UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________
FORM 10-Q
__________________________________________
For the quarterly period ended September 30, 2023
or
For the transition period from ____________ to
Commission File Number: 001-39289
__________________________________________
(Exact name of registrant as specified in its charter)
__________________________________________
(State or other jurisdiction of incorporation or organization)
(Address of principal executive offices)
(IRS Employer Identification No.)
(Zip Code)
(855 ) 226-6633
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Non-accelerated filer ☐
Accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 9, 2023 the registrant had 2,887,608 shares of Class A common stock outstanding and 2,518,894 shares of Class B common stock outstanding. Share amounts reflect the 1-for-100 Reverse Stock Split that the Company completed on November 3, 2023.
Table of Contents
| Page | |||||
PART I FINANCIAL INFORMATION | |||||
| PART II. OTHER INFORMATION | |||||
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements relate to future events and involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and could materially affect actual results, performance or achievements. Such forward-looking statements include, without limitation, our anticipated performance, operations, financial strength, potential, and prospects for long-term shareholder value creation, our anticipated results of operations, including our business strategies, our projected costs, prospects and plans, and other aspects of our operations or operating results. These forward-looking statements generally can be identified by phrases such as “will,” “expects,” “anticipates,” “believes,” “foresees,” “forecasts,” “plans,” “intends,” “estimates” or other words or phrases of similar import, including, without limitation:
i.our ability to achieve or maintain profitability;
ii.our expectations regarding executing our business plan and strategies, such as (a) our pursuing several initiatives designed to improve its profitability, liquidity, cash flow and net cash, such as controlling and reducing operating expenses, limiting capital expenditures, selling assets and operations and exiting certain markets, with efforts to reduce operating expenses including reducing permanent staff, lowering its third party medical costs through negotiations with payors and restructuring contractual arrangements with payor and specialty networks, consolidating underperforming owned medical centers and terminating underperforming affiliate partnerships, delaying renovations and other capital projects and significantly reducing all other nonessential spending; (b) shifting our strategic direction, including the following measures, among others: (i) focusing our membership base towards Medicare Advantage and ACO Realizing Equity, Access, and Community Health ("ACO REACH") and Medicare patients under Accountable Care Organizations ("ACO") and improving patient engagement; (ii) selling certain assets and operations and exiting our Puerto Rico operations by the beginning of 2024; and (iii) performing a strategic review of our Medicaid business in Florida, pharmacy assets and other specialty practices; and (c) our plans to pursue a process to identify interest in the sale of the Company or all or substantially all of its assets;
iii.our plans to achieve our expected business and financial results, including patient membership objectives, targeted medical claims expense ratios, estimated reimbursement rates, estimated revenues, estimated gross margins, and estimated cost levels, such as our plans to significantly reduce our investments in de novo medical centers in 2023;
iv.our expectations regarding the impact of changes in applicable laws, rules or regulations, including with respect to health plans and payors and our relationships with such plans and payors, and provisions that impact Medicare and Medicaid programs;
v.our expectations regarding our sources and uses of cash and liquidity, such as (a) our expectation that our existing cash position, along with our expected cash generation through operations and our CS Revolving Line of Credit will not be sufficient to fund our operating and capital expenditure requirements through at least the next 12 months from the date of issuance of our unaudited condensed consolidated financial statements included in this Q3 2023 Form 10-Q; (b) our expectation that our net cash used in investing activities will be less in 2023 due to a significant reduction in spending on de novo medical centers; and (c) our expectation that in 2023, we will incur approximately $81 million in cash interest payments (which excludes approximately $19 million of non-cash PIK interest under the 2023 Term Loan) and approximately $15 million in capital expenditures;
vi.our expectations regarding the outcome of any pending legal or regulatory proceedings; such as our (a) expectation that we have meritorious defenses to the allegations in the lawsuit captioned Alberto Gonzalez v. Cano Health, Inc. f/k/a Jaws Acquisition Corp., et al. (No. 1:22-cv-20827) and our plans to vigorously defend against such action; and (b) our expectation that the resolution of various other asserted and unasserted potential claims encountered in the normal course of business will not have a material effect on our consolidated financial position, results of operations or cash flows;
ii
vii.our estimates and judgments regarding our various tax positions, including regarding our deferred tax assets, our belief that no tax uncertainties exist based on analyzing our filing positions in the Federal, State, local and foreign jurisdictions where we are required to file income tax returns for all open tax years and our belief that we have adequately provided for any reasonably foreseeable outcomes related to the IRS tax examination of our income tax return for the year ended December 31, 2020 and that any settlement related thereto will not have a material adverse effect on our consolidated financial statements;
viii.our expectations regarding our plan to further restructure our operations to streamline and simplify the organization to improve efficiency and reduce costs, including workforce reductions, and the expected reduction in our selling, general and administrative costs in future periods compared to current levels, including our expectation that our restructuring actions taken in the third quarter of 2023 are expected to yield approximately $65 million of annualized cost reductions, which began in the third quarter of 2023 and through the end of 2024;
ix.the Company’s expectations regarding the Reverse Stock Split, such as the Company’s belief that the Reverse Stock Split will increase the price per share of the Company’s Class A Common Stock and thus enable it to regain compliance with the price criteria of Section 802.01C of the NYSE Listed Company Manual (the “Listing Rule”), as well as to allow the Company’s common stock to be more attractive to a broader range of investors; and
x.the Company’s expectations and beliefs regarding its internal control over financial reporting, including its being committed to maintaining a strong internal control environment, its belief that it has made significant progress toward remediating the underlying causes of the material weakness in its internal control in financial reporting as described in this Q3 2023 Form 10-Q and its belief that its remediation efforts will be effective in remediating this material weakness.
