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 JuneSeptember 30, 2023
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 AugustNovember 9, 2023 the registrant had 285,474,6302,887,608 shares of Class A common stock outstanding and 253,208,9652,518,894 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
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 long-term strategypursuing several initiatives designed to focusimprove 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 business onstrategic direction, including the following measures, among others: (i) focusing our membership base towards Medicare Advantage and ACO Reach in markets that can deliver positive cash flow performance; (b)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 plans to exit the California, New Mexico and Illinois marketsPuerto Rico operations by the fallbeginning of 2023; (c) our2024; and (iii) performing a strategic review of our medical centers locatedMedicaid business in TexasFlorida, pharmacy assets and Nevadaother specialty practices; and to generate additional liquidity, we are reviewing the sale of all of our assets related to servicing our Medicaid members; (d)(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 our interest expense will increase by approximately $18.0 million in 2023 driven by the 2023 Term Loan; (d) our reduction in expected capital expenditures; (e) our expectation that in 2023, we will incur approximately $81.0$81 million in cash interest payments (which excludes approximately $19.0$19 million of non-cash PIK interest under the 2023 Term Loan) and approximately $15.0$15 million in capital expenditures; and (f) our expectation that, having secured the 2023 Side-Car Amendment on August 10, 2023, we will repay a significant portion of the CS Revolving Line of Credit by the end of September 2023;
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. 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 the shift in our strategic direction, such as our plans to focus our membership base towards Medicare Advantage and ACO Reach; sell certain assets and operations and exiting California, New Mexico and Illinois markets by the fall of 2023; exit our Puerto Rico operations by January 1, 2024, conduct a strategic review of the Company's Medicaid business in Florida, medical centers located in Texas and Nevada, pharmacy assets and other specialty practices; consolidating underperforming owned medical centers; lowering third party medical costs through negotiations with payors; reducing operating expenses, including reduction of permanent staff; significantly reducing all other non-essential spending; and delaying renovations and other capital projects, including our belief that the Company will be better positioned to achieve positive financial performance upon completion of these initiatives, as well as our expectation to remain focused on driving growth through filling capacity in our planned remaining existing centers and delivering the same high-quality, healthcare to our members and delivering positive outcomes, while more effectively controlling costs; and
ix.our expectations regarding our plan to further restructure our operations to streamline and simplify the organization to improve efficiency and reduce costs, including workforce reductions, and the expected reduction in our selling, general and administrative costs in future periods compared to current levels, including reducing staffing by approximately 700 employees, or 17% of our workforceexpectation that our restructuring actions taken in the third quarter of 2023 with approximately 40% of the workforce reductions being attributable to exiting operations in certain markets, with the remainder attributable to other operating centers and our expectation that these actions are expected to yield approximately $50$65 million of annualized cost reductions, beginningwhich began in the third quarter of 2023 and through the end of 2024,2024;
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 result in our recording a restructuring charge inthus enable it to regain compliance with the third quarterprice criteria of 2023Section 802.01C of approximately $4 million, the majority of which is expectedNYSE Listed Company Manual (the “Listing Rule”), as well as to allow the Company’s common stock to be paidmore 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 a lesser amountits belief that its remediation efforts will be effective in 2024, consisting primarily of employee-related costs, such as severance, retention and other contractual termination benefits.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 Realizing Equity, Access,REACH and Community Health ("ACO REACH") and Medicare patients under Accountable Care Organizations ("ACO") programs as it relates to benchmarks and shared savings;
ii.unexpected developments that adversely impact our ability to execute our business plan and strategies, such as due to (a) unexpected changes in the payor mix of our patients and potential decreases in our reimbursement rates; (b) unexpected developments with respect to the renegotiation, non-renewal or termination of capitation agreements with health plans; (c) difficulties and/or delays in procuring sufficient space on terms that are acceptable to us or that the costs of procuring and outfitting such space becomes uneconomical, such as due to the prevailing difficult conditions in the global supply chain environment; (d) less than expected consumer acceptance of our services and offerings and/or less than expected member retention rates; (e) greater than anticipated competition in our industry, less than anticipated advantages of our services, products and technology over competing services, products and technology existing in the market, and other competitive factors, including with respect to technological capabilities, cost and scalability; (f) difficulties or delays in exiting certain market and/or selling the Company or all or substantially all of its assets, such as due to tightness in the credit markets, higher inflation or other factors, regulatory disruptions or delays and/or securing third party agreements and approvals; (g) unexpected developments that adversely impact our ability to execute our plan to identify opportunities to maximize shareholder value, including the sale of the Company, such as due to our inability to consummate one or more transactions, whether due to higher interest rates, regulatory restrictions or other market factors; andand/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;
iii.unexpected developments that adversely impact our ability to achieve our expected financial results, suchbusiness, as due to (a) unexpected changes in anticipated Medicare reimbursement rates or changes in the rules governing the Medicare program; (b) unexpected changes in reimbursements by third-party payors and payments by individuals; (c) unexpected changes in Medicare’s risk adjustment payment system; (d) unexpected developments with respect to our estimates of revenues and refund liabilities that we recognize under our risk agreements with health plans; (e) unexpected developments with respect to our estimates about our third-party medical costs (including incurred but not report medical service accruals), including our expectation that our third-party medical costs will increase given the healthcare spending trends within the Medicare population;
iv.unanticipated changes in laws, rules and/or regulations, suchwell as those that result in less than expected payments from health plans and other payors;
v.less than anticipated sources of liquidity, such as due to (a) delays in or our inability to complete non-core asset sales, in whole or in part; (b) unanticipated demands on our available sources of cash; (c) tightness in the credit or M&A markets; (d) unexpected changes in our future capital requirements which depend on many factors, including our growth rate, medical expenses and/or our review of all aspects of our value-based care platform;
iv
vi.unexpected developments regarding the outcome of any pending legal or regulatory proceedings;
vii.unexpected developments impacting our tax positions, such as our deferred tax assets not being realized in future periods in expected amounts, which could result in adjustments to our valuation allowances and provision for income taxes and/or unexpected developments in our tax audit;
viii.unexpected developments with respect to the shift in our strategic direction that could adversely affect our plans to reduce our costs and expenses and/or generate additional sources of liquidity, such as, among other things, our inability, in whole or in part to complete one or more asset sales and/or negotiate for better payment terms and conditions, such that we are not unable to achieve positive financial performance on an acceptable timeline; and/or less than expected benefits from and/or higher than expected costs and expenses related to our restructuring program, such as delays in realizing or less than the expected cost reductions.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) | (in thousands, except share and per share data) | | June 30, 2023 | | December 31, 2022 | (in thousands, except share and per share data) | | September 30, 2023 | | December 31, 2022 |
| Assets | Assets | | | | | Assets | | | | |
| Current assets: | Current assets: | | Current assets: | |
| Cash, cash equivalents and restricted cash | Cash, cash equivalents and restricted cash | | $ | 27,721 | | | $ | 27,329 | | Cash, cash equivalents and restricted cash | | $ | 41,331 | | | $ | 27,329 | |
| Accounts receivable, net of unpaid service provider costs | Accounts receivable, net of unpaid service provider costs | | 107,164 | | | 233,816 | | Accounts receivable, net of unpaid service provider costs | | 87,499 | | | 233,816 | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | | 31,450 | | | 79,603 | | Prepaid expenses and other current assets | | 15,894 | | | 79,603 | |
| Total current assets | Total current assets | | 166,335 | | | 340,748 | | Total current assets | | 144,724 | | | 340,748 | |
| Property and equipment, net | Property and equipment, net | | 129,330 | | | 131,325 | | Property and equipment, net | | 94,153 | | | 131,325 | |
| Operating lease right-of-use assets | Operating lease right-of-use assets | | 174,581 | | | 177,892 | | Operating lease right-of-use assets | | 149,671 | | | 177,892 | |
| Goodwill | Goodwill | | 480,044 | | | 480,375 | | Goodwill | | 88,918 | | | 480,375 | |
| Payor relationships, net | Payor relationships, net | | 551,913 | | | 567,704 | | Payor relationships, net | | 543,810 | | | 567,704 | |
| Other intangibles, net | Other intangibles, net | | 199,761 | | | 226,059 | | Other intangibles, net | | 185,372 | | | 226,059 | |
| Other assets (net of allowance for credit losses of $62.0 million as of June 30, 2023) | | 5,358 | | | 4,824 | | |
| Other assets | | Other assets | | 5,283 | | | 4,824 | |
| Total assets | Total assets | | $ | 1,707,322 | | | $ | 1,928,927 | | Total assets | | $ | 1,211,931 | | | $ | 1,928,927 | |
| Liabilities and stockholders' equity | | | | | |
| Liabilities and stockholders' deficit | | Liabilities and stockholders' deficit | | | | |
| Current liabilities: | Current liabilities: | | Current liabilities: | |
| Accounts payable and accrued expenses (Related parties comprised $2,992 and $2,669 as of June 30, 2023 and December 31, 2022, respectively) | | $ | 124,821 | | | $ | 105,733 | | |
| Accounts payable and accrued expenses (Related parties comprised $5,922 and $2,669 as of September 30, 2023 and December 31, 2022, respectively) | | 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 | Current portion of notes payable, net of debt issuance costs | | 109,667 | | | 6,444 | | Current portion of notes payable, net of debt issuance costs | | 116,238 | | | 6,444 | |
| Current portion of finance lease liabilities | Current portion of finance lease liabilities | | 2,972 | | | 1,686 | | Current portion of finance lease liabilities | | 3,125 | | | 1,686 | |
| | Current portions due to sellers | Current portions due to sellers | | 46,506 | | | 46,016 | | Current portions due to sellers | | 47,396 | | | 46,016 | |
| Current portion of operating lease liabilities | Current portion of operating lease liabilities | | 24,958 | | | 24,068 | | Current portion of operating lease liabilities | | 22,964 | | | 24,068 | |
| Other current liabilities | Other current liabilities | | 28,010 | | | 24,491 | | Other current liabilities | | 40,270 | | | 24,491 | |
| Total current liabilities | Total current liabilities | | 336,934 | | | 208,438 | | Total current liabilities | | 365,934 | | | 208,438 | |
| Notes payable, net of debt issuance costs | Notes payable, net of debt issuance costs | | 922,232 | | | 997,806 | | Notes payable, net of debt issuance costs | | 951,339 | | | 997,806 | |
| Long term portion of operating lease liabilities | Long term portion of operating lease liabilities | | 163,972 | | | 166,347 | | Long term portion of operating lease liabilities | | 140,067 | | | 166,347 | |
| Warrant liabilities | Warrant liabilities | | 7,042 | | | 7,373 | | Warrant liabilities | | 1,677 | | | 7,373 | |
| Long term portion of finance lease liabilities | Long term portion of finance lease liabilities | | 7,770 | | | 3,364 | | Long term portion of finance lease liabilities | | 7,663 | | | 3,364 | |
| Due to sellers, net of current portion | Due to sellers, net of current portion | | 1,050 | | | 15,714 | | Due to sellers, net of current portion | | 1,500 | | | 15,714 | |
| Long term portion of contingent consideration | Long term portion of contingent consideration | | 1,400 | | | 2,800 | | Long term portion of contingent consideration | | — | | | 2,800 | |
| Other liabilities | Other liabilities | | 31,149 | | | 32,810 | | Other liabilities | | 2,852 | | | 32,810 | |
| Total liabilities | Total liabilities | | 1,471,549 | | | 1,434,652 | | Total liabilities | | 1,471,032 | | | 1,434,652 | |
| Stockholders’ Equity | | |
| Shares of Class A common stock $0.0001 par value (6,000,000,000 shares authorized and 281,517,626 and 224,118,566 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively) | | 28 | | | 22 | | |
| Shares of Class B common stock $0.0001 par value (1,000,000,000 shares authorized and 253,208,965 and 268,794,608 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively) | | 25 | | | 27 | | |
Stockholders’ Deficit1 | | 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) | | 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) | | 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 | Additional paid-in capital | | 601,589 | | | 538,614 | | Additional paid-in capital | | 593,271 | | | 538,614 | |
| Accumulated deficit | Accumulated deficit | | (454,935) | | | (286,032) | | Accumulated deficit | | (715,422) | | | (286,032) | |
| | Total Stockholders' Equity before non-controlling interests | | 146,707 | | | 252,631 | | |
| Total Stockholders' Deficit before non-controlling interests | | Total Stockholders' Deficit before non-controlling interests | | (122,098) | | | 252,631 | |
| Non-controlling interests | Non-controlling interests | | 89,066 | | | 241,644 | | Non-controlling interests | | (137,003) | | | 241,644 | |
| Total Stockholders' Equity | | 235,773 | | | 494,275 | | |
| Total Liabilities and Stockholders' Equity | | $ | 1,707,322 | | | $ | 1,928,927 | | |
| Total Stockholders' Deficit | | Total Stockholders' Deficit | | (259,101) | | | 494,275 | |
| Total Liabilities and Stockholders' Deficit | | Total Liabilities and Stockholders' Deficit | | $ | 1,211,931 | | | $ | 1,928,927 | |
1All 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 OPERATIONS
(UNAUDITED)
| | | Three Months Ended
June 30, | | Six Months Ended June 30, | | Three Months Ended
September 30, | | Nine Months Ended September 30, |
| (in thousands, except share and per share data) | (in thousands, except share and per share data) | | 2023 | | 2022 | | 2023 | | 2022 | | (in thousands, except share and per share data) | | 2023 | | 2022 | | 2023 | | 2022 | |
| Revenue: | Revenue: | | | | | | | | | | Revenue: | | | | | | | | | |
| Capitated revenue | Capitated revenue | | $ | 743,324 | | | $ | 655,493 | | | $ | 1,584,397 | | | $ | 1,329,844 | | | Capitated revenue | | $ | 770,269 | | | $ | 625,895 | | | $ | 2,354,667 | | | $ | 1,955,739 | | |
| Fee-for-service and other revenue | Fee-for-service and other revenue | | 23,422 | | | 33,880 | | | 49,258 | | | 63,671 | | | Fee-for-service and other revenue | | 17,804 | | | 39,133 | | | 67,062 | | | 102,804 | | |
| Total revenue | Total revenue | | 766,746 | | | 689,373 | | | 1,633,655 | | | 1,393,515 | | | Total revenue | | 788,073 | | | 665,028 | | | 2,421,729 | | | 2,058,543 | | |
| Operating expenses: | Operating expenses: | | | Operating expenses: | | |
| Third-party medical costs | Third-party medical costs | | 769,629 | | | 541,317 | | | 1,477,960 | | | 1,077,097 | | | Third-party medical costs | | 706,922 | | | 489,565 | | | 2,184,882 | | | 1,566,661 | | |
| Direct patient expense (Related parties comprised $3,073 and $7,188 in the three months ended June 30, 2023 and 2022, respectively, and $3,064 and $4,518 in the six months ended June 30, 2023 and 2022, respectively) | | 56,757 | | | 52,647 | | | 125,184 | | | 113,323 | | | |
| Selling, general, and administrative expenses (Related parties comprised $1,452 and $2,496 in the three months ended June 30, 2023 and 2022, respectively, and $3,305 and $5,452 in the six months ended June 30, 2023 and 2022, respectively) | | 99,418 | | | 106,179 | | | 195,890 | | | 202,849 | | | |
| 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) | | 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) | | 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 | Depreciation and amortization expense | | 27,251 | | | 19,836 | | | 54,473 | | | 38,872 | | | Depreciation and amortization expense | | 26,740 | | | 25,343 | | | 81,213 | | | 64,215 | | |
| Transaction costs | Transaction costs | | 9,125 | | | 6,207 | | | 19,211 | | | 14,583 | | | Transaction costs | | 7,862 | | | 5,033 | | | 27,073 | | | 19,616 | | |
| Change in fair value of contingent consideration | Change in fair value of contingent consideration | | (11,800) | | | (5,764) | | | (15,900) | | | (10,425) | | | Change in fair value of contingent consideration | | 13,100 | | | 900 | | | (2,800) | | | (9,525) | | |
| | Goodwill impairment loss | | Goodwill impairment loss | | 354,000 | | | — | | | 354,000 | | | — | | |
| Credit loss on other assets | Credit loss on other assets | | 62,000 | | | — | | | 62,000 | | | — | | | Credit loss on other assets | | — | | | — | | | 62,000 | | | — | | |
| Total operating expenses | Total operating expenses | | 1,012,380 | | | 720,422 | | | 1,918,818 | | | 1,436,299 | | | Total operating expenses | | 1,254,992 | | | 696,473 | | | 3,173,811 | | | 2,132,774 | | |
| Income (loss) from operations | Income (loss) from operations | | (245,634) | | | (31,049) | | | (285,163) | | | (42,784) | | | Income (loss) from operations | | (466,919) | | | (31,445) | | | (752,082) | | | (74,231) | | |
| Other income (expense): | Other income (expense): | | | Other income (expense): | | |
| Interest expense | Interest expense | | (26,719) | | | (13,134) | | | (50,224) | | | (26,418) | | | Interest expense | | (29,646) | | | (16,451) | | | (79,870) | | | (42,868) | | |
| Interest income | Interest income | | 90 | | | 2 | | | 99 | | | 3 | | | Interest income | | 258 | | | 4 | | | 357 | | | 7 | | |
| Loss on extinguishment of debt | Loss on extinguishment of debt | | — | | | — | | | — | | | (1,428) | | | Loss on extinguishment of debt | | — | | | — | | | — | | | (1,428) | | |
| Change in fair value of warrant liabilities | Change in fair value of warrant liabilities | | (1,677) | | | 30,175 | | | 331 | | | 57,337 | | | Change in fair value of warrant liabilities | | 5,365 | | | (65,721) | | | 5,696 | | | (8,383) | | |
| Other income (expense) | Other income (expense) | | 1,323 | | | 251 | | | 1,755 | | | 530 | | | Other income (expense) | | (900) | | | 354 | | | 855 | | | 884 | | |
| Total other income (expense) | Total other income (expense) | | (26,983) | | | 17,294 | | | (48,039) | | | 30,024 | | | Total other income (expense) | | (24,923) | | | (81,814) | | | (72,962) | | | (51,788) | | |
| Net income (loss) before income tax expense | Net income (loss) before income tax expense | | (272,617) | | | (13,755) | | | (333,202) | | | (12,760) | | | Net income (loss) before income tax expense | | (491,842) | | | (113,259) | | | (825,044) | | | (126,019) | | |
| Income tax expense (benefit) | Income tax expense (benefit) | | (1,872) | | | 809 | | | (1,872) | | | 1,889 | | | Income tax expense (benefit) | | (145) | | | (1,248) | | | (2,017) | | | 641 | | |
| Net income (loss) | Net income (loss) | | $ | (270,745) | | | $ | (14,564) | | | $ | (331,330) | | | $ | (14,649) | | | Net income (loss) | | $ | (491,697) | | | $ | (112,011) | | | $ | (823,027) | | | $ | (126,660) | | |
| Net income (loss) attributable to non-controlling interests | Net income (loss) attributable to non-controlling interests | | (129,992) | | | (9,231) | | | (162,427) | | | (9,976) | | | 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 | | $ | (140,753) | | | $ | (5,333) | | | $ | (168,903) | | | $ | (4,673) | | | |
| Net income (loss) attributable to Class A common stockholders2 | | 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, basic | | $ | (0.51) | | | $ | (0.03) | | | $ | (0.66) | | | $ | (0.02) | | | |
| Net income (loss) per share attributable to Class A common stockholders, diluted | | $ | (0.51) | | | $ | (0.03) | | | $ | (0.66) | | | $ | (0.03) | | | |
| Weighted-average shares outstanding: | | | | | | | | | | |
Net income (loss) per share attributable to Class A common stockholders, basic2 | | 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 | | Net income (loss) per share attributable to Class A common stockholders, diluted2 | | $ | (91.87) | | | $ | (23.34) | | | $ | (161.33) | | | $ | (27.86) | | |
Weighted-average shares outstanding2: | | Weighted-average shares outstanding2: | | | | | | | | | |
| Basic | Basic | | 274,640,987 | | | 210,053,037 | | | 257,317,776 | | | 200,783,129 | | | Basic | | 2,835,250 | | | 2,323,142 | | | 2,661,495 | | | 2,114,090 | | |
| Diluted | Diluted | | 527,849,952 | | | 474,580,471 | | | 257,317,776 | | | 465,310,563 | | | 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
(UNAUDITED)
Three and SixNine Months Ended JuneSeptember 30, 2023 and 2022
| | (in thousands, except shares) | (in thousands, except shares) | | | 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 | | | Amount | | Total Equity | |
| BALANCE—March 31, 2023 | | | 261,819,529 | | | $ | 26 | | | 263,638,069 | | | $ | 26 | | | $ | 594,994 | | | $ | (314,182) | | | $ | 223,537 | | | $ | 504,401 | | |
| 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 | | | — | | | — | | | — | | | — | | | 2,017 | | | — | | | — | | | 2,017 | | 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 | | | 1,469,730 | | | — | | | — | | | — | | | (4,984) | | | — | | | 4,984 | | | — | | 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 | | | — | | | — | | | — | | | — | | | 99 | | | — | | | — | | | 99 | | 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 | | | 10,429,104 | | | 1 | | | (10,429,104) | | | (1) | | | 9,463 | | | — | | | (9,463) | | | — | | Exchange of Class B common stock for Class A common stock | | | 10,254 | | | — | | | (10,254) | | | — | | | (157) | | | — | | | 157 | | | — | |
| Warrants Exercised | | | 7,799,263 | | | 1 | | | — | | | — | | | — | | | — | | | — | | | 1 | | |
| | Employee Stock Purchase Plan issuance | | Employee Stock Purchase Plan issuance | | | 8,748 | | | — | | | — | | | — | | | 781 | | | — | | | — | | | 781 | |
| | Net income (loss) | Net income (loss) | | | — | | | — | | | — | | | — | | | — | | | (140,753) | | | (129,992) | | | (270,745) | | Net income (loss) | | | — | | | — | | | — | | | — | | | — | | | (260,487) | | | (231,210) | | | (491,697) | |
| BALANCE—June 30, 2023 | | | 281,517,626 | | | $ | 28 | | | 253,208,965 | | | $ | 25 | | | $ | 601,589 | | | $ | (454,935) | | | $ | 89,066 | | | $ | 235,773 | | |
| 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) | (in thousands, except shares) | | | 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 | | | Amount | | Total Equity | |
| BALANCE—March 31, 2022 | | | 205,026,367 | | | $ | 20 | | | 276,722,704 | | | $ | 28 | | | $ | 464,262 | | | $ | (78,100) | | | $ | 451,567 | | | $ | 837,777 | | |
| BALANCE—June 30, 2022 | | 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 | Stock-based compensation expense, net | | | — | | | — | | | — | | | — | | | 17,783 | | | — | | | — | | | 17,783 | | Stock-based compensation expense, net | | | — | | | — | | | — | | | — | | | 11,041 | | | — | | | — | | | 11,041 | |
