UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
or
For the transition period from to
Commission
File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction | (I.R.S. Employer |
| of incorporation or organization) | Identification No.) |
| (Address of principal executive offices) | (Zip code) |
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company |
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| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐
As of November 18, 2022, the registrant had shares of common stock outstanding.
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NUTEX HEALTH INC.
FORM 10-Q
TABLE OF CONTENTS
| Introductory Note | 3 |
| Note About Forward-Looking Statements | 3 |
| Part I — Financial Information | |
| Item 1. Financial Statements | 4 |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 31 |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 43 |
| Item 4. Controls and Procedures | 43 |
| Part II — Other Information | |
| Item 1. Legal Proceedings | 44 |
| Item 1A. Risk Factors | 45 |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 45 |
| Item 3. Defaults upon Senior Securities | 45 |
| Item 4. Mine Safety Disclosures | 45 |
| Item 5. Other Information | 45 |
| Item 6. Exhibits | 46 |
| 2 |
INTRODUCTORY NOTE
Unless the context dictates otherwise, references in this Quarterly Report on Form 10-Q to the “Company,” “we,” “us,” “our,” and similar words are references to Nutex Health Inc. (formerly known as Clinigence Holdings, Inc.), a Delaware corporation, and its consolidated subsidiaries and affiliated entities, as appropriate, including its consolidated variable interest entities (“VIEs”) and “Nutex” refers to Nutex Health Inc.
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, changes in laws or regulations, any statements about our business (including the impact of the COVID-19 pandemic on our business), financial condition, operating results, plans, objectives, expectations and intentions, any guidance on, or projections of, earnings, revenue or other financial items, or otherwise, and our future liquidity, including cash flows; any statements of any plans, strategies, and objectives of management for future operations, such as the material opportunities that we believe exist for our Company; any statements concerning proposed services, developments, mergers or acquisitions; or strategic transactions; any statements regarding management’s view of future expectations and prospects for us; any statements about prospective adoption of new accounting standards or effects of changes in accounting standards; any statements regarding future economic conditions or performance; any statements of belief; any statements of assumptions underlying any of the foregoing; and other statements that are not historical facts. Forward-looking statements may be identified by the use of forward-looking terms such as “anticipate,” “could,” “can,” “may,” “might,” “potential,” “predict,” “should,” “estimate,” “expect,” “project,” “believe,” “think,” “plan,” “envision,” “intend,” “continue,” “target,” “seek,” “contemplate,” “budgeted,” “will,” “would,” and the negative of such terms, other variations on such terms or other similar or comparable words, phrases, or terminology. These forward-looking statements present our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q and are subject to change.
Forward-looking statements involve risks and uncertainties and are based on the current beliefs, expectations, and certain assumptions of management. Some or all of such beliefs, expectations, and assumptions may not materialize or may vary significantly from actual results. Such statements are qualified by important economic, competitive, governmental, and technological factors that could cause our business, strategy, or actual results or events to differ materially from those in our forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, the risk factors discussed under the heading “Risk Factors” in Part I, Item IA thereof. Although we believe that the expectations reflected in our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change, and significant risks and uncertainties that could cause actual conditions, outcomes, and results to differ materially from those indicated by such statements. Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequence to or effects on the Company or its business or operations. The Company assumes no obligations to update any such forward-looking statements
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ITEM 1. FINANCIAL STATEMENTS
NUTEX HEALTH INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| September 30, 2022 | December 31, 2021 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Accounts receivable - related parties | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating right-of-use assets | ||||||||
| Financing right-of-use assets | ||||||||
| Intangible assets, net | ||||||||
| Goodwill, net | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accounts payable - related parties | ||||||||
| Lines of credit | ||||||||
| Current portion of long-term debt | ||||||||
| Operating lease liabilities, current portion | ||||||||
| Financing lease liabilities, current portion | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term debt, net | ||||||||
| Operating lease liabilities, net | ||||||||
| Financing lease liabilities, net | ||||||||
| Deferred tax liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Equity: | ||||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings (accumulated deficit) | ( | ) | ||||||
| Nutex Health Inc. equity | ||||||||
| Noncontrolling interests | ||||||||
| Total equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 4 |
NUTEX HEALTH INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue: | ||||||||||||||||
| Hospital division | $ | $ | $ | $ | ||||||||||||
| Population health management division | ||||||||||||||||
| Total revenue | ||||||||||||||||
| Operating costs and expenses: | ||||||||||||||||
| Payroll | ||||||||||||||||
| Contract services | ||||||||||||||||
| Medical supplies | ||||||||||||||||
| Insurance expense | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Other | ||||||||||||||||
| Total operating costs and expenses | ||||||||||||||||
| Gross profit (loss) | ( | ) | ||||||||||||||
| Corporate and other costs: | ||||||||||||||||
| Acquisition costs | ||||||||||||||||
| Impairment of goodwill | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Total corporate and other costs | ||||||||||||||||
| Operating income (loss) | ( | ) | ( | ) | ||||||||||||
| Interest expense, net | ||||||||||||||||
| Other expense (income) | ( | ) | ( | ) | ( | ) | ||||||||||
| Income (loss) before taxes | ( | ) | ( | ) | ||||||||||||
| Income tax expense (benefit) | ( | ) | ||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ||||||||||||
| Less: net income (loss) attributable to noncontrolling interests | ( | ) | ( | ) | ||||||||||||
| Net income (loss) attributable to Nutex Health Inc. | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Earnings (loss) per common share | ||||||||||||||||
| Basic | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Diluted | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
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NUTEX HEALTH INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
| Common Stock | ||||||||||||||||||||||||
| Shares | Amount | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Noncontrolling Interests | Total Equity | |||||||||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | $ | $ | |||||||||||||||||||
| Contributions | — | |||||||||||||||||||||||
| Distributions | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Net income | — | |||||||||||||||||||||||
| Balance at March 31, 2021 | ||||||||||||||||||||||||
| Contributions | — | |||||||||||||||||||||||
| Distributions | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Net income | — | |||||||||||||||||||||||
| Balance at June 30, 2021 | ||||||||||||||||||||||||
| Contributions | — | |||||||||||||||||||||||
| Distributions | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Net income | — | |||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | $ | |||||||||||||||||||
(Continued)
See accompanying notes to the unaudited condensed consolidated financial statements.
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NUTEX HEALTH INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
| Common Stock | ||||||||||||||||||||||||
| Shares | Amount | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Noncontrolling Interests | Total Equity | |||||||||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | $ | $ | |||||||||||||||||||
| Contributions | — | |||||||||||||||||||||||
| Distributions | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Net income | — | |||||||||||||||||||||||
| Balance at March 31, 2022 | ||||||||||||||||||||||||
| Reverse acquisition with Clinigence | ||||||||||||||||||||||||
| Notes payable converted to common stock | ||||||||||||||||||||||||
| Common stock issued for exercise of warrants | ||||||||||||||||||||||||
| Common stock issued for exercise of options | ||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||
| Deconsolidation of Real Estate Entities | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Contributions | — | |||||||||||||||||||||||
| Distributions | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance at June 30, 2022 | ||||||||||||||||||||||||
| Notes payable converted to common stock | ||||||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||||||
| Contributions | — | |||||||||||||||||||||||
| Distributions | — | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
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NUTEX HEALTH INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine months ended September 30 | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | ( | ) | $ | ||||
| Adjustment to reconcile net income (loss) to net cash from operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Impairment of goodwill | ||||||||
| Stock-based compensation expense | ||||||||
| Other income - gain on PPP loan forgiveness | ( | ) | ||||||
| Deferred tax expense | ||||||||
| Debt accretion expense | ||||||||
| Non-cash lease expense | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Accounts receivable - related party | ( | ) | ||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Accounts payable | ||||||||
| Accounts payable - related party | ( | ) | ( | ) | ||||
| Accrued expenses and other current liabilities | ||||||||
| Other current assets | ( | ) | ( | ) | ||||
| Net cash from operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Acquisitions of property and equipment | ( | ) | ( | ) | ||||
| Acquired cash in reverse acquisition with Clinigence | ||||||||
| Cash related to deconsolidation of Real Estates Entities | ( | ) | ||||||
| Net cash from investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from lines of credit | ||||||||
| Proceeds from notes payable | ||||||||
| Repayments of lines of credit | ( | ) | ( | ) | ||||
| Repayments of notes payable | ( | ) | ( | ) | ||||
| Repayments of finance leases | ( | ) | ( | ) | ||||
| Common stock issued for exercise of warrants | ||||||||
| Common stock issued for exercise of options | ||||||||
| Members' contributions | ||||||||
| Members' distributions | ( | ) | ( | ) | ||||
| Net cash from financing activities | ( | ) | ( | ) | ||||
| Net change in cash and cash equivalents | ||||||||
| Cash and cash equivalents - beginning of the period | ||||||||
| Cash and cash equivalents - end of the period | $ | $ | ||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
| 8 |
NUTEX HEALTH INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 – Organization and Operations
Nutex Health Inc. (“Nutex Health” or the “Company”), is a physician-led, healthcare services and operations company with 21 hospital facilities in eight states (hospital division), and a primary care-centric, risk-bearing population health management division. Our hospital division implements and operates different innovative health care models, including micro-hospitals, specialty hospitals and hospital outpatient departments (“HOPDs”). The population health management division owns and operates provider networks such as independent physician associations (“IPAs”) and offers a cloud-based proprietary technology platform to IPAs which aggregates clinical and claims data across multiple settings, information systems and sources to create a holistic view of patients and providers.
We employ approximately 942 full time employees and partner with over 800 physicians. Our corporate headquarters is based in Houston, Texas. We were incorporated on April 13, 2000 in the state of Delaware.
Merger of Nutex Health Holdco LLC and Clinigence Holdings, Inc. On April 1, 2022, the merger (the “Merger”) of Nutex Health Holdco LLC and Clinigence Holdings, Inc. (“Clinigence”) was completed pursuant to the Agreement and Plan of Merger (the “Merger Agreement”) entered on November 23, 2021 between Clinigence, Nutex Acquisition LLC, a Delaware limited liability company and wholly-owned subsidiary of Clinigence, Nutex, Micro Hospital Holding LLC (solely for the purposes of certain sections of the Merger Agreement), Nutex Health Holdco LLC and Thomas Vo, M.D., solely in his capacity as the representative of the equity holders of Nutex Health Holdco LLC.
In
connection with the Merger Agreement, Nutex Health Holdco LLC entered into certain Contribution Agreements with holders of equity interests
(“Nutex Owners”) of subsidiaries and affiliates (the “Nutex Subsidiaries”) pursuant to which such Nutex Owners
agreed to contribute certain equity interests in the Nutex Subsidiaries to Nutex Health Holdco LLC in exchange for specified equity interests
in Nutex Health Holdco LLC (collectively, the “Contribution Transaction”). Nutex owners having ownership interests representing
approximately
Pursuant to the Merger Agreement, each unit representing an equity interest in Nutex Health Holdco LLC issued and outstanding immediately prior to the effective time of the Merger but after the Contribution Transaction (collectively, the “Nutex Membership Interests”) was converted into the right to receive 3.571428575 shares of common stock of Clinigence, or an aggregate of shares of common stock of Clinigence.
Potential
Future Stock Issuances. Under the terms of the Contribution Agreements, contributing owners of the under-development hospitals
and ramping hospitals are eligible to receive a one-time additional issuance of Company common stock based on their trailing twelve months
earnings before interest, taxes, depreciation and amortization as determined on the 24th anniversary of their respective opening, adjusted
for the aggregate amount of such owner’s capital contribution minus such owner’s pro rata share of the aggregate debt of
the applicable hospital outstanding as of the closing of the Merger.
After completing the merger, Clinigence was renamed Nutex Health Inc.
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Lock-up agreements. Also on April 1, 2022, each member of Nutex Health Holdco LLC entered into a Lock-up agreement agreeing not to, without the prior written consent of the Company and except in limited circumstances (i) offer, pledge, sell, contract to sell, sell any option or contract purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of their shares of Company common stock received in the merger or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of such shares.
The lock-up restrictions terminate with respect to one-third of the shares of Company Common Stock on October 1, 2021. The lock-up restrictions terminate for the remaining shares on April 1, 2023 (one-third) and October 1, 2023 (final one-third).
Registration rights agreement. In September 2022, we filed a registration statement pursuant to a registration rights agreement dated as of April 1, 2022 and amended effective as of July 1, 2022, to register for resale one-third of the shares of Company common stock issued in the merger that were released from lockup restrictions on October 1, 2022. The registration rights agreement terminates on the earlier of (i) when the shares may be sold under Rule 144 without any restrictions or (ii) the dissolution or liquidation of the Company.
Note 2 – Summary of Significant Accounting Policies
Basis of presentation. The merger of Nutex Health Holdco LLC and Clinigence was accounted for as a reverse business combination with Nutex Health Holdco LLC as the accounting acquirer in accordance with ASC 805, Business Combinations, and Clinigence as the accounting acquiree. Our financial statements presented for periods prior to the merger date are those of Nutex Health Holdco, LLC, as the Company’s predecessor entity. Subsequent to the merger date, our financial statements are presented on a consolidated basis including Clinigence.