These forward-looking statements are based on information available to us at the time of this report and our current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known or unknown factors, and it is impossible for us to anticipate all factors that could affect our actual results. It is uncertain whether any of the events anticipated by our forward-looking statements will transpire or occur, or if any of them do, what impact they will have on our results of operations and financial condition. Important risks and uncertainties that could cause our actual results and financial condition to differ materially from those indicated in our forward-looking statements include, among others, changes in market or industry conditions, changes in the regulatory environment, competitive conditions, and/or consumer receptivity to our services; changes in our strategy, future operations, prospects and plans; developments and uncertainties related to the Direct Contracting Entity program; our ability to realize expected financial results, including with respect to patient membership, total revenue and earnings; our ability to predict and control our medical cost ratio; our ability to grow market share in existing markets and continue our growth; our ability to integrate our acquisitions and achieve desired synergies; our ability to maintain our relationships with health plans and other key payors; our future capital requirements and sources and uses of cash, including funds to satisfy our liquidity needs; our ability to attract and retain members of management and our Board of Directors; and/or our ability to recruit and retain qualified team members and independent physicians.
iii
Actual results may also differ materially from such forward-looking statements for a number of other reasons, including those set forth in our filings with the SEC, including, without limitation, the risk factors identified in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 15, 2023, as amended by our Annual Report on Form 10-K/A, filed with the SEC on April 7, 2023 (the “2022 Form 10-K”), as well as our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K that we have filed or will file with the SEC during 2023 (which may be viewed on the SEC’s website at http://www.sec.gov or on our website at http://www.investors.canohealth.com/ir-home), as well as reasons including, without limitation:
i.unexpected developments that adversely impact our ability to achieve or maintain profitability, such as due to (a) less than anticipated capacity utilization at our medical centers; (b) higher than expected costs and expenses; (c) less than anticipated growth in revenues, Adjusted EBITDA margins and/or cash flows; (d) difficulties and/or delays in improving our operational execution, enhancing our cost discipline, and/or achieving positive free cash flow, such as due to a broad recessionary economic environment, higher interest rates and/or a higher inflationary environment; (e) our inability to predict changes to the Medicare Advantage, ACO REACH and ACO programs as it relates to benchmarks and shared savings;
ii.unexpected developments that adversely impact our ability to execute our business plan and strategies, such as due to (a) unexpected changes in the payor mix of our patients and potential decreases in our reimbursement rates; (b) unexpected developments with respect to the renegotiation, non-renewal or termination of capitation agreements with health plans; (c) difficulties and/or delays in procuring sufficient space on terms that are acceptable to us or that the costs of procuring and outfitting such space becomes uneconomical, such as due to the prevailing difficult conditions in the global supply chain environment; (d) less than expected consumer acceptance of our services and offerings and/or less than expected member retention rates; (e) greater than anticipated competition in our industry, less than anticipated advantages of our services, products and technology over competing services, products and technology existing in the market, and other competitive factors, including with respect to technological capabilities, cost and scalability; (f) difficulties or delays in exiting certain market and/or selling the Company or all or substantially all of its assets, such as due to tightness in the credit markets, higher inflation or other factors, regulatory disruptions or delays and/or securing third party agreements and approvals; (g) unexpected developments that adversely impact our ability to execute our plan to identify opportunities to maximize shareholder value, including the sale of the Company, such as due to our inability to consummate one or more transactions, whether due to higher interest rates, regulatory restrictions or other market factors; and/or (h) possible actions that vendors and other third parties that we deal with may take to impose enhanced credit controls that effectively increase our cost base or make it difficult for us to maintain services and supplies required to conduct business, as well as unexpected developments with respect to the shift in our strategic direction that could adversely affect our plans to reduce our costs and expenses and/or generate additional sources of liquidity, such as, among other things, our inability, in whole or in part to complete one or more asset sales and/or negotiate for better payment terms and conditions, such that we are not unable to achieve positive financial performance on an acceptable timeline; and/or less than expected benefits from and/or higher than expected costs and expenses related to our restructuring program, such as delays in realizing or less than the expected cost reductions;
iii.unexpected developments that adversely impact our ability to achieve our expected financial results, such as due to (a) unexpected changes in anticipated Medicare reimbursement rates or changes in the rules governing the Medicare program; (b) unexpected changes in reimbursements by third-party payors and payments by individuals; (c) unexpected changes in Medicare’s risk adjustment payment system; (d) unexpected developments with respect to our estimates of revenues and refund liabilities that we recognize under our risk agreements with health plans; and/or (e) unexpected developments with respect to our estimates about our third-party medical costs (including incurred but not report medical service accruals), including our expectation that our third-party medical costs will increase given the healthcare spending trends within the Medicare population;
iv.unanticipated changes in laws, rules and/or regulations, such as those that result in less than expected payments from health plans and other payors;
iv
v.less than anticipated sources of liquidity, such as due to (a) delays in or our inability to complete non-core asset sales, in whole or in part; (b) unanticipated demands on our available sources of cash; (c) tightness in the credit or M&A markets; (d) unexpected changes in our future capital requirements which depend on many factors, including our growth rate, medical expenses and/or our review of all aspects of our value-based care platform;
vi.unexpected developments regarding the outcome of any pending legal or regulatory proceedings;
vii.unexpected developments impacting our tax positions, such as our deferred tax assets not being realized in future periods in expected amounts, which could result in adjustments to our valuation allowances and provision for income taxes and/or unexpected developments in our tax audit;
viii. less than expected benefits from and/or higher than expected costs and expenses related to our restructuring program, such as delays in realizing or less than the expected cost reductions;
ix.our experiencing delays or difficulties in, and/or unexpected or less than anticipated results from its efforts to regain compliance with the NYSE Listing Rule, whether due to difficulties in implementing the Company’s business strategy, such as resulting from less than expected liquidity and/or difficulties and/or delays in consummating one or more transactions, in whole or in part, to sell all or part of the Company and/or the impact of future decreases in the price of shares of the Company’s Class A Common Stock due to, among other things, the consummation of the Reverse Stock Split, our inability to make our stock more attractive to a broader range of investors or an inability to increase the stock price in an amount sufficient to satisfy compliance with the NYSE's Listing Rule; and/or
x.difficulties, delays or unanticipated internal control deficiencies or weaknesses that could affect the Company’s plans to remediate the material weakness that it identified in its internal control over financial reporting as described in this Q3 2023 Form 10-Q or difficulties or delays in completing the remediation.
