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 September 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$0.01 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$1,150.00 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, 20229, 2023 the registrant had 244,574,3272,887,608 shares of Class A common stock outstanding and 249,909,4752,518,894 shares of Class B common stock outstanding. Share amounts reflect the 1-for-100 Reverse Stock Split that the Company completed on November 3, 2023.
Table of Contents
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PART I FINANCIAL INFORMATION |
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PART II. OTHER INFORMATION |
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i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q may constitute “forward-looking statements” for purposes of the federal securities laws. Our forward-looking statements include, but are not limited to, statements regarding our or our management team’s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this report may include, for example, statements about:
•our ability to recognize the benefits of the Business Combination (as defined herein) and our other recent acquisitions, which may be affected by, among other things, competition and our ability to grow and manage growth profitability;
•our financial and business performance, including our ability to realize expected results;
•changes in our strategy, future operations, financial position, estimated revenues, forecasts, projected costs, prospects and plans;
•changes in applicable laws or regulations, including with respect to health plans and payors and our relationships with such plans and payors, and provisions that impact Medicare and Medicaid programs;
•our ability to realize expected results with respect to patient membership, revenue and earnings;
•our ability to grow market share in existing markets or enter into new markets and success of acquisitions;
•our ability to predict and control our medical claims expense ratio;
•the risk that we may not be able to procure sufficient space as we continue to grow and open additional medical centers;
•our predictions about the need for our wellness centers, including the attractiveness of our offerings and member retention rates;
•competition in our industry, the advantages of our products and technology over competing products and technology existing in the market, and competitive factors including with respect to technological capabilities, cost and scalability;
•the impact of the coronavirus disease (the "COVID-19 pandemic") or any other pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide on our business, financial condition and results of operations and the actions we may take in response thereto;
•our future capital requirements and sources and uses of cash;
•our business, expansion plans and opportunities;
•our ability to access new capital through sales of shares of our Class A common stock or issuance of debt, which may harm our liquidity and / or our ability to grow our business;
•anticipated financial performance, including gross margin, and the expectation that our future results of operations will fluctuate on a quarterly basis for the foreseeable future;
•our expected capital expenditures, cost of revenue and other future expenses, and the sources of funds to satisfy liquidity needs;
•our ability to maintain proper and effective internal controls;
•our ability to predict changes to the 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
These forward-looking statements are based on information available to us at the time of this Quarterly Report on Form 10-Q and current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties, and other factors. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factors that could cause actual results to differ include:
•the ability to maintain the listing of our Class A common stock and warrants on the New York Stock Exchange ("NYSE");
•the price of our securities may be volatile due to a variety of factors, including the volatility in capital markets, changes in the competitive and highly regulated industries in which we operate, variations in performance across competitors, changes in laws and regulations affecting our business and changes in our capital structure;
•the risk of downturns in the economy, 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.
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section 27A of the Securities 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, 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 generally can be identified by phrases such as “will,” “expects,” “anticipates,” “believes,” “foresees,” “forecasts,” “plans,” “intends,” “estimates” or other words or phrases of similar import, including, without limitation:
i.our ability to achieve or maintain profitability;
ii.our expectations regarding executing our business plan and strategies, such as (a) our pursuing several initiatives designed to improve its profitability, liquidity, cash flow and net cash, such as controlling and reducing operating expenses, limiting capital expenditures, selling assets and operations and exiting certain markets, with efforts to reduce operating expenses including reducing permanent staff, lowering its third party medical costs through negotiations with payors and restructuring contractual arrangements with payor and specialty networks, consolidating underperforming owned medical centers and terminating underperforming affiliate partnerships, delaying renovations and other capital projects and significantly reducing all other nonessential spending; (b) shifting our strategic direction, including the following measures, among others: (i) focusing our membership base towards Medicare Advantage and ACO Realizing Equity, Access, and Community Health ("ACO REACH") and Medicare patients under Accountable Care Organizations ("ACO") and improving patient engagement; (ii) selling certain assets and operations and exiting our Puerto Rico operations by the beginning of 2024; and (iii) performing a strategic review of our Medicaid business in Florida, pharmacy assets and other specialty practices; and (c) our plans to pursue a process to identify interest in the sale of the 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 estimated cost levels, such as our plans to significantly reduce our investments in de novo medical centers in 2023;
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 expectations 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 fund 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 Q3 2023 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; and (c) our expectation that in 2023, we will incur approximately $81 million in cash interest payments (which excludes approximately $19 million of non-cash PIK interest under the 2023 Term Loan) and approximately $15 million in capital expenditures;
vi.our expectations regarding the outcome of any pending legal or regulatory proceedings; such as our (a) expectation that we have meritorious defenses to the allegations in the lawsuit captioned Alberto Gonzalez v. Cano Health, Inc. f/k/a Jaws Acquisition Corp., et al. (No. 1:22-cv-20827) and our plans to vigorously defend against such action; and (b) our expectation that the resolution of various other asserted and unasserted potential claims encountered in the normal course of business will not have a material effect on our consolidated financial position, results of operations or cash flows;
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 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 our expectation that our restructuring actions taken in the third quarter of 2023 are expected to yield approximately $65 million of annualized cost reductions, which began in the third quarter of 2023 and through the end of 2024;
ix.the Company’s expectations regarding the Reverse Stock Split, such as the Company’s belief that the Reverse Stock Split will increase the price per share of the Company’s Class A Common Stock and thus enable it to regain compliance with the price criteria of Section 802.01C of the NYSE Listed Company Manual (the “Listing Rule”), as well as to allow the Company’s common stock to be more attractive to a broader range of investors; and
x.the Company’s expectations and beliefs regarding its internal control over financial reporting, including its being committed to maintaining a strong internal control environment, its belief that it has made significant progress toward remediating the underlying causes of the material weakness in its internal control in financial reporting as described in this Q3 2023 Form 10-Q and its belief that its remediation efforts will be effective in remediating this material weakness.
These forward-looking statements are based on information available to us at the time of this report and our current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. We derive many of our forward-looking statements from our operating 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 of 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 differ materially from those indicated in our forward-looking statements include, among others, changes in market or industry conditions, changes in the regulatory 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 cash, including funds to satisfy our liquidity needs; our ability to attract and retain members of management and our Board of Directors; and/or our ability to recruit and retain qualified team members and independent physicians.
iii
Actual results may also differ materially from such forward-looking statements for a number of other 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 Current 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 REACH and 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/or (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, as well as 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;
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; and/or (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;
iv
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;
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. 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;
ix.our experiencing delays or difficulties in, and/or unexpected or less than anticipated results from its efforts to regain compliance with the NYSE Listing Rule, whether due to difficulties in implementing the Company’s business strategy, such as resulting from less than expected liquidity and/or difficulties and/or delays in consummating one or more transactions, in whole or in part, to sell all or part of the Company and/or the impact of future decreases in the price of shares of the Company’s Class A Common Stock due to, among other things, the consummation of the Reverse Stock Split, our inability to make our stock more attractive to a broader range of investors or an inability to increase the stock price in an amount sufficient to satisfy compliance with the NYSE's Listing Rule; and/or
x.difficulties, delays or unanticipated internal control deficiencies or weaknesses that could affect the Company’s plans to remediate the material weakness that it identified in its internal control over financial reporting as described in this Q3 2023 Form 10-Q or difficulties or delays in completing the remediation.
For a detailed discussion of other risks and uncertainties that could cause our actual results to differ materially 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 risks and uncertainties. Factors other than those listed above could also cause our results to differ 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.
v
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
4
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) | | | |
| | | | | | | | | | | | | | |
(in thousands, except share and per share data) | | September 30, 2023 | | December 31, 2022 |
Assets | | | | |
Current assets: | | | | |
Cash, cash equivalents and restricted cash | | $ | 41,331 | | | $ | 27,329 | |
Accounts receivable, net of unpaid service provider costs | | 87,499 | | | 233,816 | |
Prepaid expenses and other current assets | | 15,894 | | | 79,603 | |
Total current assets | | 144,724 | | | 340,748 | |
Property and equipment, net | | 94,153 | | | 131,325 | |
Operating lease right-of-use assets | | 149,671 | | | 177,892 | |
Goodwill | | 88,918 | | | 480,375 | |
Payor relationships, net | | 543,810 | | | 567,704 | |
Other intangibles, net | | 185,372 | | | 226,059 | |
Other assets | | 5,283 | | | 4,824 | |
Total assets | | $ | 1,211,931 | | | $ | 1,928,927 | |
Liabilities and stockholders' deficit | | | | |
Current liabilities: | | | | |
Accounts payable and accrued expenses (Related parties comprised $5,922 and $2,669 as of September 30, 2023 and December 31, 2022, respectively) | | $ | 135,941 | | | $ | 105,733 | |
Current portion of notes payable, net of debt issuance costs | | 116,238 | | | 6,444 | |
Current portion of finance lease liabilities | | 3,125 | | | 1,686 | |
| | | | |
Current portions due to sellers | | 47,396 | | | 46,016 | |
Current portion of operating lease liabilities | | 22,964 | | | 24,068 | |
Other current liabilities | | 40,270 | | | 24,491 | |
Total current liabilities | | 365,934 | | | 208,438 | |
Notes payable, net of debt issuance costs | | 951,339 | | | 997,806 | |
Long term portion of operating lease liabilities | | 140,067 | | | 166,347 | |
Warrant liabilities | | 1,677 | | | 7,373 | |
Long term portion of finance lease liabilities | | 7,663 | | | 3,364 | |
Due to sellers, net of current portion | | 1,500 | | | 15,714 | |
Long term portion of contingent consideration | | — | | | 2,800 | |
Other liabilities | | 2,852 | | | 32,810 | |
Total liabilities | | 1,471,032 | | | 1,434,652 | |
Stockholders’ Deficit1 | | | | |
Shares of Class A common stock $0.01 par value (60,000,000 shares authorized and 2,856,095 and 2,241,186 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively) | | 28 | | | 22 | |
Shares of Class B common stock $0.01 par value (10,000,000 shares authorized and 2,521,836 and 2,687,946 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively) | | 25 | | | 27 | |
Additional paid-in capital | | 593,271 | | | 538,614 | |
Accumulated deficit | | (715,422) | | | (286,032) | |
| | | | |
Total Stockholders' Deficit before non-controlling interests | | (122,098) | | | 252,631 | |
Non-controlling interests | | (137,003) | | | 241,644 | |
Total Stockholders' Deficit | | (259,101) | | | 494,275 | |
Total Liabilities and Stockholders' Deficit | | $ | 1,211,931 | | | $ | 1,928,927 | |
The accompanying Notes are an integral part of these Condensed Financial Statements
1
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 | | | |
| | | | | | | | | | |
All outstanding share amounts have been restated to reflect the 1-for-100 reverse stock split that the Company completed on November 3, 2023.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 September 30, | | Nine Months Ended September 30, |
(in thousands, except share and per share data) | | 2023 | | 2022 | | 2023 | | 2022 | | |
Revenue: | | | | | | | | | | |
Capitated revenue | | $ | 770,269 | | | $ | 625,895 | | | $ | 2,354,667 | | | $ | 1,955,739 | | | |
Fee-for-service and other revenue | | 17,804 | | | 39,133 | | | 67,062 | | | 102,804 | | | |
Total revenue | | 788,073 | | | 665,028 | | | 2,421,729 | | | 2,058,543 | | | |
Operating expenses: | | | | | | | | | | |
Third-party medical costs | | 706,922 | | | 489,565 | | | 2,184,882 | | | 1,566,661 | | | |
Direct patient expense (Related parties comprised $3,403 and $1,972 in the three months ended September 30, 2023 and 2022, respectively, and $10,592 and $6,490 in the nine months ended September 30, 2023 and 2022, respectively) | 0 | 65,547 | | | 63,867 | | | 190,731 | | | 177,190 | | | |
Selling, general, and administrative expenses (Related parties comprised $1,086 and $2,709 in the three months ended September 30, 2023 and 2022, respectively, and $5,378 and $6,913 in the nine months ended September 30, 2023 and 2022, respectively) | | 80,821 | | | 111,765 | | | 276,712 | | | 314,617 | | | |
Depreciation and amortization expense | | 26,740 | | | 25,343 | | | 81,213 | | | 64,215 | | | |
Transaction costs | | 7,862 | | | 5,033 | | | 27,073 | | | 19,616 | | | |
Change in fair value of contingent consideration | | 13,100 | | | 900 | | | (2,800) | | | (9,525) | | | |
Goodwill impairment loss | | 354,000 | | | — | | | 354,000 | | | — | | | |
Credit loss on other assets | | — | | | — | | | 62,000 | | | — | | | |
Total operating expenses | | 1,254,992 | | | 696,473 | | | 3,173,811 | | | 2,132,774 | | | |
Income (loss) from operations | | (466,919) | | | (31,445) | | | (752,082) | | | (74,231) | | | |
Other income (expense): | | | | | | | | | | |
Interest expense | | (29,646) | | | (16,451) | | | (79,870) | | | (42,868) | | | |
Interest income | | 258 | | | 4 | | | 357 | | | 7 | | | |
Loss on extinguishment of debt | | — | | | — | | | — | | | (1,428) | | | |
Change in fair value of warrant liabilities | | 5,365 | | | (65,721) | | | 5,696 | | | (8,383) | | | |
Other income (expense) | | (900) | | | 354 | | | 855 | | | 884 | | | |
Total other income (expense) | | (24,923) | | | (81,814) | | | (72,962) | | | (51,788) | | | |
Net income (loss) before income tax expense | | (491,842) | | | (113,259) | | | (825,044) | | | (126,019) | | | |
Income tax expense (benefit) | | (145) | | | (1,248) | | | (2,017) | | | 641 | | | |
Net income (loss) | | $ | (491,697) | | | $ | (112,011) | | | $ | (823,027) | | | $ | (126,660) | | | |
Net income (loss) attributable to non-controlling interests | | (231,210) | | | (57,783) | | | (393,637) | | | (67,759) | | | |
Net income (loss) attributable to Class A common stockholders2 | | $ | (260,487) | | | $ | (54,228) | | | $ | (429,390) | | | $ | (58,901) | | | |
| | | | | | | | | | |
Net income (loss) per share attributable to Class A common stockholders, basic2 | | $ | (91.87) | | | $ | (23.34) | | | $ | (161.33) | | | $ | (27.86) | | | |
Net income (loss) per share attributable to Class A common stockholders, diluted2 | | $ | (91.87) | | | $ | (23.34) | | | $ | (161.33) | | | $ | (27.86) | | | |
Weighted-average shares outstanding2: | | | | | | | | | | |
Basic | | 2,835,250 | | | 2,323,142 | | | 2,661,495 | | | 2,114,090 | | | |
Diluted | | 2,835,250 | | | 2,323,142 | | | 2,661,495 | | | 2,114,090 | | | |
| | | | | | | | | | |
2All outstanding share amounts have been restated to reflect the 1-for-100 reverse stock split that the Company completed on November 3, 2023.
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)
Three and Nine Months Ended September 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 Shares3 | | Class B Shares3 | | 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—June 30, 2023 | | BALANCE—June 30, 2023 | | | 2,815,176 | | | $ | 28 | | | 2,532,090 | | | $ | 25 | | | $ | 601,589 | | | $ | (454,935) | | | $ | 89,066 | | | $ | 235,773 | |
Stock-based compensation expense, net | | Stock-based compensation expense, net | | | — | | | — | | | — | | | — | | | (4,083) | | | — | | | — | | | (4,083) | |
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 | | | 21,917 | | | — | | | — | | | — | | | (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 | | | — | | | — | | | — | | | — | | | 125 | | | — | | | — | | | 125 | |
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 | | | 10,254 | | | — | | | (10,254) | | | — | | | (157) | | | — | | | 157 | | | — | |
Employee stock purchase plan issuance | | — | | | — | | | 1,819,559 | | | — | | | — | | | — | | | 11,377 | | | | — | | | — | | | 11,377 | | |
Impact of transactions affecting non-controlling interests | | — | | | — | | | — | | | — | | | — | | | — | | | (27,428) | | | | — | | | 27,428 | | | — | | |
| Employee Stock Purchase Plan issuance | | Employee Stock Purchase Plan issuance | | | 8,748 | | | — | | | — | | | — | | | 781 | | | — | | | — | | | 781 | |
| Net income (loss) | Net income (loss) | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | (58,901) | | | (67,759) | | | (126,660) | | Net income (loss) | | | — | | | — | | | — | | | — | | | — | | | (260,487) | | | (231,210) | | | (491,697) | |
BALANCE—September 30, 2022 | | — | | | $ | — | | | 241,646,505 | | | $ | 24 | | | 250,093,479 | | | $ | 25 | | | $ | 544,106 | | | | $ | (137,661) | | | $ | 376,540 | | | $ | 783,034 | | |
BALANCE—September 30, 2023 | | BALANCE—September 30, 2023 | | | 2,856,095 | | | $ | 28 | | | 2,521,836 | | | $ | 25 | | | $ | 593,271 | | | $ | (715,422) | | | $ | (137,003) | | | $ | (259,101) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands, except shares) | | | | Class A Shares3 | | Class B Shares3 | | Additional Paid-in Capital | | Accumulated Deficit | | Non-Controlling Interests | | Total Equity |
| | | | | | Shares | | Amount | | Shares | | Amount | | | | |
BALANCE—June 30, 2022 | | | | | | 2,180,290 | | | $ | 22 | | | 2,645,274 | | | $ | 27 | | | $ | 495,642 | | | $ | (83,433) | | | $ | 428,739 | | | $ | 840,997 | |
Stock-based compensation expense, net | | | | | | — | | | — | | | — | | | — | | | 11,041 | | | — | | | — | | | 11,041 | |
Issuance of Class A common stock upon vesting of restricted stock units | | | | | | 18,606 | | | — | | | — | | | | | (8,271) | | | — | | | 8,271 | | | — | |
Issuance of common stock for acquisitions | | | | | | 68,958 | | | — | | | — | | | — | | | 41,337 | | | — | | | — | | | 41,337 | |
Exchange of Class B common stock for Class A common stock | | | | | | 144,340 | | | 2 | | | (144,340) | | | (2) | | | 24,557 | | | — | | | (24,557) | | | — | |
Employee Stock Purchase Plan issuance | | | | | | 4,272 | | | — | | | — | | | — | | | 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 | | | | | | 2,416,466 | | | $ | 24 | | | 2,500,934 | | | $ | 25 | | | $ | 544,106 | | | $ | (137,661) | | | $ | 376,540 | | | $ | 783,034 | |
3All outstanding share amounts have been restated to reflect the 1-for-100 reverse stock split that the Company completed on November 3, 2023.
