Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes accompanying those statements appearing elsewhere in this Annual Report on Form 10-K. The results described below are not necessarily indicative of the results to be expected in any future periods.
Company Overview
MultiPlan is a leading provider of data analytics and technology-enabled solutions designed to bring affordability, efficiency and fairness to the United States healthcare industry. We do so through services focused on reducing medical cost and improving payment accuracy for the payors of healthcare, which are health insurers, self-insured employers and other health plan sponsors (typically through their health plan administrators), and, indirectly, the plan members who are the consumers of healthcare services.
Founded initially in 1980 as a New York-based hospital network, MultiPlan has evolved both organically and through acquisition into a national organization offering three categories of services:
•Analytics-Based Services: data-driven algorithms which detect claims over-charges and either negotiate or recommend fair reimbursement using a variety of data sources and pricing algorithms;
•Network-Based Services: contracted discounts with healthcare providers to form one of the largest independent preferred provider organizations ("PPO") in the United States with over 1.2 million under contract, as well as outsourced network development and/or management services; and
•Payment and Revenue Integrity Services: data, technology, and clinical expertise deployed to identify and remove improper and unnecessary charges before or after claims are paid, or to identify and help restore and preserve underpaid premium dollars.
Although the end beneficiary of our services are employers and other plan sponsors and their health plan members, our direct customers are mostly health plan administrators ("Payors"). We offer these Payors a single electronic gateway to a comprehensive set of services in each of the above three categories, which are used in combination or individually to reduce the medical cost burden on their health plan customers and members while fostering fair and efficient payments to the providers. These comprehensive offerings have enabled us to maintain long-term relationships with a number of our customers, including relationships of over 25 years with some of the nation's largest Payors. For the year ended December 31, 2021, our services identified approximately $21.7 billion in potential medical cost savings.
We believe our solutions provide a strong value proposition to Payors, their health plan customers and healthcare consumers, as well as to providers. Overall, our service offerings aim to reduce healthcare costs in a manner that is orderly, efficient and fair to all parties. In addition, because in most instances the fee for our services is directly linked to the savings we identify, our revenue model is aligned with the interests of our customers.
The Transactions
On July 12, 2020, Churchill entered into the Merger Agreement by and among First Merger Sub, Second Merger Sub, Holdings, and MultiPlan Parent. On October 8, 2020, the Merger Agreement was consummated and the Transactions were completed.
The Transactions were accounted for as a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with GAAP. Under this method of accounting, Churchill was treated as the "acquired" company for financial reporting purposes with MultiPlan Parent determined to be the accounting acquiror. This determination was primarily based on the existing MultiPlan Parent stockholders being the majority stockholders and holding majority voting power in the combined company, MultiPlan Parent's senior management comprising the majority of senior management of the combined company, and the ongoing operations of MultiPlan Parent comprising the ongoing operations of the combined company. Accordingly, for accounting purposes, the Transactions were treated as the equivalent of MultiPlan Parent issuing shares for the net assets of Churchill, accompanied by a recapitalization. The net assets of Churchill were recognized at fair value (which were consistent with carrying value), with no goodwill or other intangible assets recorded. See Note 4 The Transactions of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further information on the Transactions.
As a consequence of the Transactions, we became the successor to an SEC-registered and NYSE-listed company.
HST Acquisition
On November 9, 2020, the Company acquired HST, a healthcare technology company that enables value-driven health benefit plan designs featuring reference-based pricing and tools to engage health plan members and providers in making the best use of available benefits both before and after care delivery. The Company acquired 100 percent of the voting equity interests of HST.
The results of operations and financial condition of HST have been included in the Company's consolidated results from the date of acquisition. In connection with the HST acquisition, the Company incurred transaction costs. The transaction costs have been expensed as incurred and these amounts, totaling $0.1 million and $0.9 million for the years ended December 31, 2021 and 2020, respectively, are included in general and administrative expenses in the accompanying consolidated statements of income (loss) and comprehensive income (loss).
DHP Acquisition
On February 26, 2021, the Company completed the acquisition of DHP, an analytics and technology company offering healthcare payment and revenue integrity services. The Company acquired 100 percent of the voting equity interest of DHP. The acquisition strengthens MultiPlan's service offering in the payment integrity market with new and complementary services to help its payor customers manage the overall cost of care and improve their competitiveness. It also adds revenue integrity services for plans that receive premiums from the Centers for Medicare and Medicaid Services.
The results of operations and financial condition of DHP have been included in the Company's consolidated results from the date of acquisition. In connection with the DHP acquisition, the Company incurred transaction-related expenses of $4.9 million and $0.6 million for the years ended December 31, 2021 and 2020, respectively. The transaction-related expenses have been expensed as incurred and are included in general and administrative expenses in the accompanying consolidated statements of income (loss) and comprehensive income (loss).
Uncertainty Relating to the Ongoing COVID-19 Pandemic
As discussed in Note 1 General Information and Basis of Accounting of the Notes to Consolidated Financial Statements included in this Annual Report, the COVID-19 pandemic has negatively impacted our business, results of operations and financial condition during the years ended December 31, 2021 and 2020.
We temporarily closed all of our offices and restricted travel due to concern for our employees' health and safety and also in compliance with state orders. Most of our approximately 2,400 employees continue to work remotely. Other than these modifications, we have not experienced any material changes to our operations including receiving and processing transactions with our customers as a result of the COVID-19 pandemic.