For a detailed discussion of other risks and uncertainties that could cause our actual results to differ materially from those expressed or implied by the forward-looking statements, please refer to our risk factor disclosure included in our filings with the SEC, including, without limitation, our 2022 Form 10-K. Investors should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties. Factors other than those listed above could also cause our results to differ materially from expected results. Forward-looking statements speak only as of the date they are made and, except as required by law, we undertake no obligation or duty to publicly update or revise any forward-looking statement, whether to reflect actual results of operations; changes in financial condition; changes in general U.S. or international economic, industry conditions; changes in estimates, expectations or assumptions; or other circumstances, conditions, developments or events arising after the issuance of this report. Additionally, the business and financial materials and any other statement or disclosure on or made available through our websites or other websites referenced herein shall not be incorporated by reference into this report.
v
CANO HEALTH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| (in thousands, except share and per share data) | September 30, 2023 | December 31, 2022 | ||||||||||||
| Assets | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash, cash equivalents and restricted cash | $ | $ | ||||||||||||
| Accounts receivable, net of unpaid service provider costs | ||||||||||||||
| Prepaid expenses and other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Property and equipment, net | ||||||||||||||
| Operating lease right-of-use assets | ||||||||||||||
| Goodwill | ||||||||||||||
| Payor relationships, net | ||||||||||||||
| Other intangibles, net | ||||||||||||||
Other assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
Liabilities and stockholders' deficit | ||||||||||||||
| Current liabilities: | ||||||||||||||
Accounts payable and accrued expenses (Related parties comprised $ | $ | $ | ||||||||||||
| Current portion of notes payable, net of debt issuance costs | ||||||||||||||
| Current portion of finance lease liabilities | ||||||||||||||
| Current portions due to sellers | ||||||||||||||
| Current portion of operating lease liabilities | ||||||||||||||
| Other current liabilities | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Notes payable, net of debt issuance costs | ||||||||||||||
| Long term portion of operating lease liabilities | ||||||||||||||
| Warrant liabilities | ||||||||||||||
| Long term portion of finance lease liabilities | ||||||||||||||
| Due to sellers, net of current portion | ||||||||||||||
| Long term portion of contingent consideration | ||||||||||||||
| Other liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
Stockholders’ Deficit1 | ||||||||||||||
Shares of Class A common stock $ | ||||||||||||||
Shares of Class B common stock $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
| Accumulated deficit | ( | ( | ||||||||||||
Total Stockholders' Deficit before non-controlling interests | ( | |||||||||||||
| Non-controlling interests | ( | |||||||||||||
Total Stockholders' Deficit | ( | |||||||||||||
Total Liabilities and Stockholders' Deficit | $ | $ | ||||||||||||
1 All outstanding share amounts have been restated to reflect the 1-for-100 reverse stock split that the Company completed on November 3, 2023.
The accompanying Notes are an integral part of these Condensed Financial Statements
6
CANO HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| (in thousands, except share and per share data) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||
| Capitated revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Fee-for-service and other revenue | ||||||||||||||||||||||||||
| Total revenue | ||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Third-party medical costs | ||||||||||||||||||||||||||
Direct patient expense (Related parties comprised $ | 0 | |||||||||||||||||||||||||
Selling, general, and administrative expenses (Related parties comprised $ | ||||||||||||||||||||||||||
| Depreciation and amortization expense | ||||||||||||||||||||||||||
| Transaction costs | ||||||||||||||||||||||||||
| Change in fair value of contingent consideration | ( | ( | ||||||||||||||||||||||||
| Goodwill impairment loss | ||||||||||||||||||||||||||
| Credit loss on other assets | ||||||||||||||||||||||||||
| Total operating expenses | ||||||||||||||||||||||||||
| Income (loss) from operations | ( | ( | ( | ( | ||||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | ||||||||||||||||||||||
| Interest income | ||||||||||||||||||||||||||
| Loss on extinguishment of debt | ( | |||||||||||||||||||||||||
| Change in fair value of warrant liabilities | ( | ( | ||||||||||||||||||||||||
| Other income (expense) | ( | |||||||||||||||||||||||||
| Total other income (expense) | ( | ( | ( | ( | ||||||||||||||||||||||
| Net income (loss) before income tax expense | ( | ( | ( | ( | ||||||||||||||||||||||
| Income tax expense (benefit) | ( | ( | ( | |||||||||||||||||||||||
| Net income (loss) | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Net income (loss) attributable to non-controlling interests | ( | ( | ( | ( | ||||||||||||||||||||||
| Net income (loss) attributable to Class A common stockholders2 | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
Net income (loss) per share attributable to Class A common stockholders, basic2 | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
Net income (loss) per share attributable to Class A common stockholders, diluted2 | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
Weighted-average shares outstanding2: | ||||||||||||||||||||||||||
| Basic | ||||||||||||||||||||||||||
| Diluted | ||||||||||||||||||||||||||
2 All outstanding share amounts have been restated to reflect the 1-for-100 reverse stock split that the Company completed on November 3, 2023.
The accompanying Notes are an integral part of these Condensed Financial Statements
7
CANO HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Three and Nine Months Ended September 30, 2023 and 2022
| (in thousands, except shares) | Class A Shares3 | Class B Shares3 | Additional Paid-in Capital | Accumulated Deficit | Non-Controlling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE—June 30, 2023 | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense, net | — | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock upon vesting of restricted stock units | — | — | — | ( | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for acquisitions | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Exchange of Class B common stock for Class A common stock | — | ( | — | ( | — | |||||||||||||||||||||||||||||||||||||||||||||
| Employee Stock Purchase Plan issuance | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
BALANCE—September 30, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||||||||
| (in thousands, except shares) | Class A Shares3 | Class B Shares3 | Additional Paid-in Capital | Accumulated Deficit | Non-Controlling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE—June 30, 2022 | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense, net | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock upon vesting of restricted stock units | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for acquisitions | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Exchange of Class B common stock for Class A common stock | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Employee Stock Purchase Plan issuance | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Impact of transactions affecting non-controlling interests | — | — | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
BALANCE—September 30, 2022 | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
3 All outstanding share amounts have been restated to reflect the 1-for-100 reverse stock split that the Company completed on November 3, 2023.
