Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context otherwise requires, references in this section to “CareMax,” “we,” “us,” “our,” and the “Company” refers to CareMax, Inc. together with its consolidated subsidiaries. The following discussion and analysis summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity, capital resources and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q/A (the “Report”).
Forward-Looking Statements
This Report 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. The words “anticipate,” “believe,” “plan,” “expect,” “may,” “could,” “should,” “project,” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement in not forward-looking. Actual results could differ materially from those discussed in these forward-looking statements.
Factors that could cause or contribute to such differences include, but are not limited to, those identified below, in Item 2 of this Report and those set forth in the Company's Registration Statement on Form S-1, filed with the SEC on June 30, 2021 (the "Registration Statement") under the caption “Risk Factors.” Some of the risks and uncertainties we face include:
•the impact of the COVID-19 pandemic or any other pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide on our business, financial condition and results of operation;
•our ability to grow and manage growth profitably, maintain relationships with customers, compete within its industry and retain our key employees;
•our ability to integrate the businesses of CareMax Medical Group, L.L.C., a Florida limited liability company (“CMG”), IMC Medical Group Holdings, LLC, a Delaware limited liability company (“IMC”), and Senior Medical Associates, LLC, a Florida limited liability company, and Stallion Medical Management, LLC, a Florida limited liability company (collectively, “SMA”), and, the assets of Unlimited Medical Services of Florida, LLC, a Florida limited liability company, d/b/a DNF Medical Centers (“DNF”);
•our ability to complete acquisitions and to open new medical centers and the timing of such acquisitions and openings;
•the viability of our growth strategy, including both organic and de novo growth and growth by acquisition, and our ability to realize expected results, as well as our ability to access the capital necessary for such growth;
•our ability to attract new patients;
•the dependence of our revenue and operations on a limited number of key payors;
•the risk of termination, non-renewal or renegotiation of the Medicare Advantage (“MA”) contracts held by the health plans with which we contract, or the termination, non-renewal or renegotiation of our contracts with those plans;
•the impact on our business from changes in the payor mix of our patients and potential decreases in our reimbursement rates;
•our ability to manage our growth effectively, execute our business plan, maintain high levels of service and patient satisfaction and adequately address competitive challenges;
•competition from primary care facilities and other healthcare services providers;
•competition for physicians and nurses, and shortages of qualified personnel;
•the impact on our business of reductions in Medicare reimbursement rates or changes in the rules governing the Medicare program, including the MA program;
•the impact on our business of state and federal efforts to reduce Medicaid spending;
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•a shift in payor mix to Medicare payors as well as an increase in the number of Medicaid patients may result in a reduction in the average rate of reimbursement;
•our assumption under most of our agreements with health plans of some or all of the risk that the cost of providing services will exceed our compensation;
•risks associated with estimating the amount of revenues and refund liabilities that we recognize under our risk agreements with health plans;
•the impact on our business of security breaches, loss of data, or other disruptions causing the compromise of sensitive information or preventing us from accessing critical information;
•the impact of our existing or future indebtedness on our business and growth prospects;
•the impact on our business of disruptions in our disaster recovery systems or management continuity planning;
•the potential adverse impact of legal proceedings and litigation;
•the impact of reductions in the quality ratings of the health plans we serve;
•our ability to maintain and enhance our reputation and brand recognition;
•our ability to effectively invest in, implement improvements to and properly maintain the uninterrupted operation and data integrity of our information technology and other business systems;
•our ability to obtain, maintain and enforce intellectual property protection for our technology;
•the potential adverse impact of claims by third parties that we are infringing on or otherwise violating their intellectual property rights;
•our ability to protect the confidentiality of our trade secrets, know-how and other internally developed information;
•the impact of any restrictions on our use of or ability to license data or our failure to license data and integrate third-party technologies;
•our ability to adhere to all of the complex government laws and regulations that apply to our business;
•the impact on our business if we are unable to effectively adapt to changes in the healthcare industry, including changes to laws and regulations regarding or affecting U.S. healthcare reform
•our ability to navigate rules and regulations that govern our licensing and certification, as well as credentialing processes with private payors, before we can receive reimbursement for their services.
•
our ability to develop and maintain proper and effective internal control over financial reporting
Due to the uncertain nature of these factors, management cannot assess the impact of each factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Any forward-looking statement speaks only as of the date on which statement is made, and we undertake no obligation to update any of these statements or circumstances occurring after the date of this Report. New factors may emerge, and it is not possible to predict all factors that may affect our business and prospects.
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Our Business
CareMax is a technology-enabled care platform providing high-quality, value-based care and chronic disease management through physicians and health care professionals committed to the overall health and wellness continuum of care for its patients. The Company is an at-risk primary-care provider contracted by MA and Medicaid plans to provide care to patients in Florida, which is one of the largest and fastest growing Medicare and dual-eligible markets in the US. We have embarked on a plan to expand our business nationwide – see - Expand our Center Base within Existing and New Markets. CareMax operates a growing network of physicians and multi-specialty medical and wellness centers. The Company utilizes a high touch, comprehensive approach to primary care for patients that incorporates both high quality clinical service and the integration of technology and data analytics to manage patient’s healthcare. By proactively managing patient’s health and working to impact patient wellbeing prior to acute healthcare episodes, the Company is able to maintain high patient satisfaction while also helping to reduce unnecessary healthcare expenses. The Company is able to benefit from this dynamic through value-based payor contracts that provide the Company with the opportunity to participate in performance bonuses and surplus sharing agreements. The Company currently operates 40 medical centers in Florida and plans to open at least fifteen medical centers in 2022. CareMax offers a comprehensive range of medical services, including primary and preventative care, specialist services, diagnostic testing, chronic disease management and dental and optometry services under global capitation contracts.
CareMax also has a Management Services Organization/Independent Physician Association (“MSO" or "IPA”), arm Managed Healthcare Partners (“MHP”), that provides managerial support to physicians, allowing them to devote more time to patient care and less time to back-office activities. Through such services, physicians can benefit from the economies of scale, efficient specialty network and negotiated utilization network, dental and optometry services, technology, coding, quality support and overall infrastructure that CareMax and MHP have tirelessly built to better serve its network of independent physicians. CareMax has also developed a proprietary platform called CareOptimize that assists the care team in aggregating and curating data from across the care continuum. The CareOptimize platform uses a rules engine, powered by machine learning and artificial intelligence, to manifest cost, quality, and clinical data points at point of care during visits and between visits.
CareMax takes a “whole person health” approach to primary care that goes above and beyond the standard levels of care. In addition to traditional medical services, the Company’s medical centers help members achieve and maintain healthier lives with wellness engagement initiatives focused on:
•nutritional best practices;
•fall prevention for seniors;
•diabetes education, prevention and control;
•Medicaid eligibility assistance;
•social service application and eligibility assistance; and
•transportation to and from appointments.
While CareMax’s primary focus is providing care to Medicare eligible seniors who are mostly 65+ (80% of revenue for the nine months ended September 30, 2021 came from these patients), we also provide services to children and adults through Medicaid programs as well as through commercial insurance plans. Substantially all of CareMax’s Medicare patients are enrolled in MA plans which are run by private insurance companies, and are approved by and under contract with Medicare. With MA, patients get all of the same coverage as original Medicare, including emergency care, and most plans also include prescription drug coverage. In many cases, MA plans offer more benefits than original Medicare, including dental, vision, hearing and wellness programs.
We believe we can translate the above premium services into economic benefits. By focusing on interventions that keep our patients healthy, we can capture the cost savings that our care model creates and reinvest them further in our care model. We believe these investments lead to better outcomes and improved patient experiences, which will drive further cost savings, power patient retention and enable us to attract new patients. We believe increasing cost savings over a growing patient population will deliver an even greater surplus to the organization, enabling us to reinvest to scale and fund new centers, progress our care model and enhance our technology.
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Comparability of Financial Results
Restatement
Management’s Discussion and Analysis of Financial Condition and Results of Operations have been updated to reflect the effects of the restatement described in Note 2 to our Condensed Consolidated Financial Statements in Part I, Item 1 included in this Quarterly Report on Form 10-Q/A.
On June 8, 2021, we consummated the transactions contemplated by that certain Business Combination Agreement, dated December 18, 2020 (the “Business Combination Agreement”), by and among CMG, the entities listed in Annex I to the Business Combination Agreement (the “CMG Sellers”), IMC, IMC Holdings, LP, a Delaware limited partnership (“IMC Parent”), and Deerfield Partners, L.P. (“Deerfield Partners”), pursuant to which, on June 8, 2021 (the “Closing Date”), DFHT acquired 100% of the equity interests of CMG and 100% of the equity interests in IMC, with CMG and IMC becoming wholly owned subsidiaries of DFHT. Immediately upon completion (the “Closing”) of the transactions contemplated by the Business Combination Agreement and the related financing transactions (the “Business Combination”), the name of the combined company was changed to CareMax, Inc. CMG was determined to be the accounting acquirer in the Business Combination. Accordingly, the acquisition of CMG by the Company was accounted for as a reverse recapitalization. Under this method of accounting, the Company was treated as the acquiree for financial reporting purposes. The net assets of the Company were stated at their historical cost, with no goodwill or other separately identifiable intangible assets recorded. The balance sheet, results of operations and cash flows prior to the Business Combination are those of CMG. Further, CMG was determined to the accounting acquirer of IMC and the acquisition of IMC (the “IMC Acquisition”) was accounted for in accordance with FASB ASC Topic 805, Business Combinations (“ASC 805”) as a business combination. Accordingly, the IMC assets acquired, including separately identifiable intangible assets, and liabilities assumed were recorded at their fair value as of the Closing Date. The IMC Acquisition drove, among other things, increases of $5.8 million in Property and Equipment, $30.8 million in amortizable intangible assets and $302.2 million in goodwill as of September 30, 2021, compared to our balance sheet as of December 31, 2020. The amortization of the acquired intangibles is expected to materially increase our noncash amortization expense for the foreseeable future.