Effects from COVID-19 began to impact our business in first quarter 2020 with various federal, state, and local governments and private entities mandating restrictions on travel, restrictions on public gatherings, closure of non-essential commerce, and shelter in place orders. The Company experienced an approximately 4.6% decline in revenues for the year ended December 31, 2020 as compared to 2019 primarily due to reduced volume from customers as a result of restrictions on elective medical procedures and non-essential medical services. Although the revenues for the year ended December 31, 2021, exceeded revenues for the year ended December 31, 2020 and the pre-COVID revenues for the year ended December 31, 2019, the Company's revenues continue to be negatively impacted by the ongoing COVID-19 pandemic, but to a lesser extent compared to 2020 as vaccination rates have increased and restrictions on medical services have been lifted. The extent of the ultimate impact of COVID-19 will depend on the severity and duration of the pandemic. Future developments remain uncertain, including the number of confirmed cases, the emergence of highly contagious variants, and any actions taken by federal, state and local governments such as economic relief efforts, as well as U.S. and global economies, consumer behavior and healthcare utilization patterns.
In connection with the COVID-19 pandemic, the CARES Act was enacted on March 27, 2020 and included certain changes to corporate income taxes. Specifically, the CARES Act provided numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain payroll tax credits associated with the retention of employees. We assessed these impacts and noted the largest impact is due to the tax law change related to the interest disallowance rules retroactive to 2019. The other aspects of the CARES Act did not have a material effect on us.
Factors Affecting Our Results of Operations
Key Technology
Our strength as a company is our ability to use data and analytics to develop new service opportunities to enhance our customer relationships and to increase revenues. We use technology, data and analytics to transform healthcare transactions into multiple opportunities for savings and recurring revenues by leveraging data and analytics to inform our transaction processing systems (i.e., our claims processing systems). The transaction processing systems generate savings for our customers, revenues for us, and each transaction adds more data to our intelligence engine and data warehouse. The intelligence engine drives our analytics and development of new saving opportunities and revenue growth through service enhancement or new product development.
Our technology also contributes to our ability to efficiently process our transactions through EDI batch files, real-time web services and online through customer and provider portals. We believe our current infrastructure can support significantly more than the current transaction volume giving us room for growth and increased volume. Our application platforms are architected and built with redundancy to eliminate downtime. All of the claims processed in our system are received via EDI or direct web service integration. As we process more claims through EDI and direct service integration, our electronic integration with customers results in substantial back office interconnectivity and considerably reduces complexity and processing failures. Because we believe our transaction processing systems are scalable, we should be able to absorb significant increases in volume at minimal marginal costs. Our integration into our customers' systems and processes is an important component of our business model.
Medical Cost Savings
Our business and revenues are driven by the ability to lower medical costs through claims savings for our customers. The medical charges of those claims can influence our ability to generate claim savings.
The following table presents the medical charges processed and the potential savings identified for the periods presented:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (in billions) | | 2021 | | 2020 | | 2019 |
Medical charges processed(1)(3) | | $ | 120.7 | | | $ | 101.7 | | | $ | 107.1 | |
Potential medical cost savings(2)(3) | | $ | 21.7 | | | $ | 18.6 | | | $ | 18.1 | |
_____________________________
(1)Medical charges processed represent the aggregate dollar amount of claims processed by our cost management solutions in the period presented. The dollar amount of the claim for purposes of this calculation is the dollar amount of the claim prior to any reductions that may be made as a result of the claim being processed by our cost management solutions. Medical charges processed include medical charges processed on HST acquired claims of $1.9 billion for the year ended December 31, 2021. No medical charges processed by HST were included for 2020 and 2019. Medical charges processed exclude medical charges processed by DHP in all time periods.
(2)Potential medical cost savings represent the aggregate amount of potential savings in dollars identified by our cost management solutions in the period presented. Since certain of our fees are based on the amount of savings achieved by our customers and our customers are the final adjudicator of the claims and may choose not to reduce claims or reduce claims by only a portion of the potential savings identified, potential medical cost savings may not directly correlate with the amount of fees earned in connection with the processing of such claims. Potential medical cost savings include potential medical cost savings identified on HST acquired claims of $1.5 billion for the year ended December 31, 2021. No potential medical cost savings for HST were included for 2020 and 2019. Potential medical cost savings exclude potential medical cost savings identified by DHP in all time periods.
(3)Changes to previously reported medical charges processed and potential medical cost savings are due to client claim resubmissions or cancellation of claims. Examples of these changes include, but are not limited to, adjudication changes, billing changes, and elimination of claims that were later determined to be invalid.
Our medical charges processed and potential medical cost savings figures may not be directly comparable from period to period due to the completion and integration of acquisitions made in a particular period.
Business Model
Our business model avoids reimbursement, underwriting and malpractice risk and exposure. We do not provide or manage healthcare services or provide medical care. This reduces our exposure to state and federal regulations that are imposed on insurers and medical services providers.
Healthcare Industry Exposure
According to CMS, healthcare expenditures will grow from $3.8 trillion, or 17.8% of U.S. GDP, in 2019 to represent 19.7% of GDP by 2028, representing a compounded annual growth rate of 5.5%. There are a multitude of factors driving this expected growth, including recent regulations and ongoing secular trends, such as the aging population and other demographic factors, which are driving expanded healthcare coverage and increased utilization. Additional growth in healthcare costs are driven by availability of new medical technologies, therapies and modalities. As expenditures continue to rise, stakeholders and especially payors, are becoming increasingly focused on solutions that reduce medical costs and improve payment accuracy.
Components of Results of Operations
Revenues
We generate revenues from several sources including: (i) Analytics-Based Services that use our leading and proprietary information technology platform to offer customers solutions to reduce medical costs, (ii) Network-Based Services that process claims at a discount compared to billed fee-for-service rates and by using an extensive network and (iii) Payment and Revenue Integrity Services that use data, technology, and clinical expertise to identify improper, unnecessary and excessive charges. Payors typically compensate us through either a PSAV achieved or a PEPM rate. Approximately 93% of revenues for the year ended December 31, 2021 were based on a PSAV achieved rate.