| Issuance of Class A common stock upon vesting of restricted stock units | Issuance of Class A common stock upon vesting of restricted stock units | | | 807,315 | | | 1 | | | — | | | (5,086) | | | — | | | 5,085 | | | — | | Issuance of Class A common stock upon vesting of restricted stock units | | | 18,606 | | | — | | | — | | | (8,271) | | | — | | | 8,271 | | | — | |
| | Issuance of common stock for acquisitions | | Issuance of common stock for acquisitions | | | 68,958 | | | — | | | — | | | — | | | 41,337 | | | — | | | — | | | 41,337 | |
| Exchange of Class B common stock for Class A common stock | Exchange of Class B common stock for Class A common stock | | | 12,195,270 | | | 1 | | | (12,195,270) | | | (1) | | | 18,682 | | | — | | | (18,682) | | | — | | 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 | | Employee Stock Purchase Plan issuance | | | 4,272 | | | — | | | — | | | — | | | 1,670 | | | — | | | — | | | 1,670 | |
| Impact of transactions affecting non-controlling interests | | Impact of transactions affecting non-controlling interests | | | — | | | — | | | — | | | — | | | (21,870) | | | — | | | 21,870 | | | — | |
| Net income (loss) | Net income (loss) | | | — | | | — | | | — | | | — | | | — | | | (5,333) | | | (9,231) | | | (14,564) | | Net income (loss) | | | — | | | — | | | — | | | — | | | — | | | (54,228) | | | (57,783) | | | (112,011) | |
| BALANCE—June 30, 2022 | | | 218,028,952 | | | $ | 22 | | | 264,527,434 | | | $ | 27 | | | $ | 495,642 | | | $ | (83,433) | | | $ | 428,739 | | | $ | 840,997 | | |
| BALANCE—September 30, 2022 | | 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
(UNAUDITED)
| | (in thousands, except shares) | (in thousands, except shares) | | | Class A Shares | | Class B Shares | | Additional Paid-in Capital | | Accumulated Deficit | | Non-Controlling Interests | | Total Equity | (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 | | | | | Shares | | Amount | | | Amount | | Total Equity | |
| BALANCE—December 31, 2022 | BALANCE—December 31, 2022 | | | 224,118,566 | | | 22 | | | 268,794,608 | | | 27 | | | 538,614 | | | (286,032) | | | 241,644 | | | $ | 494,275 | | BALANCE—December 31, 2022 | | | 2,241,186 | | | 22 | | | 2,687,946 | | | 27 | | | 538,614 | | | (286,032) | | | $ | 494,275 | |
| Stock-based compensation expense, net | Stock-based compensation expense, net | | | — | | | — | | | — | | | — | | | 11,368 | | | — | | | — | | | 11,368 | | Stock-based compensation expense, net | | | — | | | — | | | — | | | — | | | 7,285 | | | — | | | — | | | 7,285 | |
| Issuance of Class A common stock upon vesting of restricted stock units | Issuance of Class A common stock upon vesting of restricted stock units | | | 1,510,066 | | | — | | | — | | | (5,080) | | | — | | | 5,080 | | | — | | Issuance of Class A common stock upon vesting of restricted stock units | | | 37,018 | | | — | | | — | | | (10,064) | | | — | | | 10,064 | | | — | |
| Issuance of common stock for acquisitions | Issuance of common stock for acquisitions | | | 9,724,852 | | | 1 | | | — | | | — | | | 14,401 | | | — | | | — | | | 14,402 | | Issuance of common stock for acquisitions | | | 97,249 | | | 1 | | | — | | | — | | | 14,526 | | | — | | | — | | | 14,527 | |
| Exchange of Class B common stock for Class A common stock | Exchange of Class B common stock for Class A common stock | | | 15,585,643 | | | 2 | | | (15,585,643) | | | (2) | | | 13,033 | | | — | | | (13,033) | | | — | | Exchange of Class B common stock for Class A common stock | | | 166,110 | | | 2 | | | (166,110) | | | (2) | | | 12,876 | | | — | | | (12,876) | | | — | |
| Warrants Exercised | Warrants Exercised | | | 29,420,204 | | | 3 | | | — | | | — | | | 214 | | | — | | | — | | | 217 | | Warrants Exercised | | | 294,202 | | | 3 | | | — | | | — | | | 214 | | | — | | | — | | | 217 | |
| Debt discount - warrants issued | Debt discount - warrants issued | | | — | | | — | | | — | | | — | | | 45,698 | | | — | | | — | | | 45,698 | | Debt discount - warrants issued | | | — | | | — | | | — | | | — | | | 45,698 | | | — | | | — | | | 45,698 | |
| Employee Stock Purchase Plan issuance | Employee Stock Purchase Plan issuance | | | 1,158,295 | | | — | | | — | | | — | | | 1,143 | | | — | | | — | | | 1,143 | | Employee Stock Purchase Plan issuance | | | 20,330 | | | — | | | — | | | — | | | 1,924 | | | — | | | — | | | 1,924 | |
| Impact of transactions affecting non-controlling interests | Impact of transactions affecting non-controlling interests | | | — | | | — | | | — | | | — | | | (17,802) | | | — | | | 17,802 | | | — | | Impact of transactions affecting non-controlling interests | | | — | | | — | | | — | | | — | | | (17,802) | | | — | | | 17,802 | | | — | |
| Net income (loss) | Net income (loss) | | | — | | | — | | | — | | | — | | | — | | | (168,903) | | | (162,427) | | | (331,330) | | Net income (loss) | | | — | | | — | | | — | | | — | | | — | | | (429,390) | | | (393,637) | | | (823,027) | |
| BALANCE—June 30, 2023 | | | 281,517,626 | | | $ | 28 | | | 253,208,965 | | | $ | 25 | | | $ | 601,589 | | | $ | (454,935) | | | $ | 89,066 | | | $ | 235,773 | | |
| 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) | (in thousands, except shares) | | | Class A Shares | | Class B Shares | | Additional Paid-in Capital | | Accumulated Deficit | | Non-Controlling Interests | | Total Equity | (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 | | | | | Shares | | Amount | | | Amount | | Total Equity | |
| BALANCE—December 31, 2021 | BALANCE—December 31, 2021 | | | 180,113,551 | | | $ | 18 | | | 297,385,981 | | | $ | 30 | | | $ | 397,443 | | | $ | (78,760) | | | $ | 479,837 | | | $ | 798,568 | | BALANCE—December 31, 2021 | | | 1,801,136 | | | $ | 18 | | | 2,973,860 | | | $ | 30 | | | $ | 397,443 | | | $ | (78,760) | | | $ | 798,568 | |
| Stock-based compensation expense, net | Stock-based compensation expense, net | | | — | | | — | | | — | | | — | | | 31,600 | | | — | | | — | | | 31,600 | | Stock-based compensation expense, net | | | — | | | — | | | — | | | — | | | 42,641 | | | — | | | — | | | 42,641 | |
| Issuance of Class A common stock upon vesting of restricted stock units | Issuance of Class A common stock upon vesting of restricted stock units | | | 807,315 | | | 1 | | | — | | | — | | | (5,086) | | | — | | | 5,085 | | | — | | 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 | Issuance of common stock for acquisitions | | | 2,857,167 | | | — | | | — | | | — | | | 15,771 | | | — | | | — | | | 15,771 | | Issuance of common stock for acquisitions | | | 97,530 | | | — | | | — | | | — | | | 57,108 | | | — | | | — | | | 57,108 | |
| Exchange of Class B common stock for Class A common stock | Exchange of Class B common stock for Class A common stock | | | 32,858,547 | | | 3 | | | (32,858,547) | | | (3) | | | 51,765 | | | — | | | (51,765) | | | — | | 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 | Employee Stock Purchase Plan issuance | | | 1,392,372 | | | — | | | — | | | — | | | 9,707 | | | — | | | — | | | 9,707 | | Employee Stock Purchase Plan issuance | | | 18,196 | | | — | | | — | | | — | | | 11,377 | | | — | | | — | | | 11,377 | |
| Impact of transactions affecting non-controlling interests | Impact of transactions affecting non-controlling interests | | | — | | | — | | | — | | | — | | | (5,558) | | | — | | | 5,558 | | | — | | Impact of transactions affecting non-controlling interests | | | — | | | — | | | — | | | — | | | (27,428) | | | — | | | 27,428 | | | — | |
| Net income (loss) | Net income (loss) | | | — | | | — | | | — | | | — | | | — | | | (4,673) | | | (9,976) | | | (14,649) | | Net income (loss) | | | — | | | — | | | — | | | — | | | — | | | (58,901) | | | (67,759) | | | (126,660) | |
| BALANCE—June 30, 2022 | | | 218,028,952 | | | $ | 22 | | | 264,527,434 | | | $ | 27 | | | $ | 495,642 | | | $ | (83,433) | | | $ | 428,739 | | | $ | 840,997 | | |
| BALANCE—September 30, 2022 | | 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)
| | | Six Months Ended June 30, | | Nine Months Ended September 30, |
| (in thousands) | (in thousands) | | 2023 | | 2022 | | (in thousands) | | 2023 | | 2022 | |
| Cash Flows (used in) from Operating Activities: | Cash Flows (used in) from Operating Activities: | | | | | | Cash Flows (used in) from Operating Activities: | | | | | |
| Net loss | Net loss | | $ | (331,330) | | | $ | (14,649) | | | Net loss | | $ | (823,027) | | | $ | (126,660) | | |
| 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: | | | Adjustments to reconcile net loss to net cash (used in) from operating activities: | | |
| Depreciation and amortization expense | Depreciation and amortization expense | | 54,473 | | | 38,872 | | | Depreciation and amortization expense | | 81,213 | | | 64,215 | | |
| Change in fair value of contingent consideration | Change in fair value of contingent consideration | | (15,900) | | | (10,425) | | | 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 | | (331) | | | (57,337) | | | 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 | | | Loss on extinguishment of debt | | — | | | 1,428 | | |
| Fixed asset abandonment | Fixed asset abandonment | | 1,709 | | | — | | | Fixed asset abandonment | | 2,200 | | | — | | |
| Amortization of debt issuance costs | Amortization of debt issuance costs | | 2,560 | | | 1,570 | | | Amortization of debt issuance costs | | 3,872 | | | 2,743 | | |
| Non-cash lease expense | Non-cash lease expense | | 1,642 | | | 3,642 | | | Non-cash lease expense | | 2,010 | | | 8,367 | | |
| | 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 | | 11,368 | | | 31,600 | | | Stock-based compensation, net | | 7,285 | | | 42,641 | | |
| Paid in kind interest expense | Paid in kind interest expense | | 7,380 | | | — | | | Paid in kind interest expense | | 13,564 | | | — | | |
| Credit loss on other assets | Credit loss on other assets | | 62,000 | | | — | | | 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 | Accounts receivable, net | | 126,652 | | | (67,557) | | | Accounts receivable, net | | 146,317 | | | (75,913) | | |
| Other assets | Other assets | | (649) | | | 7,158 | | | Other assets | | 1,216 | | | 10,885 | | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | | 654 | | | (17,834) | | | Prepaid expenses and other current assets | | 1,979 | | | (47,492) | | |
| Interest accrued due to sellers | Interest accrued due to sellers | | — | | | 100 | | | Interest accrued due to sellers | | — | | | 100 | | |
| | Accounts payable and accrued expenses (Related parties comprised $(295) and $1,331 for the six months ended June 30, 2023 and 2022, respectively) | | 28,289 | | | (9,362) | | | |
| 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 | | 6,528 | | | 10,621 | | | Other liabilities | | 23,811 | | | 3,521 | | |
| Net cash (used in) provided by operating activities | Net cash (used in) provided by operating activities | | (44,955) | | | (82,173) | | | Net cash (used in) provided by operating activities | | (84,666) | | | (84,158) | | |
| | Cash Flows (used in) from Investing Activities: | | | |
| Purchase of property and equipment (Related parties comprised $766 and $3,567 for the six months ended June 30, 2023 and 2022, respectively) | | (11,270) | | | (20,431) | | | |
| 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) | | | Acquisitions of subsidiaries including non-compete intangibles, net of cash acquired | | — | | | (4,995) | | |
| Payments to sellers | Payments to sellers | | (6,431) | | | (3,847) | | | Payments to sellers | | (6,557) | | | (4,097) | | |
| | Net cash (used in) provided by investing activities | | (17,701) | | | (29,273) | | | |
| 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 (used in) from Financing Activities: | | | |
| Cash Flows from (used in) Financing Activities: | | Cash Flows from (used in) Financing Activities: | | |
| | | Payments of long-term debt | Payments of long-term debt | | (3,223) | | | (3,222) | | | Payments of long-term debt | | (4,834) | | | (4,833) | | |
| Debt issuance costs | Debt issuance costs | | (9,256) | | | (88) | | | Debt issuance costs | | (9,256) | | | (88) | | |
| Proceeds from long-term debt | Proceeds from long-term debt | | 150,000 | | | — | | | Proceeds from long-term debt | | 150,000 | | | — | | |
| | Proceeds from CS Revolving Line of Credit | Proceeds from CS Revolving Line of Credit | | 55,000 | | | — | | | 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 | | (129,000) | | | — | | | Repayments of CS Revolving Line of Credit | | (209,000) | | | (25,000) | | |
| Proceeds from insurance financing arrangements | Proceeds from insurance financing arrangements | | 2,690 | | | 2,529 | | | Proceeds from insurance financing arrangements | | 2,690 | | | 2,529 | | |
| Payments of principal on insurance financing arrangements | Payments of principal on insurance financing arrangements | | (1,467) | | | (1,380) | | | Payments of principal on insurance financing arrangements | | (2,201) | | | (2,070) | | |
| | Other | Other | | (1,696) | | | (1,716) | | | Other | | (2,577) | | | (2,300) | | |
| Net cash (used in) provided by financing activities | | 63,048 | | | (3,877) | | | |
| | Net increase (decrease) in cash, cash equivalents and restricted cash | | 392 | | | (115,323) | | | |
| Cash, cash equivalents and restricted cash at beginning of year | | 27,329 | | | 163,170 | | | |
| Cash, cash equivalents and restricted cash at end of period | | $ | 27,721 | | | $ | 47,847 | | | |
The accompanying Notes are an integral part of these Condensed Financial Statements
10
CANO HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| | Net 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 | | 14,002 | | | (139,073) | | |
| Cash, cash equivalents and restricted cash at beginning of year | | Cash, cash equivalents and restricted cash at beginning of year | | 27,329 | | | 163,170 | | |
| Cash, cash equivalents and restricted cash at end of period | | Cash, cash equivalents and restricted cash at end of period | | $ | 41,331 | | | $ | 24,097 | | |
| | Supplemental cash flow information: | Supplemental cash flow information: | | | Supplemental cash flow information: | | |
| Interest paid | Interest paid | | 40,476 | | | 27,670 | | | Interest paid | | 57,603 | | | 38,233 | | |
| Income taxes paid | Income taxes paid | | — | | | 82 | | | 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 | | 16,558 | | | 50,297 | | | Right-of-use assets obtained in exchange of lease liabilities | | 16,922 | | | 58,595 | | |
| Issuance of Class A common stock for acquisitions | Issuance of Class A common stock for acquisitions | | 14,402 | | | 15,771 | | | 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 | | |
| Contingent consideration assets in connection with acquisitions | | Contingent consideration assets in connection with acquisitions | | — | | | (5,600) | | |
| Due to sellers in connection with acquisitions | Due to sellers in connection with acquisitions | | — | | | 3,533 | | | Due to sellers in connection with acquisitions | | — | | | 1,530 | | |
| Addition to construction in process funded through accounts payable | | 906 | | | 3,580 | | | |
| 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 | | 363 | | | 2,928 | | | Humana Affiliate Provider clinic leasehold improvements | | (294) | | | 5,878 | | |
| Employee Stock Purchase Plan issuance | Employee Stock Purchase Plan issuance | | 1,143 | | | 9,707 | | | Employee Stock Purchase Plan issuance | | 1,924 | | | 11,377 | | |
| Warrants issued | Warrants issued | | 45,698 | | | — | | | 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. The Company focuses on providing high-touch population health and wellness services to Medicare Advantage, Accountable Care Organization Realizing Equity, Access, and Community Health ("ACO REACH"), Medicare patients under ACO and Medicaid capitated members, particularly in underserved communities by leveraging our proprietary technology platform to deliver high-quality health care services. The Company also operates pharmacies in the network for the purpose of providing a full range of managed care services to its members.
On June 3, 2021 (the “Closing Date”), Jaws Acquisition, Corp. (“Jaws”) consummated the 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, 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 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 stockholders 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 dividends depends 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 52.6%53.1% controlling ownership as of the Closing Date and as of JuneSeptember 30, 2023, respectively. Certain members of PCIH who retained their common unit interests in PCIH held the remaining 64.9% and 47.4%46.9% non-controlling ownership interests as of the Closing Date and as of JuneSeptember 30, 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 entitles 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 (as(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) 306.83.07 million shares of Class B common stock valued at $3,068.4 million based 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 while the Seller, as the sole Class B stockholder, owned indirect economic interests in PCIH shown as non-controlling interests in Cano Health's unaudited condensed consolidated financial statements. The Seller holds these indirect economic interests in the form of PCIH Common Units that are 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. 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 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 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
For additional information on the Company’s risk factors, please see Item 1A, "Risk Factors,” included in the Company’s 2022 Form 10-K, as supplemented by Part II, Item 1A, “Risk Factors,” included in the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2023 filed with the SEC on May 9, 2023 (the “Q1 2023 Form 10-Q"), and in this
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2023 filed with the SEC on August 10, 2023 (the “Q2 2023 Form 10-Q”10-Q").
Reclassifications
Certain prior year amounts have also been reclassified for consistency with the current year presentation. Such reclassifications impacted the classification of: repayments of equipment loans, repayment of finance lease obligation and employee stock purchase plan contributions within the statement of cash flows. Additionally, there were reclassifications related to revenue and 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, “Summary of Significant Accounting Policies,” included in the audited consolidated financial statements for the year ended December 31, 2022 included in its 2022 Form 10-K. During the sixnine months ended JuneSeptember 30, 2023, there were no significant changes to those accounting policies.
Recent Accounting Pronouncements
The Company has evaluated recent accounting pronouncements through JuneSeptember 30, 2023 and believes that none of them will have a 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 sixnine months ended JuneSeptember 30, 2023, the Company generated a net loss of $331.3$823.0 million and used $45.0used $84.7 million ofof cash from operations.
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company’s current liquidity as of AugustNovember 9, 2023 was approximately $101.5$52.5 million, consisting of cash and cash equivalents (excluding restricted cash of approximately $14.1$33.7 million). As of August 10,November 9, 2023, the CS Revolving Line of Credit was fully drawn to ensure that the Company had access to liquidity while it was negotiating the 2023 Side-Car Amendment (each as discussed under Note 12, “Debt”); provided, however, having secured the 2023 Side-Car Amendment on August 10, 2023, the Company currently expects to repay a significant portion of such line of credit by the end of September 2023.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. The Company’s ability to continue as a going concern is contingent upon successful execution of management’s intended plan over the next 12 months to improve the Company’s liquidity and profitability, as discussed below.
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 nonessential spending.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 Company effortsongoing initiatives designed to improve itsgenerate additional liquidity include athe Company’s continued pursuit of its strategic review, which may result in the sale of itsall 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, medical centers located in Texas and Nevada, pharmacy assets and other specialty practices.
The Company is inConsistent with the processterms and conditions of closing medical centers and exiting markets in California, New Mexico and Illinois. The Company also plans to exit its Puerto Rico operations by January 1, 2024.
In addition to the above,2023 Side-Car Amendment, discussed below, the Company is pursuinghas 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, consistent with the terms and conditions of the 2023 Side-Car Amendment, discussed below. The Company hasincluding having engaged advisors to assist in the process. The Company has not setWhile these efforts have yet to yield a timetable forsale transaction, the conclusion of thisCompany’s process and thereremains ongoing. There is no assurance that thethis 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 5.80:5.80:1.00 on the last day of any four consecutive fiscal quarter period. Capitalized terms used, but not defined, in this Note are defined in Note 12, “Debt.” With a First Lien Leverage Ratio of approximately 12.00:12.00:1.00 at June 30, 2023, the Borrower was not in compliance with this financial maintenance covenant as of such date. Under the Side-Car Credit Agreement, the Borrower has a right to cure noncompliance with the financial maintenance covenant by obtaining sufficient equity proceeds, which may be sourced from equity or debt financings by the Company, that will be deemed added to the Borrower’s Consolidated Adjusted EBITDA for purposes of recalculating the financial maintenance covenant when such proceeds are contributed to the Borrower. The cure right may be exercised by the Borrower no more than 2 times in any 4 consecutive testing periodsdate and, no more than 5 times during the term of the Side-Car Credit Agreement. Accordingly, on July 28, 2023, the Borrower delivered to the 2023 Term Loan Administrative Agent a notice of its intent to cure such noncompliance by September 5, 2023, which would require the Company to raise approximately $71 million of new capital, which amount, if raised, would be contributed to the Borrower to consummate the cure.
Thereafter,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
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
payment of 5% of the outstanding principal amount of the 2023 Term Loan will be paid in kind by capitalizing such payment to the principal amount of the 2023 Term Loan; (iv) the applicable prepayment premium will be required in connection with any voluntary or mandatory prepayment or repayment of the 2023 Term Loan; and (v) the lenders will have participation rights in certain new debt financings incurred by the Borrower or any of its subsidiaries. Absent such waiver, the 2023 Term Loan Administrative Agent, acting at the direction of the lead lender, and at the requisite lenders request, could have immediately terminated all commitments under the 2023 Term Loan and accelerated the maturity of all principal, interest and other amounts due thereon. Pursuant to the terms of the 2023 Side-Car Amendment, the Borrower will not be required to pursue its cure right.
Under the Credit Suisse Credit Agreement, if the Borrower was unable to obtain such waiver from the lenders under the 2023 Term Loan Agreement, or cure any such noncompliance by September 5, 2023, then the administrative agent under the Credit Suisse Credit Agreement would have been entitled to, and acting at the direction of the requisite lenders, could have, among other things, immediately terminated all commitments under the CS Term Loan and the CS Revolving Line of Credit and accelerated the maturity of all principal, interest and other amounts due thereunder. Under the Senior Notes, if (i) the Borrower was unable to obtain such waiver from the lenders under the 2023 Term Loan Agreement, or cure any such noncompliance by September 5, 2023; (ii) the lender under such facility or under the Credit Suisse Credit Agreement accelerated the maturity of $50 million or more of the amount outstanding thereunder; and (iii) the Borrower failed to pay such amount when due, then the trustee for the Senior Notes or the holders of at least 30% in principal amount of the Senior Notes would have been entitled to immediately accelerate the maturity of the Senior Notes, including all principal, interest and other amounts due thereon.