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 Shares4 | | Class B Shares4 | | Additional Paid-in Capital | | Accumulated Deficit | | Non-Controlling Interests | | Total Equity |
| | | | | | Shares | | Amount | | Shares | | Amount | | | | |
BALANCE—December 31, 2022 | | | | | | 2,241,186 | | | 22 | | | 2,687,946 | | | 27 | | | 538,614 | | | (286,032) | | | 241,644 | | | $ | 494,275 | |
Stock-based compensation expense, net | | | | | | — | | | — | | | — | | | — | | | 7,285 | | | — | | | — | | | 7,285 | |
Issuance of Class A common stock upon vesting of restricted stock units | | | | | | 37,018 | | | — | | | — | | | | | (10,064) | | | — | | | 10,064 | | | — | |
Issuance of common stock for acquisitions | | | | | | 97,249 | | | 1 | | | — | | | — | | | 14,526 | | | — | | | — | | | 14,527 | |
Exchange of Class B common stock for Class A common stock | | | | | | 166,110 | | | 2 | | | (166,110) | | | (2) | | | 12,876 | | | — | | | (12,876) | | | — | |
Warrants Exercised | | | | | | 294,202 | | | 3 | | | — | | | — | | | 214 | | | — | | | — | | | 217 | |
Debt discount - warrants issued | | | | | | — | | | — | | | — | | | — | | | 45,698 | | | — | | | — | | | 45,698 | |
Employee Stock Purchase Plan issuance | | | | | | 20,330 | | | — | | | — | | | — | | | 1,924 | | | — | | | — | | | 1,924 | |
Impact of transactions affecting non-controlling interests | | | | | | — | | | — | | | — | | | — | | | (17,802) | | | — | | | 17,802 | | | — | |
Net income (loss) | | | | | | — | | | — | | | — | | | — | | | — | | | (429,390) | | | (393,637) | | | (823,027) | |
BALANCE—September 30, 2023 | | | | | | 2,856,095 | | | $ | 28 | | | 2,521,836 | | | $ | 25 | | | $ | 593,271 | | | $ | (715,422) | | | $ | (137,003) | | | $ | (259,101) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands, except shares) | | | | Class A Shares4 | | Class B Shares4 | | Additional Paid-in Capital | | Accumulated Deficit | | Non-Controlling Interests | | Total Equity |
| | | | | | Shares | | Amount | | Shares | | Amount | | | | |
BALANCE—December 31, 2021 | | | | | | 1,801,136 | | | $ | 18 | | | 2,973,860 | | | $ | 30 | | | $ | 397,443 | | | $ | (78,760) | | | $ | 479,837 | | | $ | 798,568 | |
Stock-based compensation expense, net | | | | | | — | | | — | | | — | | | — | | | 42,641 | | | — | | | — | | | 42,641 | |
Issuance of Class A common stock upon vesting of restricted stock units | | | | | | 26,679 | | | 1 | | | — | | | — | | | (13,357) | | | — | | | 13,356 | | | — | |
Issuance of common stock for acquisitions | | | | | | 97,530 | | | — | | | — | | | — | | | 57,108 | | | — | | | — | | | 57,108 | |
Exchange of Class B common stock for Class A common stock | | | | | | 472,925 | | | 5 | | | (472,925) | | | (5) | | | 76,322 | | | — | | | (76,322) | | | — | |
Employee Stock Purchase Plan issuance | | | | | | 18,196 | | | — | | | — | | | — | | | 11,377 | | | — | | | — | | | 11,377 | |
Impact of transactions affecting non-controlling interests | | | | | | — | | | — | | | — | | | — | | | (27,428) | | | — | | | 27,428 | | | — | |
Net income (loss) | | | | | | — | | | — | | | — | | | — | | | — | | | (58,901) | | | (67,759) | | | (126,660) | |
BALANCE—September 30, 2022 | | | | | | 2,416,466 | | | $ | 24 | | | 2,500,935 | | | $ | 25 | | | $ | 544,106 | | | $ | (137,661) | | | $ | 376,540 | | | $ | 783,034 | |
4All outstanding share amounts have been restated to reflect the 1-for-100 reverse stock split that the Company completed on November 3, 2023.
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, | | Nine Months Ended September 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 | | $ | (823,027) | | | $ | (126,660) | | |
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 | | 81,213 | | | 64,215 | | |
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 | | (2,800) | | | (9,525) | | |
| 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 | | (5,696) | | | 8,383 | | |
Goodwill impairment loss | | Goodwill impairment loss | | 354,000 | | | — | | |
Intangible assets disposals | | Intangible assets disposals | | 1,467 | | | — | | |
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 | | 2,200 | | | — | | |
Amortization of debt issuance costs | Amortization of debt issuance costs | | 2,743 | | | 4,162 | | | Amortization of debt issuance costs | | 3,872 | | | 2,743 | | |
Non-cash lease expense | Non-cash lease expense | | 8,367 | | | — | | | Non-cash lease expense | | 2,010 | | | 8,367 | | |
Class A shares issued for bonus award | | 2,194 | | | — | | | |
Stock-based compensation | | 42,641 | | | 13,131 | | | |
| Class A common shares issued for bonus award | | Class A common shares issued for bonus award | | — | | | 2,194 | | |
Stock-based compensation, net | | Stock-based compensation, net | | 7,285 | | | 42,641 | | |
Paid in kind interest expense | | Paid in kind interest expense | | 13,564 | | | — | | |
Credit loss on other assets | | Credit loss on other assets | | 62,000 | | | — | | |
Gain on Sale Transaction | | Gain on Sale Transaction | | (386) | | | — | | |
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 | | 146,317 | | | (75,913) | | |
Other assets | Other assets | | 10,885 | | | (9,874) | | | Other assets | | 1,216 | | | 10,885 | | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | | (47,492) | | | (22,603) | | | Prepaid expenses and other current assets | | 1,979 | | | (47,492) | | |
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 $(2,875) and $3,047 for the nine months ended September 30, 2023 and 2022, respectively) | | Accounts payable and accrued expenses (Related parties comprised $(2,875) and $3,047 for the nine months ended September 30, 2023 and 2022, respectively) | | 46,309 | | | 30,955 | | |
Other liabilities | | Other liabilities | | 23,811 | | | 3,521 | | |
Net cash (used in) provided by operating activities | | Net cash (used in) provided by operating activities | | (84,666) | | | (84,158) | | |
| Cash Flows from (used in) Investing Activities: | | Cash Flows from (used in) Investing Activities: | | |
Purchase of property and equipment (Related parties comprised $983 and $0 for the nine months ended September 30, 2023 and 2022, respectively) | | Purchase of property and equipment (Related parties comprised $983 and $0 for the nine months ended September 30, 2023 and 2022, respectively) | | (18,139) | | | (39,061) | | |
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 | | (6,557) | | | (4,097) | | |
| Net cash provided by (used in) investing activities | | (48,153) | | | (1,112,848) | | | |
Proceeds from Sale Transaction | | Proceeds from Sale Transaction | | 33,542 | | | — | | |
Net cash provided (used in) by investing activities | | Net cash provided (used in) by investing activities | | 8,846 | | | (48,153) | | |
| Cash Flows from Financing Activities: | | | |
Cash Flows from (used in) Financing Activities: | | Cash Flows from (used in) 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 | | (4,834) | | | (4,833) | | |
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 | | 165,000 | | | 25,000 | | |
Repayments of CS Revolving Line of Credit | | Repayments of CS Revolving Line of Credit | | (209,000) | | | (25,000) | | |
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 | | (2,201) | | | (2,070) | | |
| 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 | | (2,577) | | | (2,300) | | |
Net cash provided by (used in) financing activities | | (6,762) | | | 1,382,447 | | | |
|
The accompanying Notes are an integral part of these Condensed Financial Statements
10
CANO HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Net cash provided (used in) by financing activities | | Net cash provided (used in) by financing activities | | 89,822 | | | (6,762) | | |
| 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 | | 14,002 | | | (139,073) | | |
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 | | $ | 41,331 | | | $ | 24,097 | | |
| Supplemental cash flow information: | Supplemental cash flow information: | | | Supplemental cash flow information: | | |
Interest paid | Interest paid | | 38,233 | | | 28,075 | | | Interest paid | | 57,603 | | | 38,233 | | |
Income taxes paid | Income taxes paid | | 82 | | | 1,150 | | | Income taxes paid | | 148 | | | 82 | | |
| Non-cash investing and financing activities: | Non-cash investing and financing activities: | | | Non-cash investing and financing activities: | | |
Additional principal additions from long term | | Additional principal additions from long term | | 7,866 | | | — | | |
Debt discount addition | | Debt discount addition | | (7,866) | | | — | | |
Right-of-use assets obtained in exchange of lease liabilities | Right-of-use assets obtained in exchange of lease liabilities | | 58,595 | | | — | | | Right-of-use assets obtained in exchange of lease liabilities | | 16,922 | | | 58,595 | | |
Issuance of class A common stock for acquisitions | | 54,914 | | | 61,500 | | | |
Issuance of Class A common stock for acquisitions | | Issuance of Class A common stock for acquisitions | | 14,527 | | | 54,914 | | |
| Contingent consideration liability in connection with acquisitions | Contingent consideration liability in connection with acquisitions | | 1,500 | | | 47,900 | | | Contingent consideration liability in connection with acquisitions | | — | | | 1,500 | | |
Contingent consideration assets in connection with acquisitions | Contingent consideration assets in connection with acquisitions | | (5,600) | | | — | | | Contingent consideration assets in connection with acquisitions | | — | | | (5,600) | | |
Due to sellers in connection with acquisitions | Due to sellers in connection with acquisitions | | 1,530 | | | 1,295 | | | Due to sellers in connection with acquisitions | | — | | | 1,530 | | |
Addition to construction in process funded through accounts payable | | 5,665 | | | — | | | |
Changes to construction in process reflected through accounts payable | | Changes to construction in process reflected through accounts payable | | (1,993) | | | 5,665 | | |
Humana Affiliate Provider clinic leasehold improvements | Humana Affiliate Provider clinic leasehold improvements | | 5,878 | | | 5,605 | | | Humana Affiliate Provider clinic leasehold improvements | | (294) | | | 5,878 | | |
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 | | | |
Employee Stock Purchase Plan issuance | | Employee Stock Purchase Plan issuance | | 1,924 | | | 11,377 | | |
Warrants issued | | 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 a proprietary technologyour 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 69.00.7 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 17.250.2 million Class B ordinary shares owned by Jaws Sponsor, LLC (the "Sponsor"). In connection with the Business Combination, the Company issued 306.83.1 million shares of the Company’s Class B common stock to existing shareholdersstockholders of PCIH. The Company also issued 80.00.8 million shares of the Company’s Class A common stock in a private placement for $800.0 million (the "PIPE Investors"). Share amounts have been restated to reflect the 1-for-100 reverse stock split that the Company completed on November 3, 2023, discussed below.
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%53.1% controlling ownership as of the Closing Date and as of September 30, 2022,2023, respectively. Certain members of PCIH who retained their common unit interests in PCIH held the remaining 64.9% and 50.9%46.9% non-controlling ownership interests as of the Closing Date and as of September 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 306.83.07 million shares of Class B common stock valued at $3,068.4 millionbased on a reference stock price of $10.00$1,000.00 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.
Reverse Stock Split
As previously-disclosed in the Company’s Current Report on Form 8-K filed with the SEC on November 2, 2023, the Company effected the previously-announced 1-for-100 reverse stock split of the Company’s Class A and Class B common stock (the “Reverse Stock Split”) pursuant to which each 100 shares of the Company’s Class A and Class B common stock issued and outstanding immediately prior to filing the Certificate of Amendment to the Company’s Certificate of Incorporation on November 2, 2023 were automatically combined into one share of Class A Common Stock and Class B Common Stock, respectively, subject to the elimination of fractional shares. All references to outstanding share and per share amounts for all periods presented have been adjusted to give effect to the Reverse Stock Split. The par value per share of each share of Class A and Class B common stock was proportionately multiplied by 100, and the number and exercise price of all Public Warrants, PCIH Common Units, stock options, restricted stock awards and restricted stock unit awards were each proportionately adjusted by the ratio used to complete the Reverse Stock Split.
In connection with consummating the Reverse Stock Split, the total number of Class A common stock in Cano Health, Inc.and Class B common stock authorized for issuance under the Company’s amended Certificate of Incorporation was reduced from 6,000,000,000 to 60,000,000 shares of its Class A common stock and from 1,000,000,000 to 10,000,000 shares of its Class B common stock, each with an adjusted par value of $0.01 per share. The Reverse Stock Split did not change the number of shares of the Company’s authorized preferred stock, which will remain at 10,000,000 shares. The Reverse Stock Split reduced the Company’s issued and outstanding shares of common stock from approximately 288,760,727 shares of Class A Common Stock and 251,893,556 shares of Class B Common Stock issued and outstanding as of October 30, 2023 to approximately 2,887,607 and 2,518,936 issued and outstanding shares of Class A Common Stock and Class B Common Stock, respectively, after the effectiveness of the Reverse Stock Split.
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 for the fiscal quarter ended March 31, 2023 filed with the U.S. SecuritiesSEC on May 9, 2023 (the “Q1 2023 Form 10-Q"), and Exchange Commission (the "SEC") on March 14, 2022.
The Company was deemed the accounting acquirer in the Business Combination of Jaws based on an analysis of the criteria outlined in Accounting Standards Codification ("ASC") Topic 805, "Business Combinations" ("ASC 805"),as the Company’s former owner retained control after the Business Combination. Refer to Note 1, "Nature of Business", for details surrounding the Business Combination. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of the Company issuing stock for the net assets of Jaws, accompanied by a recapitalization. The net assets of Jaws were stated at historical cost, with no goodwill or other intangible assets recorded.
While Jaws was the legal acquirer in the Business Combination, because the Company was deemed the accounting acquirer, the historical financial statements of PCIH became the historical financial statements of the combined company upon
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the consummation ofCompany’s Quarterly Report on Form 10-Q for the Business Combination. As a result,fiscal quarter ended June 30, 2023 filed with 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.
ReclassificationsSEC on August 10, 2023 (the “Q2 2023 Form 10-Q").
Certain prior year amounts have also 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 nine months ended September 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 September 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. GOING CONCERN
The Company’s accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. For the nine months ended September 30, 2023, the Company generated a net loss of $823.0 million and used $84.7 million of cash from operations.
The Company’s current liquidity as of November 9, 2023 was approximately $52.5 million, consisting of cash and cash equivalents (excluding restricted cash of approximately $33.7 million). As of November 9, 2023, the CS Revolving Line of Credit was fully drawn. 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.
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’s ability to continue as a going concern is contingent upon, among other things, successful execution of management’s intended plan over the next 12 months to improve the Company’s liquidity and profitability, as discussed below.
The Company is pursuing several initiatives designed to improve its profitability, liquidity, cash flow 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 and restructuring contractual arrangements with payor and specialty networks, consolidating underperforming owned medical centers and terminating underperforming affiliate partnerships, delaying renovations and other capital projects and significantly reducing all other non-essential spending, as well as improving patient engagement.
In the third quarter of 2023, the Company implemented a plan designed 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 expenses in future periods compared to current levels.
As previously-disclosed, as part of the Company’s effort to generate additional liquidity, on September 25, 2023, the Company sold to Primary Care Holdings II, LLC ("CenterWell"), a wholly owned subsidiary of Humana Inc. (“Humana”), substantially all of the assets associated with the operation of Cano Health’s senior-focused primary care centers in Texas and
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Nevada (the “Sale Transaction”) for a total transaction value to the Company of approximately $66.7 million, consisting of approximately $35.4 million in cash paid at closing (of which approximately $1.9 million was withheld for satisfaction of potential indemnification claims), plus the release of certain liabilities owed by Cano Health or its affiliates primarily for centers built under commercial agreements entered into with affiliates of Humana. The net cash proceeds from the Sale Transaction enabled the Company to repay a portion of its outstanding commitment under its revolving credit facility, for which Credit Suisse AG, Cayman Islands Branch is the administrative agent, such that the financial maintenance covenant of this facility was not applicable for the testing period ended September 30, 2023.
As part of its plan to improve cash flow and liquidity, the Company also exited operations within its medical centers in California and New Mexico, actions that were substantially completed by the end of the third quarter of 2023. The Company exited its Illinois market after the end of the third quarter of 2023 and is on track to also exit its Puerto Rico operations by the beginning of 2024. These actions are designed to position the Company to focus on and optimize its core Florida Medicare Advantage and ACO REACH assets.
Other ongoing initiatives designed to generate additional liquidity include the Company’s continued pursuit of its strategic review, which may result in the sale of all or substantially all of the Company’s business and/or the sale of certain lines of business, such as the Company’s Medicaid business in Florida, pharmacy assets and other specialty practices.
Consistent with the terms and conditions of the 2023 Side-Car Amendment, discussed below, the Company has formally launched, announced and continues to pursue a comprehensive process to identify and evaluate interest in a sale of the Company, or all or substantially all of its assets, including having engaged advisors to assist in the process. While these efforts have yet to yield a sale transaction, the Company’s process remains ongoing. There is no assurance that this process will result in any transaction.
Each of the 2023 Side-Car Credit Agreement and the Credit Suisse Credit Agreement contains a covenant that will require the Company’s 2023 Annual Report on Form 10-K (the “2023 Form 10-K”) to not contain any qualification or explanatory paragraph as to the Company’s “going concern” status (except for any such qualification or explanatory paragraph pertaining to (i) the maturity of certain indebtedness occurring within 12 months of the relevant audit or (ii) any breach or anticipated breach of any financial covenant). Based on the amount of the Company’s available liquidity at November 9, 2023 and its current forecast of available liquidity for the 12 months following the anticipated filing of its 2023 Form 10-K, the Company expects that it will be required to seek a waiver of this “going concern” covenant from the respective lenders under each of the Side-Car Credit Agreement and the Credit Suisse Credit Agreement on or before April 22, 2024, being the earlier of (i) when the Company will be required to deliver to the administrative agents under each of the 2023 Side-Car Credit Agreement and the Credit Suisse Credit Agreement its 2023 Form 10-K without any such “going concern” qualification or explanatory paragraph, being due March 30, 2024, followed by a 30-day cure period and (ii) such time that the Company would be required to cure any breach of the financial maintenance covenant under the Credit Suisse Credit Agreement for the period ending December 31, 2023. Capitalized terms used, but not defined, in this Note are defined in Note 12, “Debt.”
Under each of the Side-Car Credit Agreement and the Credit Suisse Credit Agreement, if the Borrower is unable to obtain such waiver from the respective lenders and fails to cure such default within a 30-day period after the earlier of (i) receipt by the Borrower of written notice thereof from the respective administrative agent under each of the credit agreements and (ii) the date on which a Company “responsible officer” has knowledge of such default, then the administrative agent under each such facility may, and acting at the direction or request of the requisite lenders, will, among other things, immediately terminate all commitments under the Side-Car Credit Agreement and the Credit Suisse Credit Agreement and accelerate the maturity of all principal, interest and other amounts due thereunder.
Under the Company’s Senior Notes, if (i) the Borrower is unable to obtain such waivers from the respective lenders; (ii) the lenders under either the 2023 Side-Car Credit Agreement and/or the Credit Suisse Credit Agreement accelerate 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 of the Senior Notes will be entitled to immediately accelerate the maturity of the Senior Notes, including all principal, interest and other amounts due thereon. The Company expects that it would not have sufficient liquidity to repay all principal, interest and other costs and expenses if one or
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
more of the Side-Car Credit Agreement, the Credit Suisse Credit Agreement and/or the Senior Notes were terminated and accelerated under these circumstances.
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. 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 and, accordingly, 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.
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 nine months ended September 30, 2023 and 2022, and 2021respectively, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | % | | | | |
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | Nine Months Ended September 30, | | | Three Months Ended September 30, |
| | 2022 | | 2021 | | | 2023 | | 2022 | |
(in thousands) | (in thousands) | | Revenue $ | | Revenue % | | Revenue $ | | Revenue % | | (in thousands) | | Revenue $ | | Revenue % | | Revenue $ | | Revenue % | |
Capitated revenue | Capitated revenue | | | | | | | | | | Capitated revenue | | | | | | | | | |
Medicare | Medicare | | $ | 1,795,820 | | | 87.2 | % | | $ | 924,892 | | | 82.8 | % | | Medicare | | $ | 728,435 | | | 92.4 | % | | $ | 577,989 | | | 86.9 | % | |
Other capitated revenue | Other capitated revenue | | 159,919 | | | 7.8 | % | | 139,712 | | | 12.5 | % | | Other capitated revenue | | 41,834 | | | 5.3 | % | | 47,906 | | | 7.2 | % | |
Total capitated revenue | Total capitated revenue | | 1,955,739 | | | 95.0 | % | | 1,064,604 | | | 95.3 | % | | Total capitated revenue | | 770,269 | | | 97.7 | % | | 625,895 | | | 94.1 | % | |
Fee-for-service and other revenue | Fee-for-service and other revenue | | | | | | | | | | Fee-for-service and other revenue | | | | | | | | | |
Fee-for-service | Fee-for-service | | 29,349 | | | 1.4 | % | | 17,113 | | | 1.5 | % | | Fee-for-service | | 6,886 | | | 0.9 | % | | 9,677 | | | 1.5 | % | |
Pharmacy | Pharmacy | | 37,185 | | | 1.8 | % | | 25,619 | | | 2.3 | % | | Pharmacy | | 14,243 | | | 1.8 | % | | 12,910 | | | 1.9 | % | |
Other | Other | | 36,270 | | | 1.8 | % | | 9,778 | | | 0.9 | % | | Other | | (3,325) | | | (0.4) | % | | 16,546 | | | 2.5 | % | |
Total fee-for-service and other revenue | Total fee-for-service and other revenue | | 102,804 | | | 5.0 | % | | 52,510 | | | 4.7 | % | | Total fee-for-service and other revenue | | 17,804 | | | 2.3 | % | | 39,133 | | | 5.9 | % | |
Total revenue | Total revenue | | $ | 2,058,543 | | | 100.0 | % | | $ | 1,117,114 | | | 100.0 | % | | Total revenue | | $ | 788,073 | | | 100.0 | % | | $ | 665,028 | | | 100.0 | % | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2023 | | 2022 | | |
(in thousands) | | Revenue $ | | Revenue % | | Revenue $ | | Revenue % | | | | |
Capitated revenue | | | | | | | | | | | | |
Medicare | | $ | 2,217,675 | | | 91.6 | % | | $ | 1,795,820 | | | 87.2 | % | | | | |
Other capitated revenue | | 136,992 | | | 5.7 | % | | 159,919 | | | 7.8 | % | | | | |
Total capitated revenue | | 2,354,667 | | | 97.3 | % | | 1,955,739 | | | 95.0 | % | | | | |
Fee-for-service and other revenue | | | | | | | | | | | | |
Fee-for-service | | 22,861 | | | 0.9 | % | | 29,349 | | | 1.4 | % | | | | |
Pharmacy | | 41,907 | | | 1.7 | % | | 37,185 | | | 1.8 | % | | | | |
Other | | 2,294 | | | 0.1 | % | | 36,270 | | | 1.8 | % | | | | |
Total fee-for-service and other revenue | | 67,062 | | | 2.7 | % | | 102,804 | | | 5.0 | % | | | | |
Total revenue | | $ | 2,421,729 | | | 100.0 | % | | $ | 2,058,543 | | | 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 September 30, 20222023 and December 31, 2021.2022.
| | | As of | | As of |
(in thousands) | (in thousands) | | September 30, 2022 | | December 31, 2021 | (in thousands) | | September 30, 2023 | | December 31, 2022 |
Accounts receivable | Accounts receivable | | $ | 374,456 | | | $ | 227,889 | | Accounts receivable | | $ | 377,603 | | | $ | 388,122 | |
Medicare risk adjustment | Medicare risk adjustment | | 26,915 | | | 21,072 | | Medicare risk adjustment | | 13,328 | | | 49,586 | |
Unpaid service provider costs | Unpaid service provider costs | | (199,334) | | | (115,528) | | Unpaid service provider costs | | (303,432) | | | (203,892) | |
Accounts receivable, net | Accounts receivable, net | | $ | 202,037 | | | $ | 133,433 | | Accounts receivable, net | | $ | 87,499 | | | $ | 233,816 | |
Concentration of Risk
Contracts with three of the 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 nine months ended September 30, 2022, respectively and three and two payors that represented approximately 60.7% and 55.7% of our total revenue for the three and nine months ended September 30, 2021, respectively.
