022, the Company issued 25,386 shares of Class A common stock as a finder’s fee to Robert Camerlinck in connection with the Company’s acquisition of Doctor’s Medical Center, LLC and its affiliates. These shares were not registered under the Securities Act in reliance upon the exemption provided in Section 4(a)(2) of the Securities Act.
On September 1, 2022, the Company issued 97,313 shares of Class A common stock as a finder’s fee to Dan Miller in connection with the Company’s acquisition of Doctor’s Medical Center, LLC and its affiliates. These shares were not registered under the Securities Act in reliance upon the exemption provided in Section 4(a)(2) of the Securities Act.are now registered.
Recent PurchasesRepurchases of Equity Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.Rule 10b5-1 Trading Plans
On June 27, 2023, David Armstrong, the Company’s Chief Compliance Officer & General Counsel (the “Executive”), entered into a Rule 10b5-1 trading plan (the “10b5-1 Plan”) intended to satisfy the affirmative defense of the SEC’s Rule 10b5–1(c). Under the 10b5-1 Plan, the Executive may sell a maximum of 387,500 shares of the Company’s Class A common stock (the “Maximum Plan Shares”). Following a mandatory cooling-off period, trading under the 10b5-1 Plan is expected to commence on or about September 27, 2023. The 10b5-1 Plan will terminate on the earlier of: (i) December 31, 2025; (ii) the date on which the Maximum Plan Shares have been sold; or (iii) such date the 10b5-1 Plan is otherwise terminated according to its terms.
Item 6. ExhibitsCessation of Employment
On August 8, 2023, Dr. Richard B. Aguilar ceased employment as the Company’s Chief Clinical Officer and in exchange for his entering into a Separation Agreement and Release of Claims, which conforms in all material respects with the form of separation agreement and release of claims attached to Dr. Aguilar’s Employment Agreement (filed as Exhibit 10.8 to the Company’s Current Report on Form 8-K filed with the SEC on June 9, 2021), Dr. Aguilar is eligible for the severance benefits described in Sections 6(a) and 6(c) of his Employment Agreement.
2023 Side-Car Credit Agreement Amendment
On August 10, 2023, the Borrower entered into the 2023 Side-Car Amendment, as described in Note 12, “Debt,” and in “Liquidity and Capital Resources” in the MD&A.
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| | Exhibit Index |
| Exhibit Number | | Description |
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| 4.2^ | | |
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| 10.7^ | | |
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| 10.11+ | | |
| 31.1* | | |
| 31.2* | | |
| 32.1** | | |
| 32.2** | | |
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| 101.INS* | | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
| 101.SCH* | | Inline XBRL Taxonomy Extension Schema Document |
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| 101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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| 101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document |
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| 101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104* | | Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.) |
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| * | Filed herewith. |
| ** | The certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to be furnished with this QuarterlyAnnual Report and will not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by referenceFurnished herewith.reference. |
| + | Indicates a management contract or any compensatory plan, contract or arrangement. |
| ^ | Schedules and exhibits to this Exhibit have been omitted in accordance with Item 601 of Regulation S-K. The Company agrees to furnish supplementally a copy of all omitted schedules and exhibits to the U.S. Securities and Exchange Commission or its staff upon request. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CANO HEALTH, INC.
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| Date | | Signature | | Title |
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November 9, 2022August 10, 2023 | By: | /s/ Dr. Marlow HernandezMark Kent | | Interim Chief Executive Officer |
| | Dr. Marlow HernandezMark Kent | | (Principal Executive Officer) |
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November 9, 2022August 10, 2023 | By: | /s/ Brian D. Koppy | | Chief Financial Officer |
| | Brian D. Koppy | | (Principal Financial Officer) |
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November 9, 2022August 10, 2023 | By: | /s/ Mark Novell | | Chief Accounting Officer |
| | Mark Novell | | (Principal Accounting Officer) |
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