CAREMAX, INC. Unless the context otherwise requires, references in this section to "CareMax ," "we," "us," "our," and the "Company" refers toCareMax, 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 financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K/A (the "Annual Report").
Forward-Looking Statements
This Annual 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 1A of this Annual Report under the caption "Risk Factors." Some of the risks and uncertainties we face include:
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the impact of the COVID-19 pandemic or any other pandemic, epidemic or outbreak
of an infectious disease in
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our ability to grow and manage growth profitably, maintain relationships with customers, compete within its industry and retain our key employees;
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our ability to integrate the businesses of CMG, IMC , SMA, DNF, Advantis and other acquisitions;
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our ability to complete acquisitions and to open new medical centers and the timing of such acquisitions and openings;
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the viability of our growth strategy, including both organic and de novo growth and growth by acquisition, and our ability to realize expected results, as well as our ability to access the capital necessary for such growth;
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our ability to attract new patients;
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the dependence of our revenue and operations on a limited number of key payors;
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the risk of termination, non-renewal or renegotiation of the Medicare Advantage ("MA") contracts held by the health plans with which we contract, or the termination, non-renewal or renegotiation of our contracts with those plans;
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the impact on our business from changes in the payor mix of our patients and potential decreases in our reimbursement rates;
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our ability to manage our growth effectively, execute our business plan, maintain high levels of service and patient satisfaction and adequately address competitive challenges;
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the impact of restrictions on our current and future operations contained in certain of our agreements;
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competition from primary care facilities and other healthcare services providers;
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competition for physicians and nurses, and shortages of qualified personnel;
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the impact on our business of reductions in Medicare reimbursement rates or changes in the rules governing the Medicare program, including the MA program;
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the impact on our business of state and federal efforts to reduce Medicaid spending;
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a shift in payor mix to Medicare payors as well as an increase in the number of Medicaid patients may result in a reduction in the average rate of reimbursement;
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our assumption under most of our agreements with health plans of some or all of the risk that the cost of providing services will exceed our compensation;
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risks associated with estimating the amount of revenues and refund liabilities that we recognize under our risk agreements with health plans;
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the impact on our business of security breaches, loss of data, or other disruptions causing the compromise of sensitive information or preventing us from accessing critical information;
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the impact of our existing or future indebtedness and any associated debt covenants on our business and growth prospects;
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the impact on our business of disruptions in our disaster recovery systems or management continuity planning;
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the potential adverse impact of legal proceedings and litigation;
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the impact of reductions in the quality ratings of the health plans we serve;
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our ability to maintain and enhance our reputation and brand recognition;
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our ability to effectively invest in, implement improvements to and properly maintain the uninterrupted operation and data integrity of our information technology and other business systems;
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our ability to obtain, maintain and enforce intellectual property protection for our technology;
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the potential adverse impact of claims by third parties that we are infringing on or otherwise violating their intellectual property rights;
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our ability to protect the confidentiality of our trade secrets, know-how and other internally developed information;
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the impact of any restrictions on our use of or ability to license data or our failure to license data and integrate third-party technologies;
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our ability to protect data, including personal health data, and maintain our information technology systems from cybersecurity breaches and data leakage;
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our ability to adhere to all of the complex government laws and regulations that apply to our business;
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our reliance on strategic relationships with third-parties to implement our growth strategy;
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the impact on our business if we are unable to effectively adapt to changes in the healthcare industry, including changes to laws and regulations regarding or affectingU.S. healthcare reform;
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that estimates of market opportunity and forecasts of market and revenue growth included in this Annual Report may prove to be inaccurate, if at all;
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our operating results and stock price may be volatile;
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risks associated with estimating the amount of revenues that we recognize under our risk agreements with health plans;
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our ability to navigate rules and regulations that govern our licensing and certification, as well as credentialing processes with private payors, before we can receive reimbursement for their services, and
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our ability to develop and maintain proper and effective internal control over financial reporting
Due to the uncertain nature of these factors, management cannot assess the impact of each factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Any forward-looking statement speaks only as of the date on which statement is made, and we undertake no obligation to update any of these statements or circumstances occurring after the date of this Annual Report. New factors may emerge, and it is not possible to predict all factors that may affect our business and prospects.