In connection with the Business Combination, we (i) issued and sold in a private placement an aggregate of 41,000,000 shares of Class A Common Stock, (ii) issued 10,796,069 shares of Class A Common Stock to the CMG Sellers, and 10,412,023 shares of Class A Common Stock to IMC Parent (See Note 1 to the Condensed Consolidated Financial Statements) and entered into the Credit Agreement. The Credit Agreement provides for credit facilities (collectively, the "Credit Facilities"), including (i) initial term loans in the aggregate principal amount of $125.0 million, which was fully drawn on the closing date to finance the Business Combination, (ii) a revolving credit facility in an aggregate principal amount of $40.0 million (the “Revolving Credit Facility”) and (iii) a delayed term loan facility in an aggregate principal amount of $20.0 million (the “Delayed Draw Term Loan”) (See Note 7 to the Condensed Consolidated Financial Statements - Credit Agreement). Interest and other costs associated with the Credit Facilities is expected to materially increase our interest expense for the foreseeable future.
In connection with the closing of the Business Combination, the Company repaid all outstanding borrowings under CMG's Loan Agreement, which was terminated on the Closing Date (See Note 7 to the Condensed Consolidated Financial Statements - CMG Loan Agreement).
In addition, as a result of the Business Combination, we have had to hire personnel and incur costs that are necessary and customary for our operations as a public company, which has contributed and is expected to continue contributing to higher corporate, general and administrative costs in the near term.
On June 18, 2021, we completed the acquisition of SMA (the "SMA Acquisition") (See Note 3 to the Condensed Consolidated Financial Statements - Acquisition of SMA Entities). The SMA Acquisition was accounted for as a business combination. Accordingly, the SMA assets acquired, including separately identifiable intangible assets, and liabilities assumed were recorded at their fair value as of June 18, 2021. The SMA Acquisition drove, among other things, increases of $100,000 in Property and Equipment, $7.8 million in amortizable intangible assets and $45.8 million in goodwill as of September 30, 2021, compared to our balance sheet as of December 31, 2020. The amortization of the acquired intangibles is expected to materially increase our noncash amortization expense for the foreseeable future.
On September 1, 2021, we completed the acquisition of DNF (the “DNF Acquisition”) (See Note 3 to the Condensed Consolidated Financial Statements - Acquisition of DNF). The DNF Acquisition was accounted for as a business combination.
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Accordingly, the DNF assets acquired, including separately identifiable intangible assets, and liabilities assumed were recorded at their fair value as of September 1, 2021. The DNF Acquisition drove, among other things, increases of $3.4 million in Property and Equipment, $14.7 million in amortizable intangible assets and $92.2 million in goodwill as of September 30, 2021, compared to our balance sheet as of December 31, 2020. The amortization of the acquired intangibles is expected to materially increase our noncash amortization expense for the foreseeable future.
The following discussion includes our results of operations for the three months ended September 30, 2021 include the results of operations for the full quarter for CMG, IMC and SMA and the results of operations of DNF from September 1, 2021 through September 30, 2021. For the nine months ended September 30, 2021, our results of operations include the full period for CMG, results of operations of IMC from June 8, 2021 through September 30, 2021, results of operations from SMA from June 18, 2021 through September 30, 2021 and the results of operations of DNF from September 1, 2021 through September 30, 2021. Accordingly, our consolidated results of operations for prior periods are not comparable to our consolidated results of operations for prior periods and may not be comparable with our consolidated results of operations for future periods.
Key Factors Affecting Our Performance
Acquisitions
We account for our acquisitions in accordance with FASB ASC Topic 805, Business Combinations, and the operations of the acquired entities are included in the historical results of CareMax for the periods following the closing of the acquisition. The most significant of these acquisitions impacting the comparability of CareMax’s operating results in the three and nine months ended September 30, 2021, as compared to the three and nine months ended September 30, 2020 were IMC on June 8, 2021 in connection with the Business Combination with IMC. See to Note 3 to the Condensed Consolidated Financial Statements for additional information regarding CareMax’s acquisitions.
Our Patients
As discussed above, the Company partners with Medicare Advantage, Medicaid, and commercial insurance plans. While CareMax currently services mostly MA patients, we also accept Medicare Fee-for-Service (FFS) patients. The chart below shows a breakdown of our current membership on a pro forma basis. This pro forma view assumes the Business Combination with IMC occurred on January 1, 2020 and are based upon estimates which we believe are reasonable:
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|
|
|
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|
|
|
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|
|
|
|
Patient Count as of* |
March 31, 2020 |
|
June 30, 2020 |
|
September 30, 2020 |
|
December 31, 2020 |
|
March 31, 2021 |
|
June 30, 2021 |
|
September 30, 2021 |
|
Medicare |
|
15,500 |
|
|
15,500 |
|
|
16,500 |
|
|
16,500 |
|
|
16,500 |
|
|
21,500 |
|
|
26,500 |
|
Medicaid |
|
12,500 |
|
|
22,500 |
|
|
22,500 |
|
|
21,000 |
|
|
23,000 |
|
|
23,500 |
|
|
24,500 |
|
Commercial |
|
15,500 |
|
|
13,500 |
|
|
15,000 |
|
|
14,500 |
|
|
15,000 |
|
|
17,500 |
|
|
17,500 |
|
Total Count |
|
43,000 |
|
|
51,500 |
|
|
54,000 |
|
|
52,000 |
|
|
54,500 |
|
|
62,500 |
|
|
68,500 |
|
*Figures may not sum due to rounding
Because CareMax accepts multiple insurance types, it uses a Medicare-Equivalent Member (“MCREM”) value in reviewing key factors of its performance. To determine the Medicare-Equivalent, CareMax calculates the amount of support typically received by one Medicare patient as equivalent to the level of support received by three Medicaid or Commercial patients. This is due to Medicare patients on average having significantly higher levels of chronic and acute conditions that need higher levels of care. Due to this dynamic, a 3:1 ratio is applied when normalizing membership statistics year over year. The breakdown of membership on a pro forma basis using MCREM is below:
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|
|
MCREM Count as of* |
March 31, 2020 |
|
June 30, 2020 |
|
September 30, 2020 |
|
December 31, 2020 |
|
March 31, 2021 |
|
June 30, 2021 |
|
September 30, 2021 |
|
Medicare |
|
15,500 |
|
|
15,500 |
|
|
16,500 |
|
|
16,500 |
|
|
16,500 |
|
|
21,500 |
|
|
26,500 |
|
Medicaid |
|
4,200 |
|
|
7,400 |
|
|
7,500 |
|
|
7,000 |
|
|
7,600 |
|
|
7,900 |
|
|
8,100 |
|
Commercial |
|
5,100 |
|
|
4,600 |
|
|
5,000 |
|
|
4,900 |
|
|
5,100 |
|
|
5,900 |
|
|
5,800 |
|
Total MCREM |
|
24,800 |
|
|
27,500 |
|
|
29,000 |
|
|
28,400 |
|
|
29,200 |
|
|
35,300 |
|
|
40,400 |
|
*Figures may not sum due to rounding
Medicare Advantage Patients
As of September 30, 2021, CareMax had approximately 26,500 Medicare Advantage patients of which 95% were in value-based, or risk-based, agreements. This means CareMax has been selected as the patient’s primary care provider and is financially responsible for all of the patient’s medical costs, including but not limited to emergency room and hospital visits,
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post-acute care admissions, prescription drugs, specialist physician spend (e.g., orthopedics) and primary care spend. For these patients CareMax is attributed an agreed percentage of the premium the MA plan receives from the Centers for Medicare and Medicaid Services (“CMS”) (typically a substantial majority of such premium given the risk assumed by the Company). CareMax’s value proposition to these patients and their MA plan is to improve these patients’ health and reduce these patients’ healthcare costs by providing a more comprehensive patient experience via the CareMax system, whereby CareMax has invested more heavily in primary care to avoid more expensive downstream costs, such as hospital admissions. Because CareMax is at-risk for the entirety of a patient’s medical expense, investing more heavily in preventative primary care makes economic sense given the relative costs to acute, episodic hospital-based care. CareMax is not delegated for claims payments and therefore does not receive the agreed percentage of premiums from the MA plan nor does it pay claims. A reconciliation is performed periodically and if premiums exceed medical costs paid by the MA plan, CareMax receives payment from the MA plan. If medical costs paid by the MA plan exceed premiums, CareMax is responsible to reimburse the MA plan.
Because plan premiums are enhanced when a contracted plan achieves high quality scores (STARS program), it is important for CareMax to deliver high quality of care to its members. Through its data analytics and outreach programs, IMC has achieved the highest quality rating possible, 5 STARS, for each of the last two years.
Medicare provides an annual enrollment period during the fall of each year to allow patients to select an MA program or traditional Medicare, with only limited ability for patients to make that selection during other periods of the year. Once patients have selected MA, they can change the selection of their primary care provider at any time. Accordingly, while the annual enrollment period is important to us, CareMax is able to attract new patients at any time during the year from the existing pool of MA patients and we must work to retain our patients throughout the year.
Medicaid Patients
As of September 30, 2021, CareMax had approximately 24,500 Medicaid patients of which approximately 96% were in value-based contracts. Using the MCREM, the level of support required to manage these Medicaid patients equates to that of approximately 8,100 Medicare patients. In Florida, most Medicaid recipients are enrolled in the Statewide Medicaid Managed Care program. The program has three parts of which CareMax accepts one: Managed Medical Assistance (“MMA”). This program provides covered medical services like doctors visits, hospital care, prescription drugs, mental health care, and transportation to these recipients. Most recipients on Medicaid will receive their care from a plan that covers MMA services. CareMax contracts with a majority of the plans that cover MMA patients in our service area.
