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| Share Name | Share Symbol | Market | Type |
|---|---|---|---|
| Deerfield Healthcare Technology Acquisitions Corporation | NASDAQ:DFHT | NASDAQ | Common Stock |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 14.92 | 12.00 | 66.00 | 0 | 00:00:00 |
l
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
Amendment No. 2
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2021
OR
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 001-39391
CareMax, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware |
85-0992224 |
( State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
1000 NW 57 Court, Suite 400 Miami, FL, |
33126 |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (786) 360-4768
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
|
Trading Symbol(s) |
|
Name of each exchange on which registered |
Class A common stock, par value $0.0001 per share |
|
CMAX |
|
The Nasdaq Stock Market LLC |
Warrants, each whole warrant exercisable for one share of Class A common stock, each at an exercise price of $11.50 per share |
|
CMAXW |
|
The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
|
☐ |
|
Accelerated filer |
|
☐ |
Non-accelerated filer |
|
☒ |
|
Smaller reporting company |
|
☒ |
Emerging growth company |
|
☒ |
|
|
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐
As of November 15, 2021, the registrant had 87,073,985 shares of Class A common stock, $0.0001 par value per share, and no shares of Class B common stock, $0.0001 par value per share issued and outstanding.
EXPLANATORY NOTE
CareMax, Inc. (the “Company”) is filing this Amendment No. 2 on Form 10-Q/A for the quarter ended September 30, 2021 (this “Form 10-Q/A”).
This Form 10-Q/A amends the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021, as filed with the Securities and Exchange Commission (“SEC”) on November 15, 2021, as amended by the Amendment No. 1 to Quarterly Report on Form 10-Q/A, originally filed with the SEC on March 16, 2022 (collectively, the “Q3 Report”). This Form 10-Q/A is being filed to restate the Company’s unaudited Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2021. The restatement reflects a correction of the classification of the equity consideration, issued to the Company’s real estate advisor in July 2021, from prepaid expenses to other assets. See Note 2 to the unaudited Condensed Consolidated Financial Statements included in this Form 10-Q/A for further information regarding the restatement.
The Company is filing this Form 10-Q/A to amend and restate the Q3 Report with modification as necessary to reflect the restatement. The following items have been amended to reflect the restatement:
Part I, Item 1: Financial Information
Part I, Item 4: Controls and Procedures
Part II, Item 1A: Risk Factors
Part II, Item 6: Exhibits
In addition, the Company’s Chief Executive Officer and Chief Financial Officer have provided new certifications dated as of the date of this Form 10-Q/A (Exhibits 31.1, 31.2, 32.1 and 32.2).
Except as described above and set forth in this Form 10-Q/A, this Form 10-Q/A does not amend or update any other information contained in the Q3 Report. This Form 10-Q/A does not purport to reflect any information or events subsequent to the Q3 Report, except as expressly described herein.
CareMax, Inc.
Quarterly Report on Form 10-Q/A
For the Quarter Ended September 30, 2021
Table of Contents
|
|||
|
1 |
||
|
|
2 |
|
|
|
Condensed Consolidated Statements of Changes in Stockholders'/Members' Equity |
3 |
|
|
4 |
|
|
|
6 |
|
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
27 |
|
|
48 |
||
|
49 |
||
51 |
|||
|
51 |
||
|
51 |
||
|
52 |
||
|
52 |
||
|
52 |
||
|
52 |
||
|
52 |
||
PART I. – FINANCIAL INFORMATION
CAREMAX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share and per share data)
ITEM 1. FINANCIAL STATEMENTS
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
(1)
CAREMAX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except share and per share data)
|
Three Months Ended |
|
Three Months Ended |
|
Nine Months Ended |
|
Nine Months Ended |
|
||||
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|
||||
Revenue |
|
|
|
|
|
|
|
|
||||
Medicare risk-based revenue |
$ |
76,428 |
|
$ |
24,242 |
|
$ |
142,005 |
|
$ |
75,083 |
|
Medicaid risk-based revenue |
|
20,884 |
|
|
- |
|
|
26,333 |
|
|
- |
|
Other revenue |
|
7,308 |
|
|
64 |
|
|
9,118 |
|
|
251 |
|
Total revenue |
|
104,620 |
|
|
24,306 |
|
|
177,456 |
|
|
75,334 |
|
|
|
|
|
|
|
|
|
|
||||
Operating expenses |
|
|
|
|
|
|
|
|
||||
External provider costs |
|
73,329 |
|
|
17,304 |
|
|
127,023 |
|
|
49,110 |
|
Cost of care |
|
21,602 |
|
|
4,341 |
|
|
34,822 |
|
|
12,244 |
|
Sales and marketing |
|
1,274 |
|
|
311 |
|
|
2,340 |
|
|
811 |
|
Corporate, general and administrative |
|
13,589 |
|
|
1,885 |
|
|
24,264 |
|
|
4,626 |
|
Depreciation and amortization |
|
5,176 |
|
|
359 |
|
|
7,127 |
|
|
1,072 |
|
Acquisition related costs |
|
879 |
|
|
- |
|
|
1,028 |
|
|
- |
|
Total operating expenses |
|
115,849 |
|
|
24,200 |
|
|
196,603 |
|
|
67,863 |
|
Operating (loss) income |
|
(11,229 |
) |
|
106 |
|
|
(19,147 |
) |
|
7,471 |
|
Interest (expense), net |
|
(1,291 |
) |
|
(387 |
) |
|
(2,587 |
) |
|
(1,117 |
) |
Gain on remeasurement of warrant liabilities |
|
10,227 |
|
|
- |
|
|
12,022 |
|
|
- |
|
(Loss) gain on remeasurement of contingent earnout liabilities |
|
(11,625 |
) |
|
- |
|
|
5,794 |
|
|
- |
|
Gain on extinguishment of debt, net |
|
279 |
|
|
- |
|
|
1,637 |
|
|
- |
|
Other expense, net |
|
(840 |
) |
|
- |
|
|
(840 |
) |
|
- |
|
(Loss) income before income tax |
|
(14,479 |
) |
|
(281 |
) |
|
(3,120 |
) |
|
6,354 |
|
Income tax provision |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Net (loss) income |
$ |
(14,479 |
) |
$ |
(281 |
) |
$ |
(3,120 |
) |
$ |
6,354 |
|
|
|
|
|
|
|
|
|
|
||||
Net income attributable to non-controlling interest |
|
- |
|
|
34 |
|
|
- |
|
|
26 |
|
Net (loss) income attributable to controlling interest |
$ |
(14,479 |
) |
$ |
(315 |
) |
$ |
(3,120 |
) |
$ |
6,328 |
|
|
|
|
|
|
|
|
|
|
||||
Net (loss) income attributable to CareMax, Inc. Class A common stockholders |
$ |
(14,479 |
) |
$ |
(315 |
) |
$ |
(3,120 |
) |
$ |
6,328 |
|
Weighted average basic shares outstanding |
|
82,552,520 |
|
|
10,796,069 |
|
|
40,847,294 |
|
|
10,796,069 |
|
Weighted average diluted shares outstanding |
|
82,552,520 |
|
|
10,796,069 |
|
|
40,847,294 |
|
|
10,796,069 |
|
Net (loss) income per share |
|
|
|
|
|
|
|
|
||||
Basic |
$ |
(0.18 |
) |
$ |
(0.03 |
) |
$ |
(0.08 |
) |
$ |
0.59 |
|
Diluted |
$ |
(0.18 |
) |
$ |
(0.03 |
) |
$ |
(0.08 |
) |
$ |
0.59 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
(2)
CAREMAX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'/MEMBERS' EQUITY
(Unaudited)
(in thousands, except share data)
|
Class A Common Stock |
|
|
Additional |
|
|
Total |
|
|
|
|
|
Noncontrolling |
|
|
Total |
|
||||||||||
|
Shares |
|
|
Amount |
|
|
Paid-in-capital |
|
|
Controlling Interest |
|
|
Retained Earnings |
|
|
Interest |
|
|
Equity |
|
|||||||
BALANCE - DECEMBER 31, 2019 |
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
5,160 |
|
|
$ |
- |
|
|
$ |
(214 |
) |
|
$ |
4,946 |
|
Net income (loss) |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,261 |
|
|
|
- |
|
|
|
(90 |
) |
|
|
3,171 |
|
Purchase of non-controlling interest |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(400 |
) |
|
|
- |
|
|
|
- |
|
|
|
(400 |
) |
Change in ownership due to change in non-controlling interest |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(44 |
) |
|
|
- |
|
|
|
44 |
|
|
|
- |
|
BALANCE- MARCH 31, 2020 |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,977 |
|
|
|
- |
|
|
|
(260 |
) |
|
|
7,717 |
|
Net income |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,382 |
|
|
|
- |
|
|
|
82 |
|
|
|
3,464 |
|
Change in ownership due to change in non-controlling interest |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Distributions |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(81 |
) |
|
|
- |
|
|
|
- |
|
|
|
(81 |
) |
BALANCE- JUNE 30, 2020 |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11,278 |
|
|
|
- |
|
|
|
(178 |
) |
|
|
11,100 |
|
Net (loss) income |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(315 |
) |
|
|
- |
|
|
|
34 |
|
|
|
(281 |
) |
Change in ownership due to change in non-controlling interest |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(42 |
) |
|
|
- |
|
|
|
42 |
|
|
|
- |
|
Distributions |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(63 |
) |
|
|
- |
|
|
|
- |
|
|
|
(63 |
) |
BALANCE- SEPTEMBER 30, 2020 |
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
10,858 |
|
|
$ |
- |
|
|
$ |
(102 |
) |
|
$ |
10,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
BALANCE - DECEMBER 31, 2020 |
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
6,727 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
6,727 |
|
Net income |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,302 |
|
|
|
- |
|
|
|
- |
|
|
|
1,302 |
|
Distributions |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
BALANCE- MARCH 31, 2021 |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,029 |
|
|
|
- |
|
|
|
- |
|
|
|
8,029 |
|
Activity prior to the business combination: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Additional paid-in-capital |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net loss |
|
|
|
|
- |
|
|
|
|
|
|
(6,487 |
) |
|
|
|
|
|
|
|
|
(6,487 |
) |
||||
Effects of the business combination: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
||||||
Reverse recapitalization |
|
28,780,819 |
|
|
|
3 |
|
|
|
(186,632 |
) |
|
|
(1,542 |
) |
|
|
1,542 |
|
|
|
- |
|
|
|
(186,629 |
) |
Equity consideration issued to acquire IMC |
|
10,412,023 |
|
|
|
1 |
|
|
|
155,346 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
155,347 |
|
Shares issued for holdback |
|
55,000 |
|
|
|
- |
|
|
|
821 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
821 |
|
Proceeds from the sale of Class A Common stock, net of offering costs |
|
41,000,000 |
|
|
|
4 |
|
|
|
397,525 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
397,529 |
|
Activity after the business combination: |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|||||
Net income |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
16,543 |
|
|
|
- |
|
|
|
16,543 |
|
|
Equity consideration issued to acquire SMA |
|
384,615 |
|
|
|
- |
|
|
|
5,027 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,027 |
|
BALANCE- JUNE 30, 2021 |
|
80,632,457 |
|
|
|
8 |
|
|
|
372,088 |
|
|
|
- |
|
|
|
18,085 |
|
|
|
- |
|
|
|
390,181 |
|
Equity consideration issued to acquire DNF |
|
2,741,528 |
|
|
|
- |
|
|
|
26,072 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
26,072 |
|
Reverse recapitalization |
|
- |
|
|
|
- |
|
|
|
(104 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(104 |
) |
Contingently issuable stock to CMG Sellers and IMC Parent - First Share Price Trigger on Earnout Shares |
|
3,200,000 |
|
|
|
1 |
|
|
|
39,109 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
39,110 |
|
Reclassification of contingent consideration previously liability classified |
|
|
|
|
|
|
|
45,088 |
|
|
|
|
|
|
|
|
|
|
|
|
45,088 |
|
|||||
Proceeds from the sale of Class A Common stock, net of offering costs |
|
500,000 |
|
|
|
- |
|
|
|
6,650 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,650 |
|
Stock compensation expense |
|
- |
|
|
|
- |
|
|
|
966 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
966 |
|