Our Business
CareMax currently operates 45 medical centers inFlorida , has recently opened two centers inMemphis, Tennessee and one inNew York for a total of 48 centers and plans to open a total of 15 additional 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's comprehensive, high touch approach to health care delivery is powered by its CareOptimize technology platform. CareOptimize is a proprietary end-to-end technology platform that aggregates data and analyzes that data using proprietary algorithms and machine learning to support more informed care delivery decisions and to focus care decisions on preventative chronic disease management and the social determinants of health.CareMax believes that CareOptimize is designed to drive better outcomes and lower costs. The CareOptimize technology platform also providesCareMax with a national reach beyondFlorida . As ofDecember 31, 2021 , the CareOptimize platform was used by approximately 20,000 providers in more than 30 states.CareMax has shifted from selling the CareOptimize platform to new outside customers for a software subscription fee and is instead focused on providing the software to 60 -------------------------------------------------------------------------------- affiliated practices of its managed services organization ("MSO") to further improve financial, clinical and quality outcomes from the affiliated providers. As of December of 2021, this MSO services more than 100 independent physician associations ("IPAs"). CarMax's medical centers offer 24/7 access to care through employed providers and provide a comprehensive suite of high-touch health care and social services to its patients, including primary care, specialty care, telemedicine, health & wellness, optometry, dental, pharmacy and transportation.CareMax's differentiated healthcare delivery model is focused on care coordination with vertically integrated ambulatory care and community-centric services. The goal ofCareMax is to intercede as early as possible to manage chronic conditions for its patient members in a proactive, holistic, and tailored manner to provide a positive influence on patient outcomes and a reduction in overall healthcare costs.CareMax specifically focuses on providing access to high quality care in underserved communities, with approximately 60% of its Medicare Advantage patients being dual-eligible (meaning eligible for both Medicare and Medicaid) and low-income subsidy eligible as ofDecember 31, 2021 . WhileCareMax's primary focus is providing care to Medicare eligible seniors who are mostly 65+ (79% of revenue for the twelve months endedDecember 31, 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 ofCareMax'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.
Comparability of Financial Results
OnJune 8, 2021 , we consummated the transactions contemplated by that certain Business Combination Agreement, datedDecember 18, 2020 (the "Business Combination Agreement"), by and amongDeerfield Healthcare Technology Acquisitions Corp. , aDelaware corporation now known asCareMax, Inc. ("DFHT").CareMax Medical Group, L.L.C. , aFlorida limited liability company ("CMG"), the entities listed in Annex I to the Business Combination Agreement (the "CMG Sellers"), IMC,IMC Holdings, LP , aDelaware limited partnership ("IMC Parent"), andDeerfield Partners , L.P pursuant to which, onJune 8, 2021 (the "Closing Date"), DFHT acquired 100% of the equity interests in 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 toCareMax, 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, CMG was treated as the acquiree for financial reporting purposes. The net assets of CMG 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 be 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$6.2 million in Property and Equipment,$34.1 million in amortizable intangible assets and$302.2 million in goodwill as ofDecember 31, 2021 , as compared to our balance sheet as ofDecember 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 our Class A common stock,$0.0001 par value per share ("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 Consolidated Financial Statements) and (iii) entered into a Credit Agreement (as amended, the "Credit Agreement), by and among the Company, Royal Bank of Canada, as Administrative Agent, Collateral Agent,Swing Line Lender and Issuing Bank ;RBC Capital Markets, LLC andTruist Securities, Inc. , as Syndication Agents, Joint Lead Arrangers and Joint Book Runners; and certain other banks and financial institutions serving as lenders. The Credit Agreement provides for credit facilities (collectively, the "Credit Facilities"), including (i) an 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 Consolidated Financial Statements - Credit Agreement). This Delayed Draw Term Loan was not drawn upon and matured onDecember 8, 2021 . Interest and other costs associated with the Credit Facilities are 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 then existing Loan Agreement, (the "Loan Agreement"), which was terminated on the Closing Date (See Note 7 to the Consolidated Financial Statements - CMG Loan Agreement). 