4. REVENUE AND ACCOUNTS RECEIVABLE
The Company’s revenue streams for the three and sixnine months ended JuneSeptember 30, 2023 and 2022, respectively, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| | 2023 | | 2022 | | |
| (in thousands) | | Revenue $ | | Revenue % | | Revenue $ | | Revenue % | | | | |
| Capitated revenue | | | | | | | | | | | | |
| Medicare | | $ | 695,612 | | | 90.7 | % | | $ | 602,613 | | | 87.4 | % | | | | |
| Other capitated revenue | | 47,712 | | | 6.2 | % | | 52,880 | | | 7.6 | % | | | | |
| Total capitated revenue | | 743,324 | | | 96.9 | % | | 655,493 | | | 95.0 | % | | | | |
| Fee-for-service and other revenue | | | | | | | | | | | | |
| Fee-for-service | | 4,282 | | | 0.6 | % | | 9,701 | | | 1.4 | % | | | | |
| Pharmacy | | 15,559 | | | 2.0 | % | | 12,759 | | | 1.9 | % | | | | |
| Other | | 3,581 | | | 0.5 | % | | 11,420 | | | 1.7 | % | | | | |
| Total fee-for-service and other revenue | | 23,422 | | | 3.1 | % | | 33,880 | | | 5.0 | % | | | | |
| Total revenue | | $ | 766,746 | | | 100.0 | % | | $ | 689,373 | | | 100.0 | % | | | | |
| | | | | | | | | | | | |
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | Six Months Ended June 30, | | Three Months Ended September 30, |
| | 2023 | | 2022 | | | 2023 | | 2022 | |
| (in thousands) | (in thousands) | | Revenue $ | | Revenue % | | Revenue $ | | Revenue % | | (in thousands) | | Revenue $ | | Revenue % | | Revenue $ | | Revenue % | |
| Capitated revenue | Capitated revenue | | | | | | | | | | Capitated revenue | | | | | | | | | |
| Medicare | Medicare | | $ | 1,489,240 | | | 91.2 | % | | $ | 1,217,831 | | | 87.5 | % | | Medicare | | $ | 728,435 | | | 92.4 | % | | $ | 577,989 | | | 86.9 | % | |
| Other capitated revenue | Other capitated revenue | | 95,157 | | | 5.8 | % | | 112,013 | | | 8.0 | % | | Other capitated revenue | | 41,834 | | | 5.3 | % | | 47,906 | | | 7.2 | % | |
| Total capitated revenue | Total capitated revenue | | 1,584,397 | | | 97.0 | % | | 1,329,844 | | | 95.5 | % | | 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 | | 15,975 | | | 1.0 | % | | 19,671 | | | 1.4 | % | | Fee-for-service | | 6,886 | | | 0.9 | % | | 9,677 | | | 1.5 | % | |
| Pharmacy | Pharmacy | | 27,664 | | | 1.7 | % | | 24,274 | | | 1.7 | % | | Pharmacy | | 14,243 | | | 1.8 | % | | 12,910 | | | 1.9 | % | |
| Other | Other | | 5,619 | | | 0.3 | % | | 19,726 | | | 1.4 | % | | Other | | (3,325) | | | (0.4) | % | | 16,546 | | | 2.5 | % | |
| Total fee-for-service and other revenue | Total fee-for-service and other revenue | | 49,258 | | | 3.0 | % | | 63,671 | | | 4.5 | % | | Total fee-for-service and other revenue | | 17,804 | | | 2.3 | % | | 39,133 | | | 5.9 | % | |
| Total revenue | Total revenue | | $ | 1,633,655 | | | 100.0 | % | | $ | 1,393,515 | | | 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 JuneSeptember 30, 2023 and December 31, 2022.
| | | As of | | As of |
| (in thousands) | (in thousands) | | June 30, 2023 | | December 31, 2022 | (in thousands) | | September 30, 2023 | | December 31, 2022 |
| Accounts receivable | Accounts receivable | | $ | 459,633 | | | $ | 388,122 | | Accounts receivable | | $ | 377,603 | | | $ | 388,122 | |
| Medicare risk adjustment | Medicare risk adjustment | | 24,868 | | | 49,586 | | Medicare risk adjustment | | 13,328 | | | 49,586 | |
| Unpaid service provider costs | Unpaid service provider costs | | (377,337) | | | (203,892) | | Unpaid service provider costs | | (303,432) | | | (203,892) | |
| Accounts receivable, net | Accounts receivable, net | | $ | 107,164 | | | $ | 233,816 | | Accounts receivable, net | | $ | 87,499 | | | $ | 233,816 | |
Concentration of Risk
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three payors represented greater than 10% of our total revenue for the three and sixnine months ended on each of JuneSeptember 30, 2023 and JuneSeptember 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 | | |
| Revenues | 64.6% | | 64.7% | | 66.3% | | 64.9% | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three 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 JuneSeptember 30, 2023 and December 31, 2023,2022, respectively.
| | | | | | | | | | | | | |
| As of |
| June 30, 2023 | | December 31, 2022 | | |
| Accounts receivable, net | 36.6% | | 56.3% | | |
| | | | | | | | | | | | | |
| As of |
| September 30, 2023 | | December 31, 2022 | | |
| Accounts receivable, net | 50.6% | | 56.3% | | |
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following as of JuneSeptember 30, 2023 and December 31, 2022, respectively:
| | (in thousands) | (in thousands) | | June 30, 2023 | | December 31, 2022 | (in thousands) | | September 30, 2023 | | December 31, 2022 |
| Third party receivables | Third party receivables | | $ | — | | | $ | 60,400 | | Third party receivables | | $ | — | | | $ | 60,400 | |
| Contingent consideration asset | | 14,500 | | | — | | |
| | Other | Other | | 16,950 | | | 19,203 | | Other | | 15,894 | | | 19,203 | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | | $ | 31,450 | | | $ | 79,603 | | Prepaid expenses and other current assets | | $ | 15,894 | | | $ | 79,603 | |
Third party receivables represent amounts due from MSP Recovery Inc. ("MSP"). MSP provides healthcare claims reimbursement recovery services using data analytics to identify and recover improper payments made by Medicare, Medicaid and commercial health insurers (each a “Health Plan”), and charged to the Company under risk agreements, when the Health Plan is not the primary payor under the Medicare Secondary Payer Act and other state and federal laws. The Company has assigned certain past claims data to MSP, which could have been paid in either cash or equity at MSP's option. On July 7, 2023, the Company received 199,000,0017.96 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. As of June 30, 2023, the Company classified the receivables of $62.0 million from MSP in other assets due to the belief that at the balance sheet date the asset is not expected to be realized into cash within the next 12 months.
On August 2, 2023, MSP announced that the SEC initiated an investigation of MSP on August 11, 2022. In addition, MSP announced that it received a subpoena on March 10, 2023 from the U.S. Attorney's Office in the U.S. District Court for the Southern District of Florida. As a result of (i) these recent disclosures by MSP; (ii) MSP's delinquent filing of its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2023; and (iii) MSP's not being in compliance with the NASDAQ listing requirements, the Company decided to utilize a third-party valuation specialist to provide a market value analysis of the shares of Class A common stock that MSP issued to the Company on July 7, 2023. As2023 and as of June 30, 2023, the Company has recognized an allowance for credit losses of $62.0 million.million related to the third party receivables as of June 30, 2023.
ContingentAs 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 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, 2022, other assets include contingent consideration asset relatesassets related to a 2022 acquisition with various contingent consideration arrangements. The contingent consideration is valued based on the future performance of two acquired payor contracts using Monte-Carlo simulations. AsAfter the balance sheet date, the contingency was resolved as a result of June 30, 2023, one
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
conditions present at the balance sheet date pertaining to probability of collection in the valuation model and the fair value of the plansasset was adjusted to $0 through change in a deficit resulting in afair value of contingent consideration asset as the seller is required to pay the Company a multiple of the 2023 deficit.September 30, 2023.
6. UNPAID SERVICE PROVIDER COSTS
Activity in unpaid service provider costs for the sixnine months ended JuneSeptember 30, 2023 and 2022, respectively, is summarized below:
| | (in thousands) | (in thousands) | | 2023 | | 2022 | (in thousands) | | 2023 | | 2022 |
| Balance as of January 1, | Balance as of January 1, | | $ | 318,554 | | | $ | 129,110 | | Balance as of January 1, | | $ | 318,554 | | | $ | 129,110 | |
| | Incurred related to: | Incurred related to: | | Incurred related to: | |
| Current year | Current year | | 1,270,245 | | | 843,427 | | Current year | | 1,888,700 | | | 1,267,742 | |
| Prior years | Prior years | | 2,317 | | | 2,576 | | Prior years | | 6,524 | | | 11,319 | |
| | 1,272,562 | | | 846,003 | | | 1,895,224 | | | 1,279,061 | |
| Paid related to: | Paid related to: | | Paid related to: | |
| Current year | Current year | | 885,119 | | | 543,984 | | Current year | | 1,497,782 | | | 955,998 | |
| Prior years | Prior years | | 286,528 | | | 120,997 | | Prior years | | 291,173 | | | 132,475 | |
| | 1,171,647 | | | 664,981 | | | 1,788,955 | | | 1,088,473 | |
| Balance as of June 30, | | $ | 419,469 | | | $ | 310,132 | | |
| Balance as of September 30, | | Balance as of September 30, | | $ | 424,823 | | | $ | 319,698 | |
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The foregoing reconciliation reflects an increase in our estimate of unpaid service provider costs during the sixnine months ended JuneSeptember 30, 2023 of $2.3$6.5 million and an increase in our estimate of unpaid service provider costs during the sixnine months ended JuneSeptember 30, 2022 of $2.6$11.3 million, driven by higher than expected utilization. $20.9$38.1 million and $18.5 million of accounts receivable, net of $42.1 million and $32.7 millionfor plans that were in a deficit position as of the balance sheet date, with liabilities for unpaid service providerprovder costs of $121.4 million and $32.8 million, were included in other current liabilities in the condensed consolidated balance sheet as these plans were in a net deficit position as of JuneSeptember 30, 2023 and JuneSeptember 30, 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. As of both JuneSeptember 30, 2023 and JuneSeptember 30, 2022, the Company's excess loss insurance deductible was $0.2 million and maximum coverage was $2.0 million per member per calendar year. The Company recorded excess loss insurance premiums of $1.4$1.1 million and $2.4$3.5 million for the three and sixnine months ended JuneSeptember 30, 2023, respectively, and reimbursement of $0.7$0.5 million and $1.4$1.9 million for the three and sixnine months ended JuneSeptember 30, 2023, respectively. The Company recorded excess loss insurance premiums of $2.5$5.6 million and $4.9$10.6 million for the three and sixnine months ended JuneSeptember 30, 2022, respectively, and reimbursements of $1.6$16.0 million and $3.6$23.1 million for the three and sixnine months ended JuneSeptember 30, 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.
7. GOODWILL
Activity impacting the Company's goodwill balance during the sixnine months ended JuneSeptember 30, 2023 is summarized below:
| | | | | |
| (in thousands) | |
| Goodwill as of December 31, 2022 | $ | 480,375 | |
| Impairment | (354,000) | |
| Sale Transaction allocation | (37,126) | |
| Other | (331) | |
| |
Goodwill as of JuneSeptember 30, 2023 | $ | 480,04488,918 | |
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 secondthird quarter of 2023, due to the drop in the Company's significant losses,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 Market Approach and the Income Approach. We are required to impair goodwill only 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 faircarrying value exceeded the carryingfair value and that no supplementalthe Company recorded a $354.0 million reduction in its goodwill, which has been reflected as an impairment was necessary.loss in the accompanying statement of operations for the three months ended September 30, 2023.
8. PAYOR RELATIONSHIPS AND OTHER INTANGIBLES, NET
As of JuneSeptember 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 | | | $ | (1,024) | | | $ | 385 | | Trade names | | | $ | 1,410 | | | $ | (1,064) | | | $ | 346 | |
| Brand names | Brand names | | | 183,877 | | | (43,612) | | | 140,265 | | Brand names | | | 181,901 | | | (50,318) | | | 131,583 | |
| Non-compete agreements | Non-compete agreements | | | 85,461 | | | (37,115) | | | 48,346 | | Non-compete agreements | | | 84,942 | | | (41,077) | | | 43,865 | |
| Customer relationships | Customer relationships | | | 880 | | | (257) | | | 623 | | Customer relationships | | | 880 | | | (270) | | | 610 | |
| Payor relationships | Payor relationships | | | 631,186 | | | (79,273) | | | 551,913 | | Payor relationships | | | 630,953 | | | (87,143) | | | 543,810 | |
| Provider relationships | Provider relationships | | | 19,842 | | | (9,700) | | | 10,142 | | Provider relationships | | | 19,842 | | | (10,874) | | | 8,968 | |
| Total intangibles, net | Total intangibles, net | | | $ | 922,655 | | | $ | (170,981) | | | $ | 751,674 | | Total intangibles, net | | | $ | 919,928 | | | $ | (190,746) | | | $ | 729,182 | |
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 $21.0$20.7 million and $42.1$62.8 million for the three and sixnine months ended JuneSeptember 30, 2023, respectively, and $15.5$20.2 million and $30.6$50.8 million for the three and sixnine months ended JuneSeptember 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, 2023 in the amount of $2.7 million.
Expected amortization expense for the Company’s existing amortizable intangibles for the next 5 years, and thereafter, as of JuneSeptember 30, 2023 is as follows:
| | (in thousands) | (in thousands) | | Amount | (in thousands) | | Amount |
| 2023 - remaining | 2023 - remaining | $ | 40,835 | | 2023 - remaining | $ | 20,032 | |
| 2024 | 2024 | | 60,855 | | 2024 | | 60,547 | |
| 2025 | 2025 | | 57,166 | | 2025 | | 56,954 | |
| 2026 | 2026 | | 46,996 | | 2026 | | 46,797 | |
| 2027 | 2027 | | 40,230 | | 2027 | | 40,035 | |
| Thereafter | Thereafter | | 505,592 | | Thereafter | | 504,817 | |
| Total | Total | $ | 751,674 | | 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.
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 1514 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 JuneSeptember 30, 2023 were as follows:
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | (in thousands) | (in thousands) | | Operating | | Finance | | Total | (in thousands) | | Operating | | Finance | | Total |
| 2023 - remaining | 2023 - remaining | | $ | 19,121 | | $ | 2,075 | | $ | 21,196 | 2023 - remaining | | $ | 8,773 | | $ | 1,075 | | $ | 9,848 |
| 2024 | 2024 | | 36,796 | | 3,941 | | 40,737 | 2024 | | 33,760 | | 4,204 | | 37,964 |
| 2025 | 2025 | | 33,984 | | 3,515 | | 37,499 | 2025 | | 30,925 | | 3,780 | | 34,705 |
| 2026 | 2026 | | 31,232 | | 2,922 | | 34,154 | 2026 | | 28,070 | | 3,187 | | 31,257 |
| 2027 | 2027 | | 28,651 | | 801 | | 29,452 | 2027 | | 25,447 | | 978 | | 26,425 |
| Thereafter | Thereafter | | 99,961 | | — | | 99,961 | Thereafter | | 88,644 | | — | | 88,644 |
| Total minimum lease payments | Total minimum lease payments | | 249,745 | | 13,254 | | 262,999 | Total minimum lease payments | | 215,619 | | 13,224 | | 228,843 |
| Less: amount representing interest | Less: amount representing interest | | (60,815) | | (2,512) | | (63,327) | Less: amount representing interest | | (52,588) | | (2,436) | | (55,024) |
| Lease liabilities | Lease liabilities | | $ | 188,930 | | $ | 10,742 | | $ | 199,672 | Lease liabilities | | $ | 163,031 | | $ | 10,788 | | $ | 173,819 |
|
The Company recorded rent expense of $9.7$9.6 million and $19.3$28.9 million for the three and sixnine months ended JuneSeptember 30, 2023,, respectively, and $8.2$8.7 million and $15.4$24.1 million for the three and six nine months ended JuneSeptember 30, 2022,, respectively.
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following as of JuneSeptember 30, 2023 and December 31, 2022, respectively:
| | (in thousands) | (in thousands) | | June 30, 2023 | | December 31, 2022 | (in thousands) | | September 30, 2023 | | December 31, 2022 |
| Service fund liability1 | Service fund liability1 | | $ | 20,934 | | | $ | 16,652 | | Service fund liability1 | | $ | 38,065 | | | $ | 16,652 | |
| Other | Other | | 7,076 | | | 7,839 | | Other | | 2,205 | | | 7,839 | |
| Other current liabilities | Other current liabilities | | $ | 28,010 | | | $ | 24,491 | | Other current liabilities | | $ | 40,270 | | | $ | 24,491 | |
1 The balance reflected in service fund liability related to service funds in a deficit position and reflects the net amount of medical services incurred butbut not reported ("IBNR") and accounts receivable. The IBNR and accounts receivable reclassified to other current liabilities was $42.1$121.4 million and $21.2$83.3 million, respectively, as of JuneSeptember 30, 2023 and $114.7 million and $98.0 million, respectively, as of December 31, 2022.
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. CONTRACT LIABILITIES
As further explained in Note 15, “Related Party 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 $5.1$0.2 million and $6.5 million as of JuneSeptember 30, 2023 and December 31, 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 $1.4$2.0 million in revenue from contract liabilities recorded during the three and sixnine months ended JuneSeptember 30, 2023, respectively, and $0.7 million and $1.3$1.9 million in the three and sixnine months ended JuneSeptember 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, 2023 |
| Balance at June 30, 2023 |
Balance at March 31, 2023 | $ | 5,7865,111 | |
| | |
| | |
| Revenues recognized from current period increases | | (675) | |
| Release related to the Sale Transaction | | (4,234) | |
Balance at JuneSeptember 30, 2023 | $ | 5,111202 | |
| | | | | | | | |
| (in thousands) | | For the sixnine months ended JuneSeptember 30, 2023 |
| Balance at December 31, 2022 | $ | 6,461 | |
| | |
| | |
| Revenues recognized from current period increases | | (1,350)(2,025) | |
| Release related to the Sale Transaction | | (4,234) | |
Balance at JuneSeptember 30, 2023 | $ | 5,111202 | |
Of the JuneSeptember 30, 2023 contract liabilities balance, the Company expects to recognize the following amounts as revenue in the succeeding years:
| | Years ended December 31, | Years ended December 31, | | Amount (in thousands) | Years ended December 31, | | Amount (in thousands) |
| 2023 - remaining | 2023 - remaining | $ | 1,349 | 2023 - remaining | $ | 41 |
| 2024 | 2024 | | 2,514 | 2024 | | 161 |
| 2025 | | 1,183 | |
| 2026 | | 65 | |
| | | Total | Total | $ | 5,111 | Total | $ | 202 |
12. DEBT
At JuneSeptember 30, 2023 and December 31, 2022, the Company's current notes payable were as follows:.
| | | | | | | | | | | | | | |
| Current Notes Payable | | As of, |
| (in thousands) | | June 30, 2023 | | December 31, 2022 |
| | | | |
| | | | |
2023 Term Loan1 | | 157,380 | | | — | |
| Current portion of CS term loan | | 6,444 | | | 6,444 | |
| | 163,824 | | | 6,444 | |
| Less: Debt issuance costs | | (54,157) | | | — | |
| Current notes payable, net of debt issuance costs | | $ | 109,667 | | | $ | 6,444 | |
1.Includes $7.4 million of Paid-in-Kind ("PIK") interest that was incurred under the 2023 Term Loan through June 30, 2023. | | | | | | | | | | | | | | |
| 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.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.
At JuneSeptember 30, 2023 and December 31, 2022, the Company’s long-term notes payable were as follows:
| | Long-Term Notes Payable | Long-Term Notes Payable | | As of, | Long-Term Notes Payable | | As of, |
| (in thousands) | (in thousands) | | June 30, 2023 | | December 31, 2022 | | (in thousands) | | September 30, 2023 | | December 31, 2022 | |
| CS Term Loan | CS Term Loan | | $ | 628,322 | | | $ | 631,544 | | | CS Term Loan | | $ | 626,710 | | | $ | 631,544 | | |
| CS Revolving Line of Credit | CS Revolving Line of Credit | | 10,000 | | | 84,000 | | | CS Revolving Line of Credit | | 40,000 | | | 84,000 | | |
| | Senior Notes | Senior Notes | | 300,000 | | | 300,000 | | | Senior Notes | | 300,000 | | | 300,000 | | |
| | 938,322 | | | 1,015,544 | | | | 966,710 | | | 1,015,544 | | |
| Less: Debt issuance costs | Less: Debt issuance costs | | (16,090) | | | (17,738) | | | Less: Debt issuance costs | | (15,371) | | | (17,738) | | |
| Long-term notes payable, net of debt issuance costs | Long-term notes payable, net of debt issuance costs | | $ | 922,232 | | | $ | 997,806 | | | Long-term notes payable, net of debt issuance costs | | $ | 951,339 | | | $ | 997,806 | | |
Credit Suisse Credit AgreementAgreements – General
Pursuant toAs discussed under Note 3, “Going Concern,” each of the Credit Suisse2023 Side-Car Credit Agreement the Company, through its wholly owned operating subsidiary, Cano Health, LLC (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 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 maintenance covenant (which iscovenant). Based on the amount of the Company’s available liquidity at November 9, 2023 and its current forecast of available liquidity for the benefit12 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 lenders under the CS Revolving Line ofSide-Car Credit only), requiring the Borrower to not exceed a total first lien secured net debt to Consolidated Adjusted EBITDA (as defined therein) ratio, which is tested quarterly only if the Borrower has exceeded a certain amount drawn under the CS Revolving Line of Credit, which is approximately 35% of the total commitment under the CS Revolving Line of Credit, or approximately $42 million. As of June 30, 2023, the available balance on the CS Revolving Line of Credit was $110 million,Agreement and as of August 10, 2023 such line of credit was fully drawn to ensure that the Company had access to liquidity while it was negotiating the 2023 Side-Car Amendment, discussed under “2023 Term Loan Agreement;” provided, however, having secured the 2023 Side-Car Amendment on August 10, 2023, the Company currently expects to repay a significant portion of such line of credit by the end of September 2023. Accordingly, as of June 30, 2023, the Company was not required to test its compliance with the financial maintenance covenant under the Credit Suisse Credit Agreement. Please seeAgreement on or before April 22, 2024, being the discussion below regardingearlier of (i) when the Company’s noncompliance withCompany will be required to deliver to the financial maintenance covenantadministrative agents under each of the 2023 Side-Car Credit Agreement as of June 30, 2023 and the Company’s receipt ofCredit 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 waiver of30-day cure period and (ii) such noncompliance on August 10, 2023.