The accompanying Notes are an integral part of these Condensed Financial Statements
8
CANO HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
| (in thousands, except shares) | Class A Shares4 | Class B Shares4 | Additional Paid-in Capital | Accumulated Deficit | Non-Controlling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE—December 31, 2022 | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense, net | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock upon vesting of restricted stock units | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for acquisitions | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Exchange of Class B common stock for Class A common stock | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Warrants Exercised | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Debt discount - warrants issued | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Employee Stock Purchase Plan issuance | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Impact of transactions affecting non-controlling interests | — | — | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
BALANCE—September 30, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||||||||
| (in thousands, except shares) | Class A Shares4 | Class B Shares4 | Additional Paid-in Capital | Accumulated Deficit | Non-Controlling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE—December 31, 2021 | $ | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense, net | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common stock upon vesting of restricted stock units | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for acquisitions | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Exchange of Class B common stock for Class A common stock | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Employee Stock Purchase Plan issuance | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Impact of transactions affecting non-controlling interests | — | — | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
BALANCE—September 30, 2022 | $ | 2,500,935 | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
4 All outstanding share amounts have been restated to reflect the 1-for-100 reverse stock split that the Company completed on November 3, 2023.
The accompanying Notes are an integral part of these Condensed Financial Statements
9
CANO HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine Months Ended September 30, | ||||||||||||||
| (in thousands) | 2023 | 2022 | ||||||||||||
| Cash Flows (used in) from Operating Activities: | ||||||||||||||
| Net loss | $ | ( | $ | ( | ||||||||||
| Adjustments to reconcile net loss to net cash (used in) from operating activities: | ||||||||||||||
| Depreciation and amortization expense | ||||||||||||||
| Change in fair value of contingent consideration | ( | ( | ||||||||||||
| Change in fair value of warrant liabilities | ( | |||||||||||||
| Goodwill impairment loss | ||||||||||||||
Intangible assets disposals | ||||||||||||||
| Loss on extinguishment of debt | ||||||||||||||
| Fixed asset abandonment | ||||||||||||||
| Amortization of debt issuance costs | ||||||||||||||
| Non-cash lease expense | ||||||||||||||
| Class A common shares issued for bonus award | ||||||||||||||
| Stock-based compensation, net | ||||||||||||||
| Paid in kind interest expense | ||||||||||||||
| Credit loss on other assets | ||||||||||||||
Gain on Sale Transaction | ( | |||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||
| Accounts receivable, net | ( | |||||||||||||
| Other assets | ||||||||||||||
| Prepaid expenses and other current assets | ( | |||||||||||||
| Interest accrued due to sellers | ||||||||||||||
Accounts payable and accrued expenses (Related parties comprised $( | ||||||||||||||
| Other liabilities | ||||||||||||||
| Net cash (used in) provided by operating activities | ( | ( | ||||||||||||
Cash Flows from (used in) Investing Activities: | ||||||||||||||
Purchase of property and equipment (Related parties comprised $ | ( | ( | ||||||||||||
| Acquisitions of subsidiaries including non-compete intangibles, net of cash acquired | ( | |||||||||||||
| Payments to sellers | ( | ( | ||||||||||||
Proceeds from Sale Transaction | ||||||||||||||
Net cash provided (used in) by investing activities | ( | |||||||||||||
Cash Flows from (used in) Financing Activities: | ||||||||||||||
| Payments of long-term debt | ( | ( | ||||||||||||
| Debt issuance costs | ( | ( | ||||||||||||
| Proceeds from long-term debt | ||||||||||||||
| Proceeds from CS Revolving Line of Credit | ||||||||||||||
| Repayments of CS Revolving Line of Credit | ( | ( | ||||||||||||
| Proceeds from insurance financing arrangements | ||||||||||||||
| Payments of principal on insurance financing arrangements | ( | ( | ||||||||||||
| Other | ( | ( | ||||||||||||
The accompanying Notes are an integral part of these Condensed Financial Statements
10
CANO HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Net cash provided (used in) by financing activities | ( | |||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | ( | |||||||||||||
| Cash, cash equivalents and restricted cash at beginning of year | ||||||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | ||||||||||||
| Supplemental cash flow information: | ||||||||||||||
| Interest paid | ||||||||||||||
| Income taxes paid | ||||||||||||||
| Non-cash investing and financing activities: | ||||||||||||||
| Additional principal additions from long term | ||||||||||||||
| Debt discount addition | ( | |||||||||||||
| Right-of-use assets obtained in exchange of lease liabilities | ||||||||||||||
| Issuance of Class A common stock for acquisitions | ||||||||||||||
| Contingent consideration liability in connection with acquisitions | ||||||||||||||
| Contingent consideration assets in connection with acquisitions | ( | |||||||||||||
| Due to sellers in connection with acquisitions | ||||||||||||||
Changes to construction in process reflected through accounts payable | ( | |||||||||||||
Humana Affiliate Provider clinic leasehold improvements | ( | |||||||||||||
| Employee Stock Purchase Plan issuance | ||||||||||||||
| Warrants issued | ||||||||||||||
The accompanying Notes are an integral part of these Condensed Financial Statements
11
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. NATURE OF BUSINESS AND OPERATIONS
Nature of Business
Cano Health, Inc. (“Cano Health”, or the “Company”), formerly known as Primary Care (ITC) Intermediate Holdings, LLC (“PCIH” or the "Seller"), provides value-based medical care for its members. The Company focuses on providing high-touch population health and wellness services to Medicare Advantage, Accountable Care Organization Realizing Equity, Access, and Community Health ("ACO REACH"), Medicare patients under ACO and Medicaid capitated members, particularly in underserved communities by leveraging our platform to deliver high-quality health care services. The Company also operates pharmacies in the network for the purpose of providing a full range of managed care services to its members.
On June 3, 2021 (the “Closing Date”), Jaws Acquisition, Corp. (“Jaws”) consummated the business combination (the “Business Combination”) pursuant to the terms of the Business Combination Agreement, dated as of November 11, 2020 (as amended, the “Business Combination Agreement”) by and among Jaws, Jaws Merger Sub, LLC, a Delaware limited liability company (“Merger Sub”), PCIH, and PCIH’s sole member, and the Seller (each as defined in the Business Combination Agreement). Upon the closing of the Business Combination, Jaws was reincorporated in the State of Delaware and changed its name to "Cano Health, Inc."
Unless the context requires, "the Company", "we", "us", and "our" refer, for periods prior to the completion of the Business Combination, to PCIH and its consolidated subsidiaries, and for periods upon or after the completion of the Business Combination, to Cano Health and its consolidated subsidiaries, including PCIH and its subsidiaries.
