Claritev Corp 8-K/A, filed Nov 13, 2020
Claritev Corp (CTEV)
About this 8-K/A
Claritev Corp filed this 8-K/A on November 13, 2020, reporting on events of October 8, 2020.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 13, 2020 (October 8, 2020)
MultiPlan Corporation
(Exact name of registrant as specified in its charter)
| Delaware | 001-39228 | 83-3536151 | ||
| (State or other jurisdiction of incorporation) |
(Commission File Number) |
(I.R.S. Employer Identification No.) |
|
115 Fifth Avenue New York, New York |
10003 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (212) 780-2000
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
| ¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol |
Name of each exchange on which registered | ||
| Shares of Class A common stock, $0.0001 par value per share | MPLN | New York Stock Exchange | ||
| Warrants | MPLN.WS | New York Stock Exchange |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Unless the context otherwise requires, “we,” “us,” “our,” “MultiPlan” and the “Company” refer to MultiPlan Corporation, a Delaware corporation, and its consolidated subsidiaries.
Introductory Note
This Amendment No. 1 on Form 8-K/A (“Amendment No. 1”) amends the Current Report on Form 8-K of the Company filed on October 9, 2020 (the “Original Report”), in which the Company reported, among other events, the completion of the business combination (as defined in the Original Report).
This Amendment No. 1 is being filed in order to include (i) the unaudited condensed consolidated financial statements of Polaris Parent Corp., a Delaware corporation (“MultiPlan Parent”), as of September 30, 2020 and for the three and nine months ended September 30, 2020 and 2019 and (ii) the Management’s Discussion and Analysis of Financial Condition and Results of Operations of MultiPlan Parent for the three and nine months ended September 30, 2020 and 2019.
This Amendment No. 1 does not amend any other item of the Original Report or purport to provide an update or a discussion of any developments at the Company or its subsidiaries, including MultiPlan Parent, subsequent to the filing date of the Original Report. The information previously reported in or filed with the Original Report is hereby incorporated by reference to this Amendment No. 1.
| Item 9.01. | Financial Statements and Exhibits. |
(a) Financial statements of businesses acquired.
The unaudited condensed consolidated financial statements of MultiPlan Parent as of September 30, 2020 and for the three and nine months ended September 30, 2020 and 2019, and the related notes thereto are attached as Exhibit 99.1 and are incorporated herein by reference. Also included as Exhibit 99.2 and incorporated herein by reference is the Management’s Discussion and Analysis of Financial Condition and Results of Operations of MultiPlan Parent for the three and nine months ended September 30, 2020 and 2019.
(d) Exhibits.
Forward-Looking Statements
This Amendment No. 1 includes statements that express our and our subsidiaries’ opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, “forward-looking statements.” These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “seeks,” “projects,” “intends,” “plans,” “may,” “will” or “should” or, in each case, their negative or other variations or comparable terminology. 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 the factors discussed under “Part II, Item 1A, Risk Factors” of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020, as such risk factors may be updated from time to time, in the Company’s periodic and other filings with the SEC. The Company’s periodic and other filings are accessible on the SEC’s website at www.sec.gov. You should not rely upon forward-looking statements as predictions of future events. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee that the future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or occur. Except as required by applicable law, the Company undertakes no obligation to update publicly any forward-looking statements for any reason after the date of this news release to conform these statements to actual results or to changes in our expectations.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Dated: November 13, 2020
| MULTIPLAN CORPORATION | ||
| By: | /s/ David Redmond | |
| David Redmond | ||
| Executive Vice President and Chief Financial Officer | ||
Exhibit 99.1
Polaris Parent Corp.
Unaudited Condensed Consolidated Balance Sheets
($ in thousands, except share and per share data)
| September 30, 2020 | December 31, 2019 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 203,807 | $ | 21,825 | ||||
| Trade accounts receivable, net | 53,873 | 77,071 | ||||||
| Prepaid expenses and other current assets | 13,902 | 5,032 | ||||||
| Prepaid software and maintenance | 7,322 | 9,556 | ||||||
| Prepaid taxes | - | 2,130 | ||||||
| Deferred transaction costs | 30,217 | - | ||||||
| Total current assets | 309,121 | 115,614 | ||||||
| Property and equipment, net | 182,270 | 177,992 | ||||||
| Operating lease right-of-use asset | 31,851 | 29,998 | ||||||
| Goodwill | 4,142,013 | 4,142,013 | ||||||
| Client relationships intangible, net | 2,930,082 | 3,135,782 | ||||||
| Provider network intangible, net | 638,721 | 683,561 | ||||||
| Other intangibles, net | 67,300 | 67,300 | ||||||
| Equity investments | 93,222 | - | ||||||
| Other assets | 5,447 | 8,151 | ||||||
| Total assets | $ | 8,400,027 | $ | 8,360,411 | ||||
| Liabilities and Shareholders' Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 38,905 | $ | 9,565 | ||||
| Accrued interest | 70,730 | 17,966 | ||||||
| Accrued taxes | 17,630 | - | ||||||
| Operating lease obligation | 6,811 | 9,521 | ||||||
| Accrued compensation | 33,404 | 26,311 | ||||||
| Accrued legal | 9,136 | 10,038 | ||||||
| Accrued administrative fees | 3,593 | 3,861 | ||||||
| Other accrued expenses | 9,883 | 8,524 | ||||||
| Total current liabilities | 190,092 | 85,786 | ||||||
| Long-term debt | 5,409,451 | 5,397,122 | ||||||
| Operating lease obligation | 28,040 | 23,086 | ||||||
| Deferred income taxes | 834,840 | 869,199 | ||||||
| Total liabilities | 6,462,423 | 6,375,193 | ||||||
| Shareholders' equity: | ||||||||
| Shareholder interests | ||||||||
| Shareholder shares par value $0.001, 1,000 shares authorized (500 Series A and 500 Series B), issued and outstanding 5 shares of Series A and 5 shares of Series B as of September 30, 2020 and December 31, 2019 | - | - | ||||||
| Contributed capital | 1,647,284 | 1,347,656 | ||||||
| Retained earnings | 290,320 | 637,562 | ||||||
| Shareholders' equity | 1,937,604 | 1,985,218 | ||||||
| Total liabilities and shareholders' equity | $ | 8,400,027 | $ | 8,360,411 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
Polaris Parent Corp.
Unaudited Condensed Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income
($ in thousands, except share and per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenues | $ | 223,517 | $ | 245,820 | $ | 682,419 | $ | 736,497 | ||||||||
| Costs of services (exclusive of depreciation and amortization of intangible assets shown below) | 147,866 | 41,059 | 244,445 | 116,191 | ||||||||||||
| General and administrative expenses | 184,164 | 25,986 | 241,931 | 62,513 | ||||||||||||
| Depreciation | 15,262 | 14,153 | 44,903 | 41,723 | ||||||||||||
| Amortization of intangible assets | 83,513 | 83,513 | 250,540 | 250,540 | ||||||||||||
| Total expenses | 430,805 | 164,711 | 781,819 | 470,967 | ||||||||||||
| Operating (loss) income | (207,288 | ) | 81,109 | (99,400 | ) | 265,530 | ||||||||||
| Interest expense | 82,275 | 93,246 | 259,290 | 286,438 | ||||||||||||
| Interest income | (81 | ) | (54 | ) | (229 | ) | (133 | ) | ||||||||
| Gain on repurchase and retirement of Notes | - | (18,450 | ) | - | (18,450 | ) | ||||||||||
| Net (loss) income before income taxes | (289,482 | ) | 6,367 | (358,461 | ) | (2,325 | ) | |||||||||
| (Benefit) provision for income taxes | (1,080 | ) | 1,005 | (11,219 | ) | (191 | ) | |||||||||
| (Loss) income from continuing operations | (288,402 | ) | 5,362 | (347,242 | ) | (2,134 | ) | |||||||||
| Net (loss) income | (288,402 | ) | 5,362 | (347,242 | ) | (2,134 | ) | |||||||||
| Weighted average shares outstanding – Basic and Diluted: | 10 | 10 | 10 | 10 | ||||||||||||
| Net (loss) income per share – Basic and Diluted: | $ | (28,840,200 | ) | $ | 536,200 | $ | (34,724,200 | ) | $ | (213,400 | ) | |||||
| Comprehensive (loss) income | (288,402 | ) | 5,362 | (347,242 | ) | (2,134 | ) | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
Polaris Parent Corp.
Unaudited Condensed Consolidated Statements of Shareholders' Equity
($ in thousands, except share data)
| Common Stock | Common Stock | Contributed | Retained | |||||||||||||||||
| Shares | Amount | Capital | Earnings | Total | ||||||||||||||||
| Balance as of January 1, 2019 | 10 | $ | - | $ | 1,362,536 | $ | 627,852 | 1,990,388 | ||||||||||||
| Class B Unit expense | - | - | 5,036 | - | 5,036 | |||||||||||||||
| Net loss | - | - | - | (8,364 | ) | (8,364 | ) | |||||||||||||
| Balance as of March 31, 2019 | 10 | $ | - | $ | 1,367,572 | $ | 619,488 | $ | 1,987,060 | |||||||||||
| Class B Unit expense | - | - | (9,666 | ) | - | (9,666 | ) | |||||||||||||
| Net income | - | - | - | 868 | 868 | |||||||||||||||
| Balance as of June 30, 2019 | 10 | $ | - | $ | 1,357,906 | $ | 620,356 | $ | 1,978,262 | |||||||||||
| Class B Unit expense | - | - | 4,321 | - | 4,321 | |||||||||||||||
| Net income | - | - | - | 5,362 | 5,362 | |||||||||||||||
| Balance as of September 30, 2019 | 10 | $ | - | $ | 1,362,227 | $ | 625,718 | $ | 1,987,945 | |||||||||||
| Balance as of January 1, 2020 | 10 | $ | - | $ | 1,347,656 | $ | 637,562 | 1,985,218 | ||||||||||||
| Class B Unit expense | - | - | 9,361 | - | 9,361 | |||||||||||||||
| Net loss | - | - | - | (2,594 | ) | (2,594 | ) | |||||||||||||
| Balance as of March 31, 2020 | 10 | $ | - | $ | 1,357,017 | $ | 634,968 | $ | 1,991,985 | |||||||||||
| Class B Unit expense | - | - | 27,911 | - | 27,911 | |||||||||||||||
| Net loss | - | - | - | (56,246 | ) | (56,246 | ) | |||||||||||||
| Balance as of June 30, 2020 | 10 | $ | - | $ | 1,384,928 | $ | 578,722 | $ | 1,963,650 | |||||||||||
| Class B Unit expense | - | - | 262,356 | - | 262,356 | |||||||||||||||
| Net loss | - | - | - | (288,402 | ) | (288,402 | ) | |||||||||||||
| Balance as of September 30, 2020 | 10 | $ | - | $ | 1,647,284 | $ | 290,320 | $ | 1,937,604 | |||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
Polaris Parent Corp.
Unaudited Condensed Consolidated Statements of Cash Flows
($ in thousands)
| Nine Months | Nine Months | |||||||
| Ended | Ended | |||||||
| September 30, 2020 | September 30, 2019 | |||||||
| Operating activities: | ||||||||
| Net loss | $ | (347,242 | ) | $ | (2,134 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation | 44,903 | 41,723 | ||||||
| Amortization of the right-of-use asset | 6,537 | 7,120 | ||||||
| Amortization of intangible assets | 250,540 | 250,540 | ||||||
| Amortization of debt issuance costs | 11,016 | 8,546 | ||||||
| Stock-based compensation | 299,629 | (308 | ) | |||||
| Deferred tax benefit | (34,359 | ) | (17,129 | ) | ||||
| Non-cash interest costs | 1,434 | 1,476 | ||||||
| Loss on equity investments | 7,784 | - | ||||||
| Gain on repurchase and cancellation of Notes | - | (18,450 | ) | |||||
| Loss on disposal of property and equipment | 77 | 152 | ||||||
| Changes in assets and liabilities, net of acquired balances: | ||||||||
| Accounts receivable, net | 23,198 | 6,270 | ||||||
| Prepaid expenses and other assets | (34,280 | ) | (2,389 | ) | ||||
| Prepaid taxes | 2,130 | (64,897 | ) | |||||
| Operating lease obligation | (6,082 | ) | (7,171 | ) | ||||
| Accounts payable and accrued expenses and other | 107,016 | 64,578 | ||||||
| Net cash provided by operating activities | 332,301 | 267,927 | ||||||
| Investing activities: | ||||||||
| Purchases of property and equipment | (49,322 | ) | (48,020 | ) | ||||
| Purchases of equity investments | (101,006 | ) | - | |||||
| Net cash used in investing activities | (150,328 | ) | (48,020 | ) | ||||
| Financing activities: | ||||||||
| Repayments of long term debt | - | (100,000 | ) | |||||
| Repurchase and cancellation of Senior PIK Toggle Notes | - | (101,013 | ) | |||||
| Borrowings on revolving credit facility | 98,000 | - | ||||||
| Repayment of revolving credit facility | (98,000 | ) | - | |||||
| Borrowings (payments) on capital leases, net | 9 | (130 | ) | |||||
| Net cash provided by (used in) financing activities | 9 | (201,143 | ) | |||||
| Net change in cash and cash equivalents | 181,982 | 18,764 | ||||||
| Cash and cash equivalents at beginning of period | 21,825 | 5,014 | ||||||
| Cash and cash equivalents at end of period | $ | 203,807 | $ | 23,778 | ||||
| Noncash investing and financing activities: | ||||||||
| Purchases of property, plant and equipment not yet paid | $ | 4,327 | $ | 3,850 | ||||
| Operating lease right-of-use assets obtained in exchange for operating lease liabilities | $ | 10,158 | $ | 3,908 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | (194,074 | ) | $ | (221,934 | ) | ||
| Income taxes, net of refunds | $ | (4,415 | ) | $ | (82,225 | ) | ||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
POLARIS PARENT CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
1. General Information and Basis of Accounting
General Information
Polaris Parent Corp. (the “Company”) is a leading value-added provider of data analytics and technology-enabled end-to-end cost management solutions to the U.S. healthcare industry. The Company, through its operating subsidiary, MultiPlan, Inc. (“MultiPlan”), offers these solutions nationally through its Analytics-Based Services, which reduce medical cost through means other than contracted provider discounts and include Fee Negotiation and Medical Reimbursement Analysis Services, its Network-Based Services, which reduce medical cost through contracted discounts with healthcare providers and include one of the largest independent preferred provider organizations (“PPOs”) in the United States, and its Payment Integrity Services, which reduce medical cost by identifying and removing improper, unnecessary and excessive charges before claims are paid. We are a technology-enabled service provider and transaction processor and do not deliver health care services, bear insurance risk, underwrite risk, provide or manage healthcare services, provide care or care management, or adjudicate or pay claims.
Our customers include large national insurance companies, Blues plans, provider-sponsored health plans, third party administrators (“TPAs”), bill review companies, Taft-Hartley plans and other entities that pay medical bills in the commercial healthcare, government, workers’ compensation, auto medical and dental markets (collectively, “payors”). We offer these payors a single electronic gateway to a highly-integrated and comprehensive set of services in each of the three categories (Analytics-Based Services, Network-Based Services, and Payment Integrity Services – see descriptions below), which are used in combination or individually to reduce the medical cost burden on healthcare payors and patients while fostering efficient payment to the providers. For the year ended December 31, 2019, our expansive network included access to over 1,200,000 healthcare providers.