61 -------------------------------------------------------------------------------- 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. OnJune 18, 2021 , we completed the acquisition of the assets of SMA (the "SMA Acquisition") (See Note 3 to the 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 ofJune 18, 2021 . The SMA Acquisition drove, among other things, increases of$178,000 in property and equipment,$9.4 million in amortizable intangible assets and$45.7 million in goodwill as ofDecember 31, 2021 , compared to our balance sheet as ofDecember 31, 2020 . The amortization of the acquired intangibles is expected to materially increase our noncash amortization expense for the foreseeable future. OnSeptember 1, 2021 , we completed the acquisition of the assets of DNF (the "DNF Acquisition") (See Note 3 to the Consolidated Financial Statements - Acquisition of DNF). The DNF Acquisition was accounted for as a business combination. Accordingly, the DNF assets acquired, including separately identifiable intangible assets, and liabilities assumed were recorded at their fair value as ofSeptember 1, 2021 . The DNF Acquisition drove, among other things, increases of$3.5 million in property and equipment,$15.3 million in amortizable intangible assets and$91.5 million in goodwill as ofDecember 31, 2021 , compared to our balance sheet as ofDecember 31, 2020 . The amortization of the acquired intangibles is expected to materially increase our noncash amortization expense for the foreseeable future. OnDecember 22, 2021 , we completed the acquisition of the assets of Advantis (the "Advantis Acquisition") (See Note 3 to the Consolidated Financial Statements - Acquisition of Advantis). The Advantis Acquisition was accounted for as a business combination. Accordingly, the Advantis assets acquired, including separately identifiable intangible assets were recorded at their fair value as ofDecember 22, 2021 . The Advantis acquisition drove, among other things, increases of$18,000 in Property and Equipment,$1.1 million in amortizable intangible assets, and$9.6 million in goodwill as ofDecember 31, 2021 , compared to our balance sheet as ofDecember 31, 2020 . The amortization of the acquired intangibles is expected to materially increase our noncash amortization expense for the foreseeable future. OnDecember 22, 2021 , we completed the acquisition of the assets ofBusiness Intelligence & Analytics LLC ("BIX") (the "BIX Acquisition") (See Note 3 to the Consolidated Financial Statements - Acquisition of BIX). The BIX Acquisition was accounted for as a business combination. Accordingly, the BIX assets acquired, including separately identifiable intangible assets were recorded at their fair value as ofDecember 22, 2021 . The BIX acquisition drove, among other things, increases$289,000 in amortizable intangible assets, and$4.8 million in goodwill as ofDecember 31, 2021 , compared to our balance sheet as ofDecember 31, 2020 . The amortization of the acquired intangibles is expected to materially increase our noncash amortization expense for the foreseeable future. The following discussion (except for pro-forma financial information) includes our results of operations for the twelve months endedDecember 31, 2021 , our results of operations include the full period for CMG, results of operations of IMC fromJune 8, 2021 throughDecember 31, 2021 , results of operations from SMA fromJune 18, 2021 throughDecember 31, 2021 , results of operations of DNF fromSeptember 1, 2021 throughDecember 31, 2021 , and results of operations of Advantis and BIX fromDecember 22, 2021 throughDecember 31, 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
Our Patients