Pursuant to the Business Combination Agreement, on the Closing Date, Jaws contributed cash to PCIH in exchange for 0.7 million common limited liability company units of PCIH ("PCIH Common Units") equal to the number of shares of Jaws' Class A ordinary shares outstanding on the Closing Date, as well as 0.2 million Class B ordinary shares owned by Jaws Sponsor, LLC (the "Sponsor"). In connection with the Business Combination, the Company issued 3.1 million shares of the Company’s Class B common stock to existing stockholders of PCIH. The Company also issued 0.8 million shares of the Company’s Class A common stock in a private placement for $800.0 million (the "PIPE Investors"). Share amounts have been restated to reflect the 1-for-100 reverse stock split that the Company completed on November 3, 2023, discussed below.
Following the consummation of the Business Combination, substantially all of the Company’s assets and operations are held and conducted by PCIH and its subsidiaries. As the Company is a holding company with no material assets other than its ownership of PCIH Common Units and its managing member interest in PCIH, the Company has no independent means of generating revenue or cash flow. The Company’s ability to pay taxes and dividends depends on the financial results and cash flows of PCIH and the distributions it receives from PCIH. The Company’s only assets are equity interests in PCIH, which represented a 35.1 % and 53.1 % controlling ownership as of the Closing Date and as of September 30, 2023, respectively. Certain members of PCIH who retained their common unit interests in PCIH held the remaining 64.9 % and 46.9 % non-controlling ownership interests as of the Closing Date and as of September 30, 2023, respectively. These members hold an economic interest in PCIH through PCIH Common Units and a corresponding number of non-economic Class B common stock, which entitles the holder to one vote per share.
Our organizational structure following the completion of the Business Combination is commonly referred to as an umbrella partnership-C (or Up-C) corporation structure. This organizational structure allowed the Seller, the former sole owner and managing member of PCIH, to retain its equity ownership in PCIH, an entity that is classified as a partnership for U.S. federal income tax purposes, in the form of PCIH Common Units (as defined in the Business Combination Agreement). The former stockholders of Jaws and the PIPE Investors who, prior to the Business Combination, held Class A ordinary shares or Class B ordinary shares of Jaws, by contrast, received equity ownership in Cano Health, Inc., a Delaware corporation that is a domestic corporation for U.S. federal income tax purposes.
Subject to the terms and conditions set forth in the Business Combination Agreement, the Seller and its equity holders received aggregate consideration with a value equal to $3,534.9 million, which consisted of (i) $466.5 million of cash and (ii) 3.07 million shares of Class B common stock valued at $3,068.4 million based on a reference stock price of $1,000.00 per share.
12
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Following the closing of the Business Combination, Class A stockholders owned direct controlling interests in the combined results of PCIH and Cano Health while the Seller, as the sole Class B stockholder, owned indirect economic interests in PCIH shown as non-controlling interests in Cano Health's unaudited condensed consolidated financial statements. The Seller holds these indirect economic interests in the form of PCIH Common Units that are redeemable for shares of Cano Health Class A common stock, together with the cancellation of an equal number of shares of Cano Health Class B common stock. The non-controlling interests will decrease over time as shares of Class B common stock and PCIH Common Units are exchanged for shares of Cano Health's Class A common stock.
Reverse Stock Split
As previously-disclosed in the Company’s Current Report on Form 8-K filed with the SEC on November 2, 2023, the Company effected the previously-announced 1-for-100 reverse stock split of the Company’s Class A and Class B common stock (the “Reverse Stock Split”) pursuant to which each 100 shares of the Company’s Class A and Class B common stock issued and outstanding immediately prior to filing the Certificate of Amendment to the Company’s Certificate of Incorporation on November 2, 2023 were automatically combined into one share of Class A Common Stock and Class B Common Stock, respectively, subject to the elimination of fractional shares. All references to outstanding share and per share amounts for all periods presented have been adjusted to give effect to the Reverse Stock Split. The par value per share of each share of Class A and Class B common stock was proportionately multiplied by 100, and the number and exercise price of all Public Warrants, PCIH Common Units, stock options, restricted stock awards and restricted stock unit awards were each proportionately adjusted by the ratio used to complete the Reverse Stock Split.
In connection with consummating the Reverse Stock Split, the total number of Class A common stock and Class B common stock authorized for issuance under the Company’s amended Certificate of Incorporation was reduced from 6,000,000,000 to 60,000,000 shares of its Class A common stock and from 1,000,000,000 to 10,000,000 shares of its Class B common stock, each with an adjusted par value of $0.01 10,000,000 shares. The Reverse Stock Split reduced the Company’s issued and outstanding shares of common stock from approximately 288,760,727 251,893,556 2,887,607 2,518,936
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The portion of an entity not wholly-owned by the Company is presented as non-controlling interests. All significant intercompany balances and transactions are eliminated in consolidation. The financial statements of the Company’s subsidiaries are prepared using accounting policies consistent with those of the Company.
Risks and Uncertainties
For additional information on the Company’s risk factors, please see Item 1A, "Risk Factors,” included in the Company’s 2022 Form 10-K, as supplemented by Part II, Item 1A, “Risk Factors,” included in the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2023 filed with the SEC on May 9, 2023 (the “Q1 2023 Form 10-Q"), and
13
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2023 filed with the SEC on August 10, 2023 (the “Q2 2023 Form 10-Q").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company described its significant accounting policies in Note 2, “Summary of Significant Accounting Policies,” included in the audited consolidated financial statements for the year ended December 31, 2022 included in its 2022 Form 10-K. During the nine months ended September 30, 2023, there were no significant changes to those accounting policies.
Recent Accounting Pronouncements
The Company has evaluated recent accounting pronouncements through September 30, 2023 and believes that none of them will have a material effect on our unaudited condensed consolidated financial statements.
3. GOING CONCERN
The Company’s accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. For the nine months ended September 30, 2023, the Company generated a net loss of $823.0 million and used $84.7 million of cash from operations.
The Company’s current liquidity as of November 9, 2023 was approximately $52.5 million, consisting of cash and cash equivalents (excluding restricted cash of approximately $33.7 million). As of November 9, 2023, the CS Revolving Line of Credit was fully drawn. The Company currently believes that this amount of liquidity is not sufficient to cover the Company’s operating, investing and financing cash uses for the next 12 months.