Costs of Services (exclusive of depreciation and amortization of intangible assets)
Costs of services (exclusive of depreciation and amortization of intangible assets) consist of all costs specifically associated with claims processing activities for customers, sales and marketing, and the development and maintenance of our networks, analytics-based services, and payment and revenue integrity services. Two of the largest components in costs of services are personnel expenses and access and bill review fees. Access and bill review fees include fees for accessing non-owned third-party provider networks, expenses associated with vendor fees for database access and systems technology used to reprice claims, and outsourced services. Third-party network expenses are fees paid to non-owned provider networks used to supplement our owned network assets to provide more network claim savings to our customers.
General and Administrative Expenses
General and administrative expenses include corporate management and governance functions composed of general management, legal, treasury, tax, real estate, financial reporting, auditing, benefits and human resource administration, communications, public relations, billing and information management. In addition, general and administrative expenses include taxes, insurance, advertising, transaction costs, and other general expenses.
Depreciation Expense
Depreciation expense consists of depreciation and amortization of property and equipment related to our investments in leasehold improvements, furniture and equipment, computer hardware and software, and internally generated capitalized software development costs. We provide for depreciation and amortization on property and equipment using the straight-line method to allocate the cost of depreciable assets over their estimated useful lives.
Amortization of Intangible Assets
Amortization of intangible assets includes amortization of the value of our customer relationships, provider network, technology, and trademarks which were identified in valuing the intangible assets in connection with the June 6, 2016 acquisition by H&F, as well as recent acquisitions by the Company.
Interest Expense
Interest expense consists of accrued interest and related interest payments on our outstanding long-term debt and amortization of debt issuance costs, discounts and premiums.
Loss (Gain) on Extinguishment of Debt
The Company recognizes a loss (gain) on extinguishment of debt for the difference between the net carrying amount of the extinguished debt immediately before the refinancing and the fair value of the new debt instruments, and fees associated with the issuance of the new debt under the refinancing.
(Gain) Loss on Investments
(Gain) loss on investments consists of the changes in the fair value of the Company's investments.
Change in fair value of Private Placement Warrants and unvested founder shares
The Company remeasures the fair value of the Private Placement Warrants and unvested founder shares at each reporting period. The changes in fair value are primarily due to the change in the stock price of the Company's Class A common stock over the reporting period.
Income Tax Expense (Benefit)
Income tax expense (benefit) consists of federal, state, and local income taxes. Due to the variability of our taxable income as compared to net income, stock-based compensation and the variability of the jurisdictions where income is earned, our effective tax rate can vary significantly from one period to the next depending on relative changes in net income.
Non-GAAP Financial Measures
We use EBITDA, Adjusted EBITDA and Adjusted EPS to evaluate our financial performance. EBITDA, Adjusted EBITDA and adjusted earnings per share are financial measures that are not presented in accordance with GAAP. We believe the presentation of these non-GAAP financial measures provides useful information to investors in assessing our financial condition and results of operations across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our financial operating results of our core business.
These measurements of financial performance have important limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Additionally, they may not be comparable to other similarly titled measures of other companies. Some of these limitations are:
•such measures do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;
•such measures do not reflect changes in, or cash requirements for, our working capital needs;
•such measures do not reflect the significant interest expense, or cash requirements necessary to service interest or principal payments on our debt;
•such measures do not reflect any cash requirements for any future replacement of depreciated assets;
•such measures do not reflect the impact of stock-based compensation upon our results of operations;
•such measures do not reflect our income tax (benefit) expense or the cash requirements to pay our income taxes;
•such measures do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and
•other companies in our industry may calculate these measures differently from how we do, limiting their usefulness as a comparative measure.
In evaluating EBITDA, Adjusted EBITDA and Adjusted EPS, you should be aware that in the future we may incur expenses similar to those eliminated in the presentation.
EBITDA, Adjusted EBITDA, and Adjusted EPS are widely used measures of corporate profitability eliminating the effects of financing and capital expenditures from the operating results. We define EBITDA as net income adjusted for interest expense, interest income, income tax expense (benefit) , depreciation, amortization of intangible assets, and non-income taxes. We define Adjusted EBITDA as EBITDA further adjusted to eliminate the impact of certain items that we do not consider to be indicative of our core business, including other expense, change in fair value of Private Placement Warrants and unvested
founder shares, transaction related expenses, loss (gain) on the debt extinguishment, (gain) loss on investments and stock-based compensation. See our consolidated financial statements for more information regarding these adjustments. Adjusted EBITDA is used in our agreements governing our outstanding indebtedness for debt covenant compliance purposes. Our Adjusted EBITDA calculation is consistent with the definition of Adjusted EBITDA used in our debt instruments.
Adjusted EPS is used in reporting to our Board and executive management and as a component of the measurement of our performance. We believe that this measure provides useful information to investors because it is the profitability measure we use to evaluate earnings performance on a comparable year-to-year basis. Adjusted EPS is defined as net income (loss) adjusted for amortization of intangible assets, stock-based compensation, transaction related expenses, (gain) loss on investments, loss (gain) on debt extinguishment, other expense, change in fair value of Private Placement Warrants and unvested founder shares and tax effect of adjustments to arrive at Adjusted net income divided by our weighted average number of shares outstanding.