As discussed above, the Company partners with MA, Medicaid, and commercial insurance plans. WhileCareMax currently services mostly MA patients, we also accept Medicare Fee-for-Service 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 onJanuary 1, 2020 and is based upon estimates which we believe are reasonable: Patient Count as of* Mar 31, 2020 Jun 30, 2020 Sep 30, 2020 Dec 31, 2020 Mar 31, 2021 Jun 30, 2021 Sep 30, 2021 Dec 31, 2021 Medicare 15,500 15,500 16,500 16,500 16,500 21,500 26,500 33,500 Medicaid 12,500 22,500 22,500 21,000 23,000 23,500 24,500 28,000 Commercial 15,500 13,500 15,000 14,500 15,000 17,500 17,500 21,500 Total Count 43,000 51,500 54,000 52,000 54,500 62,500 68,500 83,500
*Figures may not sum due to rounding
BecauseCareMax 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 62 -------------------------------------------------------------------------------- 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* Mar 31, 2020 Jun 30, 2020 Sep 30, 2020 Dec 31, 2020 Mar 31, 2021 Jun 30, 2021 Sep 30, 2021 Dec 31, 2021 Medicare 15,500 15,500 16,500 16,500 16,500 21,500 26,500 33,500 Medicaid 4,200 7,400 7,500 7,000 7,600 7,900 8,100 9,400 Commercial 5,100 4,600 5,000 4,900 5,100 5,900 5,800 7,200 Total MCREM 24,800 27,500 29,000 28,400 29,200 35,300 40,400 50,100
*Figures may not sum due to rounding
Medicare Advantage Patients
As ofDecember 31, 2021 ,CareMax had approximately 33,500 MA patients of which 86% were in value-based, or risk-based, agreements. This meansCareMax has been selected as the patient's primary care provider and is financially responsible for all of the patient's medical costs For these patients,CareMax is attributed an agreed percentage of the premium the MA plan receives from theCenters for Medicare and Medicaid Services ("CMS") (typically a substantial majority of such premium given the risk assumed by the Company). 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.
Medicaid Patients
As ofDecember 31, 2021 ,CareMax had approximately 28,000 Medicaid patients of which approximately 93% were in value-based contracts. Using the MCREM metric, the level of support required to manage these Medicaid patients equates to that of approximately 9,400 Medicare patients. InFlorida , most Medicaid recipients are enrolled in the Statewide Medicaid Managed Care program. Similar to the risk it takes with Medicare,CareMax is attributed an agreed percentage of the premium the Medicaid plan receives fromFlorida's Agency for Health Care Administration ("AHCA") (typically a substantial majority of such premium given the risk assumed by the Company). 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.
Commercial Patients
As ofDecember 31, 2021 ,CareMax managed approximately 21,500 commercial patients of which 29% were under a value-based arrangement that provided upside only financial incentives for quality and utilization performance. Using the MCREM metric, the level of support required to manage these commercial patients equates to that of approximately 7,200 Medicare patients.
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. Contracts with Payors Our economic model relies on its capitated partnerships with payors which manage and market MA plans acrossthe United States .CareMax has established strategic value-based relationships with twelve 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 ofJanuary 1, 2020 , our three largest payor relationships were Anthem, Centene, and United, which generated 43%, 17%, 15% of our revenue in the twelve months endedDecember 31, 2021 , respectively, and 51%, 16%, and 17% of our revenue in the twelve months endedDecember 31, 2020 , respectively. These existing contracts and relationships with our partners' and their understanding of the value of theCareMax model reduces the risk of entering into new markets asCareMax typically seeks to have payor contracts in place before entering a new market. Maintaining, supporting, and growing these relationships, particularly asCareMax enters new markets, is critical to our long-term success. We believeCareMax'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 helps ensures our continued success with our payor partners. 63 --------------------------------------------------------------------------------
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 64% of our total operating expenses for the twelve months endedDecember 31, 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 when the number of patients at a center expands.
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 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.
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, platform, 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 theSEC , 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 ofFlorida 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. 64 --------------------------------------------------------------------------------
Key Business Metrics
In addition to our financial information which conforms with generally accepted accounting principles inthe 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 Annual 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 theSEC . Some of the financial information and data contained in this Annual 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. 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 in connection with GAAP results. You should review the Company's audited financial statements, which included in this Annual Report. 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 18 months after opening, discontinued operations, acquisition costs and other costs that are considered one-time in nature as determined by management. Additionally, Adjusted EBITDA presented on a pro forma basis gives effect to the acquisitions ofIMC and Care Holdings Group, LLC , which owned Care Optimize, as if they had occurred in historical periods, which does not necessarily reflect what the Company's Adjusted EBITDA would have been had the acquisitions occurred on the dates indicated. 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 65 -------------------------------------------------------------------------------- on a supplemental basis. Please review the reconciliation of net (loss) income to EBITDA and Adjusted EBITDA below and not rely on any single financial measure to evaluate the Company's business: Twelve months endedDecember 31, 2021 and 2020 Reconciliation to Adjusted EBITDA For the Twelve Months Ended December 31, $ in thousands 2021 2020 Y/Y Change Net (loss) income$ (6,675 ) $ 7,572$ (14,246 ) GAAP Pro Forma Adjustments (8,916 ) (1,629 ) (7,287 ) Pro Forma Net (loss)/income (15,590 ) 5,943 (21,533 ) Interest expense 6,263 6,630 (368 ) Depreciation and amortization 17,583 13,544 4,039 Income tax provision 159 - 159 Gain on remeasurement of warrant liabilities (20,757 ) - (20,757 ) Gain on remeasurement of contingent earnout liabilities (5,794 ) - (5,794 ) Loss on disposal of fixed assets, net 50 - 50 Loss on extinguishment of debt 534 451 83 Other expenses (823 ) (912 ) 89 EBITDA (18,376 ) 25,657 (44,033 ) Other Adjustments Non-recurring expenses 19,955 5,829 14,126 Acquisition costs 9,169 3,016 6,153 Stock based compensation 1,341 - 1,341 De novo losses 1,232 578 654 Discontinued operations (1 ) (48 ) 47 Adjusted EBITDA$ 13,321 $ 35,033 $ (21,712 )
*Pro Forma figures give effect to the Business Combinations of
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 occurred onJanuary 1, 2020 , and are based upon estimates which we believe are reasonable. Non-GAAP Operating Metrics Patient & Platform Contribution Mar 31, 2020 Jun 30, 2020 Sep 30, 2020 Dec 31, 2020 Mar 31, 2021 Jun 30, 2021 Sep 30, 2021 Dec 31, 2021 Centers 21 21 22 24 24 34 40 45 Markets 1 1 1 1 1 2 3 4 Patients (MCREM) 24,800 27,500 29,000 28,400 29,200 35,300 40,400 50,100 At-risk 84.8 % 86.7 % 85.6 % 87.7 % 87.0 % 84.1 % 87.2 % 79.3 % Platform Contribution ($, Millions) $ 14.1 $ 18.1 $ 15.5 $ 17.9 $ 14.7 $ 8.2 $ 11.0 $ 16.0
Note: In prior filings, management had defined "markets" as states instead of Metropolitan Statistical Areas ("MSA's"). 2021 figures have been re-cast to reflect this change from states to MSA's.
Centers
We define our centers as those primary care medical 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 and at-risk 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
66
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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 twelve months ended December 31, 2021 was
impacted by approximately $23.1 million of direct non-recurring COVID-19 costs,
consisting of a decrease in revenues due to our inability to adequately document
the acuity of our patients and an increase in costs related to COVID-19 claims.
While we utilized telehealth to document the health conditions of our patients
and increased our efforts to return our patients to our centers for in-person
visits during the latter half of 2020 and the beginning of 2021, based on the
difference between the risk adjusted PPPM revenue expected by our historical
models and the actual risk adjusted PPPM rates in 2021, we believe our revenue
was negatively impacted by approximately $11.5 million in 2021 due to our
inability to adequately document the acuity of our patients in 2020. In the
event we were unable to adequately document the acuity of our patients for 2021
and in subsequent years, our revenues and financial performance could be
significantly affected.
Additionally, for the twelve months ended
Management cannot accurately predict the future impacts of COVID-19 due to the uncertainty surrounding future spikes in COVID-19 cases or new variants that may emerge in the future.
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 MSO 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 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 byFlorida'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, and may periodically shift premiums from health plans with lower acuity members to health plans with higher acuity members. 67
-------------------------------------------------------------------------------- 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, wherebyCareMax is not liable for medical costs in excess of the fixed payment. Capitated revenues are typically prepaid monthly toCareMax 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, pharmacy revenue and revenue generated from CareOptimize are reported in other revenue. See "-Critical Accounting Policies and Estimates-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 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 that contract with our MSO 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 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 withCareMax 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, 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. 68 --------------------------------------------------------------------------------
Other Income (Expense)
Interest Expense. Interest expense consists primarily of interest payments on our outstanding borrowings (see Note 7 -to the Consolidated Financial Statements - Long Term Debt). Results of Operations
Twelve Months Ended
The following table sets forth our consolidated statements of operations data
for the periods indicated:
For the Twelve Months Ended December 31,
$ in thousands 2021 2020 $ Change % Change
Revenue
Medicare risk-based revenue $ 233,282 $ 103,051 $ 130,231 126.4 %
Medicaid risk-based revenue 46,493 - 46,493
Other revenue 15,987 370 15,617 4220.9 %
Total revenue 295,762 103,421 192,341 186.0 %
Operating expense
External provider costs 206,747 66,050 140,697 213.0 %
Cost of care 57,566 17,373 40,193 231.4 %
Sales and marketing 4,955 1,067 3,888 364.4 %
Corporate, general and administrative 40,579 7,748 32,831 423.7 %
Depreciation and amortization 13,216 1,501 11,715 780.5 %
Acquisition related costs 1,522 - 1,522
Total costs and expenses 324,585 93,739 230,846 246.3 %
Operating (loss) income $ (28,822 ) $ 9,682 $ (38,504 ) (397.7 )%
Interest expense, net (4,492 ) (1,659 ) (2,833 ) 170.8 %
Gain on remeasurement of warrant 20,757 - 20,757
liabilities
Gain on remeasurement of contingent 5,794 -
5,794
earnout liabilities Loss on disposal of fixed assets, net (50 ) - (50 ) Gain (loss) on extinguishment of 1,630 (451 ) 2,081 (461.3 )% debt, net Other (expense), net (1,333 ) - (1,333 ) Income/(loss) before income taxes$ (6,516 ) $ 7,572 $ (14,088 ) (186.1 )% Income tax provision 159 - 159 Net (loss)/income$ (6,675 ) $ 7,572 $ (14,247 ) (188.2 )% Net loss attributable to $ -$ (29 ) $ - 0.0 % non-controlling interest Net (loss) income attributable to$ (6,675 ) $ 7,601 $ (14,276 ) (187.8 )% controlling interest
*Figures may not sum due to rounding
Medicare Risk-Based Revenue. Medicare risk-based revenue was$233.3 million for the twelve months endedDecember 31, 2021 , an increase of$130.2 million , or 126.4%, compared to$103.1 million for the twelve months endedDecember 31, 2020 . This increase was primarily driven by a 174% increase in the total number of at-risk patients from the acquisitions of IMC, SMA, and DNF, partially offset by a 17% reduction in PPPM rates, driven by member mix and a decrease in risk adjustment payments due to our inability to adequately document the acuity of our patients in 2020 due to COVID-19. Medicaid Risk-Based Revenue. Medicaid risk-based revenue was$46.5 million for the twelve months endedDecember 31, 2021 . Medicaid risk-based revenue relates entirely to patients that were acquired in the Business Combination with IMC. Other Revenue. Other revenue was$16.0 million for the twelve months endedDecember 31, 2021 , an increase of$15.6 million , or 4,221%, compared to$0.4 million for the twelve months endedDecember 31, 2020 . The increase is almost entirely related to revenue from patients that were acquired in the Business Combination with IMC. External Provider Costs. External provider costs were$206.7 million for the twelve months endedDecember 31, 2021 , an increase of$140.7 million , or 213.0%, compared to$66.1 million for the twelve months endedDecember 31, 2020 . The increase was primarily due to a 377% increase in total at-risk MCREM patients that were acquired in the Business Combination with IMC and the additional costs attributable to claims with a COVID-19 diagnosis. Cost of Care Expenses. Cost of care expenses were$57.6 million for the twelve months endedDecember 31, 2021 , an increase of$40.2 million or 231.4%, compared to$17.4 million for the twelve months endedDecember 31, 2020 . The increase was primarily due to additional membership growth from the IMC, SMA, and DNF acquisitions and the reopening of our wellness centers. 