Management has evaluated the significance of these relevant conditions in relation to the Company’s ability to meet its obligations and has concluded that there is substantial doubt about the Company’s ability to continue as going concern within one year after the date that the financial statements are issued.
The Company’s ability to continue as a going concern is contingent upon, among other things, successful execution of management’s intended plan over the next 12 months to improve the Company’s liquidity and profitability, as discussed below.
The Company is pursuing several initiatives designed to improve its profitability, liquidity, cash flow and net cash, such as controlling and reducing operating expenses, limiting capital expenditures, selling assets and operations and exiting certain markets. The Company’s efforts to reduce operating expenses include reducing permanent staff, lowering its third party medical costs through negotiations with payors and restructuring contractual arrangements with payor and specialty networks, consolidating underperforming owned medical centers and terminating underperforming affiliate partnerships, delaying renovations and other capital projects and significantly reducing all other non-essential spending, as well as improving patient engagement.
In the third quarter of 2023, the Company implemented a plan designed to further restructure its operations to streamline and simplify the organization to improve efficiency and reduce costs. These actions include workforce reductions, which are expected to reduce our selling, general and administrative expenses in future periods compared to current levels.
As previously-disclosed, as part of the Company’s effort to generate additional liquidity, on September 25, 2023, the Company sold to Primary Care Holdings II, LLC ("CenterWell"), a wholly owned subsidiary of Humana Inc. (“Humana”), substantially all of the assets associated with the operation of Cano Health’s senior-focused primary care centers in Texas and
14
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Nevada (the “Sale Transaction”) for a total transaction value to the Company of approximately $66.7 million, consisting of approximately $35.4 million in cash paid at closing (of which approximately $1.9 million was withheld for satisfaction of potential indemnification claims), plus the release of certain liabilities owed by Cano Health or its affiliates primarily for centers built under commercial agreements entered into with affiliates of Humana. The net cash proceeds from the Sale Transaction enabled the Company to repay a portion of its outstanding commitment under its revolving credit facility, for which Credit Suisse AG, Cayman Islands Branch is the administrative agent, such that the financial maintenance covenant of this facility was not applicable for the testing period ended September 30, 2023.
As part of its plan to improve cash flow and liquidity, the Company also exited operations within its medical centers in California and New Mexico, actions that were substantially completed by the end of the third quarter of 2023. The Company exited its Illinois market after the end of the third quarter of 2023 and is on track to also exit its Puerto Rico operations by the beginning of 2024. These actions are designed to position the Company to focus on and optimize its core Florida Medicare Advantage and ACO REACH assets.
Other ongoing initiatives designed to generate additional liquidity include the Company’s continued pursuit of its strategic review, which may result in the sale of all or substantially all of the Company’s business and/or the sale of certain lines of business, such as the Company’s Medicaid business in Florida, pharmacy assets and other specialty practices.
Consistent with the terms and conditions of the 2023 Side-Car Amendment, discussed below, the Company has formally launched, announced and continues to pursue a comprehensive process to identify and evaluate interest in a sale of the Company, or all or substantially all of its assets, including having engaged advisors to assist in the process. While these efforts have yet to yield a sale transaction, the Company’s process remains ongoing. There is no assurance that this process will result in any transaction.
Each of the 2023 Side-Car Credit Agreement and the Credit Suisse Credit Agreement contains a covenant that will require the Company’s 2023 Annual Report on Form 10-K (the “2023 Form 10-K”) to not contain any qualification or explanatory paragraph as to the Company’s “going concern” status (except for any such qualification or explanatory paragraph pertaining to (i) the maturity of certain indebtedness occurring within 12 months of the relevant audit or (ii) any breach or anticipated breach of any financial covenant). Based on the amount of the Company’s available liquidity at November 9, 2023 and its current forecast of available liquidity for the 12 months following the anticipated filing of its 2023 Form 10-K, the Company expects that it will be required to seek a waiver of this “going concern” covenant from the respective lenders under each of the Side-Car Credit Agreement and the Credit Suisse Credit Agreement on or before April 22, 2024, being the earlier of (i) when the Company will be required to deliver to the administrative agents under each of the 2023 Side-Car Credit Agreement and the Credit Suisse Credit Agreement its 2023 Form 10-K without any such “going concern” qualification or explanatory paragraph, being due March 30, 2024, followed by a 30-day cure period and (ii) such time that the Company would be required to cure any breach of the financial maintenance covenant under the Credit Suisse Credit Agreement for the period ending December 31, 2023. Capitalized terms used, but not defined, in this Note are defined in Note 12, “Debt.”
Under each of the Side-Car Credit Agreement and the Credit Suisse Credit Agreement, if the Borrower is unable to obtain such waiver from the respective lenders and fails to cure such default within a 30-day period after the earlier of (i) receipt by the Borrower of written notice thereof from the respective administrative agent under each of the credit agreements and (ii) the date on which a Company “responsible officer” has knowledge of such default, then the administrative agent under each such facility may, and acting at the direction or request of the requisite lenders, will, among other things, immediately terminate all commitments under the Side-Car Credit Agreement and the Credit Suisse Credit Agreement and accelerate the maturity of all principal, interest and other amounts due thereunder.
Under the Company’s Senior Notes, if (i) the Borrower is unable to obtain such waivers from the respective lenders; (ii) the lenders under either the 2023 Side-Car Credit Agreement and/or the Credit Suisse Credit Agreement accelerate the maturity of $50 million or more of the amount outstanding thereunder; and (iii) the Borrower fails to pay such amount when due, then the trustee for the Senior Notes or the holders of at least 30 % in principal amount of the Senior Notes will be entitled to immediately accelerate the maturity of the Senior Notes, including all principal, interest and other amounts due thereon. The Company expects that it would not have sufficient liquidity to repay all principal, interest and other costs and expenses if one or
15
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
more of the Side-Car Credit Agreement, the Credit Suisse Credit Agreement and/or the Senior Notes were terminated and accelerated under these circumstances.