Payors generally aim to pay provider claims at a discount to reduce cost, and to eliminate any improperly billed charges before payment is made. Our Analytics-Based Services discount claims using data-driven negotiation and/or pricing methodologies to support payments to providers with whom contractual discounts are not possible and are generally priced based on a percentage of savings achieved. Our Network-Based Services offer payors a broad network of discounted rates for providers with whom payors do not have a contractual relationship, and are priced based on either a percentage of savings achieved or at a per employee/member per month fee. Our Payment Integrity Services use data, technology and clinical expertise to assist payors in identifying improper, unnecessary and excessive charges before claims are paid. Payment Integrity Services are generally priced based on a percentage of savings achieved.
Basis of Presentation and Consolidation
The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, certain information and disclosures required by GAAP for completed consolidated financial statements are not included herein. The interim financial statements include all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the results of operations for the periods shown. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements of Polaris Parent Corp. as of and for the year ended December 31, 2019 and the notes related thereto. The unaudited condensed consolidated financial statements include the accounts of all subsidiaries, all of which are wholly owned.
5
POLARIS PARENT CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
Summary of Significant Accounting Policies
Use of Estimates
The COVID-19 pandemic ("COVID-19") has negatively impacted our business, results of operations and financial condition. Effects from COVID-19 began to impact our business in the first quarter of 2020 with various federal, state, and local governments and private entities mandating restrictions on travel, restrictions on public gatherings, closure of non-essential commerce, and shelter in place orders. The Company experienced a 9.1% decline in revenue during third quarter of 2020 compared to the third quarter of 2019 primarily due to reduced volume from customers as a result of restrictions on elective medical procedures and non-essential medical services. Revenue for the three months ended September 30, 2020 increased by $16.6 million or 8% when compared to the three months ended June 30, 2020, signaling an improvement of market conditions related to COVID-19. The extent of the ultimate impact will depend on the severity and duration of the pandemic, for example future developments that are highly uncertain, including results of new information that may emerge concerning COVID-19 and any actions taken by federal, state and local governments to contain or treat COVID-19, as well as U.S. and global economies and consumer behavior and health care utilization patterns. See Note 3 for discussion of our precautionary measure to ensure our cash flow requirements were met and Note 5 for discussion on the impact of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).
These unaudited condensed consolidated financial statements presented herein reflect the latest estimates and assumptions made by management that affect the reported amounts of assets and liabilities and related disclosures as of the date of the unaudited condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. The Company believes it has used reasonable estimates and assumptions to assess the fair values of goodwill, long-lived assets and indefinite-lived intangible assets; assessment of the annual effective tax rate; valuation of deferred income taxes and the allowance for doubtful accounts. Actual results may differ from these estimates and assumptions.
6
POLARIS PARENT CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
Segment Reporting
Operating segments are defined as components of an entity for which separate financial information is available and regularly reviewed by the chief operating decision maker (“CODM”). The Company manages its operations as a single segment for the purposes of assessing performance and making decisions. The Company’s singular focus is being a value-added provider of data analytics and technology-enabled end-to-end cost management solutions to the U.S. healthcare industry.
In addition, all of the Company’s revenue and long-lived assets are attributable to operations in the United States for all periods presented.
Revenue Recognition
Disaggregation of Revenue
The following table presents net sales disaggregated by services and contract types:
| ($ in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenues | ||||||||||||||||
| Network Services | $ | 65,323 | $ | 77,038 | $ | 200,448 | $ | 239,799 | ||||||||
| Percentage of Savings | 49,721 | 61,026 | 153,127 | 190,748 | ||||||||||||
| PEPM | 13,772 | 14,042 | 41,643 | 43,112 | ||||||||||||
| Other | 1,830 | 1,970 | 5,678 | 5,939 | ||||||||||||
| Analytic-Based Services | 133,119 | 141,307 | 407,216 | 416,105 | ||||||||||||
| Percentage of Savings | 132,541 | 141,055 | 405,849 | 415,580 | ||||||||||||
| PEPM | 578 | 252 | 1,367 | 525 | ||||||||||||
| Payment Integrity Services | 25,075 | 27,475 | 74,755 | 80,593 | ||||||||||||
| Percentage of Savings | 25,054 | 27,454 | 74,689 | 80,530 | ||||||||||||
| PEPM | 21 | 21 | 66 | 63 | ||||||||||||
| Total Revenues | $ | 223,517 | $ | 245,820 | $ | 682,419 | $ | 736,497 | ||||||||
Due to the nature of our arrangements, certain estimates may be constrained if it is probable that a significant reversal of revenue will occur when the uncertainty is resolved. For our percentage of savings contracts, portions of revenue that is recognized and collected in a reporting period may be returned or credited in subsequent periods. These credits are the result of payers not utilizing the discounts that were initially calculated, or differences between the Company’s estimates of savings achieved for a customer and the amounts self-reported in the following month by that same customer. Significant judgment is used in constraining estimates of variable consideration, and based upon both client-specific and aggregated factors that include historical billing and adjustment data, client contract terms, and performance guarantees. We update our estimates at the end of each reporting period as additional information becomes available. There have not been any material changes to estimates of variable consideration for performance obligations satisfied prior to the nine months ended September 30, 2020.
7
POLARIS PARENT CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
The timing of payments from customers from time to time generates contract assets or contract liabilities, however these amounts are immaterial in all periods presented.
Recently Adopted Accounting Standards
In 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments including subsequent amendments to the initial guidance: ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. Accounting Standards Codification (“ASC”) 326 and related amendments require credit losses on financial instruments measured at amortized cost basis to be presented at the net amount expected to be collected, replacing the current incurred loss approach with an expected loss methodology that is referred to as the Current Expected Credit Loss (“CECL”). The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We adopted this standard on January 1, 2020, using a modified retrospective approach. Our financial instruments in the scope of the new standard consist primarily of trade receivables. The allowance for credit losses was $0.4 million as of September 30, 2020 and December 31, 2019. There were no material write offs charged or increases to the allowance for credit losses during the nine month period ended September 30, 2020. The adoption of ASC 326 had no material impact on our unaudited condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU addresses a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). We adopted this new accounting standard as of January 1, 2020 on a prospective basis. The adoption of this ASU did not have a material impact on our unaudited condensed consolidated financial statements.
8
POLARIS PARENT CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
In June 2016, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Change to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures. This ASU is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. We adopted this guidance on January 1, 2020 and it had no material impact on our unaudited condensed consolidated financial statements.
New Accounting Pronouncements Issued but Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Early adoption is permitted. The Company is currently evaluating the effect that implementation of this standard will have on the Company’s consolidated operating results, cash flows, financial condition and related disclosures.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this Update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. This standard is effective for all entities as of March 12, 2020 through December 31, 2022. Early adoption is permitted. The Company has a term loan and a revolving credit loan for which the interest rates are indexed on the London InterBank Offered Rate (“LIBOR”) and as a result is currently evaluating the effect that implementation of this standard will have on the Company’s consolidated operating results, cash flows, financial condition and related disclosures.
On August 5, 2020, the FASB issued ASU 2020-06, Debt — Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendments simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Early adoption is permitted. As a result of the transactions described in Note 2, the Company could issue convertible debt and will then evaluate the effect that implementation of this standard will have on the Company’s consolidated operating results, cash flows, financial condition and related disclosures.
9
POLARIS PARENT CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
2. Mergers and Acquisitions
Churchill Merger
On July 12, 2020, Churchill Capital Corp III (“Churchill”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among Churchill, Music Merger Sub I, Inc., a Delaware corporation and direct, wholly owned subsidiary of Churchill (“First Merger Sub”), Music Merger Sub II, LLC, a Delaware limited liability company and direct, wholly owned subsidiary of Churchill (“Second Merger Sub”), the Company, and Polaris Investment Holdings L.P. (“Holdings”). Pursuant to the Merger Agreement, the parties will enter into a business combination transaction (the “Transactions”) by which, pursuant to a Private Investment in Public Equity (“PIPE”) of $1.3 billion to Churchill from a capital raise and an additional $1.3 billion from the issuance of 6% interest convertible debt (with a conversion price of $13 per share), Churchill will acquire Holdings’ equity in the Company for a total consideration of $5.7 billion, paid in cash and in shares of Churchill, and will change its name to MultiPlan Corporation.
At the effective time of the First Merger, each share of Class A common stock of the Company will be cancelled and automatically deemed for all purposes to represent the right to receive an amount of shares of Class A common stock, par value $0.0001 per share, of Churchill (the “Churchill Class A Common Stock”) as determined pursuant to the terms of the Merger Agreement. At the effective time of the First Merger, each share of Class B common stock of the Company will be cancelled and automatically deemed for all purposes to represent the right to receive an amount of cash as determined pursuant to the terms of the Merger Agreement.
In connection with the Merger Agreement, the Company and/or Holdings entered into additional agreements on July 12, 2020 related to and contingent upon the Transactions, including:
| ● | voting and support agreements with certain stockholders pursuant to which such stockholders have agreed to vote in favor of the adoption of the Merger Agreement and approval of the Transactions and certain other matters voted on at a special meeting of Churchill’s stockholders; | |
| ● | the Churchill Capital Corp III 2020 Omnibus Incentive Plan whereby our directors, officers, employees, consultants and advisors can acquire and maintain an equity interest in us, or be paid incentive compensation, including incentive compensation measured by reference to the value of our Class A common stock, thereby strengthening their commitment to our welfare and aligning their interests with those of our stockholders; | |
| ● | an investor rights agreement which includes certain corporate governance rights, including entitling certain of the parties thereto to nominate directors to Churchill’s board of directors, and certain registration rights, including demand, shelf and piggy-back rights, subject to cut-back provisions; and | |
| ● | common stock subscription agreements pursuant to which Churchill has agreed to issue and sell shares of Churchill Class A Common Stock and warrants to purchase shares of Churchill Class A Common Stock and convertible notes subscription agreements pursuant to which Churchill has agreed to issue and sell senior unsecured convertible notes, in each case, to the applicable investors in order to finance the Transactions. |
10
POLARIS PARENT CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
From August 20, 2020 through August 25, 2020, the Company purchased 9,094,876 shares of Class A Common Stock of Churchill for an aggregate purchase price of $101.0 million for the purpose of supporting the Transactions by securing additional votes in favor of the merger. These equity securities are included in equity investments in the accompanying unaudited condensed consolidated balance sheets. These equity securities were reclassified as treasury stock at the close of the Transactions. Refer to Notes 4 and 10 for additional information.
In connection with the Transactions, the Company has incurred transaction costs. The transaction costs directly attributable to the Transactions have been deferred and as of September 30, 2020 represent $30.2 million and are included in deferred transaction costs in the accompanying unaudited condensed consolidated balance sheets, of which $29.3 million is unpaid and included in accounts payable. The transaction costs considered incremental have been expensed as incurred and these amounts, $3.1 million and $3.6 million for the three and nine month periods ended September 30, 2020, respectively, are included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of (loss) income and comprehensive (loss) income. Refer to Note 10 for additional information on subsequent transaction costs incurred in connection with the Transactions.
The Transactions have influenced the valuation of the stock-based compensation awards (as defined below), as more fully described in Note 7, and will constitute a definitive liquidity event under the agreements governing the awards, as more fully described in Note 10.
On October 8, 2020, the Transactions were consummated, as more fully described in Note 10.
3. Long-Term Debt
As of September 30, 2020 and December 31, 2019, long-term debt consisted of the following:
| ($ in thousands) | September 30, 2020 | December 31, 2019 | ||||||
| Term Loan G | $ | 2,710,000 | $ | 2,710,000 | ||||
| Notes due 2024 | 1,560,000 | 1,560,000 | ||||||
| Senior PIK Note | 1,178,727 | 1,178,727 | ||||||
| Finance lease obligations | 110 | 101 | ||||||
| Long-term debt | 5,448,837 | 5,448,828 | ||||||
| Premium - Notes due 2024 | 8,776 | 10,327 | ||||||
| Discount - Term Loan G | (4,945 | ) | (6,195 | ) | ||||
| Discount - Senior PIK Notes | (5,701 | ) | (7,436 | ) | ||||
| Debt issuance costs, net: | ||||||||
| Term Loan G | (12,600 | ) | (18,332 | ) | ||||
| Notes Due 2024 | (18,375 | ) | (21,539 | ) | ||||
| Senior PIK Notes | (6,541 | ) | (8,531 | ) | ||||
| Long- term debt, net | $ | 5,409,451 | $ | 5,397,122 | ||||
11
POLARIS PARENT CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
The interest rate in effect for Term Loan G was 3.75% and 4.85% as of September 30, 2020 and 2019, respectively. Interest expense was $26.0 million and $86.8 million and $35.2 million and $110.7 million for the three and nine month periods ended September 30, 2020 and 2019, respectively. These amounts are included in interest expense in the accompanying unaudited condensed consolidated statements of (loss) income and comprehensive (loss) income.
Interest on Revolver G for the three and nine months ended September 30, 2020 was $62,700 and $1.3 million, respectively. This amount is included in interest expense in the accompanying unaudited condensed consolidated statements of (loss) income and comprehensive (loss) income.
On March 19, 2020 the Company activated $98.0 million of Revolver G as a precautionary measure due to the uncertainty of COVID-19. The revolver and associated interest of $1.1 million was repaid on June 25, 2020. On July 2, 2020 the Company, the administrative agent and the revolving credit lenders agreed to amend the revolving credit maturity date to June 7, 2023, or September 1, 2022 should the aggregate principal outstanding on the Senior PIK Notes exceed $300.0 million on September 1, 2022. See Note 10 for details regarding the October 29, 2020 debt refinancing.
A correcting adjustment of $2.3 million was made during the three months ended March 31, 2020 to increase interest expense to account for acceleration of debt issuance cost due to principal prepayments made on the Term Loan in years 2017, 2018 and 2019. The adjustment was not material to the current period or historical period financial statements.
Debt Covenants and Events of Default
The Company is subject to certain affirmative and negative debt covenants under Term Loan G, the Notes due 2024, and the Senior PIK Notes that limit the Company and its subsidiaries the ability to engage in specified types of transactions.
In addition, solely with respect to the Revolver G, the Company is required to maintain a consolidated first lien debt to consolidated EBITDA ratio no greater than 7.60 to 1.00. As of September 30, 2020 and December 31, 2019 the Company was in compliance with all of the debt covenants.
4. Fair Value Measurements
Fair value measurements are based on the premise that fair value represents an exit price representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the following three-tier fair value hierarchy has been used in determining the inputs used in measuring fair value:
12
POLARIS PARENT CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
| ● | Level 1 – Quoted prices in active markets for identical assets or liabilities on the reporting date. |
| ● | Level 2 – Inputs, other than quoted prices in active markets (Level 1), that are observable for the asset or liability, either directly or indirectly. |
| ● | Level 3 – Unobservable inputs in which there is little or no market data, which require the entity to develop its own assumptions |
Financial Instruments
Certain financial instruments which are not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable and accounts payable, which approximate fair value due to their short-term nature. The financial instrument that potentially subjects the Company to concentrations of credit risk consists primarily of accounts receivable. The Company’s accounts receivable are spread over a large customer base and various product lines that the Company offers.
The fair values of equity investments using quoted market prices from daily exchange traded markets are based on the closing price as of the balance sheet date and are classified as Level 1.