Similar to the risk it takes with Medicare, CareMax is attributed an agreed percentage of the premium the Medicaid plan receives from Florida’s Agency for Health Care Administration (“AHCA”) (typically a substantial majority of such premium given the risk assumed by the Company). Its value proposition to these patients and their Medicaid plan is to improve these patients’ health and reduce these patients’ healthcare costs by providing a more comprehensive patient experience via the CareMax system, whereby we invest more heavily in primary care to avoid more expensive downstream costs, such as hospital admissions. Because CareMax is at-risk for the entirety of a patient’s medical expense, investing more heavily in preventative primary care makes economic sense given the relative costs to acute, episodic hospital-based care. CareMax is not delegated for claims payments and therefore does not receive the agreed percentage of premiums from the Medicaid plan nor does it pay claims. A reconciliation is performed periodically and if premiums exceed medical costs paid by the Medicaid plan, CareMax receives payment from the Medicaid plan. If medical costs paid by the Medicaid plan exceed premiums, we are responsible to reimburse the Medicaid plan.
AHCA provides an annual enrollment period during the fall of each year to allow patients to select a Medicaid plan with only limited ability for patients to make that selection during other periods of the year. Although every enrolling Medicaid patient has the option to select a health plan, most patients do not and are auto assigned to the plans using AHCA’s methodology. Once patients are assigned to a Medicaid plan, they can change the selection of their primary care provider at any time. In the enrollment process, most Medicaid patients do not select a primary care provider and rely on the auto-assignment logic the plan has in place. CareMax leverages its ability to manage risk and provide the highest level of quality care to request their providers be in the top tier of the plan’s auto assignment logic. While the annual enrollment period is important, CareMax is able to attract new at-risk patients at any time during the year from the existing pool of Medicaid patients and we must work to retain our patients throughout the year.
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Commercial Patients
As of September 30, 2021, CareMax managed approximately 17,500 commercial patients of which 37% were under a value-based arrangement that provided upside only financial incentives for quality and utilization performance. Using the MCREM, the level of support required to manage these commercial patients equates to that of approximately 5,800 Medicare patients. CareMax accepts the following insurance policies under commercial insurance: patients covered by the ACA, Florida Healthy Kids and other individual or group insurance coverage. The ACA represent 94% of the patients in this category.
For the patients that are under upside only arrangements, CareMax is initially compensated a contractually agreed upon flat capitation per patient per month (“PPPM”) rate for primary care services and care coordination. Like the risk it takes on Medicare, a reconciliation is performed periodically and if premiums exceed medical costs paid by the commercial plan, CareMax receives a percentage of the savings from the commercial plan. However, if medical costs paid by the commercial plan exceed premiums, CareMax is not responsible to reimburse the commercial plan. Because the risk is limited to savings generated by better utilization of medical services, CareMax does not recognize these premiums as “at-risk” premiums, nor does CareMax recognize the medical expenses. Instead, CareMax records the capitation amount and any upside as other revenue. CareMax also accrues any quality bonuses as other revenue as well.
CareMax counts fee-for-service patients as those that have been assigned by a Health Plan to one of its centers. A fee-for-service patient remains active until CareMax is informed by the Health Plan the patient is no longer active. CareMax cares for a number of commercial patients (approximately 23% of the Company’s total patients) for whom it is reimbursed on a fee-for-service basis via their health plan in situations where it does not have a capitation relationship with that particular health plan.
CareMax fee for-service revenue, received directly from commercial plans, on a per patient basis is lower than its per patient revenue for at-risk patients basis in part because its fee-for-service revenue covers only the primary care services that it directly provides to the patient, while the risk revenue is intended to compensate it for the services directly performed by it as well as the financial risk that it assumes related to the third-party medical expenses of at-risk patients.
Our historical financial performance has been, and we expect our financial performance in the future to be, driven by our ability to:
Add New Patients in Existing Centers
We believe our ability to add new patients is a key indicator of the market’s recognition of the attractiveness of our care model, both to our patients and payor partners, and a key growth driver for the business. We have a largely embedded growth opportunity within our existing center base. With an average capacity of 1,750 patients, our 40 centers as of September 30, 2021 can support approximately 70,000 MCREM patients, and if we include the two centers scheduled to open in 2022, capacity increases to 73,000 MCREM patients. As we add patients to our existing centers, we expect these patients to contribute incremental economics to CareMax as we leverage our fixed cost base at each center. The additional de novo centers we expect to open in 2022 will also increase our capacity.
We utilize a proactive strategy to drive growth to our centers. We employ a grassroots approach to patient engagement led by our Outreach Team and supplemented by more traditional marketing, including digital and social media, print, mail and telemarketing. We leverage our Outreach Team to ensure we are connecting with Medicare-eligible patients across a number of channels to make them aware of their healthcare choices and the services we offer. These efforts have historically included hosting events within our centers and participating in community events. Each of our centers has a community room, a space designated and available for our patients’ use whenever the center is open. We also utilize this space to provide fitness and health education classes to our patients and often open up events to any older adults in the community regardless of their affiliation. During the global pandemic, we have leveraged our community centers as extra waiting room space as needed which allowed easier social distancing for patients or their companions. We are continuing to leverage our community-based marketing approach with less focus on in-person interactions and more focus on working with our community partners to identify older adults who need our services. It is our belief that the enhanced awareness of the importance of managing chronic illnesses as well as patient varied preferences on preferred method to interact with providers will continue to drive demand for CareMax’s services amongst older adults. We believe our marketing efforts lead to increased awareness of CareMax and to additional patients choosing us as their primary care provider, regardless of whether that patient is covered under MA or traditional Medicare. We believe that our outreach efforts also help to grow our payor partners’ membership base as we grow our own patient base and help educate patients about their choices on Medicare, further aligning our model with that of healthcare payors.
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Our payor partners will also direct patients to CareMax. They do this either by assigning patients who have not yet selected a primary care provider to CareMax, or by insurance agents informing their clients about CareMax, which we believe often results in the patient selecting us as their primary care provider when they select an MA plan. Payors dedicate a large share of their internal efforts to reducing medical costs, and they have a nearly unlimited desire to engage with solutions proven to achieve that goal. Due to our care delivery model’s patient-centric focus, we have been able to consistently help payors manage their costs while raising the quality of their plans, affording them quality bonuses that increase their revenue. We believe that we represent an attractive opportunity for payors to meaningfully improve their overall membership growth in a given market without assuming any financial downside.
Patient Satisfaction
Once we bring on new patients, we focus on engagement around a care plan and satisfaction. The result is high patient satisfaction. Our model provides visibility on our financial and growth trajectory given the recurring nature of the revenue we collect from our MA partners once their members begin utilizing CareMax programs.
CMS allows for MA enrollees to be risk-adjusted in order to compensate the MA plan for the greater medical costs associated with sicker patients, so long as the health plan appropriately and accurately documents the patients’ health conditions. Often, our patients have not previously engaged with the healthcare system, and therefore their health conditions are poorly documented. Through our care model, we organically determine and assess the health needs of our patients and create a care plan consistent with those needs. We capture and document health conditions as a part of this process. We believe our model aligns best with the risk adjustment framework as we scale the clinical intensity of our care model based upon the needs of the individual patient—we invest more dollars and resources towards our sicker patients.
Expand our Center Base within Existing and New Markets
We believe that we currently serve approximately 2% of the total patients in the markets where we currently have centers. As a result, there is significant opportunity to expand in our existing markets through the acquisition of new patients to existing centers and the addition of new centers. For the long term, these strategically developed new sites allow us to access additional neighborhoods while leveraging our established brand and infrastructure in a market. The table below reflects statistics of our current centers on a pro forma basis. This pro forma view assumes the Business Combination with IMC occurred on January 1, 2020 and are based upon estimates which we believe are reasonable.
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020 |
|
June 30, 2020 |
|
September 30, 2020 |
|
December 31, 2020 |
|
March 31, 2021 |
|
June 30, 2021 |
|
September 30, 2021 |
|
Centers |
|
21 |
|
|
21 |
|
|
22 |
|
|
24 |
|
|
24 |
|
|
34 |
|
|
40 |
|
Markets |
|
1 |
|
|
1 |
|
|
1 |
|
|
1 |
|
|
1 |
|
|
1 |
|
|
1 |
|
Patients (MCREM) |
|
24,800 |
|
|
27,500 |
|
|
29,000 |
|
|
28,400 |
|
|
29,200 |
|
|
35,300 |
|
|
40,400 |
|
At-risk |
|
84.8 |
% |
|
86.7 |
% |
|
85.6 |
% |
|
87.7 |
% |
|
87.0 |
% |
|
84.1 |
% |
|
87.2 |
% |
Fee for service |
|
15.2 |
% |
|
13.3 |
% |
|
14.4 |
% |
|
12.3 |
% |
|
13.0 |
% |
|
15.9 |
% |
|
12.8 |
% |
We estimate that the core addressable market for our services is approximately 1,279,000 Medicare eligible patients in our target demographic. We believe this market represents approximately $15.3 billion of annual healthcare expenditures based on multiplying an average annual revenue of $12,000 per member, which is derived from our experience and industry knowledge and which we believe represents a reasonable national assumption, by the number of Medicare eligible patients in our target markets. Our existing market today represent a small fraction of this massive market opportunity. Based upon our experience to date, we believe our innovative care model can scale nationally, and we therefore expect to selectively and strategically expand into new geographies. As we continue this expansion, our success will depend on the competitive dynamics in those markets, and our ability to attract patients and deploy our care model in those markets. Through CareOptimize’s clients, which are spread across more than 30 states, we already understand the healthcare dynamics in communities we are looking to expand to. This gives management a high degree of confidence that the CareMax care model can have similar clinical and financial outcomes as we have seen in South Florida in other locations.