Additionally, as discussed in Note 12, “Debt,” the Side-Car Credit Agreement contains a financial maintenance covenant, requiring the Borrower to maintain a First Lien Net Leverage Ratio (i.e., total first lien senior secured net debt to Consolidated Adjusted EBITDA) not to exceed 5.80 :1.00 on the last day of any four consecutive fiscal quarter period. With a First Lien Leverage Ratio of approximately 12.00 :1.00 at June 30, 2023, the Borrower was not in compliance with this financial maintenance covenant as of such date and, accordingly, on August 10, 2023, the Borrower obtained a waiver of such noncompliance and entered into an amendment of the Side-Car Credit Agreement (the “2023 Side-Car Amendment”) under which the Company will not be required to test compliance with the Side-Car Credit Agreement’s financial maintenance covenant until the fiscal quarter ending September 30, 2024. The 2023 Side-Car Amendment provides, among other modifications to the Side-Car Credit Agreement, that: (i) the Company will formally launch, announce and pursue a comprehensive process in an effort to yield one or more offers for a sale of all or substantially all of the assets or businesses of, or direct or indirect equity interests in, the Borrower and its subsidiaries with a purchase price that includes cash proceeds sufficient to pay the obligations under the Side-Car Credit Agreement, and will use its commercially reasonable efforts to promptly close such a transaction; (ii) the interest rate for the 2023 Term Loan will be increased to 16 % during the payment-in-kind period ending on February 24, 2025; (iii) a premium payment of 5 % of the outstanding principal amount of the 2023 Term Loan will be paid in kind by capitalizing such payment to the principal amount of the 2023 Term Loan; (iv) the applicable prepayment premium will be required in connection with any voluntary or mandatory prepayment or repayment of the 2023 Term Loan; and (v) the lenders will have participation rights in certain new debt financings incurred by the Borrower or any of its subsidiaries. Absent such waiver, the 2023 Term Loan Administrative Agent, acting at the direction of the lead lender, and at the requisite lenders request, could have immediately terminated all commitments under the 2023 Term Loan and accelerated the maturity of all principal, interest and other amounts due thereon.
Under the Credit Suisse Credit Agreement, if the Borrower was unable to obtain such waiver from the lenders under the 2023 Term Loan Agreement, or cure any such noncompliance by September 5, 2023, then the administrative agent under the Credit Suisse Credit Agreement would have been entitled to, and acting at the direction of the requisite lenders, could have, among other things, immediately terminated all commitments under the CS Term Loan and the CS Revolving Line of Credit and accelerated the maturity of all principal, interest and other amounts due thereunder. Under the Senior Notes, if (i) the Borrower was unable to obtain such waiver from the lenders under the 2023 Term Loan Agreement, or cure any such noncompliance by September 5, 2023; (ii) the lender under such facility or under the Credit Suisse Credit Agreement accelerated the maturity of $50 million or more of the amount outstanding thereunder; and (iii) the Borrower failed to pay such amount when due, then the trustee for the Senior Notes or the holders of at least 30 % in principal amount of the Senior Notes would have been entitled to immediately accelerate the maturity of the Senior Notes, including all principal, interest and other amounts due thereon.
4. REVENUE AND ACCOUNTS RECEIVABLE
16
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| Three Months Ended September 30, | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| (in thousands) | Revenue $ | Revenue % | Revenue $ | Revenue % | ||||||||||||||||||||||
| Capitated revenue | ||||||||||||||||||||||||||
| Medicare | $ | % | $ | % | ||||||||||||||||||||||
| Other capitated revenue | % | % | ||||||||||||||||||||||||
| Total capitated revenue | % | % | ||||||||||||||||||||||||
| Fee-for-service and other revenue | ||||||||||||||||||||||||||
| Fee-for-service | % | % | ||||||||||||||||||||||||
| Pharmacy | % | % | ||||||||||||||||||||||||
| Other | ( | ( | % | % | ||||||||||||||||||||||
| Total fee-for-service and other revenue | % | % | ||||||||||||||||||||||||
| Total revenue | $ | % | $ | % | ||||||||||||||||||||||
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||
| (in thousands) | Revenue $ | Revenue % | Revenue $ | Revenue % | ||||||||||||||||||||||
| Capitated revenue | ||||||||||||||||||||||||||
| Medicare | $ | % | $ | % | ||||||||||||||||||||||
| Other capitated revenue | % | % | ||||||||||||||||||||||||
| Total capitated revenue | % | % | ||||||||||||||||||||||||
| Fee-for-service and other revenue | ||||||||||||||||||||||||||
| Fee-for-service | % | % | ||||||||||||||||||||||||
| Pharmacy | % | % | ||||||||||||||||||||||||
| Other | % | % | ||||||||||||||||||||||||
| Total fee-for-service and other revenue | % | % | ||||||||||||||||||||||||
| Total revenue | $ | % | $ | % | ||||||||||||||||||||||
Accounts Receivable
The Company's accounts receivable balances are summarized for the periods indicated below. The Company’s accounts receivable are presented net of the unpaid service provider costs. A right of offset exists when all of the following conditions are met: 1) each of the two parties owed the other determinable amounts; 2) the reporting party has the right to offset the amount owed with the amount owed to the other party; 3) the reporting party intends to offset; and 4) the right of offset is enforceable by law. The Company believes all of the aforementioned conditions existed as of September 30, 2023 and December 31, 2022.
| As of | ||||||||||||||
| (in thousands) | September 30, 2023 | December 31, 2022 | ||||||||||||
| Accounts receivable | $ | $ | ||||||||||||
| Medicare risk adjustment | ||||||||||||||
| Unpaid service provider costs | ( | ( | ||||||||||||
| Accounts receivable, net | $ | $ | ||||||||||||
Concentration of Risk
17
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three payors represented greater than 10% of our total revenue for the three and nine months ended on each of September 30, 2023 and September 30, 2022.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenues | |||||||||||||||||||||||
Three payors represented, in aggregate, the following percentages of accounts receivable as of September 30, 2023 and December 31, 2022, respectively.
| As of | |||||||||||
| September 30, 2023 | December 31, 2022 | ||||||||||
| Accounts receivable, net | |||||||||||
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following as of September 30, 2023 and December 31, 2022, respectively:
| (in thousands) | September 30, 2023 | December 31, 2022 | ||||||||||||
| Third party receivables | $ | $ | ||||||||||||
| Other | ||||||||||||||
| Prepaid expenses and other current assets | $ | $ | ||||||||||||
Third party receivables represent amounts due from MSP Recovery Inc. ("MSP"). MSP provides healthcare claims reimbursement recovery services using data analytics to identify and recover improper payments made by Medicare, Medicaid and commercial health insurers (each a “Health Plan”), and charged to the Company under risk agreements, when the Health Plan is not the primary payor under the Medicare Secondary Payer Act and other state and federal laws. The Company has assigned certain past claims data to MSP, which could have been paid in either cash or equity at MSP's option. On July 7, 2023, the Company received 7.96 million shares (which amount is presented after giving effect to MSP’s 1-for-25 reverse stock split on October 12, 2023) of MSP Class A common stock to settle certain receivables from MSP.