Series A Warrants issued under the Advisory Agreement |
|
- |
|
|
|
- |
|
|
|
12,883 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
12,883 |
|
Net loss |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(14,479 |
) |
|
|
- |
|
|
|
(14,479 |
) |
BALANCE- SEPTEMBER 30, 2021 |
|
87,073,985 |
|
|
$ |
9 |
|
|
$ |
502,751 |
|
|
$ |
- |
|
|
|
3,605 |
|
|
$ |
- |
|
|
$ |
506,365 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
(3)
CAREMAX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
||
|
|
2021 |
|
|
2020 |
|
||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
||
Net (Loss)/Income |
|
$ |
(3,120 |
) |
|
$ |
6,354 |
|
Adjustments to reconcile net (loss)/income to net cash |
|
|
|
|
|
|
||
(Used in)/provided by operating activities: |
|
|
|
|
|
|
||
Depreciation expense |
|
|
1,657 |
|
|
|
626 |
|
Amortization expense |
|
|
5,488 |
|
|
|
448 |
|
Amortization of debt issuance costs |
|
|
522 |
|
|
|
52 |
|
Stock compensation expense |
|
|
966 |
|
|
|
- |
|
Change in fair value of warrant liabilities |
|
|
(12,022 |
) |
|
|
- |
|
Change in fair value of contingent earnout liabilities |
|
|
(5,794 |
) |
|
|
- |
|
Gain on extinguishment of debt |
|
|
(1,637 |
) |
|
|
- |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
Accounts receivable |
|
|
4,296 |
|
|
|
(583 |
) |
Inventory |
|
|
67 |
|
|
|
(3 |
) |
Prepaid expenses |
|
|
(1,371 |
) |
|
|
55 |
|
Risk settlements due from/due to providers |
|
|
(384 |
) |
|
|
(92 |
) |
Due to/from related parties |
|
|
235 |
|
|
|
(141 |
) |
Other assets |
|
|
(312 |
) |
|
|
12 |
|
Accounts payable |
|
|
1,583 |
|
|
|
(347 |
) |
Accrued expenses |
|
|
(3 |
) |
|
|
(381 |
) |
Other liabilities |
|
|
1,178 |
|
|
|
- |
|
Accrued interest |
|
|
(149 |
) |
|
|
- |
|
Net Cash (Used In)/Provided by Operating Activities |
|
|
(8,801 |
) |
|
|
5,998 |
|
|
|
|
|
|
|
|
||
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
||
Purchase of property and equipment |
|
|
(2,967 |
) |
|
|
(1,789 |
) |
Acquisition of businesses |
|
|
(298,344 |
) |
|
|
(2,656 |
) |
Asset Purchase Agreement Holdback Payment |
|
|
- |
|
|
|
(333 |
) |
Purchase of noncontrolling interest ownership |
|
|
- |
|
|
|
(316 |
) |
Net Cash Used in Investing Activities |
|
|
(301,311 |
) |
|
|
(5,094 |
) |
|
|
|
|
|
|
|
||
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
||
Borrowings under revolving loan commitment |
|
|
- |
|
|
|
2,467 |
|
Loan from Paycheck Protection Program |
|
|
- |
|
|
|
2,164 |
|
Proceeds from issuance of Class A common stock |
|
|
415,000 |
|
|
|
- |
|
Issuance costs of Class A common stock |
|
|
(12,471 |
) |
|
|
- |
|
Reverse recapitalization |
|
|
(108,386 |
) |
|
|
- |
|
Proceeds from borrowings on long-term debt and credit facilities |
|
|
125,000 |
|
|
|
- |
|
Principal payments on long-term debt |
|
|
(26,143 |
) |
|
|
(251 |
) |
Payment of deferred financing costs |
|
|
(6,883 |
) |
|
|
- |
|
Payment of debt prepayment penalties |
|
|
(487 |
) |
|
|
- |
|
Distributions to members |
|
|
- |
|
|
|
(144 |
) |
Net Cash Provided by Financing Activities |
|
|
385,630 |
|
|
|
4,236 |
|
|
|
|
|
|
|
|
||
NET INCREASE IN CASH |
|
|
75,518 |
|
|
|
5,140 |
|
Cash - Beginning of Period |
|
|
4,934 |
|
|
|
4,438 |
|
CASH - END OF PERIOD |
|
$ |
80,451 |
|
|
$ |
9,578 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
(4)
CAREMAX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(in thousands)
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND |
|
Nine Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||
|
|
2021 |
|
|
2020 |
|
||
Equity consideration issued in acquisitions |
|
$ |
187,266 |
|
|
$ |
- |
|
Contingent consideration issued in business combination |
|
|
72,571 |
|
|
|
- |
|
Purchase of non-controlling interest through accounts payable |
|
|
- |
|
|
|
183 |
|
Payroll Protection Program loan forgiveness |
|
|
2,164 |
|
|
|
- |
|
Equity/Warrant consideration issued to The Related Companies, L.P. |
|
|
14,533 |
|
|
|
- |
|
SUPPLEMENTAL DISCLOSURES OF CASH ACTIVITIES: |
|
|
|
|
|
|
||
Cash paid for interest |
|
|
2,317 |
|
|
|
815 |
|
Acquisition of business financed through deferred consideration |
|
|
- |
|
|
|
450 |
|
Purchase of non-controlling interest financed through accounts payable |
|
|
- |
|
|
|
83 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
(5)
CAREMAX, inc.
NOTES TO condensed consolidated FINANCIAL STATEMENTS
(unaudited)
Note 1. DESCRIPTION of business
CareMax Inc. (“CareMax” or the “Company”), f/k/a Deerfield Healthcare Technology Acquisitions Corp. (“DFHT”), a Delaware corporation, was originally formed in July 2020 as a publicly traded special purpose acquisition company for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business combination involving one or more businesses. 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 currently operates 40 wholly owned, multi-specialty medical centers in Florida that offer a comprehensive suite of healthcare and social services, and a proprietary software and services platform that provides data, analytics, and rules-based decision tools/workflows for physicians across the United States.
The Business Combination
On December 18, 2020, DFHT entered into a Business Combination Agreement (the “Business Combination Agreement”) with CareMax Medical Group, L.L.C., a Florida limited liability company (“CMG”), the entities listed in Annex I to the Business Combination Agreement (the “CMG Sellers”), IMC Medical Group Holdings, LLC, a Delaware limited liability company (“IMC”), IMC Holdings, LP, a Delaware limited partnership (“IMC Parent”) and Deerfield Partners, L.P. (“Deerfield Partners”). The Business Combination (as defined below) was approved by DFHT’s stockholders and closed on June 8, 2021 (the “Closing Date”), whereby 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.
At the Closing, the CMG Sellers and IMC Parent were paid consideration valued in the aggregate at approximately $364 million and $250 million respectively, less repayment of net debt and further subject to the purchase price adjustments set forth in the Business Combination Agreement (the “Closing Consideration”). The net Closing Consideration was comprised of 68% ($229.4 million) and 45% ($85.2 million) in cash for the CMG Sellers and IMC Parent, respectively, with the remainder of the Closing Consideration comprised of 10,796,069 and 10,412,023 shares of Class A common stock of the Company, par value $0.0001 per share (“Class A Common Stock”), issued to the CMG Sellers and IMC Parent, respectively, at a reference price of $10.00 per share. The Business Combination Agreement also provides that an additional 3,500,000 and 2,900,000 shares of Class A Common Stock (the “Earnout Shares”) are payable after the Closing to the CMG Sellers and IMC Parent, respectively, upon the satisfaction of certain conditions (see Note 8 – Stockholders' Equity).
Also at the Closing, DFHT, DFHTA Sponsor LLC (the “Sponsor”), O.M. Investment Group, Inc. (“O.M.”), in its capacity as representative of the CMG Sellers, and Continental Stock Transfer & Trust Company, in its capacity as escrow agent ( “Continental”), entered into an escrow agreement (the “CMG Escrow Agreement”), and DFHT, the Sponsor, IMC Parent and Continental entered into an escrow agreement (the “IMC Escrow Agreement” and together with the CMG Escrow Agreement, the “Escrow Agreements”). Pursuant to the terms of the CMG Escrow Agreement and the IMC Escrow Agreement, DFHT deposited $0.5 million and $1.0 million, respectively, into adjustment escrow accounts (the “Adjustment Escrow Amounts”) for the purpose of securing certain post-closing adjustment obligations of the CMG Sellers and IMC Parent, respectively. Of such $0.5 million securing the post-closing adjustment obligations of the CMG Sellers, 68% ($340,000) was in cash and 32% was in 16,000 shares of Class A Common Stock, and of such $1.0 million securing the post-closing adjustment obligations of IMC Parent, 45% ($450,000) was in cash and 55% was in 55,000 shares of Class A Common Stock (such shares collectively, the “Adjustment Escrow Shares”). Following the date on which the Closing Consideration is finally determined pursuant to the Business Combination Agreement, all or a portion of the applicable Adjustment Escrow Amounts and Adjustment Escrow Shares will either be released to the CMG Sellers or to IMC Parent, as applicable, or to the Company in accordance with certain adjustment mechanisms in the Business Combination Agreement.
Immediately following the Closing, all of the 3,593,750 issued and outstanding shares of Class B common stock of the Company, par value $0.0001 per share (“Class B Common Stock”), automatically converted, on a one-for-one basis, into shares of Class A Common Stock in accordance with DFHT’s second amended and restated certificate of incorporation.
Contingent Consideration Common Shares
(6)
CAREMAX, inc.
NOTES TO condensed consolidated FINANCIAL STATEMENTS
(unaudited)
Pursuant to the Business Combination Agreement, the CMG Sellers and IMC Parent, who received Class A Common Stock in connection with the Business Combination, are entitled to receive earn-out consideration to be paid out in the form of Class A Common Stock. Up to an additional 3.5 million and 2.9 million Earnout Shares are payable after the Closing to the CMG Sellers and IMC Parent, respectively: (i) if within the first year after the Closing, the volume weighted average trading price of Class A Common Stock equals or exceeds $12.50 per share on any 20 trading days in any 30-day trading period (the “First Share Price Trigger”), then 1.75 million and 1.45 million Earnout Shares are issuable to the CMG Sellers and IMC Parent, respectively, and (ii) if within the two years after the Closing (the “Second Earnout Period”), the volume weighted average trading price of Class A Common Stock equals or exceeds $15.00 per share on any 20 trading days in any 30-day trading period (the “Second Share Price Trigger” and together with the First Share Price Trigger, the “Share Price Triggers”), then 1.75 million and 1.45 million Earnout Shares will be issued and paid to the CMG Sellers and IMC Parent, respectively. If prior to (i) the satisfaction of the Share Price Triggers, and (ii) the end of the Second Earnout Period, the Company enters into a change in control transaction as described in the Business Combination Agreement, and the price per share of the Company’s Class A Common Stock payable to the stockholders of the Company in such change in control transaction is greater than the Share Price Triggers that have not been satisfied during the Earnout Period, then at the closing of such change in control transaction, the Share Price Triggers will be deemed to have been satisfied and the Company is required to issue, as of such closing, the applicable unissued Earnout Shares. In accordance with ASC 815-40, as the Earnout Shares were not indexed to the Company’s common stock, they were accounted for as a liability at the Closing Date and subsequently remeasured at the reporting date with the change in fair value recorded as a gain on remeasurement of contingent earnout liabilities in the condensed consolidated statement of operations as of June 30, 2021. Subsequent to June 30, 2021, the volume weighted average trading price of Class A Common Stock exceeded the First Share Price Trigger, resulting in the satisfaction of the contingent conditions. Accordingly, 1.75 million and 1.45 million Earnout Shares were issued and paid to the CMG Sellers and IMC Parent, respectively.
