CONVEY HEALTH SOLUTIONS HOLDINGS, INC.
You should read the following discussion of our financial condition and results
of operations in conjunction with our financial statements and the related notes
and other financial information included elsewhere in this Quarterly Report on
Form 10-Q ("Form 10-Q") and the Form 10-K.
The following discussion and analysis also includes discussion of certain non-GAAP financial measures. For a description and reconciliation of the non-GAAP measures discussed in this section, see "Non-GAAP Financial Measures" below.
This Form 10-Q contains "forward-looking statements". These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies and other future conditions. Such forward-looking statements may include, without limitation, statements about future opportunities for us and our products and services, our future operations, financial or operating results, anticipated business levels, future earnings, planned activities, anticipated growth, market opportunities, strategies, competitions and other expectations and targets for future periods. In some cases, you can identify forward-looking statements because they contain words such as "anticipate," "believe," "estimate," "expect," "intend," "may," "predict," "project," "target," "potential," "seek," "will," "would," "could," "should," continue," contemplate," "plan" and other words and terms of similar meaning. Forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control. We caution you that forward-looking statements are not guarantees of future performance or outcomes and that actual performance and outcomes may differ materially from those made in or suggested by the forward-looking statements contained in this Form 10-Q. In addition, even if our results of operations, financial condition and cash flows, and the development of the markets in which we operate, are consistent with the forward-looking statements contained in this Form 10-Q, those results or developments may not be indicative of results or developments in subsequent periods. New factors emerge from time to time that may cause our business not to develop as we expect, and it is not possible for us to predict all of them. Factors that could cause actual results and outcomes to differ from those reflected in forward-looking statements include, among others, the following: our ability to retain our existing clients or attract new clients, and sell additional solutions and services to our clients; our dependence on a small number of clients for a substantial portion of our total revenue; limitations of our clients' growth prospects, and the failure of the size of the total addressable markets in which we compete or expect that we may compete in the future to grow at rates currently expected; our ability to achieve or maintain profitability; Federal reductions in Medicare Advantage funding; significant consolidation in the healthcare industry, and decisions by clients to perform internally some of the same solutions or services we offer; the limited operating history we have with certain of our solutions; a failure to deliver high-quality member management services to our clients' members; the competition we face from healthcare services and technology companies; risks related to acquisitions of other businesses or technologies and other significant transactions; increases in labor costs, including due to changing minimum wage laws, and an overall tightening of the labor market; the long and unpredictable sales and integration cycles for our solutions; an economic downturn or volatility, including as a result of the ongoing COVID-19 pandemic; our ability to achieve market acceptance of new or updated solutions and services; our reliance on third parties for certain components of our business; significant fluctuations in our quarterly results of operations due to seasonality; our ability to achieve or maintain adequate utilization and suitable billing rates for our consultants, and our ability to deliver our services to our clients; recent and future developments in the Medicare Advantage market or the healthcare industry generally, including with respect to changing laws and regulations; our ability to comply with applicable laws, regulations and standards relating to data privacy and security; security breaches or incidents, failures and other disruptions of the information technology systems used in our business operations and of the sensitive information we collect, process, transmit, use and store; disruptions in service, and other software and systems failures, affecting us and our vendors; our ability to obtain, maintain, protect and enforce our intellectual property and proprietary rights; our ability to operate our business without infringing, misappropriating or otherwise violating the intellectual property or proprietary rights of third parties; our substantial indebtedness, and the restrictions imposed by our indebtedness on our subsidiaries; identified material weaknesses in our internal control over financial reporting and a failure to remediate these material weaknesses, and the effectiveness of our internal control over financial reporting; and the significant influence our principal stockholder, TPG, has over us. For a further discussion of these and other factors that could impact our future results, performance or transactions, see Part I, Item 1A "Risk Factors" of our Form 10-K and our other filings with theSEC . Given these uncertainties, you should not place undue reliance on these forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our 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 we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information 31
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available to us as of the date of this Form 10-Q, and, while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. We qualify all of the forward-looking statements in this Form 10-Q by these cautionary statements. Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
The Company is a leading healthcare platform that utilizes technology and
processes to improve government-sponsored health plans, including Medicare
Advantage ("MA") plans. We help health plans to grow membership and revenue as
well as operate more effectively and efficiently. We are a trusted
solutions-oriented partner to payors and deliver purpose-built technology and
services to enhance our clients' mission-critical workflows. Our solutions
address health plan needs, including product development and sales, member
experience management, clinical management, core operations, business
intelligence and analytics. Leveraging our technology and expert advisory
services, we serve as a unified and integrated extension of our clients' core
health plan operations. Our proprietary, modular technology and end-to-end
solutions replace or supplement our clients' existing systems and processes,
enabling us to help health plans attract and retain members, improve revenue
accuracy, drive cost savings, facilitate regulatory compliance, and enhance
operational effectiveness.