Whiletime that the Company currently believes that the Borrower will notwould be required to testcure any breach of the financial maintenance covenant under the Credit Suisse Credit Agreement for the testing period ending September 30, 2023, if it were required to test such financial maintenance covenantDecember 31, 2023.
Under each of the Side-Car Credit Agreement and if, at such time, it is not in compliance with the financial maintenance covenant, the Borrower would be required to cure or seek a waiver of such noncompliance from the requisite revolving lenders under the Credit Suisse Credit Agreement, by December 6, 2023. Under the Credit Suisse Credit Agreement, the Borrower has a right to cure any such noncompliance by obtaining sufficient equity proceeds, which may be sourced from equity or debt financings by the Company, that would be deemed added to the Borrower’s Consolidated Adjusted EBITDA for purposes of recalculating the financial maintenance covenant when such proceeds are contributed to the Borrower. The cure right may be exercised by the Borrower no more than 2 times in any 4 consecutive testing periods and no more than 5 times during the term of the Credit Suisse Credit Agreement. Ifif the Borrower is unable to obtain asuch waiver of, orfrom the respective lenders and fails to cure any such noncompliance,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 the Credit Suisse Credit Agreement would be entitled to,each such facility may, and acting at the direction or request of the requisite lenders, could,will, among other things, immediately terminate all commitments under the CS Term LoanSide-Car Credit Agreement and CS Revolving Line ofthe Credit commitmentsSuisse Credit Agreement and accelerate the maturity of all principal, interest and other amounts due under such facilities. If such circumstances were to arise, the Company can provide no assurances that the Borrower would be able to obtain such waiver or timely consummate such cure or repay or refinance any accelerated principal, interest and other amounts that may become due, if any.thereunder.
Under the Side-Car Credit Agreement, if the Borrower becomes required to test the financial maintenance covenant under the Credit Suisse Credit Agreement and if, at such time, the Borrower is not in compliance with such financial maintenance covenant and was unable to obtain a waiver of, or cure, any such noncompliance by December 6, 2023, then the 2023 Term Loan Administrative Agent would be entitled to, and acting at the direction of the requisite lenders, could, among other things, immediately terminate all commitments under the 2023 Term Loan and accelerate the maturity of all principal, interest and other amounts due thereunder. Under theCompany’s Senior Notes, if (i) the Borrower becomes requiredis unable to testobtain such waivers from the financial maintenance covenant
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
respective lenders; (ii) the lenders under either the 2023 Side-Car Credit Agreement and/or the Credit Suisse Credit Agreement and if, at such time, the Borrower is not in compliance with such financial maintenance covenant and was unable or obtain a waiver of, or cure, any such noncompliance by December 6, 2023; (ii) the lender under such facility or under the Side-Car Credit Agreement acceleratesaccelerate 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 wouldwill be entitled to immediately accelerate the maturity of the Senior Notes, including all principal, interest and other amounts due thereon.
Prior The Company expects that it would not have sufficient liquidity to the CS Term Loan’s maturity date, the Borrower may elect to prepay, in wholerepay all principal, interest and other costs and expenses if one or in part at any time without premium or penalty, other than in connection with certain repricing transactions and customary breakage costs.
As of June 30, 2023 and December 31, 2022, the Borrower maintains restricted letters of credit for an aggregate amount of $5.7 million and $7.2 million, respectively. As of June 30, 2023 and December 31, 2022, the Borrower had $13.0 million (of its total cash of $27.7 million) and $4.4 million (of its total cash of $27.3 million), respectively, of cash held as collateral and letters of credit related to the ACO REACH program, respectively. The letters of credit and the collateral are both presented within the Company's cash, cash equivalents and restricted cash.
On January 14, 2022, the Company entered into an amendment to the Credit Suisse Credit Agreement, pursuant to which the outstanding principal amountmore 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 ofSide-Car Credit Agreement, the Credit Suisse Credit Agreement implemented a forward-looking term rate based onand/or the secured overnight financing rate (“SOFR”) as the replacement for LIBOR as the benchmark interest rate for borrowingsSenior Notes were terminated and accelerated 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, which was recorded as a loss on extinguishment of debt for the six months ended June 30, 2022. During the six months ended June 30, 2023, the SOFR exceeded the credit spread adjustment of 0.50%, resulting in monthly variable interest rates for the quarter. As of June 30, 2023, the effective interest rate of the CS Term Loan was 9.76%.circumstances.
2023 Term Loan Agreement
On February 24, 2023 (the “2023 Term Loan Closing Date”),Additionally, 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 funded on the 2023 Term Loan Closing Date.
The Side-Car Credit Agreement contains a financial maintenance covenant, requiring the Borrower to maintain a First Lien Net Leverage Ratio (i.e., total first lien senior secured net debt to Consolidated Adjusted EBITDA) not to exceed 5.80:1.00 on the last day of any four consecutive fiscal quarter period. With a First Lien Leverage Ratio of approximately 12.00:1.00 at June 30, 2023, the Borrower was not in compliance with this financial maintenance covenant as of such date. Under the Side-Car Credit Agreement, the Borrower has a right to cure noncompliance with the financial maintenance covenant by obtaining sufficient equity proceeds, which may be sourced from equity or debt financings by the Company, that will be deemed added to the Borrower’s Consolidated Adjusted EBITDA for purposes of recalculating the financial maintenance covenant when such proceeds are contributed to the Borrower. The cure right may be exercised by the Borrower no more than 2 times in any 4 consecutive testing periodsdate and, no more than 5 times during the term of the Side-Car Credit Agreement. Accordingly, on July 28, 2023, the Borrower delivered to the 2023 Term Loan Administrative Agent a notice of its intent to cure such noncompliance by September 5, 2023, which would require the Company to raise approximately $71 million of new capital, which amount, if raised, would be contributed to the Borrower to consummate the cure.
Thereafter, on August 10, 2023, the Borrower obtained a waiver of such noncompliance and entered into the 2023 Side-Car Amendment under which the Company will not be required to test compliance with the Side-Car Credit Agreement’s
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.subsidiaries. Absent such waiver, the 2023 Term Loan Administrative Agent, acting at the direction of the lead lender, and at the requisite lenders request, could have immediately terminated all commitments under the 2023 Term Loan and accelerated the maturity of all principal, interest and other amounts due thereon. Pursuant to the terms of the 2023 Side-Car Amendment, the Borrower will not be required to pursue its cure right. Based on the conditions present within the Side-Car Amendment, amounts outstanding pertaining to the 2023 Term Loan Agreement have been classified within current notes payable.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 5.8:1 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. 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.
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 (as amended, the “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 Credit”). The Obligations under the Credit Suisse Credit Agreement are secured by substantially all of the Borrower’s assets.
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.
As of September 30, 2023 and December 31, 2022, the Borrower 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 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.
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. This amendment represented a partial extinguishment and resulted in a write-off of deferred issuance costs of $1.4 million, which was recorded as a loss on extinguishment of debt for the nine months ended September 30, 2022. 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 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 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 bewas 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
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
reinvestment rights) or casualty or condemnation event or any incurrence of debt not permitted by the Side-Car Credit Agreement. The Side-Car Credit Agreement also provides for annual excess cash flow mandatory prepayments. The mandatory prepayments under the Side-Car Credit Agreement are substantially consistent with the Credit Suisse Credit Agreement. Mandatory prepayments of the 2023 Term Loan and the CS Term Loan must be offered pro rata to the lenders thereof.
The Side-Car Credit Agreement contains certain other representations and warranties, events of default and covenants, which are qualified by certain exceptions and baskets, that are customary for a transaction of this type, including, among other things, covenants that restrict the ability of the Borrower and its subsidiaries to incur certain additional indebtedness, create or prevent certain liens on assets, engage in certain mergers or consolidations, engage in asset dispositions, declare or pay dividends and make equity redemptions or restrict the ability of its subsidiaries to do so, make loans and investments, enter into transactions with affiliates, or make voluntary payments, amendments or modifications to subordinated or junior indebtedness.
The 2023 Term Loan is guaranteed, jointly and severally by Holdings and each domestic wholly-owned material subsidiary of the Borrower’s current and future direct and indirect domestic wholly-owned material subsidiaries, with certain exceptions in accordance with the terms of the Side-Car Credit Agreement. The 2023 Term Loan is secured on a first lien basis by substantially all the assets of the Borrower and the guarantors. The obligations under the Side-Car Credit Agreement and the Credit Suisse Credit Agreement are secured by the same collateral on a ratable basis.
In connection with and as consideration for entering into the Side-Car Credit Agreement, on February 24, 2023, the Company granted the lenders warrants to purchase, in the aggregate, up to 29.53.0 million shares of the Company’s Class A common stock at an exercise price of $0.01$0.10 per share, of which 21.60.2 million warrants were exercised on March 8, 2023 and the remaining 7.90.1 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 sixnine months ended JuneSeptember 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.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 JuneSeptember 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 earlier in this Note 12.
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 Loans and Senior Notes
The following table sets forth the Company’s future principal payments as of JuneSeptember 30, 2023, assuming acceleration of principal and capitalized paid-in-kindPIK interest related to the 2023 Term Loan into calendar year 2024 :
CANO HEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | (in thousands) | (in thousands) | | (in thousands) | |
| Year ending December 31, | Year ending December 31, | | Amount | Year ending December 31, | | Amount |
| 2023 | 2023 | $ | 3,222 | 2023 | $ | 1,611 |
| 2024 | 2024 | | 163,824 | 2024 | | 177,725 |
| 2025 | 2025 | | 6,444 | 2025 | | 6,444 |
| 2026 | 2026 | | 6,444 | 2026 | | 6,444 |
| 2027 | 2027 | | 622,212 | 2027 | | 652,211 |
| Thereafter | Thereafter | | 300,000 | Thereafter | | 300,000 |
| Total | Total | $ | 1,102,146 | Total | $ | 1,144,435 |
As of JuneSeptember 30, 2023 and December 31, 2022, the balance of debt issuance costs totaled $70.8$77.4 million and $18.4 million, respectively, and is being amortized into interest expense over the term of the loans using the effective interest method. Of the balance as of JuneSeptember 30, 2023, $76.9 million$70.2 million related to the CS 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 $0.3 million and $0.3$0.2 million related to the CS Revolving Line of Credit, and reflected in prepaid expenses and other current assets and other assets, respectively.
The Company recognized interest expense of $26.7$29.6 million (including $5.3$6.2 million of PIK interest under the 2023 Term Loan) and $50.2$79.9 million (including $7.4$13.6 million of PIK interest under the 2023 Term Loan) for the three and sixnine months ended JuneSeptember 30, 2023, respectively, compared to $13.1$16.5 million and $26.4$42.9 million for the three and sixnine months ended JuneSeptember 30, 2022, respectively. From the interest expense, approximately $0.5$2.3 million and $1.6$3.9 million were recognized related to the amortization expense for the three and sixnine months ended JuneSeptember 30, 2023, respectively, and $0.9$1.1 million and $1.6$2.7 million for the three and sixnine months ended JuneSeptember 30, 2022, respectively.
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 3 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.
If the asset or liability has a specified (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 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 $882.2$717.0 million and $745.9 million as of JuneSeptember 30, 2023 and December 31, 2022, respectively.
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
Due to seller: 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 Company's Class A
common stock during the 20 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 JuneSeptember, 30, 2023 the seller hashad met the 2022 performance metrics to earn a 100% payout and the liability is classified in current portionsportion due to sellers on the consolidated balance sheet at a fair valuesheet.
On December 9, 2022, the Company entered into an asset acquisition agreement (a copy of $28.7 million.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 common stock and various contingent consideration arrangements. The contingent consideration is valued based on the future performance of two acquired payor contracts using Monte-Carlo simulations. As of September 30, 2023, after the balance sheet date, the contingency was resolved as a result of 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.
Contingent consideration: There was a $15.9$2.8 million decrease in the fair value of the contingent consideration during the sixnine months ended JuneSeptember 30, 2023, which was recorded in change in fair value of contingent consideration in the consolidated statement of operations. This amount representrepresents net gains that were recorded related to the acquisition which was completed on August 5, 2022, as described above. The net gains resulted from a changechanges in the fair value of the future performance and contingencies being resolved of the assets acquired.
On December 9, 2022, the Company entered into an asset acquisition agreement requiring future payments in shares of the Company's Class A common stock. As of June 30, 2023, $16.7 million of the liability was classified as current portions due to sellers in the condensed consolidated balance sheet. The liability will continue to be fair valued until paid, as it will be settled in a variable amount of shares of the Company's Class A common stock. The Company issued 9.7 million Class A common stock on January 31, 2023, to settle a portion of the purchase price.
Warrant Liabilities: As of June 3, 2021, the Closing Date of the Business Combination, and as of JuneSeptember 30, 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," 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 JuneSeptember 30, 2023 and December 31, 2022.
As discussed in Note 12 "Debt","Debt," the Company granted the lenders to the 2023 Term Loan warrants to purchase, in the aggregate, up to 29.40.3 million shares of the Company’s Class A common stock at an exercise price of $0.01$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 $0.01. 21.6the per share exercise price $0.10. 0.2 million of these warrants were exercised onin March 8, 2023 and the remaining warrants were exercised onin April 24, 2023.
The preceding methods described may produce fair value calculations that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation methods are appropriate and
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The following table provides quantitative information regarding the Level 3 inputs used for the fair value measurements of the warrant liabilities:
| | | As of | | As of |
| Unobservable Input | Unobservable Input | | June 30, 2023 | | | December 31, 2022 | 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 | | $1.39 | | | $1.37 | Stock price | | $25.36 | | | $137.00 |
| Term (years) | Term (years) | | 2.9 | | | 3.4 | Term (years) | | 2.7 | | | 3.4 |
| | Risk free interest rate | Risk free interest rate | | 4.5% | | | 4.1% | Risk free interest rate | | 4.8% | | | 4.1% |
| Dividend yield | Dividend yield | | None | | | None | Dividend yield | | None | | | None |
| Public warrant price | Public warrant price | | $0.21 | | | $0.22 | 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 JuneSeptember 30, 2023:
| | (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 | | $ | 1,400 | | | $ | — | | | $ | — | | | $ | 1,400 | | |
| Contingent consideration asset | | (14,500) | | | — | | | — | | | (14,500) | | |
| | Due to sellers liabilities | Due to sellers liabilities | | 45,122 | | | 45,122 | | | — | | | — | | Due to sellers liabilities | | 16,022 | | | 16,022 | | | — | | | — | |
| Public Warrant Liabilities | Public Warrant Liabilities | | 4,830 | | | 4,830 | | | — | | | — | | Public Warrant Liabilities | | 1,150 | | | 1,150 | | | — | | | — | |
| Private Placement Warrant Liabilities | Private Placement Warrant Liabilities | | 2,212 | | | — | | | — | | | 2,212 | | Private Placement Warrant Liabilities | | 527 | | | — | | | — | | | 527 | |
| Total liabilities and assets measured at fair value | Total liabilities and assets measured at fair value | | $ | 39,064 | | | $ | 49,952 | | | $ | — | | | $ | (10,888) | | Total liabilities and assets measured at fair value | | $ | 17,699 | | | $ | 17,172 | | | $ | — | | | $ | 527 | |
There was a decreasedecrease of $0.2$3.7 million in the fair value of the Public Warrant Liabilities during the sixnine months ended JuneSeptember 30, 2023, and a decrease of $0.1$1.7 million in the fair va valuelue of the Private Placement Warrant Liabilities during the sixnine months ended JuneSeptember 30, 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.
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, 2022:
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Carrying
Value | | Quoted Prices in
Active Markets
for Identical
Items
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Liabilities and assets measured at fair value on a recurring basis: | | | | | | | | |
| Contingent consideration liability | $ | 2,800 | | $ | — | | $ | — | | $ | 2,800 | |
| Due to sellers liabilities | | 56,940 | | | 56,940 | | | — | | | — | |
| Public Warrant Liabilities | | 5,060 | | | 5,060 | | | — | | | — | |
| Private Placement Warrant Liabilities | | 2,313 | | | — | | | — | | | 2,313 | |
| Total liabilities and assets measured at fair value | $ | 67,113 | | $ | 62,000 | | $ | — | | $ | 5,113 | |
The following table includes a roll forward of the amounts for the three and sixnine months ended JuneSeptember 30, 2023 and 2022 and for liabilities measured at fair value:
| | | Fair Value Measurements for the Three Months Ended June 30, | | Fair Value Measurements for the Three Months Ended September 30, |
| (in thousands) | (in thousands) | | 2023 | | 2022 | (in thousands) | | 2023 | | 2022 |
| Balance as of March 31, | | $ | 46,865 | | | $ | 86,744 | | |
| Balance as of July 1, | | Balance as of July 1, | | $ | 39,064 | | | $ | 50,805 | |
| | Change in fair value of contingent consideration | Change in fair value of contingent consideration | | (11,800) | | | (5,764) | | Change in fair value of contingent consideration | | 13,100 | | | 900 | |
| | Contingent consideration recognized due to acquisitions | | Contingent consideration recognized due to acquisitions | | — | | | (4,100) | |
| | Change in fair value of warrants | Change in fair value of warrants | | 1,677 | | | (30,175) | | Change in fair value of warrants | | (5,365) | | | 65,720 | |
| | Contingent consideration write off | | Contingent consideration write off | | — | | | (197) | |
| | Change in fair value of due to sellers | Change in fair value of due to sellers | | 2,322 | | | — | | Change in fair value of due to sellers | | 900 | | | — | |
| | Balance as of June 30, | | $ | 39,064 | | | $ | 50,805 | | |
| Due to seller reclassification | | Due to seller reclassification | | (30,000) | | | $ | — | |
| Balance as of September 30, | | Balance as of September 30, | | $ | 17,699 | | | $ | 113,128 | |
| | | Fair Value Measurements for the Six Months Ended June 30, | | Fair Value Measurements for the Nine Months Ended September 30, |
| (in thousands) | (in thousands) | | 2023 | | 2022 | | (in thousands) | | 2023 | | 2022 | |
| Balance as of January 1, | Balance as of January 1, | | $ | 67,113 | | | $ | 118,567 | | | Balance as of January 1, | | $ | 67,113 | | | $ | 118,567 | | |
| | Change in fair value of contingent consideration | Change in fair value of contingent consideration | | (15,900) | | | (10,425) | | | Change in fair value of contingent consideration | | (2,800) | | | (9,525) | | |
| | Contingent consideration recognized due to acquisitions | | Contingent consideration recognized due to acquisitions | | — | | | (4,100) | | |
| | Change in fair value of warrants | Change in fair value of warrants | | (331) | | | (57,337) | | | Change in fair value of warrants | | (5,696) | | | 8,383 | | |
| | Contingent consideration write off | | Contingent consideration write off | | — | | | (197) | | |
| | Change in fair value of due to sellers | Change in fair value of due to sellers | | 3,461 | | | — | | | Change in fair value of due to sellers | | 4,361 | | | — | | |
| Due to seller payments | | (15,279) | | | — | | | |
| Balance as of June 30, | | $ | 39,064 | | | $ | 50,805 | | | |
| Due to seller payments and other | | Due to seller payments and other | | (15,279) | | | — | | |
| Due to seller reclassification | | Due to seller reclassification | | (30,000) | | | $ | — | | |
| Balance as of September 30, | | Balance as of September 30, | | $ | 17,699 | | | $ | 113,128 | | |
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
transfers substantially all the residual risks and rewards of ownership to the Company. The Physicians Groups’ equity at risk, as defined by GAAP, is insufficient to finance its activities without additional support, and therefore, the Physicians Groups are considered VIEs, and are not affiliates of the Company.
In order to determine whether the Company has a controlling financial interest in the Physicians Groups, and thus, whether the Company is the primary beneficiary, the Company considered whether it has (i) the power to direct the activities that most significantly impact the Physicians Groups’ economic performance and (ii) the obligation to absorb losses of the entities that could potentially be significant to it or the right to receive benefits from the Physicians Groups that could potentially be significant to it. The Company concluded that it may unilaterally remove the physician owners of the Physicians Groups at its discretion and is therefore considered to hold substantive kick-out rights over the decision maker of the Physicians Groups. Under each MSA, the Company is entitled to a management fee and a performance bonus that entitle the Company to substantially all of the residual returns or losses and is exposed to economics that 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.
The table below illustrates the aggregated VIE assets and liabilities and performance for the Physicians Groups:
| | (in thousands) | (in thousands) | | June 30, 2023 | | December 31, 2022 | (in thousands) | | September 30, 2023 | | December 31, 2022 |
| Total Assets1 | Total Assets1 | | $ | 21,832 | | | $ | 16,247 | | Total Assets1 | | $ | 7,492 | | | $ | 16,247 | |
Total Liabilities1 | Total Liabilities1 | | $ | 32,370 | | | $ | 19,445 | | Total Liabilities1 | | $ | 6,361 | | | $ | 19,445 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
June 30, | | Six Months Ended
June 30, |
| (in thousands) | 2023 | | 2022 | | 2023 | | 2022 | | |
| Total revenue | $ | 21,369 | | | $ | 24,754 | | | $ | 49,030 | | | $ | 39,072 | | | |
| Operating expenses:2 | | | | | | | | | |
| Third-party medical costs | 18,748 | | | 18,792 | | | 37,000 | | | 25,423 | | | |
| Direct patient expense | 7,381 | | | 7,666 | | | 14,768 | | | 13,430 | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total operating expenses | 26,129 | | | 26,458 | | | 51,768 | | | 38,853 | | | |
| Net income | $ | (4,760) | | | $ | (1,704) | | | $ | (2,738) | | | $ | 219 | | | |
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 Groups can be used to settle the Company's obligations. The Physicians Groups are included in the Company’s creditor group; thus, the Company'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.
1Amounts exclude specific assets and liabilities from the Company used to support the operations of the VIE's which were approximately $125.8 million and $99.2 million in Total Assets and $85.0 million and $156.8 million in Total Liabilities as of June 30, 2023 and December 31, 2022, respectively.
2 Amounts exclude selling, general and administrative expenses from the Company spent to support the operations of the VIE's which were approximately $13.2$8.5 million and $26.3$34.8 million for the three and sixnine months ended JuneSeptember 30, 2023, respectively and $9.1$6.1 million and $20.8$26.8 million for the three and sixnine months ended JuneSeptember 30, 2022, respectively. Additionally, amounts exclude depreciation and amortization expenses incurred by the Company to support the VIEs' operations which were approximately $2.0$1.7 million and $3.9$5.5 million for the three and sixnine months ended JuneSeptember 30, 2023, respectively, and $1.1$1.7 million and $1.9$3.6 million for the three and sixnine months ended JuneSeptember 30, 2022, respectively.