Unless the context otherwise requires, “the Company,” “we,” “us,” and “our” refer, for periods prior to the completion of the Business Combination, to CMG and its subsidiaries, and, for periods upon or after the completion of the Business Combination, to CareMax, Inc. and its subsidiaries.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP has been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a complete presentation of financial position, results of operations, or cash flows. The unaudited condensed consolidated financial statements should be read in connection with the Company’s audited financial statements and related notes as of and for the year ended December 31, 2020. In the opinion of management, the accompanying unaudited and condensed consolidated financial statements include all adjustments of a normal recurring nature, which are necessary for a fair presentation of financial position, operating results and cash flows for the periods presented. Operating results for the three and nine months ended September 30, 2021, including the impacts of COVID-19, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
Pursuant to the Business Combination, the acquisition of CMG by DFHT was accounted for as a reverse recapitalization in accordance with GAAP (the “Reverse Recapitalization”). Under this method of accounting, DFHT was treated as the “acquired” company for financial reporting purposes. Accordingly, for accounting purposes, the Reverse Recapitalization was treated as the equivalent of CMG issuing equity for the net assets of DFHT, accompanied by a recapitalization. The net assets of DFHT are stated at historical cost, with no goodwill or other intangible assets recorded. The condensed consolidated assets, liabilities and results of operations prior to the Reverse Recapitalization are those of CMG. Further, CMG was determined to be the accounting acquirer in the acquisition of IMC (the “IMC Acquisition”), as such, the acquisition is considered a business combination under Accounting Standards Codification ("ASC") Topic 805, "Business Combinations," and was accounted for using the acquisition method of accounting. CareMax recorded the fair value of assets acquired and liabilities assumed from IMC. The presented financial information for the three and nine months ended September 30, 2021 includes the financial information and activities for IMC for the period from June 8, 2021 to (and including) September 30, 2021 (92 and 115 days, respectively). The presented financial information for the three and nine months ended September 30, 2021 includes the financial information and activities for SMA (as defined in Note 3 - Acquisitions) for the period from June 18, 2021 to (and
(7)
CAREMAX, inc.
NOTES TO condensed consolidated FINANCIAL STATEMENTS
(unaudited)
including) September 30, 2021 (92 days and 105 days, respectively). The presented financial information for the three and nine months ended September 30, 2021 includes the financial information and activities for DNF (as defined in Note 3 - Acquisitions) for the period from September 1, 2021 to (and including) September 30, 2021 (30 days and 30 days, respectively). Unless otherwise noted, information for periods prior to the Closing of Business Combination reflects the financial information of CMG only.
The unaudited condensed consolidated financial statements include the accounts and operations of the Company. All intercompany accounts and transactions have been eliminated.
Restatement of Previously Reported Financial Statements
In conjunction with the Company's close process for the year ended December 31, 2022, management identified an error related to classification of equity consideration issued to the Company's real estate advisor in July 2021 (the "Prepaid Asset"). The Prepaid Asset was previously presented as part of the Company's short-term assets, in prepaid expenses. The Company determined that the Prepaid Asset relates to services that are performed by the real estate advisor over multiple years. Accordingly, the Prepaid Asset should be recorded in other assets, except for the portion that represents the Prepaid Asset amortization expense expected to be recognized during the next twelve months following a given period.
The following table reflects the impact of the restatement to the specified line items presented in the Company's previously reported unaudited condensed consolidated balance sheet as of September 30, 2021:
(in thousands) |
As Previously Reported |
|
Adjustment |
|
As Restated |
|
|||
ASSETS |
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|||
Affected financial statement line items |
|
|
|
|
|
|
|||
Prepaid expenses |
|
17,926 |
|
|
(13,396 |
) |
|
4,530 |
|
Total Current Assets |
$ |
132,863 |
|
$ |
(13,396 |
) |
$ |
119,467 |
|
|
|
|
|
|
|
|
|||
Other assets |
|
1,109 |
|
|
13,396 |
|
|
14,505 |
|
There was no impact on the condensed consolidated statement of operations, statements of changes in stockholders'/members' equity or statement of cash flows.
The accompanying applicable Notes have been updated to reflect the restatement described above.
Segment Financial Information
The Company’s chief operating decision maker regularly reviews financial operating results on a condensed consolidated basis for purposes of allocating resources and evaluating financial performance. The Company identifies operating segments based on this review by its chief operating decision makers and operates in and reports as a single operating segment, which is to care for its patients’ needs. For the periods presented, all of the Company’s long-lived assets were located in the United States, and all revenue was earned in the United States.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The areas where significant estimates are used in the accompanying financial statements include, but are not limited to, purchase price allocations, including fair value estimates of intangibles and contingent consideration; the valuation of and related impairment recognitions of long-lived assets; the valuation of the derivative warrant liabilities; the estimated useful lives of fixed assets and intangible assets, including internally developed software; settlements related to revenue and the revenue accrual and accrued expenses. Actual results could differ from those estimates.
Emerging Growth Company
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
(8)
CAREMAX, inc.
NOTES TO condensed consolidated FINANCIAL STATEMENTS
(unaudited)
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 nonemerging growth companies, but any such election to opt out is irrevocable. The Company has 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, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s unaudited condensed consolidated financial statements with another 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. Additionally, as an emerging growth company, the Company is exempt from the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002, as amended, and the Company’s independent registered public accounting firm is not required to evaluate and report on the effectiveness of internal control over financial reporting.
Acquisitions
The Company accounts for business combinations under the acquisition method of accounting, in accordance with ASC Topic 805, Business Combinations, which requires assets acquired and liabilities assumed to be recognized at their fair values on the acquisition date. Any excess of the fair value of purchase consideration over the fair value of the assets acquired less liabilities assumed is recorded as goodwill. The fair values of the assets acquired, and liabilities assumed are determined based upon the valuation of the acquired business and involves management making significant estimates and assumptions.
Revenue Recognition
Since capitated revenue is received regardless of whether services are performed, the performance obligation is the completion of enrollment of the patient and providing access to care. Fee-for-service revenue generally relates to contracts with patients in which our performance obligation is to provide healthcare services to the patients. Revenues are recorded during the period our obligations to provide healthcare services are satisfied.
Medicare Risk-based and Medicaid Risk-based revenue consists primarily of capitated fees for medical services provided by us under capitated arrangements directly made with various Medicare Advantage and Medicaid managed care payors. The Company receives a fixed fee per patient under what is typically known as a “risk contract.” Risk contracting, or full risk capitation, refers to a model in which the Company receives from the third-party payor a fixed payment of At-risk premium less an administrative charge for reporting on enrollees on a per patient per month basis (“PPPM” payment) for a defined patient population, and the Company is then responsible for providing healthcare services required by that patient population. Neither the Company nor any of its affiliates is a registered insurance company because state law in the states in which it operates does not require such registration for risk-bearing providers.
The Company’s payor contracts generally have a term of one year or longer, but the contracts between the enrolled members (our customers) and the payor are one calendar year or less. In general, the Company considers all contracts with customers (enrolled members) as a single performance obligation to stand ready to provide managed healthcare services. The Company identified that contracts with customers for capitation arrangements have similar performance obligations and therefore groups them into one portfolio. This performance obligation is satisfied as the Company stands ready to fulfill its obligation to enrolled members.
Settlements with third-party payors for retroactive adjustments due to capitation risk adjustment, or claim audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing patient care. These settlements are estimated based on the terms of the payment agreement with the payor, correspondence from the payor and the Company’s historical settlement activity, including an assessment to ensure that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the retroactive adjustment is subsequently resolved. Estimated settlements are adjusted in future periods as adjustments become known (that is, new information becomes available), or as years are settled or are no longer subject to such audits, reviews, and investigations.
The Company has determined that the nature, amount, timing, and uncertainty of revenue and cash flows are affected by the following factors:
(9)
CAREMAX, inc.
NOTES TO condensed consolidated FINANCIAL STATEMENTS
(unaudited)
The Company has elected the practical expedient allowed under ASC 606-10-32-18, “Revenue from Contracts with Customers-The Existence of a Significant Financing Component in the Contract,” and does not adjust the promised amount of consideration from patients and third-party payors for the effects of a significant financing component due to the Company’s expectation that the period between the time the service is provided to a patient and the time that the patient or a third-party payor pays for that service will be one year or less.
The Company has applied the practical expedient provided by ASC 340-40-25-4, “Other Assets and Deferred Costs,” and all incremental customer contract acquisition costs are expensed as they are incurred as the amortization period of the asset that the Company otherwise would have recognized is one year or less in duration.
For the three and nine months ended September 30, 2021 and 2020, substantially all of the revenue recognized by the Company was from goods and services, namely, providing access to physicians and wellness centers.
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 the Company is not liable for medical costs in excess of the fixed payment. Capitated revenues are typically prepaid monthly to the Company 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 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 are reported in other revenue.
Concentration of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and accounts receivable. The Company’s cash balances with individual banking institutions are in excess of federally insured limits from time to time. The Company believes it is not exposed to any significant concentrations of credit risk from these financial instruments. The Company has not experienced any losses on its deposits of cash and cash equivalents.
Anthem, Inc. ("Anthem") represented approximately 25% and 100% of the Company’s accounts receivable balance as of September 30, 2021 and December 31, 2020, respectively. Anthem represented 46% and 94% of the Company’s revenues for the three months ended September 30, 2021 and 2020 and 51% and 97% of the Company’s revenues for the nine months ended September 30, 2021 and 2020, respectively.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received for sale of an asset or paid for transfer of a liability, in an orderly transaction between market participants at the measurement date. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:
Level 1 - defined as observable inputs such as quoted prices (unadjusted) for identical instruments in active markets.
(10)
CAREMAX, inc.
NOTES TO condensed consolidated FINANCIAL STATEMENTS
(unaudited)
Level 2 - defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active.
Level 3 - defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
In some circumstances, the inputs used to measure fair value might be categorized within different levels of the fair value hierarchy. In those instances, the fair value measurement is categorized in its entirety in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.
Derivative Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its 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 “Distinguishing Liabilities from Equity,” and ASC 815-15, “Derivatives and Hedging - Embedded Derivatives.” 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.
The Company issued 2,875,000 common stock warrants in connection with DFHT's initial public offering (the “IPO”) (the “Public Warrants”). Simultaneously with the closing of the IPO, DFHT consummated the private placement of 2,916,667 common stock warrants (the “Private Placement Warrants”). The Public Warrants and Private Placement Warrants are accounted for as derivative warrant liabilities in accordance with ASC 815-40 , “Derivatives and Hedging - Contracts in an Entities Own Equity.” Accordingly, the Company recognizes the warrant instruments as liabilities at fair value and adjusts 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 unaudited condensed consolidated statement of operations. The fair value of the Public Warrants and Private Placement Warrants was initially measured at fair value using a Monte Carlo simulation model and subsequently, the fair value of the Private Placement Warrants has been estimated using a Monte Carlo simulation model at each measurement date. The fair value of Public Warrants issued in connection with the IPO has subsequently been measured based on the listed market price of such warrants.