On February 1, 2022 , Convey's indirect wholly-owned subsidiary, D-M-S Holdings
Parent, LLC (f/k/a Dragon Holdings Parent, LLC ), a Delaware limited liability
company, acquired all of the issued and outstanding capital stock of D-M-S
Holdings, Inc. d/b/a HealthSmart International , a Delaware corporation
("HealthSmart"). HealthSmart provides a diverse portfolio of health, wellness
and diagnostic products centered on home based care outcomes. The acquisition of
HealthSmart supports Convey's vision to empower health plans to excel by
delivering a more diverse healthcare product portfolio to their members while
streamlining logistics, resulting in a better healthcare consumer experience.
The acquisition will combine Convey's best-in-class supplemental benefits
administration technology and services solution with HealthSmart's market
leading abilities as a trusted supplier of quality consumer healthcare products.
Convey will extend the solutions serving the MA supplemental benefits business
through a broader set of consumer healthcare products and expertise that serves
many of the top health plans in the U.S. Since our inception, we have created and continuously refined our technology solutions to best serve government-sponsored health plans. Our clients are primarily MA plans, Medicare Part D plans, including Employer Group Waiver plans, and pharmacy benefit managers.
We foster long-term collaborative partnerships as evidenced by our average relationship with our top 10 clients of over eight years, and we serve as a partner to nine of the nation's top 10 MA payors by lives covered, in each case as ofDecember 31, 2021 . We believe that we have significant opportunity to grow within our existing client base as the majority of our clients currently subscribe to only a subset of our overall solutions and services. Moreover, we believe we have significant opportunity to grow by winning new clients in the MA market, by selling more products to our existing clients, by expanding into adjacent markets such as Medicaid and commercial insurance, and through complementary strategic acquisitions.
Our clients face significant and constantly evolving challenges managing their Medicare health plans:
•Increasingly Competitive Environment for Medicare Plans: Effective benefit design and sales are critical to retaining and growing members during the Medicare annual enrollment period. Once members are enrolled in a plan, effective member engagement and supplemental benefits administration are paramount to ensuring strong satisfaction and retention. Moreover, the proliferation of value-based reimbursement models such as MA requires effective member management and broad ecosystem coordination, which fall outside the core competencies of many health plans. •Compliance withCenters for Medicare and Medicaid Services ("CMS") Requirements: Constantly evolving CMS and client requirements result in hundreds of modifications per year that inhibit the operational effectiveness and capabilities of health plans. Our purpose-built government sector technology platform addresses these constantly evolving requirements. •Complex and Highly Regulated Medicare Market: Many health plans enter the government plan market by simply adapting their existing systems designed for the commercial insurance market. As a result, the technology they employ often lacks the sophistication and design needed to effectively maintain and administer benefits tailored for the complex and highly regulated Medicare market. 32
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Health plans increasingly recognize the need for specialized solutions like ours
to help them overcome these challenges and drive superior performance. We
believe our proprietary technology and processes facilitate member engagement,
health plan growth, and operational efficiencies.
We operate in two segments: Technology Enabled Solutions ("TES") in which we
provide technology and support solutions to our clients, and Advisory Services
("Advisory") in which we provide project-based consulting services led by our
long-tenured subject matter experts. We believe that our combination of
technology and advisory solutions gives us a competitive advantage in the
government-sponsored health plan market. Our Technology Enabled Solutions and
Advisory teams collaborate effectively to combine a strong technology platform
with deep domain expertise to deliver best-in-class solutions to our clients.
Furthermore, we leverage the Advisory team's industry expertise to identify new
opportunities as well as cross-sell our solutions within existing clients.
We have a highly predictable and recurring revenue model with strong cash flow
from operations. We typically charge a recurring subscription or per-member fee
or a re-occurring utilization-based fee, which, coupled with our long-term
contracts and strong client retention, has historically provided us with strong
revenue visibility into estimated future revenue. Our Technology Enabled
Solutions business historically has been highly predictable as most of our
revenue in any given year is under contract or otherwise visible by the
beginning of that year due to the contract structures we employ.