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 21,620,9410.2 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 7,862,1600.1 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 February 24, 2025,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 sixnine months ended JuneSeptember 30, 2023, the Company paid in kind $5.3incurred $6.2 million and $7.4$13.6 million ofof PIK interest expense, respectively, which was compounded into the principal, and paid $9.2$9.3 million in cash for debt issuance costs.
MedCloud Depot, LLC Relationship
On August 1, 2022, the Company appointed Bob Camerlinck as Chief Operating Officer (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 to MedCloud that amounted to approximately $1.2$1.3 million and $2.0$3.3 million for the three and sixnine months ended JuneSeptember 30, 2023, respectively, and $0.8recorded $0.6 million and $1.2$1.8 million of payments for three and sixnine months ended JuneSeptember 30, 2022, respectively, which were recorded within the caption selling, general and administrative expenses in the condensed consolidated financial statements. As of JuneSeptember 30, 2023, the Company owed $0.6$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 who at the time of the acquisition was owned by the spouse of Dr. Marlow Hernandez, the Company's former Chief Executive Officer who remainsand a former member of the Company’s Board of Directors ("Dr. Hernandez"), and Onsite Dental entered into a dental services agreement with the Company. Dr. Hernandez’ spouse became a minority shareholder of Onsite Dental upon closing of the 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. For such space, the Company recognized sublease income of approximately $0.2 million and $0.4$0.6 million during the three and sixnine months ended JuneSeptember 30, 2023, respectively, and $0.2 million and $0.3$0.7 million during the three and sixnine months ended JuneSeptember 30, 2022, respectively, which was recorded within the caption "Other Income (Expense)" in the accompanying condensed consolidated statements of operations. As of JuneSeptember 30, 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 expenses of an immaterial amount and $1.5 million during the three and sixnine months ended JuneSeptember 30, 2022, respectively, which was recorded within the caption "Direct Patient Expense". As of JuneSeptember 30, 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 dental services provided to Cano Health's members by Onsite Dental in the amount of approximately $2.4$0.0 million and $6.4 million for the three and sixnine months ended JuneSeptember 30, 2023, respectively, $2.0 million and $3.1$5.0 million for the three and sixnine months ended JuneSeptember 30, 2022. As of JuneSeptember 30, 2023, the Company owed $2.2was billed $5.6 million by Onsite Dental.
On 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.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.
Operating Leases
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company indirectly leased a medical space from the Company's COO. The Company paid approximately $0.2$0.1 million and $0.3$0.4 million forfor the three and sixnine months ended JuneSeptember 30, 2023 to Humana, Inc., a managed care organization with whom the Company has entered into multi-year agreements, (“Humana”), and in turn, Humana paid the Company's COO $0.1 million and $0.2$0.3 million for the three and sixnine months ended JuneSeptember 30, 2023, respectively. In addition, the Company paid $0.2$0.1 million and $0.2$0.4 million to the Humana and Humana paid the Company's COO $0.1 million and $0.2$0.3 million for the three and sixnine months ended JuneSeptember 30, 2022, respectively. The Company's COO leased threeseveral other properties directly to the Company and was paid $0.1 million and $0.2 million for the three and sixnine months ended JuneSeptember 30, 2023 and $0.1 million and $0.1$0.2 million for the three and sixnine months ended JuneSeptember 30, 2022, respectively.
General Contractor Agreements
The Company has entered into various general contractor agreements with Cano Builders, USA, Inc. ("Cano Builders"), a company that is controlled by Jose Hernandez, the father of Dr. Hernandez, pursuant to which Cano Builders performs leasehold improvements at various Company locations, as well as performing various repairs and related maintenance. Payments made to Cano Builders pursuant to these general contractor agreements, as well as amounts paid for repairs and maintenance, totaled approximately $0.3$0.2 million and $0.8$1.0 million for the three and sixnine months ended JuneSeptember 30, 2023, respectively, and $1.9$2.6 million and $3.6$6.2 million for the three and sixnine months ended JuneSeptember 30, 2022, respectively. As of JuneSeptember 30, 2023, the Company owed $0.2 milliondid 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)
Consideration 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 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 the 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 certain 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 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.
The 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
Dr. Hernandez' sister-in-law is employed at the Company as its director of payroll and her annualized cash compensation is approximately $135,000.
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
The Company maintains the 2021 Stock Option and Incentive Plan (the “2021 Stock(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 2021 Stock 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.47.0 thousand. On January 1 of each year 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 lesser of (i) 15.00.2 million shares of Class A common stock, (ii)
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 Compensation Committee, which is the plan administrator.
The 2021 Stock Plan provides for the grant of incentive and nonqualified stock option, restricted stock units (“RSUs”), restricted share awards, stock appreciation awards, unrestricted stock awards, and cash-based awards to the Company's employees, directors and consultants.
Stock Options
On June 3, 2021, in connection with closing 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. 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, subject to the optionee remaining employed. The unrecognized compensation cost of the Market Condition Awards as of JuneSeptember 30, 2023 was $8.5$4.3 million, which is expected to be recognized over the weighted average remaining service period of 1.1 years.0.9 years.
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Further, on March 15, 2022, March 31, 2023 and April 11, 2023, in connection with achieving certain performance metrics, the Company granted a total of 2.3 million23.0 thousand stock options with service conditions ("Service Condition Awards") to several of the Company's executive officers. The Service Condition Awards vest over 4 years, with 25% of the shares underlying the award vesting at the end of each successive 1-year period thereafter, subject to the optionee remaining employed. The unrecognized compensation cost of the Service Condition Awards as of JuneSeptember 30, 2023 was $1.7$0.9 million, which is expected to be recognized over the weighted average remaining service period of 1.91.8 years.
Stock Option Valuation
The Company uses two valuation methods to determine the fair value of the stock options granted under the 2021 Stock Plan. The Monte-Carlo simulation model is used to estimate the fair value of the Market Condition Awards. The Monte-Carlo simulation model calculates multiple potential outcomes for an award and establishes a fair value based on the most likely outcome. The fair values were calculated using the Monte-Carlo model with the following assumptions as of the June 3, 2021 grant date:
| | | As of June 3, 2021 | | As of June 3, 2021 |
| | Closing Cano Health share price as of valuation date | Closing Cano Health share price as of valuation date | $ | 14.75 | Closing Cano Health share price as of valuation date | $ | 1,475.00 |
| Risk-free interest rate | Risk-free interest rate | 1.68% - 2.0% | Risk-free interest rate | 1.68% - 2.01% |
| Expected volatility | Expected volatility | 45.0% | Expected volatility | 45.0% |
| Expected dividend yield | Expected dividend yield | 0.0% | Expected dividend yield | 0.0% |
| Expected cost of equity | Expected cost of equity | 9.0% | 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 options. The fair values of the Service Condition Awards were calculated using the following assumptions as of the March 15, 2022, March 31, 2023 and April 11, 2023 grant dates:
| | | | | | | | | | |
| | | | As of March 15, 2022 |
| | | | |
| Strike price | | | | $ | 6.03 |
| Risk-free interest rate | | | | 2.1% |
| Expected volatility | | | | 70.0% |
| Expected dividend yield | | | | 0.0% |
| Expected term | | | | 6.25 |
| | | | | | | | | | |
| | | | As of March 31, 2023 |
| | | | |
| Strike price | | | | $ | 0.91 |
| Risk-free interest rate | | | | 3.5% |
| Expected volatility | | | | 100.0% |
| Expected dividend yield | | | | 0.0% |
| Expected term | | | | 6.25 |
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | As of April 11, 2023 | | | | As of March 15, 2022 |
| | Strike price | Strike price | | | $ | 1.50 | Strike price | | | $ | 603.00 |
| Risk-free interest rate | Risk-free interest rate | | | 3.5% | Risk-free interest rate | | | 2.1% |
| Expected volatility | Expected volatility | | | 100.0% | Expected volatility | | | 70.0% |
| Expected dividend yield | Expected dividend yield | | | 0.0% | Expected dividend yield | | | 0.0% |
| Expected term | Expected term | | | 6.25 | 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 2021 Stock Plan through JuneSeptember 30, 2023 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, 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 | |
| | Forfeitures | Forfeitures | | (262,146) | | | 4.23 | | | — | | | — | | Forfeitures | | (19,299) | | | 423 | | | (289) | | | 388 | |
| Balance, June 30, 2022 | | 12,441,552 | | | $ | 4.23 | | | 435,141 | | | $ | 3.88 | | |
| Balance, September 30, 2022 | | Balance, September 30, 2022 | | 107,738 | | | $ | 423 | | | 4,062 | | | $ | 388 | |
| | Balance, December 31, 2022 | Balance, December 31, 2022 | | 10,634,998 | | | $ | 4.23 | | | 405,652 | | | $ | 3.88 | | Balance, December 31, 2022 | | 106,350 | | | $ | 423 | | | 4,057 | | | $ | 388 | |
| Granted | Granted | | — | | | — | | | 1,864,628 | | | 0.84 | | Granted | | — | | | — | | | 18,646 | | | 84 | |
| | Forfeitures | Forfeitures | | (904,906) | | | 4.23 | | | (16,393) | | | 1.22 | | Forfeitures | | (34,164) | | | 402 | | | (6,543) | | | 126 | |
| Balance, June 30, 2023 | | 9,730,092 | | | $ | 4.23 | | | 2,253,887 | | | $ | 1.38 | | |
| 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 4.9 million49.0 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 JuneSeptember 30, 2023, while the performance condition has not been earned, the Company is recording expense at 100% of the overall target awards and will adjust the expense based on the Company's performance going forward. In addition, the Company granted 11.1 million service based RSU's during the quarter.
The fair value of the RSUs is based on the closing price of the Company’s Class A common stock on the grant date. The unrecognized compensation cost of the outstanding RSUs as of JuneSeptember 30, 2023 was $49.8$29.4 million for service based awards and $5.2$2.9 million for PRSUs. The RSUs and PRSUs are expected to be recognized over the weighted average remaining service period of 1.71.5 years and 1.71.5 years, respectively. A majority of the RSUs vest in equal annual installments over a period of 4 years from the grant date. Certain of the Company's executives received RSUs which vest in equal annual 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 stockholders' meeting.
A summary of the status of unvested RSUs granted under the 2021 Stock Plan through JuneSeptember 30, 2023 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 | | 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 | | 11,326,599 | | | 5.38 | | | — | | | — | | Granted | | 117,938 | | | 540 | | | — | | | — | |
| Vested | Vested | | (717,138) | | | 12.44 | | | (93,493) | | | 13.37 | | Vested | | (25,174) | | | 975 | | | (1,767) | | | 1,337 | |
| Forfeitures | Forfeitures | | (293,538) | | | 7.62 | | | — | | | — | | Forfeitures | | (17,715) | | | 797 | | | — | | | — | |
| Balance, June 30, 2022 | | 14,776,695 | | | $ | 7.73 | | | 613,257 | | | $ | 12.63 | | |
| Balance, September 30, 2022 | | Balance, September 30, 2022 | | 119,657 | | | $ | 747 | | | 5,301 | | | $ | 1,252 | |
| | Balance, December 31, 2022 | Balance, December 31, 2022 | | 10,672,574 | | | $ | 7.64 | | | 280,477 | | | $ | 13.36 | | Balance, December 31, 2022 | | 106,726 | | | $ | 764 | | | 2,805 | | | $ | 1,336 | |
| Granted | Granted | | 11,174,399 | | | 1.33 | | | 4,900,598 | | | 1.36 | | Granted | | 127,201 | | | 132 | | | 54,052 | | | 136 | |
| Vested | Vested | | (1,416,575) | | | 7.10 | | | (93,493) | | | 13.37 | | Vested | | (37,588) | | | 643 | | | (3,078) | | | 501 | |
| Forfeitures | Forfeitures | | (1,550,430) | | | 4.83 | | | — | | | — | | Forfeitures | | (51,321) | | | 538 | | | (15,659) | | | 279 | |
| Balance, June 30, 2023 | | 18,879,968 | | | $ | 4.18 | | | 5,087,582 | | | $ | 1.80 | | |
| 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 $1.7$4.2 million for the three months ended September 30, 2023 due to significant forfeitures during the quarter and compensation expense of $6.4 million for the nine months ended September 30, 2023, and $10.7 million and $10.6$41.3 million for the three and sixnine months ended June 30, 2023, respectively, and $17.4 million and $30.6 million for the three and six months ended JuneSeptember 30, 2022, respectively. The Company recorded compensation expense related to the 2021 ESPP of $0.4$0.2 million and $0.7$0.9 million for the three and sixnine months ended JuneSeptember 30, 2023, respectively, and $0.4 million and $1.0$1.4 million for the three and sixnine months ended JuneSeptember 30, 2022, respectively.
On June 16, 2023, Dr. Marlow Hernandez, the Company’s former CEO, resigned from such position (while remaining a member of the Company’s Board of Directors)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.
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 our acquisition of University 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 December 2023, contains a provision that requires average monthly net purchases of $0.6 million, and if the minimum is not met, the vendor may adjust the pricing of goods.
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
This agreement was terminated on October 31, 2023.
Management believes it has satisfied the minimum requirements of these agreements for the sixnine months ended JuneSeptember 30, 2023 and 2022.
Legal Matters
On March 18, 2022, a purported stockholder of the Company filed a putative class action lawsuit in the U.S. District Court for the Southern District of Florida against the Company certain current officers and certain of its former officers of Jaws, captioned Alberto Gonzalez v. Cano Health, Inc. f/k/a Jaws Acquisition Corp., et al. (No. 1:22-cv-20827). An amended complaint was filed on February 21, 2023. Defendants moved to dismiss the amended complaint on April 7, 2023. The lawsuit alleges violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 against all defendants in connection with allegedly false and misleading statements made by the Company regarding compliance with GAAP and the timing of its revenue recognition from Medicare 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 attorneys’ fees and 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.
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 operations or cash flows.
18. INCOME TAXES
The Company generated a $1.9$0.1 million and $2.0 million tax benefit for the three and sixnine months ended JuneSeptember 30, 2023, resulting in an effective tax rate of 0.7%0.03% and 0.6%0.2%, respectively, as compared to an effective tax rate of (5.9)(0.5)% and (14.8)%0.6% for the three and sixnine months ended JuneSeptember 30, 2022. The effective tax rate for the periods presented differs from the statutory U.S. tax rate primarily as a result of the income allocated to non-controlling interests and the valuation allowance recorded against the Company’s deferred tax assets. The Company evaluates the realizability of its deferred tax assets on a quarterly basis and adjusts the valuation allowance 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") as of JuneSeptember 30, 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 Internal Revenue Service ("IRS") commenced an examination of PCIH’s income tax return for the year ended December 31, 2020 in the first quarter of 2023. The Company believes that it has adequately provided for any reasonably foreseeable outcomes related to the tax examination and that any settlement related thereto will not have a material adverse effect on the Company’s consolidated financial statements; however, there can be no assurances as to the ultimate outcome until the examination is completed. The Company has analyzed filing positions in the Federal, State, local and foreign jurisdictions where it is required to file income tax returns for all open tax years and does not believe any tax uncertainties exist.
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Tax Receivable Agreement
Upon the completion of the Business Combination, Cano Health became a party to the Tax Receivable Agreement ("TRA"). Under the terms of that agreement, Cano Health generally is 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 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 generally is 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 are 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 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's historical loss position and other factors that make it difficult to rely on forecasts, we have not recorded the Tax Receivable Agreement liability as of JuneSeptember 30, 2023. We will continue to evaluate this on a quarterly basis which may result in future adjustments to the treatment.
19. NET INCOME (LOSS) PER SHARE
The following table sets forth the net income (loss) and the computation of basic and diluted per common stock for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| (in thousands, except shares and per share data) | 2023 | | 2022 | | 2023 | | 2022 | | |
| Numerator: | | | | | | | | | |
| Net income (loss) | $ | (270,745) | | | $ | (14,564) | | | $ | (331,330) | | | $ | (14,649) | | | |
| Less: net income (loss) attributable to non-controlling interests | (129,992) | | | (9,231) | | | (162,427) | | | (9,976) | | | |
| Net income (loss) attributable to Class A common stockholders | (140,753) | | | (5,333) | | | (168,903) | | | (4,673) | | | |
| Dilutive effect of RSU's | — | | | — | | | — | | | — | | | |
| Dilutive effect of Class B common stock | (129,992) | | | (9,231) | | | — | | | (9,976) | | | |
| | | | | | | | | |
| Net income (loss) attributable to Class A common stockholders - Diluted | $ | (270,745) | | | $ | (14,564) | | | $ | (168,903) | | | $ | (14,649) | | | |
| Basic and Diluted Earnings Per Share denominator: | | | | | | | | | |
| Weighted average common stock outstanding - basic | 274,640,987 | | | 210,053,037 | | | 257,317,776 | | | 200,783,129 | | | |
| Net income (loss) per share - basic | $ | (0.51) | | | $ | (0.03) | | | $ | (0.66) | | | $ | (0.02) | | | |
| Diluted Earnings Per Share: | | | | | | | | | |
| Dilutive effect of RSU's | — | | | — | | | — | | | — | | | |
| Dilutive effect of Class B common stock on weighted average common stock outstanding | 253,208,965 | | | 264,527,434 | | | — | | | 264,527,434 | | | |
| | | | | | | | | |
| Weighted average common stock outstanding - diluted | 527,849,952 | | | 474,580,471 | | | 257,317,776 | | | 465,310,563 | | | |
| Net income (loss) per share - diluted | $ | (0.51) | | | $ | (0.03) | | | $ | (0.66) | | | $ | (0.03) | | | |
| | | | | | | | | |
CANO HEALTH, INC.
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. The Class B common stock was dilutive for the three months ended June 30, 2023.
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 Company's Class A common stock during the 20 consecutive trading days preceding the transaction's closing date. These shares were deposited in escrow and will be released to the seller upon the satisfaction of certain performance metrics during 2022 and 2023. The final number of shares to be issued to the seller, if any, from the escrow account will be calculated by multiplying the initial share amount by an earned share percentage in accordance with the purchase agreement and subtracting any forfeited indemnity shares. The dilutive effects of these shares were excluded from the diluted earnings per share calculation for the sixnine months ended JuneSeptember 30, 2023 because they were anti-dilutive.
The table below presents the Company’s potentially dilutive securities:
| | | | | |
| As of JuneSeptember 30, 2023 |
| Class B common stock | 253,208,9652,521,836 | |
| Public Warrants | 22,999,900229,999 | |
| Private Placement Warrants | 10,533,292105,333 | |
| |
| Restricted Stock Units | 23,967,551183,138 | |
| Stock Options | 11,983,97988,345 | |
| Contingent Shares Issued in Connection with Acquisitions | 2,720,96627,210 | |
| ESPP Shares | 1,345,32518,766 | |
| Potential Common Stock Equivalents | 326,759,9783,174,627 | |
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-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 U.S., including Puerto Rico, and all of the Company’s long-lived assets were located in the U.S.
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
21. SUBSEQUENT EVENTS
Except as set forthOn November 3, 2023, the Company completed the Reverse Stock Split discussed in Note 12, "Debt,"1, “Nature of Business and Operations – 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 Company has evaluated subsequent events throughnumber 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 filing of this Form 10-Q, and determined that there have been no events that have occurred that would require adjustments1-for-100 ratio used to our disclosures incomplete the 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," "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's unaudited condensed consolidated financial statements and related notes presented here in Part I, Item 1 included elsewhere in this Quarterly Report on Form 10-Q (the "Form"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, 2022 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 ReportReports on Form 10-Q filed with the SEC on May 9, 2023 (theand 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 Form 10-Q, particularly in the sections entitled "Forward-Looking Statements," as well as Part I, Item 1A, “Risk Factors” in our 2022 Form 10-K, as supplemented by Part II, Item 1A, “Risk Factors,” included in the Company’s Q1 2023 Form 10-Q. and Q2 2023 Form 10-Q.
Executive Overview
During the sixnine months ended JuneSeptember 30, 2023, our operating results have performed below historical levels, with the majority of the decline arising from a 15.6%8.8% decrease in capitated revenue per member per month compared to the sixnine months ended JuneSeptember 30, 2022 with onlyand a 2.8% decrease5.7% increase in third party medical costs per member per month for the sixnine months ended JuneSeptember 30, 2022.
In June 2023, we decided to shift the Company's strategic direction, which primarily includes the following measures:
•Focusing our membership base towards Medicare Advantage and ACO Reach;Reach and improving patient engagement;
•Selling certain assets and operations and exiting certain markets; we completed exiting our California, New Mexico and Illinois markets by the fall of 2023;prior to this filing;
•Exiting itsour Puerto Rico operations by January 1,the beginning of 2024;
•Conducting a strategic review of the Company's Medicaid business in Florida, medical centers located in Texas and Nevada, pharmacy assets and other specialty practices;
•Consolidating underperforming owned medical centers;centers and terminating underperforming affiliate partnerships;
•Lowering third party medical costs through negotiations with payors;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; and
•Delaying renovations and other capital projects.projects; and
•Evaluating the performance our affiliate provider relationships.
In additionAs 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 above,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 pursuingthe 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, consistent with the terms and conditions of the 2023 Side-Car Amendment. The Company hasincluding having engaged advisors to assist in the process. The Company has not setWhile these efforts have yet to yield a timetable forsale transaction, the conclusion of thisCompany’s process and thereremains ongoing. There is no assurance that thethis process will result in any transaction.
TheseWe believe that these strategic and operational steps are critical to improvingour 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 membersmembers.
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 ensurewhich each 100 shares of the organization’s long-term success.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 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.
As previously disclosed, the Company believes 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 asto allow the Company’s common stock to be more attractive to a broader range of investors. The Company, however, cannot assure that the price of its Class A Common Stock after the Reverse Stock Split will reflect the 1-for-100 reverse split ratio, that the price per share following the effective time of the Reverse Stock Split will be maintained for any period of time, or that the price will remain above the 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.
| | | June 30, 2023 | December 31, 2022 | June 30, 2022 | | September 30, 2023 | December 31, 2022 | September 30, 2022 |
| Membership | Membership | 381,066 | 309,590 | 281,525 | Membership | 312,151 | 309,590 | 294,596 |
| Medical centers | Medical centers | 169 | 172 | 143 | Medical centers | 133 | 172 | 151 |
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 is exiting thealso exited its California and New Mexico and Illinois markets by the fallend of 2023.the third quarter. Total membership and total medical centers for these markets were 4,999769 and 17,10, respectively, as of JuneSeptember 30, 2023.