Once we have identified a location for a new center, our typical center takes 6-12 months to open. Historically, our buildout costs have averaged approximately $90 per square foot, inclusive of licensing, center construction, center furnishing, and purchase of medical equipment and supplies, with roughly half covered by upfront capital expenditures and the balance covered by tenant improvement allowances, landlord or developer work and similar items. We typically enter into long-term triple-net leases with our landlords and do not own any real estate, enabling us to more quickly identify and build new centers with a capital efficient model.
(34)
By adding new patients to our existing centers, retaining our existing patients, and strategically opening new centers in existing geographies, we have generated significant revenue growth over our competitors. We currently plan to continue pursuing further strategic acquisitions of medical centers in the future.
Contract with Payors
Our economic model relies on its capitated partnerships with payors which manage and market MA plans across the United States. CareMax has established strategic value-based relationships with eleven different payors for Medicare Advantage patients, four different payors for Medicaid patients and one payor for ACA patients. On a pro forma basis giving effect to the Business Combination with IMC as of January 1, 2020, our three largest payor relationships were Anthem, Centene, and United, which generated 46%, 17%, 16% of our revenue in the nine months ended September 30, 2021, respectively, and 51%, 16%, and 17% of our revenue in the nine months ended September 30, 2020, respectively. These existing contracts and relationships with our partners’ understanding of the value of the CareMax model reduces the risk of entering into new markets as CareMax typically has payor contracts before entering a new market. Maintaining, supporting, and growing these relationships, particularly as CareMax enters new geographies, is critical to our long-term success. CareMax’s model is well-aligned with its payor partners — to drive better health outcomes for their patients, enhancing patient satisfaction, while driving incremental patient and revenue growth. This alignment of interests and its highly effective care model helps ensures our continued success with our payor partners.
Effectively Manage the Cost of Care for Our Patients
The capitated nature of our contracting with payors requires us to prudently manage the medical expense of our patients. Our external provider costs are our largest expense category, representing 65% of our total operating expenses for the nine months ended September 30, 2021. Our care model focuses on leveraging the primary care setting as a means of avoiding costly downstream healthcare costs, such as acute hospital admissions. Our patients retain the freedom to seek care at ERs or hospitals; we do not restrict their access to care. Therefore, we could be liable for potentially large medical claims should we not effectively manage our patients’ health. We utilize stop-loss insurance for our patients, protecting us for medical claims per episode in excess of certain levels.
Center-Level Contribution Margin
We endeavor to expand our number of centers and number of patients at each center over time. Due to the significant fixed costs associated with operating and managing our centers, we generate significantly better center-level contribution margins as the patient base within our centers increases and our costs decrease as a percentage of revenue. As a result, the value of a center to our business increases over time.
Seasonality to our Business
Due to the large number of dual-eligible patients (meaning eligible for both Medicare and Medicaid) we serve, the annual enrollment period does not materially affect our growth during the year. We typically see large increases in Affordable Care Act (“ACA”) patients during the first quarter as a result of the ACA annual enrollment period (October to December). However, this is not a large portion of our business.
Our operational and financial results will experience some variability depending upon the time of year in which they are measured. This variability is most notable in the following areas:
Per-Patient Revenue
The revenue derived from our at-risk patients is a function of the percentage of premium we have negotiated with our payor partners, as well as our ability to accurately and appropriately document the acuity of a patient. We experience some seasonality with respect to our per-patient revenue, as it will generally decline over the course of the year. In January of each year, CMS revises the risk adjustment factor for each patient based upon health conditions documented in the prior year, leading to changes in per-patient revenue. As the year progresses, our per-patient revenue declines as new patients join us, typically with less complete or accurate documentation (and therefore lower risk-adjustment scores), and patient mortality disproportionately impacts our higher-risk (and therefore greater revenue) patients.
(35)
External Provider Costs
External Provider Costs will vary seasonally depending on a number of factors, but most significantly the weather. Certain illnesses, such as the influenza virus, are far more prevalent during colder months of the year, which can result in an increase in medical expenses during these time periods. We would therefore expect to see higher levels of per-patient medical costs in the first and fourth quarters. Medical costs also depend upon the number of business days in a period. Shorter periods will have lesser medical costs due to fewer business days. Business days can also create year-over-year comparability issues if one year has a different number of business days compared to another. We would also expect to experience an impact in the future should there be another pandemic such as COVID-19, which may result in increased or decreased total medical costs depending upon the severity of the infection, the duration of the infection and the impact to the supply and availability of healthcare services for our patients.
Investments in Growth
We expect to continue to focus on long-term growth through investments in our centers, care model and marketing. In addition, we expect our corporate, general and administrative expenses to increase in absolute dollars for the foreseeable future to support our growth and because of additional costs as a public company, including expenses related to compliance with the rules and regulations of the SEC, Sarbanes Oxley Act compliance, the stock exchange listing standards, additional corporate and director and officer insurance expenses, greater investor relations expenses and increased legal, audit and consulting fees. As we have communicated, we plan to invest in openings of new de novo centers both within and outside of Florida over the next several years. Historically, de novo centers require upfront capital and operating expenditures, which may not be fully offset by additional revenues in the near-term, and we similarly expect a period of unprofitability in our future de novo centers before they break even. While our net income may decrease in the future because of these activities, we plan to balance these investments in future growth with a continued focus on managing our results of operations and generating positive income from our core centers and scaled acquisitions. In the longer term we anticipate that these investments will positively impact our business and results of operations.
Key Business Metrics
In addition to our financial information which conforms with generally accepted accounting principles in the United States of America (“GAAP”), management reviews a number of operating and financial metrics, including the following key metrics, to evaluate its business, measure its performance, identify trends affecting its business, formulate business plans, and make strategic decisions.
Use of Non-GAAP Financial Information
Certain financial information and data contained this Report is unaudited and does not conform to Regulation S-X. Accordingly, such information and data may not be included in, may be adjusted in, or may be presented differently in, any periodic filing, information or proxy statement, or prospectus or registration statement to be filed by the Company with the SEC. Some of the financial information and data contained in this Report, such as Adjusted EBITDA and margin thereof, platform contribution and margin thereof and pro forma medical expense ratio have not been prepared in accordance with GAAP. These non-GAAP measures of financial results are not GAAP measures of our financial results or liquidity and should not be considered as an alternative to net income (loss) as a measure of financial results, cash flows from operating activities as a measure of liquidity, or any other performance measure derived in accordance with GAAP. The Company believes these non-GAAP measures of financial results provide useful information to management and investors regarding certain financial and business trends relating to the Company’s financial condition and results of operations. The Company’s management uses these non-GAAP measures for trend analyses and for budgeting and planning purposes.
The Company believes that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating projected operating results and trends in and in comparing the Company’s financial measures with other similar companies, many of which present similar non-GAAP financial measures to investors. Management does not consider these non-GAAP measures in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of these non-GAAP financial measures is that they exclude significant expenses and income that are required by GAAP to be recorded in the Company’s financial statements. In addition, they are subject to inherent limitations as they reflect the exercise of judgments by management about which expense and income are excluded or included in determining these non-GAAP financial measures. In order to compensate for these limitations, management presents non-GAAP financial measures
(36)
in connection with GAAP results. You should review the Company’s audited financial statements, which have been filed by the Company with the SEC with the Registration Statement.
EBITDA and Adjusted EBITDA
Management defines “EBITDA” as net income or net loss before interest expense, income tax expense or benefit, depreciation and amortization, change in fair value of warrant liabilities, and gain or loss on extinguishment of debt. “Adjusted EBITDA” is defined as EBITDA adjusted for special items such as duplicative costs, non-recurring legal, consulting, and professional fees, stock based compensation, de novo costs for the first 12 months after opening, discontinued operations, acquisition costs and other costs that are considered one-time in nature as determined by management. Adjusted EBITDA is intended to be used as a supplemental measure of our performance that is neither required by, nor presented in accordance with, GAAP. Management believes that the use of Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing its financial measure with those of comparable companies, which may present similar non-GAAP financial measures to investors. However, we may incur future expenses similar to those excluded when calculating these measures. In addition, our presentations of these measures should not be construed as an inference that its future results will be unaffected by unusual or non-recurring items. Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Adjusted EBITDA in the same fashion.