The following table presents a reconciliation of net income (loss) to EBITDA and Adjusted EBITDA for the periods presented:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (in thousands) | | 2021 | | 2020 | | 2019 |
| Net income (loss) | | $ | 102,080 | | | $ | (520,564) | | | $ | 9,710 | |
| Adjustments: | | | | | | |
| Interest expense | | 267,475 | | | 335,638 | | | 376,346 | |
| Interest income | | (30) | | | (288) | | | (196) | |
| Income tax provision (benefit) | | 33,373 | | | (26,343) | | | 799 | |
| Depreciation | | 64,885 | | | 60,577 | | | 55,807 | |
| Amortization of intangible assets | | 340,210 | | | 334,697 | | | 334,053 | |
| Non-income taxes | | 1,698 | | | 3,221 | | | 1,944 | |
| EBITDA | | $ | 809,691 | | | $ | 186,938 | | | $ | 778,463 | |
| Adjustments: | | | | | | |
| Other expenses | | 8,295 | | | 1,095 | | | 1,947 | |
| Integration expenses | | 9,460 | | | 801 | | | — | |
| Change in fair value of Private Placement Warrants and unvested founder shares | | (32,596) | | | (35,422) | | | — | |
| Transaction-related expenses | | 9,647 | | | 31,689 | | | 3,270 | |
| (Gain) loss on investments | | (25) | | | 12,165 | | | — | |
| Loss (gain) on extinguishment of debt | | 15,843 | | | 102,993 | | | (18,450) | |
| Stock-based compensation | | 18,010 | | | 406,054 | | | (14,880) | |
| Adjusted EBITDA | | $ | 838,325 | | | $ | 706,313 | | | $ | 750,350 | |
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Material differences between MultiPlan Corporation and MPH for the years ended December 31, 2021 and 2020 include differences in interest expense, change in fair value of Private Placement Warrants and unvested founder shares, stock-based compensation, and net insurance premiums associated with our captive insurance company, which are eliminated in the consolidated financial reporting of MultiPlan Corporation. For the years ended December 31, 2021, 2020 and 2019 interest expense for MultiPlan Corporation was $82.1 million, $107.2 million, and $112.0 million higher than interest expense, respectively, for MPH due to interest expense incurred by MultiPlan Corporation on the Senior Convertible Notes (issued on October 8, 2020) and Senior PIK Notes (redeemed October 8, 2020) including amortization of discount on Senior PIK Notes, net of debt issue costs. For the years ended December 31, 2021 and 2020, the change in fair value of Private Placement Warrants and unvested founder shares, and stock-based compensation are recorded in the parent company MultiPlan Corporation and not in the MPH operating company and therefore represent differences between MultiPlan Corporation and MPH. In the year ended December 31, 2021, MPH had higher EBITDA expenses than MultiPlan Corporation of $0.4 million due to insurance premiums paid to our captive insurance company, net of related captive insurance company costs which are eliminated in the consolidated financial reporting of MultiPlan Corporation.
The following table presents a reconciliation of net income (loss) to Adjusted EPS for the periods presented:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| ($ in thousands, except share and per share amounts) | | 2021 | | 2020 | | 2019 |
| | | | | | |
| Net income (loss) | | $ | 102,080 | | | $ | (520,564) | | | $ | 9,710 | |
| Adjustments: | | | | | | |
| Amortization of intangible assets | | 340,210 | | | 334,697 | | | 334,053 | |
| Stock-based compensation | | 18,010 | | | 406,054 | | | (14,880) | |
| Transaction-related expenses | | 9,647 | | | 31,689 | | | 3,270 | |
| (Gain) loss on investments | | (25) | | | 12,165 | | | — | |
| Loss (gain) on extinguishment of debt | | 15,843 | | | 102,993 | | | (18,450) | |
| Integration expenses | | 9,460 | | | 801 | | | — | |
| Other expenses | | 8,295 | | | 1,095 | | | 1,947 | |
| Change in fair value of Private Placement Warrants and unvested founder shares | | (32,596) | | | (35,422) | | | — | |
| Estimated tax effect of adjustments | | (98,671) | | | (106,989) | | | (76,992) | |
| Adjusted net income | | $ | 372,253 | | | $ | 226,519 | | | $ | 238,658 | |
| | | | | | |
Weighted average shares outstanding – Basic(1) | | 651,006,567 | | | 470,785,192 | | | 415,700,000 | |
| | | | | | |
| Net income (loss) per share – basic | | $ | 0.16 | | | $ | (1.11) | | | $ | 0.02 | |
| Adjusted earnings per share | | $ | 0.57 | | | $ | 0.48 | | | $ | 0.57 | |
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(1) The shares of the Company's common stock, prior to the Transactions, have been retroactively restated as shares reflecting the exchange ratio established in the Transactions.
Factors Affecting the Comparability of our Results of Operations
As a result of a number of factors, our historical results of operations may not be comparable to our results of operations in future periods and may not be directly comparable from period to period. Set forth below is a brief discussion of the key factors impacting the comparability of our results of operations.
The Transactions
On July 12, 2020, Churchill entered into the Merger Agreement by and among First Merger Sub, Second Merger Sub, Holdings, and Polaris. On October 8, 2020, the Merger Agreement was consummated and the Transactions were completed.
HST Acquisition
On November 9, 2020, the Company completed the acquisition of HST, a healthcare technology company that enables value-driven health benefit plan designs featuring reference-based pricing and tools to engage health plan members and providers in making the best use of available benefits both before and after care delivery.
The results of operations and financial condition of HST have been included in the Company's consolidated results from the date of acquisition.
DHP Acquisition
On February 26, 2021, the Company completed the acquisition of DHP, an analytics and technology company offering healthcare payment and revenue integrity services. The Company acquired 100 percent of the voting equity interest of DHP. The acquisition strengthens MultiPlan's service offering in the payment integrity market with new and complementary services to help its payor customers manage the overall cost of care and improve their competitiveness. It also adds revenue integrity services for plans that receive premiums from the Centers for Medicare and Medicaid Services.