The assets, including identified intangible assets, and liabilities of Clinigence were recorded at their fair values with the excess purchase price recorded as goodwill. The financial statements reflect the merger as the equivalent of the issuance of common stock for the net monetary assets of Clinigence. The accounting for the merger did not affect the carrying values of the assets and liabilities of Nutex Health Holdco LLC.
Equity of the accounting acquirer, Nutex Health Holdco LLC, has been retroactively restated for the equivalent number of shares issued to the accounting acquirer. Similarly, shares outstanding and earnings per share have been also retroactively restated based on the equivalent number of shares issued to the accounting acquirer.
These financial statements present the Company’s consolidated financial condition and results of operations including those of majority-owned subsidiaries and variable interest entities (“VIEs”) for which we are the primary beneficiary.
The hospital division includes our healthcare billing and collections organization and hospital entities. In addition, we have financial and operating relationships with multiple professional entities (the “Physician LLCs”) and real estate entities (the “Real Estate Entities”). The Physician LLCs employ the doctors who work in our hospitals. These entities are consolidated by the Company as VIEs because they do not have significant equity at risk, and we have historically provided support to the Physician LLCs in the event of cash shortages and received the benefit of their cash surpluses.
The Real Estate Entities own the land and hospital buildings which are leased to our hospital entities. The Real Estate Entities have mortgage loans payable to third parties which are collateralized by the land and buildings. We consolidate the Real Estate Entities as VIEs in instances where our hospital entities are guarantors or co-borrowers under their outstanding mortgage loans. During the second quarter of 2022, we deconsolidated 17 Real Estate Entities after the third-party lenders released our guarantees of associated mortgage loans.
The
Company has no direct or indirect ownership interest in the consolidated Physician LLCs or Real Estate Entities, so
| 10 |
The population health management division includes our management services organizations and a healthcare information technology company providing a cloud-based platform for healthcare organizations. In addition, Associated Hispanic Physicians of So. California (“AHISP”), an IPA entity that is not owned by us, but is consolidated as a VIE of our wholly-owned subsidiary AHP Health Management Services Inc. (“AHP”) since AHP is the primary beneficiary of its operations and has 100% control of AHISP’s operations through its management services agreement with AHISP.
All significant intercompany balances and transactions have been eliminated in consolidation.
Interim financial statements. These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting Accordingly, they do not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The unaudited condensed consolidated financial statements include all material adjustments of a normal recurring nature that, in the opinion of management, are necessary for a fair presentation of the results of operations for the interim periods presented. These interim financial statements should be read together with the consolidated financial statements and notes thereto included in our audited financial statements for the years ended December 31, 2021 and 2020.
Use of estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include (i) estimates of net revenue and accounts receivable, (ii) fair value of acquired assets and liabilities in business combinations and (iii) impairment of long-lived assets and goodwill. Actual results could differ from those estimates.
Revenue recognition.
Hospital division – Our hospital division recognizes net patient service revenue for contracts with patients and in most cases a third-party payor (commercial insurance, workers compensation insurance or, in limited cases, Medicare/Medicaid). The Company’s performance obligations are to provide emergency health care services primarily on an outpatient basis. Net patient service revenues are recorded at the amount that reflects the consideration to which the Company expects to be entitled in exchange for providing patient care. These amounts are net of appropriate discounts giving recognition to differences between the Company’s charges and reimbursement rates from third party payors.
Patient service net revenues earned by the Company are recognized at a point in time when the services are provided, net of adjustments and discounts. Because all the Company’s performance obligations relate to contracts with a duration of less than one-year, certain disclosures are limited.
The transaction price is determined based on gross charges for services provided, reduced by contractual adjustments provided to third-party payors, discounts and implicit price concessions provided primarily to uninsured patients in accordance with the Company’s policy. For uninsured patients, the Company recognizes revenue based on established rates, subject to certain discounts and implicit price concessions. The Company is reimbursed from third party payors under various methodologies based on the level of care provided. We are considered “out-of-network” with commercial health plans. As there are no contractual rates established with insurance entities, revenues are estimated based on the “usual and customary” charges allowed by insurance payors using historical collection experience, historical trends of refunds and payor payment adjustments (retractions). Revenue from the Medicare program is based on reimbursement rates set by governmental authorities.
Patients who have health care insurance may also have discounts applied related to their copayment or deductible. Estimates of contractual adjustments and discounts are determined by major payor classes for outpatient revenues based on historical experience. The Company estimates implicit price concessions based on its historical collection experience with these classes of patients using a portfolio approach. The portfolios consist of major payor classes for outpatient revenue. Based on historical collection trends and other analyses, the Company concluded that revenue for a given portfolio would not be materially different than if accounting for revenue on a contract-by-contract basis.
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Customer payments are due upon receipt of an explanation of benefits for insured patients or it is due upon receipt of the bill from the Company for uninsured payments. There is no financing component associated with payments due from insurers or patients.
Population health management division – The population health management division recognizes revenue for capitation and management fees for services to IPAs and physician groups and for the licensing, training, and consulting related to our cloud-based proprietary technology.
Capitation revenue consists primarily of capitated fees for medical services provided by physician-owned entities we consolidate as VIEs. Capitated arrangements are made directly with various managed care providers including HMOs. Capitation revenues are typically prepaid monthly to us based on the number of enrollees selecting us as their healthcare provider. Capitation is a fixed payment amount per patient per unit of time paid in advance for the delivery of health care services, whereby the service providers are generally liable for excess medical costs.
We receive management fees that are received based on gross capitation revenues of the IPAs or physician groups we manage. Revenue is recognized and received monthly for our services. In addition, we provide consultant services that are charged as a flat fixed rate and recognized as revenue when the service is performed. Consultant services revenues represent a small portion of our total revenue.
Software licenses are provided as SaaS-based subscriptions that grants access to proprietary online databases and data management solutions. Training and consulting are project based and billable to customers on a monthly-basis or task-basis. Revenue from training and consulting are generally recognized upon delivery of training or completion of the consulting project. The duration of training and consulting projects are typically a few weeks or months and last no longer than 12 months.
SaaS-based subscriptions are generally marketed under multi-year agreements with annual, semi-annual, quarterly, or month-to-month renewals and revenue is recognized ratably over the renewal period with the unearned amounts received recorded as deferred revenue. For multiple-element arrangements accounted for in accordance with specific software accounting guidance, multiple deliverables are segregated into units of accounting which are delivered items that have value to a customer on a standalone basis.
Cash payments for SaaS-based subscriptions received in advance of the satisfaction of our performance obligations are reported as deferred revenue and recognized as revenue over the period in which the performance obligations are satisfied. The Company completes its contractual performance obligations through providing its customers access to specified data through subscriptions for a service period, and training on consulting associated with the subscriptions. We primarily invoice our customers on a monthly basis and do not provide any refunds, rights of return, or warranties.
Cash
and cash equivalents. The
Company considers all highly liquid investments with an original maturity of three months or less to be cash and cash equivalents. The
Federal Deposit Insurance Corporation generally insures deposit accounts up to $
Intangible assets. Intangible assets include hospital operating licenses having indefinite lives; and acquired technology, relationships, contracts and trademark intangibles each having definite lives. Indefinite lived intangible assets are not amortized but instead are assessed for impairment at least annually, or when certain indicators of impairment exist on an interim basis. Definite lived intangible assets are amortized using the straight-line method over the estimated lives of the respective assets.
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Goodwill. Goodwill represents the excess of the fair value of the consideration conveyed in the acquisition over the fair value of net assets acquired. Goodwill is not amortized but instead is evaluated for impairment at the same time every year and when an event occurs or circumstances change such that it is more likely than not that impairment may exist.
Goodwill is tested for impairment at least annually by comparing the estimated fair values of our reporting units to their respective carrying values. We use an income method to estimate the fair value of these assets, which is based on forecasts of the expected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflect a consideration of other marketplace participants, and include the amount and timing of future cash flows (including expected growth rates and profitability). Estimates utilized in the projected cash flows include consideration of macroeconomic conditions, overall category growth rates, competitive activities, Company business plans and the discount rate applied to the cash flows. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions.
During
the three months ended September 30, 2022, we determined that the estimated fair value of our population
health management division reporting unit (representing the assets of Clinigence Holdings Inc.
acquired in the reverse business combination) was less than its carrying value. Therefore, we conducted a second step of the goodwill
impairment test to determine the implied fair value of the reporting unit's goodwill. In this analysis, we allocated the fair value of
the reporting unit to identifiable assets and liabilities of the reporting unit. The residual fair value after this allocation was compared
to the goodwill balance with the excess goodwill charged to expense. Based on this analysis, we recognized a non-cash impairment charge
of $
We believe the estimates and assumptions utilized in our impairment testing are reasonable and are comparable to those that would be used by other marketplace participants. However, actual events and results could differ substantially from those used in our valuations. To the extent such factors result in a failure to achieve the level of projected cash flows used to estimate fair value for purposes of establishing or subsequently impairing the carrying amount of goodwill and intangible assets, we may need to record additional noncash impairment charges in the future.
Long-lived assets. The Company assesses the valuation of components of its property and equipment and other long-lived assets whenever events or circumstances indicate that the carrying value might not be recoverable. The Company bases its evaluation on indicators such as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements and other external market conditions or factors that may be present. If such factors indicate that the carrying amount of an asset or asset group may not be recoverable, the Company determines whether an impairment has occurred by analyzing an estimate of undiscounted future cash flows at the lowest level for which identifiable cash flows exist. If the estimate of undiscounted cash flows during the estimated useful life of the asset is less than the carrying value of the asset, the Company recognizes a loss for the difference between the carrying value of the asset and its estimated fair value, generally measured by the present value of the estimated cash flows.
The Company uses the Black-Scholes option pricing model to estimate the fair value of its stock options and warrants. The Black-Scholes option pricing model requires the input of highly subjective assumptions including the expected stock price volatility of the Company’s common stock, the risk-free interest rate at the date of grant, the expected vesting term of the grant, expected dividends, and an assumption related to forfeitures of such grants. Changes in these subjective input assumptions can materially affect the fair value estimate of the Company’s stock options and warrants.
Leases. Leases are capitalized on the Company’s balance sheet through recognition of a liability for the discounted present value of future fixed lease payments and a corresponding right-of-use (“ROU”) asset. The ROU asset recorded at commencement of the lease represents the right to use the underlying asset over the lease term in exchange for the lease payments. When readily determinable, the Company uses the interest rate implicit in a lease to determine the present value of future lease payments. For leases where the implicit rate is not readily determinable, the Company’s incremental borrowing rate is utilized. The Company calculates its incremental borrowing rate on a quarterly basis using a third-party financial model that estimates the rate of interest the Company would have to pay to borrow an amount equal to the total lease payments on a collateralized basis over a term similar to the lease. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Short-term leases which have an initial term of 12 months or less and do not have an option to purchase the underlying asset that is deemed reasonably certain to be exercised, are not recorded on the balance sheet. Rent expense for these short-term leases is recognized on a straight-line basis over the lease term, or when incurred if a month-to-month lease.
| 13 |
Convertible instruments. The Company bifurcates conversion options from their host instruments and account for them as free-standing derivative financial instruments when (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
The Company accounts for the conversion of convertible debt when a conversion option has been bifurcated using the general extinguishment standards. The debt and equity linked derivatives are removed at their carrying amounts and the shares issued are measured at their then-current fair value, with any difference recorded as a gain or loss on extinguishment of the two separate accounting liabilities.
Noncontrolling interests. Noncontrolling interests (“NCI”) represent the portion of net assets in consolidated entities that are not owned by the Company. NCI is presented as a component of total equity in the consolidated balance sheets and the share of net income or loss attributable to noncontrolling interests is shown as a component of net income in the consolidated statements of operations.
Fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. We classify fair value balances based on the classification of the inputs used to calculate the fair value of a transaction. The three levels related to fair value measurements are as follows:
Level 1 — Observable inputs such as quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The estimated fair value of accounts receivable, accounts payable, accrued expenses and notes payable approximate the carrying amount due to the relatively short maturity or time to maturity of these instruments. Accounts receivable and payable with related parties may not be arms-length transactions and therefore, may not reflect fair value.
Except for the initial valuation of intangible assets in connection with the reverse business combination with Clinigence discussed in Note 3 and the impairment of goodwill discussed above, there were no assets or liabilities that were re-measured at fair value on a non-recurring basis during the periods presented.
Advertising and marketing expense. The Company advertising and marketing expense consists of expense associated with marketing its brand and services via media outlets such as social media, billboards and publications. These costs are expensed as incurred.
| 14 |
Income taxes. We account for income taxes under the asset and liability method, in which deferred income tax assets and liabilities are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in the consolidated statements of operations during the period in which the tax rate change becomes law. A valuation allowance against deferred tax assets is established if it is more likely than not that the related tax benefits will not be realized. In determining the appropriate valuation allowance, we consider the projected realization of tax benefits based on expected levels of future taxable income, available tax planning strategies and reversals of existing taxable temporary differences.