As further described in Note 8, in connection with the Business Combination, up to 6,400,000 Earnout Shares become issuable to IMC Parent and 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 (also referred to as “Earnout Shares”). On the Closing Date, the Earnout Shares were 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 remeasurement at each balance sheet date until the Earnout Shares were issued or conditions or events required the Company to reassess the classification, and the 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 upon achievement of the First Share Price Trigger on July 9, 2021, which was the event that caused the reclassification, and the change in fair value was recorded in earnings in the three months ended September 30, 2021. Subsequent to the July 9, 2021 remeasurement and reclassification to equity, the Company determined the remaining 3,200,000 unissued Earnout Shares do not require fair value remeasurement.
Goodwill and intangible assets
Goodwill represents the excess of cost over the fair value of net assets acquired. Pursuant to ASC 350, “Intangibles – Goodwill and Other,” we review goodwill annually in the fourth quarter or whenever significant events or changes indicate the possibility of impairment. For purposes of the annual goodwill impairment assessment, the Company has identified a single reporting unit. The most recently completed impairment test of goodwill was performed in the fourth quarter of 2020, and it was determined that no impairment existed.
(11)
CAREMAX, inc.
NOTES TO condensed consolidated FINANCIAL STATEMENTS
(unaudited)
Intangible assets with a finite useful life are amortized over their useful lives.
We review the recoverability of any long-lived intangible assets whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable.
Property and Equipment
Property and equipment is recorded at cost. Maintenance and repairs are charged to expense as incurred. Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed on the straight-line method. Leasehold improvements are depreciated over the lesser of the length of the related lease plus any renewal options or the estimated life of the asset.
A summary of estimated useful lives is as follows:
Leasehold Improvements |
15 to 39 Years |
Furniture and Equipment |
5 to 7 Years |
Vehicles |
5 Years |
Software |
3 Years |
Income Taxes
The Company follows the asset and liability method of accounting for income taxes under ASC 740, “Income Taxes.” Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the unaudited condensed consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. There were no unrecognized tax benefits as of September 30, 2021 and December 31, 2020. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense.
External Provider Costs
External Provider Costs include capitation payments and fee for service claims paid, claims in process and pending, and an estimate of unreported claims and charges by physicians, hospitals, and other health care providers for services rendered to enrollees during the period. Changes to prior-period estimates of medical expenses are reflected in the current period.
Net Income (Loss) Per Share
Net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. The Company follows the provisions of ASC Topic 260, Earnings Per Share, for determining whether contingently issuable shares are included for purposes of calculating net income (loss) per share and determining whether instruments granted in equity-based compensation arrangements are participating securities for purposes of calculating net income (loss) per share. See Note 9, Net Income (Loss) Per Share.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, "Leases" (“ASU 2016-02”), which amended the accounting for leases, requiring lessees to recognize most leases on their balance sheet with a right-of-use asset and a lease liability. Leases will be classified as either finance or operating leases, which will impact the expense recognition of such leases over the lease term. ASU 2016-02 also modifies the lease classification criteria for lessors and
(12)
CAREMAX, inc.
NOTES TO condensed consolidated FINANCIAL STATEMENTS
(unaudited)
eliminates some of the real estate leasing guidance previously applied for certain leasing transactions. In June 2020, the FASB issued ASU 2020-05, “Revenue from Contracts with Customers and Leases,” that deferred the required effective date for non-issuers to fiscal years beginning after December 15, 2021 and to interim periods within fiscal years beginning after December 15, 2022. Because the Company is currently an emerging growth company, the Company plans to adopt ASU 2016-02 on January 1, 2022. Because of the number of leases the Company utilizes to support its operations, the adoption of ASU 2016-02 is expected to have a significant impact on the Company’s financial position and results of operations. The total future estimated gross annual lease payments are $67.6 million as of September 30, 2021. Management is currently evaluating the extent of this anticipated impact on the Company’s financial statements, including quantitative and qualitative factors, as well as any changes to its leasing strategy that may be needed.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" (“ASU 2016-13”). ASU 2016-13 introduced a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The guidance is effective for us beginning January 1, 2022. The new current expected credit losses (CECL) model generally calls for the immediate recognition of all expected credit losses and applies to loans, accounts and trade receivables as well as other financial assets measured at amortized cost, loan commitments and off-balance sheet credit exposures, debt securities and other financial assets measured at fair value through other comprehensive income, and beneficial interests in securitized financial assets. The new guidance replaces the current incurred loss model for measuring expected credit losses, requires expected losses on available for sale debt securities to be recognized through an allowance for credit losses rather than as reductions in the amortized cost of the securities, and provides for additional disclosure requirements. The Company plans to adopt this standard on January 1, 2022 and does not believe adoption will have a material effect on its condensed consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, "Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815" (“ASU 2020-01”). ASU 2020-01 clarifies the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. The guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2021. The Company is currently evaluating the impact the adoption of ASU 2020-01 will have on its condensed consolidated financial statements.
In March 2020, the FASB issued guidance to provide temporary optional expedients and exceptions through December 31, 2022 to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (SOFR). The amendments are effective for all entities from the beginning of an interim period that includes the issuance date of the ASU. An entity may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the effect the update will have on its unaudited condensed consolidated financial statements and related disclosures.
We do not expect that any other recently issued accounting guidance will have a significant effect on our condensed consolidated financial statements.
NOTE 3. ACQUISITIONS
Acquisition of IMC
On June 8, 2021, the Company acquired 100% of the equity interests of IMC for total purchase consideration of $369.7 million, subject to final closing adjustments. The purchase consideration was comprised of the following (in thousands):
|
|
|
|
Cash consideration (1) |
$ |
172,302 |
|
Share consideration (2) |
$ |
155,347 |
|
Contingent consideration (3) |
$ |
40,785 |
|
Other consideration (4) |
$ |
1,271 |
|
(1) Represents cash consideration inclusive of the payment of $79.8 million of IMC debt simultaneous with the Closing and the reimbursement of IMC Parent's transaction costs of $7.3 million.
(13)
CAREMAX, inc.
NOTES TO condensed consolidated FINANCIAL STATEMENTS
(unaudited)
(2) Represent the issuance of 10,412,023 shares of Class A Common Stock, which shares were issued at a reference price of $10.00 per share, but the value of which was $14.92 per share, the closing price on the date of the IMC Acquisition.
(3) Represents the fair value of contingent consideration.
(4) Represents the fair value of cash and equity purchase consideration held in escrow pending the finalization of final closing adjustments.
The IMC Acquisition was recorded as a business combination under ASC 805 with identifiable assets acquired recorded at their estimated fair values as of the acquisition date.
As of September 30, 2021, we have not finalized the acquisition accounting related to the IMC Acquisition and these amounts represent preliminary values. The allocation of the purchase price may be modified up to one year from the acquisition date as more information is obtained about the fair value of assets acquired and liabilities assumed. The following table summarizes the purchase consideration and the preliminary fair value of the assets acquired and liabilities assumed (in thousands):
|
|
Purchase |
|
|
|
|
|
|
|
Cash |
|
$ |
14,842 |
|
Accounts receivable |
|
|
21,298 |
|
Other current assets |
|
|
1,446 |
|
Property, plant, & equipment |
|
|
6,198 |
|
Intangible assets |
|
|
34,121 |
|
Other assets |
|
|
448 |
|
Accounts payable and accrued expenses |
|
|
(8,793 |
) |
Long term debt |
|
|
(197 |
) |
Other long term liabilities |
|
|
(1,898 |
) |
Net Assets Acquired |
|
|
67,465 |
|
Excess of Consideration over Net Assets Acquired |
|
|
302,241 |
|
Total Consideration |
|
$ |
369,706 |
|
Goodwill represents the excess of the gross consideration transferred over the fair value of the underlying net assets acquired and liabilities assumed. The goodwill generated is attributable to the assembled workforce and the expected growth and cost synergies and the expected contribution to the Company’s overall strategy. The amount allocated to goodwill and intangible assets is subject to final adjustment to reflect the final valuations. The goodwill recognized that is expected to be deductible for income tax purposes is $80.4 million.
The fair value associated with definite-lived intangible assets was $34.1 million, comprised of $33.9 million in risk contracts and $263,000 in trademarks. The definite-lived intangible assets will be amortized ranging from to six years.
The Company’s net revenue and loss before income taxes for the nine months ended September 30, 2021 includes revenues of $88.2 million and net income before taxes of $970,000 related to IMC.
Acquisition of SMA Entities
On June 18, 2021, IMC completed the acquisition of 100% of the issued and outstanding equity interests of Senior Medical Associates, LLC, a Florida limited liability company (“SMA”), and Stallion Medical Management, LLC, a Florida limited liability company (“SMM” and together with SMA, the “SMA Entities”) (“the SMA Acquisition”). The purchase consideration was comprised of the following (in thousands):
Cash consideration (1) |
|
$ |
52,000 |
|
Share consideration (2) |
|
$ |
5,027 |
|
(14)
CAREMAX, inc.
NOTES TO condensed consolidated FINANCIAL STATEMENTS
(unaudited)
(1) Represents cash consideration of $52.0 million, including a holdback of $2.5 million.
(2) Represents equity consideration of 384,615 shares of Class A Common Stock valued at $5.0 million based on the June 18, 2021 closing price of $13.07.
The SMA Acquisition was recorded as a business combination under ASC 805 with identifiable assets acquired and liabilities assumed liabilities recorded at their estimated fair values as of the acquisition date.
As of September 30, 2021, we have not finalized the acquisition accounting related to the SMA Acquisition and these amounts represent preliminary values. The allocation of the purchase price may be modified up to one year from the acquisition date as more information is obtained about the fair value of assets acquired and liabilities assumed. The following table summarizes the consideration paid and the preliminary fair value of the assets acquired and liabilities assumed (in thousands):
|
|
Purchase |
|
|
Cash |
|
$ |
73 |
|
Accounts receivable |
|
|
1,830 |
|
Property, plant & equipment |
|
|
178 |
|
Intangible Assets |
|
|
8,824 |
|
Other assets |
|
|
29 |
|
Accounts payable and accrued expenses |
|
|
(178 |
) |
Net Assets Acquired |
|
|
10,756 |
|
Excess of Consideration over Net Assets Acquired |
|
|
46,271 |
|
Total Consideration |
|
$ |
57,027 |
|
Goodwill was recognized as the excess of the purchase price over the net identifiable assets recognized. The goodwill is primarily attributed to our assembled workforce, the expected growth and cost synergies and the expected contribution to the Company’s overall strategy. The goodwill recognized that is expected to be deductible for income tax purposes is $46.3 million.
The Company incurred and expensed acquisition-related transaction costs of $149,000 related to the SMA Acquisition that were paid by the Company.
The fair value associated with definite-lived intangible assets was $8.8 million, comprised of $8.7 million in risk contracts and $92,000 in tradenames. The definite-lived intangible assets will be amortized over periods ranging from to six years.
The Company’s net revenue and loss before income taxes for the nine months ended September 30, 2021 includes revenues of $6.5 million and net income before taxes of $661,000 related to SMA.
Acquisition of DNF
On September 1, 2021, the Company acquired 100% of the assets of Unlimited Medical Services of Florida, LLC, ("DNF"), a Florida limited liability company, dba DNF Medical Centers, for total purchase consideration of $114.2 million, subject to final closing adjustments (the "DNF Acquisition"). The purchase consideration was comprised of the following (in thousands):
Cash consideration (1) |
|
$ |
88,118 |
|
Share consideration (2) |
|
$ |
26,072 |
|
The DNF Acquisition was recorded as a business combination under ASC 805 with identifiable assets acquired recorded at their estimated fair values as of the acquisition date.
(15)
CAREMAX, inc.
NOTES TO condensed consolidated FINANCIAL STATEMENTS
(unaudited)
As of September 30, 2021, we have not finalized the acquisition accounting related to the DNF Acquisition and these amounts represent preliminary values. The allocation of the purchase price may be modified up to one year from the acquisition date as more information is obtained about the fair value of assets acquired and liabilities assumed. The following table summarizes the purchase consideration and the preliminary fair value of the assets acquired (in thousands):
|
|
Purchase |
|
|
|
|
|
|
|
Cash |
|
$ |
- |
|
Accounts receivable |
|
$ |
3,732 |
|
Property, plant & equipment |
|
|
3,520 |
|
Intangible Assets |
|
|
14,691 |
|
Other assets |
|
|
65 |
|
Net Assets Acquired |
|
|
22,008 |
|
Excess of Consideration over Net Assets Acquired |
|
|
92,182 |
|
Total Consideration |
|
$ |
114,190 |
|
Goodwill represents the excess of the gross consideration transferred over the fair value of the underlying net assets acquired and liabilities assumed. The goodwill generated is attributable to the assembled workforce and the expected growth and cost synergies and the expected contribution to the Company’s overall strategy. The amount allocated to goodwill and intangible assets is subject to final adjustment to reflect the final valuations. The goodwill recognized that is expected to be deductible for income tax purposes is $92.2 million.
The Company incurred and expensed acquisition-related transaction costs of $701,000 related to the DNF Acquisition that were paid by the Company.
The fair value associated with definite-lived intangible assets was $14.7 million, comprised of $14.0 million in risk contracts and $646,000 in trademarks. The definite-lived intangible assets will be amortized ranging from to six years.
The Company’s net revenues and loss before income taxes for the nine months ended September 30, 2021 includes revenue of $4.9 million and net income before income taxes of $14,000 related to DNF.
Other Acquisitions
During the nine months ended September 30, 2021, we acquired 100% of two additional business. The acquisitions were accounted for as business combinations and the overall impact to our unaudited condensed consolidated financial statements was not considered to be material. The fair value associated with definite-lived intangible assets from the acquisitions was $852,000. The total fair value of consideration paid or payable on the acquisition was $2.2 million.
NOTE 4. REINSURANCE
The Company has acquired insurance on catastrophic costs to limit the exposure on patient losses. Premiums and policy recoveries are reported in external provider costs in the accompanying condensed consolidated statements of operations.
The nature of the Company’s stop loss coverage is to limit the benefits paid under one patient. The Company’s stop loss limits are defined within each health plan contract and stop loss purchased from a third party and range from $30,000 to $200,000 per patient per year. Premium expense incurred was $3.3 million and $5.5 million for the three and nine months ended September 30, 2021, respectively, and approximately $254,000 and $747,000 for the three and nine months ended September 30, 2020, respectively. Physicians under capitation arrangements typically have stop loss coverage so that a physician’s financial risk for any single member is limited to a maximum amount on an annual basis. The Company monitors the financial performance and solvency of its stop loss providers. However, the Company remains financially responsible for health care services to its members in the event the health plans are unable to fulfill their obligations under stop loss contractual terms.
(16)
CAREMAX, inc.
NOTES TO condensed consolidated FINANCIAL STATEMENTS
(unaudited)
Recoveries recognized were $5.2 million and $6.9 million for the three and nine months ended September 30, 2021, respectively and $93,000 and $301,000 for the three and nine months ended September 30, 2020, respectively. Estimated recoveries under stop loss policies are reported within the capitation receivable or amounts due health plans as the counterparty responsible for the payment of the claims and the stop loss is the respective health plan.
NOTE 5. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The following table shows changes in the carrying amount of goodwill from December 31, 2020 to September 30, 2021 (in thousands):
|
Carrying Amount |
|
|
Balance at December 31, 2020 |
$ |
10,068 |
|
Acquired goodwill during the period |
|
441,840 |
|
Balance at September 30, 2021 |
$ |
451,908 |
|
Intangible Assets
The following table summarizes the gross carrying amounts and accumulated amortization of intangible assets by major class (in thousands):
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Book |
|
|
Weighted Average |
|
||||
September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
||||
Risk Contracts |
$ |
64,967 |
|
|
$ |
(5,655 |
) |
|
$ |
59,312 |
|
|
|
7 |
|
Trademarks |
|
1,696 |
|
|
|
(318 |
) |
|
|
1,378 |
|
|
|
1 |
|
Non-compete agreements |
|
1,320 |
|
|
|
(435 |
) |
|
|
885 |
|
|
|
5 |
|
Total |
$ |
67,983 |
|
|
$ |
(6,408 |
) |
|
$ |
61,575 |
|
|
|
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Book |
|
|
Weighted Average |
|
||||
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
||||
Risk Contracts |
$ |
8,174 |
|
|
$ |
(682 |
) |
|
$ |
7,492 |
|
|
|
11 |
|
Non-compete agreements |
|
1,320 |
|
|
|
(237 |
) |
|
|
1,083 |
|
|
|
5 |
|
Total |
$ |
9,494 |
|
|
$ |
(919 |
) |
|
$ |
8,575 |
|
|
|
|
|
Amortization expense totaled $1.1 million and $1.3 million for the three and nine months ended September 30, 2021, respectively, and $141,000 and $281,000 for the three and nine months ended September 30, 2020, respectively.
(17)
CAREMAX, inc.
NOTES TO condensed consolidated FINANCIAL STATEMENTS
(unaudited)
NOTE 6. PROPERTY AND EQUIPMENT
A summary of property and equipment at September 30, 2021 and December 31, 2020 is as follows (in thousands):
|
|
September 30, 2021 |
|
|
December 31, 2020 |
|
||
Leasehold improvements |
|
$ |
6,905 |
|
|
$ |
2,726 |
|
Vehicles |
|
|
3,693 |
|
|
|
2,823 |
|
Furniture and equipment |
|
|
8,040 |
|
|
|
1,983 |
|
Construction in progress |
|
|
2,278 |
|
|
|
360 |
|
Total |
|
|
20,916 |
|
|
|
7,892 |
|
Less: Accumulated depreciation |
|
|
(4,753 |
) |
|
|
(3,096 |
) |
Total Property and equipment, net |
|
$ |
16,163 |
|
|
$ |
4,796 |
|
Construction in progress at September 30, 2021 is made up of various leasehold improvements at the Company's medical centers. The Company has a contractual commitment to complete the construction of its Homestead medical center with remaining estimated capital expenditures of $700,000. Plans have been submitted for the Company's East Hialeah medical center, and the opening of the facility is projected in the fourth quarter of 2022. The projects are being funded internally.
Depreciation expense totaled $1.0 million and $1.7 million for the three and nine months ended September 30, 2021 and 2020, respectively, and $193,000 and $626,000 for the three and nine months ended September 30, 2020, respectively.
NOTE 7. LONG TERM DEBT
Long-term debt consisted of the following at September 30, 2021 and December 31, 2020 (in thousands):
|
|
September 30, |
|
|
December 31, 2020 |
|
||
Secured term loans |
|
$ |
123,438 |
|
|
$ |
24,184 |
|
Payroll protection plan |
|
|
- |
|
|
|
2,164 |
|
Other |
|
|
72 |
|
|
|
1,358 |
|
Unamortized debt issuance costs |
|
|
(4,341 |
) |
|
|
(377 |
) |
|
|
|
119,169 |
|
|
|
27,329 |
|
Current portion |
|
|
(6,279 |
) |
|
|
(1,004 |
) |
Long-term portion |
|
$ |
112,890 |
|
|
$ |
26,325 |
|
On the Closing Date, the Company entered into a Credit Agreement (the “Credit Agreement”) , by and among the Company, Royal Bank of Canada, as Administrative Agent (in such capacity, the “Agent”), Collateral Agent, Swing Line Lender and Issuing Bank, RBC Capital Markets, LLC and Truist Securities, Inc., as Syndication Agents, Joint Lead Arrangers and Joint Book Runners, and certain other banks and financial institutions serving as lenders (collectively with their successors and assigns, the “Lenders”). The Credit Agreement provides for (i) initial term loans in an aggregate principal amount of $125.0 million (the “Initial Term Loans”), which was fully drawn on the Closing Date to finance the Business Combination and related transaction costs, (ii) a revolving credit facility in an aggregate principal amount of $40.0 million for working capital and other general corporate purposes, of which $0 was drawn as of September 30, 2021 and (iii) a delayed draw term loan facility in an aggregate principal amount of $20.0 million, which will be available to be drawn from and after the Closing until the six month anniversary of the Closing Date to finance permitted acquisitions and similar permitted investments and of which $0 was drawn as of September 30, 2021 (collectively, the “Credit Facilities”).
Interest is payable on the outstanding loans under the Credit Facilities based on, at the option of the Company, either: (i) Eurocurrency (with a floor of 0.75% per annum) plus variable spreads ranging from 2.75% to 3.50% per annum based on first lien net leverage ratio levels or (ii) the Alternate Base Rate (defined as the highest of (a) the Prime Rate (as defined in the Credit Agreement and established by the Agent), (b) the Federal Funds Rate (as defined in the Credit Agreement) plus 0.50% per annum, and (c) the LIBOR Quoted Rate (as defined in the Credit Agreement) plus 1.00% per annum, in each case, with a floor of 1.75% per annum), plus variable spreads ranging from 1.75% to 2.50% per annum based on first lien net leverage ratio levels. Accrued and unpaid interest is payable with respect to LIBOR loans, on the last day interest period as selected by the Company but no later than three months, and with respect to Alternate Base Rate Loans, quarterly on the last business day of each of March, June, September and December. An unused commitment fee is also payable with respect to the revolving credit facility and the delayed draw term loan facility ranging between 0.35% and 0.50% depending on the Company’s first lien net leverage ratio, and is payable quarterly in arrears with respect to the revolving credit facility and on the earliest of the
(18)
CAREMAX, inc.
NOTES TO condensed consolidated FINANCIAL STATEMENTS
(unaudited)
termination of the delayed draw term loan facility, the six month anniversary of the Closing Date with respect to any delayed draw term loan commitments that have expired and otherwise after the end of the first full fiscal quarter after the Closing Date.
Amortization payments with respect to the Initial Term Loans are payable in quarterly installments, commencing with the last business day of the first full fiscal quarter ending after the Closing Date, in aggregate principal amounts equal to (i) 1.25% of the aggregate principal amount of the Initial Term Loans outstanding on the Closing Date from the Closing Date until June 7, 2024, (ii) 1.875% of the aggregate principal amount of the Initial Term Loans outstanding on the Closing Date from June 8, 2024 to June 7, 2025 and (iii) 2.50% of the aggregate principal amount of the Initial Term Loans outstanding on the Closing Date from June 8, 2025 to June 7, 2026. All amounts owed under the Credit Facilities are due and payable upon the five-year anniversary of the Closing Date, unless otherwise extended in accordance with the terms of the Credit Agreement.
The Credit Agreement contains certain covenants that limit, among other things, the ability of the Company and its subsidiaries to incur additional indebtedness or liens, to make certain investments, to enter into sale-leaseback transactions, to make certain restricted payments, including dividends, to enter into consolidations, mergers or sales of material assets and other fundamental changes, or to transact with affiliates subject to exceptions, materiality and other qualifications as provided in the Credit Agreement. The Credit Agreement also contains customary events of default and also includes an equity cure right.
All obligations under the Credit Agreement are guaranteed by the Company and substantially all of its subsidiaries, and all obligations under the Credit Agreement, including the guarantees of those obligations, are secured by substantially all of the assets of the Company and its subsidiaries. As of September 30, 2021, the Company was in compliance, in all material respects, with all covenants under the Credit Agreement.
CMG Loan Agreement
On the Closing Date, the Company repaid all outstanding term loan borrowings under CMG's previous loan agreement (the “Loan Agreement”) and the Loan Agreement was terminated. The Company repaid $24.5 million, inclusive of $487,000 in prepayment penalties, fees and interest. The Company recorded a loss on early of extinguishment of debt of $806,000, inclusive of the write-off of deferred debt issuance costs and prepayment penalties related to the Loan Agreement.
Other Debt
Other long-term debt repaid on the Closing Date totaled $229,000. In addition, $2.0 million was deposited into an escrow account as security for amounts borrowed under the Paycheck Protection Program ("PPP"). In the three months ended September 30, 2021, the Company paid $2.0 million to the CMG sellers for the amount owed related to a loan under the PPP. This amount was held in escrow as of June 30, 2021 and was reported in restricted cash in the June 30, 2021 condensed consolidated balance sheet. During the three and nine months ended September 30, 2021, borrowings under the PPP of $279,000 and $2.5 million were forgiven and are included in the gain on extinguishment of debt.
NOTE 8. STOCKHOLDERS’ EQUITY
The unaudited condensed consolidated statement of changes in equity reflects the Reverse Recapitalization and the IMC Acquisition as discussed in Notes 2 and 3. As CMG was deemed the accounting acquirer in the Reverse Recapitalization with DFHT, all periods prior to the consummation of the Business Combination reflect the balances and activity of CMG.
In connection with the Business Combination, the Company adopted the third amended and restated certificate of incorporation, dated June 8, 2021 (the “Amended and Restated Charter”) to, among other things, increased the total number of authorized shares of all classes of capital stock, par value of $0.0001 per share, to 261,000,000 shares, consisting of (i) 260,000,000 shares
(19)
CAREMAX, inc.
NOTES TO condensed consolidated FINANCIAL STATEMENTS
(unaudited)
of common stock, including 250,000,000 shares of Class A Common Stock and 10,000,000 shares of Class B Common Stock, and (ii) 1,000,000 shares of preferred stock. In addition, 3,593,750 shares of Class B Common Stock were converted, on a one-for-one basis, into shares of Class A Common Stock, and as of September 30, 2021, there were no shares of Class B Common Stock issued or outstanding.
Also in connection with the Business Combination, (i) Deerfield Partners and the Sponsor purchased an aggregate of 10,000,000 shares of Class A Common Stock (the “Deerfield PIPE Investments”), consisting of 9,600,000 shares of Class A Common Stock purchased by Deerfield Partners and 400,000 shares of Class A Common Stock purchased by the Sponsor, for a purchase price of $10.00 per share and an aggregate purchase price of $100.0 million and (ii) certain investors purchased an aggregate of 31,000,000 shares of Class A Common Stock (the “Third-Party PIPE Investments,” and together with the Deerfield PIPE Investments, the “PIPE Investments”), for a purchase price of $10.00 per share, for an aggregate purchase price of $310.0 million. The Company paid offering costs of $12.8 million.
In connection with the acquisition of SMA (see Note 3 - Acquisitions), the Company issued 384,615 shares of Class A Common Stock.
On July 13, 2021, the Company issued 500,000 shares of Class A Common Stock to the Related Group in connection with the execution of the Advisory Agreement (as defined below).
In connection with the DNF Acquisition (see Note 3 - Acquisitions), the Company issued 2,741,528 shares of Class A Common Stock to DNF. Also, during the three months ended September 30, 2021, the first tranche of contingently issuable shares totaling an aggregate of 3,200,000 shares of Class A Common Stock were issued to the CMG Sellers and IMC Parent (“Earnout Shares” described in Contingent Consideration Common Shares below). In total, this activity brought the total number of shares of Class A Common Stock outstanding at September 30, 2021 to 87,073,985.
Related Advisory Agreement
On July 13, 2021, the Company entered into an exclusive real estate advisory agreement (the "Advisory Agreement") with Related CM Advisor, LLC (the “Advisor”), a Delaware limited liability company and a subsidiary of The Related Companies, L.P. (“Related”) (the “Advisory Agreement”), pursuant to which the Advisor has agreed provide certain real estate advisory services to the Company on an exclusive basis. The services include identifying locations for new medical centers nationwide as part of the Company’s de novo growth strategy, including, but not limited to, locations within and proximate to affordable housing communities that may be owned by Related.
In connection with the Advisory Agreement, the Company and the Advisor entered into a subscription agreement (the “Subscription Agreement”), whereby the Advisor purchased 500,000 shares (the “Initial Shares”) of the Company’s Class A Common Stock for an aggregate purchase price of $5.0 million and the Company issued to the Advisor (i) a warrant (the “Series A Warrant”) to purchase 2,000,000 shares of Class A Common Stock (the “Series A Warrant Shares”), which vested immediately upon issuance, is exercisable for a period of five years and is not redeemable by the Company and (ii) a warrant (the “Series B Warrant” and together with the Series A Warrant, the “Warrants”) to purchase up to 6,000,000 shares of Class A Common Stock (the “Series B Warrant Shares” and, together with the Series A Warrant Shares, the “Warrant Shares”), pursuant to which 500,000 Series B Warrant Shares will vest and become exercisable from time to time upon the opening of each medical center under the Advisory Agreement for which the Advisor provides services, other than two initial medical centers.
The Series B Warrant is exercisable, to the extent vested, until the later of five years from the date of issuance or one year from vesting of the applicable Series B Warrant Shares and is redeemable with respect to vested Warrant Shares at a price of $0.01 per Warrant Share if the price of the Class A Common Stock equals or exceeds $18.00 per share, or $0.10 per Warrant Share if the price of the Class A Common Stock equals or exceeds $10.00 per share, in each case when such price conditions are satisfied for any 20 trading days within a 30-trading day period and subject to certain adjustments and conditions as described in the Series B Warrant. In the event that the Series B Warrant is called for redemption by the Company, the Advisor may pay the exercise price for the Series B Warrant Shares six months following the notice of redemption by the Company.
The company assessed the substance of the Subscription Agreement and determined that all instruments referenced in the Subscription Agreement should be assessed under the guidance of ASC 718 as non-employee awards issued to Related in
(20)
CAREMAX, inc.
NOTES TO condensed consolidated FINANCIAL STATEMENTS
(unaudited)
exchange for real estate advisory services to be rendered per the Advisory Agreement. As a result, the Company recorded the Series A Warrants as a component of additional paid-in-capital using the fair value as of July 13, 2021.
Preferred Stock
The Amended and Restated Charter authorizes the Company to issue 1,000,000 shares of preferred stock, with such designations, voting and other rights and preferences as may be determined from time to time by the Company’s board of directors. As of September 30, 2021, there were no shares of preferred stock issued or outstanding.
Redeemable Warrants - Public Warrants
On July 16, 2020, in connection with the IPO, DFHT sold 2,875,000 Public Warrants. Each whole Public Warrant entitles the registered holder to purchase one share of Class A Common Stock at a price of $11.50 per share, subject to adjustment, at any time commencing on the later of 12 months from the closing of the IPO and 30 days after the completion of the Business Combination, provided in each case that the Company has an effective registration statement under the Securities Act covering the shares of Class A Common Stock issuable upon exercise of the Public Warrants and a current prospectus relating to them is available (or the Company permits holders to exercise their Public Warrants on a cashless basis under the circumstances specified in the warrant agreement) and such shares are registered, qualified or exempt from registration under the securities, or blue sky, laws of the state of residence of the holder. Pursuant to the warrant agreements entered into at the time of the IPO, a warrant holder may exercise its Public Warrants only for a whole number of shares of Class A Common Stock. This means only a whole Public Warrant may be exercised at a given time by a warrant holder. No fractional warrants were issued upon separation of the units issued in connection with the IPO and only whole Public Warrants will trade. The Company may redeem the Public Warrants when the price per share of Class A Common Stock equals or exceeds certain threshold prices.
Redeemable Warrants - Private Placement Warrants
Also in connection with the IPO, DFHT issued the 2,916,667 Private Placement Warrants at a purchase price of $1.50 per warrant. The Private Placement Warrants (including the Class A Common Stock issuable upon exercise of the Private Placement Warrants) are not transferable, assignable or salable until 30 days after the completion of the Business Combination (except, among other limited exceptions to DFHT’s officers and directors and other persons or entities affiliated with the initial purchasers of the Private Placement Warrants) and they will not be redeemable by CareMax for cash so long as they are held by the initial stockholders or their permitted transferees. With some exceptions, the Private Placement Warrants have terms and provisions that are identical to those of the Public Warrants. If the Private Placement Warrants are held by holders other than the initial purchasers or their permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by the holders on the same basis as the Public Warrants.
Contingent Consideration Common Shares
Pursuant to the Business Combination Agreement, the CMG Sellers and IMC Parent, who received Class A Common Stock in connection with the Business Combination, are entitled to receive earn-out consideration to be paid out in the form of Class A Common Stock. The Business Combination Agreement provides that up to an additional 3,500,000 and 2,900,000 Earnout Shares are payable after the Closing to the CMG Sellers and IMC Parent: (i) if within the first year after the Closing, the volume weighted average trading price of Class A Common Stock equals or exceeds $12.50 on any 20 trading days in any 30-day trading period (the “First Share Price Trigger”), then 1,750,000 and 1,450,000 Earnout Shares are issuable to the CMG Sellers and IMC Parent, respectively, and (ii) if within the two years after the Closing (the “Second Earnout Period”), the volume weighted average trading price of Class A Common Stock equals or exceeds $15.00 on any 20 trading days in any 30-day trading period (the “Second Share Price Trigger” and together with the First Share Price Trigger, the “Share Price Triggers”), then 1,750,000 and 1,450,000 Earnout Shares will be issued and paid to the CMG Sellers and IMC Parent, respectively. If prior to (i) the satisfaction of the Share Price Triggers, and (ii) the end of the Second Earnout Period, the Company enters into a change in control transaction as described in the Business Combination Agreement, and the price per share of the Company’s Class A Common Stock payable to the stockholders of the Company in such change in control transaction is greater than the Share Price Triggers that have not been satisfied during the Earnout Period, then at the closing of such change in control transaction, the Share Price Triggers will be deemed to have been satisfied and the Company is required to issue, as of such closing, the applicable unissued Earnout Shares. The estimated fair value of the Earnout Shares was initially accounted for as a liability-classified instrument with changes in its fair value recorded in the condensed consolidated statements of operations until July 9, 2021. On July 9, 2021, the First Share Price Trigger was achieved, resulting in issuance of 1,750,000 and 1,450,000
(21)
CAREMAX, inc.
NOTES TO condensed consolidated FINANCIAL STATEMENTS
(unaudited)
Earnout Shares to the CMG Sellers and IMC Parent, respectively. Subsequent to the achievement of the First Share Price Trigger, the Company determined the Earnout Shares subject to the second Share Price Trigger should be equity classified.
Equity-based Compensation
On June 4, 2021, the stockholders of the Company approved the CareMax Inc. 2021 Long-term Incentive Plan (the “2021 Plan”), effective on the Closing Date. The 2021 Plan permits the grant of equity-based awards to officers, directors, employees and other service providers. The 2021 Plan permits the grant of an initial share pool of 7,000,000 shares of Class A Common Stock and will:
-be increased automatically, without further action of the Company’s board of directors, on January 1st of each calendar year commencing after the Closing Date and ending on (and including) January 1, 2031, by a number of shares of Class A Common Stock equal to the lesser of (i) four percent of the aggregate number of shares of Class A Common Stock outstanding on December 31stof the immediately preceding calendar year, excluding for this purpose any such outstanding shares of Class A Common Stock that were granted under the 2021 Plan and remain unvested and subject to forfeiture as of the relevant December 31st, or (B) a lesser number of shares of Class A Common Stock as determined by the Company’s board of directors or the Compensation Committee of the board of directors prior to the relevant January 1st;
As of September 30, 2021, no grants have been made and there were no shares of Class A Common Stock issued or outstanding under the 2021 Plan.