The results of operations and financial condition of DHP have been included in the Company's consolidated results from the date of acquisition. In connection with the DHP acquisition, the Company incurred transaction-related expenses of $4.9 million and $0.6 million for the years ended December 31, 2021 and 2020, respectively. The transaction-related expenses have been expensed as incurred and are included in general and administrative expenses in the accompanying consolidated statements of income (loss) and comprehensive income (loss).
Debt Refinancings, Repayments and Repricing
During August and September of 2019, the Company repurchased and cancelled $121.3 million of the Senior PIK Notes, resulting in the recognition of a gain on debt extinguishment of $18.5 million in the year ended December 31, 2019.
On October 8, 2020, the Senior PIK notes were redeemed in full for a total redemption price of $1,237.6 million, resulting in the recognition of a loss on debt extinguishment of $35.7 million in the year ended December 31, 2020.
On October 29, 2020, the Company (a) issued 5.750% Notes under MPH and increased the revolving credit facility under the senior secured credit facilities from $100.0 million to $450.0 million and (b) repaid all outstanding 7.125% Notes and $369.0 million of indebtedness under Term Loan G with the net proceeds of the 5.750% Notes, together with $715.0 million of cash on hand. As a result, we recognized a loss on debt extinguishment of $67.2 million in the year ended December 31, 2020.
On August 24, 2021, MPH issued new senior secured credit facilities composed of $1,325.0 million of Term Loan B and $450.0 million of a Revolver B, and $1,050.0 million in aggregate principal amount of 5.50% Senior Secured Notes. MPH used the net proceeds from Term Loan B, and the 5.50% Senior Secured Notes to repay all of the outstanding balance of its Term Loan G of $2,341.0 million, and pay fees and expenses in connection therewith. As a result, we recognized a loss on debt extinguishment of $15.8 million in the year ended December 31, 2021.
Interest on Term Loan B and Revolver B is calculated, at MPH's option, as (a) LIBOR (or, with respect to the term loan facility only, 0.50%, whichever is higher), plus the applicable margin, or (b) the highest rate of (1) prime rate, (2) the federal funds effective rate, plus 0.50%, (3) the LIBOR for an interest period of one month, plus 1.00% and (4) 0.50% for Term Loan B and 1.00% for Revolver B, in each case, plus an applicable margin of 4.25% for Term Loan B and between 3.50% and 4.00% for Revolver B, depending on MPH's first lien debt to consolidated EBITDA ratio. The interest rate in effect for Term Loan B was 4.75% as of December 31, 2021.
The Company is obligated to pay a commitment fee on the average daily unused amount of Revolver B. The annual commitment fee can range from an annual rate of 0.25% to 0.50% based on the Company's first lien debt to consolidated EBITDA ratio, as defined in the agreement.
In connection with the issuance of our debt instruments, the Company incurred specific expenses related to raising the debt, including commissions, fees and expenses of investment bankers and underwriters, registration and listing fees, accounting and legal fees pertaining to the financing and other external, incremental expenses paid to advisors that were directly attributable to realizing the proceeds of the debt issues. These costs were capitalized and are being amortized over the term of the related debt using the effective interest method. The amortization of the debt issuance costs, premiums and discounts are included in interest expense in the accompanying consolidated statements of income (loss) and comprehensive income (loss).
In the years ended December 31, 2019, 2018, and 2017, we did not recognize expense for the portions of debt issuance costs related to the amounts of the principal loan prepayments of Term Loan G made in each year, which resulted in an understatement of long-term debt of $2.3 million as of December 31, 2019. We corrected this error as an out-of-period adjustment resulting in an overstatement of interest expense of $2.3 million in the year ended December 31, 2020.
Stock-Based Compensation
Prior to the consummation of the Transactions, we were a wholly-owned subsidiary of Holdings and our stock-based compensation was granted to employees in the form of Units via a Class B Unit Award Agreement. The fair value of the Units was remeasured at each reporting period. The consummation of the Transactions constituted a definitive Liquidity Event under the agreements governing the Unit awards and as a result the incentive plan was liquidated. For the year ended December 31,
2020, the Company recorded stock-based compensation expense under the Class B Unit Award Agreement of $405.8 million in the accompanying consolidated statements of income (loss) and comprehensive income (loss).
Since the consummation of the Transactions, the Company has operated under the 2020 Omnibus Incentive Plan effective October 8, 2020. To date, awards granted under the 2020 Omnibus Incentive Plan have been in the form of Employee RS, Employee RSUs, Fixed Value RSUs, Employee NQSOs and Director RSUs. Stock-based compensation is measured at the grant date based on the fair value of the award.
For the year ended December 31, 2021, the Company has granted 4.2 million Employee NQSOs, 2.9 million Employee RSUs, 0.1 million Employee RS, 0.5 million Fixed Value RSUs and 0.1 million Director RSUs under the 2020 Omnibus Incentive Plan. For the years ended December 31, 2021 and 2020, the Company recorded stock-based compensation expense under the 2020 Omnibus Incentive Plan of 18.0 million and 0.2 million, respectively, in the accompanying consolidated statements of income (loss) and comprehensive income (loss).