Each of the VIEs and other entities that are not wholly-owned are pass-through entities treated as partnerships for U.S. federal income tax purposes. No provision for federal income taxes is provided in the consolidated statements of operations for the noncontrolling interests associated with these entities.
We file tax returns in the U.S. and various state jurisdictions. With few exceptions, our returns for periods prior to 2017 are no longer subject to examination by tax authorities in these jurisdictions. We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. If a tax position meets the “more likely than not” recognition criteria, accounting guidance requires the tax position be measured at the largest amount of benefit greater than 50% likely of being realized upon ultimate settlement. We record income tax related interest and penalties, if any, as a component in the provision for income tax expense.
Business combinations. The Company accounts for business combinations under the acquisition method of accounting. Under this method, identifiable assets acquired, the liabilities assumed, and any noncontrolling interest are recognized at their estimated fair values at the acquisition date. The excess of purchase price over the fair value amounts assigned to the assets acquired and liabilities assumed represents the goodwill amount resulting from the acquisition. Transaction costs are expensed as incurred.
Segment reporting. A public company is required to report descriptive information about its reportable operating segments. Operating segments, as defined, are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Aggregation of similar operating segments into a single reportable operating segment is permitted if the businesses have similar economic characteristics and meet established criteria. The Company operates three reportable segments – the hospital division, the population health management division and the real estate division. The real estate division is comprised of the Real Estate Entities.
Variable interest entities. On an ongoing basis, as circumstances indicate the need for reconsideration, the Company evaluates each legal entity that is not wholly-owned by the Company in accordance with the consolidation guidance. The evaluation considers all of the Company’s variable interests, including equity ownership, as well as management services agreements. A legal entity is determined to be a VIE if it (i) does not have sufficient equity to finance its activities without additional subordinated financial support; (ii) the entity is established with non-substantive voting rights; or (ii) the equity holders, as a group, lack the characteristics of a controlling financial interest. If an entity is determined to be a VIE, the Company evaluates whether the Company is the primary beneficiary.
The primary beneficiary analysis is a qualitative analysis based on power and economics. The Company consolidates a VIE if both power and benefits belong to the Company – that is, the Company (i) has the power to direct the activities of a VIE that most significantly influence the VIE’s economic performance (power), and (ii) has the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE (benefits). The Company consolidates VIEs whenever it is determined that the Company is the primary beneficiary.
| 15 |
Refer to Note 19 – “Variable Interest Entities” to the consolidated financial statements for information on the Company’s consolidated VIEs. If there are variable interests in a VIE but the Company is not the primary beneficiary, the Company may account for the investment using the equity method of accounting.
Revision of Prior Period Financial Statements. We made certain immaterial revisions to previously reported amounts in our combined and consolidated financial statements as of and for the nine months ended September 30, 2021, and as of and for the six months ended June 30, 2022. These revisions corrected the classification of net income and equity attributable to noncontrolling interests, corrected the omission of certain lease assets and obligations and corrected the presentation of items within the statement of cash flows. We evaluated these matters in accordance with SAB No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements and determined that their related impact was not material to our financial statements for any prior annual or interim period. We will correct previously reported financial information for these immaterial matters in our future filings, as applicable. A summary of the revisions to our prior period financial statements is presented below:
| September 30, 2021 | ||||||||||||
| As | As | |||||||||||
| Reported | Revisions | Revised | ||||||||||
| Revised balance sheets | ||||||||||||
| Total current assets | $ | $ | $ | |||||||||
| Right-of-use assets | ||||||||||||
| Other long-term assets | ||||||||||||
| Total assets | ||||||||||||
| Lease liabilities, current portion | $ | $ | $ | |||||||||
| Other current liabilities | ||||||||||||
| Total current liabilities | ||||||||||||
| Long-term debt, net | ||||||||||||
| Lease liabilities | ||||||||||||
| Total liabilities | ||||||||||||
| Equity: | ||||||||||||
| Members' equity | ||||||||||||
| Noncontrolling interest | ( | ) | ||||||||||
| Total equity | ||||||||||||
| Total liabilities and equity | $ | $ | $ | |||||||||
| 16 |
| Nine Months Ended September 30, 2021 | ||||||||||||
| As | As | |||||||||||
| Reported | Revisions | Revised | ||||||||||
| Revised statements of operations | ||||||||||||
| Net income (loss) | $ | $ | $ | |||||||||
| Less: net income (loss) attributable to noncontrolling interests | ( | ) | ||||||||||
| Net income (loss) attributable to Nutex Health Inc. | $ | $ | $ | |||||||||
| Revised statements of cash flows | ||||||||||||
| Cash flow from operating activities | $ | $ | $ | |||||||||
| Cash flow from investing activities | ( | ) | ( | ) | ( | ) | ||||||
| Cash flow from financing activities | ( | ) | ( | ) | ( | ) | ||||||
| Net change in cash | $ | $ | $ | |||||||||
| June 30, 2022 | ||||||||||||
| As | As | |||||||||||
| Reported | Revisions | Revised | ||||||||||
| Revised balance sheets | ||||||||||||
| Equity: | ||||||||||||
| Members' equity | $ | $ | $ | |||||||||
| Noncontrolling interest | ( | ) | ||||||||||
| Total equity | $ | $ | $ | |||||||||
| Six Months Ended June 30, 2022 | ||||||||||||
| As | As | |||||||||||
| Reported | Revisions | Revised | ||||||||||
| Revised statements of operations | ||||||||||||
| Net income (loss) | $ | $ | ( | ) | ||||||||
| Less: net income (loss) attributable to noncontrolling interests | ( | ) | ( | ) | ( | ) | ||||||
| Net income (loss) attributable to Nutex Health Inc. | $ | $ | ||||||||||
| Three months ended June 30, 2022 | ||||||||||||
| As | As | |||||||||||
| Reported | Revisions | Revised | ||||||||||
| Revised statements of changes in equity | ||||||||||||
| Deconsolidation of Real Estate Entities | ||||||||||||
| Retained earnings | $ | ( | ) | $ | $ | ( | ) | |||||
| Noncontrolling interest | ( | ) | ( | ) | ( | ) | ||||||
| Total deconsolidation of real estate entities | $ | ( | ) | $ | $ | ( | ) | |||||
| Net income (loss) | ||||||||||||
| Retained earnings | $ | ( | ) | $ | ( | ) | ||||||
| Noncontrolling interest | ( | ) | ( | ) | ( | ) | ||||||
| Total net income (loss) | $ | ( | ) | $ | ( | ) | ( | ) | ||||
Reclassifications. Financial statements presented for prior periods include reclassifications that were made to conform to the current year presentation.
Recent accounting pronouncements. There are no new accounting pronouncements that are expected to have a material impact on the condensed consolidated financial statements.
Note 3 - Merger of Nutex Health Holdco LLC and Clinigence Holdings, Inc.
The merger of Nutex Health Holdco LLC and Clinigence was completed pursuant to the Merger Agreement on April 1, 2022. As discussed above, the merger was accounted for as a reverse business combination with Nutex Health Holdco LLC as the accounting acquirer and Clinigence as the accounting acquiree.
The fair value of purchase consideration transferred on the closing date includes the value of the shares of the combined company owned by Clinigence shareholders at closing of the merger and the fair value of Clinigence’s outstanding and exercisable common stock options and warrants as determined using a Black-Scholes valuation model. The fair value per share of Clinigence’s common stock was $6.40; its traded closing price on April 1, 2022. Total consideration in the merger is shown below:
| Fair value of Clinigence common shares at $6.40 per share | $ | |||
| Fair value of Clinigence outstanding common stock options and warrants | ||||
| Total consideration | $ |
| 17 |
The following is a preliminary estimate of the allocation of the total purchase consideration to acquired assets and assumed liabilities including the fair value of identified intangible assets as determined by independent valuation (a level 3 measurement):
| Cash and cash equivalents | $ | | |
| Accounts receivable, net | | ||
| Prepaid expenses and other current assets | | ||
| Property and equipment, net | | ||
| Right of use asset, net | | ||
| Intangible assets, net | | ||
| Goodwill | | ||
| Accounts payable and accrued expenses | ( | ||
| Deferred revenue | ( | ||
| Convertible notes payable, net | ( | ||
| Term note payable | ( | ||
| Lease liability | ( | ||
| Deferred tax liability | ( | ||
| Assets acquired | $ | |
The
intangible assets denoted above each have definite lives. These intangible assets are being amortized over their estimated useful lives
of
The
results of operations of Clinigence have been included in the Company’s consolidated financial statements since the April 1, 2022
merger date. We expensed $
Supplemental Pro Forma Information – The supplemental pro forma financial information presented below is for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have been realized if the merger with Clinigence had been completed on the date indicated, nor is it indicative of future operating results or financial position. The pro forma adjustments are based upon currently available information and certain assumptions that management believes are reasonable under the circumstances.
The supplemental pro forma financial information reflects pro forma adjustments to present the combined pro forma results of operations as if the acquisition had occurred on January 1, 2021, to give effect to certain events that management believes to be directly attributable to the acquisition. These pro forma adjustments primarily include an increase to depreciation and amortization expense that would have been recognized due to acquired tangible and intangible assets.
The supplemental pro forma financial information for the periods presented is as follows:
| Three months ended September 30 | Nine months ended September 30 | |||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||
| Revenue | $ | |
$ | |
$ | |
$ | | ||||
| Net income (loss) attributable to Nutex Health Inc. | ( |
( |
( |
| ||||||||
The pro
forma adjustment included in the pro forma loss above for the nine months ended September 30, 2022 included $
| 18 |
Note 4 – Revenue
We disaggregate revenue from contracts with customers into types of services or products, consistent with our reportable segments, as follows:
| Three months ended September 30 | Nine months ended September 30 | |||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||
| Hospital Division: | ||||||||||||
| Net patient service revenue | $ | |
$ | |
$ | |
$ | | ||||
| Management fees | |
|
|
| ||||||||
| Total Hospital Division revenue | |
|
|
| ||||||||
| Population Health Management Division: | ||||||||||||
| Capitation revenue, net | |
|
||||||||||
| Management fees | |
|
||||||||||
| SaaS revenue | |
|
||||||||||
| Total Population Health Management Division revenue | |
|
||||||||||
| Total revenue | $ | |
$ | |
$ | |
$ | | ||||
Net patient service revenue. We receive payment for facility services rendered by us from federal agencies, private insurance carriers, and patients. The Physician LLCs receive payment for doctor services from these same sources. On average, greater than 90% of our net patient service revenue is paid by insurers, federal agencies, and other non-patient third parties. The remaining revenues are paid by our patients in the form of copays, deductibles, and self-payment. The following tables present the allocation of the estimated transaction price with the patient between the primary patient classification of insurance coverage:
| Three months ended September 30 | Nine months ended September 30 | |||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||
| Insurance | ||||||||||||
| Self pay | ||||||||||||
| Workers compensation | ||||||||||||
| Medicare/Medicaid | ||||||||||||
| Total | ||||||||||||
Contract
balances. Cash payments for SaaS-based subscriptions received in advance of the satisfaction of our performance obligations are reported
as deferred revenue and subsequently recognized as revenue over the period in which the performance obligations are satisfied. The Company
completes its contractual performance obligations through providing its customers access to specified data through subscriptions for
a service period, and training on consulting associated with the subscriptions. We primarily invoice our customers on a monthly basis
and do not provide any refunds, rights of return, or warranties. Deferred revenue is presented as current liabilities and totaled $
Changes in estimate. The No Surprises Act (“NSA”) is a federal law that took effect January 1, 2022, to protect consumers from most instances of “surprise” balance billing. The legislation was included in the Consolidated Appropriations Act, 2021, which was passed by Congress and signed into law by President Trump on December 27, 2020. With respect to the Company, the NSA limits the amount an insured patient will pay for emergency services furnished by an out-of-network provider. The NSA addresses the payment of these out-of-network providers by group health plans or health insurance issuers (collectively, “insurers”). In particular, the NSA requires insurers to reimburse out-of-network providers at a statutorily calculated “out-of-network rate.” In states without an all-payor model agreement or specified state law, the out-of-network rate is either the amount agreed to by the insurer and the out-of-network provider or an amount determined through an independent dispute resolution (“IDR”) process.
| 19 |
Under the NSA, insurers must issue an initial payment or notice of denial of payment to a provider within thirty days after the provider submits a bill for an out-of-network service. If the provider disagrees with the insurer’s determination, the provider may initiate a thirty-day period of open negotiation with the insurer over the claim. If the parties cannot resolve the dispute through negotiation, the parties may then proceed to IDR arbitration.
Since the NSA became effective January 1, 2022, our average payment by insurers of patient claims for emergency services has declined by approximately 30%. In our experience, insurers often initially pay amounts lower than the QPA without regard for other information relevant to the claim. This requires us to make more appeals using the IDR process. While we are working within the established processes for IDR, we have had varying successes at achieving collections higher than the established QPA.