Stock Based Compensation Expense
In July 2021, the Company’s board of directors authorized an award of 100,000 shares of Class A Common Stock to an executive. The award has not been granted as of September 30, 2021. There are no additional performance or market conditions that will be required to be satisfied before the award is granted. The historical close price of the Class A Common Stock was $9.66 on September 30, 2021. Based on this fact pattern, the Company has recorded Stock Based Compensation expense totaling $966,000 for the three months ended September 30, 2021.
NOTE 9. NET INCOME (LOSS) PER SHARE
The Business Combination was accounted for as a reverse recapitalization by which CMG issued equity for the net assets of the Company accompanied by a recapitalization. Earnings per share has been recast for all historical periods to reflect the Company’s capital structure for all comparative periods.
The Earnout Shares are excluded from the computation of basic net income (loss) per share until the conditions to trigger the issuance of the Earnout Shares have been satisfied. During the three months ended September 30, 2021, the first tranche of Earnout Shares totaling 3,200,000 shares of Class A Common Stock were issued to the CMG Sellers and IMC Parent and such shares are included in the computation of basic net income (loss) per share from the date of issuance for the three and nine months ended September 30, 2021. The remaining Earnout Shares totaling 3,200,000 shares were excluded from the computation of basic net income (loss) per share for the three and nine months ended September 30, 2021 as the Second Share Price Trigger had not been achieved as of September 30, 2021.
The Company excluded the effect of the Public Warrants and the Private Placement Warrants from the computation of diluted net income (loss) per share in the three and nine months ended September 30, 2021 as their inclusion would have been anti-dilutive because the Company was in a loss position for such periods.
(22)
CAREMAX, inc.
NOTES TO condensed consolidated FINANCIAL STATEMENTS
(unaudited)
The following table sets forth the calculation of basic and diluted earnings per share for the periods indicated based on the weighted average number of common share outstanding for the period subsequent to the transactions that occurred in connection with the Business Combination (in thousands, except share and per share data):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Net (loss) income attributable to CareMax, Inc. class A common stockholders |
|
$ |
(14,479 |
) |
|
$ |
(315 |
) |
|
$ |
(3,120 |
) |
|
$ |
6,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average basic shares outstanding |
|
|
82,552,520 |
|
|
|
10,796,069 |
|
|
|
40,847,294 |
|
|
|
10,796,069 |
|
Weighted average diluted shares outstanding |
|
|
82,552,520 |
|
|
|
10,796,069 |
|
|
|
40,847,294 |
|
|
|
10,796,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net (loss) income per share |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
(0.18 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.08 |
) |
|
$ |
0.59 |
|
Diluted |
|
$ |
(0.18 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.08 |
) |
|
$ |
0.59 |
|
NOTE 10. FAIR VALUE MEASUREMENTS
The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques that the Company utilized to determine such fair value (in thousands).
September 30, 2021 |
|
Quoted Prices |
|
|
Significant other |
|
|
Significant other |
|
|||
Description |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|||
Derivative warrant liabilities |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
17,110 |
|
Liability-classified contingent consideration |
|
|
- |
|
|
|
- |
|
|
|
1,400 |
|
The fair value of the Public Warrants issued in connection with the IPO and the Private Placement Warrants were initially measured at fair value using a Monte Carlo simulation model and subsequently, the fair value of the Private Placement Warrants has been estimated using a Monte Carlo simulation model each measurement date. The fair value of Public Warrants issued in connection with the IPO has been measured based on the listed market price of such warrants since the IPO. For the three months ended September 30, 2021, the Company recognized a benefit resulting from a decrease in the fair value of the derivative warrant liabilities of $10.2 million.
Transfers to/from Levels 1, 2, and 3 are recognized at the end of the reporting period. There were no transfers between levels for the nine months ended September 30, 2021.
The estimated fair value of the Private Placement Warrants, and the Public Warrants prior to being separately listed and traded, was determined using Level 3 inputs. Inherent in a Monte Carlo simulation are assumptions related to expected stock-price volatility, expected life, risk-free interest rate and dividend yield. The Company estimates the volatility of its common stock based on historical volatility of select peer companies that matches the expected remaining life of the warrants. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which the Company anticipates remaining at zero.
The following table provides quantitative information regarding Level 3 fair value measurements inputs as of the Closing (June 8, 2021) and September 30, 2021:
|
|
September 30, |
|
|
June 8, |
|
||
Exercise price |
|
$ |
11.50 |
|
|
$ |
11.50 |
|
Unit price |
|
$ |
9.66 |
|
|
$ |
14.92 |
|
Volatility |
|
|
43.4 |
% |
|
|
29.8 |
% |
Expected life of the options to convert |
|
|
4.69 |
|
|
|
5 |
|
Risk-free rate |
|
|
0.93 |
% |
|
|
0.77 |
% |
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
(23)
CAREMAX, inc.
NOTES TO condensed consolidated FINANCIAL STATEMENTS
(unaudited)
The change in the fair value of the warrant liabilities for the nine months ended September 30, 2021 is summarized as follows (in thousands):
Fair value of derivative warrant liabilities at Closing |
|
$ |
29,132 |
|
Change in fair value of derivative warrant liabilities |
|
|
(12,022 |
) |
Derivative warrant liabilities at September 30, 2021 |
|
$ |
17,110 |
|
The following table provides quantitative information regarding Level 3 fair value measurements of the Related Warrants as of the date of issuance:
|
|
July 13, |
|
|
Exercise price |
|
$ |
11.50 |
|
Unit price |
|
$ |
13.30 |
|
Volatility |
|
|
50.9 |
% |
Expected life of the options to convert |
|
|
5.00 |
|
Risk-free rate |
|
|
0.85 |
% |
Dividend yield |
|
|
0.0 |
% |
The following table provides quantitative information regarding Level 3 fair value measurements of the IMC Parent and CMG Sellers Contingent Earnout consideration as of July 9, 2021:
CMG Sellers - Second Share Price Trigger |
|
July 9, |
|
|
Share Price Trigger |
|
$ |
15.00 |
|
Potential Shares |
|
|
1,750,000 |
|
Beginning Share Price |
|
$ |
14.09 |
|
Volatility |
|
|
60.7 |
% |
Remaining Term |
|
|
1.92 |
|
Risk-free rate |
|
|
0.22 |
% |
Dividend yield |
|
|
0.0 |
% |
IMC Parent - Second Share Price Trigger |
|
July 9, |
|
|
Share Price Trigger |
|
$ |
15.00 |
|
Potential Shares |
|
|
1,450,000 |
|
Beginning Share Price |
|
$ |
14.09 |
|
Volatility |
|
|
60.7 |
% |
Remaining Term |
|
|
1.92 |
|
Risk-free rate |
|
|
0.22 |
% |
Dividend yield |
|
|
0.0 |
% |
NOTE 11. RELATED PARTY TRANSACTIONS
The Company had a 49% ownership interest in Care Smile, LLC (“Care Smile”), a dental care organization with majority ownership by the dental provider, who is the spouse of a member of the Company's senior management. The Company pays for dental services provided to enrollees by Care Smile on a capitated basis. Total capitation payments for the three and nine months ended September 30, 2020 were $0 and $222,000, respectively. The net loss of Care Smile for the three and nine months ended September 30, 2020 was $52,000 and $97,000, respectively. Care Smile was voluntarily dissolved on November 24, 2020.
The Company leases certain facilities from related parties under operating leases expiring through 2026. Rent expenses totaled $0 and $21,000 for the three and nine months ended September 30, 2021.
On July 13, 2021, the Company entered into the Advisory Agreement the Advisor, the substance of which is described in detail in Note 8 - Stockholders Equity.
The relative fair value method was used to allocate the $5.0 million purchase price between the Class A Common Shares and the Series A Warrants under the Subscription Agreement. The Company recorded the excess of the grant date fair value difference between the fair value of the equity and Series A Warrants instruments at the grant date (July 13, 2021) as prepaid service contracts totaling $14.5 million, subject to amortization over the terms of the respective agreements. In the three months
(24)
CAREMAX, inc.
NOTES TO condensed consolidated FINANCIAL STATEMENTS
(unaudited)
ended September 30, 2021, the Company recognized $142,000 of expense related to amortization of the prepaid service contracts.
The Series B Warrants were assigned a value of $0 as the vesting was not probable at issuance through the three months ended September 30, 2021. The grant date fair value of the Series B Warrants will be used to determine the cost of these awards upon the opening of the 12 future sites not yet identified.
On July 13, 2021 the Company's board of directors appointed Mr. Bryan Cho, an Executive Vice President of Related, to serve as a Class III director of the Company. The appointment of Mr. Cho was made in connection with the Advisory Agreement, which provides the Advisor with the right to designate a director to serve on the Company's board of directors, subject to the continuing satisfaction of certain conditions, including that the Advisor and its affiliates maintain ownership of at least 500,000 shares of Class A Common Stock.
The board of directors has determined that Mr. Cho is independent under the rules of the Nasdaq Global Select Market. Mr. Cho has been appointed to serve as a member on the Compensation Committee and Nominating and Governance Committee of the Board. As a director of the Company, Mr. Cho will receive compensation in the same manner as the Company’s other non-employee directors and will enter into the Company’s standard indemnification agreement for directors.
NOTE 12. OPERATING LEASES AND COMMITMENTS
The Company has entered into non-cancelable operating lease agreements for office and clinical space expiring at various times through 2031. The operating lease agreements have renewal options ranging from to seven years. Future minimum rental payments under these lease agreements, including renewal options which are considered reasonably certain of exercise, consisted of the following at September 30, 2021:
|
|
Amount |
|
|
Remainder of 2021 |
|
$ |
2,082 |
|
2022 |
|
|
8,610 |
|
2023 |
|
|
7,542 |
|
2024 |
|
|
7,067 |
|
2025 |
|
|
6,685 |
|
Thereafter |
|
|
35,640 |
|
Total |
|
$ |
67,626 |
|
Rent expense, including other related expenses for property taxes, sale taxes, and utilities, was approximately $2.8 million and $4.4 million for the three and nine months ended September 30, 2021, respectively, and $575,000 and $1,501,000 for the three and nine months ended September 30, 2020, respectively. Rent expense is included in Corporate General and Administrative Expenses on the unaudited condensed consolidated statements of operations.
NOTE 13. INCOME TAXES
Prior to the completion of the Business Combination, CMG was a limited liability company and treated as a partnership for federal and state income tax purposes. A partnership is not a tax-paying entity for federal and state income tax purposes, and as such, the results of operations were allocated to the members for inclusion in their income tax returns. Following the Business Combination, the income of CMG will flow through to the Company and will be taxed at the federal and state levels accordingly.
Income tax expense for the three and nine months ended September 30, 2021 was $0. The effective tax rate for the three and nine months ended September 30, 2021 was 0.0% based on the determination that a full valuation allowance was recorded.
(25)
CAREMAX, inc.