Results of Operations for the Years Ended December 31, 2021 and 2020
The following table provides the results of operations for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Change | |
| ($ in thousands) | 2021 | | 2020 | | $ | | % | |
| Revenues | | | | | | | | |
| Network-Based Services | $ | 278,457 | | | $ | 271,262 | | | $ | 7,195 | | | 2.7 | % | |
| Analytics-Based Services | 709,272 | | | 564,661 | | | 144,611 | | | 25.6 | % | |
| Payment and Revenue Integrity Services | 129,873 | | | 101,840 | | | 28,033 | | | 27.5 | % | |
| Total Revenues | $ | 1,117,602 | | | $ | 937,763 | | | $ | 179,839 | | | 19.2 | % | |
| Costs of services (exclusive of depreciation and amortization of intangible assets shown below) | | | | | | | | |
| Personnel expenses excluding stock-based compensation | 147,342 | | | 128,222 | | | 19,120 | | | 14.9 | % | |
| Stock-based compensation | 2,618 | | | 163,025 | | | (160,407) | | | (98.4) | % | |
| Personnel expenses including stock-based compensation | 149,960 | | | 291,247 | | | (141,287) | | | (48.5) | % | |
| Access and bill review fees | 13,526 | | | 13,794 | | | (268) | | | (1.9) | % | |
| Other cost of services expenses | 11,806 | | | 13,634 | | | (1,828) | | | (13.4) | % | |
| Total costs of services (exclusive of depreciation and amortization of intangible assets shown below) | 175,292 | | | 318,675 | | | (143,383) | | | (45.0) | % | |
| General and administrative expenses excluding stock-based compensation and transaction-related expenses | 126,056 | | | 80,917 | | | 45,139 | | | 55.8 | % | |
| Stock-based compensation | 15,392 | | | 243,029 | | | (227,637) | | | (93.7) | % | |
| Transaction-related expenses | 9,647 | | | 31,689 | | | (22,042) | | | (69.6) | % | |
| Total general and administrative expenses | 151,095 | | | 355,635 | | | (204,540) | | | (57.5) | % | |
| Depreciation expense | 64,885 | | | 60,577 | | | 4,308 | | | 7.1 | % | |
| Amortization of intangible assets | 340,210 | | | 334,697 | | | 5,513 | | | 1.6 | % | |
| Operating income (loss) | 386,120 | | | (131,821) | | | 517,941 | | | NM | |
| Interest expense | 267,475 | | | 335,638 | | | (68,163) | | | (20.3) | % | |
| Interest income | (30) | | | (288) | | | 258 | | | 89.6 | % | |
| Loss on extinguishment of debt | 15,843 | | | 102,993 | | | (87,150) | | | (84.6) | % | |
| (Gain) loss on investments | (25) | | | 12,165 | | | (12,190) | | | NM | |
| Change in fair value of Private Placement Warrants and unvested founder shares | (32,596) | | | (35,422) | | | 2,826 | | | 8.0 | % | |
| Net income (loss) before taxes | 135,453 | | | (546,907) | | | 682,360 | | | NM | |
| Provision (benefit) for income taxes | 33,373 | | | (26,343) | | | 59,716 | | | NM | |
| Net income (loss) | $ | 102,080 | | | $ | (520,564) | | | $ | 622,644 | | | NM | |
NM = Not meaningful
Revenues
The increase in revenues for the year ended December 31, 2021 as compared to the year ended December 31, 2020 was primarily due to increased claims volumes from customers, higher savings rates per unit of billed charges on processed claims, favorable changes in the mix of claims toward higher charge medical services as the effects of the COVID-19 pandemic subsided, and revenues from the acquisitions of DHP and HST. Acquired revenues related to the acquisitions of DHP and HST were $44.4 million and $2.0 million for the years ended December 31, 2021 and 2020, respectively. The increase in revenues, excluding acquired revenues, was $137.4 million or 14.7% for the year ended December 31, 2021 as compared to the year ended December 31, 2020.
Network-Based Services revenues increased in the year ended December 31, 2021 as compared to the year ended December 31, 2020 primarily due to increases in claims volumes from customers, higher savings rates on processed claims, and reduced effects of the COVID-19 pandemic on claim mix, partially offset by certain client adoptions of our Analytics-Based Services in lieu of our Network-Based Services.
Analytics-Based Services revenues increased for the year ended December 31, 2021 as compared to the year ended December 31, 2020 primarily due to increases in claim volumes from customers, higher savings rates, reduced effects of the COVID-19 pandemic on claim mix, certain client adoptions of our Analytics-Based Services in lieu of our Network-Based Services and revenues from the acquisition of HST. Within Analytics-Based Services, revenue increased across all major product categories: Reference-Based Pricing, which includes our Data iSight program, Financial Negotiation, and Value-Driven Health Plan Services.
Payment and Revenue Integrity Services revenues increased for the year ended December 31, 2021 as compared to the year ended December 31, 2020 primarily due to revenues from the acquisition of DHP, increases in claims volumes from customers, and reduced effects of the COVID-19 pandemic on claim mix. The acquisition of DHP contributed to revenues from our Data Mining and Clinical Auditing Services and added revenues from new product categories, including Revenue Integrity Services and Coordination of Benefits and Subrogation Services.
Costs of Services (exclusive of depreciation and amortization of intangible assets)
| | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Change | |
| ($ in thousands) | 2021 | | 2020 | | $ | | % | |
| Cost of services (exclusive of depreciation and amortization of intangible assets) | $ | 175,292 | | | $ | 318,675 | | | $ | (143,383) | | | (45.0) | % | |
| Less: stock-based compensation | 2,618 | | | 163,025 | | | (160,407) | | | (98.4) | % | |
| Costs of services excluding stock-based compensation | $ | 172,674 | | | $ | 155,650 | | | $ | 17,024 | | | 10.9 | % | |
The decrease in cost of services for the year ended December 31, 2021 as compared to the year ended December 31, 2020 was due to decreases in personnel expenses primarily related to stock-based compensation as explained below.