We estimate the fair value of long-term debt, including current maturities of finance lease obligations using present value techniques that are significantly affected by the assumptions used concerning the amount and timing of estimated future cash flows and discount rates that reflect varying degrees of risk. Assumptions include interest rates currently available for instruments with similar terms as well as the five, seven, and eight-year Treasury bill rates. As such, this is considered a Level 2 fair value measurement. As of September 30, 2020 and December 31, 2019, the Company’s carrying amount and fair value of financial instruments consisted of the following:
| ($ in thousands) | September 30, 2020 | December 31, 2019 | ||||||||||||||
| Carrying | Carrying | |||||||||||||||
| Amount | Fair Value | Amount | Fair Value | |||||||||||||
| Assets: | ||||||||||||||||
| Equity investments | $ | 93,222 | $ | 93,222 | $ | - | $ | - | ||||||||
| Total Assets | $ | 93,222 | $ | 93,222 | $ | - | $ | - | ||||||||
| Liabilities: | ||||||||||||||||
| Notes due 2024, net of premium | $ | 1,568,776 | $ | 1,613,640 | $ | 1,570,327 | $ | 1,544,976 | ||||||||
| Term Loan G, net of discount | 2,705,055 | 2,770,910 | 2,703,805 | 2,769,645 | ||||||||||||
| Senior PIK Note, net of discount | 1,173,026 | 1,221,992 | 1,171,291 | 1,191,694 | ||||||||||||
| Finance lease obligations | 110 | 110 | 101 | 101 | ||||||||||||
| Total Liabilities | $ | 5,446,967 | $ | 5,606,652 | $ | 5,445,524 | $ | 5,506,416 | ||||||||
13
POLARIS PARENT CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
Recurring Fair Value Measurements
We measure our 2016 Class B Unit Incentive Plan at fair market value on a recurring basis. The fair value of the Plan was determined based on significant inputs not observable in the market which would represent a level 3 measurement within the fair value hierarchy. The Company used a Monte Carlo simulation to estimate the fair value of the stock-based compensation awards prior to September 30, 2020. See Note 7 for further information, including details of our unobservable assumptions.
Non-recurring Fair Value Measurements
We also measure certain non-financial assets at fair value on a nonrecurring basis, primarily goodwill and long-lived tangible and intangible assets, in connection with periodic evaluations for potential impairment. We estimate the fair value of these assets using primarily unobservable inputs and, as such, these are considered Level 3 fair value measurements. There were no material impairment charges for these assets as of September 30, 2020 or December 31, 2019.
5. Income Taxes
The pre-tax loss during the three and nine-month periods ended September 30, 2020 of $289.5 million and $358.5 million, respectively, generated an income tax benefit of $1.1 million and $11.2 million, respectively. The pre-tax income during the three-month period ended September 30, 2019 of $6.4 million, generated an income tax provision of $1.0 million. The pre-tax loss during the nine-month period ended September 30, 2019 of $2.3 million, generated an income tax benefit of $0.2 million. The Company’s effective tax rate differed from the statutory rate primarily due to state taxes, transaction costs, a valuation allowance on a potential capital loss carryforward that will more likely than not remain unrealized, and stock-based compensation expense.
The CARES Act was signed into law on March 27, 2020. The law features tax relief measures for businesses including a change in the Section 163(j) interest deduction limitation increasing the adjusted taxable income limitation from 30% to 50% retroactively to tax years beginning on or after January 1, 2019. The provision also allows the taxpayer to elect to use its 2019 adjusted taxable income for its 2020 limitation.
The Treasury and the IRS released final regulations on the Section 163(j) interest deduction limitation on July 28, 2020. Taxpayers may apply the final regulations in their entirety to tax years beginning after December 31, 2017. The final regulations clarify the definition of interest to limit to items treated as “interest” for U.S. Federal income tax purposes. As a result of the changes to the final regulations, the Company recorded a $3.2 million increase to its deferred income tax liability to account for the retrospective change to the tax law applicable to the Company’s years ended December 31, 2018 and 2019 during the third quarter in addition to the $32.4 million increase already booked during the first quarter due to the CARES Act. The CARES Act had additional impacts to the 2019 tax year, however, they do not have a material impact to the Company’s 2019 income tax provision.
14
POLARIS PARENT CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
Various regulatory tax authorities periodically examine the Company’s and its subsidiaries’ tax returns. Tax years December 2016 through 2019 are open for Federal examination. The Company was notified by the IRS during the fourth quarter of 2019, that the Company’s 2017 tax return was selected for audit. The audit commenced during the first quarter of 2020. Tax years 2015 through 2019 are still open for examination related to income taxes to various state taxing authorities.
6. Commitments and Contingencies
Commitments
The Company has certain irrevocable letters of credit that reduced the capacity of Revolver G by $1.8 million as of September 30, 2020 and December 31, 2019.
Claims and litigation
The Company is a party to certain claims and litigation in the ordinary course of business. The Company is not involved in any claims or legal proceedings that it believes will result, individually, or in the aggregate, in a material adverse effect upon our financial condition or results of operations, or cash flows. We accrue for costs associated with certain contingencies, including, but not limited to, settlement of legal proceedings, regulatory compliance matters and self-insurance exposures when such costs are probable and reasonably estimable. Such accruals are included in other accrued expenses on the accompanying unaudited condensed consolidated balance sheet. In addition, we accrue for legal fees incurred in defense of asserted litigation and regulatory matters as such legal fees are incurred. To the extent it is probable under our existing insurance coverage that we are able to recover losses and legal fees related to contingencies, we record such recoveries concurrently with the accrual of the related loss or legal fees. Significant management judgment is required to estimate the amounts of such contingent liabilities and the related insurance recoveries. In our determination of the probability and ability to estimate contingent liabilities and related insurance recoveries we consider the following: litigation exposure based on currently available information, consultations with external legal counsel, adequacy and applicability of existing insurance coverage, and other pertinent facts and circumstances regarding the contingency. Liabilities established to provide for contingencies are adjusted as further information develops, circumstances change, or contingences are resolved; and such changes are recorded in the accompanying unaudited condensed consolidated statement of income and comprehensive income during the period of the change and appropriately reflected in other accrued liabilities in the accompanying unaudited condensed consolidated balance sheets.
15
POLARIS PARENT CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
Five actions (collectively, the “Stockholder Actions”), including two putative class actions, were filed in federal courts in New York and Delaware by purported Churchill stockholders in connection with the Business Combination: Hutchings v. Churchill Capital Corp III, et al.,No. 1:20-cv-06318 (S.D.N.Y.) (the “Hutchings Complaint”); Kent v. Churchill Capital Corp III, et al., No. 1:20-cv-01068 (D. Del.) (the “Kent Complaint”); Feges v. Churchill Capital Corp III, et al., No. 1:20-cv-06627 (S.D.N.Y.) (the “Feges Complaint”); Noor v. Churchill Capital Corp III, et al., No. 1:20-cv-06686 (S.D.N.Y.) (the “Noor Complaint”); and Greenman v. Churchill Capital Corp III, et al., No. 1:20-cv-07466 (S.D.N.Y.) (the “Greenman Complaint”). On September 11, 2020, October 5, 2020, October 8, 2020, October 19, 2020, and November 2, 2020, the plaintiffs in the Noor, Greenman, Kent, Hutchings and Feges actions, respectively, voluntarily dismissed their complaints. Each of the complaints in the Stockholder Actions names Churchill and the members of the Churchill Board as defendants. The Stockholder Actions generally allege, among other things, that the proxy statement relating to the Transactions was false and misleading and/or omitted material information concerning the transactions contemplated by the Merger Agreement in violation of Sections 14(a) and 20(a) of the Exchange Act and Rule 14d-9 promulgated thereunder. The Hutchings Complaint and the Greenman Complaint also alleged breach of fiduciary duty claims against the Churchill Board in connection with the Transactions. The Stockholder Actions generally sought, among other things, injunctive relief and an award of attorneys’ fees and expenses.
7. Stock-Based Compensation
Holdings established an incentive plan effective June 7, 2016 (the “Polaris Plan”). The purpose of the Polaris Plan is to provide a means through which Holdings may attract and retain key personnel and to provide a means whereby directors, officers, employees, consultants and advisors (“Participants”) can acquire and maintain an equity interest in Holdings, thereby strengthening their commitment to the welfare of Holdings and its subsidiaries, including MultiPlan, Inc. Under the Polaris Plan, Holdings may grant awards to select Participants at the sole discretion of the Board of Directors (“Board”) of Holdings. Polaris Plan awards are granted in the form of Holdings’ Class B Units (“Units”) via the Class B Unit Award Agreement (“Polaris Agreement”). There are 343,114 Units available for issuance under the Polaris Plan. There were 267,768 Units issued and outstanding as of September 30, 2020. The Company’s CEO, with the approval of the Board, determines participation and the allocation of the Units (“Awards”).
Each individual Award is comprised of time vesting Units (“Time Vesting Units”) and performance vesting Units (“Performance Vesting Units”). Time Vesting Units and Performance Vesting Units vest based on the vesting dates and the achievement of certain performance measures as defined in each Agreement. The Company amortizes the Time Vesting Units on a straight line basis, and the Performance Vesting Units on a graded vesting basis. In the event of the termination of an employee Participant due to a Qualifying Termination as defined by the Agreement, the Participant shall have the right to cause Holdings to purchase all or any portion of the vested Units owned by the employee, subject to the approval of the Company’s CEO. Based on this put right available to the employee Participants, stock-based compensation awards related to the Polaris Plan have been accounted for as liability classified awards within Holdings’ consolidated financial statements. The Company records these awards within Shareholders’ equity as an equity contribution from Holdings based on the fair value of the outstanding Units at each reporting period. Upon the occurrence of a definitive liquidity event all unvested units will vest immediately prior to such liquidity event. All vested shares will be exchanged for new shares and cash as determined at the time of such liquidity event. See Note 10 for details regarding the Churchill merger.
16
POLARIS PARENT CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
The fair value of the outstanding Units was $475.5 million as of September 30, 2020. The valuation as of September 30, 2020 used the cumulative exit value of the Company, corresponding to the transaction value and prior distributions, and removed the discount for lack of marketability. See Note 10 for subsequent stock-based compensation expense information. Forfeitures are accounted for as they occur.
The following table lists the assumptions used in the analyses as of September 30, 2019:
| As of | ||||
| September 30, 2019 | ||||
| Risk free rate of return | 1.7 | % | ||
| Expected volatility | 23.2 | % | ||
| Expected dividend yield | 0.0 | % | ||
| Discount for lack of marketability | 19.0 | % | ||
Stock-based compensation expense has been allocated between costs of services and general and administrative expenses in the accompanying unaudited condensed consolidated statements of (loss) income and comprehensive (loss) income for the three and nine month periods ended September 30, 2020 and 2019 as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| ($ in thousands) | September 30, | September 30, | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Cost of services | $ | 108,777 | $ | 1,593 | $ | 126,723 | $ | (1,324 | ) | |||||||
| General and administrative | 153,579 | 2,728 | 172,906 | 1,016 | ||||||||||||
| Total stock-based compensation | $ | 262,356 | $ | 4,321 | $ | 299,629 | $ | (308 | ) | |||||||
Following is a vesting summary of the Class B Units for the nine month period ended September 30, 2020:
Number of Units | Weighted Average Fair Value Per Unit | |||||||
| Nonvested at December 31, 2019 | 80,671 | $ | 363.91 | |||||
| Awarded | - | - | ||||||
| Vested | (18,978 | ) | $ | 1,775.68 | ||||
| Forfeited | (1,877 | ) | $ | 1,775.68 | ||||
| Nonvested at September 30, 2020 | 59,816 | $ | 1,775.68 | |||||
None of the Units were puttable as of September 30, 2020. See Note 10 for Units vested at the close of the Transactions.
17
POLARIS PARENT CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
8. Net (Loss) Income Per Share
The following is a reconciliation of basic and diluted net (loss) income per share for the three and nine month periods ended September 30, 2020 and 2019:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| ($ in thousands, except number of shares and per share data) | September 30, | September 30, | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Numerator for (loss) income per share calculation | ||||||||||||||||
| Net (loss) income | $ | (288,402 | ) | $ | 5,362 | $ | (347,242 | ) | $ | (2,134 | ) | |||||
| Denominator for (loss) income per share calculation | ||||||||||||||||
| Weighted average number of shares outstanding - basic and diluted | 10 | 10 | 10 | 10 | ||||||||||||
| (Loss) income per share—basic and diluted: | ||||||||||||||||
| Net (loss) income per share—basic and diluted | $ | (28,840,200 | ) | $ | 536,200 | $ | (34,724,200 | ) | $ | (213,400 | ) | |||||
| Three months ended September 30, As Adjusted (1) | Nine months ended September 30, As Adjusted (1) | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net (loss) income per share—basic and diluted | $ | (0.69 | ) | $ | 0.01 | $ | (0.84 | ) | $ | (0.01 | ) | |||||
| Shares | 415,700,000 | 415,700,000 | 415,700,000 | 415,700,000 | ||||||||||||
___________________
| (1) | The As Adjusted EPS and shares reflect the impact of the ratio of the reverse recapitalization which occurred on October 8, 2020, and which will be retroactively recast in the period in which the reverse recapitalization occurs. This information is unaudited and is presented to facilitate the understanding of the impact of the reverse recapitalization on EPS prior to its consummation. |
9. Related Party Transactions
The accompanying unaudited condensed consolidated statements of (loss) income and comprehensive (loss) income include expenses and revenues to and from related parties for the three and nine month periods ended September 30, 2020 and 2019 as follows:
| ($ in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenues | $ | 509 | $ | 1,209 | $ | 1,545 | $ | 2,373 | ||||||||
| Total revenues from related parties | $ | 509 | $ | 1,209 | $ | 1,545 | $ | 2,373 | ||||||||
| Cost of services | $ | (500 | ) | $ | (857 | ) | $ | (1,666 | ) | $ | (2,961 | ) | ||||
| General and administrative | (63 | ) | (53 | ) | (163 | ) | (159 | ) | ||||||||
| Total expense from related parties | $ | (563 | ) | $ | (910 | ) | $ | (1,829 | ) | $ | (3,120 | ) | ||||
The accompanying unaudited condensed consolidated balance sheets include accruals from related parties as of September 30, 2020 and December 31, 2019 as follows:
| ($ in thousands) | September 30, 2020 | December 31, 2019 | ||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 2,414 | $ | 2,500 | ||||
| Total liabilities from related parties | $ | 2,414 | $ | 2,500 | ||||
The related party transactions include the following:
| ● | The Company purchased PPO network services from a company controlled by Hellman & Friedman LLC to supplement our provider network. We also recognize revenues from that same company for the use of our provider network and other claims processing services. |
18
POLARIS PARENT CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
| ● | The Company has obtained insurance brokered through a company controlled by Hellman & Friedman LLC. | |
| ● | The Company compensates a non-employee member of the Board for his services on the Board. The Company also purchases cyber security risk management services from a company controlled by that same member of the Board. | |
| ● | The Company reimburses Hellman & Friedman LLC for reasonable out of pocket expenses that include travel, lodging, means, and any similar expenses. |
10. Subsequent Events
Churchill Merger
On October 7, 2020, in order to facilitate the consummation of the Mergers, the Company has undergone a recapitalization pursuant to which, among other things, the aggregate number of authorized shares of the Company’s common stock was increased to an aggregate of 30,880,280 shares, consisting of shares of Class A common stock, par value $0.001 per share, each having two votes per-share on all voting matters, and shares of Class B common stock, par value $0.001 per share, each having one vote per-share on all voting matters, and the Company’s existing capital stock was exchanged for such new shares of Class A common stock and Class B common stock, as applicable.