NOTES TO condensed consolidated FINANCIAL STATEMENTS
(unaudited)
NOTE 14. COMMITMENTS AND CONTINGENCIES
Compliance
The health care industry is subject to numerous laws and regulations of federal, state, and local governments. These laws and regulations include, but are not limited to, matters such as licensure, accreditation, government healthcare program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud and abuse. Recently, government activity has increased with respect to investigations and allegations concerning possible violations of fraud and abuse statues and regulations by healthcare providers. Violations of these laws and regulations could result in expulsion from government healthcare programs together with imposition of significant fines and penalties, as well as significant repayments for patient services billed. Compliance with these laws and regulations, specifically those related to the Medicare and Medicaid programs, can be subject to government review and interpretation, as well as regulatory actions unknown and not yet asserted at this time. Management believes that the Company is in substantial compliance with current laws and regulations.
Litigation
The Company is involved in various legal actions arising in the normal course of business. In consultation with legal counsel, management estimates that these matters will be resolved without material adverse effect on the Company’s financial position.
NOTE 15. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date of the Original Filing, and determined that there have been no events that have occurred that would require adjustments to our disclosures in the condensed consolidated financial statements.
(26)
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:
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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:
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:
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:
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.
|
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.
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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:
(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.
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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
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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.
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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.
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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.
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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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide this information.
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Item 4. Controls and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
Under supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of September 30, 2021. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls were not effective as of September 30, 2021, based on the material weaknesses identified below. In light of these material weaknesses, we performed additional analysis as deemed necessary to ensure that our financial statements were prepared in accordance with U.S. generally accepted accounting principles. Based on such analysis and notwithstanding the identified material weaknesses, management, including our Chief Executive Officer and Chief Financial Officer believe that the condensed consolidated financial statements included in this 10-Q/A fairly represent in all material respects our financial condition, results of operations and cash flows as at and for the periods presented in accordance with U.S. GAAP.
Material Weaknesses
As discussed in the Company's Amendment No. 1 to its Annual Report on Form 10-K for the year ended December 31, 2020 (the "2020 10-K"), a material weakness in the Company's internal control over financial reporting did not result in the proper classification of its previously issued warrants. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The warrants were previously classified as equity in the Company's balance sheets; after discussion and evaluation, taking into account consideration statements by the staff of the SEC, including our independent registered public accounting firm, we concluded that the warrants should be presented as liabilities with subsequent fair value remeasurement, which required a restatement of our financial statements for the year ended December 31, 2020. In addition, the Company is restating its previously filed consolidated financial statements as of and for the year ended December 31, 2021, as well as the quarterly condensed consolidated financial information for the 2021 interim period ended September 30, 2021 to correct classification of prepaid expenses and other assets.
In addition to the material weakness identified above, we identified a material weakness in our internal control over financial reporting related to an improper classification of the Earnout Shares which resulted in the restatement of our unaudited condensed consolidated financial statements for the three-month and year-to-date periods ended September 30, 2021, as contained in this Form 10-Q/A. As further described in Note 2 the unaudited Condensed Consolidated Financial Statements, the Earnout Shares were originally classified as equity from and after the Closing Date, and the Company subsequently determined in connection with the preparation of 2021 Annual report Form 10-K that (i) the Earnout shares should have been liability classified and measured at fair value prior to the achievement of the First Share Price Trigger on July 9, 2021, with changes in fair value recorded in profit (loss) for the period reported and (ii) following the achievement of the First Share Price Trigger, the remaining Earnout Shares should have been remeasured at fair value on July 9, 2021 with the change in fair value recorded in profit (loss) during the three months ended September 30, 2021. This control deficiency related to the interpretation and accounting of the obligation to issue the Earnout Shares resulted in us having to restate our unaudited condensed consolidated financial statements for the three-month and year-to-date periods ended September 30, 2021, and accordingly, management has determined that this control deficiency constitutes a material weakness.
We conclude to evaluate steps to remediate the material weaknesses. While we have processes to identify and appropriately apply applicable accounting requirements, we plan to enhance our system of evaluating and implementing the complex accounting standards that apply to our financial statements. Our plans at this time include providing enhanced access to accounting training, literature, research materials and documents and increased communication among our personnel and third-party professionals with whom we consult regarding the application of complex accounting applications. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects. For a discussion of management's consideration of the material weakness identified related to our accounting for a significant and unusual transaction related to the warrants we issued in connection with the July 2020 initial public offering, see Note 2, Restatement of Previously Issued Financial Statements to the financial statements in the 2020 10-K.
Changes in Internal Control over Financial Reporting
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As discussed elsewhere Report on Form 10-Q/A, we completed the Business Combination on June 8, 2021. Prior to the Business Combination, DFHT was a special purpose acquisition company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or other similar business combination with one or more target businesses, and CMG was a privately held limited liability company. Additionally, the Business Combination included the acquisition of IMC, and subsequent to the Closing Date, the Company acquired the SMA and DNF entities.
The Company’s operations prior to the Business Combination were materially different compared to the Company post-Business Combination. The design and implementation of internal control over financial reporting for the post-Business Combination Company has required and will continue to require significant time and resources from management and other personnel. Post consummation of the acquisitions, we began establishing standards and procedures at the acquired subsidiaries, controls over accounting systems and over the preparation of financial statements in accordance with generally accepted accounting principles to ensure that we have in place appropriate internal control over financial reporting at the acquired subsidiaries. We are continuing to integrate the acquired operations of each subsidiary into our overall internal control over financial reporting process.
We are in the process of implementing a new comprehensive enterprise resource planning (“ERP”) system on a company-wide basis, which is one of the systems used for financial reporting. The implementation of the ERP system involves changes to our financial systems and other systems and accordingly, necessitated changes to our internal control over financial reporting. These changes to the Company’s internal control over financial reporting that occurred during the most recent quarter ended September 30, 2021 have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
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PART II. – OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, CareMax may be involved in various legal proceedings and subject to claims that arise in the ordinary course of business. Although the results of litigation and claims are inherently unpredictable and uncertain, CareMax is not currently a party to any legal proceedings the outcome of which, if determined adversely to CareMax, are believed to, either individually or taken together, have a material adverse effect on CareMax’s business, operating results, cash flows or financial condition. Regardless of the outcome, litigation has the potential to have an adverse impact on CareMax because of defense and settlement costs, diversion of management resources, and other factors.
Item 1A. Risk Factors
Factors that could cause our actual results to differ materially from those in this Quarterly Report on Form 10-Q are any of the risks described in our Registration Statement on Form S-1, filed with the SEC on June 30, 2021, and the following risks. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations.
We have identified material weaknesses in our internal control over financial reporting and determined that our disclosure controls and procedures were ineffective as of December 31, 2021. If we are unable to remediate these material weaknesses, or if we identify additional material weaknesses in the future or otherwise fail to establish and maintain an effective system of internal control over financial reporting or adequate disclosure controls and procedures, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence, our reputation, our ability to raise additional capital, our business operations and financial condition and the trading prices of our securities.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that the information required to be disclosed by us in such reports is accumulated and communicated to our management, including our principal executive officer and principal financial officer or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
As discussed in the Company's Amendment No. 1 to its Annual Report on Form 10-K for the year ended December 31, 2020, a material weakness in the Company's internal control over financial reporting did not result in the proper classification of its previously issued warrants. The warrants were previously classified as equity in the Company's balance sheets; after discussion and evaluation, taking into account consideration statements by the staff of the SEC, including our independent registered public accounting firm, we concluded that these warrants should be presented as liabilities with subsequent fair value remeasurement, which required a restatement of our financial statements for the year ended December 31, 2020.
In addition to the material weakness identified above, we identified a material weakness in our internal control over financial reporting related to an improper classification of the 6,400,000 contingently issuable shares of Class A Common Stock issuable pursuant to the Business Combination Agreement (“Earnout Shares”). As previously disclosed in our Quarterly Reports on Form 10-Q/A for each of the three-month and year-to-date periods ended June 30, 2021 and September 30, 2021, respectively, the Earnout Shares were originally classified as equity from and after the Closing Date, and the Company subsequently determined that the Earnout Shares should have been liability classified and measured at fair value, with changes in fair value each period reported in earnings prior to July 9, 2021. This control deficiency related to the interpretation and accounting of the obligation to issue the Earnout Shares resulted in us having to restate our unaudited condensed consolidated financial statements for the three-month and year-to-date periods ended June 30, 2021 and September 30, 2021. In addition, the Company is restating its quarterly condensed consolidated financial information for the 2021 interim period ended September 30, 2021 to correct the classification of prepaid expenses and other assets. Accordingly, management has determined that these control deficiencies constitute a material weakness.
(51)
Our management and other personnel will need to devote a substantial amount of time to compliance initiatives applicable to public companies, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and the evaluation of the effectiveness of our internal control over financial reporting within the prescribed timeframe, as well as the remediation of the material weaknesses that we have identified. We may discover additional deficiencies in existing systems and controls that it may not be able to remediate in an efficient or timely manner. If we are unable to remediate these material weaknesses, or if we identify additional material weaknesses in the future or otherwise fail to establish and maintain an effective system of internal control over financial reporting or adequate disclosure controls and procedures, our ability to accurately record, process, and report financial information and, consequently, our ability to prepare financial statements within required time periods could be adversely affected. Failure to maintain effective internal control or adequate disclosure controls and procedures could result in a failure to comply with SEC rules and regulations, stock exchange listing requirements, and the covenants under our debt agreements, subject us to litigation, investigations or enforcement actions, negatively affect investor confidence in our financial statements, and adversely impact the trading price of our securities and ability to access capital markets. The defense of any such claims, investigations or enforcement actions could cause the diversion of the Company’s attention and resources and could cause us to incur significant legal and other expenses even if the matters are resolved in our favor.
We may face litigation and other risks as a result of the material weaknesses in our internal control over financial reporting.
As a result of the material weaknesses identified in our financial reporting and the restatement of certain of our financial statements, we face the potential for litigation or other disputes which may include, among others, claims invoking the federal and state securities laws, contractual claims or other claims arising from the restatement of our financial statements, material weaknesses in our internal control over financial reporting, and the preparation of our financial statements. As of the date of this Form 10-Q/A, we have no knowledge of any such litigation or dispute resulting from the material weaknesses in our internal control over financial reporting. However, we can provide no assurance that litigation or disputes will not arise in the future. Any such litigation or dispute, whether successful or not, could have a material adverse effect on our business, results of operations and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Information regarding all equity securities of the registrant sold by the Company during the period covered by this Report that were not registered under the Securities Act were included in a Current Report on Form 8-K filed by the Company, and therefore is not required to be furnished herein.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
The following exhibits are filed as part of, or incorporated by reference into, this Report.
No. |
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Description of Exhibit |
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(52)
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101.INS* |
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Inline XBRL Instance Document |
101.CAL* |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.SCH* |
|
Inline XBRL Taxonomy Extension Schema Document |
101.DEF* |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |
|
Inline XBRL Taxonomy Extension Labels Linkbase Document |
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* Filed herewith.
** Furnished herewith.
† Certain of the exhibits and schedules to this Exhibit have been omitted in accordance with Item 601(a)(5) of Regulation S-K. The Registrant agrees to furnish a copy of all omitted exhibits and schedules to the SEC upon its request.
+ Certain portions of this exhibit have been omitted pursuant to Item (601)(b)(10) of Regulation S-K
(53)
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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CareMax Inc. |
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Date: March 29, 2023 |
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/s/ Carlos de Solo |
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Name: |
Carlos de Solo |
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Title: |
President, Chief Executive Officer, and Director (Principal Executive Officer) |
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Date: March 29, 2023 |
|
/s/ Kevin Wirges |
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Name: |
Kevin Wirges |
|
Title: |
Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Principal Accounting Officer) |
(54)
1 Year Deerfield Healthcare Tec... Chart |
1 Month Deerfield Healthcare Tec... Chart |
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