The decrease in personnel expenses, including contract labor, for the year ended December 31, 2021 as compared to the year ended December 31, 2020 was primarily due to decreases in stock-based compensation of $160.4 million partially offset by increases in other compensation-related expenses, including salaries, bonus, commissions, fringe benefits and contract labor of $19.1 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The increase in other compensation-related expenses was primarily due to increased headcount related to organic growth, the full year impact of the HST acquisition in fourth quarter 2020, and the acquisition of DHP in first quarter 2021. The change in stock-based compensation expense over these time periods was primarily the result of changes in the stock-based compensation plans as described above in the Factors Affecting the Comparability of our Results of Operations.
General and Administrative Expenses
| | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Change | |
| ($ in thousands) | 2021 | | 2020 | | $ | | % | |
| General and administrative expenses | $ | 151,095 | | | $ | 355,635 | | | $ | (204,540) | | | (57.5) | % | |
| Less: stock-based compensation | 15,392 | | | 243,029 | | | (227,637) | | | (93.7) | % | |
| Less: transaction-related expenses | 9,647 | | | 31,689 | | | (22,042) | | | (69.6) | % | |
| Less: integration expenses | 9,460 | | | 801 | | | 8,659 | | | NM | |
| General and administrative expenses excluding stock-based compensation, transaction-related expenses, and integration expenses | $ | 116,596 | | | $ | 80,116 | | | $ | 36,480 | | | 45.5 | % | |
| | | | | | | | |
The decrease in general and administrative expenses for the year ended December 31, 2021 as compared to the year ended December 31, 2020 was primarily due to a decrease in personnel expenses of $202.0 million, a decrease in transaction-related expenses of $22.0 million, and an increase in capitalized development costs of $10.5 million, partially offset by an increase in professional fees of $8.6 million including higher legal, audit, and consulting fees, an increase in insurance premiums of $6.5 million primarily related to higher errors and omissions liability and directors and officers liability insurance, an increase in integration expenses of $8.7 million primarily related to integrating HST and DHP, an increase in equipment lease and
maintenance expenses of $2.8 million, an increase in the loss on disposal of assets of $2.6 million based on a periodic review of capitalized computer hardware and software, and an increase in other general and administrative expenses of $0.8 million.
The decrease in personnel expenses of $202.0 million was due to a decrease in stock-based compensation of $227.6 million, partially offset by an increase in other compensation related expenses, including salaries, bonus, fringe benefits, and contract labor of $25.6 million due to increased headcount through organic growth, non-integration related severance costs of $5.0 million, the full year impact of the acquisition of HST in fourth quarter of 2020, and the acquisition of DHP in first quarter of 2021. The decrease in transactions costs of $22.0 million was primarily due to higher costs associated with the Transactions on October 8, 2020 and acquisition of HST on November 9, 2020 as compared to the costs associated with the acquisition of DHP on February 26, 2021. See Note 5 Business Combinations and Note 4 The Transactions of the Notes to Consolidated Financial Statements for additional information.
Depreciation Expense
The increase in depreciation expense for the year ended December 31, 2021 as compared to the year ended December 31, 2020 was due to purchases of property and equipment, including internally generated capitalized software in the years ended December 31, 2021 and 2020, partially offset by assets that were written-off or became fully depreciated in the period.
Amortization of Intangible Assets
The increase in the amortization of intangible assets for the year ended December 31, 2021 as compared to the year ended December 31, 2020 was primarily due to the acquisitions of HST and DHP. This expense represents the amortization of intangible assets, as explained above and in the Notes to Consolidated Financial Statements.
Interest Expense and Interest Income
The decrease in interest expense for the year ended December 31, 2021 as compared to the year ended December 31, 2020 was due to the effect of (i) the Transactions on October 8, 2020 when we redeemed our Senior PIK Notes (8.500% interest rate) and issued Convertible PIK Notes (6.000% interest rate), (ii) the Refinancing on October 29, 2020 when we prepaid $369.0 million of principal balance on Term Loan G and we redeemed the 7.125% Notes and issued 5.750% Notes, and (iii) the refinancing on August 24, 2021 when MPH issued new senior secured credit facilities composed of Term Loan B and Revolver B, and issued the 5.50% Senior Secured Notes, using the net proceeds to repay all of the outstanding balance of Term Loan G.
In the years ended December 31, 2017, 2018 and 2019, we did not recognize expense for the portions of debt issuance costs related to the amounts of the principal loan prepayments made in each year, which resulted in an understatement of long-term debt of $2.3 million as of December 31, 2019. We corrected this error as an out-of-period adjustment resulting in an overstatement of interest expense of $2.3 million in the year ended December 31, 2020.
As of December 31, 2021, our long-term debt was $4,879.1 million and included (i) $1,308.4 million Term Loan B, discount on Term Loan B of $12.9 million, (ii) $1,050.0 million of 5.50% Senior Secured Notes, (iii) $1,300.0 million of 5.750% Senior Notes, (iv) $1,300.0 million of Senior Convertible PIK Notes, discount on Senior Convertible PIK Notes of $27.7 million (reduction in discount on Senior Convertible PIK Notes from December 30, 2020 relates to the adoption of ASU 2020-06 effective January 1, 2021), and (v) $0.1 million of long-term finance lease obligations, net of (vi) debt issue costs of $38.8 million. As of December 31, 2021, our total debt had an annualized weighted average cash interest rate of 4.6%.
As of December 31, 2020, our long-term debt was $4,578.5 million and included (i) $2,341.0 million Term Loan G, discount on Term Loan G of $3.8 million, (ii) $1,300.0 million of 5.750% Senior Notes, (iii) $1,300.0 million of Senior Convertible PIK Notes, discount on Senior Convertible PIK Notes of $329.5 million, and (iv) $0.1 million of long-term finance lease obligations, net of (v) debt issue costs of $29.3 million. As of December 31, 2020, our total debt had a weighted average cash interest rate of 4.9%
Loss (gain) on extinguishment of debt
As a result of the refinancing transactions of August 24, 2021, the Company recognized a loss on debt extinguishment of $15.8 million representing the difference between Term Loan G's net carrying amount immediately before the refinancing and the fair value of the new debt instruments, and fees associated with the issuance of the new debt under the refinancing.