Due to these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on its GAAP results and using Adjusted EBITDA on a supplemental basis. Please review the reconciliation of net income (loss) to EBITDA and Adjusted EBITDA below and not rely on any single financial measure to evaluate the Company’s business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
($ in thousands) |
|
September 30, 2021 |
|
|
September 30, 2020 |
|
|
Y/Y Change |
|
|
September 30, 2021 |
|
|
September 30, 2020 |
|
|
Y/Y Change |
|
Net (loss) income |
|
$ |
(14,479 |
) |
|
$ |
(281 |
) |
|
$ |
(14,198 |
) |
|
$ |
(3,120 |
) |
|
$ |
6,354 |
|
|
$ |
(9,474 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP Pro Forma adjustments |
|
|
- |
|
|
|
(189 |
) |
|
|
189 |
|
|
|
(8,917 |
) |
|
|
(3,541 |
) |
|
|
(5,376 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma net (loss) income |
|
|
(14,479 |
) |
|
|
(470 |
) |
|
|
(14,009 |
) |
|
|
(12,037 |
) |
|
|
2,813 |
|
|
|
(14,850 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
1,291 |
|
|
|
1,656 |
|
|
|
(364 |
) |
|
|
4,358 |
|
|
|
5,002 |
|
|
|
(644 |
) |
Depreciation and amortization |
|
|
5,176 |
|
|
|
3,368 |
|
|
|
1,808 |
|
|
|
11,494 |
|
|
|
10,126 |
|
|
|
1,368 |
|
Gain on remeasurement of warrant liabilities |
|
|
(10,227 |
) |
|
|
- |
|
|
|
(10,227 |
) |
|
|
(12,022 |
) |
|
|
- |
|
|
|
(12,022 |
) |
Loss (gain) on remeasurement of contingent earnout liability |
|
|
11,625 |
|
|
|
- |
|
|
|
11,625 |
|
|
|
(5,794 |
) |
|
|
- |
|
|
|
(5,794 |
) |
Gain on extinguishment of debt |
|
|
(279 |
) |
|
|
- |
|
|
|
(279 |
) |
|
|
(1,637 |
) |
|
|
- |
|
|
|
(1,637 |
) |
Other expenses |
|
|
840 |
|
|
|
100 |
|
|
|
740 |
|
|
|
849 |
|
|
|
86 |
|
|
|
763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
(6,053 |
) |
|
|
4,653 |
|
|
|
(10,706 |
) |
|
|
(14,791 |
) |
|
|
18,027 |
|
|
|
(32,818 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-recurring expenses |
|
|
4,249 |
|
|
|
2,763 |
|
|
|
1,486 |
|
|
|
15,302 |
|
|
|
4,439 |
|
|
|
10,863 |
|
Acquisition costs |
|
|
1,871 |
|
|
|
789 |
|
|
|
1,083 |
|
|
|
6,844 |
|
|
|
2,123 |
|
|
|
4,721 |
|
Stock based compensation |
|
|
966 |
|
|
|
- |
|
|
|
966 |
|
|
|
966 |
|
|
|
- |
|
|
|
966 |
|
De novo losses |
|
|
195 |
|
|
|
68 |
|
|
|
127 |
|
|
|
743 |
|
|
|
94 |
|
|
|
649 |
|
Discontinued operations |
|
|
- |
|
|
|
(35 |
) |
|
|
35 |
|
|
|
(1 |
) |
|
|
(35 |
) |
|
|
34 |
|
Adjusted EBITDA |
|
$ |
1,229 |
|
|
$ |
8,237 |
|
|
$ |
(7,009 |
) |
|
$ |
9,064 |
|
|
$ |
24,648 |
|
|
$ |
(15,584 |
) |
*Pro Forma figures give effect to the Business Combinations of IMC and Care Holdings as if they had occurred in historical periods. Figures may not sum due to rounding. |
|
(37)
In addition to our 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. The chart below is a pro forma view of our operations. This pro forma view assumes the Business Combination with IMC occurred on January 1, 2020, and are based upon estimates which we believe are reasonable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient & Platform Contribution |
March 31, 2020 |
|
June 30, 2020 |
|
September 30, 2020 |
|
December 31, 2020 |
|
March 31, 2021 |
|
June 30, 2021 |
|
September 30, 2021 |
|
Centers |
|
21 |
|
|
21 |
|
|
22 |
|
|
24 |
|
|
24 |
|
|
34 |
|
|
40 |
|
Markets |
|
1 |
|
|
1 |
|
|
1 |
|
|
1 |
|
|
1 |
|
|
1 |
|
|
1 |
|
Patients (MCREM) |
|
24,800 |
|
|
27,500 |
|
|
29,000 |
|
|
28,400 |
|
|
29,200 |
|
|
35,300 |
|
|
40,400 |
|
At-risk |
|
84.8 |
% |
|
86.7 |
% |
|
85.6 |
% |
|
87.7 |
% |
|
87.0 |
% |
|
84.1 |
% |
|
87.2 |
% |
Platform Contribution ($, Millions) |
$ |
14.1 |
|
$ |
18.1 |
|
$ |
15.5 |
|
$ |
17.9 |
|
$ |
14.7 |
|
$ |
8.2 |
|
$ |
11.0 |
|
Centers
We define our centers as those primary care centers open for business and attending to patients at the end of a particular period.
Patients (MCREM)
MCREM Patients includes both at-risk MA patients (those patients for whom we are financially responsible for their total healthcare costs) as well as risk and non-risk, non-MA patients. We define our total at-risk patients as at-risk patients who have selected us as their provider of primary care medical services as of the end of a particular period. We define our total fee-for-service patients as fee-for-service patients who come to one of our centers for medical care at least once per year. A fee-for-service patient remains active in our system until we are informed by the health plan the patient is no longer active. As discussed above, CareMax calculates the amount of support typically received by one Medicare patient as equivalent to the level of support received by three Medicaid or Commercial patients.
Platform Contribution
We define platform contribution as revenue less the sum of (i) external provider costs and (ii) cost of care, excluding depreciation and amortization. We believe this metric best reflects the economics of our care model as it includes all medical claims expense associated with our patients’ care as well as the costs we incur to care for our patients via the CareMax System. As a center matures, we expect the platform contribution from that center to increase both in terms of absolute dollars as well as a percentage of capitated revenue. This increase will be driven by improving patient contribution economics over time, as well as our ability to generate operating leverage on the costs of our centers. Our aggregate platform contribution may not increase despite improving economics at our existing centers should we open new centers at a pace that skews our mix of centers towards newer centers. We would expect to experience minimal seasonality in platform contribution due to minimal seasonality in our patient contribution.
Impact of COVID-19
The rapid spread of COVID-19 around the world and throughout the United States altered the behavior of businesses and people, with significant negative effects on federal, state and local economies. The virus disproportionately impacts older adults, especially those with chronic illnesses, which describes many of our patients.
We estimate our performance for the nine months ended September 30, 2021 has been impacted by approximately $18.5 million of direct non-recurring COVID-19 costs. Management cannot accurately predict of the impact for the foreseeable future especially given the geographical concentration of patients in South Florida.
Components of Results of Operations
Revenue
Medicare risk-based revenue and Medicaid risk-based revenue. Our capitated revenue consists primarily of fees for medical services provided by us or managed by our affiliated medical groups under a global capitation arrangement made directly with various MA payors. Capitation is a fixed amount of money per patient per month paid in advance for the delivery of health care services, whereby we are generally liable for medical costs in excess of the fixed payment and are able to retain any surplus created if medical costs are less than the fixed payment. A portion of our capitated revenues are typically prepaid monthly to
(38)
us based on the number of MA patients selecting us as their primary care provider. Our capitated rates are determined as a percentage of the premium the MA plan receives from CMS for our at-risk members. Those premiums are determined via a competitive bidding process with CMS and are based upon the cost of care in a local market and the average utilization of services by the patients enrolled. Medicare pays capitation using a “risk adjustment model,” which compensates providers based on the health status (acuity) of each individual patient. Payors with higher acuity patients receive more in premium, and those with lower acuity patients receive less in premium. Under the risk adjustment model, capitation is paid on an interim basis based on enrollee data submitted for the preceding year and is adjusted in subsequent periods after the final data is compiled. As premiums are adjusted via this risk adjustment model, our capitation payments will change in unison with how our payor partners’ premiums change with CMS. Risk adjustment in future periods may be impacted by COVID-19 and our inability to accurately document the health needs of our patients in a compliant manner, which may have an adverse impact on our revenue.
For Medicaid, premiums are determined by Florida’s AHCA and based rates are adjusted annually using historical utilization data projected forward by a third-party actuarial firm. The rates are established based on specific cohorts by age and sex and geographical location. AHCA uses a “zero sum” risk adjustment model that establishes acuity for certain cohorts of patients quarterly, depending on the scoring of that acuity, may periodically shift premiums from health plans with lower acuity members to health plans with higher acuity members.
Other revenue. Other revenue includes professional capitation payments. These revenues are a fixed amount of money per patient per month paid in advance for the delivery of primary care services only, whereby CareMax is not liable for medical costs in excess of the fixed payment. Capitated revenues are typically prepaid monthly to CareMax based on the number of patients selecting us as their primary care provider. Our capitated rates are fixed, contractual rates. Incentive payments for Healthcare Effectiveness Data and Information Set (“HEDIS”) and any services paid on a fee for service basis by a health plan are also included in other managed care revenue. Other revenue also includes ancillary fees earned under contracts with certain payors for the provision of certain care coordination and other care management services. These services are provided to patients covered by these payors regardless of whether those patients receive their care from our affiliated medical groups. Revenue for primary care service for patients in a partial risk or up-side only contracts, pharmacy revenue and revenue generated from CareOptimize are reported in other revenue.
See “—Critical Accounting Policies—Revenue” for more information. We expect capitated revenue will increase as a percentage of total revenues over time because of the greater revenue economics associated with at-risk patients compared to fee-for-service patients.
Operating Expenses
Medicare and Medicaid external provider costs. External provider costs include all services at-risk patients utilize. These include claims paid by the health plan and estimates for unpaid claims. The estimated reserve for incurred but not paid claims is included in accounts receivable as we do not pay medical claims. Actual claims expense will differ from the estimated liability due to factors in estimated and actual patient utilization of health care services, the amount of charges, and other factors. We typically reconcile our medical claims expense with our payor partners on a monthly basis and adjust our estimate of incurred but not paid claims if necessary. To the extent we revise our estimates of incurred but not paid claims for prior periods up or down, there would be a correspondingly favorable or unfavorable effect on our current period results that may or may not reflect changes in long term trends in our performance. We expect our medical claims expenses to increase in both absolute dollar terms as well as on a PPPM basis given the healthcare spending trends within the Medicare population and the increasing disease burden of patients as they age.
Cost of care. Cost of care costs includes the costs of additional medical services we provide to patients that are not paid by the plan. These services include patient transportation, medical supplies, auto insurance and other specialty costs, like dental or vision. In some instances, we have negotiated better rates than the health plans for these health plan covered services. In addition, cost of care includes rent and facilities costs required to maintain and operate our centers.
Expenses from our physician groups are consolidated with other clinical and MSO expenses to determine profitability for our at-risk and fee-for-service arrangements. Physician group economics are not evaluated on a stand-alone basis, as certain non-clinical expenses need to be consolidated to consider profitability.
We measure the incremental cost of our capitation agreements by starting with our center-level expenses, which are calculated based upon actual expenses incurred at a specific center for a given period of time and expenses that are incurred centrally and
(39)
allocated to centers on a ratable basis. These expenses are allocated to our at-risk patients based upon the number of visit slots these patients utilized compared to the total slots utilized by all of our patients. All visits, however, are not identical and do not require the same level of effort and expense on our part. Certain types of visits are more time and resource intensive and therefore result in higher expenses for services provided internally. Generally, patients who are earlier in their tenure with CareMax utilize a higher percentage of these more intensive visits, as we get to know the patient and properly assess and document such patient’s health condition.
Selling and marketing expenses. Selling and marketing expenses include the cost of our sales and community relations team, including salaries and commissions, radio and television advertising, events and promotional items.
Corporate general and administrative expenses. Corporate general and administrative expenses include employee-related expenses, including salaries and related costs and stock-based compensation for executive, technology infrastructure, operations, clinical and quality support, finance, legal, human resources, and business development departments. In addition, corporate general and administrative expenses include corporate technology, third party professional services and corporate occupancy costs. We expect these expenses to increase over time due to the additional legal, accounting, insurance, investor relations and other costs that we will incur as a public company, as well as other costs associated with continuing to grow its business. We also expect our corporate, general and administrative expenses to increase in absolute dollars in the foreseeable future. However, we anticipate corporate, general and administrative expenses to decrease as a percentage of revenue over the long term, although they may fluctuate as a percentage of revenue from period to period due to the timing and amount of these expenses.
Depreciation and amortization. Depreciation and amortization expenses are primarily attributable to our capital investments and consist of fixed asset depreciation, amortization of intangibles considered to have definite lives, and amortization of capitalized internal-use software costs.
Other Income (Expense)
Interest expense. Interest expense consists primarily of interest payments on our outstanding borrowings (see “Note 7 - Condensed Consolidated Financial Statements - Long Term Debt”).
(40)
Results of Operations
Three Months Ended September 30, 2021 compared to Three Months Ended September 30, 2020.
The following table sets forth our unaudited condensed consolidated statements of operations data for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
($ in thousands) |
2021 |
|
2020 |
|
$ Change |
|
% Change |
|
Revenue |
|
|
|
|
|
|
|
|
Medicare risk-based revenue |
$ |
76,428 |
|
$ |
24,242 |
|
$ |
52,186 |
|
|
215.3 |
% |
Medicaid risk-based revenue |
|
20,884 |
|
|
— |
|
|
20,884 |
|
|
|
Other revenue |
|
7,308 |
|
|
64 |
|
|
7,244 |
|
|
11260.6 |
% |
Total revenue |
$ |
104,620 |
|
$ |
24,306 |
|
$ |
80,314 |
|
|
330.4 |
% |
Operating expense |
|
|
|
|
|
|
|
|
External provider costs |
|
73,329 |
|
|
17,304 |
|
|
56,025 |
|
|
323.8 |
% |
Cost of care |
|
21,602 |
|
|
4,341 |
|
|
17,261 |
|
|
397.7 |
% |
Sales and marketing |
|
1,274 |
|
|
311 |
|
|
963 |
|
|
309.5 |
% |
Corporate, general and administrative |
|
13,589 |
|
|
1,885 |
|
|
11,704 |
|
|
621.0 |
% |
Depreciation and amortization |
|
5,176 |
|
|
359 |
|
|
4,816 |
|
|
1340.7 |
% |
Acquisition related costs |
|
879 |
|
|
— |
|
|
879 |
|
|
|
Total costs and expenses |
$ |
115,848 |
|
$ |
24,200 |
|
$ |
91,648 |
|
|
378.7 |
% |
Operating (loss) income |
$ |
(11,228 |
) |
$ |
106 |
|
$ |
(11,334 |
) |
|
(10696.1 |
)% |
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
1,291 |
|
|
387 |
|
|
904 |
|
|
233.6 |
% |
Gain on remeasurement of warrant liabilities |
|
(10,227 |
) |
|
— |
|
|
(10,227 |
) |
|
|
Loss on remeasurement of contingent earnout liabilities |
|
11,625 |
|
|
— |
|
|
11,625 |
|
|
|
Gain on extinguishment of debt, net |
|
(279 |
) |
|
— |
|
|
(279 |
) |
|
|
Other expenses |
|
840 |
|
|
— |
|
|
840 |
|
|
|
Loss before income taxes |
$ |
(14,479 |
) |
$ |
(281 |
) |
$ |
(14,198 |
) |
|
5050.1 |
% |
Income tax provision |
|
— |
|
|
— |
|
|
— |
|
|
|
Net loss |
$ |
(14,479 |
) |
$ |
(281 |
) |
$ |
(14,198 |
) |
|
5050.1 |
% |
|
|
|
|
|
|
|
|
|
Net income attributable to non-controlling interest |
$ |
– |
|
$ |
34 |
|
$ |
(34 |
) |
|
(100.0 |
)% |
Net loss attributable to controlling interest |
$ |
(14,479 |
) |
$ |
(315 |
) |
$ |
(14,164 |
) |
|
4494.5 |
% |
*Figures may not sum due to rounding
Medicare risk-based revenue. Medicare risk-based revenue was $76.4 million for the three months ended September 30, 2021, an increase of $52.2 million, or 215.3%, compared to $24.2 million for the three months ended September 30, 2020. This increase was driven primarily by a 256% increase in the total number of at-risk patients from the acquisitions of IMC, SMA, and DNF, partially offset by a 11% reduction in rates, driven by member mix and COVID-19.
Medicaid risk-based revenue. Medicaid risk-based revenue was $20.9 million for the three months ended September 30, 2021. Medicaid risk-based revenue relates entirely to IMC.
Other revenue. Other revenue was $7.3 million for the three months ended September 30, 2021, an increase of $7.2 million, or 11,260.6%, compared to $64,000 for the three months ended September 30, 2020. The increase is almost entirely related to revenue from IMC.
External provider costs. External provider costs were $73.3 million for the three months ended September 30, 2021, an increase of $56.0 million, or 323.8%, compared to $17.3 million for the three months ended September 30, 2020. The increase was primarily due to a 370% increase in total at-risk MCREM patients and the additional costs attributable to claims with a COVID-19 diagnosis.
Cost of care expenses. Cost of care expenses were $21.6 million for the three months ended September 30, 2021, an increase of $17.3 million or 397.7%, compared to $4.3 million for the three months ended September 30, 2020. The increase was due to additional membership growth from the IMC, SMA, and DNF acquisitions and the reopening of the wellness centers.
Sales and marketing expenses. Sales and marketing expenses were $1.3 million for the three months ended September 30, 2021, an increase of $1.0 million or 309.5%, compared to $311,000 for the three months ended September 30, 2020. The increase was due to the acquisition of IMC and the recommencing of sales and community activities in 2021.
(41)
Corporate, general & administrative. Corporate, general & administrative expense was $13.6 million for the three months ended September 30, 2021, an increase of $11.7 million or 621.0% compared to $1.9 million for the three months ended September 30, 2020. The increase was primarily from the acquired overhead related to IMC, SMA, and DNF.
Depreciation and amortization. Depreciation and amortization expense was $5.2 million for the three months ended September 30, 2021, an increase of $4.8 million, or 1,340.7% compared to $359,000 for the three months ended September 30, 2020. This was due to amortization of intangible assets purchased in the IMC, SMA, and DNF acquisitions.
Interest expense. Interest expense was $1.3 million for the three months ended September 30, 2021, an increase of $904,000, or 233.6% compared to $387,000 for the three months ended September 30, 2020. This was due to the increased borrowings under the Credit Facilities.
Acquisition related costs. Acquisition related costs was $879,000 for the three months ended September 30, 2021. This cost was driven primarily by the acquisition of DNF.
Change in fair value of derivative warrant liabilities. We recorded a gain of $10.2 million during the three months ended September 30, 2021, as a result of a reduction in the fair value of derivative warrant liabilities.
Change in fair value of contingent earnout liabilities. We recorded a loss of $11.6 million during the three months ended September 30, 2021, as a result of an increase in the fair value of the contingent earnout liabilities.
Gain on extinguishment of debt. We recorded a gain of $279,000 related to the forgiveness of Paycheck Protection Program (“PPP”) loans.
Nine Months Ended September 30, 2021 compared to Nine Months Ended September 30, 2020.
The following table sets forth our unaudited condensed consolidated statements of operations data for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
($ in thousands) |
2021 |
|
2020 |
|
$ Change |
|
% Change |
|
Revenue |
|
|
|
|
|
|
|
|
Medicare risk-based revenue |
$ |
142,005 |
|
$ |
75,083 |
|
$ |
66,922 |
|
|
89.1 |
% |
Medicaid risk-based revenue |
|
26,333 |
|
|
— |
|
|
26,333 |
|
|
|
Other revenue |
|
9,118 |
|
|
251 |
|
|
8,868 |
|
|
3534.0 |
% |
Total revenue |
$ |
177,457 |
|
$ |
75,334 |
|
$ |
102,123 |
|
|
135.6 |
% |
Operating expense |
|
|
|
|
|
|
|
|
External provider costs |
|
127,023 |
|
|
49,110 |
|
|
77,912 |
|
|
158.6 |
% |
Cost of care |
|
34,822 |
|
|
12,244 |
|
|
22,578 |
|
|
184.4 |
% |
Sales and marketing |
|
2,340 |
|
|
811 |
|
|
1,529 |
|
|
188.5 |
% |
Corporate, general and administrative |
|
24,265 |
|
|
4,625 |
|
|
19,639 |
|
|
424.6 |
% |
Depreciation and amortization |
|
7,127 |
|
|
1,072 |
|
|
6,055 |
|
|
565.0 |
% |
Acquisition related costs |
|
1,028 |
|
|
— |
|
|
1,028 |
|
|
|
Total costs and expenses |
$ |
196,604 |
|
$ |
67,863 |
|
$ |
128,741 |
|
|
189.7 |
% |
Operating (loss) income |
$ |
(19,147 |
) |
$ |
7,471 |
|
$ |
(26,618 |
) |
|
(356.3 |
)% |
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
2,587 |
|
|
1,117 |
|
|
1,470 |
|
|
131.6 |
% |
Gain on remeasurement of warrant liabilities |
|
(12,022 |
) |
|
— |
|
|
(12,022 |
) |
|
|
Gain on remeasurement of contingent earnout liabilities |
|
(5,794 |
) |
|
|
|
(5,794 |
) |
|
|
Gain on extinguishment of debt, net |
|
(1,637 |
) |
|
— |
|
|
(1,637 |
) |
|
|
Other expenses |
|
840 |
|
|
— |
|
|
840 |
|
|
|
(Loss) income before income taxes |
$ |
(3,120 |
) |
$ |
6,354 |
|
$ |
(9,474 |
) |
|
(149.1 |
)% |
Income tax provision |
|
— |
|
|
— |
|
|
— |
|
|
|
Net (loss) income |
$ |
(3,120 |
) |
$ |
6,354 |
|
$ |
(9,474 |
) |
|
(149.1 |
)% |
|
|
|
|
|
|
|
|
|
Net income attributable to non-controlling interest |
$ |
– |
|
$ |
26 |
|
$ |
(26 |
) |
|
|
Net (loss) income attributable to controlling interest |
$ |
(3,120 |
) |
$ |
6,328 |
|
$ |
(9,448 |
) |
|
|
*Figures may not sum due to rounding
Medicare risk-based revenue. Medicare risk-based revenue was $142.0 million for the nine months ended September 30, 2021, an increase of $66.9 million, or 89.1%, compared to $75.1 million for the nine months ended September 30, 2020. This increase was driven primarily by a 114.1% increase in the total number of at-risk patients from IMC, SMA and DNF, partially offset by a 11.6% decrease in rate, driven by COVID-19 and patient mix.
(42)
Medicaid risk-based revenue. Medicaid risk-based revenue was $26.3 million for the nine months ended September 30, 2021. Medicaid risk-based revenue relates entirely to IMC.
Other revenue. Other revenue was $9.1 million for the nine months ended September 30, 2021, an increase of $8.9 million, or 3,534.0%, compared to $251,000 for three and nine months ended September 30, 2020. The increase is almost entirely related to revenue from IMC.
External provider costs. External provider costs were $127.0 million for the nine months ended September 30, 2021, an increase of $77.9 million, or 158.6%, compared to $49.1 million for the nine months ended September 30, 2020. The increase was primarily due to a 158.6% increase in total at-risk MCREM patients and the additional costs attributable to claims with a COVID-19 diagnosis.
Cost of care expenses. Cost of care expenses were $34.8 million for the nine months ended September 30, 2021, an increase of $22.6 million or 184.4%, compared to $12.2 million for the nine months ended September 30, 2020. The increase was due to additional membership growth from the IMC, SMA and DNF acquisitions and the reopening of the wellness centers.
Sales and marketing expenses. Sales and marketing expenses were $2.3 million for the nine months ended September 30, 2021, an increase of $1.5 million or 188.5%, compared to $811,000 for the nine months ended September 30, 2020. The increase was due to the acquisition of IMC and resuming sales and community activities in 2021.
Corporate, general & administrative. Corporate, general & administrative expense was $24.3 million for the nine months ended September 30, 2021, an increase of $19.6 million or 424.6% compared to $4.7 million for the nine months ended September 30, 2020. The increase was primarily driven from the acquired overhead related to IMC, SMA and DNF.
Depreciation and amortization. Depreciation and amortization expense was $7.1 million for the nine months ended September 30, 2021, an increase of $6.1 million, or 565.0%, compared to $1.1 million for the nine months ended September 30, 2020. This was due to amortization of intangible assets purchased in the IMC, SMA, and DNF acquisitions.
Interest expense. Interest expense was $2.6 million for the nine months ended September 30, 2021, an increase of $1.5 million, or 131.6% compared to $1.1 million for the nine months ended September 30, 2020. This was due to the increased borrowings under the Credit Facilities.
Change in fair value of derivative warrant liabilities. We recorded a gain of $12.0 million during the nine months ended September 30, 2021 as a result of a reduction in the fair value of derivative warrant liabilities.
Change in fair value of contingent earnout liabilities. We recorded a gain of $5.8 million during the nine months ended September 30, 2021, as a result of a reduction in the fair value of the contingent earnout liabilities.
Gain on extinguishment of debt. We recorded a gain of $2.5 million related to the forgiveness of PPP loans partially offset by a loss of extinguishment of debt of $806,000 in connection with the early extinguishment and termination of the Loan Agreement in June 2021.
Liquidity and Capital Resources
Overview
As of September 30, 2021, we had cash on hand of $80.5 million. Our principal sources of liquidity have been our operating cash flows, borrowings under our Credit Facilities and proceeds from equity issuances. We have used these funds to meet our capital requirements, which consist of salaries, labor, benefits and other employee-related costs, product and supply costs, third-party customer service, billing and collections and logistics costs, capital expenditures including patient equipment, medical center and office lease expenses, insurance premiums, acquisitions and debt service. Our future capital expenditure requirements will depend on many factors, including the pace and scale of our expansion in new and existing markets, patient volume, and revenue growth rates. Many of our capital expenditures are made in advance of patients beginning service. Certain operating costs are incurred at the beginning of the equipment service period and during initial patient set up. We also expect to incur costs related to acquisitions and de novo growth through the opening of new medical facilities, which we expect to require significant capital expenditures. We may be required to seek additional equity or debt financing, in addition to cash
(43)
on hand and borrowings under our Credit Facilities in connection with our business growth, including debt financing that may be available to us from certain Health Plans for each new medical center that we open under the terms of our agreements with those Health Plans. In the event that additional financing is required from outside sources, we may not be able to raise it on acceptable terms or at all. If additional capital is unavailable when desired, our business, results of operations, and financial condition would be materially and adversely affected. We believe that our expected operating cash flows, together with our existing cash, cash equivalents, amounts available under our Credit Facilities as described below, and amounts available to us under our agreements with Anthem, will continue to be sufficient to fund our operations and growth strategies for at least the next 12 months and remain in compliance with the covenants under the Credit Facilities.
The Impact of COVID-19
As further detailed above in “Impact of COVID-19”, we estimate our performance during the nine months ended September 30, 2021 has been impacted by approximately $18.5 million of direct non-recurring COVID-19 costs. While it is impossible to predict the scope or duration of COVID-19 or the future impact on our liquidity and capital resources, COVID-19 could materially affect our liquidity and operating cash flows in future periods.
Credit Facilities
On the Closing Date, we drew the full principal amount of $125.0 million of the Initial Term Loans to finance the Business Combination and related transaction costs. As of September 30, 2021, we had approximately $60.0 million available under the Credit Facilities (including $20.0 million under the Delayed Draw Term Loan and $40.0 million under the Revolving Credit Facility, with no stand-by letters of credit outstanding).
Interest is payable on the outstanding term loans under the Credit Facilities at a variable interest rate (See Note 7 to the Condensed Consolidated Financial Statements - Long Term Debt).
The Delayed Draw Loan allows up to $20.0 million to be drawn to fund permitted acquisitions and has availability to be drawn until the six month anniversary of the Closing Date. The Delayed Draw Loan may consist of Base Rate Loans or LIBOR Rate Loans. The Revolving Credit Facility allows up to $40.0 million to be drawn in order to finance working capital, make capital expenditures, finance permitted acquisitions and fund general corporate purposes.
Cash Flows
The following table summarizes our cash flows for the periods presented:
|
|
|
|
|
|
|
|
(in thousands) |
Nine Months Ended September 30, |
|
|
2021 |
|
|
2020 |
|
Net cash (used in)/provided by operating activities |
$ |
(8,801 |
) |
|
$ |
5,998 |
|
Net cash used in investing activities |
|
(301,311 |
) |
|
|
(5,094 |
) |
Net cash provided by financing activities |
|
385,630 |
|
|
|
4,236 |
|
Operating Activities. Net cash used in operating activities for the nine months ended September 30, 2021 was $8.8 million compared to $6.0 million provided by operating activities for the nine months ended September 30, 2020, a decrease of $14.8 million. The primary driver of the change is due to the net loss from operations of $8.9 million reported for the nine months ended September 30, 2021 compared to the net income from operations of $6.3 million reported for the nine months ended September 30, 2020. The primary driver of this change is related to the performance in our value-based contracts due to the impacts of COVID-19 as described above.
Investing Activities. Net cash used in investing activities for the nine months ended September 30, 2021 was $301.3 million compared to $5.1 million for the nine months ended September 30, 2020. The use of funds in the nine months ended September 30, 2021 consisted of $298.3 million used in acquisitions, including the IMC Acquisition, SMA Acquisition in the second quarter of 2021, the DNF Acquisition in the third quarter of 2021 and $3.0 million for equipment and other fixed asset purchases. The use of funds in the nine months ended September 30, 2020 consisted primarily of $2.7 million for acquisitions of businesses and $1.8 million for equipment and other fixed asset purchases.