Additionally, the Compensation Committee has approved a transaction bonus pool (in an aggregate amount of up to $20 million) that will be paid to employees, including executive officers, contingent on and after consummation of the Transaction, in recognition of their efforts in connection with the completion of the Transaction. As a result, the Company will record an expense of approximately $20 million related to the transaction bonuses during the fourth quarter of 2020.
The Transactions were accounted for as a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with GAAP.
The consummation of the Mergers constituted a definitive liquidity event under the agreements governing the Unit awards and as a result all unvested Units vested on October 7, 2020. Therefore, the Company will record expense of $106.2 million related to the accelerated vesting during the fourth quarter of 2020. The Company recorded these awards within shareholders’ equity as an equity contribution from Holdings based on the fair value of the outstanding Units at each reporting period. The settlement of these awards was made in a combination of cash and shares of Churchill’s Class A common stock and was included in the aggregate consideration paid to the Company’s owners.
19
POLARIS PARENT CORP.
Notes to Unaudited Condensed Consolidated Financial Statements
On October 8, 2020 (the “Closing Date”), the Transactions were consummated pursuant to the terms of the Merger Agreement and Churchill acquired Holdings’ equity in the Company for a total consideration of $5.7 billion, paid in cash for $1.5 billion and in 415,700,000 shares of Churchill Class A common stock. In addition, on the Closing Date, Churchill completed the $1.3 billion PIPE and issued $1.3 billion of 6% interest convertible debt. All of the outstanding Senior PIK Notes were redeemed for a total redemption price of $1.3 billion. In connection with the Transactions, Churchill changed its name to MultiPlan Corporation and The New York Stock Exchange ticker symbols for its Class A common stock and warrants to “MPLN” and “MPLN.WS”, respectively.
Debt Refinancing
On October 29, 2020, MPH Acquisition Holdings LLC, a wholly owned subsidiary of the Company, issued and sold $1.3 billion in aggregate principal amount of 5.750% Senior Notes due 2028, under an Indenture dated as of October 29, 2020, by and among the Company, the guarantors party thereto and Wilmington Trust, National Association, as trustee. The Company also entered into an amendment to increase the commitments under its senior secured revolving credit facility from $100.0 million to $450.0 million, and the revolving credit facility will require the Company to maintain a maximum first lien secured leverage ratio of 6.75 to 1.00. The Company used the net proceeds from the Notes, together with $715.0 million of cash on hand, (i) to redeem, satisfy and discharge all of the Notes due 2024 and repay $369.0 million of indebtedness under the Term Loan G and (ii) to pay fees and expenses in connection therewith.
Acquisition of HSTechnology Solutions, Inc.
On November 9, 2020, the Company acquired 100 percent of HSTechnology Solutions, Inc. (“HST”) for $140 million in cash. The acquisition will be accounted for as a business combination in accordance with ASC 805. Due to the timing of the acquisition, our initial accounting for the HST acquisition is incomplete. In connection with this acquisition, we incurred approximately $4.3 million of transaction costs.
HST is a leading reference-based pricing growth company that uses sophisticated data analytics and tools to engage members and providers on the front and back end of healthcare. The acquisition increases the value that MultiPlan offers to healthcare payors by adding complementary services to help them better manage cost, enhances MultiPlan’s analytics products and services and further extends the company into adjacent customer segments such as TPAs and Regional Health Plans.
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Exhibit 99.2
MULTIPLAN PARENT’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with the historical consolidated financial statements and the notes accompanying those statements appearing elsewhere in this Amendment No. 1. The results described below are not necessarily indicative of the results to be expected in any future periods. This discussion contains forward-looking statements based on our current expectations, which are inherently subject to risks and uncertainties. Actual results may differ significantly from those projected in such forward-looking statements due to a number of factors as a result of a variety of risks and uncertainties, including those described in MultiPlan Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020 under the headings “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.” We undertake no obligation to update or revise any forward-looking statement.
Any references to “we,” “our,” “us” or “MultiPlan” in this section shall refer to Polaris Parent Corp. for all periods before the consummation of the Transactions and MultiPlan Corporation for all periods after the consummation of the Transactions. All references to “Churchill” in this section refer to Churchill Capital Corp III for all periods before the consummation of the Transactions. The following discussion and analysis of financial condition and operating results for MultiPlan has been prepared by our management. Our disclosure and analysis in this report contains forward-looking statements. Forward-looking statements give management’s expectations regarding our future growth, results of operations, operational and financial performance and business prospects and opportunities. All statements other than statements of historical fact are forward-looking statements. You can identify such statements because they contain words such as “plans,” “expects” or “does not expect,” “budget,” “forecasts,” “anticipates” or “does not anticipate,” “believes,” “intends” and similar expressions or statements that certain actions, events or results “may,” “could,” “would,” “might” or “will” be taken, occur, or be achieved. Although the forward-looking statements contained in this report reflect management’s current beliefs based on information currently available to management and upon assumptions which management believes to be reasonable, actual results may differ materially from those stated in or implied by these forward-looking statements.
The Business Combination
The business combination (the “business combination”) between Churchill and Polaris Parent Corp. and the other transactions contemplated by the agreement and plan of merger relating to the business combination and the other agreements related thereto (together with the business combination, the “Transactions”) were consummated on October 8, 2020. The Transactions will be accounted for as a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Under this method of accounting, Churchill will be treated as the “acquired” company for financial reporting purposes. This determination was primarily based on our existing stockholders being the majority stockholder and holding majority voting power in the combined company, our senior management comprising the majority of the senior management of the combined company, and our ongoing operations comprising the ongoing operations of the combined company. Accordingly, for accounting purposes, the Transactions will be treated as the equivalent of MultiPlan issuing shares for the net assets of Churchill, accompanied by a recapitalization. The net assets of Churchill were recognized at fair value (which were consistent with carrying value), with no goodwill or other intangible assets recorded. The business combination is expected to have several significant impacts on our future reported financial position and results, as a consequence of reverse capitalization treatment. As a consequence of the business combination, we became the successor to a Securities and Exchange Commission-registered and New York Stock Exchange-listed company. We will need to hire additional staff and implement procedures and processes to address public company regulatory requirements and customary practices. We expect to incur additional annual expenses for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting, legal and administrative resources and fees. We estimate that these incremental costs will range between approximately $12 million and $18 million per year.
The Refinancing
On October 29, 2020, MPH Acquisition Holdings LLC, an indirect wholly owned subsidiary of MultiPlan (“MPH”) issued $1,300,000,000 aggregate principal amount of its 5.750% Notes. In addition, MPH increased the commitments under its Revolver G (as defined below) from $100.0 million to $450.0 million. MPH used the net proceeds from the 5.750% Notes, together with $715.0 million of cash on hand, to (i) redeem, satisfy and discharge all of the 7.125% Senior Notes (as defined below) and repay $369.0 million of indebtedness under MPH’s Term Loan G (as defined below) and (ii) pay fees and expenses in connection therewith. These transactions are collectively referred to herein as the “Refinancing.”
Company Overview
MultiPlan is a leading value-added provider of data analytics and technology-enabled end-to-end cost management solutions to the U.S. healthcare industry. We believe our primary mission is to make healthcare in the United States affordable, accessible, efficient and fair to all parties, and we believe that our products, services and business processes are aligned with this goal. MultiPlan delivers these critical solutions through the following offerings:
| · | Analytics-Based Services, which reduce medical costs for consumers and payors via data-driven algorithms which detect claims anomalies; | |
| · | Network-Based Services, which reduce medical costs through contracted discounts with healthcare providers and include one of the largest independent provider networks in the United States; and | |
| · | Payment Integrity Services, which reduce medical costs by identifying and removing improper, unnecessary and excessive charges before claims are paid. |
The Company is a technology and analytics-driven processor of medical claims data and does not deliver health care services, bear insurance risk, underwrite risk, provide or manage healthcare services, provide care or care management or adjudicate or pay claims.
Our customers include large national insurance companies, Blue Cross and Blue Shield plans, provider-sponsored health plans, TPAs, bill review companies, Taft-Hartley plans and other entities that pay medical bills in the commercial healthcare, government, workers’ compensation, auto medical and dental markets. We offer these payors a single electronic gateway to a highly-integrated and comprehensive set of services in each of the three categories (Analytics-Based Services, Network-Based Services, and Payment Integrity Services – as discussed below), which are used in combination or individually to reduce the medical cost burden on healthcare payors and patients while fostering efficient payment to the providers. These offerings have enabled us to maintain long-term relationships with a number of our customers, including relationships of over 20 years with some of the nation’s largest commercial payors. For the year ended December 31, 2019, our expansive network included access to over 1,200,000 healthcare providers and our comprehensive services generated approximately $19 billion in potential annual medical cost savings.
Payors generally aim to pay provider claims at a discount to reduce cost, and to eliminate any improperly billed charges before payment is made. Our Analytics-Based Services discount claims using data-driven negotiation and/or pricing methodologies to support payments to providers with whom contractual discounts are not possible and are generally priced based on a percentage of savings achieved. Our Network-Based Services offer payors a broad network of discounted rates for providers with whom payors do not have a contractual relationship and are priced based on either a percentage of savings achieved or at a per employee/member per month fee. Our Payment Integrity Services use data, technology and clinical expertise to assist payors in identifying improper, unnecessary and excessive charges before claims are paid. Payment Integrity Services are generally priced based on a percentage of savings achieved. Almost all of these services are able to be provided automatically, using our proprietary information technology platforms, which eliminates manual interactions and interventions, and enables significant scaling of claims handling, and supporting high margins for the business.
MultiPlan was founded in 1980. Since our inception, we have demonstrated our ability to expand and diversify offerings through core business growth as well as disciplined mergers and acquisitions
We believe that our solutions provide a strong value proposition to payors and their insureds, policyholders or health plan members (collectively “consumers”), as well as to providers. Overall, our service offerings aim to reduce healthcare costs for payors and consumers in a manner that is orderly, efficient and fair to all parties. In addition, because the fee for our services is in most instances directly linked to the savings realized by our customers, our interests are aligned with the interests of our customers.
We provide the following services:
Analytics-Based Services
The Company leverages its leading and proprietary IT platform to offer customers Analytics-Based Services to reduce medical costs. Our proprietary algorithms allow claims to be quickly and accurately compared against a library of the most updated and relevant pricing data. Our extensive nationwide network of providers and list of payor customers provide us with deep insights into the latest pricing trends. Customers of our Analytics-Based Services are primarily large commercial insurers, Blue Cross and Blue Shield plans, provider-sponsored health plans and TPAs, and property and casualty carriers through their bill review companies. Fees are generally based on a percentage of savings achieved. Analytics-Based Solutions contributed 59.6% of revenues for the nine months ended September 30, 2020 and 57.1% of revenues for the year ended December 31, 2019.
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Medical Reimbursement Analysis (“MRA”). MRA provides payors with a recommended payment amount on claims. The Company relies on data from public and private sources on a national and local level which are then analyzed using proprietary automated algorithms that deliver consistency and defensibility. The recommendations factor in key variables such as the provider’s location, type and size; the severity and resource intensity of the procedures performed; and costs/accepted reimbursements of other providers under the same circumstances. Two approaches are used to arrive at these recommendations, which are then used by the payor during the adjudication and payment process. The first approach is a cost-based (facilities) or reimbursement-based (professionals) approach which determines a fair reimbursement by calculating the median cost incurred or payment amount accepted by a benchmark group of like providers to deliver the same service. The second approach is charge-based and arrives at the recommended amount based on analysis of charges from comparable facilities for a specific procedure. All methodologies adjust for geographic differences.
Financial Negotiation. Our Financial Negotiation services assist payors with claims from providers with whom neither they nor MultiPlan have been able to secure a contractual discount. The Company handles these claims on an individual basis and attempts to negotiate with the provider an acceptable payment amount for a specific claim. Approximately half of the successfully negotiated claims are completed in a fully automated manner. The claims include those in which the proposed negotiated amount is generated by algorithms and automatically transmitted to the provider’s office. Certain providers also choose to set up an arrangement with MultiPlan for pre-determined levels of discount to be automatically deducted on claims that would otherwise be individually negotiated. For those claims that are not automatically negotiated, MultiPlan negotiates directly with the provider’s office through our negotiations staff that are aided by compiled statistics about the discounts typically received on these types of claims.
Network-Based Services
Network-Based Services includes MultiPlan’s Primary and Complementary Networks in which payors can utilize our extensive national network of over 1,200,000 contracted providers to process claims at a significant discount compared to billed fee-for-service rates, or increasingly, to build customized access for use by the customer’s health plan. This latter use is growing in popularity by Medicare Advantage plans that are seeking to expand to capitalize on membership growth. The establishment of a large and successful network of providers utilized by multiple payors creates a self-reinforcing network effect whereby, as more payors and their consumers access the network, participation in the network becomes more desirable to other providers. MultiPlan’s large provider network allows payors to share the prohibitive costs of maintaining a large and complex network. In addition, providers that join MultiPlan’s network gain access to a wide range of payors with the execution of a single contractual relationship. Network-Based Services contributed 29.4% of revenues for the nine months ended September 30, 2020 and 32.0% of revenues for the year ended December 31, 2019.
Primary Network. For customers without their own direct contractual discount arrangements with providers, our Primary Network serves as the network for the payor’s commercial or government health plan in a given service area in exchange for a PEPM rate, or as the payor’s out-of-area extended primary network in exchange for a percentage of the savings achieved. Increasingly, the network is also being used to configure custom-built access for a payor’s Medicare Advantage plans. Membership in Medicare Advantage programs is growing by an estimated 10,000 consumers every day, so current and new market entrants are focused on expanding their network footprint to serve these members. The Primary Network is National Committee for Quality Assurance (“NCQA”) accredited, which we believe provides assurances to payors regarding provider credentials and network compliance and provides consumers additional confidence regarding the quality of the providers in our network. Customers mainly include provider-sponsored commercial health plans; Medicare Advantage, Medicaid and other government-sponsored health plans; Taft-Hartley plans and TPAs as it is more cost effective for these payors to outsource this function than to incur the expense of developing and maintaining their own network of thousands of doctors and hospitals.
Complementary Network. Our Complementary Network provides payor customers with access to our national network of healthcare providers that offer discounts under the health plan’s out-of-network benefits, or otherwise can be accessed secondary to another network. Payors use the network to expand provider choice for consumers and to achieve contracted reductions on more claims. Our customers pay us if they achieve savings from the Complementary Network; therefore, we believe that MultiPlan provides payors with an effective method to reduce costs. Our Complementary Network customers include large commercial insurers, property and casualty carriers via their bill review vendors, TPAs and provider-sponsored health plans.
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Payment Integrity Services
Our Payment Integrity Services use data, technology, and clinical expertise to identify improper, unnecessary and excessive charges before claims are paid. There are two services presently offered to payors. With Clinical Negotiation, payment integrity analytics score the claim, and then based on the score, the claim is reviewed by a clinician and/or coder and routed to a negotiator to reach agreement for a lower reimbursement as a result of the identified billing issues. The payor reimburses under the negotiated agreement. With Claim Correction, payment integrity analytics and the clinician/coder review (if needed, based on the confidence level of the analytics findings) lead to a recommendation to deny certain charges which is factored into the payor’s final adjudication of the claim. Our Payment Integrity Services are integrated into network pricing, so are used by many of the customers of our primary and/or complementary networks. They also are used on non-contracted claims by large commercial and Medicare Advantage insurers, Blue Cross and Blue Shield plans, provider-sponsored commercial and Medicare Advantage health plans, property and casualty carriers via their bill review vendors, and TPAs. These Payment Integrity Solutions contributed 11.0% of revenues for the nine months ended September 30, 2020 and 10.9% of revenues for the year ended December 31, 2019.
We also are entering the dental market with pre-payment integrity services that use clinical algorithms and a fully-automated process to identify improperly or questionably billed charges. The dental market is a low-dollar, high volume environment where automation is critical to the ROI of any payment accuracy program. We believe our program is unique in that it also offers an optional provider communication service designed to eliminate improper billing over time through education of proper billing practices/codes and degrees of escalation for continued questionable billing.
Uncertainty Relating to the COVID-19 Pandemic
We are closely monitoring the impact of the COVID-19 pandemic (“COVID-19”) on all aspects of our business, including how it will impact our customers, associates and employees, suppliers, vendors, and business partners. We are unable to predict the extent of the impact COVID-19 will have on our financial position and operating results due to numerous uncertainties. These uncertainties include the severity of the virus, the duration of the pandemic, government, business or other actions (which could include limitations on our operations or mandates to our Company and our customers and providers), the effect on customer demand, or changes to our operations. The health of our workforce, and our ability to meet staffing needs and other critical functions cannot be predicted and is vital to our operations. Further, the impacts of a potential worsening of economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, consumer spending, as well as other unanticipated consequences remain unknown. In addition, we cannot predict the impact that COVID-19 will have on our customers, vendors, suppliers, and other business partners; however, any material impact on these parties could adversely impact us. Effects from COVID-19 began to impact our business in first quarter 2020 with various federal, state, and local governments and private entities mandating restrictions on travel, restrictions on public gatherings, closure of non-essential commerce, and shelter in place orders. The situation surrounding COVID-19 remains fluid, and we are actively managing our response in collaboration with our customers, associates and employees, and business partners and assessing potential impacts to our financial position and operating results, as well as adverse developments in our business.
While we did not experience a material impact from COVID-19 during the three months ended March 31, 2020, the Company experienced a 9.1% decline in revenue during third quarter of 2020 compared to the third quarter of 2019 primarily due to reduced volume of claims from customers as a result of restrictions on elective medical procedures and non-essential medical services. Revenue for the three months ended September 30, 2020 increased by $16.6 million, or 8%, when compared to the three months ended June 30, 2020, signaling an improvement of market conditions. For the nine months ended September 30, 2020, we incurred $0.4 million of expenses directly related to COVID-19, primarily for office cleaning and computer and office supplies to enable employees to work remotely.
We have temporarily closed all of our offices and restricted travel due to concern for our employees’ health and safety and also in compliance with state shelter in place orders. Most of our approximately 2,000 employees are working remotely. Other than these modifications, we have not experienced any material changes to our operations including receiving and processing transactions with our customers as a result of COVID-19.
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The COVID-19 pandemic is evolving rapidly. We believe COVID-19’s impact on our businesses, operating results, cash flows and/or financial condition primarily will be driven by the severity and duration of the pandemic; the pandemic’s impact on the U.S. and global economies and consumer behavior and health care utilization patterns; and the timing, scope and impact of stimulus legislation as well as other federal, state and local governmental responses to the pandemic. Those primary drivers are beyond our knowledge and control. COVID-19 will continue to impact our businesses, operating results, cash flows and/or financial condition but it is uncertain if such impact will become adverse or material as explained above.
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020. The law features tax relief measures for businesses including a change in the Section 163(j) interest deduction limitation increasing the adjusted taxable income limitation from 30% to 50% retroactively to tax years beginning on or after January 1, 2019. The provision also allows the taxpayer to elect to use its 2019 adjusted taxable income for its 2020 limitation. The Treasury and the IRS released final regulations on the Section 163(j) interest deduction limitation on July 28, 2020. Taxpayers may apply the final regulations in their entirety to tax years beginning after December 31, 2017. The final regulations clarify the definition of interest to limit to items treated as “interest” for U.S. Federal income tax purposes. As a result of the changes to the final regulations, the Company recorded a $3.2 million increase to its deferred income tax liability to account for the retrospective change to the tax law applicable to the Company’s years ended December 31, 2018 and 2019 during the third quarter in addition to the $32.4 million increase already booked during the first quarter due to the CARES Act. The CARES Act had additional impacts to the 2019 tax year, however, they do not have a material impact to the Company’s 2019 income tax provision. The other aspects of the CARES Act did not have a material effect to the Company. See Note 5 of the Company’s unaudited condensed consolidated financial statements.
Factors Affecting Our Results of Operations
Key Technology
Our strength as a company is our ability to use data and analytics to develop new service opportunities to enhance our customer relationships and to increase revenues. We use technology, data and analytics to transform healthcare transactions into multiple opportunities for savings and recurring revenues by leveraging data and analytics to inform our transaction processing systems (i.e., our claims processing systems). The transaction processing systems generate savings for our customers, revenues for the Company and each transaction adds more data to our intelligence engine and data warehouse. The intelligence engine drives our analytics and development of new saving opportunities and revenue growth through service enhancement or new product development.
Our technology also contributes to our ability to efficiently process our transactions through electronic data interchange (“EDI”) batch files, real time web services and online through customer and provider portals. Our current infrastructure supports significantly more than the current transaction volume giving us room for growth and increased volume. Our application platforms are architected and built with redundancy to eliminate downtime. All of the claims processed in our system are received via EDI or direct web service integration. As we process more claims through EDI and direct service integration, our electronic integration with customers results in substantial back office interconnectivity and considerably reduces complexity and processing failures. Because our transaction processing systems are scalable, we are able to absorb significant increases in volume at minimal marginal costs. Our integration into our customers’ systems and processes is an important component of our business model, and has led to relationships with key customers that have exceeded 30 years.
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.
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The following table presents the medical charges processed and the savings generated for the periods presented:
| ($ in billions) | ||||||||
| For the Nine Months Ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Medical charges processed (1) | $ | 76.6 | $ | 79.6 | ||||
| Medical cost potential savings (2) | 18.2 | % | 17.5 | % | ||||
| (1) | Medical charges processed represents the aggregate dollar amount of claims processed by MultiPlan's cost management 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 MultiPlan's cost management solutions. |
| (2) | Medical cost savings represents the aggregate amount of potential savings in dollars identified by MultiPlan's cost management solutions in the period presented expressed as a percentage of the aggregate amount of medical charges processed 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, medical cost savings may not directly correlate with the amount of fees earned in connection with the processing of such claims. |
Business Model
Our business model avoids reimbursement, underwriting and malpractice risk and exposure. We do not provide or manage healthcare services or provide medical care. This makes us free from state and federal regulations that are imposed on insurers and medical services providers.
Healthcare Industry Exposure
According to the Centers for Medicare and Medicaid Services (“CMS”), healthcare expenditures will grow from $3.8 trillion, or 17.8% of U.S. GDP, in 2019 to represent 19.7% of GDP by 2028, representing a compounded annual growth rate of 5.5%. There are a multitude of factors driving this expected growth, including recent regulations and ongoing secular trends, such as the aging population and other demographic factors, which are driving expanded healthcare coverage and increased utilization. As expenditures continue to rise, stakeholders and especially payors, are becoming increasingly focused on solutions that reduce medical costs and improve payment accuracy.
Components of Results of Operations
Revenues
We generate revenues from several sources including: (i) Network-Based Solutions that process claims at a discount compared to billed fee-for-service rates and using an extensive network, (ii) Analytics-Based Solutions that use our leading and proprietary information technology platform to offer customers solutions to reduce medical costs and (iii) Payment Integrity Solutions that use data, technology, and clinical expertise to identify improper, unnecessary and excessive charges. Payors compensate us through either a percentage of savings (“PSAV”) achieved or a per employee/member per month (“PEPM”) rate.
Costs of services
Costs of services consist of all costs specifically associated with claims processing activities for customers, sales and marketing, and the development and maintenance of the Company’s networks, analytics-based solutions, and payment integrity solutions. 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.
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General and administrative expenses
General and administrative expenses include corporate management and governance functions comprised 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. The Company provides 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 and provider network which were identified in valuing the intangible assets in connection with the June 6, 2016 acquisition by Hellman & Friedman. These intangible assets are amortized on a straight-line basis over 15 years.
Interest expense
Interest expense consists of accrued interest and related interest payments on our outstanding long-term debt and amortization of debt issuance costs, discounts on the term loan (“Term Loan G”) under the MPH senior secured credit facilities and the 8.500% / 9.250% Senior PIK Toggle Notes due 2022 issued by Polaris Intermediate Corp. (the “Senior PIK Notes”), and 7.125% Senior Notes due 2024 issued by MPH (the “7.125% Senior Notes”) premium, and the write-off of any debt issue costs, as well as the discount from the repurchase and cancellation of Notes.
Interest income
Interest income consists primarily of bank interest.
Gain on repurchase and cancellation of Notes
The gain on repurchase and cancellation of Notes consists of the gain from the cash repurchase plus accrued interest from the repurchase and cancellation of $121.3 million of Senior PIK Notes in 2019. The cash repurchase of $101.0 million plus accrued interest resulted in the recognition of a gain of $18.5 million.
Income tax (benefit) expense
Income tax (benefit) expense consists of federal, state, and local income taxes. Due to the variability of our taxable income as compared to net income, stock-based compensation and the variability of the jurisdictions where income is earned, our effective tax rate can vary significantly from one period to the next depending on relative changes in net income.
Non-GAAP Financial Measures
We use EBITDA and Adjusted EBITDA to evaluate our financial performance. EBITDA and Adjusted EBITDA 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:
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| · | 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 than we do, limiting their usefulness as a comparative measure. |
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.
EBITDA and Adjusted EBITDA 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 (benefit) expense, 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 (income) expense, transaction related expenses (including expenses related to the Transactions), loss on equity investments, gain on the repurchase and retirement of notes, and stock-based compensation. See our unaudited condensed consolidated financial statements 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.
The following table presents a reconciliation of net (loss) income to EBITDA and Adjusted EBITDA for the periods presented for Polaris Parent Corp.:
| ($ in thousands) | ||||||||||||||||
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net income (loss) - GAAP | $ | (288,402 | ) | $ | 5,362 | $ | (347,242 | ) | $ | (2,134 | ) | |||||
| Adjustments: | ||||||||||||||||
| Interest expense | 82,275 | 93,246 | 259,290 | 286,438 | ||||||||||||
| Interest income | (81 | ) | (54 | ) | (229 | ) | (133 | ) | ||||||||
| Income tax provision (benefit) | (1,080 | ) | 1,005 | (11,219 | ) | (191 | ) | |||||||||
| Depreciation | 15,262 | 14,153 | 44,903 | 41,723 | ||||||||||||
| Amortization of intangible assets | 83,513 | 83,513 | 250,540 | 250,540 | ||||||||||||
| Non-income taxes (a) | 415 | 479 | 1,335 | 1,409 | ||||||||||||
| EBITDA | $ | (108,098 | ) | $ | 197,704 | $ | 197,378 | $ | 577,652 | |||||||
| Adjustments: | ||||||||||||||||
| Other (income) expense (b) | 1,012 | 626 | 1,308 | 1,448 | ||||||||||||
| Transaction related expenses (c ) | 2,464 | 3,245 | 5,162 | 3,267 | ||||||||||||
| Loss on equity investments (d) | 7,784 | - | 7,784 | - | ||||||||||||
| Gain on repurchase and retirement of notes (e) | - | (18,450 | ) | - | (18,450 | ) | ||||||||||
| Stock-based compensation (f) | 262,356 | 4,321 | 299,629 | (308 | ) | |||||||||||
| Adjusted EBITDA | $ | 165,518 | $ | 187,446 | $ | 511,261 | $ | 563,609 | ||||||||
____________________
| (a) | Non-income taxes includes personal property taxes, real estate taxes, sales and use taxes and franchise taxes which are included in costs of services and general and administrative expenses in our unaudited condensed consolidated statements of income and comprehensive income. |
| (b) | Represents miscellaneous non-operating expenses, gain or loss on disposal of assets, and management fees. |
| (c) | Represents ordinary course transaction costs and transaction costs related to the Transactions. |
| (d) | Loss on equity investments reflects the change in value as of September 30, 2020 of 9,094,876 shares of Churchill’s Class A Common Stock that were purchased by the Company in August 2020 for an aggregate purchase price (including commissions) of $101.0 million. See the Notes to the financial statements for additional information. |
| (e) | Represents the gain related to the repurchase and cancellation of $121.3 million in aggregate principal amount of Senior PIK Notes. |
| (f) | Includes the cost of an employee stock-based compensation plan. |
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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 Refinancings, Repayments and Repricing
On June 12, 2017, the Company refinanced Term Loan G, resulting in a reduction in the loan’s base rate with terms otherwise similar to the former Term Loan G, including the same security and guarantee package. As a result of the Term Loan G refinancing on June 12, 2017, we incurred expenses of $20.1 million recorded as a loss on extinguishment of debt, including the write-off of $4.9 million of term loan discount and $15.2 million of debt issuance costs.
On November 21, 2017, Polaris Intermediate Corp. issued $1.3 billion of Senior PIK Notes. In connection with the Business Combination, all outstanding Senior PIK Notes were redeemed on October 8, 2020.
In connection with Term Loan G, the $100.0 million revolving credit facility (“Revolver G”) under the MPH senior secured credit facilities, the 7.125% Senior Notes and the Senior PIK Notes, there was $102.2 million of specific expenses incurred related to raising the debt, including commissions, fees and expenses of investment bankers and underwriters, registration and listing fees, accounting and legal fees pertaining to the financing and other external, incremental expenses paid to advisors that were directly attributable to realizing the proceeds of the debt issues. These costs were capitalized as debt issuance costs and are being amortized over the term of the related debt using the effective interest method.
During the year-ended December 31, 2019, the Company repurchased and cancelled $121.3 million of the Senior PIK Notes. The cash repurchase of $101.0 million resulted in the recognition of a gain of $18.5 million as well as a write off of the pro-rata share of debt issue costs of $1.0 million and discount of $0.8 million. The debt issuance costs and discount are included in interest expense in the accompanying unaudited condensed consolidated statements of income and comprehensive income.
The Company made several principal prepayments of the Term Loan G principal in the amounts of $100.0 million, $245.0 million and $165.0 million for the years ended December 31, 2019, 2018 and 2017 respectively. These prepayments reduce interest expense for Term Loan G for these and future time periods.
In the years ended December 31, 2017, 2018 and 2019, we did not recognize expense for the portions of debt issuance costs related to the amounts of the principal loan prepayments of Term Loan G made in each year, which resulted in an understatement of long-term debt of $2.3 million as of December 31, 2019. We corrected this error as an out-of-period adjustment resulting in an overstatement of interest expense of $2.3 million in the nine month period ended September 30, 2020.
On October 8, 2020, in conjunction with the Business Combination, the Company issued $1,300.0 million of 6.00% / 7.00% Convertible Senior PIK Toggle Notes due 2017 (“Convertible Notes”).
On October 29, 2020, MPH issued $1,300.0 million aggregate principal amount of its 5.750% Notes. In addition, MPH increased the commitments under the Revolver G from $100.0 million to $450.0 million. MPH used the net proceeds from the 5.750% Notes, together with $715.0 million of cash on hand, to (i) redeem, satisfy and discharge all of the 7.125% Notes and repay $369.0 million of indebtedness under MPH’s Term Loan G and (ii) pay fees and expenses in connection therewith.
Stock-Based Compensation
The Company is a wholly-owned subsidiary of Polaris Investment Holdings, L.P. (“Holdings”). The Company’s stock-based compensation is granted to employees in the form of Units (“Units”) via a Class B Unit Award Agreement. See Note 7 of the Company’s unaudited condensed consolidated financial statements for more information.
The Transactions have influenced the valuation of the stock-based compensation awards and will constitute a definitive liquidity event under the agreements governing the awards as more fully described in Note 10 of the Company’s unaudited condensed consolidated financial statements. The fair value of the outstanding Units was $475.5 million as of September 30, 2020. The valuation as of September 30, 2020 used the cumulative exit value of the Company, corresponding to the transaction value and prior distributions, and removed the discount for lack of marketability which was 19.0% as of September 30, 2019.
9
Results of Operations for the Three and Nine Months Ended September 30, 2020 and September 30, 2019
The following table provides the results of operations for the periods indicated:
| ($ in thousands) | ||||||||||||||||||||||||||||||||
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2020 | 2019 | Change $ | Change % | 2020 | 2019 | Change $ | Change % | |||||||||||||||||||||||||
| Revenues | ||||||||||||||||||||||||||||||||
| Network Services | $ | 65,323 | $ | 77,038 | $ | (11,715 | ) | (15.2 | )% | $ | 200,448 | $ | 239,799 | $ | (39,351 | ) | (16.4 | )% | ||||||||||||||
| Analytics-Based Solutions | 133,119 | 141,307 | (8,188 | ) | (5.8 | )% | 407,216 | 416,105 | (8,889 | ) | (2.1 | )% | ||||||||||||||||||||
| Payment Integrity Solutions | 25,075 | 27,475 | (2,400 | ) | (8.7 | )% | 74,755 | 80,593 | (5,838 | ) | (7.2 | )% | ||||||||||||||||||||
| Total Revenues | 223,517 | 245,820 | (22,303 | ) | (9.1 | )% | 682,419 | 736,497 | (54,078 | ) | (7.3 | )% | ||||||||||||||||||||
| Costs of Services | ||||||||||||||||||||||||||||||||
| Personnel expenses excluding stock-based compensation | 31,960 | 31,152 | 808 | 2.6 | % | 95,745 | 92,307 | 3,438 | 3.7 | % | ||||||||||||||||||||||
| Stock-based compensation | 108,777 | 1,593 | 107,184 | NM | 126,723 | (1,324 | ) | 128,047 | NM | |||||||||||||||||||||||
| Personnel expenses including stock-based compensation | 140,737 | 32,745 | 107,992 | 329.8 | % | 222,468 | 90,983 | 131,485 | 144.5 | % | ||||||||||||||||||||||
| Access and bill review fees | 3,581 | 3,955 | (374 | ) | (9.5 | )% | 10,888 | 12,316 | (1,428 | ) | (11.6 | )% | ||||||||||||||||||||
| Other | 3,548 | 4,359 | (811 | ) | (18.6 | )% | 11,089 | 12,892 | (1,803 | ) | (14.0 | )% | ||||||||||||||||||||
| Total Costs of Services, excluding depreciation and amortization of intangible assets as shown below | 147,866 | 41,059 | 106,807 | 260.1 | % | 244,445 | 116,191 | 128,254 | 110.4 | % | ||||||||||||||||||||||
| Gross Profit | $ | 75,651 | $ | 204,761 | $ | (129,110 | ) | (63.1 | )% | $ | 437,974 | $ | 620,306 | $ | (182,332 | ) | (29.4 | )% | ||||||||||||||
| Gross Profit % | 33.8 | % | 83.3 | % | 64.2 | % | 84.2 | % | ||||||||||||||||||||||||
| General and administrative expenses | 184,164 | 25,986 | 158,178 | 608.7 | % | 241,931 | 62,513 | 179,418 | 287.0 | % | ||||||||||||||||||||||
| Depreciation expense | 15,262 | 14,153 | 1,109 | 7.8 | % | 44,903 | 41,723 | 3,180 | 7.6 | % | ||||||||||||||||||||||
| Amortization of intangible assets | 83,513 | 83,513 | - | 0.0 | % | 250,540 | 250,540 | - | 0.0 | % | ||||||||||||||||||||||
| Operating income | (207,288 | ) | 81,109 | (288,397 | ) | (355.6 | )% | (99,400 | ) | 265,530 | (364,930 | ) | (137.4 | )% | ||||||||||||||||||
| Interest expense | 82,275 | 93,246 | (10,971 | ) | (11.8 | )% | 259,290 | 286,438 | (27,148 | ) | (9.5 | )% | ||||||||||||||||||||
| Interest income | (81 | ) | (54 | ) | (27 | ) | 50.0 | % | (229 | ) | (133 | ) | (96 | ) | 72.2 | % | ||||||||||||||||
| Gain on repurchase of Notes | - | (18,450 | ) | 18,450 | (100.0 | )% | - | (18,450 | ) | 18,450 | (100.0 | )% | ||||||||||||||||||||
| Net (loss) income before income taxes | (289,482 | ) | 6,367 | (295,849 | ) | NM | (358,461 | ) | (2,325 | ) | (356,136 | ) | NM | |||||||||||||||||||
| Provision (benefit) for income taxes | (1,080 | ) | 1,005 | (2,085 | ) | (207.5 | )% | (11,219 | ) | (191 | ) | (11,028 | ) | NM | ||||||||||||||||||
| Net (loss) income | $ | (288,402 | ) | $ | 5,362 | $ | (293,764 | ) | NM | $ | (347,242 | ) | $ | (2,134 | ) | $ | (345,108 | ) | NM | |||||||||||||
N/M = Not meaningful
Revenues
Revenues for the three months ended September 30, 2020 were $223.5 million as compared to revenues of $245.8 million for the three months ended September 30, 2019, representing a decrease of $22.3 million, or 9.1%. This decrease in revenues was attributed to decreases in Network Services revenues of $11.7 million, Analytics-Based Solutions revenues of $8.2 million and Payment Integrity Solutions revenues of $2.4 million, primarily due to reduced volumes of claims from customers as a result of COVID-19 restrictions on elective medical procedures and non-essential medical services.
Revenues for the nine months ended September 30, 2020 were $682.4 million as compared to revenues of $736.5 million for the nine months ended September 30, 2019, representing a decrease of $54.1 million, or 7.3%. This decrease in revenues was attributed to decreases in Network Services revenues of $39.4 million, Analytics-Based Solutions revenues of $8.9 million and Payment Integrity Solutions revenues of $5.8 million, primarily due to reduced volumes of claims from customers as a result of COVID-19 restrictions on elective medical procedures and non-essential medical services.
For the three months ended September 30, 2020, Network Services revenues were $65.3 million as compared to $77.0 million for the three months ended September 30, 2019, representing a decrease of $11.7 million, or 15.2%. This decrease was primarily declines in volumes from some customers as a result of overall lower volume due to COVID-19 restrictions on elective procedures and non-essential medical services.
For the nine months ended September 30, 2020, Network Services revenues were $200.4 million as compared to $239.8 million for the nine months ended September 30, 2019, representing a decrease of $39.4 million, or 16.4%. This decrease was primarily due declines in volumes from some customers as claims were moved from using our Network Services product to our Analytics-Based Solutions products and because of declines in overall volume due to COVID-19 restrictions on elective procedures and non-essential medical services.
10
For the three months ended September 30, 2020, revenues from our Analytics-Based Solutions, including Financial Negotiation and Medical Reimbursement Analytics revenues, were $133.1 million as compared to $141.3 million for the three months ended September 30, 2019, representing a decrease of $8.2 million, or 5.8%. Decreases in the Analytics-Based Solutions revenues were primarily due to a reduction in overall volume due to COVID-19 restrictions on elective procedures and non-essential medical services, offset by increases in volume due to some customers that moved their claims from using our Network Services product to our Analytics-Based Solutions products. For the nine months ended September 30, 2020, revenues from our Analytics-Based Solutions, including Financial Negotiation and Medical Reimbursement Analytics revenues, were $407.2 million as compared to $416.1 million for the nine months ended September 30, 2019, representing a decrease of $8.9 million, or 2.1%. Decreases in the Analytics-Based Solutions revenues were primarily due to a reduction in overall volume due to COVID-19 restrictions on elective procedures and non-essential medical services, offset by increases in volume due to some customers that moved their claims from using our Network Services product to our Analytics-Based Solutions products. For the three months ended September 30, 2020, revenues from our Payment Integrity Solutions were $25.1 million as compared to $27.5 million for the three months ended September 30, 2019, representing a decrease of $2.4 million, or 8.7%. For the nine months ended September 30, 2020, revenues from our Payment Integrity Solutions were $74.8 million as compared to $80.6 million for the nine months ended September 30, 2019, representing a decrease of $5.8 million, or 7.2%. These decreases were primarily due to reduction in overall volume due to COVID-19 restrictions on elective procedures and non-essential medical services.
Costs of Services
| ($ in thousands) | ||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | |||||||||||||
| Costs of services (exclusive of depreciation and amortization of intangible assets) | 147,866 | 41,059 | 244,445 | 116,191 | ||||||||||||
| Less: stock-based compensation | 108,777 | 1,593 | 126,723 | (1,324 | ) | |||||||||||
| Costs of services excluding stock-based compensation | 39,089 | 39,466 | 117,722 | 117,515 | ||||||||||||
Costs of services for the three months ended September 30, 2020 were $147.9 million as compared to costs of services of $41.1 million for the three months ended September 30, 2019, representing an increase of $106.8 million, or 260.1%. This increase was primarily due to increases in stock-based compensation of $107.2 million.
Costs of services for the nine months ended September 30, 2020 were $244.4 million as compared to costs of services of $116.2 million for the nine months ended September 30, 2019, representing an increase of $128.3 million, or 110.4%. This increase was primarily due to increases in stock-based compensation of $128.0 million.
Personnel expenses, including stock-based compensation, were $140.7 million for the three months ended September 30, 2020 as compared to $32.7 million, representing an increase of $108.0 million, or 329.8%. This increase was primarily due to increases in stock-based compensation of $107.2 million and net increases in compensation, including salaries, bonuses, commissions, fringe benefits and contract labor of $0.8 million.
Personnel expenses, including stock-based compensation, were $222.5 million for the nine months ended September 30, 2020 as compared to $91.0 million, representing an increase of $131.5 million, or 144.5%. This increase was primarily due to increases in stock-based compensation of $128.0 million and net increases in compensation, including salaries, bonuses, commissions, fringe benefits, and contract labor of $3.4 million.
Access and bill review fees for the three months ended September 30, 2020 were $3.6 million, as compared to $4.0 million for the three months ended September 30, 2019, representing a decrease of $0.4 million, or 9.5%. This decrease was primarily due to decreases in network access fees for accessing non-owned third-party provider networks of $0.1 million and reductions in claims processing fees of $0.2 million.
Access and bill review fees for the nine months ended September 30, 2020 were $10.9 million, as compared to $12.3 million for the nine months ended September 30, 2019, representing a decrease of $1.4 million, or 11.6%. This decrease was primarily due to decreases in network access fees for accessing non-owned third-party provider networks of $0.6 million and reductions in claims processing fees of $0.8 million.
11
General and Administrative Expenses
| ($ in thousands) | Three Months Ended | Nine Months Ended | ||||||||||||||
| September 30, 2020 | September 30, 2019 | September 30, 2020 | September 30, 2019 | |||||||||||||
| General and administrative expenses | 184,164 | 25,986 | 241,931 | 62,513 | ||||||||||||
| Less: stock-based compensation | 153,579 | 2,728 | 172,906 | 1,016 | ||||||||||||
| Less: transaction costs | 2,464 | 3,245 | 5,162 | 3,267 | ||||||||||||
| Less: loss on equity investments | 7,784 | - | 7,784 | - | ||||||||||||
| General and administrative expenses excluding stock-based compensation, transactions costs and loss on equity investments | 20,337 | 20,013 | 56,079 | 58,230 | ||||||||||||
General and administrative expenses for the three months ended September 30, 2020 were $184.2 million as compared to $26.0 million for the three months ended September 30, 2019, representing an increase of $158.2 million. This increase was primarily due to increases in stock-based compensation of $150.9 million and a loss on equity investments of $7.8 million from the change in share prices on shares of common stock purchased by the Company in August 2020. General and administrative expenses for the nine months ended September 30, 2020 were $241.9 million as compared to $62.5 million for the nine months ended September 30, 2019, representing an increase of $179.4 million. This increase was primarily due to increases in stock-based compensation $171.9 million, increases in transaction costs of $1.9 million, and a loss on equity investments of $7.8 million as explained above. The increases in transaction costs were primarily due to costs associated with a potential acquisition that did not occur and to the Transactions related to the business combination between Churchill Capital Corp III and MultiPlan that consummated on October 8, 2020. Please see Note 10 of the unaudited condensed consolidated financial statements for more information.
Depreciation Expense
Depreciation expense was $15.3 million for the three months ended September 30, 2020, as compared to $14.2 million for the three months ended September 30, 2019, representing an increase of $1.1 million, or 7.8%. Depreciation expense was $44.9 million for the nine months ended September 30, 2020, as compared to $41.7 million for the nine months ended September 30, 2019, representing an increase of $3.2 million, or 7.6%. These increases were due to $49.3 million and $66.4 million purchases of property and equipment, including internally generated capital software in the nine months ended September 30, 2020 and in the year ended December 31, 2019, respectively.
Amortization of Intangible Assets
Amortization of intangible assets was $83.5 million for the three months ended September 30, 2020 and September 30, 2019. Amortization of intangible assets was $250.5 million for the nine months ended September 30, 2020 and September 30, 2019. This expense represents the amortization of intangible assets, as explained above and in the notes to the unaudited condensed consolidated financial statements.
Interest Expense and Interest Income
Interest expense was $82.3 million for the three months ended September 30, 2020, as compared to $93.2 million for the three months ended September 30, 2019, representing a decrease of $11.0 million, or 11.8%. Interest expense was $259.3 million for the nine months ended September 30, 2020, as compared to $286.4 million for the nine months ended September 30, 2019, representing a decrease of $27.1 million, or 9.5%. The decreases in interest expense for these time periods was due to lower term loan interest rates in the three months and nine months ended September 30, 2020, as compared to the three and nine months ended September 30, 2019, as well as reductions in interest on the Senior PIK Notes due to the repurchase and cancellation of $121.3 million of Senior PIK Notes in third quarter 2019, as explained below. In the years ended December 31, 2017, 2018 and 2019, we did not recognize expense for the portions of debt issuance costs related to the amounts of the principal loan prepayments made in each year, which resulted in an understatement of long-term debt of $2.3 million as of December 31, 2019. We corrected this error as an out-of-period adjustment resulting in an overstatement of interest expense of $2.3 million in the nine month period ended September 30, 2020. Interest income was $0.1 million for the three months ended September 30, 2020 and 2019. Interest income was $0.2 million and $0.1 million for the nine months ended September 30, 2020 and 2019, respectively.
As of September 30, 2020, the Company’s long-term debt was $5,409.5 million and included (i) $2,710.0 million Term Loan G, discount on Term Loan G of $4.9 million, (ii) $1,560.0 million of 7.125% Senior Notes, premium on 7.125% Senior Notes of $8.8 million, (iii) $1,178.7 million of Senior PIK Notes, discount on Senior PIK Notes of $5.7 million, and (iv) $0.1 million of long-term capital lease obligations, net of (v) debt issue costs of $37.5 million. As of September 30, 2020, the Company’s total debt had an annualized weighted average interest rate of 5.8%.
12
At September 30, 2019, the Company’s long-term debt was $5,393.8 million and included $2,710.0 million Term Loan, discount on Term Loan of $6.6 million, $1,560.0 million of 7.125% Senior Notes, premium on Senior Notes of $10.8 million, and $1,178.7 million of Senior PIK Notes, discount on Senior PIK Notes of $8.0 million, and $55 thousand of long-term capital lease obligations, net of debt issue costs of $51.2 million. As of September 30, 2019, the Company’s total debt had a weighted average interest rate of 6.4%.
During third quarter 2019, the Company repurchased and cancelled $121.3 million of the Senior PIK Notes. The cash repurchase of $101.0 million plus accrued interest resulted in the recognition of a gain of $18.5 million, as well as a write-off of the pro-rata share of debt issue costs of $1.0 million and discount of $0.8 million. These amounts were included in interest expense.
Provision (Benefit) for Income Taxes
Net loss before income taxes for the three months ended September 30, 2020 of $289.5 million generated a benefit for income taxes of $1.1 million with an effective tax rate of less than 1%. Net income before income taxes for the three months ended September 30, 2019 of $6.4 million generated a provision for income taxes of $1.0 million with an effective tax rate of 16%. Net loss before income taxes for the nine months ended September 30, 2020 of $358.5 million generated a benefit for income taxes of $11.2 million with an effective tax rate of 3%. Net loss before income taxes for the nine months ended September 30, 2019 of $2.3 million generated a benefit for income taxes of $0.2 million with an effective tax rate of 9%. The Company’s effective tax rate during the three and nine months ended September 30, 2020 and 2019 differed from the statutory rate primarily due to stock-based compensation expense and state tax rates.
Net Income (Loss)
Net loss for the three months ended September 30, 2020 was $288.4 million as compared to net income of $5.4 million for the three months ended September 30, 2019. The increase in net loss of $293.8 million was primarily due to a decrease in revenues of $22.3 million, increases in costs of services of $106.8 million, increases in general and administrative expenses of $158.2 million, increases in depreciation expense of $1.1 million and decreases in gain on repurchase of Notes of $18.5 million, offset by decreases in interest expense of $11.0 million, increase in the benefit for income taxes of $2.1 million, and increases in interest income of $27 thousand as explained in the sections above.
Net loss for the nine months ended September 30, 2020 was $347.2 million as compared to net loss of $2.1 million for the nine months ended September 30, 2019. The increase in net loss of $345.1 million was primarily due to a decrease in revenues of $54.1 million, increases in costs of services of $128.3 million, increases in general and administrative expenses of $179.4 million, increases in depreciation expense of $3.2 million, and decreases in gain on repurchase of Notes of $18.5 million, offset by decreases in interest expense of $27.1 million, increases in the benefit for income taxes of $11.0 million, and increases in interest income of $0.1 million as explained in the sections above.
Liquidity and Capital Resources
As of September 30, 2020, we had cash and cash equivalents of $203.8 million. As of September 30, 2020, the Company had three letters of credit totaling $1.8 million of utilization against the Revolver G and $98.2 million of loan availability under the Revolver G. The three letters of credit are used to satisfy real estate lease agreements for three of our offices in lieu of security deposits. In March 2020, $98.0 million of borrowings were activated on our Revolver G as a precautionary measure due to the uncertainty of the COVID-19 pandemic. As there were no liquidity issues related to COVID-19, the Revolver G and associated interest was repaid on June 25, 2020.
As of December 31, 2019, we had cash and cash equivalents of $21.8 million. As of December 31, 2019, the Company had three letters of credit totaling $1.8 million of utilization against the Revolver G and $98.2 million loan availability under the Revolver G. The three letters of credit are used to satisfy real estate lease agreements for three of our offices in lieu of security deposits.
Our primary sources of liquidity will be internally generated funds combined with our borrowing capacity under our Revolver G. 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 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.
On October 29, 2020, MPH issued $1,300.0 million aggregate principal amount of its 5.750% Notes. In addition, MPH increased the commitments under the Revolver G from $100.0 million to $450.0 million. MPH used the net proceeds from the 5.750% Notes, together with $715.0 million of cash on hand, to (i) redeem, satisfy and discharge all of the 7.125% Notes and repay $369.0 million of indebtedness under MPH’s Term Loan G and (ii) pay fees and expenses in connection therewith.
13
Cash Flow Summary
The following table is derived from our consolidated statements of cash flows:
| ($ in thousands) | ||||||||
| For the Nine Months Ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Net cash flows provided by (used in): | ||||||||
| Operating activities | $ | 332,301 | $ | 267,927 | ||||
| Investing activities | $ | (150,328 | ) | $ | (48,020 | ) | ||
| Financing activities | $ | 9 | $ | (201,143 | ) | |||
Cash Flows from Operating Activities
For the nine months ended September 30, 2020 as compared to September 30, 2019
Cash flows from operating activities provided $332.3 million for the nine months ended September 30, 2020 and $267.9 million for the nine months ended September 30, 2019. This $64.4 million increase in cash flows from operating activities was primarily the result of changes in non-cash items of $313.9 million and changes in net working capital of $95.6 million, offset by an increase in net loss of $345.1 million. The increase in net loss during the nine months ended September 30, 2020 as compared to September 30, 2019 was primarily the result of decreases in revenues and increases in costs of services, general and administrative expenses, depreciation expenses, and reduction in gain on repurchase of Notes of $18.5 million, offset by reductions in interest expense and increases in the benefit for income taxes and increases in interest income, as explained above.
The $313.9 million increase in non-cash items was primarily due to an increase in stock-based compensation of $299.9 million, decrease in gain on repurchase and cancellation of Notes of $18.5 million, increase in loss on equity investments of $7.8 million, increase in the amortization of debt issuance costs of $2.5 million, and increase in depreciation of $3.2 million, offset by an increase in deferred tax benefit of $17.3 million partially due to a retroactive change to the tax law as a result of the CARES Act, and increase in amortization of the right-of-use asset of $0.6 million. The increase in debt issuance costs was primarily due to an out-of-period adjustment in the nine months ended September 30, 2020 to correct for the unrecognized debt issuance costs related to principal loan prepayments made in each of the years ended December 31, 2017, 2018 and 2019, as described above.
During the nine months ended September 30, 2020, $92.0 million was provided by changes in working capital including decreases in net accounts receivable of $23.2 million primarily due to declines in year-over-year revenues and timing of collections, decreases in prepaid taxes of $2.1 million primarily due to a retrospective change in the tax law (See Note 5 to our unaudited condensed consolidated financial statements), increases in accounts payable and accrued expenses and other of $107.0 million primarily due to accrued transactions costs and accrued interest, offset by increases in prepaid expenses and other assets of $34.3 million primarily due to prepayment of deferred transaction costs related to the Transactions, and decreases of $6.1 million of operating lease obligation.
During the nine months ended September 30, 2019, $3.6 million was used by changes in working capital including increases in prepaid taxes of $64.9 million as a retrospective tax adjustment resulting in overpaid taxes and increases in prepaid expenses and other assets of $2.4 million, and decreases in operating lease obligation of $7.2 million, offset by decreases in accounts receivable of $6.3 million primarily due to declines in year-over-year revenues and timing of collections and increases in accounts payable and accrued expenses of $64.6 million.
14
Cash Flow from Investing Activities
For the nine months ended September 30, 2020 as compared to September 30, 2019
For the nine months ended September 30, 2020, net cash of $150.3 million was used in investing activities for $49.3 million purchases of property and equipment and capitalization of software development and $101.0 million purchases of equity investments. For the nine months ended September 30, 2019, net cash of $48.0 million was used in investing activities for purchases of property and equipment and capitalization of software development. This increase of $1.3 million in purchases of property and equipment was primarily due to increased capitalization of software development on capital projects primarily to enhance our information technology infrastructure and platforms to increase efficiencies, data security, and service line capabilities.
Cash Flow from Financing Activities
For the nine months ended September 30, 2020 as compared to September 30, 2019
Cash flows provided by financing activities for the nine months ended September 30, 2020 were $9 thousand consisting of $9 thousand of net borrowings on capital leases and $98.0 million of borrowings and repayments on the Revolver G taken as a precautionary measure due to the uncertainty of the COVID-19 pandemic. The Revolver G and associated interest was repaid on June 25, 2020.
Cash flows used in financing activities for the nine months ended September 30, 2019 were $201.1 million consisting of $100.0 million of prepayments on our Term Loan G, $101.0 million for the repurchase and cancellation of Notes, and $0.1 million net payments on capital leases.
Term Loans and Revolvers
On June 7, 2016, in conjunction with the acquisition of the Company by affiliates of Hellman & Friedman, the Company borrowed $3.5 billion with a group of lenders due and payable on June 7, 2023, creating the Term Loan G and settling all other outstanding term loans. The Company has a $100.0 million revolving credit facility in conjunction with Term Loan G. On March 19, 2020 the Company activated $98.0 million of Revolver G as a precautionary measure due to the uncertainty of the COVID-19 pandemic. As there were no liquidity issues related to COVID-19, the Revolver G and associated interest was repaid on June 25, 2020.
The term loan and revolver are secured by a first priority lien on substantially all of the Company’s tangible and intangible property, including a pledge of all of the capital stock of each of its Subsidiaries.
Term Loan G was refinanced on June 12, 2017 to obtain an applicable margin on the interest rate lower by 1.00% with terms otherwise similar to the former term loan, including a 2023 maturity and the same security and guarantee package. The proceeds of the new term loan were used to repay the Company’s existing term loan. As a result of the Term Loan G refinancing on June 12, 2017, and in accordance with GAAP, we incurred expenses of $20.1 million recorded as loss on extinguishment of debt, including the write off of $4.9 million of the term loan discount and $15.2 million of debt issuance costs. During the first quarter of 2018, the Company achieved a 25 basis point reduction in the margin of Term Loan G due to an improved leverage ratio, resulting in a lower interest rate of LIBOR plus 2.75%. These amounts are included in the loss on early extinguishments and modifications of debt in the accompanying unaudited condensed consolidated statements of (loss) income and comprehensive (loss) income.
On July 2, 2020 the Company, the administrative agent and the revolving credit lenders agreed to amend the revolving credit maturity date to June 7, 2023, or September 1, 2022 should the aggregate principal outstanding on the Senior PIK Notes exceed $300 million on September 1, 2022.
For all our debt agreements with an interest rate dependent on LIBOR, the Company is currently assessing and monitoring how transitioning from LIBOR to an alternative reference rate may affect the company past 2021.
Interest on Term Loan G and Revolver G is calculated, at the Company’s option, as (a) LIBOR (or, with respect to the term loan facility only 1.00%, whichever is higher), plus the applicable margin, or (b) the highest rate of (1) prime rate, (2) the federal funds effective rate plus 0.50%, (3) LIBOR for an interest period of one month plus 1.00% and (4) 2.00% for Term Loan G and 0.00% for Revolver G, in each case plus an applicable margin of 2.00%. The interest rate in effect for Term Loan G was 4.69% as of December 31, 2019.
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The Company is obligated to pay a commitment fee on the average daily unused amount of Revolver G. The annual commitment fee rate was 0.25% at December 31, 2019. The fee can range from an annual rate of 0.25% to 0.50% based on the Company’s leverage ratio, as defined in the agreement. Commitment fees were $249,000 for the twelve months ended December 31, 2019. These amounts are included in interest expense in the accompanying unaudited condensed consolidated statements of income and comprehensive income.
In connection with the Refinancing, the commitments under the Revolver G were increased from $100.0 million to $450.0 million and $369.0 million of indebtedness under the Term Loan G were repaid.
Senior Notes
On June 7, 2016 the Company sold $1.1 billion of 7.125% Senior Notes. The 7.125% Senior Notes are guaranteed on a senior unsecured basis jointly and severally by the Company and its subsidiaries and will mature on June 7, 2024. On November 18, 2016, MultiPlan sold $460.0 million of additional 7.125% Senior Notes at 103.5% plus accrued interest from June 7, 2016 to November 18, 2016 of $14.7 million. The notes were issued as additional notes under the same indenture governing our $1.1 billion of 7.125% Senior Notes. The proceeds of the sale were used to make a $385.0 million distribution to our Class A Unit holders and pay related fees and expenses of $6.9 million, and $98.9 million was transferred to the Company’s operating account.
The interest rate on the 7.125% Senior Notes is fixed at 7.125% and is payable semi-annually on June 1 and December 1 of each year. Annual interest expense on the 7.125% Senior Notes was $111.2 million in 2019. These amounts are included in interest expense in the accompanying unaudited condensed consolidated statements of income and comprehensive income.
The Company sold Senior PIK Notes of $1.3 billion on November 21, 2017. The Senior PIK Notes were issued with a 1.0% discount and will mature on December 1, 2022. The net proceeds of the Senior PIK Notes plus $28.6 million of operating cash were used to make distributions of $1.3 billion to Class A and B unit holders and pay related transaction expenses and debt issuance costs.
The interest rate on the Senior PIK Notes is fixed at 8.5% and is payable semi-annually on June 1 and December 1 of each year. Interest expense on the Senior PIK Notes was $107.0 million in 2019. These amounts are included in the interest expense in the accompanying unaudited condensed consolidated statements of income and comprehensive income.
During August and September of 2019, the Company repurchased and cancelled $121.3 million of the Senior PIK Notes. The cash repurchase of $101.0 million resulted in the recognition of a gain of $18.5 million as well as a write-off of the pro-rata share of debt issue costs of $1.0 million and discount of $0.8 million. The debt issuance costs and discount are included in interest expense in the accompanying unaudited condensed consolidated statements of (loss) income and comprehensive (loss) income.
On October 8, 2020, we redeemed the Senior PIK Notes in full at a redemption price of 102.000% of the principal amount plus accrued and unpaid interest for a total redemption price of $1,237.6 million.
On October 29, 2020, MPH issued $1,300.0 million in aggregate principal amount of 5.750% Notes and redeemed the 7.125% Senior Notes in full at a redemption price of 103.563% of the principal amount plus accrued and unpaid interest for a total redemption price of $1,661.3 million.
Debt Covenants and Events of Default
The Company is subject to certain affirmative and negative debt covenants under Term Loan G, the Revolver G and the 5.750% Notes that limit the Company and its subsidiaries the ability to engage in specific types of transactions. These covenants limit the Company and its 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; |
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| • | 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 the Company; | |
| • | guarantee indebtedness or incur other contingent obligations; | |
| • | 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 the Company’s affiliates. |
In addition, solely with respect to the Revolver G, if, as of the last day of any fiscal quarter of MPH, the aggregate amount of loans under the Revolver G, letters of credit issued under the Revolver G (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 30% of the total commitments in respect of the Revolver G at such time, we were required to maintain a consolidated first lien debt to consolidated EBITDA ratio no greater than 7.60 to 1.00 (the “Revolver Ratio”). Our consolidated first lien debt to consolidated EBITDA ratio was 3.59 times, 3.58 times, and 3.4 times as of September 30, 2020 and December 31, 2019 and 2018, respectively. As of September 30, 2020 and December 31, 2019 and 2018 we were in compliance with all of the debt covenants. In connection with the Refinancing, the Revolver Ratio was amended such that, if, as of the last day of any fiscal quarter of MPH, the aggregate amount of loans under the Revolver G, letters of credit issued under the Revolver G (to the extent not cash collateralized or backstopped or, in the aggregate, in excess of $10.0 million) and swingline loans are outstanding and/or issued in an aggregate amount greater than 35% of the total commitments in respect of the Revolver G at such time, the Revolver G will require MPH to maintain a maximum first lien secured leverage ratio of 6.75 to 1.00.
The debt agreements governing the Term Loan G, the Revolver G and the 5.750% Notes contain customary events of default, subject to grace periods and exceptions, which include, among others, payment defaults, cross-defaults to certain material indebtedness, certain events of bankruptcy, material judgments, and, in the case of the debt agreement governing the Term Loan G and the Revolver G, any change of control. Upon the occurrence of an event of default under such debt agreements, the lenders and holders of such debt will be permitted to accelerate the loans and terminate the commitments, as applicable, thereunder and exercise other specified remedies available to the lenders and holders thereunder.
Contractual Obligations
As of December 31, 2019, through 2024, the estimated future principal payments due were as follows:
| ($ in thousands) | Payments Due by Period | |||||||||||||||||||
| Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | ||||||||||||||||
| Long-term debt obligations(1): | ||||||||||||||||||||
| Senior secured credit facilities: | ||||||||||||||||||||
| Term Loan G | $ | 2,710,000 | $ | — | $ | 2,710,000 | $ | — | $ | — | ||||||||||
| 7.125% Notes due 2024 | 1,560,000 | — | — | 1,560,000 | — | |||||||||||||||
| Senior PIK Notes (2) | 1,178,727 | — | 1,178,727 | — | — | |||||||||||||||
| Finance lease obligations | 187 | 86 | 101 | — | — | |||||||||||||||
| Operating lease obligations | 36,607 | 11,226 | 23,560 | 1,821 | — | |||||||||||||||
| Total contractual obligations | $ | 5,485,521 | $ | 11,312 | $ | 3,912,388 | $ | 1,561,821 | $ | — | ||||||||||
| (1) | Reflects principal amounts, not adjusted for any discounts or premiums. | |
| (2) | The Senior PIK Notes were redeemed in connection with the Transactions. |
In conjunction with the Transactions, the Company redeemed the Senior PIK Notes and issued $1,300 million of Convertible Notes. On October 29, 2020, the Company refinanced and redeemed the $1,560 million of 7.125% Senior Notes due 2024 and issued $1,300 million of 5.750% Notes due 2028. The following table reflects our contractual obligations and commercial commitments as of September 30, 2020, adjusted to give pro forma effect to the Transactions and Refinancing:
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| ($ in thousands) | Payments Due by Period | |||||||||||||||||||
| Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | ||||||||||||||||
| Long-term debt obligations(1): | ||||||||||||||||||||
| Senior secured credit facilities: | ||||||||||||||||||||
| Term Loan G | $ | 2,341,000 | $ | — | $ | 2,341,000 | $ | — | $ | — | ||||||||||
| 5.750% Notes due 2028 | 1,300,000 | — | — | — | 1,300,000 | |||||||||||||||
| Convertible Notes (2) | 1,300,000 | — | — | — | 1,300,000 | |||||||||||||||
| Finance lease obligations | 207 | 97 | 110 | — | — | |||||||||||||||
| Operating lease obligations | 39,162 | 8,809 | 16,173 | 7,580 | 6,600 | |||||||||||||||
| Total contractual obligations | $ | 4,980,369 | $ | 8,906 | $ | 2,357,283 | $ | 7,580 | $ | 2,606,600 | ||||||||||
| (1) | Reflects principal amounts, not adjusted for any discounts or premiums. | |
| (2) | The Convertible Notes were issued in connection with the Transactions. |
Critical Accounting Policies
A critical accounting policy is one that is both important to the portrayal of a company’s financial condition and results and requires management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company’s financial statements and accompanying notes are prepared in accordance with GAAP. Preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The Company bases these determinations upon the best information available to it during the period in which the Company accounts for its financial condition and results. The Company’s estimates and assumptions could change materially as conditions within and beyond its control change or as further information becomes available. The Company records changes in its estimates in the period the change occurs.
The following is a discussion of the Company’s critical accounting policies and the related management estimates and assumptions necessary in determining the value of related assets, liabilities, revenues and expenses.
Revenue Recognition
We derive revenues from contracts with customers by selling various cost containment services and solutions. Variable consideration is estimated using the expected value method based on our historical experience and best judgment at the time. Due to the nature of our arrangements, certain estimates may be constrained if it is probable that a significant reversal of revenue will occur when the uncertainty is resolved. For our PSAV contracts, portions of revenue that is recognized and collected in a reporting period may be returned or credited in subsequent periods. These credits are the result of payors not utilizing the discounts that were initially calculated, or differences between the Company’s estimates of savings achieved for a customer and the amounts self-reported in the following month by that same customer. Significant judgment is used in constraining estimates of variable consideration, and these estimates are based upon both client-specific and aggregated factors that include historical billing and adjustment data, client contract terms, and performance guarantees. We update our estimates at the end of each reporting period as additional information becomes available.
Goodwill
Goodwill is calculated as the excess of the purchase price in an acquisition over the fair value of identifiable net assets acquired. Acquired intangible assets are separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the Company’s intent to do so.
The Company assesses the impairment of its goodwill at least annually on June 30 and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Important factors that may trigger an impairment review include but are not limited to:
| • | significant underperformance relative to historical or projected future operating results; |
| • | significant changes in the manner of use of the acquired assets or the strategy for the overall business; |
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| • | significant negative industry or economic trends; and | |
| • | significant decline in the Company's estimated enterprise value relative to carrying value. |
The Company is required to write down its goodwill and indefinite-lived intangible assets if they are determined to be impaired. The Company tests its goodwill for impairment at the reporting unit level. The Company recognizes an impairment charge for the amount, if any, by which the carrying amount of the reporting unit, including goodwill, exceeds its fair value. The carrying value is the reporting unit’s carrying amount after all of the reporting unit’s other assets (excluding goodwill) have been adjusted for impairment, if necessary, under other applicable GAAP. The Company establishes fair values using a (i) discounted cash flow analysis, (ii) comparable public company analysis and (iii) comparable acquisitions analysis. Equal weight was given to the three approaches.
The following table shows the range of significant assumptions in the development of the goodwill assessment:
Range of Significant Unobservable Inputs
| As of June 30, | ||||
| 2020 | 2019 | |||
| Long term growth rate | 2.75% to 3.25% | 2.75% to 3.25% | ||
| Discount rate | 10.25% to 10.75% | 9.75% to 10.25% | ||
| Public company EBITDA multiples | 10.0x to 12.5x | 10.0x to 11.0x | ||
| Acquisition EBITDA multiples | 11.0x to 12.0x | 11.0x to 12.0x | ||
The Company is not aware of any triggering events subsequent to the impairment review, and concluded no impairment exists as of September 30, 2020 and December 31, 2019.
Stock-Based Compensation
Stock-based compensation expense includes costs associated with Units awarded to certain members of key management. Stock-based compensation is measured at the grant date based on the fair value of the Unit and is recognized as compensation expense, net of forfeitures, over the applicable requisite service period of the Unit. The fair value of the Units is remeasured at each reporting period. Based on this put right available to the employee participants, stock-based compensation Units have been accounted for as liability classified within Holdings’ consolidated financial statements and the Company recorded these Units within shareholders’ equity as an equity contribution from Holdings based on the fair value of the outstanding Units at each reporting period.
Each individual award is comprised of time vesting Units (“Time Vesting Units”) and performance vesting Units (“Performance Vesting Units”). Time Vesting Units and Performance Vesting Units vest based on the vesting dates and the achievement of certain performance measures as defined in each Agreement. The Company amortizes the Time Vesting Units on a straight line basis, and the Performance Vesting Units on a graded vesting basis.
We determine the fair value of our awards based on (i) the customized payout structure of the subject Units, (ii) liquidity timing, and (iii) vesting hurdles, as applicable. The simulation was based on a risk neutral framework which is a common technique for valuing financial derivatives that possess optionality.
The valuation as of September 30, 2020 used the cumulative exit value of the Company, corresponding to the transaction value and prior distributions, and removed the discount for lack of marketability.
See Note 7 of the unaudited condensed consolidated financial statements for further discussion.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred income tax assets are recognized for deductible temporary differences, net operating loss carryforwards, and tax credit carryforwards if it is more likely than not that the tax benefits will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company evaluates a variety of factors on a regular basis to determine the amount of deferred income tax assets to recognize in the financial statements, including its recent earnings history, current and projected future taxable income, the number of years its net operating loss and tax credits can be carried forward, the existence of taxable temporary differences, any changes in current tax law, such as the CARES Act, the Tax Cuts and Jobs Act of 2017 (the “TCJA”) and available tax planning strategies.
The CARES Act was signed into law on March 27, 2020. The law features tax relief measures for businesses including a change in the Section l63(j) interest deduction limitation increasing the adjusted taxable income limitation from 30% to 50% retroactively to tax years beginning on or after January 1, 2019. The provision also allows the taxpayer to elect to use its 2019 adjusted taxable income for its 2020 limitation. The Treasury and the IRS released final regulations on the Section 163(j) interest deduction limitation on July 28, 2020. Taxpayers may apply the final regulations in their entirety to tax years beginning after December 31, 2017. The final regulations clarify the definition of interest to limit to items treated as “interest” for U.S. Federal income tax purposes. As a result of the changes to the final regulations, the Company recorded a $3.2 million increase to its deferred income tax liability to account for the retrospective change to the tax law applicable to the Company’s years ended December 31, 2018 and 2019 during the third quarter in addition to the $32.4 million increase already booked during the first quarter due to the CARES Act. The CARES Act had additional impacts to the 2019 tax year, however, they do not have a material impact to the Company’s 2019 income tax provision. See Note 5 of the unaudited condensed consolidated financial statements for further discussion.
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Equity Offering Costs
The Company accounts for costs directly attributable to the issuance of equity instruments as an offset to the proceeds received and a reduction of additional paid in capital. Such costs are deferred until the equity offering is completed. These costs include underwriting fees, fees related to legal and accounting advisors, printing costs, SEC filing fees, exchange listing fees and any other filing fees.
Incremental costs related to operating as a public company are expensed as they are incurred. These costs include the hiring and retaining of new talent with skills across several areas of the business, advisory costs, expenses of independent auditors related to quarterly and annual reports, and compliance-related costs.
See Note 2 of the unaudited condensed consolidated financial statements for further discussion.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.
Customer Concentration
Two customers individually accounted for 35% and 20% of revenues during the year ended December 31, 2019. The loss of the business of one or more of the Company's larger customers could have a material adverse effect on the Company's results of operations.
Recent Accounting Pronouncements
See Notes to the unaudited condensed consolidated financial statements for recent accounting pronouncements.
Quantitative and Qualitative Disclosure about Market Risk
As a result of our financing activities, we are exposed to market risks that may affect our consolidated results of operations and financial position. These market risks include fluctuations in interest rates, which impact the amount of interest we must pay on our variable-rate debt. Other than the interest rate swaps described below, financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash investments and trade accounts receivable.
Trade accounts receivable include amounts billed and currently due from customers, amounts currently due but unbilled, certain estimated contract changes, claims in negotiation that are probable of recovery, and amounts retained by the customer pending contract completion. We continuously monitor collections and payments from customers. Based upon historical experience and any specific customer collection issues that have been identified, we record a provision for estimated credit losses, as deemed appropriate.
While such credit losses have historically been within our expectations, we cannot guarantee that we will continue to experience the same credit loss rates in the future.
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Interest Rate Risks. We are exposed to changes in interest rates. Borrowings under our senior secured credit facilities are variable rate debt. Interest rate changes generally impact the amount of our interest payments and, therefore, our future earnings and cash flows, assuming other factors are held constant. A 100-basis point increase (decrease) in the variable interest rates under Term Loan G would result in a $27.2 million increase (decrease) in interest expense, per annum on our borrowings.
We may manage our exposure to fluctuations in interest rates with respect to our new senior secured credit facilities by entering into interest rate swap or cap agreements. From time to time, we have entered into interest rate swap and cap agreements or other financial instruments in the normal course of business for purposes other than trading. These financial instruments were used to mitigate interest rate or other risks, although to some extent they exposed us to market risks and credit risks. The Company currently has no derivative instruments and had no derivatives in 2020 and 2019.
We controlled the credit risks associated with these instruments through the evaluation of the creditworthiness of the counterparties. In the event that the counterparty failed to meet the terms of a contract or agreement then our exposure would have been limited to the current value, at that time, of the interest rate differential, not the full notional or contract amount. Management believes that such contracts and agreements were executed with creditworthy financial institutions. As such, we considered the risk of nonperformance to be remote.
In July 2017 the United Kingdom Financial Conduct Authority announced its intention to phase out LIBOR rates by the end of 2021. The effect of any changes in the methods by which LIBOR is determined, or any other reforms to LIBOR that may be enacted in the United Kingdom or elsewhere cannot be predicted. Such developments may cause LIBOR to perform differently from the past, including sudden or prolonged increases or decreases in LIBOR, or LIBOR may cease to exist resulting in the application of a successor base rate under our credit facilities. Either development could have unpredictable effects on our interest payment obligations, including an increase in interest payments under our credit facilities.
Internal Controls of Financial Reporting
In connection with the preparation of the audits of our consolidated financial statements as of December 31, 2018 and 2019, and for the years ended December 31, 2017, 2018 and 2019, we identified two material weaknesses in our internal control over financial reporting:
| · | We did not maintain a sufficient complement of resources with an appropriate level of accounting knowledge and experience commensurate with the financial reporting requirements for a public company, including condensed timelines to close and sufficient oversight of internal control over financial reporting. | |
| · | We did not maintain sufficient formal accounting policies, procedures, and controls for accounting and financial reporting with respect to the requirements and application of public company financial reporting requirements. |
Our remediation efforts will include the hiring of additional resources, with the requisite knowledge of accounting and financial reporting, sufficient to meet the needs of a public company in the United States. We will also develop and maintain formal accounting policies, procedures and controls for accounting and financial reporting. In addition, as of the date of this Management’s Discussion and Analysis of Financial Condition:
| · | In September 2020, we hired a Chief Accounting Officer with the requisite skills in public company financial reporting. | |
| · | In October 2020, we hired a Vice President of Internal Audit with the requisite skills in risk assessment, Sarbanes-Oxley Act compliance and internal controls over financial reporting. | |
| · | We have engaged third-party consulting firms to help us review and develop formal accounting policies, procedures and controls for accounting and financial reporting with respect to the requirements and application of public company financial reporting requirements. |
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