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three payors represented greater than 10% of our total revenue for the three and nine months ended on each of September 30, 2023 and September 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 | | |
Revenues | 67.6% | | 61.3% | | 66.7% | | 63.8% | | |
Three payors represented, in aggregate, the following percentages of accounts receivable as of September 30, 2023 and December 31, 2022, respectively.
| | | | | | | | | | | | | |
| As of |
| September 30, 2023 | | December 31, 2022 | | |
Accounts receivable, net | 50.6% | | 56.3% | | |
4.5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following as of September 30, 20222023 and December 31, 2021:2022, respectively:
| (in thousands) | (in thousands) | | September 30, 2022 | | December 31, 2021 | (in thousands) | | September 30, 2023 | | December 31, 2022 |
Third party receivables | Third party receivables | | $ | 57,800 | | $ | $ | — | | Third party receivables | | $ | — | | | $ | 60,400 | |
| Other | Other | | 21,033 | | | 20,632 | | Other | | 15,894 | | | 19,203 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | | $ | 78,833 | | $ | $ | 20,632 | | Prepaid expenses and other current assets | | $ | 15,894 | | | $ | 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 7.96 million shares (which amount is presented after giving effect to MSP’s 1-for-25 reverse stock split on October 12, 2023) of MSP Class A common stock to settle certain receivables from MSP.
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 receivables is payable on the earlierU.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, 2022,2023; 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 and as of June 30, 2023, the Company recognized an allowance for credit losses of $62.0 million related to the third party receivables as of June 30, 2023.
As of September 30, 2023, the 7.96 million shares described above continue to be unregistered and the Company believes it is not reasonably possible that these equity securities will be either registered or April 30, 2023. be exempt from registration due to meeting the holding period requirements, within the next 1 year. These equity securities are in the scope of ASC 321- Investments - Equity Securities, and accordingly the Company has concluded that the securities do not have a readily determinable fair value.
As of December 31, 2021, $10.0 million of MSP receivables were non-current and included in2022, other assets ininclude contingent consideration assets related to a 2022 acquisition with various contingent consideration arrangements. The contingent consideration is valued based on the consolidatedfuture performance of two acquired payor contracts using Monte-Carlo simulations. After the balance sheet.
The company may also receive and recognizesheet date, the contingency was resolved as a percentageresult 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.
5. UNPAID SERVICE PROVIDER COSTS
Activity in unpaid service provider costs for the nine months ended September 30, 2022 and 2021 is summarized below:
| | | | | | | | | | | | | | |
(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")conditions present at the balance sheet date pertaining to probability of collection in the valuation model and the fair value of the asset was adjusted to $0 through change in fair value of contingent consideration as of September 30, 2023.
6. UNPAID SERVICE PROVIDER COSTS
Activity in unpaid service provider costs for the nine months ended September 30, 2023 and 2022, respectively, is summarized below:
| | | | | | | | | | | | | | |
(in thousands) | | 2023 | | 2022 |
Balance as of January 1, | | $ | 318,554 | | | $ | 129,110 | |
| | | | |
Incurred related to: | | | | |
Current year | | 1,888,700 | | | 1,267,742 | |
Prior years | | 6,524 | | | 11,319 | |
| | 1,895,224 | | | 1,279,061 | |
Paid related to: | | | | |
Current year | | 1,497,782 | | | 955,998 | |
Prior years | | 291,173 | | | 132,475 | |
| | 1,788,955 | | | 1,088,473 | |
Balance as of September 30, | | $ | 424,823 | | | $ | 319,698 | |
The foregoing reconciliation reflects an increase in our estimate of unpaid service provider costs during the nine months ended September 30, 2023 of $6.5 million and an increase in our estimate of unpaid service provider costs during the nine months ended September 30, 2022 of $11.3 million, driven by higher than expected utilization. $38.1 million and $18.5 million of accounts receivable, net for plans that were in a deficit position as of the balance sheet date, with liabilities for unpaid service provder costs of $121.4 million and $32.8 million, were included in other current liabilities in the condensed consolidated balance sheet as theythese plans were in a net deficit position as of September 30, 20222023 and September 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 September 30, 20222023 and September 30, 2021,2022, 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 $1.1 million and $3.5 million for the three and nine months ended September 30, 2023, respectively, and reimbursement of $0.5 million and $1.9 million for the three and nine months ended September 30, 2023, respectively. The Company recorded excess loss insurance premiums of $5.6 million and $10.6 million for the three and nine months ended September 30, 2022, respectively, and reimbursementreimbursements of $16.0 million and $23.1 million for the three and nine months ended September 30, 2022, respectively. The Company recorded excess loss insurance premiums of $1.9 million and $5.4 million for the three and nine months ended September 30, 2021, respectively, and reimbursements of $3.6 million and $5.4 million for the three and nine months ended September 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 Company's goodwill balance during the nine months ended September 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.
While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the asset acquisition date, the estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the asset acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. For changes in the valuation of intangible assets between the preliminary and final purchase price allocation, the related amortization is adjusted in the period it occurs. Subsequent to the measurement period, any adjustment to assets acquired or liabilities assumed is included in operating results in the period in which the adjustment is identified. Transaction costs that are incurred in connection with an asset acquisition, other than costs associated with the issuance of debt or equity securities, are expensed as incurred.
7. PAYOR RELATIONSHIPS AND OTHER INTANGIBLES, NET
As of September 30, 2022, the Company’s total intangibles, net consisted of the following: | | | | | |
(in thousands) | |
Goodwill as of December 31, 2022 | $ | 480,375 | |
Impairment | (354,000) | |
Sale Transaction allocation | (37,126) | |
Other | (331) | |
Goodwill as of September 30, 2023 | $ | 88,918 | |
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 | |
We 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 third quarter of 2023, due to the drop in the Company's share price, the Company determined 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 Company's fair value using the Income Approach. We are required to impair goodwill when our assessment determines the Company’s carrying value exceeds its fair value as we operate as one reporting unit. It was determined that the Company's carrying value exceeded the fair value and the Company recorded a $354.0 million reduction in its goodwill, which has been reflected as an impairment loss in the accompanying statement of operations for the three months ended September 30, 2023.
8. PAYOR RELATIONSHIPS AND OTHER INTANGIBLES, NET
As of December 31, 2021,September 30, 2023, 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 | | | $ | 1,410 | | | $ | (1,064) | | | $ | 346 | |
Brand names | Brand names | | 183,238 | | | (9,037) | | | 174,201 | | Brand names | | | 181,901 | | | (50,318) | | | 131,583 | |
Non-compete agreements | Non-compete agreements | | 75,794 | | | (12,110) | | | 63,684 | | Non-compete agreements | | | 84,942 | | | (41,077) | | | 43,865 | |
Customer relationships | Customer relationships | | 880 | | | (184) | | | 696 | | Customer relationships | | | 880 | | | (270) | | | 610 | |
Payor relationships | Payor relationships | | 609,362 | | | (32,714) | | | 576,648 | | Payor relationships | | | 630,953 | | | (87,143) | | | 543,810 | |
Provider relationships | Provider relationships | | 12,242 | | | (2,472) | | | 9,770 | | Provider relationships | | | 19,842 | | | (10,874) | | | 8,968 | |
Total intangibles, net | Total intangibles, net | | $ | 882,925 | | | $ | (57,304) | | | $ | 825,621 | | Total intangibles, net | | | $ | 919,928 | | | $ | (190,746) | | | $ | 729,182 | |
As of December 31, 2022, 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 | | | $ | (945) | | | $ | 464 | |
Brand names | | | | 183,878 | | | (29,169) | | | 154,709 | |
Non-compete agreements | | | | 85,476 | | | (28,341) | | | 57,135 | |
Customer relationships | | | | 880 | | | (233) | | | 647 | |
Payor relationships | | | | 631,214 | | | (63,510) | | | 567,704 | |
Provider relationships | | | | 19,842 | | | (6,738) | | | 13,104 | |
Total intangibles, net | | | | $ | 922,699 | | | $ | (128,936) | | | $ | 793,763 | |
The Company recorded amortization expense of $20.2$20.7 million and $14.2$62.8 million for the three and nine months ended September 30, 2023, respectively, and $20.2 million and $50.8 million for the three and nine months ended September 30, 2022, respectively.
Long-lived assets are reviewed periodically for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. In the third quarter of 2023, in conjunction with the goodwill impairment test, the Company performed a recoverability test and concluded no impairment charge was
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
necessary. The Company disposed of certain intangibles during the three months ended September 30, 2022 and 2021, respectively, and $50.8 million and $23.3 million for2023 in the nine months ended September 30, 2022 and 2021, respectively.amount of $2.7 million.
Expected amortization expense for the Company’s existing amortizable intangibles for the next five5 years, and thereafter, as of September 30, 20222023 is as follows:
| | Amount (in thousands) | |
2022 - remaining | $ | 56,069 | | |
2023 | | 58,317 | | |
(in thousands) | | (in thousands) | | Amount |
2023 - remaining | | 2023 - remaining | $ | 20,032 | |
2024 | 2024 | | 56,703 | | 2024 | | 60,547 | |
2025 | 2025 | | 53,893 | | 2025 | | 56,954 | |
2026 | 2026 | | 44,658 | | 2026 | | 46,797 | |
2027 | | 2027 | | 40,035 | |
Thereafter | Thereafter | | 526,941 | | Thereafter | | 504,817 | |
Total | Total | $ | 796,581 | | Total | $ | 729,182 | |
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 or termination of provider relationships, 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 1014 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 September 30, 20222023 were as follows (in thousands):follows:
| | | | | | | | | | | | | | | | | | | | |
| | 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 | |
(in thousands) | | (in thousands) | | Operating | | Finance | | Total |
2023 - remaining | | 2023 - remaining | | $ | 8,773 | | $ | 1,075 | | $ | 9,848 |
2024 | 2024 | | 22,561 | | 797 | | 23,358 | 2024 | | 33,760 | | 4,204 | | 37,964 |
2025 | 2025 | | 20,489 | | 364 | | 20,853 | 2025 | | 30,925 | | 3,780 | | 34,705 |
2026 | 2026 | | 18,424 | | 107 | | 18,531 | 2026 | | 28,070 | | 3,187 | | 31,257 |
2027 | | 2027 | | 25,447 | | 978 | | 26,425 |
Thereafter | Thereafter | | 67,569 | | — | | 67,569 | Thereafter | | 88,644 | | — | | 88,644 |
Total minimum lease payments | Total minimum lease payments | | 176,671 | | 3,831 | | 180,502 | Total minimum lease payments | | 215,619 | | 13,224 | | 228,843 |
Less: amount representing interest | Less: amount representing interest | | (38,461) | | (355) | | (38,816) | Less: amount representing interest | | (52,588) | | (2,436) | | (55,024) |
Lease liabilities | Lease liabilities | | $ | 138,210 | | $ | 3,476 | | $ | 141,686 | Lease liabilities | | $ | 163,031 | | $ | 10,788 | | $ | 173,819 |
|
The Company recorded rent expense of $8.7$9.6 million and $6.9$28.9 million for the three and nine months ended September 30, 20222023, respectively, and 2021, respectively,$8.7 million and $24.1 million and $15.9 million for the three and nine months ended September 30, 2022, and 2021, respectively.
9.CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following as of September 30, 20222023 and December 31, 2021:2022, respectively:
| | | | | | | | | | | | | | |
(in thousands) | | September 30, 2023 | | December 31, 2022 |
Service fund liability1 | | $ | 38,065 | | | $ | 16,652 | |
Other | | 2,205 | | | 7,839 | |
Other current liabilities | | $ | 40,270 | | | $ | 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 $121.4 million and $83.3 million, respectively, as of September 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)
| | | | | | | | | | | | | | |
(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 | |
10.11. 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$0.2 million and $6.1$6.5 million as of September 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$2.0 million in revenue from contract liabilities recorded during the three and nine months ended September 30, 2023, respectively, and $0.7 million and $1.9 million in the three and nine months ended September 30, 2022, respectively. Further, the Company released $4.2 million related to the Sale Transaction for the three and nine months ended September 30, 2023.
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 September 30, 2023 |
Balance at June 30, 2023 | $ | 5,111 | |
| | |
| | |
Revenues recognized from current period increases | | (675) | |
Release related to the Sale Transaction | | (4,234) | |
Balance at September 30, 2023 | $ | 202 | |
| | | | | | | | |
(in thousands) | | For the nine months ended September 30, 2022 |
| | |
| | |
| | 2023 |
Balance at December 31, 20212022 | $ | 6,0596,461 | |
| | |
| | |
| | |
Increases due to amounts collected Revenues recognized from current period increases | | 2,750 (2,025) | |
Decreases dueRelease related to revenue recognizedthe Sale Transaction | | (1,929)(4,234) | |
Balance at September 30, 20222023 | $ | 6,880202 | |
| | |
| | |
Of the September 30, 20222023 contract liabilities balance, the Company expects to recognize the following amounts as revenue in the succeeding years:
| | | | | | | | |
Years ended December 31, | | Amount (in thousands) |
2022 - remaining | $ | 657 |
2023 | | 2,628 |
2024 | | 2,442 |
2025 | | 1,111 |
2026 | | 42 |
Total | $ | 6,880 |
| | | | | | | | |
Years ended December 31, | | Amount (in thousands) |
2023 - remaining | $ | 41 |
2024 | | 161 |
| | |
| | |
| | |
Total | $ | 202 |
11.12. DEBT
The Company’sAt September 30, 2023 and December 31, 2022, the Company's current notes payable were as follows as of September 30, 2022 and December 31, 2021:follows:
| | | | | | | | | | | | | | |
Current Notes Payable | | As of, |
(in thousands) | | September 30, 2023 | | December 31, 2022 |
| | | | |
| | | | |
2023 Term Loan1 | | 171,281 | | | — | |
Current portion of CS term loan | | 6,444 | | | 6,444 | |
| | 177,725 | | | 6,444 | |
Less: Debt issuance costs | | (61,487) | | | — | |
Current notes payable, net of debt issuance costs | | $ | 116,238 | | | $ | 6,444 | |
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
| | | | | | | | | | | | | | |
| | |
(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 | |
Includes $13.6 million of Paid-in-Kind ("PIK") interest and an additional principal premium of $7.9 million that was incurred under the 2023 Term Loan through September 30, 2023.
Term LoanAt September 30, 2023 and December 31, 2022, the Company’s long-term notes payable were as follows:
Pursuant to a | | | | | | | | | | | | | | | | | |
Long-Term Notes Payable | | As of, |
(in thousands) | | September 30, 2023 | | December 31, 2022 | |
CS Term Loan | | $ | 626,710 | | | $ | 631,544 | | |
CS Revolving Line of Credit | | 40,000 | | | 84,000 | | |
| | | | | |
| | | | | |
Senior Notes | | 300,000 | | | 300,000 | | |
| | 966,710 | | | 1,015,544 | | |
Less: Debt issuance costs | | (15,371) | | | (17,738) | | |
Long-term notes payable, net of debt issuance costs | | $ | 951,339 | | | $ | 997,806 | | |
Credit Agreements – General
As discussed under Note 3, “Going Concern,” each of the 2023 Side-Car Credit Agreement withand the Credit Suisse Credit Agreement contains a covenant that will require the Company’s 2023 Form 10-K to not contain any qualification or explanatory paragraph as to the Company’s “going concern” status (except for any such qualification or explanatory paragraph pertaining to (i) the maturity of certain indebtedness occurring within 12 months of the relevant audit or (ii) any breach or anticipated breach of any financial covenant). Based on the amount of the Company’s available liquidity at November 9, 2023 and its current forecast of available liquidity for the 12 months following the anticipated filing of its 2023 Form 10-K, the Company expects that it will be required to seek a waiver of this “going concern” covenant from the respective lenders under each of the Side-Car Credit Agreement and the other lenders party thereto (the “Credit Agreement”),Credit Suisse Credit Agreement on or before April 22, 2024, being the earlier of (i) when the Company haswill be required to deliver to the administrative agents under each of the 2023 Side-Car Credit Agreement and the Credit Suisse Credit Agreement its 2023 Form 10-K without any such “going concern” qualification or explanatory paragraph, being due March 30, 2024, followed by a senior secured term loan (together with30-day cure period and (ii) such time that the revolving lineCompany would be required to cure any breach of credit, the "Credit Facilities"). Obligationsfinancial maintenance covenant under the Credit Facilities areSuisse Credit Agreement for the period ending December 31, 2023.
Under each of the Side-Car Credit Agreement and the Credit Suisse Credit Agreement, if the Borrower is unable to obtain such waiver from the respective lenders and fails to cure such default within a 30-day period after the earlier of (i) receipt by the Borrower of written notice thereof from the respective administrative agent under each of the credit agreements and (ii) the date on which a Company “responsible officer” has knowledge of such default, then the administrative agent under each such facility may, and acting at the direction or request of the requisite lenders, will, among other things, immediately terminate all commitments under the Side-Car Credit Agreement and the Credit Suisse Credit Agreement and accelerate the maturity of all principal, interest and other amounts due thereunder.
Under the Company’s Senior Notes, if (i) the Borrower is unable to obtain such waivers from the respective lenders; (ii) the lenders under either the 2023 Side-Car Credit Agreement and/or the Credit Suisse Credit Agreement accelerate 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 of the Senior Notes will be entitled to immediately accelerate the maturity of the Senior Notes, including all principal, interest and other amounts due thereon. The Company expects that it would not have sufficient liquidity to repay all principal, interest and other costs and expenses if one or more of the Side-Car Credit Agreement, the Credit Suisse Credit Agreement and/or the Senior Notes were terminated and accelerated under these circumstances.
Additionally, 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 bynet 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 and,
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
accordingly, 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 Company’s assets. 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.
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.
The Credit Facilities containSuisse Credit Agreement also 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, depreciationConsolidated Adjusted EBITDA (as defined therein) ratio of 5.8:1 as of September 30, 2023 and amortization ("EBITDA") ratio, which5.5:1 as of the December 31, 2023. This financial maintenance covenant is tested quarterly only if the CompanyBorrower has exceeded a certain amount drawn under its revolving linethe CS Revolving Line of credit.Credit, which is approximately 35% of the total commitment under the CS Revolving Line of Credit, or approximately $42 million. As of September 30, 2022,2023, while the Company was in compliancewould not have complied with this financial maintenance covenant if it were applicable, the Company used a portion of the proceeds from the Sale Transaction to repay a portion of its outstanding commitment under this facility such that the financial maintenance covenant.covenant of this facility was not applicable for the testing period ending September 30, 2023. Following such repayment, the Company fully re-borrowed amounts available under the CS Revolving Line of Credit. The Company currently expects that when it seeks a waiver of the “going concern” covenant discussed above, it will at the same time seek a waiver of this financial maintenance covenant for the period ending December 31, 2023.
TheUnder the 2023 Term Loan Agreement, if the Borrower is unable to obtain such waiver from the lenders under the Credit Suisse Credit Agreement, or cure any such noncompliance, then the administrative agent under the 2023 Term Loan Agreement will be entitled to, and acting at the direction of the requisite lenders, will, 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 is unable to obtain such waiver from the lenders under the Credit Suisse Credit Agreement, or cure any such noncompliance; (ii) the lender under such facility or under the 2023 Term Loan 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 of the Senior Notes will be entitled to immediately accelerate the maturity of the Senior Notes, including all principal, interest and other amounts due thereon.
Credit Suisse Credit Agreement
Pursuant to the Credit Suisse Credit Agreement, the Company, through its wholly owned operating subsidiary, Cano Health, LLC (the “Borrower”), has a senior secured term loan is subject to principal amortization repayments due on(as amended, the last business day“CS Term Loan”) and a revolving credit facility
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(as amended, the “CS Revolving Line of each calendar quarter equal to 0.25%Credit”). The Obligations under the Credit Suisse Credit Agreement are secured by substantially all of the initial principal amount, as applicable, based on the funding dates. Amortization payments commenced on March 31, 2021. The outstanding amount of unpaid principal and interest associated with the term loan is due on the maturity date of November 23, 2027. Borrower’s assets.
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 September 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 maintained restricted letters of credit under the CS Revolving Line of Credit for an aggregate amount of $5.7 million and $7.2 million, respectively. As of September 30, 2023 and $3.5December 31, 2022, the Borrower had $14.0 million (of its total cash of $41.3 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 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. The CompanyBorrower has not reached thethese applicable corporate ratings. TheThis 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 nine months ended September 30, 2022. During the threenine months ended September 30, 2022,2023, the SOFR exceeded the credit spread adjustment of 0.50%, resulting in monthly variable interest rates for the quarter. As of September 30, 2022,2023, the effective interest rate of the CS Term Loan and the CS Revolving Line of Credit was 9.89%.
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.
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 was 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. The Side-Car Amendment was accounted for as a modification of debt due to the difference between the present value of the cash flows under the terms of Side-Car Amendment and the present value of the cash flows under terms of the Side-Car Agreement was less than 10% on a lender-by-lender basis. The debt issuance costs remained unamortized and the additional principal premium was capitalized and no gain or loss was recognized.
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
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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 3.0 million shares of the Company’s Class A common stock at an exercise price of $0.10 per share, of which 0.2 million warrants were exercised on March 8, 2023 and the remaining 0.1 million warrants were exercised on April 24, 2023. Share amounts have been restated to reflect the 1-for-100 Reverse Stock Split that the Company completed on November 3, 2023, as discussed in Note 1.
During the nine months ended September 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, including expenses incurred in consummating the 2023 Side-Car Amendment in August 2023.
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 September 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.See “Going Concern” in Note 3 and “Credit Agreements General” discussed earlier in this Note 12.
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
CANO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 September 30, 20222023, assuming mandatory prepayment does not occur:acceleration of principal and capitalized PIK interest related to the 2023 Term Loan into calendar year 2024 :
| (in thousands) | (in thousands) | | (in thousands) | |
Year ending December 31, | Year ending December 31, | | Amount | Year ending December 31, | | Amount |
2022 - remainder | $ | 1,611 | |
2023 | 2023 | | 6,444 | 2023 | $ | 1,611 |
2024 | 2024 | | 6,444 | 2024 | | 177,725 |
2025 | 2025 | | 6,444 | 2025 | | 6,444 |
2026 | 2026 | | 6,444 | 2026 | | 6,444 |
2027 | | 2027 | | 652,211 |
Thereafter | Thereafter | | 912,212 | Thereafter | | 300,000 |
Total | Total | $ | 939,599 | Total | $ | 1,144,435 |
As of September 30, 20222023 and December 31, 2021,2022, the balance of debt issuance costs totaled $19.5totaled $77.4 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 September 30, 2022, $18.82023, $76.9 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 was and $0.2 million 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 $29.6 million (including $6.2 million of PIK interest under the 2023 Term Loan) and $79.9 million (including $13.6 million of PIK interest under the 2023 Term Loan) for the three and nine months ended September 30, 2023, respectively, compared to $16.5 million and $16.0$42.9 million for the three months ended September 30, 2022 and 2021, respectively, and $42.9 million and $36.4 million for the nine months ended September 30, 2022, respectively. From the interest expense, approximately $2.3 million and 2021,$3.9 million were recognized related to the amortization expense for the three and nine months ended September 30, 2023, respectively, of whichand $1.1 million and $4.0$2.7 million for the three months ended September 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.
, respectively.
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
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 $717.0 million and $945.0and $745.9 million as of September 30, 20222023 and December 31, 2021,2022, respectively.
The following is a description ofShare amounts below have been restated to reflect the valuation methodology used for liabilities measured at fair value.1-for-100 Reverse Stock Split that the Company completed on November 3, 2023, as discussed in Note 1.
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 2,720,96627.2 thousand shares of its Class A common stock (the “escrowed
“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 September, 30, 2023 the seller had met the performance metrics to earn a 100% payout and the liability is classified in current portion due to sellers on the consolidated balance sheet.
On December 9, 2022, the Company entered into an asset acquisition agreement (a copy of which has been included as an exhibit hereto) requiring future payments in shares of the Company's Class A common stock. The seller under such agreement included Mark Kent who became the Company’s Interim CEO in June 2023 and permanent CEO and director in August 2023. See Note 15, “Related Party Transactions.” As of September 30, 2023, $16.3 million of the liability was classified as current due to sellers in the 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 97.0 thousand Class A common stock on January 31, 2023 to settle a portion of the purchase price.
Contingent consideration: 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, 2022,2023, after the totalbalance sheet date, the contingency was resolved as a result of such contingent consideration was an assetconditions present at the balance sheet date pertaining to probability of $9.1 million of which, $5.7 million was classified in other assetscollection in the condensed consolidated balance sheets, while $3.4 million was classified in prepaid expensesvaluation model 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 resultthe asset was adjusted to $0 through change in a different fair value measurement at the reporting date.of contingent consideration.
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
There waswas a $2.8 million decrease of $9.5 million in the fair value of the net contingent consideration liability during the nine months ended September 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 acquisitionrepresents net 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 net gains resulted from a changechanges in the fair value of the put and call options and future performance contingencies being resolved of the assets acquired in the acquisitions.acquired.
Warrant Liabilities: As of June 3, 2021, the Closing Date of the Business Combination, and as of September 30, 2022,2023, there were 23.00.2 million public warrants ("Public Warrants") and 10.50.1 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
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 September 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 0.3 million shares of the Company’s Class A common stock at an exercise price of $0.10 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 the per share exercise price $0.10. 0.2 million of these warrants were exercised in March 2023 and the remaining warrants were exercised in April 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 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 | | September 30, 2023 | | | December 31, 2022 |
Exercise price | Exercise price | | $11.50 | | | $11.50 | Exercise price | | $1,150.00 | | | $1,150.00 |
Stock price | Stock price | | $8.67 | | | $8.91 | Stock price | | $25.36 | | | $137.00 |
Term (years) | Term (years) | | 3.7 | | | 4.4 | Term (years) | | 2.7 | | | 3.4 |
| Risk free interest rate | Risk free interest rate | | 4.1% | | | 1.2% | Risk free interest rate | | 4.8% | | | 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 | | $5.00 | | | $22.00 |
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 September 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 | | |
| Due to sellers liabilities | | Due to sellers liabilities | | 16,022 | | | 16,022 | | | — | | | — | |
Public Warrant Liabilities | Public Warrant Liabilities | | 60,720 | | | 60,720 | | | — | | | — | | Public Warrant Liabilities | | 1,150 | | | 1,150 | | | — | | | — | |
Private Placement Warrant Liabilities | Private Placement Warrant Liabilities | | 27,808 | | | — | | | — | | | 27,808 | | Private Placement Warrant Liabilities | | 527 | | | — | | | — | | | 527 | |
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 | | $ | 17,699 | | | $ | 17,172 | | | $ | — | | | $ | 527 | |
There was an increasea decrease of $5.8$3.7 million in the fair value of the Public Warrant Liabilities during the nine months ended September 30, 2022,2023, and an increasea decrease of $2.6$1.7 million in the fair va valuelue of the Private Placement Warrant Liabilities during the nine months ended September 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.
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table sets forth by level, within the fair value hierarchy, the Company’s liabilities measured at fair value on a recurring basis as of December 31, 2021:2022:
| (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 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 | Contingent consideration liability | $ | 38,423 | | $ | — | | $ | — | | $ | 38,423 | | Contingent consideration liability | $ | 2,800 | | $ | — | | $ | — | | $ | 2,800 | |
Due to sellers liabilities | | Due to sellers liabilities | | 56,940 | | | 56,940 | | | — | | | — | |
Public Warrant Liabilities | Public Warrant Liabilities | | 54,970 | | | 54,970 | | | — | | | — | | Public Warrant Liabilities | | 5,060 | | | 5,060 | | | — | | | — | |
Private Placement Warrant Liabilities | Private Placement Warrant Liabilities | | 25,174 | | | — | | | — | | | 25,174 | | Private Placement Warrant Liabilities | | 2,313 | | | — | | | — | | | 2,313 | |
Total liabilities measured at fair value | $ | 118,567 | | $ | 54,970 | | $ | — | | $ | 63,597 | | |
Total liabilities and assets measured at fair value | | 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 nine months ended September 30, 20222023 and 20212022 and for liabilities measured at fair value:
| | | | | | | | | | | | | | |
| | Fair Value Measurements for the Three Months Ended September 30, |
(in thousands) | | 2023 | | 2022 |
Balance as of July 1, | | $ | 39,064 | | | $ | 50,805 | |
| | | | |
| | | | |
| | | | |
Change in fair value of contingent consideration | | 13,100 | | | 900 | |
Contingent consideration recognized due to acquisitions | | — | | | (4,100) | |
| | | | |
Change in fair value of warrants | | (5,365) | | | 65,720 | |
Contingent consideration write off | | — | | | (197) | |
| | | | |
| | | | |
| | | | |
| | | | |
Change in fair value of due to sellers | | 900 | | | — | |
| | | | |
Due to seller reclassification | | (30,000) | | | $ | — | |
Balance as of September 30, | | $ | 17,699 | | | $ | 113,128 | |
| | | | | | | | | | | | | | | | |
| | Fair Value Measurements for the Nine Months Ended September 30, |
(in thousands) | | 2023 | | 2022 | | |
Balance as of January 1, | | $ | 67,113 | | | $ | 118,567 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Change in fair value of contingent consideration | | (2,800) | | | (9,525) | | | |
Contingent consideration recognized due to acquisitions | | — | | | (4,100) | | | |
| | | | | | |
Change in fair value of warrants | | (5,696) | | | 8,383 | | | |
Contingent consideration write off | | — | | | (197) | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Change in fair value of due to sellers | | 4,361 | | | — | | | |
Due to seller payments and other | | (15,279) | | | — | | | |
Due to seller reclassification | | (30,000) | | | $ | — | | | |
Balance as of September 30, | | $ | 17,699 | | | $ | 113,128 | | | |
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 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 | |
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.served. 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 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) | | September 30, 2023 | | December 31, 2022 |
Total Assets1 | | $ | 7,492 | | | $ | 16,247 | |
Total Liabilities1 | | $ | 6,361 | | | $ | 19,445 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | 2022 | | 2021 | | 2022 | | 2021 | | |
Total revenue | $ | 17,784 | | | $ | 12,321 | | | $ | 56,856 | | | $ | 14,621 | | | |
Operating expenses: | | | | | | | | | |
Third-party medical costs | 10,372 | | | 8,582 | | | 35,795 | | | 8,582 | | | |
Direct patient expense | 6,483 | | | 2,413 | | | 19,913 | | | 5,203 | | | |
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 | 25,069 | | | 18,625 | | | 87,429 | | | 27,185 | | | |
| | | | | | | | | |
Net loss | $ | (7,285) | | | $ | (6,304) | | | $ | (30,573) | | | $ | (12,564) | | | |
1Amounts exclude specific assets and liabilities from the Company used to support the operations of the VIE's which were approximately $58.6 million and $99.2 million in Total Assets and $72.9 million and $156.8 million in Total Liabilities as of September 30, 2023 and December 31, 2022, respectively.
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | 2023 | | 2022 | | 2023 | | 2022 | | |
Total revenue | $ | 23,770 | | | $ | 17,784 | | | $ | 72,800 | | | $ | 56,856 | | | |
Operating expenses:2 | | | | | | | | | |
Third-party medical costs | 18,593 | | | 10,372 | | | 55,593 | | | 35,795 | | | |
Direct patient expense | 6,046 | | | 6,483 | | | 20,814 | | | 19,913 | | | |
Total operating expenses | 24,639 | | | 16,855 | | | 76,407 | | | 55,708 | | | |
Net income | $ | (869) | | | $ | 929 | | | $ | (3,607) | | | $ | 1,148 | | | |
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 Company's general credit of the Company.credit. There are no restrictions placed on the Physicians Groups' 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 $8.5 million and $34.8 million for the three and nine months ended September 30, 2023, respectively and $6.1 million and $26.8 million for the three and nine months ended September 30, 2022, respectively. Additionally, amounts exclude depreciation and amortization expenses incurred by the Company to support the VIEs' operations which were approximately $1.7 million and $5.5 million for the three and nine months ended September 30, 2023, respectively, and $1.7 million and $3.6 million for the three and nine months ended September 30, 2022, respectively.
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
14.15. RELATED PARTY TRANSACTIONS
Share amounts below have been restated to reflect the 1-for-100 reverse stock split that the Company completed on November 3, 2023, as discussed in Note 1.
Significant Shareholder Relationship
On March 8, 2023, the Company issued an aggregate of 0.2 million 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 0.1 million 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 and amended on August 10, 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 August 10, 2023, 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) on or prior to February 24, 2025 but after August 10, 2023, 16% 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; (iii) thereafter, 13% per annum, payable quarterly in cash. During the three and nine months ended September 30, 2023, the Company incurred $6.2 million and $13.6 million of PIK interest expense, respectively, which was compounded into the principal, and paid $9.3 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 $0.6$1.3 million and $0.3$3.3 million for the three months ended September 30, 2022 and 2021, respectively, and $1.8 million and $0.9 million for nine months ended September 30, 20222023, respectively, and 2021,recorded $0.6 million and $1.8 million of payments for three and nine months ended September 30, 2022, respectively, which were recorded within the caption selling, general and administrative expenses. The Company did not owe MedCloud any amounts asexpenses in the condensed consolidated financial statements. As of September 30, 2022.2023, the Company owed $0.3 million to MedCloud.
Dental Excellence and Onsite Dental Relationships
On April 14, 2022, CD Support, LLC ("Onsite Dental") acquired Dental Excellence Partners, LLC ("DEP"), a company formerlywho at the time of the acquisition was owned by the spouse of Dr. Marlow Hernandez, the Company's former Chief Executive Officer and a former 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. As previously disclosed, Dr. Hernandez ceased service as the Company’s Chief Executive Officer in June 2023 and ceased service as a member of the Board of Directors in August 2023.
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 $0.3$0.6 million during the three and nine months ended September 30, 2023, respectively, and $0.2 million and $0.7 million during the three and nine months ended September 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 September 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 approximatelyexpenses of an immaterial amount and $1.5 million and $3.2 million during the three and nine months ended September 30, 2022, and 2021, respectively, and an immaterial amount and $2.5 million duringwhich was recorded within the three months ended September 30, 2022 and 2021.caption "Direct Patient Expense". As of September 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 CD Support, LLC, a
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
wholly owned subsidiary of 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 $0.0 million and $6.4 million for the three and nine months ended September 30, 2023, respectively, $2.0 million and $5.0 million for the three and nine months ended September 30, 2022. As of September 30, 2022, no balance2023, the Company was owed tobilled $5.6 million by Onsite Dental.
Humana RelationshipOn August 4, 2023, CD Support filed a complaint against the Company in Miami-Dade Circuit Court, styled as CD Support, LLC v. Cano Health, LLC, claiming, among other things, that it was due certain disputed amounts and on August 9, 2023, CD Support provided the Company with notice that it was terminating the dental services administration agreement effective November 22, 2023. The Company disputes that it owes any amount to Onsite Dental and CD Support and believes that it has meritorious defenses to such action and intends to vigorously defend against the claimant’s allegations. Management believes that the resolution of this matter will not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
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.Operating Leases
The multi-year agreements also contain an arrangement forCompany indirectly leased a license fee that is payable bymedical space from 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.Company's COO. The Company recorded $0.3paid approximately $0.1 million and $0.5$0.4 million in operating lease expense related to its use of Humana clinics duringfor the three and nine months ended September 30, 2021,2023 to Humana, a managed care organization with whom the Company has entered into multi-year agreements, and in turn, Humana paid the Company's COO $0.1 million and $0.3 million for the three and nine months ended September 30, 2023, respectively. In addition, the Company paid $0.1 million and $0.4 million to Humana and Humana paid the Company's COO $0.1 million and $0.3 million for the three and nine months ended September 30, 2022, respectively. The Company's COO leased several other properties directly to the Company and was paid $0.1 million and $0.2 million for the three and nine months ended September 30, 2023 and $0.1 million and $0.2 million for the three and nine months ended September 30, 2022, 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 LeasesGeneral Contractor Agreements
The Company leased several officeshas entered into various general contractor agreements with Cano Builders, USA, Inc. ("Cano Builders"), a company that is controlled by Jose Hernandez, the father of Dr. Hernandez, pursuant to which Cano Builders performs leasehold improvements at various Company locations, as well as performing various repairs and medical spaces from an employee of the company who is a beneficial shareholder of the Company. Monthly rent expense in aggregaterelated maintenance. Payments made to Cano Builders pursuant to these general contractor agreements, as well as amounts paid for repairs and maintenance, totaled approximately $0.1$0.2 million and $0.7$1.0 million for the three and nine months ended September 30, 2023, respectively, and $2.6 million and $6.2 million for the three and nine months ended September 30, 2022, respectively. As of September 30, 2023, the Company did not have any outstanding liabilities payable to Cano Builders.
Total Health Acquisition
As such transaction was previously disclosed in (i) the Company’s 2022 Form 10-K; (ii) its Form S-3 filed with the SEC on March 15, 2023 (the “Form S-3”); (iii) its Q1 2023 Form 10-Q; and (iv) its Q2 2023 Form 10-Q and together with the 2022 Form 10-K, Form S-3 and Q1 2023 Form 10-Q, the “Prior SEC Filings”), pursuant to the terms of a certain Asset Purchase Agreement, dated December 9, 2022 (the “Total Health Purchase Agreement”), by and among Your Partners in Health, LLC, Your Partners in Health I, LLC, Care Management Resources, LLC, Care Management Resources I, LLC ProCare Medical Management, LLC, Total Health Medical Centers, LLC (collectively, the "Total Health Sellers”), Mark Kent, as the owner of the Total Health Sellers and who was appointed as the Company’s Interim CEO in June 2023 and permanent CEO and a member of the Board of Directors in August 2023, and Cano Health, LLC, Cano Health, Inc., as purchasers, the Company acquired certain assets from the Total Health Sellers (the “Total Health Acquisition”) for a purchase price of $32.5 million (the “Total Health Consideration”), which was paid in part in shares of Class A common stock on January 31, 2023 (the “First Payment Date”), a portion in cash on April 1, 2023 and with additional deferred payments as described below.
The initial equity payment was made subject to certain adjustments, including, without limitation, those based on changes in the per share price of the Company’s Class A common stock between the First Payment Date and the first anniversary of the First Payment Date (which is the date on which the second portion of the equity-based purchase price becomes due and payable, depending on the relative per share price of the Company’s Class A common stock on such date, as compared to the Initial Per Share Price (as defined below). Pursuant to the terms of the Total Health Purchase Agreement, the Total Health
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
months ended September 30, 2022Consideration was payable in cash or shares of the Company’s Class A common stock, at the Company’s election upon the first such installment, so long as at least $1,335,000 was paid in cash (which minimum cash payment the Company paid to the Total Health Sellers on April 1, 2023, and 2021, respectively,with the portion of the Total Health Consideration paid in shares of Class A common stock to the Total Health Sellers on the First Payment Date and $0.2the remaining amount payable in shares of Class A common stock on the first anniversary of the First Payment Date in January 2024, collectively, the “Total Health Equity Consideration”). In addition, within 90 days of January 31, 2024, the Total Health Sellers could receive from the Company an additional $14 million in cash, depending upon certain revenue performance of the businesses sold to the Company in the Total Health Acquisition, in each case so long as Mr. Kent remains an employee of the Company in good standing, subject to certain exceptions and $2.1 millioncertain other conditions. As previously disclosed in the Company’s Prior SEC Filings, on the First Payment Date, the Company issued 96.7 thousand shares of Class A common stock (the “Initial Issuance”) to the Total Health Sellers as partial consideration for the nine months ended September 30, 2022 and 2021, respectively.Total Health Acquisition, which amount was calculated on the basis of $141.00 per share, representing the trailing 5-day volume weighted average share price of the Company’s Class A common stock as of the close of business on January 20, 2023 (the “Initial Per Share Price”). The Initial Issuance represented 44% of the value of the Total Health Equity Consideration, determined on the basis of the Initial Per Share Price. If, on January 31, 2024, the trailing 5-day volume weighted average share price of the Common Stock as of the close of business on January 20, 2024 (the “Anniversary Per Share Price”) is less than the Initial Per Share Price, then for 30% of the total shares payable to the Total Health Sellers still held by the Total Health Sellers at such time (the “Retained Shares”), the Company will issue an additional number of shares equal to the sum of (1) (a) the total number of Retained Shares multiplied by the Initial Per Share Price, divided by (b) the Anniversary Per Share Price, minus (2) the number of Retained Shares (such shares, the “Gross-Up Shares”). Pursuant to the terms of the Total Health Purchase Agreement, assuming the Anniversary Per Share Price remains less than the Initial Per Share Price, on or before January 31, 2024 the Company is obligated to issue to the Total Health Sellers a number of shares of Class A common stock as would be needed to pay the remaining 56% of the Total Health Equity Consideration owed to the Total Health Sellers, as well as the Gross-Up Shares. Additionally, if the Company’s Class A common stock is no longer listed on the NYSE on January 31, 2024, then the Total Health Sellers shall receive the value of any remaining Total Health Consideration in cash as provided in the Total Health Purchase Agreement.
General Contractor AgreementsThe terms and conditions of Mr. Kent’s employment agreement, including, without limitation, his incentive compensation arrangements, are disclosed in the Company’s Current Report on Form 8-K filed with the SEC on June 20, 2023. In addition to such arrangements, on April 5, 2023, the Company and Mr. Kent entered into an amendment to his employment agreement that reflected his earlier promotion to serve as the Company’s Chief Strategy Officer (prior to his being appointed as the Company's interim CEO in June 2023 and permanent CEO in August 2023) and reflecting his eligibility for an annual equity award with a target value of $550,000, a portion of which vests ratably over a 3-year period after the grant date and a portion of which is dependent upon the Company’s achievement of certain performance targets over such 3-year period, subject to Mr. Kent remaining employed on each such vesting date. A copy of such amendment is attached hereto as an exhibit.
Other
As of
December 31, 2018,
Dr. Hernandez' sister-in-law is employed at the Company has entered into various general contractor agreements with a company thatas its director of payroll and her annualized cash compensation is controlled by the father of the CEO of the Company to perform leasehold improvements at various Company locations as well as various repairs and related maintenance as deemed necessary. Payments made pursuant to the general contractor agreements as well as amounts paid for repairs and maintenance to this related party totaled approximately $2.6 million and $3.2 million for the three months ended September 30, 2022 and 2021, respectively and $6.2 million and $5.6 million for the nine months ended September 30, 2022 and 2021, respectively,$135,000.
15.16. STOCK-BASED COMPENSATION
Share amounts below have been restated to reflect the 1-for-100 Reverse Stock Split that the Company completed on November 3, 2023, as discussed in Note 1.
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(as amended, the “Stock Plan”) and the 2021 Employee Stock Purchase Plan (“2021 ESPP”(as amended, the “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 2021Stock Plan will not exceed 52.00.5 million shares of stock. The aggregate number of shares authorized for issuance under the 2021 ESPP will not exceed 4.7 million, plus on47.0 thousand. 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) 15.00.2 million shares of Class A common stock, (ii) one percent
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 2021Stock 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 12.80.1 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 September 30, 20222023 was $23.0$4.3 million, which is expected to be recognized over the weighted average remaining service period of 1.70.9 years.
Further, on March 15, 2022, March 31, 2023 and April 11, 2023, in connection with achieving certain performance metrics, the Company granted 0.4 milliona total of 23.0 thousand 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 September 30, 20222023 was $1.3$0.9 million, which is expected to be recognized over the weighted average remaining service period of 2.01.8 years.
Stock Option Valuation
The Company uses two valuation methods to determine the fair value of the stock options.options granted under the 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 | $ | 1,475.00 |
Risk-free interest rate | 1.68% - 2.01% |
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 |
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | |
| | | | As of March 15, 2022 |
| | | | |
Strike price | | | | $ | 603.00 |
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 | | | | $ | 91.00 |
Risk-free interest rate | | | | 3.5% |
Expected volatility | | | | 100.0% |
Expected dividend yield | | | | 0.0% |
Expected term | | | | 6.25 |
| | | | | | | | | | |
| | | | As of April 11, 2023 |
| | | | |
Strike price | | | | $ | 150.00 |
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 2021Stock Plan through September 30, 20222023 is presented below:below (all share amounts have been restated to reflect the 1-for-100 Reverse Stock Split that the Company completed on November 3, 2023, as discussed in Note 1):
| | | 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 | | 127,037 | | | $ | 423 | | | — | | | — | |
Granted | Granted | | — | | | — | | | 435,141 | | $ | 3.88 | | Granted | | — | | | — | | | 4,351 | | | $ | 388 | |
Vested | | — | | | — | | | — | | | — | | |
| Forfeitures | Forfeitures | | (1,929,940) | | | 4.23 | | | (28,865) | | | 3.88 | | Forfeitures | | (19,299) | | | 423 | | | (289) | | | 388 | |
Balance, September 30, 2022 | Balance, September 30, 2022 | | 10,773,758 | | | $ | 4.23 | | | 406,276 | | $ | 3.88 | | Balance, September 30, 2022 | | 107,738 | | | $ | 423 | | | 4,062 | | | $ | 388 | |
| Balance, December 31, 2022 | | Balance, December 31, 2022 | | 106,350 | | | $ | 423 | | | 4,057 | | | $ | 388 | |
Granted | | Granted | | — | | | — | | | 18,646 | | | 84 | |
| Forfeitures | | Forfeitures | | (34,164) | | | 402 | | | (6,543) | | | 126 | |
Balance, September 30, 2023 | | Balance, September 30, 2023 | | 72,186 | | | $ | 433 | | | 16,160 | | | $ | 143 | |
Restricted Stock Units
On May 31, 2023, the Company granted certain executives 49.0 thousand 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
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
on May 31, 2023. As of September 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.
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 September 30, 20222023 was $78.8$29.4 million for service based awards and $3.4$2.9 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 1.41.5 years and 1.21.5 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 2021Stock Plan through September 30, 20222023 is presented below:below (all share amounts have been restated to reflect the 1-for-100 Reverse Stock Split that the Company completed on November 3, 2023, as discussed in Note 1):
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 | | 44,608 | | | $ | 1,443 | | | 7,068 | | | $ | 1,273 | |
Granted | Granted | | 11,793,758 | | | 5.40 | | — | | | — | Granted | | 117,938 | | | 540 | | | — | | | — | |
Vested | Vested | | (2,517,378) | | | 9.75 | | | (176,688) | | | 13.37 | | Vested | | (25,174) | | | 975 | | | (1,767) | | | 1,337 | |
Forfeitures | Forfeitures | | (1,771,518) | | | 7.97 | | — | | — | Forfeitures | | (17,715) | | | 797 | | | — | | | — | |
Balance, September 30, 2022 | Balance, September 30, 2022 | | 11,965,634 | | | $ | 7.47 | | | 530,062 | | | $ | 12.52 | | Balance, September 30, 2022 | | 119,657 | | | $ | 747 | | | 5,301 | | | $ | 1,252 | |
| Balance, December 31, 2022 | | Balance, December 31, 2022 | | 106,726 | | | $ | 764 | | | 2,805 | | | $ | 1,336 | |
Granted | | Granted | | 127,201 | | | 132 | | | 54,052 | | | 136 | |
Vested | | Vested | | (37,588) | | | 643 | | | (3,078) | | | 501 | |
Forfeitures | | Forfeitures | | (51,321) | | | 538 | | | (15,659) | | | 279 | |
Balance, September 30, 2023 | | Balance, September 30, 2023 | | 145,018 | | | $ | 321 | | | 38,120 | | | $ | 137 | |
The Company recorded a compensation expensesgain related to stock options and RSUs of $10.7$4.2 million and $9.5 million for the three months ended September 30, 20222023 due to significant forfeitures during the quarter and 2021, respectively, $41.3 million and $13.1compensation expense of $6.4 million for the nine months ended September 30, 20222023, and 2021,$10.7 million and $41.3 million for the three and nine months ended September 30, 2022, respectively. The Company recorded compensation expense related to the 2021 ESPP of $0.2 million and $0.9 million for the three and nine months ended September 30, 2023, respectively, and $0.4 million and $1.4 million for the three and nine months ended September 30, 2022.2022, 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, which service ceased in August 2023), 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
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 continuescontinued 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.
On November 1, 2023, the Company through its subsidiaries University Health Care Pharmacy LLC, Comfort Pharmacy 2, LLC, IFB Pharmacy LLC, and Cano Pharmacy LLC, entered into a new multi-year agreement with the same pharmaceutical wholesaler effective November 1, 2023 that continues through November 25, 2025. This agreement extends on a month-to-month basis thereafter until either party gives 90 days' written notice to terminate. The pharmaceutical wholesaler will continue to serve as the Company’s primary wholesale supplier for branded and generic pharmaceuticals. The agreement contains a provision that requires average monthly net purchases of $2.0 million, and if the minimum is not met, the vendor may adjust the pricing of goods.
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. This agreement was terminated on October 31, 2023.
Management believes it has satisfied the minimum requirements of these agreements for the nine months ended September 30, 20222023 and 2021, the minimum requirements of the agreements in place were met.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 and certain current andof its former officers.officers, 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. On October 25, 2023, Plaintiff filed a motion for leave to amend the complaint, which amendment would extend the putative class period to end on August 10, 2023. Defendants filed an opposition to Plaintiff’s motion for leave to amend on November 8, 2023. 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.business, such as the action discussed in Note 15, CD Support, LLC v. Cano Health, LLC. Management believes that the
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
Our effectiveThe Company generated a $0.1 million and $2.0 million tax ratebenefit for the three and nine months ended September 30, 2022 was2023, resulting in an effective tax rate of 0.03% and 0.2%, respectively, as compared to an effective tax rate of (0.5)% compared toand 0.6% for the three and 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 September 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.
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 September 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:
CANO HEALTH, INC.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) | | | |
| | | | | | | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands, except shares and per share data) | 2023 | | 2022 | | 2023 | | 2022 | | |
Numerator: | | | | | | | | | |
Net income (loss) | $ | (491,697) | | | $ | (112,011) | | | $ | (823,027) | | | $ | (126,660) | | | |
Less: net income (loss) attributable to non-controlling interests | (231,210) | | | (57,783) | | | (393,637) | | | (67,759) | | | |
Net income (loss) attributable to Class A common stockholders | (260,487) | | | (54,228) | | | (429,390) | | | (58,901) | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Net income (loss) attributable to Class A common stockholders - Diluted | $ | (260,487) | | | $ | (54,228) | | | $ | (429,390) | | | $ | (58,901) | | | |
Basic and Diluted Earnings Per Share denominator: | | | | | | | | | |
Weighted average common stock outstanding - basic | 2,835,250 | | | 2,323,142 | | | 2,661,495 | | | 2,114,090 | | | |
Net income (loss) per share - basic | $ | (91.87) | | | $ | (23.34) | | | $ | (161.33) | | | $ | (27.86) | | | |
Diluted Earnings Per Share: | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Weighted average common stock outstanding - diluted | 2,835,250 | | | 2,323,142 | | | 2,661,495 | | | 2,114,090 | | | |
Net income (loss) per share - diluted | $ | (91.87) | | | $ | (23.34) | | | $ | (161.33) | | | $ | (27.86) | | | |
| | | | | | | | | |
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.
On August 11, 2021, the Company issued 2,720,96627.2 thousand 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. The shares were deposited in escrow and will be released to the seller upon the satisfaction of certain performance metrics during 2022 and 2023. The final number of shares to be issued to the seller, if any, from the escrow account will be calculated by multiplying the initial share amount by an earned share percentage in accordance
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
with the purchase agreement and subtracting any forfeited indemnity shares.date. The dilutive effects of these shares were excluded from the three anddiluted earnings per share calculation for the nine months ended September 30, 2022 diluted earnings per share calculation2023 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 September 30, 20222023 |
Class B common stock | 250,093,4792,521,836 | |
Public Warrants | 22,999,900229,999 | |
Private Placement Warrants | 10,533,292105,333 | |
| |
Restricted Stock Units | 12,495,697183,138 | |
Stock Options | 11,180,03488,345 | |
Contingent Shares Issued in Connection with Acquisitions | 2,720,96627,210 | |
2021 ESPP Shares | 611,18318,766 | |
Potential Common Stock Equivalents | 310,634,5513,174,627 | |
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.U.S.
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
20.21. SUBSEQUENT EVENTS
On November 3, 2023, the Company completed the Reverse Stock Split discussed in Note 1, “Nature of Business and Operations – Reverse Stock Split.” The Company has evaluated subsequent events throughpar value per share of each share of Class A and Class B common stock was proportionately multiplied by 100, and the filingnumber and exercise price of this Quarterly Report on Form 10-Q,all Public Warrants, PCIH Common Units, stock options, restricted stock awards and determined that there have been no events that have occurred that would require adjustmentsrestricted stock unit awards were each proportionately adjusted by the 1-for-100 ratio used to our disclosures incomplete the unaudited condensed consolidated financial statements.Reverse Stock Split.
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 "Q3 2023 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 Reports on Form 10-Q filed with the SEC on March 14, 2022.May 9, 2023 and August 10, 2023 (respectively, the “Q1 2023 Form 10-Q" and "Q2 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 and Q2 2023 Form 10-Q.
Executive Overview
Description of Cano Health
We are a primary care-centric, technology-powered healthcare delivery and population health management platform designedDuring the nine months ended September 30, 2023, our operating results have performed below historical levels, with a focus on clinical excellence. Our mission is simple: to improve patient health by delivering superior primary care medical services, while forging life-long bonds with our members. Our vision is clear: to become the national leader in primary care by improving the health, wellness and quality of lifemajority 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:
•decline arising from a Patients8.8%: Our members are offered services decrease in modern, clean, and contemporary medical centers, with same or next day appointments, integrated virtual care, wellness services, ancillary services (such as physiotherapy), home services, transportation, telemedicine and a 24/7 urgency line, all without additional cost to them. This broad-based care model is critical to our success in delivering care to members of low-income communities, including large minority and immigrant populations, with complex care needs, many of whom previously had very limited or no access to quality healthcare. We are proud of the impact we have made in these underserved communities.
•Providers: We believe that providers want to be clinicians. Our employed physicians enjoy a collegial, near-academic environment and the tools and multi-disciplinary support they need to focus on medicine, their patients and their families rather than administrative matters like pre-authorizations, referrals, billing and coding. Our physicians receive ongoing training through regular clinical meetings to review the latest findings in primary care medicine. Furthermore, we offer above-average pay and no hospital call requirements. In addition, our physicians are eligible to receive a bonus based upon clinical outcomes, among other metrics.
•Payors: Payors want three things: high-quality care, membership growth and effective medical cost management. We have a multi-year and multi-geography track record of delivering on all three. Our proven track record of high-quality ratings increases the premiums paid by the Centers for Medicare & Medicaid ("CMS") to health plans, increases our quality primary-care-driven membership growth, and increases our scaled, highly professional value-based provider group that delivers quality care.
CanoPanorama, our proprietary population health management technology-powered platform, powers our efforts to deliver superior clinical care. Our platform provides the healthcare providers at our medical centers with a 360-degree view of their members, along with actionable insights to empower better care decisions and drive high member engagement. We leverage our technology to risk-stratify members and apply a highly personalized approach to primary care, chronic care, preventive care and members’ broader healthcare needs. We believe our model is well-positioned to capitalize on the large and growing opportunity being driven by the marketplace’s shift to value-based care, demographic tailwinds in the market and the increased focus on improving health outcomes, care quality and the patient experience.
We predominantly enter into capitated contracts with the nation’s largest health plans to provide holistic, comprehensive healthcare. We predominantly recognize recurring per-member-per-month ("PMPM") capitated revenue which, in the case of health plans, is a pre-negotiated percentage of the premium that the health plan receives from the CMS. We also provide practice management and administrative support servicesper member per month compared 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 revenuea 5.7% was $2.1 billion and $1.1 billion, respectively. Our net lossincrease in third party medical costs per member per month for the nine months ended September 30, 2022 and 2021 was $126.7 million and $117.2 million, respectively.2022.
Key Factors Affecting Our Performance
Our historical financial performance has been, andIn June 2023, we expect our financial performance indecided to shift 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,Company's strategic direction, which lead to healthier and happier members. By integrating member engagement andprimarily includes 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:following measures:
•Focusing our membership base towards Medicare population density;Advantage and ACO Reach and improving patient engagement;
•Selling certain assets and operations and exiting certain markets; we completed exiting our California, New Mexico and Illinois markets prior to this filing;
•Exiting our Puerto Rico operations by the beginning of 2024;
•Conducting a strategic review of the Company's Medicaid business in Florida, pharmacy assets and other specialty practices;
•Consolidating underperforming owned medical centers and terminating underperforming affiliate partnerships;
•Lowering third party medical costs through negotiations with payors, including restructuring contractual arrangements with payors and specialty network;
•Reducing operating expenses, including reduction of permanent staff;
•Significantly reducing all other non-essential spending;
•underserved demographics;Delaying renovations and other capital projects; and
•Evaluating the performance our affiliate provider relationships.
As previously-disclosed, as part of the Company’s effort to generate additional liquidity, on September 25, 2023, the Company sold to Primary Care Holdings II, LLC (“CenterWell”), a wholly owned subsidiary of Humana Inc. ("Humana"), substantially all of the assets associated with the operation of Cano Health’s senior-focused primary care centers in Texas and Nevada (the “Sale Transaction”) for a total transaction value to the Company of a total transaction value to the Company of approximately $66.7 million, consisting of approximately $35.4 million in cash paid at closing (of which approximately $1.9 million was withheld for satisfaction of potential indemnification claims), plus the release of certain liabilities owed by Cano Health or its affiliates primarily for centers built under commercial agreements entered into with affiliates of Humana. The net cash proceeds from the Sale Transaction enabled the Company to repay a portion of its outstanding commitment under its revolving credit facility, for which Credit Suisse AG, Cayman Islands Branch is the administrative agent, such that the financial maintenance covenant of this facility was not applicable for the testing period ending September 30, 2023.
•
Consistent with the terms and conditions of the 2023 Side-Car Amendment, discussed below, the Company has formally launched, announced and continues to pursue a comprehensive process to identify and evaluate interest in a sale of the Company, or all or substantially all of its assets, including having engaged advisors to assist in the process. While these efforts have yet to yield a sale transaction, the Company’s process remains ongoing. There is no assurance that this process will result in any transaction.
We believe that these strategic and operational steps are critical to our efforts to improve our financial performance, including improved profitability, liquidity, cash flow and net cash, as well as generating greater efficiency and improving health outcomes for our members.
Reverse Stock Split
As previously-disclosed in the Company’s Current Report on Form 8-K filed with the SEC on November 2, 2023, the Company effected the previously-announced 1-for-100 reverse stock split of the Company’s Class A and Class B common stock (the “Reverse Stock Split”) pursuant to which each 100 shares of the Company’s Class A and Class B common stock issued and outstanding immediately prior to filing the Certificate of Amendment to the Company’s Certificate of Incorporation on November 2, 2023 were automatically combined into one share of Class A Common Stock and Class B Common Stock, respectively, subject to the elimination of fractional shares. All references to outstanding share and per share amounts for all periods presented have been adjusted to give effect to the Reverse Stock Split. The par value per share of each share of Class A and Class B common stock was proportionately multiplied by 100, and the number and exercise price of all Public Warrants, PCIH Common Units, stock options, restricted stock awards and restricted stock unit awards were each proportionately adjusted by the ratio used to complete the Reverse Stock Split.
In connection with consummating the Reverse Stock Split, the total number of Class A common stock and Class B common stock authorized for issuance under the Company’s amended Certificate of Incorporation was reduced from 6,000,000,000 to 60,000,000 shares of its Class A common stock and from 1,000,000,000 to 10,000,000 shares of its Class B common stock, each with an adjusted par value of $0.01 per share. The Reverse Stock Split did not change the number of shares of the Company’s authorized preferred stock, which will remain at 10,000,000 shares. The Reverse Stock Split reduced the Company’s issued and outstanding shares of common stock from approximately 288,760,727 shares of Class A Common Stock and 251,893,556 shares of Class B Common Stock issued and outstanding as of October 30, 2023 to approximately existing payor relationships;2,887,607 and 2,518,935 issued and outstanding shares of Class A Common Stock and Class B Common Stock, respectively, after the effectiveness of the Reverse Stock Split.
•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 chooseAs previously disclosed, the right solution for each market.
When building or buying a medical center isCompany believes the right solution, we leaseReverse Stock Split will increase 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 percentageprice per share of the premium thatCompany’s Class A Common Stock and thus enable it to regain compliance with 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 componentsprice criteria of our population health management platform. AsSection 802.01C 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 manage 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 NYSE Listed Company Manual (the “Listing Rule”), as well asto supplement our organic growth through our acquisition strategy. We haveallow the Company’s common stock to be more attractive to a successful acquisition and integration track record. We have established a rigorous data-driven approach andbroader range of investors. The Company, however, cannot assure that 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", andprice of its Class A Common Stock after the operationsReverse Stock Split will reflect the 1-for-100 reverse split ratio, that the price per share following the effective time of the acquired entities are included in our historical resultsReverse Stock Split will be maintained for any period of time, or that the periods followingprice will remain above 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.pre-split trading price.
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.
| | | | | | | | | | | |
| September 30, 2023 | December 31, 2022 | September 30, 2022 |
Membership | 312,151 | 309,590 | 294,596 |
Medical centers | 133 | 172 | 151 |
| | | | | | | | | | | |
| September 30, 2022 | December 31, 2021 | September 30, 2021 |
Membership | 294,596 | 227,005 | 210,663 |
Medical centers | 151 | 130 | 113 |
As a result of the Sale Transaction which closed on September 25, 2023, the Company sold substantially all of the assets associated with the operation of Cano Health’s senior-focused primary care centers in Texas and Nevada. At closing, total membership and total medical centers for these markets was 14,450 and 24. The Company also exited its California and New Mexico markets by the end of the third quarter. Total membership and total medical centers for these markets were 769 and 10, respectively, as of September 30, 2023.
Members
Members represent those Medicare, Medicaid, ACA, and Affordable Care Act ("ACA"), anduntil the second quarter of 2023, 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. In the third quarter of 2023, the Company implemented a plan designed 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 reduced staffing by approximately 842 employees, or 21% of its workforce. Approximately 52% of the workforce reductions were attributable to exiting operations in certain markets and 48% of the workforce reductions represents organizational restructuring. These actions are expected to yield approximately $65 million of annualized cost reductions beginning in the third quarter of 2023 and through the end of 2024. The Company recorded a restructuring charge in the third quarter of 2023 of approximately $1.7 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; and (ii) 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. During the quarter ended June 30, 2023, the Company recorded an allowance for credit losses of $62.0 million. As of September 30, 2023 the Company has concluded that the securities do not have a readily determinable fair value.
Goodwill impairment loss. As of September 30, 2023 the Company determined there was a triggering event and performed a quantitative assessment which resulted in a goodwill impairment loss being booked in the third quarter of 2023. See Note 7, "Goodwill," in our unaudited consolidated financial statements in Item 1 of Part I of this Form 10-Q for details.
Other Income (Expense)
Interest expense. Interest expense primarily consists of interest incurred on our outstanding borrowings under our notes payable related to our equipment loansCredit Suisse Credit Agreement, Senior Notes, and credit facility.2023 Term Loan, including Paid-in-Kind interest ("PIK"). See “Liquidity and Capital ResourcesResources.”. Costs incurred to obtain debt financing are amortized and shown as a component of interest expense.
Interest income. Interest income primarily consists of interest earned through a loan agreement with an affiliated company.
Loss on extinguishment of debt. Loss on extinguishment of debt primarily consists of unamortized debt issuance costs related to our term loanCredit Suisse Credit Agreement in connection with our financing arrangements.
Change in fair value of warrant liabilities. Change in fair value of warrant liabilities consists primarily of changes to the public warrants and private placement warrants assumed upon the consummation of the Business Combination. The liabilities are revalued at each reporting period.
Other income (expense). Other income (expense) primarily relates to sublease income and legal settlement fees.the gain on the Sale Transaction.
Results of Operations
The following table sets forth our consolidated statements of operations data for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
($ 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 September 30, | | Nine Months Ended September 30, |
($ in thousands) | 2023 | | 2022 | | 2023 | | 2022 | | |
Revenue: | | | | | | | | | |
Capitated revenue | $ | 770,269 | | | $ | 625,895 | | | $ | 2,354,667 | | | $ | 1,955,739 | | | |
Fee-for-service and other revenue | 17,804 | | | 39,133 | | | 67,062 | | | 102,804 | | | |
Total revenue | 788,073 | | | 665,028 | | | 2,421,729 | | | 2,058,543 | | | |
Operating expenses: | | | | | | | | | |
Third-party medical costs | 706,922 | | | 489,565 | | | 2,184,882 | | | 1,566,661 | | | |
Direct patient expense | 65,547 | | | 63,867 | | | 190,731 | | | 177,190 | | | |
Selling, general, and administrative expense | 80,821 | | | 111,765 | | | 276,712 | | | 314,617 | | | |
Depreciation and amortization expense | 26,740 | | | 25,343 | | | 81,213 | | | 64,215 | | | |
Transaction costs | 7,862 | | | 5,033 | | | 27,073 | | | 19,616 | | | |
Change in fair value of contingent consideration | 13,100 | | | 900 | | | (2,800) | | | (9,525) | | | |
Goodwill impairment loss | 354,000 | | | — | | | 354,000 | | | — | | | |
Credit loss on other assets | — | | | — | | | 62,000 | | | — | | | |
Total operating expenses | 1,254,992 | | | 696,473 | | | 3,173,811 | | | 2,132,774 | | | |
Loss from operations | (466,919) | | | (31,445) | | | (752,082) | | | (74,231) | | | |
Other income and expense: | | | | | | | | | |
Interest expense | (29,646) | | | (16,451) | | | (79,870) | | | (42,868) | | | |
Interest income | 258 | | | 4 | | | 357 | | | 7 | | | |
Loss on extinguishment of debt | — | | | — | | | — | | | (1,428) | | | |
Change in fair value of warrant liabilities | 5,365 | | | (65,721) | | | 5,696 | | | (8,383) | | | |
Other income (expense) | (900) | | | 354 | | | 855 | | | 884 | | | |
Total other income (expense) | (24,923) | | | (81,814) | | | (72,962) | | | (51,788) | | | |
Net income (loss) before income tax expense | (491,842) | | | (113,259) | | | (825,044) | | | (126,019) | | | |
Income tax expense (benefit) | (145) | | | (1,248) | | | (2,017) | | | 641 | | | |
Net income (loss) | $ | (491,697) | | | (112,011) | | | $ | (823,027) | | | $ | (126,660) | | | |
Net income (loss) attributable to non-controlling interests | (231,210) | | | (57,783) | | | (393,637) | | | (67,759) | | | |
Net income (loss) attributable to Class A common stockholders | $ | (260,487) | | | $ | (54,228) | | | $ | (429,390) | | | $ | (58,901) | | | |
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) | 2023 | | 2022 | | 2023 | | 2022 | | |
Revenue: | | | | | | | | | |
Capitated revenue | 97.7 | % | | 94.1 | % | | 97.3 | % | | 95.0 | % | | |
Fee-for-service and other revenue | 2.3 | % | | 5.9 | % | | 2.7 | % | | 5.0 | % | | |
Total revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | |
Operating expenses: | | | | | | | | | |
Third-party medical costs | 89.7 | % | | 73.6 | % | | 90.2 | % | | 76.1 | % | | |
Direct patient expense | 8.3 | % | | 9.6 | % | | 7.9 | % | | 8.6 | % | | |
Selling, general, and administrative expense | 10.3 | % | | 16.8 | % | | 11.4 | % | | 15.3 | % | | |
Depreciation and amortization expense | 3.4 | % | | 3.8 | % | | 3.4 | % | | 3.1 | % | | |
Transaction costs | 1.0 | % | | 0.8 | % | | 1.1 | % | | 1.0 | % | | |
Change in fair value of contingent consideration | 1.7 | % | | 0.1 | % | | (0.1) | % | | (0.5) | % | | |
Goodwill impairment loss | 44.9 | % | | 0.0 | % | | 14.6 | % | | 0.0 | % | | |
Credit loss on other assets | 0.0 | % | | 0.0 | % | 0.0 | % | 2.6 | % | 0.0 | % | 0.0 | % | | |
Total operating expenses | 159.2 | % | | 104.7 | % | | 131.1 | % | | 103.6 | % | | |
Loss from operations | (59.2) | % | | (4.7) | % | | (31.1) | % | | (3.6) | % | | |
Other income and expense: | | | | | | | | | |
Interest expense | (3.8) | % | | (2.5) | % | | (3.3) | % | | (2.1) | % | | |
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 | 0.7 | % | | (9.9) | % | | 0.2 | % | | (0.4) | % | | |
Other income (loss) | (0.1) | % | | 0.1 | % | | 0.0 | % | | 0.0 | % | | |
Total other income (loss) | (3.2) | % | | (12.3) | % | | (3.0) | % | | (2.5) | % | | |
Net income (loss) before income tax expense | (62.4) | % | | (17.0) | % | | (34.1) | % | | (6.1) | % | | |
Income tax expense (benefit) | (0.02) | % | | (0.2) | % | | (0.1) | % | | 0.0 | % | | |
Net income (loss) | (62.4) | % | | (16.8) | % | | (34.0) | % | | (6.1) | % | | |
Net income (loss) attributable to non-controlling interests | (29.3) | % | | (8.7) | % | | (16.3) | % | | (3.3) | % | | |
Net income (loss) attributable to Class A common stockholders | (33.0) | % | | (8.2) | % | | (17.7) | % | | (2.8) | % | | |
| | | | | | | | | |
The following table sets forth the Company’s disaggregated revenue for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2023 | | 2022 | | |
($ in thousands) | | Revenue $ | | Revenue % | | Revenue $ | | Revenue % | | | | |
Capitated revenue | | | | | | | | | | | | |
Medicare | | $ | 728,435 | | | 92.4 | % | | $ | 577,989 | | | 86.9 | % | | | | |
Other capitated revenue | | 41,834 | | | 5.3 | % | | 47,906 | | | 7.2 | % | | | | |
Total capitated revenue | | 770,269 | | | 97.7 | % | | 625,895 | | | 94.1 | % | | | | |
Fee-for-service and other revenue | | | | | | | | | | | | |
Fee-for-service | | 6,886 | | | 0.9 | % | | 9,677 | | | 1.5 | % | | | | |
Pharmacy | | 14,243 | | | 1.8 | % | | 12,910 | | | 1.9 | % | | | | |
Other | | (3,325) | | | (0.4) | % | | 16,546 | | | 2.5 | % | | | | |
Total fee-for-service and other revenue | | 17,804 | | | 2.3 | % | | 39,133 | | | 5.9 | % | | | | |
| | | | | | | | | | | | |
Total revenue | | $ | 788,073 | | | 100.0 | % | | $ | 665,028 | | | 100.0 | % | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2023 | | 2022 | | |
(in thousands) | | Revenue $ | | Revenue % | | Revenue $ | | Revenue % | | | | |
Capitated revenue | | | | | | | | | | | | |
Medicare | | $ | 2,217,675 | | | 91.6 | % | | $ | 1,795,820 | | | 87.2 | % | | | | |
Other capitated revenue | | 136,992 | | | 5.7 | % | | 159,919 | | | 7.8 | % | | | | |
Total capitated revenue | | 2,354,667 | | | 97.3 | % | | 1,955,739 | | | 95.0 | % | | | | |
Fee-for-service and other revenue | | | | | | | | | | | | |
Fee-for-service | | 22,861 | | | 0.9 | % | | 29,349 | | | 1.4 | % | | | | |
Pharmacy | | 41,907 | | | 1.7 | % | | 37,185 | | | 1.8 | % | | | | |
Other | | 2,294 | | | 0.1 | % | | 36,270 | | | 1.8 | % | | | | |
Total fee-for-service and other revenue | | 67,062 | | | 2.7 | % | | 102,804 | | | 5.0 | % | | | | |
| | | | | | | | | | | | |
Total revenue | | $ | 2,421,729 | | | 100.0 | % | | $ | 2,058,543 | | | 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 September 30, | |
| | 2022 | | 2021 | | % Change |
| | 2023 | | 2022 | | % Change |
Members: | | | | | | | |
Members:1 | | Members:1 | | | | | | |
Medicare Advantage | Medicare Advantage | | 128,731 | | | 112,309 | | | 14.6 | % | Medicare Advantage | | 131,557 | | | 128,731 | | | 2.2 | % |
Medicare DCE | | 39,615 | | | 7,777 | | | 409.4 | % | |
Medicare ACO REACH | | Medicare ACO REACH | | 64,328 | | | 39,615 | | | 62.4 | % |
Total Medicare | Total Medicare | | 168,346 | | | 120,086 | | | 40.2 | % | Total Medicare | | 195,885 | | | 168,346 | | | 16.4 | % |
Medicaid | Medicaid | | 73,865 | | | 63,871 | | | 15.6 | % | Medicaid | | 62,717 | | | 73,865 | | | (15.1) | % |
ACA | ACA | | 52,385 | | | 26,706 | | | 96.2 | % | ACA | | 53,549 | | | 52,385 | | | 2.2 | % |
Total members | Total members | | 294,596 | | | 210,663 | | | 39.8 | % | Total members | | 312,151 | | | 294,596 | | | 6.0 | % |
| Member months: | Member months: | | Member months: | |
Medicare Advantage | Medicare Advantage | | 383,645 | | | 337,724 | | | 13.6 | % | Medicare Advantage | | 421,141 | | | 383,645 | | | 9.8 | % |
Medicare DCE | | 119,936 | | | 22,715 | | | 428.0 | % | |
Medicare ACO REACH | | Medicare ACO REACH | | 194,267 | | | 119,936 | | | 62.0 | % |
Total Medicare | Total Medicare | | 503,581 | | | 360,439 | | | 39.7 | % | Total Medicare | | 615,408 | | | 503,581 | | | 22.2 | % |
Medicaid | Medicaid | | 218,807 | | | 187,212 | | | 16.9 | % | Medicaid | | 211,764 | | | 218,807 | | | (3.2) | % |
ACA | ACA | | 149,872 | | | 81,437 | | | 84.0 | % | ACA | | 171,674 | | | 149,872 | | | 14.5 | % |
Total member months | Total member months | | 872,260 | | | 629,088 | | | 38.7 | % | Total member months | | 998,846 | | | 872,260 | | | 14.5 | % |
| | | | | |
| | | | | |
Per Member Per Month ("PMPM"): | | |
Per Member Per Month ("PMPM"):2 | | Per Member Per Month ("PMPM"):2 | |
Medicare Advantage | Medicare Advantage | $ | 1,127 | | $ | 1,151 | | | (2.1) | % | Medicare Advantage | | $ | 1,115 | | | $ | 1,127 | | | (1.1) | % |
Medicare DCE | $ | 1,215 | | $ | 1,349 | | | (9.9) | % | |
Medicare ACO REACH | | Medicare ACO REACH | | $ | 1,333 | | | $ | 1,215 | | | 9.7 | % |
Total Medicare | Total Medicare | $ | 1,148 | | $ | 1,163 | | | (1.3) | % | Total Medicare | | $ | 1,184 | | | $ | 1,148 | | | 3.1 | % |
Medicaid | Medicaid | $ | 191 | | $ | 271 | | | (29.5) | % | Medicaid | | $ | 197 | | | $ | 191 | | | 3.1 | % |
ACA | ACA | $ | 40 | | $ | 47 | | | (14.9) | % | ACA | | $ | — | | | $ | 40 | | | (100.0) | % |
Total PMPM | Total PMPM | $ | 718 | | $ | 753 | | | (4.6) | % | Total PMPM | | $ | 771 | | | $ | 718 | | | 7.4 | % |
| Medical centers | Medical centers | | 151 | | | 113 | | Medical centers | | 133 | | | 151 | |
1 Membership reflects end of period results, which excludes membership related to the Sale Transaction.
2 Third quarter 2023 PMPM includes the members from the Sale Transaction that occurred on September 25, 2023, which were approximately 14,450 members.
| | | Nine Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2022 | | 2021 | | % Change |
| | 2023 | | 2022 | | % Change |
Members: | | | | | | | |
Members:3 | | Members:3 | | | | | | |
Medicare Advantage | Medicare Advantage | | 128,731 | | | 112,309 | | | 14.6 | % | Medicare Advantage | | 131,557 | | | 128,731 | | | 2.2 | % |
Medicare DCE | | 39,615 | | | 7,777 | | | 409.4 | % | |
Medicare ACO REACH | | Medicare ACO REACH | | 64,328 | | | 39,615 | | | 62.4 | % |
Total Medicare | Total Medicare | | 168,346 | | | 120,086 | | | 40.2 | % | Total Medicare | | 195,885 | | | 168,346 | | | 16.4 | % |
Medicaid | Medicaid | | 73,865 | | | 63,871 | | | 15.6 | % | Medicaid | | 62,717 | | | 73,865 | | | (15.1) | % |
ACA | ACA | | 52,385 | | | 26,706 | | | 96.2 | % | ACA | | 53,549 | | | 52,385 | | | 2.2 | % |
Total members | Total members | | 294,596 | | | 210,663 | | | 39.8 | % | Total members | | 312,151 | | | 294,596 | | | 6.0 | % |
| Member months: | Member months: | | Member months: | |
Medicare Advantage | Medicare Advantage | | 1,102,625 | | | 820,881 | | | 34.3 | % | Medicare Advantage | | 1,262,062 | | | 1,102,625 | | | 14.5 | % |
Medicare DCE | | 367,326 | | | 46,639 | | | 687.6 | % | |
Medicare ACO REACH | | Medicare ACO REACH | | 595,564 | | | 367,326 | | | 62.1 | % |
Total Medicare | Total Medicare | | 1,469,951 | | | 867,520 | | | 69.4 | % | Total Medicare | | 1,857,626 | | | 1,469,951 | | | 26.4 | % |
Medicaid | Medicaid | | 627,634 | | | 321,581 | | | 95.2 | % | Medicaid | | 699,673 | | | 627,634 | | | 11.5 | % |
ACA | ACA | | 411,138 | | | 195,290 | | | 110.5 | % | ACA | | 752,287 | | | 411,138 | | | 83.0 | % |
Total member months | Total member months | | 2,508,723 | | | 1,384,391 | | | 81.2 | % | Total member months | | 3,309,586 | | | 2,508,723 | | | 31.9 | % |
| | | | | |
| | | | | |
Per Member Per Month ("PMPM"): | | |
Per Member Per Month ("PMPM"):4 | | Per Member Per Month ("PMPM"):4 | |
Medicare Advantage | Medicare Advantage | | $ | 1,189 | | | $ | 1,053 | | | 12.9 | % | Medicare Advantage | | $ | 1,107 | | | $ | 1,189 | | | (6.9) | % |
Medicare DCE | | $ | 1,320 | | | $ | 1,283 | | | 2.9 | % | |
Medicare ACO REACH | | Medicare ACO REACH | | $ | 1,378 | | | $ | 1,320 | | | 4.4 | % |
Total Medicare | Total Medicare | | $ | 1,222 | | | $ | 1,066 | | | 14.6 | % | Total Medicare | | $ | 1,194 | | | $ | 1,222 | | | (2.3) | % |
Medicaid | Medicaid | | $ | 223 | | | $ | 414 | | | (46.1) | % | Medicaid | | $ | 181 | | | $ | 223 | | | (18.8) | % |
ACA | ACA | | $ | 48 | | | $ | 36 | | | 33.3 | % | ACA | | $ | 14 | | | $ | 48 | | | (70.8) | % |
Total PMPM | Total PMPM | | $ | 780 | | | $ | 769 | | | 1.4 | % | Total PMPM | | $ | 711 | | | $ | 780 | | | (8.8) | % |
| Medical centers | Medical centers | | 151 | | | 113 | | Medical centers | | 133 | | | 151 | |
3Membership reflects end of period results, which excludes membership related to the Sale Transaction.
4 Nine months ended September 30, 2023 PMPM includes the members from the Sale Transaction that occurred on September 25, 2023, which were approximately 14,450 members.
Comparison of the Three Months Ended September 30, 20222023 and 20212022
Revenue
| | | Three Months Ended September 30, | | | Three Months Ended September 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 | | $ | 770,269 | | | $ | 625,895 | | | | $ | 144,374 | | | 23.1 | % |
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 | | 17,804 | | | 39,133 | | | | (21,329) | | | -54.5 | % |
Total revenue | Total revenue | | $ | 665,028 | | | $ | 498,931 | | | | $ | 166,097 | | | Total revenue | | $ | 788,073 | | | $ | 665,028 | | | | $ | 123,045 | | |
Capitated revenue. Capitated revenue was $770.3 million for the three months ended September 30, 2023, an increase of $144.4 million, or 23.1%, compared to $625.9 million for the three months ended September 30, 2022, an increase of $152.1 million, or 32.1%, compared to $473.8 million for the three months ended September 30, 2021.2022. The increase was primarily driven by a 38.7%$132.1 million increase in the total member months slightly offset by a 4.6% decrease in total revenue per member per monthrelated to additional members driven by decreased pricing in the DCE business. The increase in member months was due to an increase in the total number of members served at new and existing centersorganic growth and certain acquisitions.
Fee-for-service and other revenue. Fee-for-service and other revenue was $17.8 million for the three months ended September 30, 2023, a decrease of $21.3 million, or 54.5%, compared to $39.1 million for the three months ended September 30, 2022, an increaseprimarily due to a decrease in volume of $14.0 million, or 55.5%, compared to $25.2 million for the three months ended September 30, 2021. The increase in fee-for-serviceservices provided and other revenue was primarily attributable to an increase in patients served across existing centers as well as a $1.1 million benefit from claims irrevocably assigned to MSP.divestiture of certain offices that provided those services.
Operating Expenses
| | | Three Months Ended September 30, | | | Three Months Ended September 30, | |
($ 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 | | $ | 706,922 | | | $ | 489,565 | | | $ | 217,357 | | | 44.4 | % |
Direct patient expense | Direct patient expense | | 63,867 | | | 50,368 | | | 13,499 | | | 26.8 | % | Direct patient expense | | 65,547 | | | 63,867 | | | 1,680 | | | 2.6 | % |
Selling, general, and administrative expenses | Selling, general, and administrative expenses | | 111,765 | | | 76,618 | | | 35,147 | | | 45.9 | % | Selling, general, and administrative expenses | | 80,821 | | | 111,765 | | | (30,944) | | | -27.7 | % |
Depreciation and amortization expense | Depreciation and amortization expense | | 25,343 | | | 16,955 | | | 8,388 | | | 49.5 | % | Depreciation and amortization expense | | 26,740 | | | 25,343 | | | 1,397 | | | 5.5 | % |
Transaction costs and other | | 5,033 | | | 11,206 | | | (6,173) | | | -55.1 | % | |
Transaction costs | | Transaction costs | | 7,862 | | | 5,033 | | | 2,829 | | | 56.2 | % |
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 | | 13,100 | | | 900 | | | 12,200 | | | 1355.6 | % |
Credit loss on other assets | | Credit loss on other assets | | — | | | $ | — | | | — | | | — | % |
Goodwill impairment loss | | Goodwill impairment loss | | 354,000 | | | $ | — | | | 354,000 | | | 0.0 | % |
Total operating expenses | Total operating expenses | | $ | 696,473 | | | $ | 532,523 | | | $ | 163,950 | | | Total operating expenses | | $ | 1,254,992 | | | $ | 696,473 | | | $ | 558,519 | | |
Third-party medical costs. Third-party medicalmedical costs were $489.6$706.9 million for thethe three months ended September 30, 2022,2023, an increase of $108.2$217.4 million, or 28.4%44.4%, comparedcompared to $381.3$489.6 million for the threethree months ended September 30, 20212022. . The increaseincrease was primarily driven by a 38.7%$116.8 million increase related to additional members driven by organic growth and certain acquisitions, a $86.4 million increase related to higher third-party medical cost PMPM and a $14.1 million increase related to membership mix. The higher third-party medical cost PMPM included approximately $24.2 million in total member months, theadditional supplemental health benefits and increased claims utilization. In addition, of Direct Contracting Entity ("DCE") members with higher medical costs, and the trending shift toward proportionately more higher acuity patients across service lines. Duringduring the three months ended September 30, 2022, $34.3$23.3 million was recognized as a net reduction in third-party medical costs related to claims irrevocably assigned to MSP. This amount was offset by $11.0 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. During the three months ended September 30, 2021, $1.8 million was recognized as a reduction to third party medical costs related to the third-party payor.
Direct patient expense. Direct patient expense was $65.5 million for the three months ended September 30, 2023, an increase of $1.7 million, or 2.6%, compared to $63.9 million for the three months ended September 30, 2022, an increase of $13.5 million, or 26.8%, compared to $50.4 million for the three months ended September 30, 2021. The increase was primarily driven by increases in payroll and benefits of $11.2 million, pharmacy drugs of $1.4 million and medical supplies of $1.3 million.2022.
Selling, general, and administrative expenses. Selling, general, and administrative expenses were $80.8 million for the three months ended September 30, 2023, a decrease of $30.9 million, or 27.7%, compared to $111.8 million for the three months ended September 30, 2022, an increase of $35.1 million, or 45.9%, compared to $76.6 million for the three months ended September 30, 2021. The increase was primarily driven by higher salaries and benefits of $14.6 million, 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
$5.8 million, marketing expenses of $3.6 million and stock-based compensation of $1.6 million. These increases were incurred to support the continued growth of our business and expansion into other states.
2022.
Depreciation and amortization expense. Depreciation and amortization expense was $26.7 million for the three months ended September 30, 2023, an increase of $1.4 million, or 5.5%, compared to $25.3 million for the three months ended September 30, 2022, an increase of $8.4 million, or 49.5%, compared to $17.0 million for the three months ended September 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 $7.9 million for the three months ended September 30, 2023, an increase of $2.8 million, or 56.2%, compared to $5.0 million for the three months ended September 30, 2022, a decrease of $6.2 million, or 55.1%, compared to $11.2 million for the three months ended September 30, 2021. 2022. The decreaseincrease primarily related to a decrease in acquisitions in 2022.certain non-recurring legal costs related to the proxy contest with 3 former members of the Board of Directors.
Change in fair value of contingent consideration. Contingent consideration generated a lossgain of $0.9$13.1 million for the three months ended September 30, 2022 primarily2023 due to the fact that the contingency was resolved as a result of conditions present at the balance sheet date pertaining to the probability of collection in the valuation model and the fair value of the asset was adjusted to zero.
Goodwill impairment loss. The non-cash goodwill impairment loss was $354.0 million for the three months ended September 30, 2023. As of September 30, 2023, the Company determined there was a triggering event for a goodwill impairment and performed a quantitative assessment which resulted in the fair value of the Company being below the
carrying value. See Note 7, "Goodwill," in our stock price increasingunaudited consolidated financial statements included in value.Item 1 of Part I of this Form 10-Q for more details.
Other Income (Expense)
| | | Three Months Ended September 30, | | | Three Months Ended September 30, | |
($ 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 | | $ | (29,646) | | | $ | (16,451) | | | $ | (13,195) | | | 80.2 | % |
Interest income | Interest income | | 4 | | | 1 | | | 3 | | | 300.0 | % | Interest income | | 258 | | | 4 | | | 254 | | | 6350.0 | % |
| 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 | | 5,365 | | | (65,721) | | | 71,086 | | | -108.2 | % |
Other income (expense) | Other income (expense) | | 354 | | | (29) | | | 383 | | | N/A | Other income (expense) | | (900) | | | 354 | | | (1,254) | | | -354.2 | % |
Total other income (expense) | Total other income (expense) | | $ | (81,814) | | | $ | (30,701) | | | $ | (51,113) | | | Total other income (expense) | | $ | (24,923) | | | $ | (81,814) | | | $ | 56,891 | | |
|
Interest expense. Interest expense was $29.6 million for the three months ended September 30, 2023, an increase of $13.2 million, or 80.2%, compared to $16.5 million for the three months ended September 30, 2022, an increase of $0.4 million, or 2.7%, compared to $16.0 million for the three months ended September 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 and amounts drawn under the CS Revolving Line of Credit.
Change in fair value of warrant liabilities. Change in fair value of warrant liabilities was $65.7$5.4 million for the three months ended September 30, 20222023 as a result of a change in the fair value of the public warrants and private placement warrants assumed in connection with the Business Combination.
Comparison of the Nine Months Ended September 30, 20222023 and 20212022
Revenue
| | | Nine Months Ended September 30, | | | Nine Months Ended September 30, | |
($ 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 | | $ | 2,354,667 | | | $ | 1,955,739 | | | $ | 398,928 | | | 20.4 | % |
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 | | 67,062 | | | 102,804 | | | | (35,742) | | | -34.8 | % |
Total revenue | Total revenue | | $ | 2,058,543 | | | $ | 1,117,114 | | | $ | 941,429 | | | Total revenue | | $ | 2,421,729 | | | $ | 2,058,543 | | | $ | 363,186 | | |
CapitatedCapitated revenue. Capitated revenue was $2.4 billion for the nine months ended September 30, 2023, an increase of $398.9 million, or 20.4%, compared to $2.0 billion for the nine months ended September 30, 2022, an increase of $891.1 million, or 83.7%, compared to $1.1 billion for the nine months ended September 30, 2021.2022. The increase was primarily
driven by a 81.2%$523.3 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$110.0 million decrease in total capitated revenue PMPM and $14.5 million related to membership mix. The decrease in capitated revenue PMPM included a decrease of certain acquisitions.approximately $95.8 million in Medicare Risk Adjustments.
Fee-for-service and other revenue. Fee-for-service and other revenue was $67.1 million for the nine months ended September 30, 2023, a decrease of $35.7 million, or 34.8%, compared to $102.8 million for the nine months ended September 30, 2022, an increaseprimarily due to a decrease in volume of $50.3 million, or 95.8%, compared to $52.5 million for the nine months ended September 30,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 $8.0 million benefit from claims irrevocably assigned to MSP.
Operating Expenses
| | | Nine Months Ended September 30, | | | Nine Months Ended September 30, | |
($ 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 | $ | 2,184,882 | | $ | 1,566,661 | | $ | 618,221 | | | 39.5 | % |
Direct patient expense | Direct patient expense | | 177,190 | | | 120,212 | | | 56,978 | | | 47.4 | % | Direct patient expense | | 190,731 | | | 177,190 | | | 13,541 | | | 7.6 | % |
Selling, general, and administrative expenses | Selling, general, and administrative expenses | | 314,617 | | | 158,786 | | | 155,831 | | | 98.1 | % | Selling, general, and administrative expenses | | 276,712 | | | 314,617 | | | (37,905) | | | -12.0 | % |
Depreciation and amortization expense | Depreciation and amortization expense | | 64,215 | | | 30,746 | | | 33,469 | | | 108.9 | % | Depreciation and amortization expense | | 81,213 | | | 64,215 | | | 16,998 | | | 26.5 | % |
Transaction costs and other | | 19,616 | | | 36,274 | | | (16,658) | | | -45.9 | % | |
Transaction costs | | Transaction costs | | 27,073 | | | 19,616 | | | 7,457 | | | 38.0 | % |
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 | | (2,800) | | | (9,525) | | | 6,725 | | | -70.6 | % |
Goodwill impairment loss | | Goodwill impairment loss | | 354,000 | | | — | | | 354,000 | | | N/A |
Credit loss on other assets | | Credit loss on other assets | | 62,000 | | | — | | | 62,000 | | | N/A |
Total operating expenses | Total operating expenses | $ | 2,132,774 | | $ | 1,210,043 | | $ | 922,731 | | | Total operating expenses | $ | 3,173,811 | | $ | 2,132,774 | | $ | 1,041,037 | | |
Third-party medical costs. Third-party medical costs were $2.2 billion for the nine months ended September 30, 2023, an increase of $618.2 million, or 39.5%, compared to $1.6 billion for the nine months ended September 30, 2022, an increase of $698.5 million, or 80.5%, compared to $868.2 million for the nine months ended September 30, 2021. 2022. The increase was driven by a 81.2%$436.0 million increase in total member months, the addition of Direct Contracting Entity ("DCE")related to additional members withdriven by organic growth and certain acquisitions, a$146.4 million increase related to higher third-party medical costs PMPM and the trending shift toward proportionately morea $35.8 million increase related to membership mix. The higher acuity patients across service lines. Further,third-party medical costs PMPM included $63.6 million in additional supplemental health benefits and increased claims development and utilization. In addition, during the nine months ended September 30, 2022, there was $6 million of unfavorable prior year claims development for the Company's Medicare DCE program. During the nine months ended September 30, 2022, $41.0$33.7 million was recognized as a net 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.MSP.
Direct patient expense. Direct patient expense was $190.7 million for the nine months ended September 30, 2023, an increase of $13.5 million, or 7.6%, compared to $177.2 million for the nine months ended September 30, 2022, an increase of $57.0 million, or 47.4%, compared to $120.2 million for the nine months ended September 30, 2021.2022. The increase was primarily driven by increases in payroll and benefits of $42.4$3.8 million due to higher volume of full time providers and supporting staff, pharmacy drugs of $8.4 million, provider payments of $0.8$5.8 million and ancillary medical suppliesservices of $4.3$3.2 million.
Selling, general, and administrative expenses. Selling, general, and administrative expenses were $276.7 million for the nine months ended September 30, 2023, a decrease of $37.9 million, or 12.0%, compared to $314.6 million for the nine months ended September 30, 2022, an increase of $155.8 million, or 98.1%, compared to $158.8 million for the nine months ended September 30, 2021.2022. The increasedecrease was primarily driven by higher salaries and benefits of $62.2 million,a decrease in stock-based compensation of $29.5$35.4 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 $15.0 million, offset by increases in occupancy costs of $20.6$7.8 million, legal and professional servicesan increase in information technology expense 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$5.5 million. These increases were incurred to support the continued growth of our business and expansion into other states.
Depreciation and amortization expense. Depreciation and amortization expense was $81.2 million for the nine months ended September 30, 2023, an increase of $17.0 million, or 26.5%, compared to $64.2 million for the nine months ended September 30, 2022, an increase of $33.5 million, or 108.9%, compared to $30.7 million for the nine months ended September 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 $27.1 million for the nine months ended September 30, 2023, an increase of $7.5 million, or 38.0%, compared to $19.6 million for the nine months ended September 30, 2022, a decrease of $16.7 million, or 45.9%, compared 2022. The increase primarily related
to $36.3 millionfinancing costs for the nine months ended September 30, 2021. The decrease related to higher than usual transactions2023 Term Loan and certain non-recurring legal costs in 2021 related to the Business Combination and a decrease in acquisitions in 2022.proxy contest with 3 former members of the Board of Directors.
Change in fair value of contingent consideration. Contingent consideration generated a gain of $9.5$2.8 million for the nine months ended September 30, 2023 due to changes in the fair value and contingencies being resolved of the assets acquired.
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; and (ii) 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. During the liability and corresponding gainquarter ended June 30, 2023, the Company recorded an allowance for credit losses of $62.0 million. As of September 30, 2023 the Company has concluded that the securities do not have a readily determinable fair value.
Goodwill impairment loss. The non-cash goodwill impairment loss was a result of our stock price decreasing during$354.0 million for 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 as2023. As of September 30, 2022. Further,2023, the Company determined there was a gain of $4.5 million was recorded related to an acquisition completed on August 5, 2022, as described above, resulting fromtriggering event for a changegoodwill impairment and performed a quantitative assessment which resulted in the fair value of a put and call option and performancethe Company being below the carrying value. See Note 7, "Goodwill," in our unaudited consolidated financial statements included in Item 1 of the assets acquired in the acquisition.
Part I of this Form 10-Q for more details.
Other Income (Expense)
| | | Nine Months Ended September 30, | | | Nine Months Ended September 30, | |
($ 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 | | $ | (79,870) | | | $ | (42,868) | | | $ | (37,002) | | | 86.3 | % |
Interest income | Interest income | | 7 | | | 4 | | | 3 | | | 75.0 | % | Interest income | | 357 | | | 7 | | | 350 | | | 5000.0 | % |
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 | | 5,696 | | | (8,383) | | | 14,079 | | | -167.9 | % |
Other income (expense) | Other income (expense) | | 884 | | | (54) | | | 938 | | | N/A | Other income (expense) | | 855 | | | 884 | | | (29) | | | -3.3 | % |
Total other income (expense) | Total other income (expense) | $ | (51,788) | | $ | (25,073) | | $ | (26,715) | | | Total other income (expense) | | $ | (72,962) | | | $ | (51,788) | | | $ | (21,174) | | |
Interest expense. Interest expense was $79.9 million for the nine months ended September 30, 2023, an increase of $37.0 million, or 86.3%, compared to $42.9 million for the nine months ended September 30, 2022, an increase of $6.5 million, or 17.9%, compared to $36.4 million for the nine months ended September 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 and amounts drawn under the CS Revolving Line of Credit.
Loss on extinguishment of debt. Loss on extinguishment of debt was $1.4 million for the nine months ended September 30, 2022 related to the amendment to the Credit Suisse Credit Agreement in January 2022. There have been no comparable amendments in the nine months ended September 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 $5.7 million for the nine months ended September 30, 2023, compared to $8.4 million for the nine months ended September 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 nine months ended September 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 September 30, 20222023 and December 31, 2021,2022, we had cash, cash equivalents and restricted cash of $24.1$41.3 million and $163.2$27.3 million, respectively. As of September 30, 20222023 and December 31, 2021, borrowings under 2022, the revolvingCompany had $13.0 million (of its total cash of $41.3 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 September 30, 2023, the available balance on the CS Revolving Line of $120.0 million. Credit was $80 million, and as of November 8, 2023 such line of credit was fully drawn. As of September 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 September 30, 2023 and December 31, 2022, the Borrower had $14.0 million (of its total cash of $41.3 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$715.4 million as of September 30, 2022 and2023 and negative cash flows from operations.
We expectAs discussed in Note 3, “Going Concern,” the Company is pursuing several initiatives to generateimprove its profitability, liquidity, cash flow and net cash, such as controlling and reducing operating lossesexpenses, limiting capital expenditures, selling assets and minimal cash flows from operations for the foreseeable future due to the investments we intend to continue to make in acquisitions, expansion of operations and dueexiting certain markets. The Company’s efforts to additionalreduce 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.
In the third quarter of 2023, the Company implemented a plan designed 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 we expect to incur in future periods. In connection with operatingits restructuring plan, in the third quarter of 2023, the Company reduced staffing by approximately 842 employees, or 21% of its workforce. Approximately 52% of the workforce reductions were attributable to exiting operations in certain markets and 48% of the workforce reductions represents organizational restructuring. These actions are expected to yield approximately $65 million of annualized cost reductions beginning in the third quarter of 2023 and through the end of 2024. The Company recorded a restructuring charge in the third quarter of 2023 of approximately $1.7 million, the majority of which will be paid in 2023 and a lesser amount in 2024, consisting primarily of employee-related costs, such as a public company. As a result, we may require additional capital resources to execute strategic initiatives to grow our business.severance, retention and other contractual termination benefits.
SinceAs previously-disclosed, as part of the Company’s effort to generate additional liquidity, on September 25, 2023, the Company consummated the Sale Transaction, selling substantially all of the assets associated with the operation of Cano Health’s senior-focused primary care centers in Texas and Nevada to CenterWell for a total transaction value to the Company of approximately $66.7 million, consisting of approximately $35.4 million in cash paid at closing (of which approximately $1.9 million was withheld for satisfaction of potential indemnification claims), plus the release of certain liabilities owed by Cano Health or its affiliates primarily for centers built under commercial agreements entered into with affiliates of Humana. The net cash proceeds from the Sale Transaction enabled the Company to repay a portion of its outstanding commitment under its revolving credit facility, for which Credit Suisse AG, Cayman Islands Branch is the administrative agent, such that the financial maintenance covenant of this facility was not applicable for the testing period ending September 30, 2023.
As part its plan to improve cash flow and liquidity, the Company also closed operations within its medical centers in California, New Mexico and Illinois, actions that were substantially completed by the end of the third quarter of 2023. The Company is on track to also exit its Puerto Rico operations by the beginning of 2024.
Other ongoing initiatives to generate additional liquidity include the Company’s continued pursuit of its strategic review, which may result in the sale of all or substantially all of the Company’s business and/or the sale of certain lines of business, such as the Company’s Medicaid business in Florida, pharmacy assets and other specialty practices.
Consistent with the terms and conditions of the 2023 Side-Car Amendment, discussed below, the Company has formally launched, announced and continues to pursue a comprehensive process to identify and evaluate interest in a sale of the Company, or all or substantially all of its assets, including having engaged advisors to assist in the process. While these efforts have yet to yield a sale transaction, the Company’s process remains ongoing. There is no assurance that this process will result in any transaction.
Each of the 2023 Side-Car Credit Agreement and the Credit Suisse Credit Agreement contains a covenant that will require the Company’s 2023 Form 10-K to not contain any qualification or explanatory paragraph as to the Company’s “going concern” status (except for any such qualification or explanatory paragraph pertaining to (i) the maturity of certain indebtedness occurring within 12 months of the relevant audit or (ii) any breach or anticipated breach of any financial covenant). Based on the amount of the Company’s available liquidity at November 9, 2023 and its current forecast of available liquidity for the 12 months following the anticipated filing of its 2023 Form 10-K, the Company expects that it will be required to seek a waiver of this “going concern” covenant from the respective lenders under each of the Side-Car Credit Agreement and the Credit Suisse Credit Agreement on or before April 22, 2024, being the earlier of (i) when the Company will be required to deliver to the administrative agents under each of the 2023 Side-Car Credit Agreement and the Credit Suisse Credit Agreement its 2023 Form 10-K without any such “going concern” qualification or explanatory paragraph, being due March 30, 2024, followed by a 30-day cure period and (ii) such time that the Company would be required to cure any breach of the financial maintenance covenant under the Credit Suisse Credit Agreement for the period ending December 31, 2021, we did2023. Capitalized terms used, but not raisedefined, in this Note are defined in Note 12, “Debt.”
Under each of the Side-Car Credit Agreement and the Credit Suisse Credit Agreement, if the Borrower is unable to obtain such waiver from the respective lenders and fails to cure such default within a 30-day period after the earlier of (i) receipt by the Borrower of written notice thereof from the respective administrative agent under each of the credit agreements and (ii) the date on which a Company “responsible officer” has knowledge of such default, then the administrative agent under each such facility may, and acting at the direction or request of the requisite lenders, will, among other things, immediately terminate all commitments under the Side-Car Credit Agreement and the Credit Suisse Credit Agreement and accelerate the maturity of all principal, interest and other amounts due thereunder.
Under the Company’s Senior Notes, if (i) the Borrower is unable to obtain such waivers from the respective lenders; (ii) the lenders under either the 2023 Side-Car Credit Agreement and/or the Credit Suisse Credit Agreement accelerate 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 of the Senior Notes will be entitled to immediately accelerate the maturity of the Senior Notes, including all principal, interest and other amounts due thereon. The Company expects that it would not have sufficient liquidity to repay all principal, interest and other costs and expenses if one or more of the Side-Car Credit Agreement, the Credit Suisse Credit Agreement and/or the Senior Notes were terminated and accelerated under these circumstances.
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 capitalfour 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 and, accordingly, 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 was 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.
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.
The Credit Suisse Credit Agreement also contains a financial maintenance covenant (which is for the benefit 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 of 6.5:1 as of September 30, 2023 and 5.5:1 as of the December 31, 2023. This financial maintenance covenant 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 September 30, 2023, while the Company would not have complied with this financial maintenance covenant if it were applicable, the Company used a portion of the proceeds from the Sale Transaction to repay a portion of its outstanding commitment under this facility such that the financial maintenance covenant of this facility was not applicable for the testing period ending September 30, 2023. Following such repayment, the Company fully re-borrowed amounts available under the CS Revolving Line of Credit to ensure that the Company had access to liquidity. However, the Company currently expects that when it seeks a waiver of the “going concern” covenant discussed above, it will at the same time seek a waiver of this financial maintenance covenant for the period ending December 31, 2023.
Under the 2023 Term Loan Agreement, if the Borrower is unable to obtain such waiver from the lenders under the Credit Suisse Credit Agreement, or cure any such noncompliance, then the administrative agent under the 2023 Term Loan Agreement will be entitled to, and acting at the direction of the requisite lenders, will, 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 is unable to obtain such waiver from the lenders under the Credit Suisse Credit Agreement, or cure any such noncompliance; (ii) the lender under such facility or under the 2023 Term Loan 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 of the Senior Notes will be entitled to immediately accelerate the maturity of the Senior Notes, including all principal, interest and other amounts due thereon.
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.
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 financing. We completed seven acquisitionsnot permitted by the Side-Car Credit Agreement. The Side-Car Credit Agreement also provides for totalannual excess cash considerationflow mandatory prepayments. The mandatory prepayments under the Side-Car Credit Agreement are substantially consistent with the Credit Suisse Credit Agreement. Mandatory prepayments of $5.0the 2023 Term Loan and the CS Term Loan must be offered pro rata to the lenders thereof.
Credit Suisse Credit Agreement
Pursuant to the Credit Suisse Credit Agreement, the Company, through the Borrower, has a senior secured term loan (as amended, the “CS Term Loan”) and a 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 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 certain repricing transactions and customary breakage costs.
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 reached these applicable corporate ratings. The amendment represented a partial extinguishment and resulted in a write-off of deferred issuance costs of $1.4 million, inwhich was recorded as a loss on extinguishment of debt for the nine months ended September 30, 20222022. During the nine months ended September 30, 2023, the SOFR exceeded the credit spread adjustment of 0.50%, resulting in monthly variable interest rates for the quarter. As of September 30, 2023, the effective interest rate of the CS Term Loan and have deferred paymentsthe CS Revolving Line of Credit was 9.89%.
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 September 30, 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. See "Going Concern" in Note 3 and "Credit Agreements General" discussed in Note 12.
issued $39.3
In 2023, we expect to incur approximately $81.0 million in equitycash 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 Q3 2023 Form 10-Q) and CS Revolving Line of Credit will not be sufficient to fund our operating and capital needs for at least the next 12 months from the date of issuance of the unaudited condensed consolidated financial statements included in this Q3 2023 Form 10-Q.
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 17,18, "Income Taxes"Taxes," in our unaudited condensed consolidated financial statements.
We believe that our cash, cash equivalents and restricted cash along with our expected cash generation through operations and revolving linestatements of credit will be sufficient to fund our operating and capital needs for at least the next 12 months from the date of issuance of these unaudited condensed consolidated financial statements. Our assessment of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties. Our actual results could vary because of, and our future capital requirements will depend on, many factors, including our growth rate, medical expenses, and the timing and extent of our expansion into new markets. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. In the event that additional capital is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations, and financial condition would be adversely affected.Q3 2023 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, | | Nine Months Ended September 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 | $ | (84,666) | | $ | (84,158) | |
Net cash (used in) provided by investing activities | | Net cash (used in) provided by investing activities | | 8,846 | | | (48,153) | |
Net cash (used in) provided by financing activities | | Net cash (used in) provided by financing activities | | 89,822 | | | (6,762) | |
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 | | 14,002 | | | (139,073) | |
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 | $ | 41,331 | | $ | 24,097 | |
Operating Activities
For the nine months ended September 30, 2022,2023, net cash used in operating activities was $84.2$84.7 million, a decreasean increase of $10.3$0.5 million in cash outflows, compared to net cash used in operating activities of $94.5$84.2 million for the nine months ended September 30, 2021.2022. Significant changes impacting net cash used in operating activities were as follows:
An increaseA decrease in cash of $78.5$295.5 million related to net loss and non-cash charges and credits, primarily related to the following:
•Increase in net losses of $9.4 million$696.4 million;
•Decrease in stock-based compensation expense of $35.4 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,$17.0 million; and
•IncreaseDecrease in lossgain related to the change in the fair value of warrant liabilities of $32.9 million,$14.1 million;
•Increase in stock-based compensation expenserelated to goodwill impairment loss of $29.5$354.0 million.
A decreaseAn increase in cash of $68.1$297.6 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 nine months ended September 30, 2022,2023, net cash used inprovided by investing activitiesactivities was $48.2$8.8 million, a decreasean increase of $1.1 billion$57.0 million in cash outflowsinflows, compared to net cash used in investing activities of $1.1 billion$48.2 million for the nine months ended September 30, 20212022, primarily due primarily to a $33.5 million increase in cash provided by the Sale Transaction and 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 used inprovided by financing activities was $6.8$89.8 million during the nine months ended September 30, 2022, a decrease2023, an increase of $1.4 billion$96.6 million, compared to net cash provided byused in financing activities of $1.4 billion during$6.8 million during the nine months ended September 30, 20212022, 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 September 30, | | Nine Months Ended September 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 | | $ | (491,697) | | | (112,011) | | | $ | (823,027) | | | $ | (126,660) | | |
Interest income | Interest income | | (4) | | | (1) | | | (7) | | | (4) | | | Interest income | | (258) | | | (4) | | | (357) | | | (7) | | |
Interest expense | Interest expense | | 16,451 | | | 16,023 | | | 42,868 | | | 36,363 | | | Interest expense | | 29,646 | | | 16,451 | | | 79,870 | | | 42,868 | | |
Income tax expense (benefit) | Income tax expense (benefit) | | (1,248) | | | 547 | | | 641 | | | (762) | | | Income tax expense (benefit) | | (145) | | | (1,248) | | | (2,017) | | | 641 | | |
Depreciation and amortization expense | Depreciation and amortization expense | | 25,343 | | | 16,955 | | | 64,215 | | | 30,746 | | | Depreciation and amortization expense | | 26,740 | | | 25,343 | | | 81,213 | | | 64,215 | | |
EBITDA | EBITDA | $ | (71,469) | | $ | (31,316) | | $ | (18,943) | | $ | (50,897) | | | EBITDA | | $ | (435,714) | | | (71,469) | | | $ | (664,318) | | | $ | (18,943) | | |
Stock-based compensation | Stock-based compensation | | 11,041 | | | 9,451 | | | 42,641 | | | 13,130 | | | Stock-based compensation | | (4,083) | | | 11,041 | | | 7,285 | | | 42,641 | | |
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 | | | |
Goodwill impairment loss | | Goodwill impairment loss | | 354,000 | | | — | | | 354,000 | | | — | | |
| Transaction costs (1) | | Transaction costs (1) | | 8,215 | | | 6,733 | | | 28,302 | | | 24,445 | | |
Restructuring and other | | Restructuring and other | | 3,758 | | | 5,245 | | | 10,441 | | | 8,846 | | |
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 | | 13,100 | | | 900 | | | (2,800) | | | (9,525) | | |
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 | | (5,365) | | | 65,721 | | | (5,696) | | | 8,383 | | |
Credit loss on other assets | | Credit loss on other assets | | — | | | — | | | 62,000 | | | — | | |
Adjusted EBITDA | Adjusted EBITDA | $ | 42,453 | | $ | 13,649 | | $ | 116,842 | | $ | 16,112 | | | Adjusted EBITDA | | $ | (66,089) | | | $ | 18,171 | | $ | $ | (210,786) | | | $ | 57,275 | | |
(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 $0.4 million and $1.7 million and $1.3 millionof corporate development payroll costs for the three months ended September 30, 2023 and 2022, respectively, and 2021, respectively,$1.2 million and $4.3 million and $3.0 millionof corporate development payroll costs for the nine months ended September 30, 2023 and 2022, and 2021, respectively, of corporate development payroll costs.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 $24.3 million and $59.6 million for the respective three and nine months ended September 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. Our management, with the participation of our Chief Executive Officer and the Chief Financial Officer, under the oversight of the Board, conducted an evaluation of the effectiveness of ourThe Company maintains 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-Qthat are designed to ensure that information required to be disclosed by us in the Company's reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’sSEC's rules and forms, and to ensure that such information is accumulated and communicated to our management, including ourthe Company's Chief Executive Officer and theInterim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation,As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), our management, includingwith the participation of our Chief Executive Officer and Interim Chief Financial Officer, has concluded thatevaluated the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)as of the end of the fiscal period covered by this Q3 2023 Form 10-Q. As described below under “Changes in Internal Control over Financial Reporting,” the Company has identified a deficiency in the Company's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) which we consider to be a "material weakness." After the third quarter of 2023, we have implemented additional controls and procedures in order to remediate this deficiency and we are continuing to assess additional controls that may be required to remediate this deficiency. In light of this material weakness, we performed additional analysis as deemed necessary to ensure that our financial statements were not prepared in accordance with GAAP, and the Company's Chief Executive Officer and Interim Chief Financial Officer have concluded that as of the end of the period covered by this Q3 Form 10-Q, the Company's disclosure controls and procedures remained effective as a result of the material weaknesses discussed in our Form 10-K for the year ended December 31, 2021.September 30, 2023.
Changes in Internal Control over Financial Reporting
While the Company has not completed its SOX 404 assessment for the fiscal year ending December 31, 2023, during the third quarter of 2023, as part of assessing the effectiveness of the Company's internal control over financial reporting as of September 30, 2023 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”) the Company identified a deficiency in internal control over financial reporting that we consider to be a material weakness. The PCAOB’s Auditing Standard No. 5 defines a “material weakness” as “a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.” The identified material weakness was due to an operating deficiency involving the preparation of sufficient documentation and the timely review regarding significant inputs and assumptions, including prospective financial information, relied upon in impairment analyses used in the preparation of the Company’s quarterly condensed consolidated financial statements. Such analyses include the interim quantitative goodwill and long-lived asset impairment tests. Accounts that could have been impacted by this deficiency include goodwill, payor relationships, net, other intangibles, net and property and equipment, net.
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 adjustmentsweakness has not resulted in an error in the financial statement close process, (ii)information presented for the three and nine months ended September 30, 2023 or in any of the Company’s other publicly-disclosed financial statements. In light of this material weakness, we performed additional analyses as deemed necessary to ensure that our failurefinancial statements were prepared in accordance with GAAP. Specifically, management has engaged third party specialists who assisted in the processpreparation and review of accounting for business combinations related to the designimpairment analyses performed by Management, specifically the interim quantitative goodwill 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.long-lived asset impairment tests.
Management is committed to maintaining a strong internal control environment, and while this material weaknesses haveweakness has not been remediated as of the date of the filing of this Quarterly Report onQ3 2023 Form 10-Q. See “Part II. Other Information, Item 1A. Risk Factors − Risks Related to Being a Public Company − Our independent registered public accountants have identified a number of material weaknesses in our internal control over financial reporting. If we are unable to remediate the material weaknesses, or if other control deficiencies are identified, we may not be able to report our financial results accurately, prevent fraud or file our periodic reports as a public company in a timely manner" to our Form 10-K for the fiscal year ended December 31, 2021.
Our10-Q, 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 progressputting forth significant effort toward remediating the underlying causes of this material weakness, by enhancing the review procedures and ensuring sufficient documentation regarding significant inputs and assumptions related to prospective financial information is maintained. The Company is continuing to evaluate additional steps in order to remediate the material weaknesses.weakness. Such additional steps may include enhanced procedures related to the review and validation of significant inputs and assumptions related to prospective financial information relied upon in impairment analyses. We believe that these actions, including the steps outlined above and the Company’s continuing evaluation of additional controls and procedures, will strengthen our internal control over financial reporting and ultimately address the material weakness relating to the procedures concerning the timely review of significant inputs and assumptions relied upon in impairment analyses. We have discussed this material weakness, these corrective actions and plans with the Audit Committee and our external auditors. Currently, while the Company is not aware of any material weaknesses in its internal control over financial reporting, other than as described above under this section, there can be no assurance that, as a result of the Company’s ongoing evaluation of internal control over financial reporting, it will not identify additional significant deficiencies, and that any such deficiencies, either alone or in combination with others, will not be considered additional material weaknesses or that such evaluation will be completed in the time required. Although we believe our remediation efforts will be effective in remediating thethis material weaknesses,weakness, 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.weakness. The material weaknessesweakness will not be considered fully addressed until the enhanced policies and procedures over documentation havehas been in operation for a sufficient period of time for our management to conclude that the material weaknesses haveweakness has been fully remediated.It is possible that such remediation will not be completed at December 31, 2023, in which case we will continue to report the material weakness in management’s assessment of internal control over financial reporting until it is fully remediated.
Notwithstanding thesethis identified material weaknesses,weakness, as of the date of the filing of this Quarterly Report onQ3 2023 Form 10-Q, our management, including our Chief Executive Officer and Interim Chief Financial Officer, believes that the unaudited condensed consolidated financial statements contained in this Quarterly Report onQ3 2023 Form 10-Q fairly present, in all material respects, our
financial condition, results of operations and cash flows for the periods reported herein and that such financial statements are presented in conformity with GAAP.
Other than as set forth above, there was no other significant change in internal control over financial reporting that occurred during the three and nine months ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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.Q3 2023 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" inof our 2022 Form 10-K for the year ended December 31, 2021.and Part 2, Item 1A of our Q1 2023 Form 10-Q and Q2 2023 Form 10-Q.
Item 2. Unregistered Sales of Equity Securities, and Use of Proceeds and Issuer Purchases of Equity Securities
Recent Sales of Unregistered Securities
On August 16, 2022, the Company issued 5,859,438 shares of Class A commons stock to Belen Health, LLC pursuant to an asset purchase agreement, dated as of August 5, 2022, by and among Cano Health, Inc., Cano Health, LLC, Belen Health, LLC and Enrique Zamora. 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 16, 2022, the Company issued 281,629 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.None
Recent Repurchases of Equity Securities
None.
Issuer Purchases 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 September 12, 2023, David Armstrong, the Company’s Chief Compliance Officer & General Counsel (the “Executive”), terminated the Rule 10b5-1 trading plan (the “10b5-1 Plan”) that he entered into on June 27, 2023, without having sold any shares under such plan, as among other things, the 10b5-1 Plan was terminated prior to the end of the mandatory cooling-off period which, absent such termination, would have been September 27, 2023.
Item 6. Exhibits
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Exhibit Number | | Description |
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3.1 | | |
3.2 | | |
3.3 | | |
10.13.4 | | |
4.1^ | | |
4.2^ | | |
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10.1+ | | |
10.2+ | | |
10.3+ | | |
10.4+ | | Asset Purchase Agreement, dated September 25, 2023, by and among Primary Care Holdings II, LLC, Cano Health, LLC, Cano Health Texas, PLLC and Cano Health Nevada, PLLC (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on September 29, 2023). |
10.5+ | | |
10.6+ | | |
10.7^ | | |
10.8+ | | |
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10.9+ | |
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10.10+ | | |
10.11+ | | |
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10.12+ | | |
10.13+ | | |
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, 20222023 | By: | /s/ Dr. Marlow HernandezMark Kent | | Chief Executive Officer |
| | Dr. Marlow HernandezMark Kent | | (Principal Executive Officer) |
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November 9, 20222023 | By: | /s/ Brian D. KoppyEladio Gil | | Interim Chief Financial Officer |
| | Brian D. KoppyEladio Gil | | (Principal Financial Officer) |
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November 9, 2022 | By: | /s/ Mark Novell | | Chief Accounting Officer | | |
| | Mark Novell | | (Principal Accounting Officer) |
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