Initial Public Offering
OnJune 18, 2021 , we closed the initial public offering ("IPO") of our common stock through an underwritten sale of 13,333,334 shares of our common stock at a price of$14.00 per share. In the offering, we sold 11,666,667 shares and a selling stockholder sold 1,666,667 shares. The aggregate net proceeds to us from the offering, after deducting underwriting discounts and commissions and other offering expenses payable by us, were approximately$146.1 million . We used approximately$131.5 million of the net proceeds from the IPO to repay outstanding indebtedness under our First Lien Credit Agreement (as amended, the "Credit Agreement"). We did not receive any of the proceeds from the sale by the selling stockholder. COVID-19 Pandemic COVID-19 was declared a global pandemic by theWorld Health Organization onMarch 11, 2020 . Governments at the national, state, and local level in theU.S. , and globally, have implemented varying measures in an effort to contain the virus, including social distancing, travel restrictions, border closures, limitations on public gatherings of people, work from home and supply chain logistical changes. While some of these actions have eased, escalating transmission rates (including of the Delta and Omicron variants of COVID-19), uneven vaccination and vaccination booster rates and further governmental guidance and orders may result in having to reimplement certain of these measures or implementing new and additional ones. The spread of COVID-19 has also caused significant volatility inUnited States and international markets and has had and continues to have widespread, rapidly evolving and unpredictable impacts on global society, economies, financial markets and business practices. Our operations have been impacted by COVID-19 sinceMarch 2020 . During March andApril 2020 , we obtained approval from our clients for a work-at-home model, though not all required our approval, and transitioned most of our employees to the home environment so that they could work more safely. COVID-19 created a hardship for many of our employees. We worked during 2020 to care for our employees by periodically implementing temporary premium pay and temporary paid sick leave programs which provided additional financial resources for our employees, as well as partial pay for those employeeswho contracted the virus or had to care for a family memberwho was affected. We also had provided compensation to employeeswho worked with us for more than six months so that they can take time off to be vaccinated. In addition, we increased cleaning protocols throughout our facilities. Certain of these measures have resulted in increased costs. Due to significant volatility to the markets, as well as business and supply chain disruptions, we incurred several additional expenses due to the COVID-19 pandemic, including the following: •Higher Pricing from Vendors and Higher Shipping Costs: We experienced higher costs to procure certain products included in the formulary available to Medicare members. The price increases were due to supply chain disruptions and product shortages caused by the COVID-19 pandemic. We quantified the pricing increase by comparing the pre-pandemic prices for high demand products directly attributable to the COVID-19 pandemic (e.g., masks and other similar high demand products) to the prices to procure such products during the pandemic. Further, we incurred additional costs due to expedited shipping fees as a result of new inventory management practices put into place due to supply chain disruptions and delays caused by COVID-19 in order to fulfill product demand.
•Sick Pay, Premium Pay and
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employees
•Work-at-Home Training: In response to the COVID-19 pandemic, we held
work-at-home remote training. To accomplish this transition, hourly new hire
employees were required to receive training regarding at-home information
technology ("IT") and telephony equipment setup. We paid the hourly new hire
employees four hours for these efforts at their regular hourly wage rate and
applicable fringe benefit rate.
•IT Expenses: Additional temporary IT resources were retained, and overtime
hours were incurred, for existing IT resources, in order to implement the remote
working environment designed in response to the COVID-19 pandemic.
•Janitorial Costs: Due to the onset of the COVID-19 pandemic, we implemented an
enhanced sanitation policy. The enhanced sanitation policy included special deep
cleaning sessions in areas contacted by employees who had tested positive for
COVID-19 and enhanced sanitation sessions through our facilities compared to the
sanitation methods used prior to the COVID-19 pandemic.
See "Non-GAAP Financial Measures" for amounts related to the additional expenses
due to the COVID-19 pandemic (Cost of COVID-19). While we had previously
expected that these costs would not be an adjustment in the calculation of
Adjusted EBITDA after 2021, the COVID-19 pandemic has not subsided and during
2022, to a lesser extent, we have continued to incur higher product costs due to
higher pricing from vendors for certain items (e.g., masks and other similar
high demand products). We now expect that these expenses will not be an
adjustment in the calculation of Adjusted EBITDA after 2022.
The full extent to which the COVID-19 pandemic and the various responses to the
COVID-19 pandemic will impact our business, operations or financial condition
continues to depend on numerous evolving factors that we may not be able to
accurately predict, including, but not limited to, the duration, severity and
scope of the COVID-19 pandemic (including due to new variants such as Delta and
Omicron); actions by governmental entities, businesses and individuals that have
been and continue to be taken in response to the pandemic; the effect on our
clients and demand by clients, clients and our clients' members for and ability
to pay for our solutions and services; and disruptions or restrictions on our
employees' ability to work and travel. The impact of these factors and others on
our suppliers and clients could persist for some time after governments ease
their restrictions and after the overall number of COVID-19 cases in the United
States decreases. We may continue to experience higher than usual costs as a
result of COVID-19 for the foreseeable future.
Non-GAAP Financial Measures
We present our financial results in accordance with GAAP. However, we use
certain non-GAAP financial measures to supplement financial information
presented on a GAAP basis. We believe that excluding certain items from our GAAP
results allows management to better understand our consolidated financial
performance from period to period and better project our future consolidated
financial performance as forecasts are developed at a level of detail different
from that used to prepare GAAP-based financial measures. Moreover, we believe
these non-GAAP financial measures provide investors with useful information to
help them evaluate our operating results by facilitating an enhanced
understanding of our operating performance and enabling them to make more
meaningful period to period comparisons. In particular, we use EBITDA and
Adjusted EBITDA to assess our financial performance and also for internal
planning and forecasting purposes. We believe EBITDA and Adjusted EBITDA provide
investors with useful information because such metrics offer a consistent and
comparable overview of our operations across historical financial periods. In
evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we
may incur expenses similar to those eliminated in the presentation. Non-GAAP
measures should be considered as a supplement to, and not as a substitute for,
or superior to, the corresponding measures calculated in accordance with GAAP.
There are limitations to the use of the non-GAAP financial measures presented in
this Form 10-Q. For example, our non-GAAP financial measures may not be
comparable to similarly titled measures of other companies. Other companies,
including companies in our industry, may calculate non-GAAP financial measures
differently than we do, limiting the usefulness of those measures for
comparative purposes.
The non-GAAP financial measures we present are not meant to be considered as
indicators of performance in isolation from or as a substitute for measures
prepared in accordance with GAAP, and should be read only in conjunction with
financial information presented on a GAAP basis. Reconciliations of each of
EBITDA and Adjusted EBITDA to the most directly comparable GAAP financial
measure, net income (loss), are presented below. We encourage you to review our
financial information in its entirety, not to rely on any single financial
measure and to view the reconciliations in conjunction with the presentation of
the non-GAAP financial measures for each of the periods presented. In future
periods, we may exclude such items, may incur income and expenses similar to
these excluded items, and include other expenses, costs, and non-recurring
items. The tables below provide reconciliations of EBITDA and Adjusted EBITDA to
net income (loss) on a consolidated basis for the periods indicated.
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We define EBITDA as net income (loss) adjusted for interest, net, income tax expense (benefit), and depreciation and amortization expense. We define Adjusted EBITDA as EBITDA further adjusted for certain items of a significant or unusual nature, including but not limited to, COVID-19 cost impacts, non-cash stock compensation expense, transaction related costs, acquisition bonus expense, inventory step-up and other costs. Other includes costs such as management fees and fees associated with obtaining the incremental term loans. In addition, we measure the performance of our individual segments using Segment Adjusted EBITDA. Segment Adjusted EBITDA is the financial measure by which management allocates resources and analyzes the performance of the reportable segments. The main difference between Segment Adjusted EBITDA and Adjusted EBITDA is that Segment Adjusted EBITDA includes add backs for sales and use tax and board of directors fees.
The following table presents a reconciliation of net income (loss) to EBITDA and Adjusted EBITDA for the periods presented:
Three Months Three Months
Ended March 31, Ended March 31,
(in thousands) 2022 2021
Net income (loss) $ (1,154) $ (934)
Interest, net 3,719 5,467
Income tax expense (benefit) (676) (1,007)
Depreciation and amortization expense 8,252 7,372
EBITDA 10,141 10,898
Cost of COVID-19(1) 274 1,185
Non-cash stock compensation expense(2) 1,264 990
Transaction related costs(3) 640 1,086
Acquisition bonus expense 58 192
Inventory step-up(4) 1,892 -
Other(5) 1,047 1,517
Adjusted EBITDA $ 15,316 $ 15,868
________________________
(1)Due to significant volatility to the markets, as well as business and supply
chain disruptions, we incurred several additional expenses due to the COVID-19
pandemic, including: (i) higher pricing from vendors due to supply chain
disruptions, product shortages and increases in shipping costs, (ii) higher
employee costs due to premium pay and hazard pay for our employees and enhanced
sick pay due to illness and quarantine protocols, (iii) COVID-19 training costs,
(iv) overtime costs for IT personnel to setup eligible employees to work from
home and temporary resources and (v) janitorial costs due to enhanced COVID-19
protocols. The expenses are included in cost of services and cost of products on
our statements of operations and comprehensive income (loss). See "COVID-19
Pandemic" above for additional information related to these expenses. While we
had previously expected that these costs would not be an adjustment in the
calculation of Adjusted EBITDA after 2021, the COVID-19 pandemic has not
subsided and during 2022, to a lesser extent, we have continued to incur higher
product costs due to higher pricing from vendors for certain items (e.g., masks
and other similar high demand products). We now expect that these expenses will
not be an adjustment in the calculation of Adjusted EBITDA after 2022.
(2)Represents non-cash stock-based compensation expense in connection with the
stock awards that have been granted to employees and non-employees. The expense
is included in selling, general and administrative expenses on our statements of
operations and comprehensive income (loss).
(3)Transaction related costs primarily consist of public company readiness costs, expenses for corporate development, such as mergers and acquisitions activity, and due diligence costs.
(4)Incremental cost of products associated with the step-up of inventory recognized in purchase accounting for the HealthSmart acquisition.
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(5)Other includes other individual adjustments related to management fees and fees associated with obtaining the incremental term loans. All costs are included in selling, general and administrative expenses on our statements of operations and comprehensive income (loss).
Components of Results of Operations
Revenue
We generate revenue from contracts with our clients within our two operating segments: Technology Enabled Solutions and Advisory Services.
Through our Technology Enabled Solutions segment, we primarily provide technology solutions and services to assist our clients with workflows across product development, member experience, clinical management, core operations, business intelligence, and analytics. Through our Advisory Services segment, we provide fixed or variable fee arrangements to assist clients in the design and management of government and commercial health plans. Our revenue includes both product revenue and service arrangements. Products revenue consists of technology enabled solutions for supplemental benefits to members through their Medicare Advantage plans. These include supplemental benefit products, administration, fulfillment, and shipment of eligible product, as well as catalog development and distribution. Revenue is derived from supplemental benefit membership, supplemental benefit dollars, member utilization of the benefits and, as a result of the HealthSmart acquisition, health, wellness and diagnostic products sold through the retail channel.
Services revenue consists of:
•Technology-based Medicare plan administration services including eligibility and enrollment processing, member services, premium billing and payment processing, reconciliation and other related services. Our solutions are primarily priced on recurring per member per month fees, annual software license fees, and transaction-based fees. •Value based payment assurance solutions, including payment tools and data analytics, that improve revenue accuracy and gaps in quality, clinical care, and compliance. Our value-based solutions are primarily priced on an annual subscription fee, shared savings or fee-based engagement. Advisory (consulting) services that support health plan operations and drive business model evolution. Our Advisory services are priced on a fixed-fee or time and materials basis.
Operating Expenses
Costs of products consist of the value of supplemental benefit products, the
value of health, wellness and diagnostic products, shipping and handling costs
to acquire and to deliver the product to our clients; personnel costs including
salaries, wages, overtime, benefits; facility costs and overhead allocation
covering information technology, telecommunications costs, and other costs
specifically identified to the shipment of our products.
Costs of services consist of all costs directly attributable to service revenue
generation activities as outlined in contracts with our clients. Our largest
components in costs of services are personnel costs, including salaries, wages,
overtime, benefits, and discretionary bonus; facility costs and overhead
allocation covering information technology, telecommunications costs, and other
costs needed in the delivery of our services.
Selling, general and administrative expenses ("SG&A") include corporate
management and governance functions comprised of general management, legal,
accounting, financial reporting, human resource, sales, marketing, and other
costs not directly associated with revenue generation activities, including
those involved with developing new service offerings. SG&A includes salaries,
bonuses, and related benefits. SG&A also includes all general operating
expenses, including, but not limited to, rent and occupancy costs for
non-revenue generating activities, telecommunications costs, information
technology infrastructure, and operations costs, including software licensing
costs, advertising and marketing expenses, insurance expenses, professional
services and consulting expenses.
Depreciation and amortization includes depreciation expense of property and equipment, including leasehold improvements, computer equipment, furniture and fixtures and software and amortization expense of capitalized internal-use software and software development costs, customer relationships, acquired software and certain trade names.
Transaction related costs primarily consist of professional services incurred in connection with public company readiness costs, expenses for corporate development such as mergers and acquisitions activity and due diligence costs.
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Other Income (Expense)
Other Income (expense) is primarily composed of:
•Interest income. Interest income consists of interest on cash and cash equivalents.
•Interest expense. Interest expense consists of accrued interest and related payments on our outstanding term loans and revolving loans, as well as the amortization of debt issuance costs associated with our debt. Interest expense also includes interest on our sales tax accrual.
Results of Operations
Comparison of the Three Months Ended
The following table sets forth our results of operations for the periods
indicated:
For the Three Months Ended March
31, Change
(in thousands, except for percentages) 2022 2021 $ %
Net revenues:
Services $ 46,480 $ 43,527 $ 2,953 7 %
Products 50,228 39,104 11,124 28 %
Net revenues 96,708 82,631 14,077 17 %
Operating expenses:
Cost of services 25,477 24,021 1,456 6 %
Cost of products 37,236 26,527 10,709 40 %
Selling, general and administrative 23,214 20,099 3,115 15 %
Depreciation and amortization 8,252 7,372 880 12 %
Transaction related costs 640 1,086 (446) (41) %
Total operating expenses 94,819 79,105 15,714 20 %
Operating income 1,889 3,526 (1,637) (46) %
Other income (expense):
Interest expense (3,719) (5,467) 1,748 (32) %
Total other expense, net (3,719) (5,467) 1,748 (32) %
Income (loss) before income taxes (1,830) (1,941) 111 (6) %
Income tax (expense) benefit 676 1,007 (331) (33) %
Net income (loss) $ (1,154) $ (934) $ (220) 24 %
Net Revenues
Services Revenue
Services revenue was $46.5 million and $43.5 million for the three months ended
March 31, 2022 , and March 31, 2021 , respectively. The $3.0 million increase is
driven by $1.9 million attributable to customer membership base increase and
$1.7 million by net new consulting projects. This is offset by a decrease of
$0.4 million in implementation related fees and $0.2 million in lower data
analytics contracts.
Products Revenue
Products revenue was$50.2 million and$39.1 million for the three months endedMarch 31, 2022 , andMarch 31, 2021 , respectively. The increase of$11.1 million is driven by$7.2 million attributable to the acquisition of HealthSmart and$3.9 million for net new clients and existing client growth of memberships. 37
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Table of Contents Operating Expenses Cost of Services Cost of services was$25.5 million and$24.0 million for the three months endedMarch 31, 2022 , andMarch 31, 2021 , respectively. The increase of$1.5 million is primarily attributable to higher staffing levels to handle increased support to our existing clients, wage increases and incentives paid to agents to handle increased call volumes. Cost of Products Cost of products was$37.2 million and$26.5 million for the three months endedMarch 31, 2022 , andMarch 31, 2021 , respectively. The increase of$10.7 million is driven by$5.2 million attributable to product costs associated with HealthSmart,$1.9 million of purchase accounting inventory step-up for HealthSmart,$2.1 million due to higher volume and$1.5 million due to higher rates and shipping costs due to supply chain constraints.
Selling, General and Administrative
Selling, general and administrative was$23.2 million and$20.1 million for the three months endedMarch 31, 2022 , andMarch 31, 2021 , respectively. The increase of$3.1 million is driven by$1.0 million attributable to the acquisition of HealthSmart and$2.1 million driven by higher IT, accounting, HR and operational costs, offset by lower expected management incentive bonus.
Depreciation and Amortization
Depreciation and amortization was$8.3 million and$7.4 million for the three months endedMarch 31, 2022 , andMarch 31, 2021 , respectively. The increase of$0.9 million in depreciation and amortization expense is due to the addition of property and equipment and capitalization of software development costs. Transaction Related Costs
Transaction related costs were
Other Income (Expense)
Interest Expense
Interest expense was$3.7 million and$5.5 million for the three months endedMarch 31, 2022 , andMarch 31, 2021 , respectively. The decrease of$1.7 million is mainly attributable to lower outstanding balances due to the pay down of the term loan from IPO proceeds; offset by the incremental term loan entered into to finance the HealthSmart acquisition. Furthermore, lower interest rates for both the term loan and the incremental term loan were also a factor.
Segment Information
Our reportable segments have been determined in accordance with Accounting Standards Codification Topic 280, Segment Reporting. We have two reportable segments: Technology Enabled Solutions and Advisory Services. We evaluate the performance of each of our two operating segments based on segment revenue and Segment Adjusted EBITDA. Segment Adjusted EBITDA represents each segment's earnings before interest, tax, depreciation and amortization and is further adjusted to exclude certain items of a significant or unusual nature, including but not limited to, COVID-19 cost impacts, sales and use tax, non-cash stock compensation expense, transaction related costs, acquisition bonus expense, inventory step-up and other costs. Other includes costs such as management and board of directors fees and fees associated with obtaining the incremental term loans.
See Note 17. Segment Information, to the notes accompanying our financial statements.
The segment measurements provided to and evaluated by the chief operating
decision maker group are described in the notes to our financial statements.
These results should be considered in addition to, and not as a substitute for,
results reported in accordance with GAAP.