On August 2, 2023, MSP announced that the SEC initiated an investigation of MSP on August 11, 2022. In addition, MSP announced that it received a subpoena on March 10, 2023 from the U.S. Attorney's Office in the U.S. District Court for the Southern District of Florida. As a result of (i) these recent disclosures by MSP; (ii) MSP's delinquent filing of its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2023; and (iii) MSP's not being in compliance with the NASDAQ listing requirements, the Company decided to utilize a third-party valuation specialist to provide a market value analysis of the shares of Class A common stock that MSP issued to the Company on July 7, 2023 and as of June 30, 2023, the Company recognized an allowance for credit losses of $62.0 million related to the third party receivables as of June 30, 2023.
As of September 30, 2023, the 7.96 million shares described above continue to be unregistered and the Company believes it is not reasonably possible that these equity securities will be either registered or be exempt from registration due to meeting the holding period requirements, within the next 1 year. These equity securities are in the scope of ASC 321- Investments - Equity Securities, and accordingly the Company has concluded that the securities do not have a readily determinable fair value.
As of December 31, 2022, other assets include contingent consideration assets related to a 2022 acquisition with various contingent consideration arrangements. The contingent consideration is valued based on the future performance of two acquired payor contracts using Monte-Carlo simulations. After the balance sheet date, the contingency was resolved as a result of
18
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. UNPAID SERVICE PROVIDER COSTS
Activity in unpaid service provider costs for the nine months ended September 30, 2023 and 2022, respectively, is summarized below:
| (in thousands) | 2023 | 2022 | ||||||||||||
| Balance as of January 1, | $ | $ | ||||||||||||
| Incurred related to: | ||||||||||||||
| Current year | ||||||||||||||
| Prior years | ||||||||||||||
| Paid related to: | ||||||||||||||
| Current year | ||||||||||||||
| Prior years | ||||||||||||||
Balance as of September 30, | $ | $ | ||||||||||||
The foregoing reconciliation reflects an increase in our estimate of unpaid service provider costs during the nine months ended September 30, 2023 of $6.5 million and an increase in our estimate of unpaid service provider costs during the nine months ended September 30, 2022 of $11.3 million, driven by higher than expected utilization. $38.1 million and $18.5 million of accounts receivable, net for plans that were in a deficit position as of the balance sheet date, with liabilities for unpaid service provder costs of $121.4 million and $32.8 million, were included in other current liabilities in the condensed consolidated balance sheet as these plans were in a net deficit position as of September 30, 2023 and September 30, 2022, respectively.
7. GOODWILL
Activity impacting the Company's goodwill balance during the nine months ended September 30, 2023 is summarized below:
| (in thousands) | |||||
| Goodwill as of December 31, 2022 | $ | ||||
| Impairment | ( | ||||
Sale Transaction allocation | ( | ||||
| Other | ( | ||||
| Goodwill as of September 30, 2023 | $ | ||||
19
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. PAYOR RELATIONSHIPS AND OTHER INTANGIBLES, NET
As of September 30, 2023, the Company’s total intangibles, net, consisted of the following:
| (in thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||
| Intangibles: | ||||||||||||||||||||
| Trade names | $ | $ | ( | $ | ||||||||||||||||
| Brand names | ( | |||||||||||||||||||
| Non-compete agreements | ( | |||||||||||||||||||
| Customer relationships | ( | |||||||||||||||||||
| Payor relationships | ( | |||||||||||||||||||
| Provider relationships | ( | |||||||||||||||||||
| Total intangibles, net | $ | $ | ( | $ | ||||||||||||||||
As of December 31, 2022, the Company’s total intangibles, net consisted of the following:
| (in thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||
| Intangibles: | ||||||||||||||||||||
| Trade names | $ | $ | ( | $ | ||||||||||||||||
| Brand names | ( | |||||||||||||||||||
| Non-compete agreements | ( | |||||||||||||||||||
| Customer relationships | ( | |||||||||||||||||||
| Payor relationships | ( | |||||||||||||||||||
| Provider relationships | ( | |||||||||||||||||||
| Total intangibles, net | $ | $ | ( | $ | ||||||||||||||||
The Company recorded amortization expense of $20.7 million and $62.8 million for the three and nine months ended September 30, 2023, respectively, and $20.2 million and $50.8 million for the three and nine months ended September 30, 2022, respectively.
Long-lived assets are reviewed periodically for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. In the third quarter of 2023, in conjunction with the goodwill impairment test, the Company performed a recoverability test and concluded no impairment charge was
20
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
necessary. The Company disposed of certain intangibles during the three months ended September 30, 2023 in the amount of $2.7 million.
Expected amortization expense for the Company’s existing amortizable intangibles for the next 5 years, and thereafter, as of September 30, 2023 is as follows:
| (in thousands) | Amount | |||||||
| 2023 - remaining | $ | |||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Thereafter | ||||||||
| Total | $ | |||||||
Changes or consolidation of the use of any of our brand names or termination of provider relationships, could result in a reduction in their remaining estimated economic lives, which could lead to increased amortization expense.
9. LEASES
The Company leases offices, operating medical centers, vehicles and medical equipment. Leases consist of finance and operating leases, and have a remaining lease term of 1 14
Future minimum lease payments under operating and finance leases as of September 30, 2023 were as follows:
| (in thousands) | Operating | Finance | Total | |||||||||||||||||
| 2023 - remaining | $ | $ | $ | |||||||||||||||||
| 2024 | ||||||||||||||||||||
| 2025 | ||||||||||||||||||||
| 2026 | ||||||||||||||||||||
| 2027 | ||||||||||||||||||||
| Thereafter | ||||||||||||||||||||
| Total minimum lease payments | ||||||||||||||||||||
| Less: amount representing interest | ( | ( | ( | |||||||||||||||||
| Lease liabilities | $ | $ | $ | |||||||||||||||||
21
CANO HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS