Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company’s financial condition and results should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes thereto contained elsewhere in this Quarterly Report and together with the information included in the Company’s 2022 Annual Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties; the results described below are not necessarily indicative of the results to be expected in any future periods.
Cautionary Note Regarding Forward-looking Statements
All statements other than statements of historical fact included in this Quarterly Report including, without limitation, statements under this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 or Section 21E of the Securities Exchange Act of 1934, each as amended, including, in particular, statements about our plans, strategies and prospects as well as estimates of industry growth for the next quarter and beyond. When used in this Quarterly Report, words such as “believes,” “estimates,” “anticipates,” “expects,” “seeks,” “projects,” “intends,” “plans,” “may,” “will” or “should” or, in each case, their negative or other variations or comparable terminology represent forward-looking statements that include matters that are not historical facts. They may appear in a number of places throughout this Quarterly Report and these forward-looking statements reflect management’s expectations regarding our future growth, results of operations, operational and financial performance and business prospects and opportunities. Such forward-looking statements are based on available current market material and management’s expectations, beliefs and forecasts concerning future events impacting our business. Factors that may impact such forward-looking statements include:
•loss of our customers, particularly our largest customers;
•trends in the U.S. healthcare system, including recent trends of unknown duration of reduced healthcare utilization and increased patient financial responsibility for services;
•inability to preserve or increase our existing market share or the size of our PPO networks;
•effects of competition;
•effects of pricing pressure;
•the inability of our customers to pay for our services;
•decreases in discounts from providers;
•the loss of our existing relationships with providers;
•the loss of key members of our management team or inability to maintain sufficient qualified personnel;
•pressure to limit access to preferred provider networks;
•the ability to achieve the goals of our strategic plans and recognize the anticipated strategic, operational, growth and efficiency benefits when expected;
•our ability to enter new lines of business and broaden the scope of our services;
•our ability to identify, complete and successfully integrate acquisitions;
•our ability to obtain additional financing;
•changes in our industry and in industry standards and technology;
•interruptions or security breaches of our information technology systems and other cyber security attacks;
•our ability to protect proprietary information, processes and applications;
•our ability to maintain the licenses or right of use for the software we use;
•our inability to expand our network infrastructure;
•changes in our accounting principles or the incurrence of impairment charges;
•our ability to remediate any material weaknesses or maintain effective internal controls over financial reporting;
•our ability to continue to attract, motivate and retain a large number of skilled employees, and adapt to the effects of inflationary pressure on wages;
•changes in our regulatory environment, including healthcare law and regulations;
•the expansion of privacy and security laws;
•heightened enforcement activity by government agencies;
•our ability to pay interest and principal on our notes and other indebtedness;
•lowering or withdrawal of our credit ratings;
•the possibility that we may be adversely affected by other political, economic, business, and/or competitive factors;
•adverse outcomes related to litigation or governmental proceedings;
•other factors disclosed in this Quarterly Report; and
•other factors beyond our control.
The forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effects on our business. There can be no assurance that future developments affecting our business will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors referred to under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report or as described in our 2022 Annual Report. Should one or more of these risks or uncertainties materialize, or should any of the assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
Company Overview
MultiPlan is a leading provider of data analytics and technology-enabled solutions designed to bring affordability, efficiency and fairness to the U.S. healthcare industry. We do so through services focused on reducing medical cost and improving payment accuracy for the Payors of healthcare, which are primarily health insurers, self-insured employers, federal and state government-sponsored health plans and other health plan sponsors (typically through their health plan administrators), and, indirectly, the plan members who are the consumers of healthcare services.
MultiPlan was founded in 1980 as a New York-based hospital network and has evolved both organically and through acquisition into an integrated data and analytics platform offering a suite of services, which efficiently address the cost of medical services. MultiPlan offers services to our customers in three categories:
•Analytics-Based Services: a suite of data-driven algorithms and insights that detect claims over-charges and either negotiate or recommend fair reimbursement for out-of-network medical costs using a variety of data sources and pricing algorithms. These services are applied prior to the payment of the claim and are often processed within a day of receipt;
•Network-Based Services: contracted discounts with healthcare providers to form one of the largest independent preferred provider organizations ("PPO") in the United States with over 1.3 million providers under contract, as well as outsourced network development and/or management services. These services are applied prior to the payment of the claim and are typically processed within a day of receipt; and
•Payment and Revenue Integrity Services: data, technology, and clinical expertise deployed to identify and remove improper and unnecessary charges before or after claims are paid, or to identify and help restore and preserve underpaid premium dollars.
MultiPlan sits at the nexus of four constituencies (Payors, employers/plan sponsors, plan members and providers) and offers an independent reimbursement solution to reduce healthcare costs in a manner that is systematic, efficient and fair to all parties involved. Although the end beneficiary of our services are employers and other plan sponsors and their health plan members, our direct customers are typically health plan administrators ("Payors") who go out to market with our services. Over the last 40+ years, we have developed a platform that offers these Payors a single interface to a comprehensive set of services, which are used in combination or individually to reduce the medical cost burden on their health plan customers and members while fostering independently developed fair and efficient reimbursements to healthcare providers. These comprehensive offerings have enabled us to maintain long-term relationships with a number of our customers, including relationships of over 25 years with some of the nation's largest Payors. For the three months ended March 31, 2023 and year ended December 31, 2022 our comprehensive services identified approximately $5.6 billion and $22.3 billion in potential medical cost savings, respectively.
We believe our solutions provide a strong value proposition to Payors, their health plan customers and healthcare consumers, as well as to providers. Overall, our service offerings aim to reduce healthcare costs in a manner that is orderly, efficient and fair to all parties. In addition, because in most instances the fee for our services is directly linked to the savings we identify, our revenue model is aligned with the interests of our customers.
Factors Affecting Our Results of Operations
Medical Cost Savings
Our business and revenues are driven by the ability to lower medical costs through claims savings for our customers. The medical charges of those claims can influence our ability to generate claim savings.
The following table presents the medical charges processed and the potential savings identified for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change | | | | |
| (in billions) | 2023 | | 2022 | | % | | | | | | |
| Commercial Health Plans | | | | | | | | | | | |
| Medical charges processed | $ | 18.4 | | | $ | 19.5 | | | (5.8)% | | | | | | |
| Potential medical cost savings | $ | 5.3 | | | $ | 5.5 | | | (4.8)% | | | | | | |
| Potential savings as a % of charges | 28.6 | % | | 28.3 | % | | | | | | | | |
| Payment & Revenue Integrity, Property & Casualty, and Other | | | | | | | | | | | |
| Medical charges processed | $ | 21.3 | | | $ | 18.6 | | | 14.7% | | | | | | |
| Potential medical cost savings | $ | 0.3 | | | $ | 0.2 | | | 21.6% | | | | | | |
| Potential savings as a % of charges | 1.4 | % | | 1.3 | % | | | | | | | | |
| Total | | | | | | | | | | | |
| Medical charges processed | $ | 39.7 | | | $ | 38.1 | | | 4.2% | | | | | | |
| Potential medical cost savings | $ | 5.6 | | | $ | 5.8 | | | (3.7)% | | | | | | |
| Potential savings as a % of charges | 14.0 | % | | 15.2 | % | | | | | | | | |
Medical charges processed represent the aggregate dollar amount of claims processed by our cost management and payment accuracy solutions in the period presented. The dollar amount of the claim for purposes of this calculation is the dollar amount of the claim prior to any reductions that may be made as a result of the claim being processed by our solutions.
Potential medical cost savings represent the aggregate amount of potential savings in dollars identified by our cost management and payment accuracy solutions in the period presented. Since certain of our fees are based on the amount of savings achieved by our customers, and our customers are the final adjudicator of the claims and may choose not to reduce claims or reduce claims by only a portion of the potential savings identified, potential medical cost savings may not directly correlate with the amount of fees earned in connection with the processing of such claims.
Components of Results of Operations
Revenues
We generate revenues from several sources including: (i) Network-Based Services that process claims at a discount compared to billed fee-for-service rates and by using an extensive network, (ii) Analytics-Based Services that use our leading and proprietary information technology platform to offer customers solutions to reduce medical costs, and (iii) Payment and
Revenue Integrity Services that use data, technology, and clinical expertise to identify improper, unnecessary and excessive charges. Payors typically compensate us through either a PSAV achieved or a PEPM rate.
Costs of Services (exclusive of depreciation and amortization of intangible assets)
Costs of services (exclusive of depreciation and amortization of intangible assets) consist of all costs specifically associated with claims processing activities for customers, sales and marketing, and the development and maintenance of our networks, analytics-based services, and payment and revenue integrity services. Two of the largest components in costs of services are personnel expenses and access and bill review fees. Access and bill review fees include fees for accessing non-owned third-party provider networks, expenses associated with vendor fees for database access and systems technology used to reprice claims, and outsourced services. Third-party network expenses are fees paid to non-owned provider networks used to supplement our owned network assets to provide more network claim savings to our customers.
General and Administrative Expenses
General and administrative expenses include corporate management and governance functions composed of general management, legal, treasury, tax, real estate, financial reporting, auditing, benefits and human resource administration, communications, public relations, billing and information management. In addition, general and administrative expenses include taxes, insurance, advertising, transaction costs, and other general expenses.
Depreciation Expense
Depreciation expense consists of depreciation and amortization of property and equipment related to our investments in leasehold improvements, furniture and equipment, computer hardware and software, and internally generated capitalized software development costs. We provide for depreciation and amortization on property and equipment using the straight-line method to allocate the cost of depreciable assets over their estimated useful lives.
Amortization of intangible assets
Amortization of intangible assets includes amortization of the value of our customer relationships, provider network, technology, and trademarks which were identified in valuing the intangible assets in connection with the June 6, 2016 acquisition by H&F and its affiliates, as well as the acquisitions of HST and DHP by the Company.
Interest expense
Interest expense consists of accrued interest and related interest payments on our outstanding long-term debt and amortization of debt issuance costs and discounts.
Interest income
Interest income consists primarily of bank interest.
Gain on extinguishment of debt
The Company recognizes a gain on extinguishment of debt for the difference between the reacquisition price of the debt and the net carrying amount of the extinguished debt.
Change in fair value of Private Placement Warrants and Unvested Founder Shares
The Company re-measures at each reporting period the fair value of the Private Placement Warrants and Unvested Founder Shares. The changes in fair value are primarily due to the changes in the stock price of the Company's Class A common stock, changes in expected stock volatility and the passage of time.
Income tax (benefit) expense
Income tax (benefit) expense consists of federal, state, and local income taxes.
Non-GAAP Financial Measures
We use EBITDA, Adjusted EBITDA and Adjusted EPS to evaluate our financial performance. EBITDA, Adjusted EBITDA and adjusted EPS are financial measures that are not presented in accordance with GAAP. We believe the presentation of these non-GAAP financial measures provides useful information to investors in assessing our financial condition and results
of operations across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our financial operating results of our core business.
These measurements of financial performance have important limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Additionally, they may not be comparable to other similarly titled measures of other companies. Some of these limitations are:
•such measures do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
•such measures do not reflect changes in, or cash requirements for, our working capital needs;
•such measures do not reflect the significant interest expense, or cash requirements necessary to service interest or principal payments on our debt;
•such measures do not reflect any cash requirements for any future replacement of depreciated assets;
•such measures do not reflect the impact of stock-based compensation upon our results of operations;
•such measures do not reflect our income tax (benefit) expense or the cash requirements to pay our income taxes;
•such measures do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and
•other companies in our industry may calculate these measures differently from how we do, limiting their usefulness as a comparative measure.
In evaluating EBITDA, Adjusted EBITDA and Adjusted EPS, you should be aware that in the future we may incur expenses similar to those eliminated in the presentation.
EBITDA, Adjusted EBITDA, and Adjusted EPS are widely used measures of corporate profitability eliminating the effects of financing and capital expenditures from the operating results. We define EBITDA as net income adjusted for interest expense, interest income, income tax expense (benefit), depreciation, amortization of intangible assets, and non-income taxes. We define Adjusted EBITDA as EBITDA further adjusted to eliminate the impact of certain items that we do not consider to be indicative of our core business, including other expenses, net, loss (gain) on change in fair value of Private Placement Warrants and Unvested Founder Shares, transaction related expenses, (gain) loss on debt extinguishment, (gain) loss on investments, and stock-based compensation. See our unaudited condensed consolidated financial statements included in this Quarterly Report for more information regarding these adjustments. Adjusted EBITDA is used in our agreements governing our outstanding indebtedness for debt covenant compliance purposes. Our Adjusted EBITDA calculation is consistent with the definition of Adjusted EBITDA used in our debt instruments.
Adjusted EPS is used in reporting to our Board and executive management and as a component of the measurement of our performance. We believe that this measure provides useful information to investors because it is the profitability measure we use to evaluate earnings performance on a comparable year-to-year basis. Adjusted EPS is defined as net income adjusted for amortization of intangible assets, stock-based compensation, transaction related expenses, (gain) loss on debt extinguishment, (gain) loss on investments, other expense, loss (gain) on change in fair value of Private Placement Warrants and Unvested Founder Shares and tax effect of adjustments to arrive at Adjusted net income divided by our basic weighted average number of shares outstanding.
The following table presents a reconciliation of net income to EBITDA and Adjusted EBITDA for the periods presented:
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| (in thousands) | | | | | 2023 | | 2022 |
| | | | | | | |
| Net income | | | | | $ | 209 | | | $ | 43,978 | |
| Adjustments: | | | | | | | |
| Interest expense | | | | | 83,428 | | | 71,445 | |
| Interest income | | | | | (3,239) | | | (12) | |
| Provision for income taxes | | | | | 1,693 | | | 14,255 | |
| Depreciation | | | | | 18,206 | | | 16,596 | |
| Amortization of intangible assets | | | | | 85,127 | | | 85,154 | |
| Non-income taxes | | | | | 341 | | | 553 | |
| EBITDA | | | | | $ | 185,765 | | | $ | 231,969 | |
| Adjustments: | | | | | | | |
Other income, net(1) | | | | | (115) | | | (890) | |
| Integration expenses | | | | | 1,043 | | | 1,672 | |
| Change in fair value of Private Placement Warrants and unvested founder shares | | | | | 1,631 | | | (12,741) | |
| Transaction-related expenses | | | | | 1,018 | | | 2,555 | |
| Gain on extinguishment of debt | | | | | (36,778) | | | — | |
| Gain on investments | | | | | — | | | (289) | |
| Stock-based compensation | | | | | 3,695 | | | 3,130 | |
| Adjusted EBITDA | | | | | $ | 156,259 | | | $ | 225,406 | |
(1) "Other income, net" represent miscellaneous non-recurring income, miscellaneous non-recurring expense, gain or loss on disposal of assets, impairment of other assets, gain or loss on disposal of leases, tax penalties, and non-integration related severance costs.
____________________
Material differences between MultiPlan Corporation and MPH for the three months ended March 31, 2023 include differences in interest expense, change in fair value of Private Placement Warrants and Unvested Founder Shares, and stock-based compensation. For the three months ended March 31, 2023, interest expense for MultiPlan Corporation was $20.6 million higher than interest expense for MPH due to interest expense incurred by MultiPlan Corporation on the Senior Convertible PIK Notes. The loss (gain) on change in fair value of Private Placement Warrants and Unvested Founder Shares and stock-based compensation are recorded in the parent company MultiPlan Corporation and not in the MPH operating company and therefore the entire amount represents differences between MultiPlan Corporation and MPH. In the three months ended March 31, 2023 and March 31, 2022, MPH had higher EBITDA expenses than MultiPlan Corporation by $1.0 million primarily due to insurance premiums paid to our captive insurance company, net of related captive insurance company costs, which are eliminated in the consolidated financial reporting of MultiPlan Corporation.
The following table presents a reconciliation of net income to Adjusted EPS for the periods presented:
| | | | | | | | | | | | | | | |
| (in thousands, except share and per share amounts) | | | Three Months Ended March 31, |
| | | | 2023 | | 2022 |
| | | | | | | |
| Net income | | | | | $ | 209 | | | $ | 43,978 | |
| Adjustments: | | | | | | | |
| Amortization of intangible assets | | | | | 85,127 | | | 85,154 | |
| Other income, net | | | | | (115) | | | (890) | |
| Integration expenses | | | | | 1,043 | | | 1,672 | |
| Change in fair value of Private Placement Warrants and unvested founder shares | | | | | 1,631 | | | (12,741) | |
| Transaction-related expenses | | | | | 1,018 | | | 2,555 | |
| Gain on investments | | | | | — | | | (289) | |
| Gain on extinguishment of debt | | | | | (36,778) | | | — | |
| Stock-based compensation | | | | | 3,695 | | | 3,130 | |
| Estimated tax effect of adjustments | | | | | (13,497) | | | (22,489) | |
| Adjusted net income | | | | | $ | 42,333 | | | $ | 100,080 | |
| | | | | | | |
| Weighted average shares outstanding – Basic | | | | | 638,721,991 | | 638,497,587 |
| | | | | | | |
| Net income per share – basic | | | | | $ | 0.00 | | | $ | 0.07 | |
| Adjusted EPS | | | | | $ | 0.07 | | | $ | 0.16 | |
Factors Affecting the Comparability of our Results of Operations
As a result of a number of factors, our historical results of operations may not be comparable to our results of operations in future periods and may not be directly comparable from period to period. Set forth below is a brief discussion of the key factors impacting the comparability of our results of operations.
Debt Repurchase and Cancellation
During the three months ended March 31, 2023, the Company repurchased and cancelled $137.8 million of the 5.750% Notes, resulting in the recognition of a gain on debt extinguishment of $36.8 million, representing the difference between the reacquisition price of the debt and the net carrying amount of the extinguished debt.
In the year ended December 31, 2022, the Company repurchased in the open market and cancelled $136.2 million of the 5.750% Notes, resulting in the recognition of a gain on extinguishment of debt of $34.6 million.
Floating Rate Debt
Term Loan B has a variable interest rate and as LIBOR interest rates have increased, our annualized weighted average cash interest rate increased by 1.24% during the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. As of March 31, 2023, our total debt had an annualized weighted average cash interest rate of 6.76%, as compared to 5.52% as of March 31, 2022.
Results of Operations for the Three Months Ended March 31, 2023 and 2022
The following table provides the results of operations for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | Change |
| (in thousands) | | | | | | | | | 2023 | | 2022 | | $ | | % |
| Revenues | | | | | | | | | | | | | | | |
| Network-Based Services | | | | | | | | | $ | 57,195 | | | $ | 68,624 | | | $ | (11,429) | | | (16.7) | % |
| Analytics-Based Services | | | | | | | | | 152,420 | | | 196,118 | | | (43,698) | | | (22.3) | % |
| Payment and Revenue Integrity Services | | | | | | | | | 26,979 | | | 33,304 | | | (6,325) | | | (19.0) | % |
| Total Revenues | | | | | | | | | $ | 236,594 | | | $ | 298,046 | | | $ | (61,452) | | | (20.6) | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Costs of services (exclusive of depreciation and amortization of intangible assets shown below) | | | | | | | | | 54,850 | | | 47,072 | | | 7,778 | | | 16.5 | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| General and administrative expenses | | | | | | | | | 31,467 | | | 32,588 | | | (1,121) | | | (3.4) | % |
| Depreciation expense | | | | | | | | | 18,206 | | | 16,596 | | | 1,610 | | | 9.7 | % |
| Amortization of intangible assets | | | | | | | | | 85,127 | | | 85,154 | | | (27) | | | 0.0 | % |
| | | | | | | | | | | | | | | |
| Operating income | | | | | | | | | 46,944 | | | 116,636 | | | (69,692) | | | (59.8) | % |
| Interest expense | | | | | | | | | 83,428 | | | 71,445 | | | 11,983 | | | 16.8 | % |
| Interest income | | | | | | | | | (3,239) | | | (12) | | | (3,227) | | | NM |
| Gain on extinguishment of debt | | | | | | | | | (36,778) | | | — | | | (36,778) | | | NM |
| Gain on investments | | | | | | | | | — | | | (289) | | | 289 | | | 100.0 | % |
| Loss (gain) on change in fair value of Private Placement Warrants and Unvested Founder Shares | | | | | | | | | 1,631 | | | (12,741) | | | 14,372 | | | 112.8 | % |
| Net income before taxes | | | | | | | | | 1,902 | | | 58,233 | | | (56,331) | | | (96.7) | % |
| Provision for income taxes | | | | | | | | | 1,693 | | | 14,255 | | | (12,562) | | | (88.1) | % |
| Net income | | | | | | | | | $ | 209 | | | $ | 43,978 | | | $ | (43,769) | | | (99.5) | % |
_____________________
NM = Not meaningful
Revenues
Revenues decreased by $61.5 million, or 20.6%, for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. This decrease in revenues was due to decreases in Network-Based Services revenues of $11.4 million, Analytics-Based Services revenues of $43.7 million, and Payment and Revenue Integrity Services revenues of $6.3 million during this time period, as explained below.
Network-Based Services revenues decreased $11.4 million, or 16.7%, in the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. This decrease in revenues was primarily related to lower medical cost savings on Network-Based Services claims received from customers and contractual rate changes contributing to decreases in Network-Based Services PSAV revenues of $11.0 million and decreases in PEPM and other network revenues of $0.4 million.
Analytics-Based Services revenues decreased $43.7 million, or 22.3%, for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. This decrease in revenues was primarily due to lower medical cost savings accepted by clients on Analytics-Based Services claims and contractual rate changes contributing to decreases in Analytics-Based Services PSAV revenues of $43.0 million and decreases in Analytics-Based Services PEPM revenues of $0.7 million.
Payment and Revenue Integrity Services revenues decreased by $6.3 million, or 19.0%, for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022. This decrease was primarily in our Clinical Negotiations pre-payment integrity line of business, contributing to decreases in PSAV revenues of $6.3 million.
Costs of Services (exclusive of depreciation and amortization of intangible assets)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change | | | | |
| (in thousands) | 2023 | | 2022 | | $ | | % | | | | | | | | |
| Personnel expenses excluding stock-based compensation | $ | 46,276 | | | $ | 39,157 | | | $ | 7,119 | | | 18.2 | % | | | | | | | | |
| Stock-based compensation | 884 | | | 600 | | | 284 | | | 47.3 | % | | | | | | | | |
| Personnel expenses including stock-based compensation | 47,160 | | | 39,757 | | | 7,403 | | | 18.6 | % | | | | | | | | |
| Access and bill review fees | 4,495 | | | 3,758 | | | 737 | | | 19.6 | % | | | | | | | | |
| Other cost of services expenses | 3,195 | | | 3,557 | | | (362) | | | (10.2) | % | | | | | | | | |
| Total costs of services | $ | 54,850 | | | $ | 47,072 | | | $ | 7,778 | | | 16.5 | % | | | | | | | | |
The increase in costs of services of $7.8 million, or 16.5%, for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022 was primarily due to increases in personnel expenses from increases in employee headcount and year-over-year increases in compensation and related fringe benefits.
General and Administrative Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | Change |
| (in thousands) | | | | | | | | | 2023 | | 2022 | | $ | | % |
| General and administrative expenses excluding stock-based compensation and transaction-related expenses | | | | | | | | | $ | 27,638 | | $ | 27,503 | | $ | 135 | | 0.5 | % |
| Stock-based compensation | | | | | | | | | 2,811 | | 2,530 | | 281 | | | 11.1 | % |
| Transaction-related expenses | | | | | | | | | 1,018 | | 2,555 | | (1,537) | | | (60.2) | % |
| General and administrative expenses | | | | | | | | | $ | 31,467 | | $ | 32,588 | | $ | (1,121) | | (3.4) | % |
| | | | | | | | | | | | | | | |
The decrease of $1.1 million, or 3.4%, in general and administrative expenses for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022 was primarily due to decreases in transaction costs of $1.5 million, increases in capitalized software development offset of $3.7 million and other net decreases in general and administrative expenses of $1.1 million, offset by increases in professional fees of $1.6 million, primarily outside legal fees, and net increases in personnel expenses including stock-based compensation and contract labor, of $3.6 million.
Depreciation Expense
The increase of $1.6 million, or 9.7%, in depreciation expense for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was due to purchases of property and equipment, including internally generated capitalized software, partially offset by assets that were written-off or became fully depreciated in the period.
Amortization of Intangible Assets
Amortization of intangible assets was relatively flat for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.
Interest Expense
The increase in interest expense of $12.0 million, or 16.8%, for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, was primarily due to the increase in LIBOR on our Term Loan B, offset by reductions in interest expense due to the repurchase and cancellation of our 5.750% Notes. Our annualized weighted average cash interest rate increased by 1.24% across our total debt in the three months ended March 31, 2023 as compared to the same period in prior year.
As of March 31, 2023, our long-term debt was $4,604.4 million and included (i) $1,291.9 million Term Loan B, excluding the current portion of Term Loan B of $13.3 million, (ii) $1,050.0 million of 5.50% Senior Secured Notes, (iii) $1,026.0 million
of 5.750% Senior Notes, (iv) $1,300.0 million of Senior Convertible PIK Notes, and net of (v) discount on Term Loan B of $10.7 million, (vi) discount on Senior Convertible PIK Notes of $22.5 million, and (vii) debt issue costs of $30.3 million. As of March 31, 2023, our total debt had an annualized weighted average cash interest rate of 6.76%. As of March 31, 2022, our total debt had an annualized weighted average cash interest rate of 5.52%.
As of December 31, 2022, our long-term debt was $4,741.9 million and included (i) $1,295.2 million Term Loan B, excluding the current portion of Term Loan B of $13.3 million, (ii) $1,050.0 million of 5.50% Senior Secured Notes, (iii) $1,163.8 million of 5.750% Senior Notes, (iv) $1,300.0 million of Senior Convertible PIK Notes, and net of (v) discount on Term Loan B of $11.1 million, (vi) discount on Senior Convertible PIK Notes of $23.6 million, and (vii) debt issue costs of $32.4 million. As of December 31, 2022, our total debt had a weighted average cash interest rate of 6.67%.
Gain on extinguishment of debt
During the three months ended March 31, 2023, the Company repurchased and cancelled $137.8 million of the 5.750% Notes, resulting in the recognition of a gain on debt extinguishment of $36.8 million, representing the difference between the reacquisition price of the debt and the net carrying amount of the extinguished debt.
Change in fair value of Private Placement Warrants and Unvested Founder Shares
The Company re-measures the fair value of the Private Placement Warrants and Unvested Founder Shares at each reporting period. From December 31, 2022 to March 31, 2023, the fair value of the Private Placement Warrants increased by $0.7 million and the fair value of the Unvested Founder Shares increased by $0.9 million. The increase was primarily due to the increase in the expected stock volatility over the period.
Provision for income taxes
Net income before income taxes for the three months ended March 31, 2023 of $1.9 million generated a provision for income taxes of $1.7 million. Net income before income taxes for the three months ended March 31, 2022 of $58.2 million generated a provision for income taxes of $14.3 million. The effective tax rate for the three months ended March 31, 2023 differed from the statutory rate primarily due to stock compensation expense, non-deductible mark-to-market liability, and state tax expense. The effective tax rate for the three months ended March 31, 2022 differed from the statutory rate primarily due to a non-deductible mark-to-market liability, impact of our acquisitions and changes in the Company's deferred state tax rate due to operations, and state tax expense.
Liquidity and Capital Resources
As of March 31, 2023, we had cash and cash equivalents of $272.2 million, which includes restricted cash of $6.5 million, and $448.2 million of loan availability under the revolving credit facility. As of March 31, 2023, we have three letters of credit totaling $1.8 million of utilization against the revolving credit facility. The three letters of credit are used to satisfy real estate lease agreements for three of our offices in lieu of security deposits.
On February 27, 2023, the Company's Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $100 million of its Class A common stock from time to time in open market transactions. The repurchase program was effective immediately and expires on December 31, 2023. As of March 31, 2023, the Company has repurchased its Class A common stock as part of this program using cash on hand for an aggregate amount of $5.7 million, including commissions.
Our primary sources of liquidity are internally generated funds combined with our borrowing capacity under our revolving credit facility. We believe that these sources will provide sufficient liquidity for us to meet our working capital, capital expenditure and other cash requirements for at least the next twelve months. We may from time to time at our sole discretion, purchase, redeem, repay or retire our long-term debt, through tender offers, in privately negotiated or open market transactions or otherwise. We plan to finance our capital expenditures with cash from operations. Furthermore, our future liquidity and future ability to fund capital expenditures, working capital and debt requirements are also dependent upon our future financial performance, which is subject to many economic, commercial, financial and other factors that are beyond our control, including the ability of financial institutions to meet their lending obligations to us. If those factors significantly change, our business may not be able to generate sufficient cash flow from operations or future borrowings may not be available to meet our liquidity needs. We anticipate that to the extent we require additional liquidity as a result of these factors or in order to execute our strategy, it would be financed either by borrowings under our senior secured credit facilities, by other indebtedness, additional equity financings or a combination of the foregoing. We may be unable to obtain any such additional financing on reasonable terms or at all.
Cash Flow Summary
The following table is derived from our unaudited condensed consolidated statements of cash flows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| (in thousands) | 2023 | | 2022 |
| Net cash flows provided by (used in): | | | |
| Operating activities | $ | 64,215 | | | $ | 194,844 | |
| Investing activities | $ | (23,101) | | | $ | (24,165) | |
| Financing activities | $ | (109,437) | | | $ | (5,270) | |
Cash Flows from Operating Activities
Cash flows from operating activities provided $64.2 million for the three months ended March 31, 2023 and $194.8 million for the three months ended March 31, 2022. This decrease of $130.6 million, or 67.0%, in cash flows from operating activities was primarily the result of changes in net working capital of $105.5 million, and decreases in net income of $43.8 million, offset by increases in adjustments for non-cash items of $18.7 million.
The $18.7 million increase in non-cash items was primarily due to increases in deferred income taxes of $38.8 million, increases in the loss (gain) on change in fair value of Private Placement Warrants and Unvested Founder Shares of $14.4 million, increases in depreciation of $1.6 million, offset by the gain on extinguishment of debt of $36.8 million.
During the three months ended March 31, 2023, $15.5 million was used by changes in net working capital including decreases in accounts payable and accrued expenses and other expenses of $20.9 million and decreases in operating lease obligations of $1.7 million and increases in prepaid taxes of $4.6 million, offset by decreases in net accounts receivable of $11.9 million. The decrease in accounts payable and accrued expenses and other expenses was primarily due to decreases of $22.3 million of accrued legal contingencies, $17.1 million in accrued compensation expense primarily related to the Company's incentive compensation program and $0.4 million of other account payable and accrued expenses, offset by increases of $18.9 million of accrued interest.
During the three months ended March 31, 2022, $90.1 million was provided by changes in net working capital including increases in accounts payable and accrued and other expenses of $61.3 million, decreases in prepaid expenses and other assets of $3.6 million, decreases in prepaid taxes of $5.1 million, and decreases in net accounts receivable of $21.7 million primarily due to the timing of collections, offset by decreases in operating lease obligations of $1.6 million. The increase in accounts payable and accrued expenses and other expenses of $61.3 million was primarily accrued taxes of $42.0 million and accrued interest of $22.5 million, offset by $3.1 million of other accounts payable and accrued expenses.
Cash Flows from Investing Activities
For the three months ended March 31, 2023, net cash of $23.1 million was used in investing activities for purchases of property and equipment and capitalization of software development. For the three months ended March 31, 2022, net cash of $24.2 million was used in investing activities including $24.5 million for purchases of property and equipment and capitalization of software development, partially offset by proceeds from the sale of an investment of $0.3 million.
Cash Flows from Financing Activities
Cash flows used in financing activities for the three months ended March 31, 2023 were $109.4 million primarily consisting of the repurchase of 5.750% Notes for $100.0 million, purchase of treasury stock for $5.7 million, including commissions, repayments of Term Loan B of $3.3 million and $0.5 million of taxes paid on net settlement of vested share awards.
Cash flows used in financing activities for the three months ended March 31, 2022 were $5.3 million consisting of repayments of Term Loan B of $3.3 million and $2.0 million of taxes paid on net settlement of vested share awards.
Term Loans and Revolvers
On August 24, 2021, MPH issued new senior secured credit facilities composed of $1,325.0 million of Term Loan B, $450.0 million of Revolver B, and $1,050.0 million in aggregate principal amount of 5.50% Senior Secured Notes. MPH used
the net proceeds from Term Loan B, issued with a discount of 1.00%, and the 5.50% Senior Secured Notes to repay all of the outstanding balance of its Term Loan G of $2,341.0 million, and pay fees and expenses in connection therewith.
Interest on Term Loan B and Revolver B is calculated, at MPH's option, as (a) LIBOR (or, with respect to Term Loan B only, 0.50%, if higher), plus the applicable margin, or (b) the highest rate of (1) the prime rate, (2) the federal funds effective rate, plus 0.50%, (3) the LIBOR for an interest period of one month plus 1.00% and (4) 0.50% for Term Loan B and 1.00% for Revolver B, in each case, plus an applicable margin of 4.25% for Term Loan B and between 3.50% and 4.00% for Revolver B, depending on MPH's first lien debt to consolidated EBITDA ratio. The interest rate in effect for Term Loan B was 9.20% and 4.76% as of March 31, 2023 and 2022, respectively.
Term Loan B matures on September 1, 2028 and Revolver B matures on August 24, 2026.
For all our debt agreements with an interest rate dependent on LIBOR, we are currently assessing and monitoring how transitioning from LIBOR to an alternative reference rate may affect us past 2023.
We are obligated to pay a commitment fee on the average daily unused amount of our revolving credit facility. The annual commitment fee rate was 0.375% at March 31, 2023 and 0.25% at December 31, 2022. The fee can range from an annual rate of 0.25% to 0.50% based on our leverage ratio, as defined in the agreement.
Senior Notes
On October 8, 2020, the Company issued $1,300.0 million in aggregate principal amount of Senior Convertible PIK Notes. The Senior Convertible PIK Notes were issued with a 2.5% discount with a maturity date of October 15, 2027.
The Senior Convertible PIK Notes are convertible into shares of Class A common stock based on a $13.00 conversion price, subject to customary anti-dilution adjustments. The interest rate on the Senior Convertible PIK Notes is fixed at 6% in cash and 7% in kind, and is payable semi-annually on April 15 and October 15 of each year.
On October 29, 2020, the Company issued $1,300.0 million in aggregate principal amount of the 5.750% Notes. The 5.750% Notes are guaranteed on a senior unsecured basis jointly and severally by the Company and its subsidiaries and have a maturation date of November 1, 2028. The 5.750% Notes were issued at par. The interest rate on the 5.750% Notes is fixed at 5.750%, and is payable semi-annually on May 1 and November 1 of each year.
On August 24, 2021 MPH issued $1,050.0 million in aggregate principal amount of 5.50% Senior Secured Notes with a maturation date of September 1, 2028. The interest rate on the 5.50% Senior Secured Notes is fixed at 5.50%, and is payable semi-annually on March 1 and September 1 of each year. The 5.50% Senior Secured Notes are guaranteed and secured as described below under "Guarantees and Security".
During 2022, the Company repurchased and cancelled $136.2 million of the 5.750% Notes, resulting in the recognition of a gain on debt extinguishment of $34.6 million for the year ended December 31, 2022.
During the three months ended March 31, 2023, the Company repurchased and cancelled $137.8 million of the 5.750% Notes, resulting in the recognition of a gain on debt extinguishment of $36.8 million.
Debt Covenants and Events of Default
We are subject to certain affirmative and negative debt covenants under the debt agreements governing our indebtedness that limit our and/or certain of our subsidiaries' ability to engage in specific types of transactions. These covenants limit our and/or certain of our subsidiaries' ability to, among other things:
•incur additional indebtedness or issue disqualified or preferred stock;
•pay certain dividends or make certain distributions on capital stock or repurchase or redeem capital stock;
•make certain loans, investments or other restricted payments;
•transfer or sell certain assets;
•incur certain liens;
•place restrictions on the ability of its subsidiaries to pay dividends or make other payments to us;
•guarantee indebtedness or incur other contingent obligations;
•prepay junior debt and make certain investments;
•consummate any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or dispose of all or substantially all of its business units, assets or other properties; and
•engage in transactions with our affiliates.
Certain covenants related to the 5.50% Senior Secured Notes will cease to apply to the 5.50% Senior Secured Notes for so long as such notes have investment grade ratings from both Moody’s Investors Service, Inc. and S&P Global Ratings.
The Revolver Ratio is such that, if, as of the last day of any fiscal quarter of MPH, the aggregate amount of loans under the revolving credit facility, letters of credit issued under the revolving credit facility (to the extent not cash collateralized or backstopped or, in the aggregate, in excess of $10.0 million) and swingline loans are outstanding and/or issued in an aggregate amount greater than 35% of the total commitments in respect of the revolving credit facility at such time, the revolving credit facility will require MPH to maintain a maximum first lien secured leverage ratio of 6.75 to 1.00. Our consolidated first lien debt to consolidated EBITDA ratio is 3.01 times, 2.32 times, and 2.64 times as of March 31, 2023, March 31, 2022, and December 31, 2022, respectively.
As of March 31, 2023 and December 31, 2022 we were in compliance with all of the debt covenants.
The debt agreements governing the senior secured credit facilities, the 5.750% Notes and the 5.50% Senior Secured Notes contain customary events of default, subject to grace periods and exceptions, which include, among others, payment defaults, cross-defaults to certain material indebtedness, certain events of bankruptcy, material judgments, in the case of the debt agreements governing the senior secured credit facilities and the 5.50% Senior Secured Notes, failure of a guarantee on the liens on material collateral to remain in effect, in the case of the debt agreements governing the senior secured credit facilities, any change of control. Upon the occurrence of an event of default under such debt agreements, the lenders and holders of such debt will be permitted to accelerate the loans and terminate the commitments, as applicable, thereunder and exercise other specified remedies available to the lenders and holders thereunder.
See the footnotes to the EBITDA and Adjusted EBITDA reconciliation table provided above under "Non-GAAP Financial Measures" for material differences between the financial information of MultiPlan and MPH.
Guarantees and Security
All obligations under the debt agreements governing the senior secured credit facilities and the 5.50% Senior Secured Notes are unconditionally guaranteed by MPH Acquisition Corp. 1, the direct holding company parent of MPH, and each existing and subsequently acquired or organized direct or indirect wholly owned U.S. organized restricted subsidiary of MPH (subject to certain exceptions). All such obligations, and the guarantees of such obligations, are secured, subject to permitted liens and other exceptions, by a first priority lien shared between the senior secured credit facilities and the 5.50% Senior Secured Notes on substantially all of MPH’s and the subsidiary guarantors’ tangible and intangible property, and a pledge of all of the capital stock of each of their respective subsidiaries.
Critical Accounting Policies
In preparing our Unaudited Condensed Consolidated Financial Statements, we are required to make judgments, assumptions and estimates, which we believe are reasonable and prudent based on the available facts and circumstances. These judgments, assumptions and estimates affect certain of our revenues and expenses and their related balance sheet accounts and disclosure of our contingent liabilities. We base our assumptions and estimates primarily on historical experience and consider known and projected trends. On an ongoing basis, we re-evaluate our selection of assumptions and the method of calculating our estimates. Actual results, however, may materially differ from our calculated estimates, and this difference would be reported in our current operations.
For a detailed description of our critical accounting estimates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 in our 2022 Annual Report. For a detailed discussion of our significant accounting policies, see Note 2 of Notes to the Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data” in our 2022 Annual Report. As of March 31, 2023, our critical accounting policies and estimates have not changed from those described in our 2022 Annual Report.
Customer Concentration
Three customers individually accounted for 32%, 20% and 10% of revenues for the year ended December 31, 2022. The loss of the business of one or more of our larger customers could have a material adverse effect on our results of operations. For further discussion on our customer concentration, please refer to Item 1A. “Risk Factors” in our 2022 Annual Report.
Recent Accounting Pronouncements
See Note 1 General Information and Basis of Accounting of the Notes to the unaudited condensed consolidated financial statements included in this Quarterly Report for additional information.