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For the Three Months Ended March
31, Change
(in thousands, except for percentages) 2022 2021 $ %
Revenue
Technology Enabled Solutions $ 83,166 $ 69,582 $ 13,584 20 %
Advisory Services 13,542 13,049 493 4 %
Total $ 96,708 $ 82,631 $ 14,077 17 %
Segment Adjusted EBITDA
Technology Enabled Solutions $ 12,370 $ 16,307 $ (3,937) (24) %
Advisory Services 5,323 3,338 1,985 59 %
Total $ 17,693 $ 19,645 $ (1,952) (10) %
Segment Revenues
Technology Enabled Solutions revenue was $83.2 million and $69.6 million for the
three months ended March 31, 2022 , and 2021, respectively. The increase of $13.6
million was mainly attributable to: (i) revenue from the acquisition of
HealthSmart, and (ii) existing client growth of membership base accounts.
Advisory revenue was
Segment Adjusted EBITDA
Technology Enabled Solutions Segment Adjusted EBITDA was$12.4 million and$16.3 million for the three months endedMarch 31, 2022 , and 2021, respectively. The decrease of$3.9 million was primarily attributable to higher staffing levels to handle increased support to our existing clients, wage increases, higher incentives paid to agents to handle increased call volumes and higher shipping costs due to supply chain constraints. The decrease is offset by the contribution from the HealthSmart acquisition, higher volume and projected lower bonus payments. Advisory Segment Adjusted EBITDA was$5.3 million and$3.3 million for the three months endedMarch 31, 2022 , and 2021, respectively. The increase of$2.0 million was attributable to flow through of consulting services demand, higher utilization of our consultants and lower projected bonus payments.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are our existing cash and cash equivalents, cash provided by operating activities and borrowings available under our Credit Agreement. As ofMarch 31, 2022 , we had unrestricted cash and cash equivalents of$20.9 million , and as ofMarch 31, 2022 , our total indebtedness was$270.6 million . We are a holding company that transacts substantially all of our business through our operating subsidiaries. Consequently, our ability to pay dividends to stockholders, meet debt payment obligations, and pay taxes and operating expenses is largely dependent on dividends or other distributions from our subsidiaries, whose ability to pay such distributions to us is restricted, subject to certain exceptions, pursuant to the terms of the Credit Agreement. Covenants contained in the Credit Agreement may restrict our operating subsidiaries from issuing dividends and other distributions to us. Our principal liquidity needs have been, and we expect them to continue to be, working capital and general corporate needs, debt service, capital expenditures and potential acquisitions. Our capital expenditures for property and equipment to support growth in the business were$1.8 million and$3.1 million for the three months endedMarch 31, 2022 , and 2021, respectively. Additional expenditures for software development were$1.1 million and$1.3 million for the three months endedMarch 31, 2022 , and 2021, respectively. We believe that our primary sources of liquidity, including our cash and cash equivalents, cash provided by operating activities and borrowing capacity under our Credit Agreement, will be sufficient to meet our liquidity needs for at least the next 12 months. We anticipate that to the extent that we require additional liquidity, it will be funded through the incurrence of additional indebtedness, the issuance of additional equity, or a combination thereof. We cannot assure you that we will be able to obtain this additional liquidity on reasonable terms, or at all. Additionally, our liquidity and our ability to meet our 39
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obligations and fund our capital requirements are also dependent on our future financial performance, which is subject to general economic, financial, and other factors that are beyond our control.
Cash Flows Information
The following table presents a summary of cash flows for the periods presented:
Three Months Three Months
Ended March 31, Ended March 31,
(in thousands) 2022 2021
Net cash (used in) provided by operating activities $ (15,660) $ (12,626)
Net cash used in investing activities $ (77,554) $ (4,350)
Net cash provided by financing activities $ 75,283 $ 515
Operating Activities
Net cash used in operating activities for the three months ended
Net loss was$1.2 million for the three months endedMarch 31, 2022 , as compared to$0.9 million net loss for the three months endedMarch 31, 2021 . The net loss for the three months endedMarch 31, 2022 is attributable to costs incurred for the HealthSmart acquisition including a$1.9 million purchase accounting inventory step-up and$0.6 million of additional transaction related costs, higher labor costs and higher freight costs driven by supply chain constraints. Non-cash items were$12.2 million for the three months endedMarch 31, 2022 , as compared to$8.5 million for the three months endedMarch 31, 2021 . The effect of changes in operating assets and liabilities was a cash decrease of$26.7 million for the three months endedMarch 31, 2022 , as compared to a cash decrease of$20.2 million for the three months endedMarch 31, 2021 . The most significant drivers contributing to this net decrease of$6.5 million relate to the following:
•Decrease of accrued expenses mainly driven by higher incentive bonus accrued
for as of
•An increase in accounts receivable when compared to the prior period; and
•Lower cash used on inventory purchases when compared to the prior period.