Members
Members represent those Medicare, Medicaid, ACA, and until the second quarter of 2023, commercially insured patients, for whom we receive a fixed PMPM 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.
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 ACO REACH program and ACO's may be adjusted based on current year utilization.
Generally, we enter into 3 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 assigned to them related to these ancillary services. We 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 payment 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 funding 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 assigned to them related to third-party medical costs. We 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. 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 the number of centers open during a given period of time, and, if determinable, the center where the expense was incurred. TheIn the third quarter of 2023, the Company has developedimplemented 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 expects to reducereduced staffing by approximately 700842 employees, or 17%21% of its workforce. Approximately 40%52% of the workforce reductions will bewere attributable to exiting operations in certain markets withand 48% of the remainder attributable to other operating centers.workforce reductions represents organizational restructuring. These actions are expected to yield approximately $50$65 million of annualized cost reductions beginning in the third quarter of 2023 and through the end of 2024. The Company expects to recordrecorded a restructuring charge in the third quarter of 2023 of approximately $4$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. Transaction costs 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. Change in fair value of contingent consideration consists of
adjustments in contingent consideration due to acquisitions.
Credit losses on other assets. On August 2, 2023, MSP announced that the SEC initiated an investigation of MSP on August 11, 2022. In addition, MSP announced that it received a subpoena on March 10, 2023 from the U.S. Attorney's Office in the U.S. District Court for the Southern District of Florida. As a result of (i) these recent disclosures by MSP; (ii) MSP's delinquent filing of its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2023; and (iii)(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. As ofDuring the quarter ended June 30, 2023, the Company has recognizedrecorded an allowance for credit losses of $62.0 million. As of September 30, 2023 the Company has concluded that the securities do not have a readily determinable fair value.
Goodwill impairment loss. As of September 30, 2023 the Company determined there was a triggering event and performed a quantitative assessment which resulted in a goodwill impairment loss being booked in the third quarter of 2023. See Note 7, "Goodwill," in our unaudited consolidated financial statements in Item 1 of Part I of this Form 10-Q for details.
Other Income (Expense)
Interest expense. Interest expense primarily consists of interest incurred on our outstanding borrowings under our Credit Suisse Credit Agreement, Senior Notes, and 2023 Term Loan, including Paid-in-Kind interest ("PIK"). See “Liquidity and Capital Resources.” Costs incurred to obtain debt financing are amortized and shown as a component of interest expense.
Interest income. Interest income primarily consists of interest earned through a loan agreement with an affiliated company.
Loss on extinguishment of debt. Loss on extinguishment of debt primarily consists of unamortized debt issuance costs related to our Credit Suisse Credit Agreement in connection with our financing arrangements.
Change in fair value of warrant liabilities. Change in fair value of warrant liabilities consists primarily of changes to the public warrants and private placement warrants assumed upon the consummation of the Business Combination. The liabilities are revalued at each reporting period.
Other income (expense). Other income (expense) primarily relates to sublease income.income and the gain on the Sale Transaction.
Results of Operations
The following table sets forth our consolidated statements of operations data for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| ($ in thousands) | 2023 | | 2022 | | 2023 | | 2022 | | |
| Revenue: | | | | | | | | | |
| Capitated revenue | $ | 743,324 | | | $ | 655,493 | | | $ | 1,584,397 | | | $ | 1,329,844 | | | |
| Fee-for-service and other revenue | 23,422 | | | 33,880 | | | 49,258 | | | 63,671 | | | |
| Total revenue | 766,746 | | | 689,373 | | | 1,633,655 | | | 1,393,515 | | | |
| Operating expenses: | | | | | | | | | |
| Third-party medical costs | 769,629 | | | 541,317 | | | 1,477,960 | | | 1,077,097 | | | |
| Direct patient expense | 56,757 | | | 52,647 | | | 125,184 | | | 113,323 | | | |
| Selling, general, and administrative expense | 99,418 | | | 106,179 | | | 195,890 | | | 202,849 | | | |
| Depreciation and amortization expense | 27,251 | | | 19,836 | | | 54,473 | | | 38,872 | | | |
| Transaction costs | 9,125 | | | 6,207 | | | 19,211 | | | 14,583 | | | |
| Change in fair value of contingent consideration | (11,800) | | | (5,764) | | | (15,900) | | | (10,425) | | | |
| | | | | | | | | |
| Credit loss on other assets | 62,000 | | | — | | | 62,000 | | | — | | | |
| Total operating expenses | 1,012,380 | | | 720,422 | | | 1,918,818 | | | 1,436,299 | | | |
| Loss from operations | (245,634) | | | (31,049) | | | (285,163) | | | (42,784) | | | |
| Other income and expense: | | | | | | | | | |
| Interest expense | (26,719) | | | (13,134) | | | (50,224) | | | (26,418) | | | |
| Interest income | 90 | | | 2 | | | 99 | | | 3 | | | |
| Loss on extinguishment of debt | — | | | — | | | — | | | (1,428) | | | |
| Change in fair value of warrant liabilities | (1,677) | | | 30,175 | | | 331 | | | 57,337 | | | |
| Other income (expense) | 1,323 | | | 251 | | | 1,755 | | | 530 | | | |
| Total other income (expense) | (26,983) | | | 17,294 | | | (48,039) | | | 30,024 | | | |
| Net income (loss) before income tax expense | (272,617) | | | (13,755) | | | (333,202) | | | (12,760) | | | |
| Income tax expense (benefit) | (1,872) | | | 809 | | | (1,872) | | | 1,889 | | | |
| Net income (loss) | $ | (270,745) | | | (14,564) | | | $ | (331,330) | | | $ | (14,649) | | | |
| Net income (loss) attributable to non-controlling interests | (129,992) | | | (9,231) | | | (162,427) | | | (9,976) | | | |
| Net income (loss) attributable to Class A common stockholders | $ | (140,753) | | | $ | (5,333) | | | $ | (168,903) | | | $ | (4,673) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 June 30, | | Six Months Ended June 30, |
| (% of revenue) | 2023 | | 2022 | | 2023 | | 2022 | | |
| Revenue: | | | | | | | | | |
| Capitated revenue | 96.9 | % | | 95.1 | % | | 97.0 | % | | 95.4 | % | | |
| Fee-for-service and other revenue | 3.1 | % | | 4.9 | % | | 3.0 | % | | 4.6 | % | | |
| Total revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | |
| Operating expenses: | | | | | | | | | |
| Third-party medical costs | 100.4 | % | | 78.5 | % | | 90.5 | % | | 77.3 | % | | |
| Direct patient expense | 7.4 | % | | 7.6 | % | | 7.7 | % | | 8.1 | % | | |
| Selling, general, and administrative expense | 13.0 | % | | 15.4 | % | | 12.0 | % | | 14.6 | % | | |
| Depreciation and amortization expense | 3.6 | % | | 2.9 | % | | 3.3 | % | | 2.8 | % | | |
| Transaction costs | 1.2 | % | | 0.9 | % | | 1.2 | % | | 1.0 | % | | |
| Change in fair value of contingent consideration | (1.5) | % | | (0.8) | % | | (1.0) | % | | (0.7) | % | | |
| | | | | | | | | |
| Credit loss on other assets | 8.1 | % | | 0.0 | % | 0.0 | % | 3.8 | % | 0.0 | % | 0.0 | % | | |
| Total operating expenses | 132.2 | % | | 104.5 | % | | 117.5 | % | | 103.1 | % | | |
| Loss from operations | (32.2) | % | | (4.5) | % | | (17.5) | % | | (3.1) | % | | |
| Other income and expense: | | | | | | | | | |
| Interest expense | (3.5) | % | | (1.9) | % | | (3.1) | % | | (1.9) | % | | |
| Interest income | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | |
| Loss on extinguishment of debt | 0.0 | % | | 0.0 | % | | 0.0 | % | | (0.1) | % | | |
| Change in fair value of warrant liabilities | (0.2) | % | | 4.4 | % | | 0.0 | % | | 4.1 | % | | |
| Other income (loss) | 0.2 | % | | 0.0 | % | | 0.1 | % | | 0.0 | % | | |
| Total other income (loss) | (3.5) | % | | 2.5 | % | | (3.0) | % | | 2.2 | % | | |
| Net income (loss) before income tax expense | (35.7) | % | | (2.0) | % | | (20.5) | % | | (0.9) | % | | |
| Income tax expense (benefit) | (0.2) | % | | 0.1 | % | | (0.1) | % | | 0.1 | % | | |
| Net income (loss) | (35.4) | % | | (2.1) | % | | (20.4) | % | | (0.8) | % | | |
| Net income (loss) attributable to non-controlling interests | (17.0) | % | | (1.3) | % | | (9.9) | % | | (0.7) | % | | |
| Net income (loss) attributable to Class A common stockholders | (18.4) | % | | (0.8) | % | | (10.4) | % | | (0.1) | % | | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 June 30, | | Three Months Ended September 30, |
| | 2023 | | 2022 | | | 2023 | | 2022 | |
| ($ in thousands) | ($ in thousands) | | Revenue $ | | Revenue % | | Revenue $ | | Revenue % | | ($ in thousands) | | Revenue $ | | Revenue % | | Revenue $ | | Revenue % | |
| Capitated revenue | Capitated revenue | | | | | | | | | | Capitated revenue | | | | | | | | | |
| Medicare | Medicare | | $ | 695,612 | | | 90.7 | % | | $ | 602,613 | | | 87.4 | % | | Medicare | | $ | 728,435 | | | 92.4 | % | | $ | 577,989 | | | 86.9 | % | |
| Other capitated revenue | Other capitated revenue | | 47,712 | | | 6.2 | % | | 52,880 | | | 7.6 | % | | Other capitated revenue | | 41,834 | | | 5.3 | % | | 47,906 | | | 7.2 | % | |
| Total capitated revenue | Total capitated revenue | | 743,324 | | | 96.9 | % | | 655,493 | | | 95.0 | % | | 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 | | 4,282 | | | 0.6 | % | | 9,701 | | | 1.4 | % | | Fee-for-service | | 6,886 | | | 0.9 | % | | 9,677 | | | 1.5 | % | |
| Pharmacy | Pharmacy | | 15,559 | | | 2.0 | % | | 12,759 | | | 1.9 | % | | Pharmacy | | 14,243 | | | 1.8 | % | | 12,910 | | | 1.9 | % | |
| Other | Other | | 3,581 | | | 0.5 | % | | 11,420 | | | 1.7 | % | | Other | | (3,325) | | | (0.4) | % | | 16,546 | | | 2.5 | % | |
| Total fee-for-service and other revenue | Total fee-for-service and other revenue | | 23,422 | | | 3.1 | % | | 33,880 | | | 5.0 | % | | Total fee-for-service and other revenue | | 17,804 | | | 2.3 | % | | 39,133 | | | 5.9 | % | |
| | Total revenue | Total revenue | | $ | 766,746 | | | 100.0 | % | | $ | 689,373 | | | 100.0 | % | | Total revenue | | $ | 788,073 | | | 100.0 | % | | $ | 665,028 | | | 100.0 | % | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2023 | | 2022 | | |
| (in thousands) | | Revenue $ | | Revenue % | | Revenue $ | | Revenue % | | | | |
| Capitated revenue | | | | | | | | | | | | |
| Medicare | | $ | 1,489,240 | | | 91.2 | % | | $ | 1,217,831 | | | 87.5 | % | | | | |
| Other capitated revenue | | 95,157 | | | 5.8 | % | | 112,013 | | | 8.0 | % | | | | |
| Total capitated revenue | | 1,584,397 | | | 97.0 | % | | 1,329,844 | | | 95.5 | % | | | | |
| Fee-for-service and other revenue | | | | | | | | | | | | |
| Fee-for-service | | 15,975 | | | 1.0 | % | | 19,671 | | | 1.4 | % | | | | |
| Pharmacy | | 27,664 | | | 1.7 | % | | 24,274 | | | 1.7 | % | | | | |
| Other | | 5,619 | | | 0.3 | % | | 19,726 | | | 1.4 | % | | | | |
| Total fee-for-service and other revenue | | 49,258 | | | 3.0 | % | | 63,671 | | | 4.5 | % | | | | |
| | | | | | | | | | | | |
| Total revenue | | $ | 1,633,655 | | | 100.0 | % | | $ | 1,393,515 | | | 100.0 | % | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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
June 30, | | | Three Months Ended
September 30, | |
| (in thousands) | | 2023 | | 2022 | | % Change | |
| Members: | | | | | | | |
| |
| | 2023 | | 2022 | | % Change |
| Members:1 | | Members:1 | | | | | | |
| Medicare Advantage | Medicare Advantage | | 140,535 | | | 123,768 | | | 13.5 | % | Medicare Advantage | | 131,557 | | | 128,731 | | | 2.2 | % |
| Medicare ACO REACH | Medicare ACO REACH | | 65,161 | | | 40,179 | | | 62.2 | % | Medicare ACO REACH | | 64,328 | | | 39,615 | | | 62.4 | % |
| Total Medicare | Total Medicare | | 205,696 | | | 163,947 | | | 25.5 | % | Total Medicare | | 195,885 | | | 168,346 | | | 16.4 | % |
| Medicaid | Medicaid | | 77,290 | | | 70,254 | | | 10.0 | % | Medicaid | | 62,717 | | | 73,865 | | | (15.1) | % |
| ACA | ACA | | 98,080 | | | 47,324 | | | 107.3 | % | ACA | | 53,549 | | | 52,385 | | | 2.2 | % |
| Total members | Total members | | 381,066 | | | 281,525 | | | 35.4 | % | Total members | | 312,151 | | | 294,596 | | | 6.0 | % |
| | Member months: | Member months: | | Member months: | |
| Medicare Advantage | Medicare Advantage | | 424,145 | | | 364,565 | | | 16.3 | % | Medicare Advantage | | 421,141 | | | 383,645 | | | 9.8 | % |
| Medicare ACO REACH | Medicare ACO REACH | | 198,614 | | | 122,301 | | | 62.4 | % | Medicare ACO REACH | | 194,267 | | | 119,936 | | | 62.0 | % |
| Total Medicare | Total Medicare | | 622,759 | | | 486,866 | | | 27.9 | % | Total Medicare | | 615,408 | | | 503,581 | | | 22.2 | % |
| Medicaid | Medicaid | | 245,260 | | | 206,630 | | | 18.7 | % | Medicaid | | 211,764 | | | 218,807 | | | (3.2) | % |
| ACA | ACA | | 296,652 | | | 139,355 | | | 112.9 | % | ACA | | 171,674 | | | 149,872 | | | 14.5 | % |
| Total member months | Total member months | | 1,164,671 | | | 832,851 | | | 39.8 | % | Total member months | | 998,846 | | | 872,260 | | | 14.5 | % |
| ($ in thousands) | | | | | | |
| Per Member Per Month ("PMPM"): | | |
| |
| | | | | |
| Per Member Per Month ("PMPM"):2 | | Per Member Per Month ("PMPM"):2 | |
| Medicare Advantage | Medicare Advantage | | $ | 1,027 | | | $ | 1,196 | | | (14.1) | % | Medicare Advantage | | $ | 1,115 | | | $ | 1,127 | | | (1.1) | % |
| Medicare ACO REACH | Medicare ACO REACH | | $ | 1,309 | | | $ | 1,362 | | | (3.9) | % | Medicare ACO REACH | | $ | 1,333 | | | $ | 1,215 | | | 9.7 | % |
| Total Medicare | Total Medicare | | $ | 1,117 | | | $ | 1,283 | | | (12.9) | % | Total Medicare | | $ | 1,184 | | | $ | 1,148 | | | 3.1 | % |
| Medicaid | Medicaid | | $ | 164 | | | $ | 223 | | | (26.5) | % | Medicaid | | $ | 197 | | | $ | 191 | | | 3.1 | % |
| ACA | ACA | | $ | 26 | | | $ | 48 | | | (45.8) | % | ACA | | $ | — | | | $ | 40 | | | (100.0) | % |
| Total PMPM | Total PMPM | | $ | 638 | | | $ | 787 | | | (18.9) | % | Total PMPM | | $ | 771 | | | $ | 718 | | | 7.4 | % |
| | Medical centers | Medical centers | | 169 | | | 143 | | 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.
| | | Six Months Ended
June 30, | | | Nine Months Ended
September 30, | |
| (in thousands) | | 2023 | | 2022 | | % Change | |
| Members: | | | | | | | |
| |
| | 2023 | | 2022 | | % Change |
| Members:3 | | Members:3 | | | | | | |
| Medicare Advantage | Medicare Advantage | | 140,535 | | | 123,768 | | | 13.5 | % | Medicare Advantage | | 131,557 | | | 128,731 | | | 2.2 | % |
| Medicare ACO REACH | Medicare ACO REACH | | 65,161 | | | 40,179 | | | 62.2 | % | Medicare ACO REACH | | 64,328 | | | 39,615 | | | 62.4 | % |
| Total Medicare | Total Medicare | | 205,696 | | | 163,947 | | | 25.5 | % | Total Medicare | | 195,885 | | | 168,346 | | | 16.4 | % |
| Medicaid | Medicaid | | 77,290 | | | 70,254 | | | 10.0 | % | Medicaid | | 62,717 | | | 73,865 | | | (15.1) | % |
| ACA | ACA | | 98,080 | | | 47,324 | | | 107.3 | % | ACA | | 53,549 | | | 52,385 | | | 2.2 | % |
| Total members | Total members | | 381,066 | | | 281,525 | | | 35.4 | % | Total members | | 312,151 | | | 294,596 | | | 6.0 | % |
| | Member months: | Member months: | | Member months: | |
| Medicare Advantage | Medicare Advantage | | 840,921 | | | 718,980 | | | 17.0 | % | Medicare Advantage | | 1,262,062 | | | 1,102,625 | | | 14.5 | % |
| Medicare ACO REACH | Medicare ACO REACH | | 401,297 | | | 247,390 | | | 62.2 | % | Medicare ACO REACH | | 595,564 | | | 367,326 | | | 62.1 | % |
| Total Medicare | Total Medicare | | 1,242,218 | | | 966,370 | | | 28.5 | % | Total Medicare | | 1,857,626 | | | 1,469,951 | | | 26.4 | % |
| Medicaid | Medicaid | | 487,909 | | | 408,827 | | | 19.3 | % | Medicaid | | 699,673 | | | 627,634 | | | 11.5 | % |
| ACA | ACA | | 580,613 | | | 261,266 | | | 122.2 | % | ACA | | 752,287 | | | 411,138 | | | 83.0 | % |
| Total member months | Total member months | | 2,310,740 | | | 1,636,463 | | | 41.2 | % | Total member months | | 3,309,586 | | | 2,508,723 | | | 31.9 | % |
| ($ in thousands) | | | | | | |
| Per Member Per Month ("PMPM"): | | |
| |
| | | | | |
| Per Member Per Month ("PMPM"):4 | | Per Member Per Month ("PMPM"):4 | |
| Medicare Advantage | Medicare Advantage | | $ | 1,103 | | | $ | 1,222 | | | (9.7) | % | Medicare Advantage | | $ | 1,107 | | | $ | 1,189 | | | (6.9) | % |
| Medicare ACO REACH | Medicare ACO REACH | | $ | 1,400 | | | $ | 1,371 | | | 2.1 | % | Medicare ACO REACH | | $ | 1,378 | | | $ | 1,320 | | | 4.4 | % |
| Total Medicare | Total Medicare | | $ | 1,199 | | | $ | 1,260 | | | (4.9) | % | Total Medicare | | $ | 1,194 | | | $ | 1,222 | | | (2.3) | % |
| Medicaid | Medicaid | | $ | 173 | | | $ | 240 | | | (27.9) | % | Medicaid | | $ | 181 | | | $ | 223 | | | (18.8) | % |
| ACA | ACA | | $ | 18 | | | $ | 53 | | | (66.0) | % | ACA | | $ | 14 | | | $ | 48 | | | (70.8) | % |
| Total PMPM | Total PMPM | | $ | 686 | | | $ | 813 | | | (15.6) | % | Total PMPM | | $ | 711 | | | $ | 780 | | | (8.8) | % |
| | Medical centers | Medical centers | | 169 | | | 143 | | 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 JuneSeptember 30, 2023 and 2022
Revenue
| | | Three Months Ended June 30, | | | Three Months Ended September 30, | |
| ($ in thousands) | ($ in thousands) | | 2023 | | 2022 | | | $ Change | | % Change | ($ in thousands) | | 2023 | | 2022 | | | $ Change | | % Change |
| Revenue: | Revenue: | | | | | | | | | | Revenue: | | | | | | | | | |
| Capitated revenue | Capitated revenue | | $ | 743,324 | | | $ | 655,493 | | | | $ | 87,831 | | | 13.4 | % | Capitated revenue | | $ | 770,269 | | | $ | 625,895 | | | | $ | 144,374 | | | 23.1 | % |
| Fee-for-service and other revenue | Fee-for-service and other revenue | | 23,422 | | | 33,880 | | | | (10,458) | | | -30.9 | % | Fee-for-service and other revenue | | 17,804 | | | 39,133 | | | | (21,329) | | | -54.5 | % |
| Total revenue | Total revenue | | $ | 766,746 | | | $ | 689,373 | | | | $ | 77,373 | | | Total revenue | | $ | 788,073 | | | $ | 665,028 | | | | $ | 123,045 | | |
Capitated revenue. Capitated revenue was $743.3$770.3 million for the three months ended JuneSeptember 30, 2023, an increase of $87.8$144.4 million, or 13.4%23.1%, compared to $655.5$625.9 million for the three months ended JuneSeptember 30, 2022. The increase was primarily driven by a $191.4$132.1 million increase related to additional members driven by organic 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 $39.1 million for the three months ended September 30, 2022, primarily due to a decrease in volume of services provided and divestiture of certain offices that provided those services.
Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | |
| ($ in thousands) | | 2023 | | 2022 | | $ Change | | % Change |
| Operating expenses: | | | | | | | | |
| Third-party medical costs | | $ | 706,922 | | | $ | 489,565 | | | $ | 217,357 | | | 44.4 | % |
| Direct patient expense | | 65,547 | | | 63,867 | | | 1,680 | | | 2.6 | % |
| Selling, general, and administrative expenses | | 80,821 | | | 111,765 | | | (30,944) | | | -27.7 | % |
| Depreciation and amortization expense | | 26,740 | | | 25,343 | | | 1,397 | | | 5.5 | % |
| Transaction costs | | 7,862 | | | 5,033 | | | 2,829 | | | 56.2 | % |
| Change in fair value of contingent consideration | | 13,100 | | | 900 | | | 12,200 | | | 1355.6 | % |
| Credit loss on other assets | | — | | | $ | — | | | — | | | — | % |
| Goodwill impairment loss | | 354,000 | | | $ | — | | | 354,000 | | | 0.0 | % |
| Total operating expenses | | $ | 1,254,992 | | | $ | 696,473 | | | $ | 558,519 | | | |
Third-party medical costs. Third-party medical costs were $706.9 million for the three months ended September 30, 2023, an increase of $217.4 million, or 44.4%, compared to $489.6 million for the three months ended September 30, 2022. The increase was driven by a $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 additional supplemental health benefits and increased claims utilization. In addition, during the three months ended September 30, 2022, $23.3 million was recognized as a net reduction in third-party medical costs related to claims irrevocably assigned to MSP.