(44)
Financing Activities: Net cash provided by financing activities for the nine months ended September 30, 2021 was $385.6 million compared to $4.2 million during the nine months ended September 30, 2020. Net cash provided by financing activities for the nine months ended September 30, 2021 was primarily related to the Business Combination, and consisted of $125.0 million of borrowings from the borrowings under the Credit Facilities, $410.0 million for the issuance and sale of Class A Common Stock, partially offset by cash used in the consummation of the reverse recapitalization of $108.8 million, repayment of borrowings, including all outstanding borrowings under the Loan Agreement, of $24.5 million, equity issuance costs of $12.5 million, payment of deferred financing costs of $6.9 million and payment of debt prepayment penalties of $500,000 related to the early repayment of borrowings under the Loan Agreement.
Net cash provided by financing activities for the nine months ended September 30, 2020 consisted of $2.5 million of borrowings under the Loan Agreement and $2.2 million of proceeds under the Paycheck Protection Program, partially offset by member distributions and repayments of debt under the Loan Agreement.
Contractual Obligations and Commitments
Our principal commitments consist of obligations under our Credit Facilities and other long-term debt and operating leases for our centers. We also have a contractual commitment to complete the construction of a Homestead, FL medical center with remaining estimated capital expenditures of approximately $700,000 as of September 30, 2021. Plans have been submitted for a new medical center in East Hialeah, FL and opening is projected in the first or second quarter of 2022.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of September 30, 2021 or December 31, 2020 other than operating leases.
JOBS Act
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies, but any such election to opt out is irrevocable. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, as an emerging growth company, we can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our consolidated financial statements with a public company which is neither an emerging growth company, nor an emerging growth company that has opted out of using the extended transition period, difficult or impossible because of the potential differences in accounting standards used.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions, impacting our reported results of operations and financial condition.
Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of assets and liabilities and the recognition of income and expenses. Management considers these accounting policies to be critical accounting policies. The estimates and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described below. Refer to Note 2 “Summary of Significant Accounting Policies” to our unaudited condensed consolidated financial statements included elsewhere in this Report for more detailed information regarding our critical accounting policies.
(45)
Revenue
The transaction price for our capitated payor contracts is variable as it primarily includes PPPM fees associated with unspecified membership. PPPM fees can fluctuate throughout the contract based on the health status (acuity) of each individual enrollee. In certain contracts, PPPM fees also include “risk adjustments” for items such as performance incentives, performance guarantees and risk shares. The capitated revenues are recognized based on the estimated PPPM fees earned net of projected performance incentives, performance guarantees, risk shares and rebates because we are able to reasonably estimate the ultimate PPPM payment of these contracts. We recognize revenue in the month in which eligible members are entitled to receive healthcare benefits. Subsequent changes in PPPM fees and the amount of revenue to be recognized are reflected through subsequent period adjustments to properly recognize the ultimate capitation amount.
External Provider Costs
External Provider Costs includes all costs of caring for our at-risk patients and for third-party healthcare service providers that provide medical care to our patients for which we are contractually obligated to pay (through our full-risk capitation arrangements). The estimated reserve for a liability for unpaid claims is included in "Accounts receivable, net" in the consolidated balance sheets. Actual claims expense will differ from the estimated liability due to factors in estimated and actual member utilization of health care services, the amount of charges and other factors. From time to time, but at least annually, we assess our estimates with an independent actuarial expert to ensure our estimates represent the best, most reasonable estimate given the data available to us at the time the estimates are made. Certain third-party payor contracts include a Medicare Part D payment related to pharmacy claims, which is subject to risk sharing through accepted risk corridor provisions. Under certain agreements the fund risk allocation is established whereby we, as the contracted provider, receive only a portion of the risk and the associated surplus or deficit. We estimate and recognize an adjustment to medical expenses for Part D claims related to these risk corridor provisions based upon pharmacy claims experience to date, as if the annual risk contract were to terminate at the end of the reporting period.
We assess the profitability of our capitation arrangements to identify contracts where current operating results or forecasts indicate probable future losses. If anticipated future variable costs exceed anticipated future revenues, a premium deficiency reserve is recognized. No premium deficiency reserves were recorded as of September 30, 2021 or December 31, 2020.
Business Combinations
We account for business acquisitions in accordance with ASC Topic 805, Business Combinations. We measure the cost of an acquisition as the aggregate of the acquisition date fair values of the assets transferred and liabilities assumed and equity instruments issued. Transaction costs directly attributable to the acquisition are expensed as incurred. We record goodwill for the excess of (i) the total costs of acquisition in the acquired business over (ii) the fair value of the identifiable net assets of the acquired business.
The acquisition method of accounting requires us to exercise judgment and make estimates and assumptions based on available information regarding the fair values of the elements of a business combination as of the date of acquisition, including the fair values of identifiable intangible assets, deferred tax asset valuation allowances, liabilities related to uncertain tax positions, contingent consideration and contingencies. We may refine these estimates over a one-year measurement period, to reflect any new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. If we are required to retroactively adjust provisional amounts that we have recorded for the fair value of assets and liabilities in connection with an acquisition, these adjustments could materially impact our results of operations and financial position. Estimates and assumptions that we must make in estimating the fair value of risk contracts and other identifiable intangible assets include future cash flows that we expect to generate from the acquired assets. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could record impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expenses. If our estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed, which could materially impact our results of operations.
(46)
The Business Combination acquisitions of IMC and the acquisitions of SMA and DNF were accounted for under ASC 805. Pursuant to ASC 805, CMG was determined to be the accounting acquirer. Refer to Note 3 “Acquisitions” of our unaudited condensed consolidated financial statements included elsewhere in this Report for more information. In accordance with the acquisition method, we recorded the fair value of assets acquired and liabilities assumed from IMC, SMA, and DNF. The allocation of the consideration to the assets acquired and liabilities assumed is based on various estimates. As of September 30, 2021, we performed our preliminary purchase price allocations. We continue to evaluate the fair value of the acquired assets, liabilities and goodwill. As such, these estimates are subject to change within the respective measurement period, which will not extend beyond one year from the acquisition date. Any adjustments will be recognized in the reporting period in which the adjustment amounts are determined.
Goodwill and Other Intangible Assets
Intangible assets consist primarily of risk-based contracts acquired through business acquisitions. Goodwill represents the excess of consideration paid over the fair value of net assets acquired through business acquisitions. Goodwill is not amortized but is tested for impairment at least annually.
We test goodwill for impairment annually or more frequently if triggering events occur or other impairment indicators arise which might impair recoverability. These events or circumstances would include a significant change in the business climate, legal factors, operating performance indicators, competition, sale, disposition of a significant portion of the business or other factors.
ASC 350, Intangibles—Goodwill and Other (“ASC 350”) allows entities to first use a qualitative approach to test goodwill for impairment. ASC 350 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not (a likelihood of greater than 50%) that the fair value of a reporting unit is less than its carrying value. We skip the qualitative assessment and proceed directly to the quantitative assessment. When the reporting units where we perform the quantitative goodwill impairment are tested, we compare the fair value of the reporting unit, which we primarily determine using an income approach based on the present value of discounted cash flows, to the respective carrying value, which includes goodwill. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, the difference would be recognized as an impairment loss. There were no goodwill impairments recorded during the nine months ended September 30, 2021.
Risk contracts represent the estimated values of customer relationships of acquired businesses and have definite lives. We amortize the risk contracts on an accelerated basis over their estimated useful lives ranging from eight to eleven years. We amortize non-compete agreement intangible assets over five years on a straight-line basis.
The determination of fair values and useful lives require us to make significant estimates and assumptions. These estimates include, but are not limited to, future expected cash flows from acquired capitation arrangements from a market participant perspective, patient attrition rates, discount rates, industry data and management’s prior experience. Unanticipated events or circumstances may occur that could affect the accuracy or validity of such assumptions, estimates or actual results.
Derivative Warrant and Contingent Earnout Liabilities
We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. We evaluate all of our financial instruments, including issued stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC 480 and ASC 815-15. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.
We issued 5,791,667 common stock warrants in connection with our initial public offering (2,875,000) and private placement (2,916,667) which are recognized as derivative liabilities in accordance with ASC 815-40. Accordingly, we recognize the warrant instruments as liabilities at fair value and adjust the instruments to fair value at each reporting period. The liabilities are subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s statement of operations. The fair value of warrants issued has been estimated using Monte-Carlo simulations at each measurement date.
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In connection with the Business Combination, up to 6,400,000 Earnout Shares become issuable to the IMC Parent and the CMG sellers as contingent consideration if certain Share Price Triggers are met or if a change in control occurs that equates to a share price equivalent to the Share Price Triggers.
In this Form 10-Q/A, the Earnout Shares are accounted for as derivative earnout liabilities in accordance with ASC 815-40, “Derivatives and Hedging - Contracts in an Entities Own Equity,” and accordingly, the Company recognized the contingent consideration as a liability at fair value upon issuance. The liabilities were subject to re-measurement at each balance sheet date until the Earnout Shares were issued or conditions or events required the Company to reassess the classification, and any change in fair value was recognized in the Company’s consolidated statement of operations. On July 9, 2021, the First Share Price Trigger was achieved, resulting in the issuance of 1,750,000 and 1,450,000 Earnout Shares to the CMG Sellers and IMC Parent, respectively. The remaining unissued Earnout Shares were re-assessed and determined to be indexed to the Company's own equity, resulting in reclassification to equity under ASC 815-40 “Derivatives and Hedging - Contracts in an Entities Own Equity.” The remaining Earnout Shares were remeasured at fair value on July 9, 2021, the date of the event that caused the reclassification, and the change in fair value was recorded in earnings during the three months ended September 30, 2021. Subsequent to the July 9, 2021 remeasurement and reclassification to equity, the Company determined remaining 3,200,000 unissued Earnout Shares do not require fair value remeasurement.
Recent Accounting Pronouncements
See Note 2 to our unaudited condensed financial statements “Summary of Significant Accounting Policies—Recent Accounting Pronouncements” included elsewhere in this Report for more information.