Investing Activities
Net cash used in investing activities for the three months endedMarch 31, 2022 , was$77.6 million compared to$4.3 million for the three months endedMarch 31, 2021 . During the three months endedMarch 31, 2022 , net cash used in investing activities was primarily attributable to the HealthSmart acquisition.
Financing Activities
Net cash provided by financing activities for the three months endedMarch 31, 2022 , was$75.3 million compared to$0.5 million for the three months endedMarch 31, 2021 . During the three months endedMarch 31, 2022 , net cash provided by financing activities was primarily attributable to net proceeds from the incremental loan established inFebruary 2022 to finance the HealthSmart acquisition and pay fees and expenses related thereto.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as ofMarch 31, 2022 . The principal commitments consisted of obligations under outstanding operating leases for office facilities, capital leases related to copy machines, our long-term debt, and purchase commitments. The amount of the obligations presented in the following table summarizes as ofMarch 31, 2022 , the commitments to settle contractual obligations in cash for the periods presented. 40
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Payments Due by Period
Less than 1 More than
(in thousands) Total year 1-3 Years 4-5 Years 5 years
Operating leases for facilities 26,512 4,735 16,168 3,602 2,007
Finance leases 993 397 596 - -
Long-term debt obligations(1) 270,631 585 2,340 267,706 -
Purchase commitments 6,910 6,910 - - -
Total contractual obligations
________________________
(1)Includes the term loan under our Credit Agreement.
Off-Balance Sheet Arrangements
During the periods presented, we did not have any off-balance sheet
arrangements, as defined in Regulation S-K promulgated by the
Critical Accounting Policies and Use of Estimates
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make judgments, estimates, and assumptions that affect the reported amounts of assets, liabilities, income, and expenses and related disclosures of contingent assets and liabilities. We base these estimates on our historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results experienced may vary materially and adversely from our estimates. Revisions to estimates are recognized prospectively. During the three months endedMarch 31, 2022 , there were no material changes to our critical accounting policies and use of estimates from those described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Use of Estimates" included in our Form 10-K for the year endedDecember 31, 2021 . The following discussion supplements our Critical Accounting Policies and Use of Estimates Policy forGoodwill as it relates to the interim goodwill impairment test performed as ofMarch 31, 2022 . As a result of the decline in our stock price sinceDecember 31, 2021 , we performed an interim impairment test for goodwill for APA, SBA, VBPA and Advisory reporting units using the quantitative approach as ofMarch 31, 2022 . Since HealthSmart was recently acquired, no impairment test was performed on that reporting unit. Based on our evaluation performed, we determined the fair value of each of the reporting units exceeded its respective carrying amount, and therefore, we determined that goodwill was not impaired at any of our reporting units as ofMarch 31, 2022 . We define "headroom" as the percentage difference between the fair value of a reporting unit and its carrying value. For the interim impairment test, the headroom for the reporting units ranged between eight percent to 65 percent. Our SBA reporting unit and our VBPA reporting unit have headroom at the low-end of that range (8.4% for SBA and 12.5% for VBPA) and could experience impairment in the future if we do not achieve our profitability projections, there is a change in key assumptions underlying the valuation or if we continue to experience a substantial decrease in our stock price. Evaluation of goodwill for impairment requires judgment, including the identification of reporting units, assignment of assets, liabilities and goodwill to reporting units and determination of the fair value of each reporting unit. We estimate the fair value of our reporting units using a combination of an income approach, utilizing a discounted cash flow analysis, and a market approach, using market multiples. Under the income approach, we estimate projected future cash flows, the timing of such cash flows and long-term growth rates, and determine the appropriate discount rate that reflects the risk inherent in the projected future cash flows. The discount rate used is based on a market participant weighted-average cost of capital and may be adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting unit's ability to execute on the projected future cash flows. Under the market approach, we estimate fair value based on market multiples of revenues and earnings derived from comparable publicly-traded companies with characteristics similar to the reporting unit. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions and other factors. The assumptions and estimates used in determining the fair values of the reporting units contain uncertainties, and any changes to these assumptions and estimates could have a negative impact and result in a future impairment. 41
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Recent Accounting Pronouncements
See Note 2 to our unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information.
Emerging Growth Company Status
Pursuant to the JOBS Act, an emerging growth company is provided the option to adopt new or revised accounting standards that may be issued by FASB or theSEC either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies. We intend to take advantage of the exemption for complying with new or revised accounting standards within the same time periods as private companies. Accordingly, the information contained herein may be different than the information you receive from other public companies. We also intend to take advantage of some of the reduced regulatory and reporting requirements of emerging growth companies pursuant to the JOBS Act so long as we qualify as an emerging growth company, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute payments.
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