69 -------------------------------------------------------------------------------- Sales and Marketing Expenses. Sales and marketing expenses were$5.0 million for the twelve months endedDecember 31, 2021 , an increase of$3.9 million or 364.4%, compared to$1.1 million for the twelve months endedDecember 31, 2020 . The increase was primarily due to the increase in sales staff resulting from acquisitions and the recommencing of sales and community activities in 2021. Corporate, general and administrative. Corporate, general and administrative expense was$40.6 million for the twelve months endedDecember 31, 2021 , an increase of$32.8 million , or 423.7%, compared to$7.7 million for the twelve months endedDecember 31, 2020 . The increase was primarily from the acquired overhead related to IMC, SMA, DNF, and Advantis as well as costs associated with becoming a publicly traded company. Depreciation and amortization. Depreciation and amortization expense was$13.2 million for the twelve months endedDecember 31, 2021 , an increase of$11.7 million , or 780.5%, compared to$1.5 million for the twelve months endedDecember 31, 2020 . This was due to amortization of intangible assets purchased in the IMC, SMA, and DNF acquisitions. Interest expense, net. Net interest expense was$4.5 million for the twelve months endedDecember 31, 2021 , an increase of$2.8 million , or 170.8%, compared to$1.7 million for the twelve months endedDecember 31, 2020 . This was due to the increased borrowings under the Credit Facilities. Acquisition related costs. Acquisition related costs were$1.5 million for the twelve months endedDecember 31, 2021 . This cost was driven primarily by the acquisitions of IMC, DNF, SMA, Advantis, and BIX. Change in fair value of derivative warrant liabilities. We recorded a gain of$20.8 million for the twelve months endedDecember 31, 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 for the twelve months endedDecember 31, 2021 , as a result of a reduction in the fair value of contingent earnout liabilities.
Gain on extinguishment of debt. We recorded a gain of
Other income (expense), net. We recorded$1.3 million in other expenses, net for the twelve months endedDecember 31, 2021 , resulting primarily from the payment of franchise taxes, miscellaneous corporate expenses, and research and development costs associated with CareOptimize.
Liquidity and Capital Resources
Overview
As ofDecember 31, 2021 , we had cash on hand of$47.9 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 centers, which we expect to require significant capital expenditures, including lease and construction expenses. We may be required to seek additional equity or debt financing, in addition to cash 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, and amounts available to us under our agreement with Anthem, each as described below 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 and other agreements. 70 --------------------------------------------------------------------------------
The Impact of COVID-19
As further detailed above in "Impact of COVID-19", we estimate our performance during the twelve months endedDecember 31, 2021 has been impacted by approximately$23.1 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 Loan to finance the Business Combination and related transaction costs. As ofDecember 31, 2021 , we had approximately$35.4 million available under the Credit Facilities, representing$40.0 million of total capacity under the Revolving Credit Facility, net of$4.6 million of 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 Consolidated Financial Statements - Long Term Debt). The Revolving Credit Facility allows up to$40.0 million to be drawn, less outstanding Letters of Credit, in order to finance working capital, make capital expenditures, finance permitted acquisitions and fund general corporate purposes. The Company's previous$20.0 million Delayed Draw Loan expired undrawn on the six month anniversary of the Closing Date, orDecember 8, 2021 .
Anthem Collaboration Agreement
In connection with our collaboration agreement with Anthem, which was announced in August of 2021, we plan to open approximately 50 centers across eight priority states as part of our de novo strategy to open new centers in additional markets. Anthem has agreed to provide debt financing of up to$1 million for each new center opened in partnership with Anthem. We intend to use such funds to partially offset the costs of opening new medical centers in connection with our de novo growth strategy.
Cash Flows
The following table summarizes our cash flows for the periods presented:
(in thousands) Twelve Months Ended
2021 2020
Net cash (used in)/provided by operating activities
(316,579 ) (6,942 )
Net cash provided by financing activities 383,418 2,123
Operating Activities. Net cash used in operating activities for the twelve months endedDecember 31, 2021 was$23.9 million , compared to$5.3 million provided by operating activities for the twelve months endedDecember 31, 2020 , an increase of$29.2 million . The primary driver of the change is due to the net loss from operations of$12.2 million reported for the twelve months endedDecember 31, 2021 , compared to the net income from operations of$7.5 million reported for the twelve months endedDecember 31, 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 twelve months endedDecember 31, 2021 was$316.3 million compared, to$6.9 million for the twelve months endedDecember 31, 2020 . The use of funds in the twelve months endedDecember 31, 2021 consisted of$309.4 million used in acquisitions, including the IMC Acquisition, SMA Acquisition, DNF Acquisition, Advantix Acquisition, and BIX Acquisition, as well as$4.0 million for equipment and other fixed asset purchases. The use of funds in the twelve months endedDecember 31, 2020 consisted primarily of$2.6 million for acquisitions of businesses and$2.1 million for equipment and other fixed asset purchases. Financing Activities: Net cash provided by financing activities for the twelve months endedDecember 31, 2021 was$383.4 million compared to$2.1 million during the twelve months endedDecember 31, 2020 . Net cash provided by financing activities for the twelve months endedDecember 31, 2021 was primarily related to the Business Combination, and consisted of$125.0 million of borrowings from the borrowings under the Credit Facilities,$415.0 million for the issuance and sale of Class A Common Stock, partially offset by cash used in the consummation of the reverse recapitalization of$108.4 million , repayment of borrowings, including all outstanding borrowings under the Loan Agreement, of$27.7 million , equity issuance costs of$12.5 million , payment of deferred financing costs of$7.4 million and payment of debt prepayment penalties of$487,000 related to the early repayment of borrowings under the Loan Agreement. 71 -------------------------------------------------------------------------------- Net cash provided by financing activities for the twelve months endedDecember 31, 2020 consisted of$4.1 million of borrowings under a legacy revolving loan commitment,$2.2 million of borrowings from the PPP Loans, partially offset by member distributions and repayments of debt under the Loan Agreement.
Contractual Obligations and Commitments
Construction in progress atDecember 31, 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$500,000 and an estimated opening in 2022.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of
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 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 "to the Consolidated Financial Statements - Summary of Significant Accounting Policies" for more detailed information regarding our critical accounting policies.
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
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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 December 31, 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. The Business Combination acquisition of IMC and the acquisitions of SMA, DNF, Advantis and BIX were accounted for under ASC 805. Pursuant to ASC 805, we were (and in the case of IMC, CMG was) determined to be the accounting acquirer. Refer to Note 3 to the Consolidated Financial Statements - Acquisitions for more information. In accordance with the acquisition method, we recorded the fair value of assets acquired and liabilities assumed from IMC, SMA, DNF, Advantis, and BIX. The allocation of the consideration to the assets acquired and liabilities assumed is based on various estimates. As ofDecember 31, 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.
Intangible assets consist primarily of risk-based contracts acquired through business acquisitions.Goodwill represents the excess of consideration transferred in excess of 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. The Company's policy is to conduct the annual impairment testing for goodwill and indefinite-lived intangibles at the reporting unit level. 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. In performing this "Step 0", management analyzed changes in macroeconomic conditions related to the spread of the Omicron variant of COVID-19 and significant 73 -------------------------------------------------------------------------------- changes in the capital markets in fourth quarter 2021. Management concluded that it was not more likely that not that the fair value of the reporting unit was greater than its carrying value. Based on this, management engaged a 3rd party valuation specialist to provide a valuation as of as ofDecember 31, 2021 of the reporting unit as prescribed in ASC 350-20-35-3C. Based on these factors, the Company concluded that it was necessary to perform a quantitative assessment of the reporting unit's goodwill. The results of the quantitative assessment noted that the fair value of the goodwill and intangible assets of the Company were in excess of the carrying value. There was no goodwill impairment recorded during the twelve months endedDecember 31, 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 four to seven 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 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 "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. DFHT issued 5,791,667 common stock warrants in connection with our initial public offering (2,875,000) and a simultaneous 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 usingMonte-Carlo simulations at each measurement date.
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 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 ofDecember 31, 2021 andDecember 31, 2020 . The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense.
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