The average payment by insurers for patient claims for emergency services has declined by approximately 30% in 2022 because of the NSA compared to prior periods. We have also experienced a decrease in collection for the remaining amounts of account receivable for periods before 2022. We believe this decline is caused, in part, by insurers underpaying these claims in the same way we are experiencing claim payments since the NSA became effective.
For
these reasons, we reduced our estimate of the ultimate amounts of accounts receivable we will collect for prior periods. This change
in estimate reduced revenue for the three and nine months ended September 30, 2022 by approximately $
Note 5 - Property and Equipment
The principal categories of property and equipment are summarized as follows:
| Useful lives (yrs) | September 30, 2022 | December 31, 2021 | ||||||||||
| Buildings and improvements | $ | $ | ||||||||||
| Land | — | |||||||||||
| Leasehold improvements | ||||||||||||
| Construction in progress | — | |||||||||||
| Medical equipment | ||||||||||||
| Office furniture and equipment | ||||||||||||
| Computer hardware and software | ||||||||||||
| Vehicles | ||||||||||||
| Signage | ||||||||||||
| Total cost | ||||||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||||||
| Total property and equipment, net | $ | $ | ||||||||||
In the second quarter of 2022, we deconsolidated 17 Real Estate Entities. Refer to Note 19.
Depreciation
and amortization of property and equipment for the three months ended September 30, 2022 and 2021 totaled $
| 20 |
Note 6 – Intangible Assets
The following tables provide detail of the Company’s intangible assets:
| As of September 30, 2022 | ||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Useful Life (in years) | |||||||||||||
| Member relationships | $ | $ | $ | |||||||||||||
| Management contracts | ||||||||||||||||
| Customer contracts | ||||||||||||||||
| Trademarks | ||||||||||||||||
| PHP technology | ||||||||||||||||
| Indefinite life intangible - license | — | |||||||||||||||
| Total | $ | $ | $ | |||||||||||||
| As of December 31, 2021 | ||||||||||||||||
| Indefinite life intangible - license | $ | $ | $ | — | ||||||||||||
Amortization
of intangible assets for the three months ended September 30, 2022 and 2021 totaled $
Note 7 – Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
| September 30, 2022 | December 31, 2021 | |||||
| Accrued wages and benefits | $ | |
$ | | ||
| Accrued other | |
| ||||
| Total accrued expenses and other current liabilities | $ | |
$ | | ||
Note 8 – Debt
The Company’s outstanding debt is shown in the following table:
| Maturity dates | Interest rates | September 30, 2022 | December 31, 2021 | |||||||||
| Term loans secured by all assets | $ | $ | ||||||||||
| Term loans secured by property and equipment | ||||||||||||
| Line of credit secured by all assets | ||||||||||||
| Term loans of consolidated Real Estate Entities | ||||||||||||
| Total | ||||||||||||
| Less: unamortized debt issuance costs | ||||||||||||
| Less: short-term lines of credit | ||||||||||||
| Less: current portion of long-term debt | ||||||||||||
| Total long-term debt | $ | $ | ||||||||||
| 21 |
Term loans and lines of credit. We have entered into private debt arrangements with banking institutions for the purchase of equipment and to provide working capital and liquidity through cash and lines of credit. Unless otherwise delineated above, these debt arrangements are obligations of Nutex and/or its wholly-owned subsidiaries. Consolidated Real Estate Entities have entered into private debt arrangements with banking institutions for purposes of purchasing land, constructing new emergency room facilities and building out leasehold improvements which are leased to our hospital entities. Nutex is a guarantor or, in limited cases, a co-borrower on the debt arrangements of the Real Estate Entities for the periods shown. During the second quarter of 2022, we deconsolidated 17 Real Estate Entities after the third-party lenders released our guarantees of associated mortgage loans.
Certain
outstanding debt arrangements require minimum debt service coverage ratios and other financial covenants. At September 30, 2022, we were
not in compliance with the debt service coverage ratio for one revolving line of credit with an outstanding balance of $
Convertible
notes payable. We assumed $
Note 9 – Leases
We have entered into hospital property, office and equipment rental agreements with various lessors including related parties. The discount rates used in determining the present value of lease payment at commencement was 5% and 15%, respectively, for building and equipment leases. The following tables disclose information about our leases of property and equipment:
| Three months ended September 30 | Nine months ended September 30 | |||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||
| Operating lease cost | $ | |
$ | |
$ | |
$ | | ||||
| Finance lease cost: | ||||||||||||
| Amortization of right-of-use assets | |
|
|
| ||||||||
| Interest on lease liabilities | |
|
|
| ||||||||
| Total finance lease cost | $ | |
$ | |
$ | |
$ | | ||||
| Operating leases | Finance leases | |||||||||||
| Minimum lease payments for the next five years: | Third-parties | Related parties | Third-parties | Related parties | ||||||||
| 2022 | $ | |
$ | |
$ | |
$ | | ||||
| 2023 | |
|
|
| ||||||||
| 2024 | |
|
|
| ||||||||
| 2025 | |
|
|
| ||||||||
| 2026 | |
|
|
| ||||||||
| 2027 | |
|
|
| ||||||||
| Thereafter | |
|
|
| ||||||||
| Total minimum lease payments | |
|
|
| ||||||||
| Less interest | ( |
( |
( |
( | ||||||||
| Total lease liabilities | $ | |
$ | |
$ | |
$ | | ||||
| 22 |
Note 10 – Commitments and Contingencies
Litigation. The Company, its consolidated subsidiaries or VIEs may be named in various claims and legal actions in the normal course of business. Based upon counsel and management’s opinion, the outcome of such matters is not expected to have a material adverse effect on the consolidated financial statements.
Note 11 – Employee Benefit Plans
The
Company’s employees are eligible to participate in the 401(k) Savings Plan. There are no restrictions in eligibility to contribute
to the 401(k) Savings Plan. Salary deferrals are allowed in amounts up to 100% of an eligible employee’s salary, not to exceed
the maximum allowed by law. Texarkana Emergency Center & Hospital, LLC (“Texarkana”) is the only entity which may
contribute a discretionary match up to
Obligations for under-development and ramping hospitals. Under the terms of the Merger Agreement, contributing owners of the under-development hospitals and ramping hospitals are eligible to receive a one-time additional issuance of Company common stock based on their trailing twelve months earnings before interest, taxes, depreciation and amortization as determined on the 24th anniversary of their respective opening, adjusted for the aggregate amount of such owner’s capital contribution minus such owner’s pro rata share of the aggregate debt of the applicable hospital outstanding as of the closing of the Merger. Such additional shares will be issued at the greater of (a) the price of the Company’s common stock at the time of determination or (b) $2.80. We have not recognized any expense for this stock-based compensation based on our current estimates of future obligations to the contributing owners.
Restricted stock. On May 9, 2022, the Company issued 83,547 restricted common stock awards, valued at $325,000 to the board of directors to vest 1/12th per month over a 12 month period. We recognized stock-based compensation expense of $and $during the three and nine months ended September 30, 2022 for these awards. Remaining compensation expense of $189,585 will be recognized over the awards’ remining seven month vesting term.
Options. In 2022, the Company adopted the Amended and Restated Nutex Health Inc. 2022 Equity Incentive Plan (the "2022 Plan"). The maximum aggregate number of shares that may be issued under the 2022 Plan is shares, subject to increases on January 1st of each calendar year through January 1, 2027 of up to 5% annually at the discretion of the compensation committee of our Board of Directors. A total of shares were available for issuance under the 2022 Plan at September 30, 2022. Awards granted under the 2022 Plan have a ten-year term and may be incentive stock options, non-statutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units or performance shares. The awards are granted at an exercise price equal to the fair market value on the date of grant and generally vest over a four-year period.
Clinigence had 6,500,010 options for the purchase of our common stock outstanding as of the merger date, all of which were fully vested and exercisable. The following table summarizes stock-based awards activity:
| Options Outstanding | Weighted Average | Weighted Average Remaining Contractual Life (Years) | ||||||||||
| Options outstanding at April 1, 2022 merger date | $ | |||||||||||
| Options exercised | ( | ) | ||||||||||
| Options outstanding at September 30, 2022 | $ | |||||||||||
| 23 |
Options outstanding as of September 30, 2022 consisted of:
| Expiration Date | Number Outstanding | Number Exercisable | Exercise Price | |||||||||
| $ | ||||||||||||
| Total | ||||||||||||
Warrants. Clinigence had 12,401,240 common stock warrants outstanding as of the merger date. Warrant activity follows:
| Warrants Outstanding | Weighted Average Exercise Price | Average Remaining Contractual Life (Years) | ||||||||||
| Warrants outstanding at April 1, 2022 merger date | $ | |||||||||||
| Warrants exercised | ( | ) | ||||||||||
| Warrants outstanding at September 30, 2022 | $ | |||||||||||
Warrants outstanding as of September 30, 2022 consisted of:
| Date | Number Outstanding | Number Exercisable | Exercise Price | ||||||||||
| $ | |||||||||||||
| Total | |||||||||||||
Note 13 – Equity
Common Stock Issued. During the second quarter of 2022, we issued common shares for the conversion of outstanding convertible notes payable.
In
the second quarter of 2022, we issued common shares for the exercise of warrants for
total proceeds of $
In the third quarter of 2022, we issued common shares for the conversion of the remaining convertible notes payable.
All issuances referenced above were unregistered and were exempt from the registration requirements of the Securities Act of 1933, as amended, under Section 4(a)(2).
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Note 14 – Income Taxes
Income tax provisions for interim quarterly periods are generally based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent or unusual items related specifically to interim periods. The income tax impact of discrete items is recognized in the period these occur.
The Company’s income tax expense for the periods presented and reconciliation of this amount to amounts calculated based on statutory tax rates follows:
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Income taxes computed at the federal statutory rate | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Effect of: | ||||||||||||||||
| State taxes, net of federal benefits | ( | ) | ( | ) | ||||||||||||
| Income of flow-through entities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in tax status of Nutex Health Holdco LLC | ||||||||||||||||
| Reversal of acquired Clinigence valuation allowance | ( | ) | ||||||||||||||
| Non-deductible goodwill impairment expense | ||||||||||||||||
| Other, net | ( | ) | ( | ) | ||||||||||||
| Total income tax expense (benefit) | $ | ( | ) | $ | $ | $ | ||||||||||
In
periods before the merger with Clinigence, Nutex Health Holdco LLC and the Nutex Subsidiaries were pass-through entities treated as partnerships
for U.S. federal income tax purposes. No provision for federal income taxes was provided for these periods as federal taxes were obligations
of these companies’ members. After the merger, Nutex Health Holdco LLC became a wholly-owned subsidiary of Clinigence and will
be included in its future consolidated corporate tax filings. We recognized a non-cash charge of $
At
the time of our merger with Clinigence, Clinigence had a full valuation allowance against its deferred tax assets. During the three months
ended June 30, 2022, we recorded a non-cash benefit of $
Each of the discrete items above, as well as the non-deductible goodwill impairment expense recognized in the three months ended September 30, 2022, are one-time, non-cash items.
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The following is the computation of earnings (loss) per basic and diluted share:
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Amounts attributable to Nutex Health Inc.: | ||||||||||||||||
| Numerator- | ||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Denominator: | ||||||||||||||||
| Weighted average shares used to compute basic EPS | ||||||||||||||||
| Dilutive effect of convertible note | ||||||||||||||||
| Dilutive effect of common stock options | ||||||||||||||||
| Dilutive effect of common stock warrants | ||||||||||||||||
| Weighted average shares used to compute diluted EPS | ||||||||||||||||
| Earnings (loss) per share: | ||||||||||||||||
| Basic | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Diluted | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
The computation of diluted earnings per common share excludes the assumed conversion of outstanding convertible notes and exercise of common stock options and warrants in periods when we report a loss. The dilutive effect of the assumed exercise of outstanding options and warrants was calculated using the treasury stock method.
Note 16 - Supplemental Cash Flows Information
| Nine months ended September 30 | ||||||||
| 2022 | 2021 | |||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Acquisition of financing leases | $ | $ | ||||||
Note 17 – Segment Information
We report the results of our operations as three segments in our consolidated financial statements: (i) the hospital division, (ii) the population health management division and (ii) the real estate division. The determination of our reporting segments was made on the basis of our strategic priorities, which corresponds to the manner in which our Chief Executive Officer, as our chief operating decision maker, reviews and evaluates operating performance to make decisions about resources to be allocated. We evaluate the performance of our reportable segments based on, among other measures, operating income, which is defined as income before interest expense, other income (expense), and taxes. Corporate costs primarily include expenses for support functions and salaries and benefits for corporate employees and are excluded from segment operating results.
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Reportable segment information, including intercompany transactions, is presented below:
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue from external customers: | ||||||||||||||||
| Hospital division | $ | $ | $ | $ | ||||||||||||
| Population health management division | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
| Segment operating income (loss): | ||||||||||||||||
| Hospital division | $ | ( | ) | $ | $ | $ | ||||||||||
| Population health management division | ( | ) | ||||||||||||||
| Total segment operating income (loss) | $ | ( | ) | $ | $ | $ | ||||||||||
| Capital expenditures: | ||||||||||||||||
| Hospital division | $ | $ | $ | $ | ||||||||||||
| Real estate division | ||||||||||||||||
| Total capital expenditures | $ | $ | $ | $ | ||||||||||||
| Revenue from inter-segment activities: | ||||||||||||||||
| Real estate division | | |||||||||||||||
| Depreciation and amortization: | ||||||||||||||||
| Hospital division | $ | $ | $ | $ | ||||||||||||
| Population health management division | ||||||||||||||||
| Real estate division | ||||||||||||||||
| Total depreciation and amortization | $ | $ | $ | $ | ||||||||||||
| As of | |||||||
| September 30, 2022 | December 31, 2021 | ||||||
| Assets: | |||||||
| Hospital division | $ | |
$ | |
|||
| Population health management division | |
|
|||||
| Real estate division | |
|
|||||
| Total Assets | $ | |
$ | |
|||
Note 18 – Related Party Transactions
Related party transactions included the following:
•
The Physician LLCs employ the doctors who work in our hospitals. We have no direct ownership interest in these entities but they are
owned and, in some instances, controlled by related parties including our CEO, Dr. Thomas Vo. The Physician LLCs are consolidated by
the Company as VIEs because they do not have significant equity at risk, and we have historically provided support to them in the event
of cash shortages and received the benefit of their cash surpluses. Amounts due from Physician LLCs totaled $
In connection with the merger with Clinigence, we forgave certain amounts due from Physician LLCs for past advances made by us in support
of their operations. We recognized net expense of $
The
Physician LLCs had outstanding obligations to their member owners, who are also Company stockholders, totaling $
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•
Most of our hospital division facilities are leased from real estate entities which are owned by related parties. These leases are typically
on a triple net basis where our hospital division is responsible for all operating costs, repairs and taxes on the facilities. Our obligations
under these leases are presented in Note 9. During the three and nine months ended September 30, 2022, we made cash payments for these
lease obligations totaling $
We
received $
• We consolidate Real Estate Entities as VIEs when they do not have sufficient equity at risk and our hospital entities are guarantors or co-borrowers under their outstanding mortgage loans. The consolidated Real Estate Entities have mortgage loans payable to third parties which are collateralized by the land and buildings. We have no direct ownership interest in these entities but they are owned and, in some instances, controlled by related parties including our CEO. During the second quarter of 2022, we deconsolidated 17 Real Estate Entities after the third-party lenders released our guarantees of associated mortgage loans. At September 30, 2022, three Real Estate Entities continue to be consolidated in our financial statements.
In
connection with the merger with Clinigence, we forgave certain amounts due from Real Estate Entities for past advances made by us. We
recognized net expense totaling $
•
We made advances to unconsolidated entities owned by related parties that we lease facilities from. These advances totaled $
•
Accounts receivable – related party included $
• Micro Hospital Holding LLC, an affiliate controlled by our CEO made advances to one of our hospital facilities, SE Texas ER. These advances totaled $1,424,948 at September 30, 2022 and December 31, 2021 and are reported as accounts payable – related party in our consolidated balance sheets. The advances have no stated maturity and bear no interest.
•
Accounts payable – related party in our consolidated balance sheets included $
•
We provide managerial services to emergency centers owned and, in some instances, controlled by related parties including an entity controlled
by our CEO. We recognized $
• Two of our ER Entities are obligated under managerial services agreements with related parties commencing in 2022. Payments under these agreements totaled $113,175 and $1,671,855 for the three and nine months ended September 30, 2022.
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Note 19 – Variable Interest Entities
The following tables provide the balance sheet amounts for consolidated VIEs:
| September 30, 2022 | ||||||||||||
| Real Estate | Physician | AHP | ||||||||||
| Entities | LLCs | IPA | ||||||||||
| Current assets | $ | $ | $ | |||||||||
| Property and equipment, net | ||||||||||||
| Other long-term assets | ||||||||||||
| Total assets | $ | $ | $ | |||||||||
| Current liabilities | ||||||||||||
| Long-term liabilities | ||||||||||||
| Total liabilities | ||||||||||||
| Equity | ( | ) | ||||||||||
| Total liabilities and equity | $ | $ | $ | |||||||||
| December 31, 2021 | ||||||||
| Real Estate | Physician | |||||||
| Entities | LLCs | |||||||
| Current assets | $ | $ | ||||||
| Property and equipment, net | ||||||||
| Long-term assets | ||||||||
| Total assets | $ | $ | ||||||
| Current liabilities | ||||||||
| Long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
The assets of each of the ER Entities may only be used to settle the liabilities of that entity or its consolidated VIEs and may not be required to be used to settle the liabilities of any of the other ER Entities, other VIEs, or corporate entity. Additionally, the assets of corporate entities cannot be used to settle the liabilities of VIEs. The Company has aggregated all of the Physician LLCs and Real Estate Entities into two categories above, because they have similar risk characteristics, and presenting distinct financial information for each VIE would not add more useful information.
Real Estate Entities are consolidated by the Company as VIEs because they do not have sufficient equity at risk and our hospital entities are guarantors of their outstanding mortgage loans. We have been working with the third-party lenders to remove our guarantees of their outstanding mortgage loans. As these guarantees are released, the associated Real Estate Entity no longer qualifies as a VIE and is deconsolidated. In the second quarter of 2022, we deconsolidated 17 Real Estate Entities. There was no gain or loss on the deconsolidation of these entities.
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At
the date we deconsolidated these Real Estate Entities, they had $
Note 20 - Subsequent Events
The Company has evaluated subsequent events through the filing of this report and determined that there have been no events that have occurred that would require adjustments to our disclosures in the consolidated financial statements except for the transaction described below:
On November 14, 2022, Nutex Health and Lincoln Park Capital Fund, LLC entered into a purchase agreement and registration rights agreement (together, the “Agreement”) pursuant to which Nutex Health will have the right, in its sole discretion, but not the obligation, to sell to Lincoln Park up to $100 million worth of shares of its common stock over the 36-month term of the Agreement, subject to terms and conditions as provided in the Agreement, including the filing and effectiveness of a registration statement. Nutex Health controls the timing and amount of any future sales of its shares of common stock and Lincoln Park is obligated to make purchases in accordance with the Agreement, subject to various limitations including those under the Nasdaq listing rules. Any common stock sold by Nutex Health to Lincoln Park can be sold pursuant to Regular Purchases and Accelerated Purchases, as defined in the Agreement, at purchase prices based on prevailing market prices at the time of each sale and at 97% of the market price on the date of sale under Accelerated Purchases. There is no upper limit to the price per share that Lincoln Park may pay for future stock issuances under the Agreement, and Lincoln Park has agreed not to cause or engage in any direct or indirect short selling or hedging of Nutex Health’s common stock. No warrants are being issued in this transaction and the Agreement does not contain any rights of first refusal, participation rights, penalties, or liquidated damages provisions in favor of any party. Nutex Health may terminate the Agreement at any time, at its sole discretion, without any cost or penalty. In connection with the Agreement, Nutex has agreed to file a registration statement with the U.S. Securities and Exchange Commission registering the resale of the shares issued to Lincoln Park. Nutex Health intends to use the net proceeds from the sale of its common stock under the Agreement for working capital and general corporate purposes to support its growth.
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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited consolidated financial statements and the notes thereto included in Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q.
Explanatory Note
On April 1, 2022 (the “Merger Date”), Nutex Health Holdco LLC and Clinigence Holdings, Inc. (“Clinigence”) completed the merger (the “Merger”) contemplated by the Agreement and Plan of Merger (the “Merger Agreement”) dated as of November 23, 2021 between Clinigence, Nutex Acquisition LLC, a Delaware limited liability company and wholly-owned subsidiary of Clinigence, Nutex, Micro Hospital Holding LLC (solely for the purposes of certain sections of the Merger Agreement), Nutex Health Holdco LLC and Thomas Vo, M.D., solely in his capacity as the representative of the equity holders of Nutex. Immediately following the completion of the Merger, Clinigence amended its certificate of incorporation and bylaws to change its name to “Nutex Health Inc.” In connection with the Merger, each outstanding equity interest of Nutex Health Holdco LLC was exchanged for 3.571428575 shares of Clinigence common stock. The Merger was accounted for as a reverse business combination under U.S. GAAP. Therefore, Nutex Health Holdco LLC was treated as the accounting acquirer in the Merger. Our financial statements presented for periods prior to the Merger Date are those of Nutex Health Holdco, LLC, as the Company’s predecessor entity. Beginning with the second quarter of 2022, our financial statements are presented on a consolidated basis and include Clinigence.
Except where the context indicates otherwise, (i) references to “we,” “us,” “our,” or the “Company” refer, for periods prior to the completion of the Merger, to Nutex Health Holdco LLC and its subsidiaries, (ii) references the “Nutex Health” for periods following the completion of the Merger, refer to Nutex Health Inc. and its subsidiaries and (ii) references to “Clinigence” refer to Clinigence Holdings, Inc. and its subsidiaries prior to the completion of the Merger.
Overview
Nutex Health Inc. is a physician-led, healthcare services and operations company with 21 hospital facilities in eight states (hospital division), and a primary care-centric, risk-bearing population health management division. Our hospital division implements and operates different innovative health care models, including micro-hospitals, specialty hospitals and hospital outpatient departments (“HOPDs”). The population health management division owns and operates provider networks such as independent physician associations (“IPAs”) and offers a cloud-based proprietary technology platform to IPAs which aggregates clinical and claims data across multiple settings, information systems and sources to create a holistic view of patients and providers.
We employ approximately 942 full time employees and partner with over 800 physicians. Our corporate headquarters is based in Houston, Texas. We were incorporated on April 13, 2000 in the state of Delaware.
Our financial statements present the Company’s consolidated financial condition and results of operations including those of majority-owned subsidiaries and variable interest entities (“VIEs”) for which we are the primary beneficiary.
The hospital division includes our healthcare billing and collections organization and hospital entities. In addition, we have financial and operating relationships with multiple professional entities (the “Physician LLCs”) and real estate entities (the “Real Estate Entities”). The Physician LLCs employ the doctors who work in our hospitals. These entities are consolidated by the Company as VIEs because they do not have significant equity at risk, and we have historically provided support to the Physician LLCs in the event of cash shortages and received the benefit of their cash surpluses.
The Real Estate Entities own the land and hospital buildings which are leased to our hospital entities. The Real Estate Entities have mortgage loans payable to third parties which are collateralized by the land and buildings. We consolidate the Real Estate Entities as VIEs in instances where our hospital entities are guarantors or co-borrowers under their outstanding mortgage loans. During the second quarter of 2022, we deconsolidated 17 Real Estate Entities after the third-party lenders released our guarantees of associated mortgage loans.
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The Company has no direct or indirect ownership interest in the Physician LLCs or Real Estate Entities, so 100% of the equity for these entities is shown as noncontrolling interest in the consolidated balance sheets and statements of operations.
The population health management division includes our management services organizations and a healthcare information technology company providing a cloud-based platform for healthcare organizations. In addition, AHISP, IPA, a physician-affiliated entity that is not owned by us—is consolidated as a VIE of our wholly-owned subsidiary AHP since we are the primary beneficiary of their operations under AHP’s management services contracts with them.
Sources of revenue. Our hospital division recognizes net patient service revenue for contracts with patients and in most cases a third-party payor (commercial insurance, workers compensation insurance or, in limited cases, Medicare/Medicaid).
We receive payment for facility services rendered by us from federal agencies, private insurance carriers, and patients. The Physician LLCs receive payment for doctor services from these same sources. On average, greater than 90% of our net patient service revenue are paid by insurers, federal agencies, and other non-patient third parties. The remaining revenues are paid by our patients in the form of copays, deductibles, and self-payment. The following tables present the allocation of the estimated transaction price with the patient between the primary patient classification of insurance coverage:
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Insurance | 91 | % | 95 | % | 94 | % | 96 | % | ||||||||
| Self pay | 7 | % | 4 | % | 5 | % | 3 | % | ||||||||
| Workers compensation | 1 | % | 1 | % | 1 | % | 1 | % | ||||||||
| Medicare/Medicaid | 1 | % | 0 | % | 0 | % | 0 | % | ||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
The population health management division recognizes revenue for capitation and management fees for services to IPAs and physician groups and for the licensing, training, and consulting related to our cloud-based proprietary technology. Capitation revenue consists primarily of capitated fees for medical services provided by physician-owned entities we consolidate as VIEs. Capitated arrangements made directly with various managed care providers including HMOs. Capitation revenues are typically prepaid monthly to us based on the number of enrollees selecting us as their healthcare provider. Capitation is a fixed payment amount per patient per unit of time paid in advance for the delivery of health care services, whereby the service providers are generally liable for excess medical costs. We receive management fees that are received based on gross capitation revenues of the IPAs or physician groups we manage.
Our growth plans. We plan to expand our operations by entering new market areas either through development of new hospitals, formation of new IPAs or by making acquisitions.
We identify new market areas for hospitals based on the area’s need for access to emergency health services and growth expectations. We identify and partner with local physicians who will operate and manage the new location. When developing new hospitals, we have a turn-key process for location selection, real estate acquisition, design, and development of the facility including staffing, training and operations. We extend our existing comprehensive suite of centralized services to operating hospitals, including executive management, billing, collections, recruiting and marketing.
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COVID-19 Pandemic
A novel strain of coronavirus causing the disease known as COVID-19 was first identified in December 2019, and has spread throughout the world. While vaccines and booster shots for the COVID-19 virus became widely available in the United States during 2021, COVID-19 continued to result in a significant number of hospitalizations.
As a provider of healthcare services, we were significantly affected by the public health and economic effects of the COVID-19 pandemic. Our hospitals, medical personnel, and employees have been actively caring for COVID-19 patients. We implemented considerable safety measures for treatment of COVID-19 patients and have incurred, and may continue to incur, certain increased expenses arising from the COVID-19 pandemic, including additional labor, supply chain, capital and other expenditures. Moreover, in recent months, the COVID-19 pandemic resulted in general inflationary pressures and significant disruptions to global supply networks. In this regard, we have experienced disruptions in connection with the provision of equipment, construction services, as well as inflationary pressures in connection with labor, supply chain, capital and other expenditures. We also experienced a delay in billing and collection of patient claims during this period.
The COVID-19 pandemic affected, and may continue to affect, our service mix, revenue mix, payor mix and/or patient volumes, as well as our ability to collect outstanding receivables. Pandemic-related factors may continue to adversely affect demand for our services, as well as the ability of patients and other payors to pay for services rendered.
While we are not able to fully quantify the impact that the COVID-19 pandemic will have on our future financial results, we expect developments related to COVID-19 to continue to affect our financial performance. Moreover, the COVID-19 pandemic may otherwise have material adverse effects on our results of operations, financial position, and/or our cash flows if economic and/or public health conditions in the United States deteriorate.
Overview of Legislative Developments
The U.S. Congress and many state legislatures have introduced and passed a large number of proposals and legislation designed to make major changes in the healthcare system, including changes that have impacted access to health insurance. The most prominent of these efforts, the Affordable Care Act, affects how healthcare services are covered, delivered and reimbursed. The Affordable Care Act increased health insurance coverage through a combination of public program expansion and private sector health insurance reforms. There is uncertainty regarding the ongoing net effect of the Affordable Care Act due to the potential for continued changes to the law’s implementation and its interpretation by government agencies and courts. There is also uncertainty regarding the potential impact of other health reform efforts at the federal and state levels.
In response to the COVID-19 pandemic, federal and state governments passed legislation, promulgated regulations, and have taken other administrative actions intended to assist healthcare providers in providing care to COVID-19 and other patients during the public health emergency and to provide financial relief. Among these, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) had the most impact on our business.
The CARES Act included a waiver of insurance copayments, coinsurance, and annual deductibles for laboratory tests to diagnose COVID-19 and visits to diagnose COVID-19 at an emergency department of a hospital. These provisions of the CARES Act expired on June 30, 2021. While these provisions were effective, we experienced higher levels of revenue due to a shift of payor mix. The larger number and acuity of patient claims for COVID-19 also resulted in higher revenue.
No Surprises Act
The No Surprises Act (“NSA”) is a federal law that took effect January 1, 2022, to protect consumers from most instances of “surprise” balance billing. The legislation was included in the Consolidated Appropriations Act, 2021, which was passed by Congress and signed into law by President Trump on December 27, 2020. With respect to the Company, the NSA limits the amount an insured patient will pay for emergency services furnished by an out-of-network provider. The NSA addresses the payment of these out-of-network providers by group health plans or health insurance issuers (collectively, “insurers”). In particular, the NSA requires insurers to reimburse out-of-network providers at a statutorily calculated “out-of-network rate.” In states without an all-payor model agreement or specified state law, the out-of-network rate is either the amount agreed to by the insurer and the out-of-network provider or an amount determined through an independent dispute resolution (“IDR”) process.
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Under the NSA, insurers must issue an initial payment or notice of denial of payment to a provider within thirty days after the provider submits a bill for an out-of-network service. If the provider disagrees with the insurer’s determination, the provider may initiate a thirty-day period of open negotiation with the insurer over the claim. If the parties cannot resolve the dispute through negotiation, the parties may then proceed to IDR arbitration.
Independent Dispute Resolution. The provider and insurer each submits a proposed payment amount and explanation to the arbitrator. The arbitrator must select one of the two proposed payment amounts taking into account the “qualifying payment amount” and additional circumstances including among other things the level of training, outcomes measurements of the facility, the acuity of the individual treated, and the case mix and scope of services of the facility providing the service. The NSA prohibits the arbitrator from considering the provider’s usual and customary charges for an item or service, or the amount the provider would have billed for the item or service in the absence of the NSA.
Qualifying Payment Amount. The “qualifying payment amount” is generally “the median of the contracted rates recognized by the plan or issuer…under such plans or coverage, respectively, on January 31, 2019, for the same or a similar item or service that is provided by a provider in the same or similar specialty and provided in the geographic region in which the items or service is furnished,” with annual increases based on the consumer price index. In other words, the qualifying payment amount is typically the median rate the insurer would have paid for the service if provided by an in-network provider or facility.
HHS Final Rule. As required by the NSA, the United States Department of Health and Human Services (“HHS”) has established an IDR process under which a certified IDR entity determines the ultimate amount of payment. The HHS’ final rule became effective October 25, 2022. The final rule eliminated the rebuttable presumption that the qualified payment amount is the correct price and also abandoned the requirement that the certified IDR entity must select the offer closest to the qualifying payment amount. These key provisions were initially part of the interim rule issued in 2021 and were challenged by several court cases. Under the final rule, the certified IDR entity must instead select the offer that best reflects the value of the item or service provided, by first considering the QPA and then considering “additional information” that is relevant to the dispute.
Since the NSA became effective January 1, 2022, our average payment by insurers of patient claims for emergency services has declined by approximately 30%. In our experience, insurers often initially pay amounts lower than the QPA without regard for other information relevant to the claim. This requires us to make more appeals using the IDR process. While we are working within the established processes for IDR, we have had varying successes at achieving collections higher than the established QPA. For these reasons, we have reduced our estimate of the ultimate amounts of accounts receivable we will collect for prior periods. This change in estimate reduced revenue for the three months ended September 30, 2022 by approximately $29.0 million. Similar changes in estimates made in the first half of 2022 reduced accounts receivable and revenue by approximately $9.6 million.
We have undertaken several strategic actions designed to improve our collections results. These include
| • | maximizing our claims coding efficiency, |
| • | increasing efforts to collect co-pays and co-insurance, |
| • | adding additional administrative staff to handle the increased administrative IDR burden |
| • | having a dedicated IDR team to accelerate resubmission of claims under the IDR process, |
| • | making appeals for additional payment of claims for periods before and after the NSA final rule was adopted through the IDR process, |
| • | making efforts to sign favorable contracts with insurers, and |
working with both
| • | local and national legislatures to enforce the NSA rules and guidelines for Insurers, |
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The final rule is already the subject of legal challenges. The Texas Medical Association (TMA) in September of 2022 filed motions for summary judgment seeking to invalidate the IDR related provisions of the final rule, arguing that the QPA does not represent the fair value of the services rendered by the physicians and providers and that the final rule illegally favors the QPA over the fair value of the provider services in contravention of the statutory language of the NSA.
On October 19, 2022, and in addition to amicus briefs by several other national medical associations, the American Society of Anesthesiologists, the American College of Emergency Physicians, and the American College of Radiology, professional associations representing an aggregate of approximately 136,000 physicians, filed an Amicus brief supporting the TMA Motion. As of November 11, 2022, the court in the Eastern District of Texas has not yet ruled on the motions.
We are supportive of industry efforts seeking to amend the NSA final rule. Our experience, like that of many other healthcare providers, is that the final rule continues to unfairly favor insurers in the determination of the QPA we receive for our healthcare services. It is difficult to predict the outcome of efforts to challenge or amend the final rule. As well, there can be no assurance that third-party payors will not attempt to further reduce the rates they pay for our services or that additional rules issued under the NSA will not have adverse consequences to our business.
Results of Operations
We report the results of our operations as three segments in our consolidated financial statements: (i) the hospital division, (ii) the population health management division and (ii) the real estate division. Activity within our business segments is significantly impacted by demand for healthcare services we provide, competition for these services in each of the market areas we serve, and the legislative changes discussed above.
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue: | ||||||||||||||||
| Hospital division | $ | 21,244,305 | $ | 117,971,732 | $ | 151,976,226 | $ | 268,129,646 | ||||||||
| Population health management division | 7,150,753 | — | 13,594,007 | — | ||||||||||||
| Total revenue | 28,395,058 | 117,971,732 | 165,570,233 | 268,129,646 | ||||||||||||
| Segment operating income (loss): | ||||||||||||||||
| Hospital division | (26,498,148 | ) | 76,008,468 | 13,149,358 | 159,795,643 | |||||||||||
| Population health management division | 29,702 | — | (227,300 | ) | — | |||||||||||
| Total segment operating income (loss) | (26,468,446 | ) | 76,008,468 | 12,922,058 | 159,795,643 | |||||||||||
| Corporate and other costs: | ||||||||||||||||
| Acquisition costs | — | — | 3,885,666 | — | ||||||||||||
| Impairment of goodwill | 408,466,575 | — | 408,466,575 | — | ||||||||||||
| General and administrative expenses | 4,077,255 | 1,545,685 | 11,721,597 | 5,067,725 | ||||||||||||
| Total corporate and other costs | 412,543,830 | 1,545,685 | 424,073,838 | 5,067,725 | ||||||||||||
| Interest expense | 3,402,606 | 1,260,187 | 9,628,189 | 4,251,277 | ||||||||||||
| Other expense (income) | (630,450 | ) | (1,745,277 | ) | 346,873 | (5,666,633 | ) | |||||||||
| Income before taxes | (441,784,432 | ) | 74,947,873 | (421,126,842 | ) | 156,143,274 | ||||||||||
| Income tax expense (benefit) | (8,543,880 | ) | 453,621 | 11,285,729 | 1,091,975 | |||||||||||
| Net income (loss) | (433,240,552 | ) | 74,494,252 | (432,412,571 | ) | 155,051,299 | ||||||||||
| Less: net income (loss) attributable to noncontrolling interests | (10,722,749 | ) | 20,700,975 | (12,052,765 | ) | 36,436,485 | ||||||||||
| Net income (loss) attributable to Nutex Health Inc. | $ | (422,517,803 | ) | $ | 53,793,277 | $ | (420,359,806 | ) | $ | 118,614,814 | ||||||
| Adjusted EBITDA | $ | (15,703,878 | ) | $ | 55,720,823 | $ | 18,456,057 | $ | 125,469,515 | |||||||
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Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
We reported a net loss attributable to Nutex Health Inc. of $422.5 million, or a loss of $0.65 per share, for the three months ended September 30, 2022 as compared with net income attributable to Nutex Health Inc. of $53.8 million, or $0.09 per diluted share, for same period of 2021. Our 2022 results were principally affected by:
| • | A non-cash impairment charge of $408.5 million to reduce the carrying amount of goodwill for the population health management division reporting unit acquired in the reverse business combination; |
| • | Decrease in revenue caused by legislative changes reducing the amounts we are able to collect for patient services to median in-network rates and the resulting change in estimate for collection of accounts receivable and revenue for prior periods totaling approximately $29.0 million; |
| • | Start-up costs associated with five new facilities opened since April 2021 which are experiencing favorable market acceptance but not yet fully achieving break-even profitability; |
| • | Higher overall cost of employees and independent contractors. |
Adjusted EBITDA for the three months ended September 30, 2022 was a loss of $15.7 million as compared to income of $55.7 million for the comparable period of 2021. Refer to Non-GAAP Financial Measures discussed below for a definition and reconciliation of Adjusted EBITDA. The items affecting revenue and start-up costs contributed significantly to the decline in Adjusted EBITDA in the 2022 period.
A discussion of our segment results is included below.
Hospital Division. Our revenue for the three months ended September 30, 2022 totaled $21.2 million as compared to $118.0 million for the same period of 2021, a decrease of 82% caused by a reduction in both collection amounts and the number of patient visits.
The following table shows the number of patient visits during the periods:
| Three months ended September 30 | ||||||||
| 2022 | 2021 | |||||||
| Patient visits: | ||||||||
| Hospital | . | 36,500 | 59,990 | |||||
Total patient visits decreased 39% during the three months ended September 30, 2022 as compared with the same period of 2021. Patient visits in the 2021 period included significant volumes of COVID-19 related cases. The average acuity or severity of patient cases in the 2022 period was slightly higher than the same period of 2021 but only minimally offset the impact of the lower number of total patient visits.
The average payment by insurers for patient claims for emergency services has declined by approximately 30% in 2022 because of the NSA compared to prior periods. We have also experienced a decrease in collection for the remaining amounts of account receivable for periods before 2022. We believe this decline is caused, in part, by insurers underpaying these claims in the same way we are experiencing claim payments since the NSA became effective. In the three months ended September 30, 2022, we accordingly reduced our estimate of the ultimate amounts of accounts receivable we expect to collect for prior periods. This change in estimate reduced revenue for the three months ended September 30, 2022 by approximately $29 million.
The hospital division’s operating loss was $26.5 million during the three months ended September 30, 2022, down as compared with income of $76.0 million in the same period of 2021. Our operating income for the third quarter of 2022 was adversely affected by the reduction in net revenue discussed above. Further, start-up costs for newer facilities contributed to reduced segment operating results. We have opened five new facilities since April 2021. Start-up costs include complete staffing for 24/7 operations, lease costs, in-market advertising and other operating expenses. These costs often exceed our revenue at these facilities until they achieve sustaining volumes of patient visits. In general, we expect new facilities to reach profitability within 12 months. In this time, we also added additional staff to manage higher volumes of medical claims billing and collection administration.
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Population Health Management Division. We acquired the population health management division in April 2022 upon completion of the reverse business combination with Clinigence. Our total revenue for the three months ended September 30, 2022 was $7.2 million consisting of capitation revenue of $4.9 million, management fees of $1.7 million and SaaS revenue of $561 thousand. Capitation revenue is recognized by our consolidated VIE, AHISP. We do not have an equity interest in this VIE but consolidate it since we are the primary beneficiary of its operations under our management services contract with them. We also earn management fees under our management services contracts with other IPAs and MSOs which are reported as revenue.
The population health management division had $30 thousand of operating income for the three months ended September 30, 2022. Strategically, we are focused on the growth of this division principally through the addition of new independent physician associations and have staffed our organization to manage larger numbers of such organizations.
Real Estate Division. This division reports the operations of consolidated Real Estate Entities where we provide guarantees of their indebtedness or are co-borrowers. During the second quarter of 2022, we deconsolidated 17 Real Estate Entities after the third-party lenders released our guarantees of associated mortgage loans.
Revenue and operating expenses of consolidated Real Estate Entities are not significant since the extent of these entities’ operations is to own facilities leased to our hospital division entities which are financed by a combination of contributed equity by related parties and third-party mortgage indebtedness. Such leases are typically on a triple net basis where our hospital division is responsible for all operating costs, repairs and taxes on the facilities. Finance lease income is recognized outside of segment operating income as other income by the Real Estate Entities. However, these amounts are largely eliminated in the consolidation of these entities into our financial statements.
At September 30, 2022, three Real Estate Entities continue to be consolidated in our financial statements. We expect that hospitals we open in the future may be leased from new Real Estate Entities which may be owned in whole or part by related parties. Third-party lenders to these entities may require that we provide a guarantee or become co-borrowers under mortgage indebtedness financings for such facilities. In such instances, we may be required to consolidate these new Real Estate Entities in our financial statements as VIEs.
Corporate and other costs. Corporate and other costs in the three months ended September 30, 2022 included general and administrative expenses totaling $4.1 million and a non-cash impairment charge reducing goodwill totaling $408.5 million. Our corporate costs for the three months ended September 30, 2021 totaled $1.5 million and consisted of general and administrative expenses. General and administrative costs include our executive management, accounting, human resources, corporate technology, insurance and professional fees. We have incurred higher levels of professional fees as a public company. In 2022, we have made staffing additions commensurate with our operational growth and made key additions to our executive management team.
As a public company, we must comply with new laws, regulations and requirements, certain corporate governance provisions of the Sarbanes-Oxley Act of 2002, related regulations of the SEC and the continued listing requirements of the NASDAQ, with which we were not required to comply with as a private company. We expect to incur additional annual expenses related to these matters and, among other things, additional directors’ and officers’ liability insurance, director fees, reporting requirements of the SEC, transfer agent fees, hiring additional accounting, legal and administrative personnel, increased auditing and legal fees and similar expenses.
During the three months ended September 30, 2022, we recognized a non-cash impairment charge of $408.5 million to reduce the carrying amount of goodwill for the population health management division reporting unit acquired in the reverse business combination. This impairment was determined as part of our annual test for impairment of goodwill. This test is made by comparing the estimated fair values of our reporting units to their respective carrying values. We use an income method to estimate the fair value of these assets, which is based on forecasts of the expected future cash flows attributable to the respective assets and is subject to significant estimates and assumptions. In performing this test, we determined that the estimated fair value of our population health management division reporting unit was less than its carrying value recorded in the reverse business combination. Therefore, we conducted a second step of the goodwill impairment test to determine the implied fair value of the reporting unit's goodwill. The non-cash impairment charge reduced the excess carrying amount of goodwill for the population health management division that were greater than its residual fair value.
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Nonoperating items
Interest expense. Interest expense totaled $3.4 million in the three months ended September 30, 2022 as compared with $1.3 million for the same period of 2021. This includes interest expense associated with the mortgage indebtedness of consolidated Real Estate Entities, interest expense on outstanding term notes and lines of credit for financing operating equipment and working capital needs, interest expense for financing leases and the accretion costs related to the conversion of notes from the Clinigence transaction. Interest expense is expected to decline in future periods as a result of the deconsolidation of 17 Real Estate Entities and their associated mortgage indebtedness during the second quarter of 2022 as well as due to the elimination of accretion costs related to the conversion of notes payable from the Clinigence transaction.
Income tax expense. Income tax provisions for interim quarterly periods are generally based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent or unusual items related specifically to interim periods. The income tax impact of discrete items is recognized in the period these occur.
Our effective tax rate for the three months ended September 30, 2022, excluding the non-deductible goodwill impairment expense, was approximately 26%. The primary difference from the federal statutory rate of 21% is related to state taxes, income of noncontrolling interests in flow-through entities and permanent differences for non-deductible expenses.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
We reported a net loss attributable to Nutex Health Inc. of $420.4 million, or $0.67 per share, for the nine months ended September 30, 2022 as compared with net income attributable to Nutex Health Inc. of $118.6 million, or $0.20 per diluted share, for same period of 2021. Our 2022 results were principally affected by:
| • | A non-cash impairment charge of $408.5 million to reduce the carrying amount of goodwill for the population health management division reporting unit acquired in the reverse business combination; |
| • | Decrease in revenue caused by legislative changes reducing the amounts we are able to collect for patient services to median in-network rates and the resulting change in estimate for collection of accounts receivable and revenue for prior periods totaling approximately $38.6 million; |
| • | Start-up costs associated with five new facilities opened since April 2021 which are experiencing favorable market acceptance but not yet fully achieving break-even profitability; |
| • | Significant, non-cash income tax expense totaling $18.4 million, net, for the one-time change in our tax status and release of the acquired valuation allowance of Clinigence; |
| • | Acquisition-related costs related to the Clinigence merger transaction and higher levels of general and administrative expenses related to our operations as a public company; and |
| • | Higher overall cost of employees and independent contractors. |
Adjusted EBITDA for the nine months ended September 30, 2022 was $18.45 million as compared with $125.5 million for the same period of 2021 with the special items affecting revenue and start-up costs causing the decline during the 2022 period.
A discussion of our segment results is included below.
Hospital Division. Revenue totaling $152.0 million for the nine months ended September 30, 2022 decreased 43% from $268.1 million for the same period of 2021. This decrease was caused by reductions in the number of patient visits and reduced amounts collected for patient claims in the 2022 period. As previously noted, our revenue has been adversely impacted in the 2022 period because of the NSA and changes in our estimate of the ultimate amounts of accounts receivable we will collect for prior periods. During the nine months ended September 30, 2022, these changes in estimates reduced our accounts receivable and revenue by $38.6 million.
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The following table shows the number of patient visits during the periods:
| Nine months ended September 30 | ||||||||
| 2022 | 2021 | |||||||
| Patient visits: | ||||||||
| Hospital | 121,414 | 137,041 | ||||||
Total patient visits during the nine months ended September 30, 2022 decreased 11% as compared with the same period of 2021. Five newly opened facilities, most opened in the second half of 2021, helped offset reductions in patient visits for COVID-19 related needs.
Typically, we experience some seasonality in the number of patient visits and revenue during the year usually corresponding with the late-fall and winter months when flu and other seasonal infirmities peak. As an emergency care provider, we are not able to predict the number of patient visits or the severity of patient healthcare needs. We operate our facilities 24 hours daily to be responsive to our communities’ needs.
The hospital division’s segment operating income was $13.1 million for the nine months ended September 30, 2022, down 92% from the same period of 2021. Our operating income for the 2022 period was adversely affected by the reduction in net revenue as well as the changes in estimate of the ultimate collections of accounts receivable discussed above.
As mentioned above, we have opened five new facilities since April 2021. Start-up costs at newly facilities often exceed our revenue at these facilities for the first 12 to 15 months after their opening. In addition, in late-2021 and through the third quarter of 2022, we made several staffing additions to manage higher volumes of medical claims billing and collection administration.
Population Health Management Division. The population health management division was started in April 2022 upon completion of the merger with Clinigence. Our results of operations for this division include periods since April 1, 2022.
Total revenue for the nine months ended September 30, 2022 was $13.6 million consisting of capitation revenue of $10.0 million, management fees of $2.7 million and SaaS revenue of $851 thousand.
The population health management division had an operating loss of $227 thousand for the nine months ended September 30, 2022.
Real Estate Division. This division reports the operations of consolidated Real Estate Entities which are partially owned by related parties. As noted, we have no equity interest in these entities but consolidate these as VIEs when Nutex is a co-borrower or provides a guarantee of the Real Estate Entities mortgage indebtedness. In the second quarter of 2022, we deconsolidated 17 Real Estate Entities.
Revenue and operating expenses for the real estate division are not significant since finance lease income is recognized outside of segment operating income as other income by the Real Estate Entities. Such amounts are generally eliminated in the consolidation of these entities into our financial statements.
Corporate and other costs. Corporate and other costs in the nine months ended September 30, 2022 included general and administrative expenses of $11.7 million, acquisition-related costs associated with the merger with Clinigence totaling $3.9 million and a non-cash impairment charge to reduce goodwill totaling $408.5 million. Corporate costs for the nine months ended September 30, 2021 totaled $5.1 million and consisted of general and administrative expenses. In the 2022 period, we incurred higher levels of professional fees as we prepared for our public listing, made staffing additions commensurate with our operational growth and made key additions to our executive management team. As discussed above, we recognized a non-cash impairment charge of $408.5 million in the three months ended September 30, 2022 to reduce the carrying amount of goodwill resulting from the reverse business combination with Clinigence.
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Nonoperating items
Interest expense. Interest expense for the nine months ended September 30, 2022 totaled $9.6 million as compared with $4.3 million for the same period of 2021. This increase in interest expense was principally a result of higher mortgage indebtedness of consolidated Real Estate Entities, interest expense on outstanding term notes and lines of credit for financing operating equipment and working capital needs, interest expense for financing lease obligations and accretion costs related to the conversion of notes payable from the Clinigence transaction.
Other expense (income). Other expense (income) for the nine months ended September 30, 2021 included $5.2 million for the forgiveness of SBA Paycheck Protection Program loans we obtained.
Income tax expense. As discussed above, our tax status changed as a result of the merger with Clinigence. Previously, Nutex Health Holdco LLC and the Nutex Subsidiaries were pass-through entities treated as partnerships for U.S. federal income tax purposes. No provision for federal income taxes was provided for these periods as federal taxes were obligations of these companies’ members. We recognized a non-cash charge of $20.8 million to income tax expense during the nine months ended September 30, 2022 for this change in tax status. Secondly, we recorded an offsetting non-cash benefit during the nine months ended September 30, 2022 of $2.4 million to income tax expense to remove the acquired valuation allowance Clinigence had against its deferred tax assets.
Each of the discrete items above, as well as the non-deductible goodwill impairment expense recognized in the nine months ended September 30, 2022, are one-time, non-cash items. Our effective tax rate for the nine months ended September 30, 2022, excluding the discrete items above, was approximately 26%. The primary difference from the federal statutory rate of 21% is related to state taxes, income of noncontrolling interests in flow-through entities and permanent differences for non-deductible expenses.
Liquidity and Capital Resources
As of September 30, 2022, we had $36.6 million of cash and equivalents, compared to $36.2 million of cash and equivalents at December 31, 2021.
Significant sources and uses of cash during the first nine months of 2022.
Sources of cash:
| • | Cash from operating activities was $46.1 million, which included $54.9 million from the primary components of our working capital (receivables, inventories, accounts payable and expenses). |
| • | Clinigence’s balance sheet at the merger date included $12.7 million of cash. |
| • | We received net proceeds of $8.0 million from borrowings under notes payable and lines of credit. |
| • | We received net proceeds of $4.8 million from the exercise of common stock warrants and options. |
Uses of cash:
| • | Capital expenditures were $22.5 million. |
| • | We made distributions to our owners related to operations prior to the merger with Clinigence and to noncontrolling interest owners totaling $49.9 million. |
| • | Cash associated with the 17 deconsolidated Real Estate Entities totaled $2.4 million. |
Future sources and uses of cash. Our operating activities are financed with cash on hand which is generated from revenues. Most of our hospital facilities are leased from various lessors including related parties. These leases are presented in our consolidated balance sheets unless the lease is from a consolidated Real Estate Entity. Our growth plans include the development of new hospital locations. We expect that in many of these locations we will lease facilities from newly established entities partially owned by related parties.
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We routinely enter into equipment lease agreements to procure new or replacement equipment and may also finance these purchases with term debt. We have smaller lines of credits available for working capital purposes and are presently working to supplement or replace these with larger financing commitments. These larger financing commitments are subject to market conditions and we may not be able to obtain such larger financing commitments at favorable economic terms or at all.
Indebtedness. The Company’s indebtedness at September 30, 2022 is presented in Item I, “Financial Statements – Note 8 – Debt” and our lease obligations are presented in Item I, “Financial Statements—Note 9 – Leases.”
Off-Balance Sheet Arrangements
As of September 30, 2022, we had no material off-balance sheet arrangements.
Non-GAAP Financial Measures
Adjusted EBITDA. Adjusted EBITDA is used as a supplemental non-GAAP financial measure by management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies. We believe Adjusted EBITDA is useful because it allows us to more effectively evaluate our operating performance.
We define Adjusted EBITDA as net income (loss) attributable to Nutex Health Inc. plus net interest expense, income taxes, depreciation and amortization, further adjusted for stock-based compensation, any acquisition related costs and impairments. A reconciliation of net income to Adjusted EBITDA is included below. Adjusted EBITDA is not intended to serve as an alternative to U.S. GAAP measures of performance and may not be comparable to similarly-titled measures presented by other companies.
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Reconciliation of net income (loss) attributable to Nutex Health Inc. to Adjusted EBITDA: | ||||||||||||||||
| Net income (loss) attributable to Nutex Health Inc. | $ | (422,517,803 | ) | $ | 53,793,277 | $ | (420,359,806 | ) | $ | 118,614,814 | ||||||
| Depreciation and amortization | 4,330,167 | 1,871,799 | 9,859,513 | 5,873,439 | ||||||||||||
| Interest expense, net | 3,402,606 | 1,260,187 | 9,628,189 | 4,251,277 | ||||||||||||
| Income tax expense (benefit) | (8,543,880 | ) | 453,621 | 11,285,729 | 1,091,975 | |||||||||||
| Allocation to noncontrolling interests | (922,792 | ) | (1,658,061 | ) | (4,445,224 | ) | (4,361,990 | ) | ||||||||
| EBITDA | (424,251,702 | ) | 55,720,823 | (394,031,599 | ) | 125,469,515 | ||||||||||
| Stock-based compensation expense | 81,249 | — | 135,415 | — | ||||||||||||
| Impairment of goodwill | 408,466,575 | — | 408,466,575 | — | ||||||||||||
| Acquisition costs | — | — | 3,885,666 | — | ||||||||||||
| Adjusted EBITDA | $ | (15,703,878 | ) | $ | 55,720,823 | $ | 18,456,057 | $ | 125,469,515 | |||||||
Significant Accounting Policies
Revenue recognition.
Hospital division – Our hospital division recognizes net patient service revenue for contracts with patients and in most cases a third-party payor (commercial insurance, workers compensation insurance or, in limited cases, Medicare/Medicaid). The Company’s performance obligations are to provide emergency health care services primarily on an outpatient basis. Net patient service revenues are recorded at the amount that reflects the consideration to which the Company expects to be entitled in exchange for providing patient care. These amounts are net of appropriate discounts giving recognition to differences between the Company’s charges and reimbursement rates from third party payors.
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Patient service net revenues earned by the Company are recognized at a point in time when the services are provided, net of adjustments and discounts. Because all the Company’s performance obligations relate to contracts with a duration of less than one-year, certain disclosures are limited.
The transaction price is determined based on gross charges for services provided, reduced by contractual adjustments provided to third-party payors, discounts and implicit price concessions provided primarily to uninsured patients in accordance with the Company’s policy. For uninsured patients, the Company recognizes revenue based on established rates, subject to certain discounts and implicit price concessions. The Company is reimbursed from third party payors under various methodologies based on the level of care provided. We are considered “out-of-network” with commercial health plans. As there are no contractual rates established with insurance entities, revenues are estimated based on the “usual and customary” charges allowed by insurance payors using historical collection experience, historical trends of refunds and payor payment adjustments (retractions). Revenue from the Medicare program is based on reimbursement rates set by governmental authorities.
Patients who have health care insurance may also have discounts applied related to their copayment or deductible. Estimates of contractual adjustments and discounts are determined by major payor classes for outpatient revenues based on historical experience. The Company estimates implicit price concessions based on its historical collection experience with these classes of patients using a portfolio approach. The portfolios consist of major payor classes for outpatient revenue. Based on historical collection trends and other analyses, the Company concluded that revenue for a given portfolio would not be materially different than if accounting for revenue on a contract-by-contract basis.
Customer payments are due upon receipt of an explanation of benefits for insured patients or it is due upon receipt of the bill from the Company for uninsured payments. There is no financing component associated with payments due from insurers or patients.
Population health management division – The population health management division recognizes revenue for capitation and management fees for services to IPAs and physician groups and for the licensing, training, and consulting related to our cloud-based proprietary technology.
Capitation revenue consists primarily of capitated fees for medical services provided by physician-owned entities we consolidate as VIEs. Capitated arrangements made directly with various managed care providers including HMOs. Capitation revenues are typically prepaid monthly to us based on the number of enrollees selecting us as their healthcare provider. Capitation is a fixed payment amount per patient per unit of time paid in advance for the delivery of health care services, whereby the service providers are generally liable for excess medical costs.
We receive management fees that are received based on gross capitation revenues of the IPAs or physician groups we manage. Revenue is recognized and received monthly for our services. In addition, we provide consultant services that are charged as a flat fixed rate and recognized as revenue when the service is performed. Consultant services revenues represent a small portion of our total revenue.
Software licenses are provided as SaaS-based subscriptions that grants access to proprietary online databases and data management solutions. Training and consulting are project based and billable to customers on a monthly-basis or task-basis. Revenue from training and consulting are generally recognized upon delivery of training or completion of the consulting project. The duration of training and consulting projects are typically a few weeks or months and last no longer than 12 months.
SaaS-based subscriptions are generally marketed under multi-year agreements with annual, semi-annual, quarterly, or month-to-month renewals and revenue is recognized ratably over the renewal period with the unearned amounts received recorded as deferred revenue. For multiple-element arrangements accounted for in accordance with specific software accounting guidance, multiple deliverables are segregated into units of accounting which are delivered items that have value to a customer on a standalone basis.
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Cash payments for SaaS-based subscriptions received in advance of the satisfaction of our performance obligations as deferred revenue and recognized as revenue over the period in which the performance obligations are satisfied. The Company completes its contractual performance obligations through providing its customers access to specified data through subscriptions for a service period, and training on consulting associated with the subscriptions. We primarily invoice our customers on a monthly basis and do not provide any refunds, rights of return, or warranties.
Construction in Progress. The Company regularly is in the process of constructing new facilities. Generally, our ER Entities are responsible for the leasehold buildout and equipment while the associated Real Estate Entity procures the land, if any, and constructs a new or remodeled facility. Costs incurred to construct assets which will ultimately be classified as fixed assets are capitalized and classified in our financial statements as construction in progress until construction is completed and the asset is available for use. Once the asset is available for use, it is reclassified as another category of fixed assets and depreciated across its useful life.
Goodwill Impairment. We test goodwill for impairment at least annually by comparing the estimated fair values of our reporting units to their respective carrying values. We use an income method to estimate the fair value of these assets, which is based on forecasts of the expected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflect a consideration of other marketplace participants, and include the amount and timing of future cash flows (including expected growth rates and profitability). Estimates utilized in the projected cash flows include consideration of macroeconomic conditions, overall category growth rates, competitive activities, Company business plans and the discount rate applied to the cash flows. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions.
During the three months ended September 30, 2022, we determined that the estimated fair value of our population health management division reporting unit which was acquired in the reverse business combination with Clinigence was less than its’ carrying value. Therefore, we conducted a second step of the goodwill impairment test to determine the implied fair value of the reporting unit’s goodwill. In this analysis, we allocated the fair value of the reporting unit to identifiable assets and liabilities of the reporting unit. The residual fair value after this allocation was compared to the goodwill balance with the excess goodwill charged to expense. Based on this analysis, we recognized a non-cash impairment charge of $408.5 million to reduce the carrying amount of goodwill for the population health management division reporting unit.
We believe the estimates and assumptions utilized in our impairment testing are reasonable and are comparable to those that would be used by other marketplace participants. However, actual events and results could differ substantially from those used in our valuations. To the extent such factors result in a failure to achieve the level of projected cash flows used to estimate fair value for purposes of establishing or subsequently impairing the carrying amount of goodwill and intangible assets, we may need to record additional noncash impairment charges in the future.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required for smaller reporting companies.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In accordance with Rule 13a-15(b) of the Exchange Act, we have evaluated, under the supervision of our CEO and our CFO, the effectiveness of disclosure controls and procedures as of September 30, 2022. Based on this evaluation, the Company concluded that our disclosure controls and procedures were ineffective as of September 30, 2022 due to the material weakness previously identified as described below.
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Previously Reported Revisions and Material Weakness. We previously reported certain immaterial revisions to previously reported amounts in our combined and consolidated financial statements as of and for the year ended December 31, 2020 and interim periods presented as of and for the nine months ended September 30, 2021. These revisions corrected the classification of net income and equity attributable to noncontrolling interests and corrected the presentation of items within the statement of cash flows. As a result, we identified a material weakness in our internal control over financial reporting. Based on our assessment for the year ended December 31, 2021, we identified material weaknesses in internal control over financial reporting related to our revenue estimation process, recordation of leases in accordance with newly adopted accounting standards and other matters caused by having inadequate accounting close processes.
Remediation Plans. These material weaknesses did not result in material misstatement of the Company’s consolidated financial statements for the periods presented. The Company has started the process of designing and implementing effective internal control measures to remediate the material weakness. The Company’s efforts include the employment of our new chief financial officer, engagement of an accounting specialist to assist in our accounting close and reporting processes, process documentation and supervisory reviews of our revenue estimate and accounting close processes. We have employed additional experienced personnel in our accounting and financial reporting teams as well.
While we believe that these efforts will improve our internal control over financial reporting, our remediation efforts are ongoing and will require validation and testing of the design and operating effectiveness of internal controls. The actions that we are taking are subject to ongoing senior management review, as well as audit committee oversight. We will not be able to conclude whether the steps we are taking will fully remediate the remaining material weakness in our internal control over financial reporting until we have completed our remediation efforts and subsequent evaluation of their effectiveness. We may also conclude that additional measures may be required to remediate the material weakness in our internal control over financial reporting.
Changes in Internal Control Over Financial Reporting. We are taking actions to remediate the material weakness relating to our internal control over financial reporting, as described above. Except as otherwise described herein, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Disclosure Controls and Procedures. Our senior members of management do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
From time-to-time, the Company is involved in various civil actions as part of its normal course of business. The Company is not a party to any litigation that is material to ongoing operations as defined in Item 103 of Regulation S-K as of the period ended September 30, 2022.
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Item 1A. Risk Factors.
In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors and other cautionary statements described under the heading “Risk Factors” included in our Form S-3 Registration Statement filed on September 30, 2022 and the risk factors and other cautionary statements contained in our other SEC filings, which could materially affect our businesses, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. There have been no material changes in our risk factors from those described in our Form S-3 Registration Statement filed on September 30, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities; use of proceeds from registered securities.
Common Stock Issued. In the third quarter of 2022, we issued 851,611 common shares for the conversion of the Company’s remaining convertible notes payable. The Company issued the convertible notes payable to accredited investors in private placements. The common stock issuances are unregistered and exempt from the registration requirements of the Securities Act. The issuances were made pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act.
Item 3. Defaults upon Senior Securities.
None
Item 4. Mine Safety Disclosures
Not Applicable
Item 5. Other Information.
None
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Item 6. Exhibits
* Filed herewith
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SIGNATURES
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, thereunto duly authorized, on November 18, 2022.
| Nutex Health Inc. | ||
| By: | /s/ Thomas Vo | |
| Thomas Vo | ||
| Chairman and Chief Executive Officer | ||
| By: | /s/ Jon Bates | |
| Jon Bates | ||
| Chief Financial Officer | ||
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