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.
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.
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. The increase was driven by the opening of de novos medical centers and center expansion to support the
growth of our business in prior periods, as well as the addition of several brand names, non-compete agreements, and payor relationships from 2022 acquisitions.
Transaction costs. Transaction costs 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. The increase primarily related to 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 gain of $13.1 million for the three months ended September 30, 2023 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 $354.0 million for the three months ended September 30, 2023. As of September 30, 2023, the Company determined there was a triggering event for a goodwill impairment and performed a quantitative assessment which resulted in the fair value of the Company being below the
carrying value. See Note 7, "Goodwill," in our unaudited consolidated financial statements included in Item 1 of Part I of this Form 10-Q for more details.
Other Income (Expense)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | |
| ($ in thousands) | | 2023 | | 2022 | | $ Change | | % Change |
| Other income and expense: | | | | | | | | |
| Interest expense | | $ | (29,646) | | | $ | (16,451) | | | $ | (13,195) | | | 80.2 | % |
| Interest income | | 258 | | | 4 | | | 254 | | | 6350.0 | % |
| | | | | | | | |
| Change in fair value of warrant liabilities | | 5,365 | | | (65,721) | | | 71,086 | | | -108.2 | % |
| Other income (expense) | | (900) | | | 354 | | | (1,254) | | | -354.2 | % |
| 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. The increasewas primarily driven by higher interest rates during the period on outstanding long-term 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 $5.4 million for the three months ended September 30, 2023 as a result of a change in the fair value of the public warrants and private placement warrants assumed in connection with the Business Combination.
Comparison of the Nine Months Ended September 30, 2023 and 2022
Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | |
| ($ in thousands) | | 2023 | | 2022 | | | | $ Change | | % Change |
| Revenue: | | | | | | | | | | |
| Capitated revenue | | $ | 2,354,667 | | | $ | 1,955,739 | | | | $ | 398,928 | | | 20.4 | % |
| Fee-for-service and other revenue | | 67,062 | | | 102,804 | | | | | (35,742) | | | -34.8 | % |
| Total revenue | | $ | 2,421,729 | | | $ | 2,058,543 | | | | $ | 363,186 | | | |
Capitated 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. The increase was primarily
driven by a $523.3 million increase related to additional members driven by organic growth and certain acquisitions, partially offset by a $83.6$110.0 million decrease in total capitated revenue per member per month ("PMPM")PMPM and $20.0$14.5 million related to membership mix. The decrease in capitated revenue PMPM included a decrease of approximately $70.3$95.8 million in Medicare Risk Adjustments.
Fee-for-service and other revenue. Fee-for-service and other revenue was $23.4$67.1 million for the threenine months ended JuneSeptember 30, 2023, a decrease of $10.5$35.7 million, or 30.9%34.8%, compared to $33.9$102.8 million for the threenine months ended JuneSeptember 30, 2022, primarily due to a decrease in volume of services provided.
Operating Expenses
| | | Three Months Ended June 30, | | | Nine Months Ended September 30, | |
| ($ in thousands) | ($ in thousands) | | 2023 | | 2022 | | $ Change | | % Change | ($ in thousands) | | 2023 | | 2022 | | $ Change | | % Change |
| Operating expenses: | Operating expenses: | | | | | | | | | Operating expenses: | | | | | | | | |
| Third-party medical costs | Third-party medical costs | | $ | 769,629 | | | $ | 541,317 | | | $ | 228,312 | | | 42.2 | % | Third-party medical costs | $ | 2,184,882 | | $ | 1,566,661 | | $ | 618,221 | | | 39.5 | % |
| Direct patient expense | Direct patient expense | | 56,757 | | | 52,647 | | | 4,110 | | | 7.8 | % | Direct patient expense | | 190,731 | | | 177,190 | | | 13,541 | | | 7.6 | % |
| Selling, general, and administrative expenses | Selling, general, and administrative expenses | | 99,418 | | | 106,179 | | | (6,761) | | | -6.4 | % | Selling, general, and administrative expenses | | 276,712 | | | 314,617 | | | (37,905) | | | -12.0 | % |
| Depreciation and amortization expense | Depreciation and amortization expense | | 27,251 | | | 19,836 | | | 7,415 | | | 37.4 | % | Depreciation and amortization expense | | 81,213 | | | 64,215 | | | 16,998 | | | 26.5 | % |
| Transaction costs | Transaction costs | | 9,125 | | | 6,207 | | | 2,918 | | | 47.0 | % | Transaction costs | | 27,073 | | | 19,616 | | | 7,457 | | | 38.0 | % |
| Change in fair value of contingent consideration | Change in fair value of contingent consideration | | (11,800) | | | (5,764) | | | (6,036) | | | 104.7 | % | 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 | | | — | % | Credit loss on other assets | | 62,000 | | | — | | | 62,000 | | | N/A |
| Total operating expenses | Total operating expenses | | $ | 1,012,380 | | | $ | 720,422 | | | $ | 229,958 | | | Total operating expenses | $ | 3,173,811 | | $ | 2,132,774 | | $ | 1,041,037 | | |
Third-party medical costs. Third-party medical costs were $769.6 million$2.2 billion for the threenine months ended JuneSeptember 30, 2023, an increase of $228.3$618.2 million, or 42.2%39.5%, compared to $541.3 million$1.6 billion for the threenine months ended JuneSeptember 30, 2022. The increase was driven by a $154.4$436.0 million increase related to additional members driven by organic growth and certain acquisitions, a $59.9$146.4 million increase related to higher third-party medical costcosts PMPM and a $14.0$35.8 million increase related to membership mix. The higher third-party medical costcosts PMPM included $38.5$63.6 million in additional over-the-counter medical costssupplemental health benefits and increased claims development and utilization. In addition, during the nine months ended September 30, 2022, $33.7 million was recognized as a net reduction in third-party medical costs related to claims irrevocably assigned to MSP.
Direct patient expense. Direct patient expense was $56.8$190.7 million for the threenine months ended JuneSeptember 30, 2023, an increase of $4.1$13.5 million, or 7.8%7.6%, compared to $52.6$177.2 million for the threenine months ended JuneSeptember 30, 2022. The increase was primarily driven by increases in payroll and benefits of $3.8 million due to higher volume of full time providers and supporting staff, pharmacy costs, offset by a reduction in provider payments.drugs of $5.8 million and ancillary medical services of $3.2 million.
Selling, general, and administrative expenses. Selling, general, and administrative expenses were $99.4$276.7 million for the threenine months ended JuneSeptember 30, 2023, a decrease of $6.8$37.9 million, or 6.4%12.0%, compared to $106.2$314.6 million for the threenine months ended JuneSeptember 30, 2022. The decrease was primarily driven by a decrease in stock-based compensation of $15.8$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 $3.6$15.0 million, offset by increases in legal and professional
services of $3.8 million, occupancy costs of $2.4$7.8 million, higher salaries and benefits of $2.4 million, andan increase in information technology expense of $2.2$5.5 million.
Depreciation and amortization expense. Depreciation and amortization expense was $27.3$81.2 million for the threenine months ended JuneSeptember 30, 2023, an increase of $7.4$17.0 million, or 37.4%26.5%, compared to $19.8$64.2 million for the threenine months ended JuneSeptember 30, 2022. The increase was driven by the openingpurchases of de novos medical centersnew property and center expansionequipment to support the growth of our business induring prior periods, as well as the addition of several brand names, non-compete agreements, and payor relationships from certain 2022 acquisitions.
Transaction costs. Transaction costs were $9.1$27.1 million for the threenine months ended JuneSeptember 30, 2023, an increase of $2.9$7.5 million, or 47.0%38.0%, compared to $6.2$19.6 million for the threenine months ended JuneSeptember 30, 2022.The2022. The increase primarily related
to financing costs for the 2023 Term Loan and certain non-recurring legal costs related to the proxy contest with the 3 former directors.
Change in fair value of contingent consideration. Contingent consideration generated a gain of $11.8$2.8 million for the threenine months ended JuneSeptember 30, 2023 due to changes in the performance fair value and contingencies being resolved of certain acquired plans and the related contingent payments.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. In addition, MSP announced that it received a subpoena on March 10, 2023 from the U.S. Attorney's Office in the U.S. District Court for the Southern District of Florida. As a result of (i) these recent disclosures by MSP; (ii) MSP's delinquent filing of its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2023; and (iii)(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. As ofDuring the quarter ended June 30, 2023, the Company has recognizedrecorded 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 $354.0 million for the nine months ended September 30, 2023. As of September 30, 2023, the Company determined there was a triggering event for a goodwill impairment and performed a quantitative assessment which resulted in the fair value of the Company being below the carrying value. See Note 7, "Goodwill," in our unaudited consolidated financial statements included in Item 1 of Part I of this Form 10-Q for more details.
Other Income (Expense)
| | | Three Months Ended June 30, | | | Nine Months Ended September 30, | |
| ($ in thousands) | ($ in thousands) | | 2023 | | 2022 | | $ Change | | % Change | ($ in thousands) | | 2023 | | 2022 | | $ Change | | % Change |
| Other income and expense: | Other income and expense: | | | | | | | | | Other income and expense: | | | | | | | | |
| Interest expense | Interest expense | | $ | (26,719) | | | $ | (13,134) | | | $ | (13,585) | | | 103.4 | % | Interest expense | | $ | (79,870) | | | $ | (42,868) | | | $ | (37,002) | | | 86.3 | % |
| Interest income | Interest income | | 90 | | | 2 | | | 88 | | | 4400.0 | % | Interest income | | 357 | | | 7 | | | 350 | | | 5000.0 | % |
| | Loss on extinguishment of debt | | 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 | | (1,677) | | | 30,175 | | | (31,852) | | | -105.6 | % | Change in fair value of warrant liabilities | | 5,696 | | | (8,383) | | | 14,079 | | | -167.9 | % |
| Other income (expense) | Other income (expense) | | 1,323 | | | 251 | | | 1,072 | | | 427.1 | % | Other income (expense) | | 855 | | | 884 | | | (29) | | | -3.3 | % |
| Total other income (expense) | Total other income (expense) | | $ | (26,983) | | | $ | 17,294 | | | $ | (44,277) | | | Total other income (expense) | | $ | (72,962) | | | $ | (51,788) | | | $ | (21,174) | | |
|
Interest expense. Interest expense was $26.7$79.9 million for the threenine months ended JuneSeptember 30, 2023, an increase of $13.6$37.0 million, or 103.4%86.3%, compared to $13.1$42.9 million for the threenine months ended June 30, 2022. The increasewas primarily driven by higher interest rates during the period on outstanding long-term debt and additional borrowing under the 2023 Term Loan.
Change in fair value of warrant liabilities. Change in fair value of warrant liabilities was $1.7 million for the three months ended June 30, 2023 as a result of a change in the fair value of the public warrants and private placement warrants assumed in connection with the Business Combination.
Comparison of the Six Months Ended June 30, 2023 and 2022
Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | |
| ($ in thousands) | | 2023 | | 2022 | | | | $ Change | | % Change |
| Revenue: | | | | | | | | | | |
| Capitated revenue | | $ | 1,584,397 | | | $ | 1,329,844 | | | | $ | 254,553 | | | 19.1 | % |
| Fee-for-service and other revenue | | 49,258 | | | 63,671 | | | | | (14,413) | | | -22.6 | % |
| Total revenue | | $ | 1,633,655 | | | $ | 1,393,515 | | | | $ | 240,140 | | | |
Capitated revenue. Capitated revenue was $1.6 billion for the six months ended June 30, 2023, an increase of $254.6 million, or 19.1%, compared to $1.3 billion for the six months ended June 30, 2022. The increase was primarily driven by a $395.9 million increase related to additional members driven by organic growth and certain acquisitions, partially offset by a $114.9 million decrease in total capitated revenue PMPM and $26.4 million related to membership mix. The decrease in capitated revenue PMPM included a decrease of approximately $98.6 million in Medicare Risk Adjustments.
Fee-for-service and other revenue. Fee-for-service and other revenue was $49.3 million for the six months ended June 30, 2023, an decrease of $14.4 million, or 22.6%, compared to $63.7 million for the six months ended June 30, 2022, primarily due to a decrease in volume of services provided.
Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | |
| ($ in thousands) | | 2023 | | 2022 | | $ Change | | % Change |
| Operating expenses: | | | | | | | | |
| Third-party medical costs | $ | 1,477,960 | | $ | 1,077,097 | | $ | 400,863 | | | 37.2 | % |
| Direct patient expense | | 125,184 | | | 113,323 | | | 11,861 | | | 10.5 | % |
| Selling, general, and administrative expenses | | 195,890 | | | 202,849 | | | (6,959) | | | -3.4 | % |
| Depreciation and amortization expense | | 54,473 | | | 38,872 | | | 15,601 | | | 40.1 | % |
| Transaction costs | | 19,211 | | | 14,583 | | | 4,628 | | | 31.7 | % |
| Change in fair value of contingent consideration | | (15,900) | | | (10,425) | | | (5,475) | | | 52.5 | % |
| | | | | | | | |
| Credit loss on other assets | | 62,000 | | | — | | | 62,000 | | | — | % |
| Total operating expenses | $ | 1,918,818 | | $ | 1,436,299 | | $ | 420,519 | | | |
Third-party medical costs. Third-party medical costs were $1.5 billion for the six months ended June 30, 2023, an increase of $400.9 million, or 37.2%, compared to $1.1 billion for the six months ended June 30, 2022. The increase was driven by a $323.2 million increase related to additional members driven by organic growth and certain acquisitions, a $60.4 million increase related to higher third-party medical costs PMPM and a $17.3 million increase related to membership mix. The higher third-party medical costs PMPM included $39.4 million in additional over-the-counter medical costs and increased claims development and utilization.
Direct patient expense. Direct patient expense was $125.2 million for the six months ended June 30, 2023, an increase of $11.9 million, or 10.5%, compared to $113.3 million for the six months ended June 30, 2022. The increase was primarily driven by increases in payroll and benefits of $5.9 million, pharmacy drugs of $3.9 million and ancillary medical services of $3.2 million.
Selling, general, and administrative expenses. Selling, general, and administrative expenses were $195.9 million for the six months ended June 30, 2023, a decrease of $7.0 million, or 3.4%, compared to $202.8 million for the six months ended June 30, 2022. The decrease was primarily driven by a decrease in stock-based compensation of $20.2 million due to a one-time
benefit related to a modification related to the vesting of the former CEO's stock-based awards, which was approved in connection with his resignation, and a decrease in marketing costs of $7.7 million, offset by increases in occupancy costs of $5.9 million, higher salaries and benefits of $5.1 million, an increase in information technology expense of $4.4 million, an increase in legal and professional services of $1.9 million.
Depreciation and amortization expense. Depreciation and amortization expense was $54.5 million for the six months ended June 30, 2023, an increase of $15.6 million, or 40.1%, compared to $38.9 million for the six months ended June 30, 2022. The increase was driven by purchases of new property and equipment to support the growth of our business during prior periods, as well as the addition of several brand names, non-compete agreements, and payor relationships from certain 2022 acquisitions.
Transaction costs. Transaction costs were $19.2 million for the six months ended June 30, 2023, an increase of $4.6 million, or 31.7%, compared to $14.6 million for the six months ended June 30, 2022. The increase related to financing costs for the 2023 Term Loan and certain non-recurring legal costs related to the proxy contest with the 3 former directors.
Change in fair value of contingent consideration. Contingent consideration generated a gain of $15.9 million for the six months ended June 30, 2023 due to the performance of certain acquired plans and the related contingent payments.
Allowance for credit losses on other assets. On August 2, 2023, MSP announced that the SEC initiated an investigation of MSP on August 11, 2022. In addition, MSP announced that it received a subpoena on March 10, 2023 from the U.S. Attorney's Office in the U.S. District Court for the Southern District of Florida. As a result of (i) these recent disclosures by MSP; (ii) MSP's delinquent filing of its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2023; and (iii) MSP's not being in compliance with the NASDAQ listing requirements, the Company decided to utilize a third-party valuation specialist to provide a market value analysis of the shares of Class A common stock that MSP issued to the Company on July 7, 2023. As of June 30, 2023, the Company has recognized an allowance for credit losses of $62.0 million.
Other Income (Expense)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | |
| ($ in thousands) | | 2023 | | 2022 | | $ Change | | % Change |
| Other income and expense: | | | | | | | | |
| Interest expense | | $ | (50,224) | | | $ | (26,418) | | | $ | (23,806) | | | 90.1 | % |
| Interest income | | 99 | | | 3 | | | 96 | | | 3200.0 | % |
| Loss on extinguishment of debt | | — | | | (1,428) | | | 1,428 | | | -100.0 | % |
| Change in fair value of warrant liabilities | | 331 | | | 57,337 | | | (57,006) | | | -99.4 | % |
| Other income (expense) | | 1,755 | | | 530 | | | 1,225 | | | N/A |
| Total other income (expense) | | $ | (48,039) | | | $ | 30,024 | | | $ | (78,063) | | | |
Interest expense. Interest expense was $50.2 million for the six months ended June 30, 2023, an increase of $23.8 million, or 90.1%, compared to $26.4 million for the six months ended JuneSeptember 30, 2022. The increase was primarily driven by interest incurred on our higher outstanding 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.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 sixnine months ended JuneSeptember 30, 2022 related to the amendment to the Credit Suisse Credit Agreement in January 2022. There have been no comparable amendments in the sixnine months ended JuneSeptember 30, 2023. See Note 13, "Debt," in our audited consolidated financial statements included in Item 8 of Part II of our 2022 Form 10-K for more details.
Change in fair value of warrant liabilities. Change in fair value of warrant liabilities was $1.8$5.7 million for the sixnine months ended JuneSeptember 30, 2023, compared to $57.3$8.4 million for the sixnine months ended JuneSeptember 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 sixnine months ended JuneSeptember 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 JuneSeptember 30, 2023 and December 31, 2022, we had cash, cash equivalents and restricted cash of $27.7$41.3 million and $27.3 million, respectively. As of JuneSeptember 30, 2023 and December 31, 2022, the Company had $13.0 million (of its total cash of $27.3$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. These letters of credit and the collateral are both presented within cash, cash equivalents and restricted cash.
As of JuneSeptember 30, 2023, the available balance on the CS Revolving Line of Credit was $110$80 million, and as of August 9,November 8, 2023 such line of credit was fully drawn to ensure that the Company had access to liquidity while it was negotiating the 2023 Side-Car Amendment, discussed under “2023 Term Loan Agreement;” provided, however, having secured the 2023 Side-Car Amendment on August 10, 2023, the Company currently expects to repay a significant portion of such line of credit by the end of September 2023.drawn. As of JuneSeptember 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 JuneSeptember 30, 2023 and December 31, 2022, the Borrower had $13.0$14.0 million (of its total cash of $27.7$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 deficit of $423.5$715.4 million as of JuneSeptember 30, 2023 and negative cash flows from operations.
2023 Term Loan AgreementAs discussed in Note 3, “Going Concern,” the Company is pursuing several initiatives 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, consolidating underperforming medical centers, delaying renovations and other capital projects and significantly reducing nonessential spending.
On February 24,In the third quarter of 2023, (the “2023 Term Loan Closing Date”), 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. 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 its wholly owned operating subsidiary,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.
As 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 LLC (the “Borrower”), and Primary Care (ITC) Intermediate Holdings, LLC (“Holdings”),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 (the “Side-Carand the Credit Agreement”) withSuisse 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, 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 JP Morgan Chase Bank, N.A., asfails 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 (the “2023 Term Loan Administrative Agent”), pursuantunder 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 whichobtain such waivers from the respective lenders; (ii) the lenders provided a senior secured term loan (the “2023 Term Loan”) tounder 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 infails to pay such amount when due, then the aggregatetrustee for the Senior Notes or the holders of at least 30% in principal amount of $150 million, the full amountSenior Notes will be entitled to immediately accelerate the maturity of which was funded on the 2023 Term Loan Closing Date.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.
TheAdditionally, 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 5.80:5.80:1.00 on the last day of any four consecutive fiscal quarter period. With a First Lien Leverage Ratio of approximately 12.00:1.00 at June 30, 2023, the Borrower was not in compliance with this financial maintenance covenant as of such date. Under the Side-Car Credit Agreement, the Borrower has a right to cure noncompliance with the financial maintenance covenant by obtaining sufficient equity proceeds, which may be sourced from equity or debt financings by the Company, that will be deemed added to the Borrower’s Consolidated Adjusted EBITDA for purposes of recalculating the financial maintenance covenant when such proceeds are contributed to the Borrower. The cure right may be exercised by the Borrower no more than 2 times in any 4 consecutive testing periodsdate and, no more than 5 times during the term of the Side-Car Credit Agreement. Accordingly, on July 28, 2023, the Borrower delivered to the 2023 Term Loan Administrative Agent a notice of its intent to cure such noncompliance by September 5, 2023, which would require the Company to raise approximately $71 million of new capital, which amount, if raised, would be contributed to the Borrower to consummate the cure.
accordingly,
Thereafter, on August 10, 2023, the Borrower obtained a waiver of such noncompliance and entered into an amendment of the Side-Car Credit Agreement (the “2023 Side-Car Amendment”) under which the Company will not be required to test compliance with the Side-Car Credit Agreement’s financial maintenance covenant until the fiscal quarter ending September 30, 2024. The 2023 Side-Car Amendment provides, among other modifications to the Side-Car Credit Agreement, that: (i) the Company will formally launch, announce and pursue a comprehensive process in an effort to yield one or more offers for a sale of all or substantially all of the assets or businesses of, or direct or indirect equity interests in, the Borrower and its subsidiaries with a purchase price that includes cash proceeds sufficient to pay the obligations under the Side-Car Credit Agreement, and will use its commercially reasonable efforts to promptly close such a transaction; (ii) the interest rate for the 2023 Term Loan will bewas increased to 16% during the payment-in-kind period ending on February 24, 2025; (iii) a premium
payment of 5% of the outstanding principal amount of the 2023 Term Loan will be paid in kind by capitalizing such payment to the principal amount of the 2023 Term Loan; (iv) the applicable prepayment premium will be required in connection with any voluntary or mandatory prepayment or repayment of the 2023 Term Loan; and (v) the lenders will have participation rights in certain new debt financings incurred by the Borrower or any of its subsidiaries. Absent such waiver, the 2023 Term Loan Administrative Agent, acting at the direction of the lead lender, and at the requisite lenders request,
could have immediately terminated all commitments under the 2023 Term Loan and accelerated the maturity of all principal, interest and other amounts due thereon. Pursuant to the terms of the 2023 Side-Car Amendment, the Borrower will not be required to pursue its cure right.
Under the Credit Suisse Credit Agreement, if the Borrower was unable to obtain such waiver from the lenders under the 2023 Term Loan Agreement, or cure any such noncompliance by September 5, 2023, then the administrative agent under the Credit Suisse Credit Agreement would have been entitled to, and acting at the direction of the requisite lenders, could have, among other things, immediately terminated all commitments under the CS Term Loan and the CS Revolving Line of Credit and accelerated the maturity of all principal, interest and other amounts due thereunder. Under the Senior Notes, if (i) the Borrower was unable to obtain such waiver from the lenders under the 2023 Term Loan Agreement, or cure any such noncompliance by September 5, 2023; (ii) the lender under such facility or under the Credit Suisse Credit Agreement accelerated the maturity of $50 million or more of the amount outstanding thereunder; and (iii) the Borrower failed to pay such amount when due, then the trustee for the Senior Notes or the holders of at least 30% in principal amount of the Senior Notes would have been entitled to immediately accelerate the maturity of the Senior Notes, including all principal, interest and other amounts due thereon.
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 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.
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 Credit Suisse Credit Agreement 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, which is tested quarterly only if the Borrower has exceeded a certain amount drawn under the CS Revolving Line of Credit, which is approximately 35% of the total commitment under the CS Revolving Line of Credit, or approximately $42 million. As of June 30, 2023, the available balance on the CS Revolving Line of Credit was $110 million, and as of August 10, 2023 such line of credit was fully drawn to ensure that the Company had access to liquidity while it was negotiating the 2023 Side-Car Amendment, discussed under “2023 Term Loan Agreement;” provided, however, having secured the 2023 Side-Car Amendment on August 10, 2023, the Company currently expects to repay a significant portion of such line of credit by the end of September 2023. Accordingly, as of June 30, 2023, the Company was not required to test its compliance with the financial maintenance covenant under the Credit Suisse Credit Agreement. Please see the discussion in this 2Q Form 10-Q regarding the Company’s noncompliance with the financial maintenance covenant under the Side-Car Credit Agreement as of June 30, 2023 and the Company’s receipt of a waiver of such noncompliance on August 10, 2023.
While the Company currently believes that the Borrower will not be required to test the financial maintenance covenant under the Credit Suisse Credit Agreement for the testing period ending September 30, 2023, if it were required to test such financial maintenance covenant and if, at such time, it is not in compliance with the financial maintenance covenant, the Borrower would be required to cure or seek a waiver of such noncompliance from the requisite revolving lenders under the Credit Suisse Credit Agreement by December 6, 2023. Under the Credit Suisse Credit Agreement, the Borrower has a right to cure any such noncompliance by obtaining sufficient equity proceeds, which may be sourced from equity or debt financings by the Company, that would be deemed added to the Borrower’s Consolidated Adjusted EBITDA for purposes of recalculating the financial maintenance covenant when such proceeds are contributed to the Borrower. The cure right may be exercised by the Borrower no more than 2 times in any 4 consecutive testing periods and no more than 5 times during the term of the Credit Suisse Credit Agreement. If the Borrower is unable to obtain a waiver of, or to cure, any such noncompliance, then the administrative agent under the Credit Suisse Credit Agreement would be entitled to, and acting at the direction of the requisite lenders could, among other things, immediately terminate the CS Term Loan and CS Revolving Line of Credit commitments and accelerate the maturity of all principal, interest and other amounts due under such facilities. If such circumstances were to arise, the Company can provide no assurances that the Borrower would be able to obtain such waiver or timely consummate such cure or repay or refinance any accelerated principal, interest and other amounts that may become due, if any.
Under the Side-Car Credit Agreement, if the Borrower becomes required to test the financial maintenance covenant under the Credit Suisse Credit Agreement and if, at such time, the Borrower is not in compliance with such financial maintenance covenant and was unable to obtain a waiver of, or cure, any such noncompliance by December 6, 2023, then the 2023 Term Loan Administrative Agent would be entitled to, and acting at the direction of the requisite lenders, could, among other things, immediately terminate all commitments under the 2023 Term Loan and accelerate the maturity of all principal, interest and other amounts due thereunder. Under the Senior Notes, if (i) the Borrower becomes required to test the financial maintenance covenant under the Credit Suisse Credit Agreement and if, at such time, the Borrower is not in compliance with such financial maintenance covenant and was unable or obtain a waiver of, or cure, any such noncompliance by December 6, 2023; (ii) the lender under such facility or under the Side-Car Credit Agreement accelerates the maturity of $50 million or more of the amount outstanding thereunder; and (iii) the Borrower fails to pay such amount when due, then the trustee for the Senior Notes or the holders of at least 30% in principal amount of the Senior Notes would be entitled to immediately accelerate the maturity of the Senior Notes, including all principal, interest and other amounts due thereon.
The CS Term Loan is subject to principal amortization repayments, due on the last business day of each calendar quarter equal to 0.25% of the initial principal amount, as applicable, based on the funding dates. Amortization payments commenced on March 31, 2021. The outstanding amount of unpaid principal and interest associated with the CS Term Loan is scheduled to become due on the maturity date of November 23, 2027.
Prior to the CS Term Loan’s maturity date, the Borrower may elect to prepay, in whole or in part at any time without premium or penalty, other than in connection with 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, which was recorded as a loss on extinguishment of debt for the sixnine months ended JuneSeptember 30, 2022. During the sixnine months ended JuneSeptember 30, 2023, the SOFR exceeded the credit spread adjustment of 0.50%, resulting in monthly variable interest rates for the quarter. As of JuneSeptember 30, 2023, the effective interest rate of the CS Term Loan and the CS Revolving Line of Credit was 9.76%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 JuneSeptember 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.
In 2023, we expect to incur approximately $81.0 million in cash interest payments (which excludes approximately $19.0 million of non-cash PIK interest under the 2023 Term Loan) and approximately $15.0 million in capital expenditures.
We believe that our existing cash, cash equivalents and restricted cash along with our expected cash generation through operations (See Note 3, "Going Concern," in our unaudited condensed consolidated financial statements in this 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, the Company became a party to the Tax Receivable Agreement ("TRA"). Under the terms of that agreement, 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 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," in our unaudited condensed consolidated financial statements of this Form 10-Q.
InQ3 2023 we expect to incur approximately $81.0 million in cash interest payments (which excludes approximately $19.0 million of non-cash PIK interest under the 2023 Term Loan) and approximately $15.0 million in capital expenditures.
We believe that our existing cash, cash equivalents and restricted cash along with our expected cash generation through operations (See Note 3, "Going Concern," in our unaudited condensed consolidated financial statements in this Form 10-Q) and CS Revolving Line of Credit will not be sufficient to fund our operating and capital needs for at least the next 12 months from the date of issuance of the unaudited condensed consolidated financial statements included in this Form 10-Q.
Cash Flows
The following table presents a summary of our consolidated cash flows from operating, investing and financing activities for the periods indicated.
| | | Six Months Ended June 30, | | Nine Months Ended September 30, |
| ($ in thousands) | ($ in thousands) | | 2023 | | 2022 | ($ in thousands) | | 2023 | | 2022 |
| Net cash (used in) provided by operating activities | Net cash (used in) provided by operating activities | $ | (44,955) | | $ | (82,173) | | Net cash (used in) provided by operating activities | $ | (84,666) | | $ | (84,158) | |
| Net cash (used in) provided by investing activities | Net cash (used in) provided by investing activities | | (17,701) | | | (29,273) | | Net cash (used in) provided by investing activities | | 8,846 | | | (48,153) | |
| Net cash (used in) provided by financing activities | Net cash (used in) provided by financing activities | | 63,048 | | | (3,877) | | 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 | | 392 | | | (115,323) | | 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 | | 27,329 | | | 163,170 | | Cash, cash equivalents and restricted cash at beginning of year | | 27,329 | | | 163,170 | |
| Cash, cash equivalents and restricted cash at end of period | Cash, cash equivalents and restricted cash at end of period | $ | 27,721 | | $ | 47,847 | | Cash, cash equivalents and restricted cash at end of period | $ | 41,331 | | $ | 24,097 | |
Operating Activities
For the sixnine months ended JuneSeptember 30, 2023, net cash used in operating activities was $45.0$84.7 million, a decreasean increase of $37.2$0.5 million in cash outflows, compared to net cash used in operating activities of $82.2$84.2 million for the sixnine months ended JuneSeptember 30, 2022. Significant changes impacting net cash used in operating activities were as follows:
A decrease in cash of $201.1$295.5 million related to net loss and non-cash charges and credits, primarily related to the following:
•Increase in net losses of $316.7$696.4 million;
•Decrease in stock-based compensation expense of $20.2$35.4 million; and
•Decrease in non-cash loss on extinguishment of debt of $1.4 million,
Offset by the following non-cash items:
•Increase in depreciation and amortization of $15.6$17.0 million; and
•Decrease in gain related to the change in the fair value of warrant liabilities of $57.0$14.1 million;
•Increase related to goodwill impairment loss of $354.0 million.
An increase in cash of $238.3$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 sixnine months ended JuneSeptember 30, 2023, net cash used inprovided by investing activitiesactivities was $17.7$8.8 million, a decreasean increase of $11.6$57.0 million in cash outflows,inflows, compared to net cash used in investing activities of $29.3$48.2 million for the sixnine months ended JuneSeptember 30, 2022, primarily due to a $33.5 million increase in cash provided by the Sale Transaction and a decrease in cash used for acquisitions and capital expenditures. The Company expects the net cash used in investing activities to be less in 2023 due to a significant reduction in spending on de novo medical centers and acquisitions.
Financing Activities
Net cash provided by financing activities was $63.0$89.8 million during the sixnine months ended JuneSeptember 30, 2023, an increase of $66.9$96.6 million, compared to net cash used in financing activities of $3.9$6.8 million duringduring the sixnine months ended JuneSeptember 30, 2022, primarily due to $141.8 million of net proceeds from the 2023 Term Loan, partially offset by the $74.0 million repayment of 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, 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, 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, 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;
•provide better transparency as to the measures used by management and others who follow our industry to estimate the value of our Company; and
•allow investors to view our financial performance and condition in the same manner that our significant lenders and landlords require us to report financial information to them in connection with determining our compliance with 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 consideration; or (5) net interest expense/income; and
•other companies, including companies in our industry, may calculate EBITDA and/or Adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure.
Because of these and other limitations, you should consider Adjusted EBITDA along with 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 measures:
| | | Three Months Ended
June 30, | | Six Months Ended
June 30, | | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| ($ in thousands) | ($ in thousands) | | 2023 | | 2022 | | 2023 | | 2022 | | ($ in thousands) | | 2023 | | 2022 | | 2023 | | 2022 | |
| Net loss | Net loss | | $ | (270,745) | | | (14,564) | | | $ | (331,330) | | | $ | (14,649) | | | Net loss | | $ | (491,697) | | | (112,011) | | | $ | (823,027) | | | $ | (126,660) | | |
| Interest income | Interest income | | (90) | | | (2) | | | (99) | | | (3) | | | Interest income | | (258) | | | (4) | | | (357) | | | (7) | | |
| Interest expense | Interest expense | | 26,719 | | | 13,134 | | | 50,224 | | | 26,418 | | | Interest expense | | 29,646 | | | 16,451 | | | 79,870 | | | 42,868 | | |
| Income tax expense (benefit) | Income tax expense (benefit) | | (1,872) | | | 809 | | | (1,872) | | | 1,889 | | | Income tax expense (benefit) | | (145) | | | (1,248) | | | (2,017) | | | 641 | | |
| Depreciation and amortization expense | Depreciation and amortization expense | | 27,251 | | | 19,836 | | | 54,473 | | | 38,872 | | | Depreciation and amortization expense | | 26,740 | | | 25,343 | | | 81,213 | | | 64,215 | | |
| EBITDA | EBITDA | | $ | (218,737) | | | 19,213 | | | $ | (228,604) | | | $ | 52,527 | | | EBITDA | | $ | (435,714) | | | (71,469) | | | $ | (664,318) | | | $ | (18,943) | | |
| Stock-based compensation | Stock-based compensation | | 2,017 | | | 17,783 | | | 11,368 | | | 31,600 | | | Stock-based compensation | | (4,083) | | | 11,041 | | | 7,285 | | | 42,641 | | |
| | Goodwill impairment loss | | Goodwill impairment loss | | 354,000 | | | — | | | 354,000 | | | — | | |
| | Transaction costs (1) | Transaction costs (1) | | 9,516 | | | 7,842 | | | 20,087 | | | 17,713 | | | Transaction costs (1) | | 8,215 | | | 6,733 | | | 28,302 | | | 24,445 | | |
| Restructuring and other | Restructuring and other | | 5,650 | | | 1,016 | | | 6,683 | | | 3,602 | | | 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 | | (11,800) | | | (5,764) | | | (15,900) | | | (10,425) | | | 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 | | | Loss on extinguishment of debt | | — | | | — | | | — | | | 1,428 | | |
| | Change in fair value of warrant liabilities | Change in fair value of warrant liabilities | | 1,677 | | | (30,175) | | | (331) | | | (57,337) | | | 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 | | | — | | | 62,000 | | | — | | | Credit loss on other assets | | — | | | — | | | 62,000 | | | — | | |
| Adjusted EBITDA | Adjusted EBITDA | | $ | (149,677) | | | $ | 9,915 | | $ | $ | (144,697) | | | $ | 39,108 | | | Adjusted EBITDA | | $ | (66,089) | | | $ | 18,171 | | $ | $ | (210,786) | | | $ | 57,275 | | |
(1) Transaction costs includedincluded $0.4 million and $1.6$1.7 million of corporate development payroll costs for the three months ended JuneSeptember 30, 2023 and 2022, respectively, and $0.9$1.2 million and $2.6$4.3 million of corporate development payroll costs for the sixnine months ended JuneSeptember 30, 2023 and 2022, respectively. Corporate development payroll costs include those expenses directly related to the additional staff needed to support our transaction activity.
Adjusted EBITDA has been adjusted to exclude $19.5$24.3 million and $35.3$59.6 million for the respective three and sixnine months ended JuneSeptember 30, 2022 in de novo losses, as the Company plans to significantly reduce its investments in de novo medical centers
in 2023 and, accordingly, modified its definition of Adjusted EBITDA beginning January 1, 2023 to no longer include de novo losses in 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. We believe we have made reasonable estimates and assumptions in preparing these 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. 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
There have been no material changes to our quantitative and qualitative disclosures about market risk that we disclosed in our 2022 Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including the Company's Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), our management, with the participation of our Interim Chief Executive Officer and Interim Chief Financial Officer, evaluated 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). Based onas of the end of the fiscal period covered by this evaluation,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 Interimfinancial statements were prepared in accordance with GAAP, and the Company's Chief Executive Officer and Interim Chief Financial Officer have concluded that ouras of the end of the period covered by this Q3 Form 10-Q, the Company's disclosure controls and procedures were remained effective as of JuneSeptember 30, 2023.
Changes in Internal Control over Financial Reporting
ThereWhile 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 weakness has not resulted in an error in the financial 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 financial statements were prepared in accordance with GAAP. Specifically, management has engaged third party specialists who assisted in the preparation and review of the impairment analyses performed by Management, specifically the interim quantitative goodwill and long-lived asset impairment tests.
Management is committed to maintaining a strong internal control environment, and while this material weakness has not been remediated as of the date of the filing of this Q3 2023 Form 10-Q, management is putting 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 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 this material 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 weakness. The material weakness will not be considered fully addressed until the documentation has been in operation for a sufficient period of time for management to conclude that the material weakness 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 this identified material weakness, as of the date of the filing of this Q3 2023 Form 10-Q, management, including our Chief Executive Officer and Interim Chief Financial Officer, believes that the unaudited condensed consolidated financial statements contained in this Q3 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 sixnine months ended JuneSeptember 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 17, "Commitments and Contingencies," in the notes to the unaudited condensed consolidated financial statements of this Q3 2023 Form 10-Q.
Item 1A. Risk Factors
Refer to the risk factors set forth in Part 1, Item 1A of our 2022 Form 10-K and Part 2, Item 1A of our Q1 2023 Form 10-Q and Q2 2023 Form 10-Q. The following risk factor supplements those risk factors:
Our capital requirements, liquidity and financial condition raise significant risks as to our ability to continue as a going concern.
The Company’s current liquidity as of August 9, 2023 was approximately $101.5 million, consisting of cash and cash equivalents (excluding restricted cash of approximately $14.1 million). The Company currently believes that this amount of liquidity is not sufficient to cover the Company’s operating, investing and financing cash uses for the next 12 months. The Company is also not in compliance with the financial maintenance covenant in one of its existing debt agreement (as more fully described in Note 12, "Debt"). Management has evaluated the significance of these relevant conditions in relation to the Company’s ability to meet its obligations and has concluded that there is substantial doubt about the Company’s ability to continue as going concern within one year after the date that the financial statements are issued. For additional information, see Note 3, “Going Concern.”
The Company is pursuing several initiatives to improve its liquidity and net cash, such as reducing operating expenses, selling assets and operations and exiting certain markets. The Company’s efforts to reduce operating expenses include reducing permanent staff, lowering its third-party medical costs through negotiations with payors, consolidating underperforming medical centers, delaying renovations and other capital projects and significantly reducing nonessential spending. Other Company efforts to improve its liquidity include a strategic review of its Medicaid business in Florida, medical centers located in Texas and Nevada, pharmacy assets and other specialty practices. The Company is also in the process of closing medical centers and exiting markets in California, New Mexico and Illinois and also plans to exit its Puerto Rico operations by January 1, 2024,
Notwithstanding these initiatives, if we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our financial statements, and it is likely that investors will lose all or a part of their investment. Further, the perception that we may be unable to continue as a going concern may impede our ability to pursue strategic opportunities or operate our business due to concerns regarding our ability to discharge our contractual obligations. In addition, if there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding to us on commercially reasonable terms, or at all. Any failure or delay to secure additional financing, or our ability to access our existing cash, cash equivalents and investments, could force us to delay, limit or terminate our operations, make further reductions in our workforce, liquidate all or a portion of our assets and/or seek protection, or Bankruptcy Protection, under Chapters 7 or 11 of the United States Bankruptcy Code.
Item 2. Unregistered Sales of Equity Securities, and Use of Proceeds and Issuer Purchases of Equity Securities
Recent Sales of Unregistered Securities
On April 26, 2023, the Company issued 7,799,263 shares of Class A commons stock to Rubicon Credit Holdings, LLC, pursuant to a warrant agreement dated February 24, 2023. These shares were not registered at the time of issuance under the Securities Act in reliance upon the exemption provided in Section 4(a)(2) of the Securities Act; however, such shares are now registered.None
Recent Repurchases of Equity Securities
Issuer Purchases of Equity Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Rule 10b5-1 Trading Plans
On June 27,September 12, 2023, David Armstrong, the Company’s Chief Compliance Officer & General Counsel (the “Executive”), entered into aterminated the Rule 10b5-1 trading plan (the “10b5-1 Plan”) intended to satisfy the affirmative defense of the SEC’s Rule 10b5–1(c). Underthat 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 Executive may sell a maximum of 387,500 sharesend of the Company’s Class A common stock (the “Maximum Plan Shares”). Following a mandatory cooling-off period trading under the 10b5-1 Plan is expected to commence on or aboutwhich, absent such termination, would have been September 27, 2023. The 10b5-1 Plan will terminate on the earlier of: (i) December 31, 2025; (ii) the date on which the Maximum Plan Shares have been sold; or (iii) such date the 10b5-1 Plan is otherwise terminated according to its terms.
Cessation of Employment
On August 8, 2023, Dr. Richard B. Aguilar ceased employment as the Company’s Chief Clinical Officer and in exchange for his entering into a Separation Agreement and Release of Claims, which conforms in all material respects with the form of separation agreement and release of claims attached to Dr. Aguilar’s Employment Agreement (filed as Exhibit 10.8 to the Company’s Current Report on Form 8-K filed with the SEC on June 9, 2021), Dr. Aguilar is eligible for the severance benefits described in Sections 6(a) and 6(c) of his Employment Agreement.
2023 Side-Car Credit Agreement Amendment
On August 10, 2023, the Borrower entered into the 2023 Side-Car Amendment, as described in Note 12, “Debt,” and in “Liquidity and Capital Resources” in the MD&A.
| | | | | | | | |
| | Exhibit Index |
| Exhibit Number | | Description |
| |
| |
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| 4.2^ | | |
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| 10.1+ | | |
| 10.2+ | | |
| 10.3+ | | |
| 10.4+ | | Amended and Restated EmploymentAsset Purchase Agreement, dated April 5, 2021,September 25, 2023, by and betweenamong Primary Care Holdings II, LLC, Cano Health, LLC, Cano Health Texas, PLLC and Brian D. KoppyCano Health Nevada, PLLC (incorporated by reference to Exhibit 10.102.1 to the Company’s Current Report on Form 8-K filed on June 9, 2021)September 29, 2023). |
| 10.5+ | | |
| 10.6+ | | |
10.6+10.7^ | | |
10.7^10.8+ | | |
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10.8+10.9+ | |
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10.9+10.10+ | | |
10.10+10.11+ | | |
10.11+ | | | | | | | | |
| 10.12+ | | |
| 10.13+ | | |
| 31.1* | | |
| 31.2* | | |
| 32.1** | | |
| 32.2** | | |
| |
| |
| 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 |
| |
| | | | | | | | |
| 101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| |
| 101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| |
| 101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document |
| |
| 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.) |
| | | | | |
| * | Filed herewith. |
| ** | The certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to be furnished with this Annual 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 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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August 10,November 9, 2023 | By: | /s/ Mark Kent | | Interim Chief Executive Officer |
| | Mark Kent | | (Principal Executive Officer) |
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August 10,November 9, 2023 | By: | /s/ Brian D. KoppyEladio Gil | | Interim Chief Financial Officer |
| | Brian D. KoppyEladio Gil | | (Principal Financial Officer) |
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August 10, 2023 | By: | /s/ Mark Novell | | Chief Accounting Officer | | |
| | Mark Novell | | (Principal Accounting Officer) |
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