The loss on extinguishment of debt for the year ended December 31, 2020 was the result of the redemption in full of the 7.125% Notes, redemption in full of the Senior PIK Notes, and the repayment of $369.0 million of indebtedness under our term loan facility.
Change in fair value of Private Placement Warrants and unvested founder shares
The Company measures at each reporting period the fair values of the Private Placement Warrants and unvested founder shares. For the year ended December 31, 2021, the fair values of the Private Placement Warrants and the unvested founder shares decreased by $6.5 million and $26.1 million, respectively. The decrease was primarily due to the variations in the stock price of the Company's Class A common stock over that period.
Provision (Benefit) for Income Taxes
Net income before income taxes for the year ended December 31, 2021 of $135.5 million generated a provision for income taxes of $33.4 million with an effective tax rate of 24.6%. Net loss before income taxes for the year ended December 31, 2020 of $546.9 million generated a benefit for income taxes of $26.3 million with an effective tax rate of 4.8%. Our effective tax rate for the years ended December 31, 2021 and December 31, 2020 differed from the statutory rate primarily due to non-deductible stock-based compensation expense, non-deductible mark-to-market liability, limitations on executive compensation, changes in the Company's deferred state tax rate due to operations, and state tax expense.
Results of Operations for the Years Ended December 31, 2020 and December 31, 2019
For a discussion comparing our consolidated operating results from the year ended December 31, 2020 with the year ended December 31, 2019, refer to Part II, Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations for the Years Ended December 31, 2020 and December 31, 2019" in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the Commission on March 16, 2021.
Liquidity and Capital Resources
As of December 31, 2021, we had cash, cash equivalents, and restricted cash of $188.4 million, which includes restricted cash of $3.1 million, and $450.0 million of loan availability under the revolving credit facility. In connection with the Refinancing, the capacity of the revolving credit facility was increased from $100.0 million to $450.0 million and $369.0 million of indebtedness under the Term Loan G was repaid. On August 24, 2021, the maturity of the revolving credit facility was extended from June 7, 2023 to August 24, 2026. As of December 31, 2021, we had three letters of credit that reduce the capacity of the revolver by $1.8 million and are used to satisfy real estate lease agreements for three of our offices in lieu of security deposits. See Note 3 Long-Term Debt of the Notes to Consolidated Financial Statements for further information on the August 24, 2021 refinancing.
On August 27, 2021, the Company's Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $250.0 million of its Class A common stock from time to time in open market transactions. The repurchase program was effective immediately and expires on December 31, 2022. As of December 31, 2021, the Company has repurchased approximately $100.0 million of its Class A common stock as part of this program using cash on hand.
Our primary sources of liquidity are internally generated funds combined with our borrowing capacity under our revolving credit facility. We believe that these sources will provide sufficient liquidity for us to meet our working capital, capital expenditure and other cash requirements for the next twelve months and for the long term. We may from time to time at our sole discretion, purchase, redeem or retire our long-term debt, through tender offers, in privately negotiated or open market transactions or otherwise. We plan to finance our capital expenditures with cash from operations. Furthermore, our future liquidity and future ability to fund capital expenditures, working capital and debt requirements are also dependent upon our future financial performance, which is subject to many economic, commercial, financial and other factors that are beyond our control, including the ability of financial institutions to meet their lending obligations to us. If those factors significantly change, our business may not be able to generate sufficient cash flow from operations or future borrowings may not be available to meet our liquidity needs. We anticipate that to the extent we require additional liquidity as a result of these factors or in order to execute our strategy, it would be financed either by borrowings under our senior secured credit facilities, by other indebtedness, additional equity financings or a combination of the foregoing. We may be unable to obtain any such additional financing on reasonable terms or at all.
Cash Flow Summary
The following table is derived from our consolidated statements of cash flows:
| | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| (in thousands) | | 2021 | | 2020 |
| Net cash flows provided by (used in): | | | | |
| Operating activities | | $ | 404,687 | | | $ | 377,374 | |
| Investing activities | | $ | (228,379) | | | $ | (210,845) | |
| Financing activities | | $ | (114,684) | | | $ | (61,599) | |
For the year ended December 31, 2021 as compared to the year ended December 31, 2020
Cash Flows from Operating Activities
Cash flows from operating activities provided $404.7 million for the year ended December 31, 2021 and $377.4 million for the year ended December 31, 2020. This $27.3 million, or 7.2%, increase in cash flows from operating activities was primarily the result of increase in net income of $622.6 million, after adjusting for non-cash items of $521.3 million, offset by changes in net working capital of $74.0 million.
The $521.3 million decrease in non-cash items was primarily due to a decrease in stock-based compensation of $388.0 million, decrease in loss on extinguishment of debt of $87.2 million, change in the deferred tax benefit of $36.9 million, decrease in loss on investments of $12.2 million, decrease in the amortization of right-of-use-asset of $1.4 million, and the decrease in non-cash interest costs of $10.6 million, offset by increases in depreciation expense of $4.3 million, increase in amortization of intangible assets of $5.5 million, increases in loss on disposal of assets of $2.4 million, and the change in fair value of Private Placement Warrants and unvested founder shares of $2.8 million.
The increase in net income of $622.6 million was primarily the result of increases in revenues and reductions in costs of services, general and administrative expenses, interest expense, loss on extinguishment of debt, and decreases in the change in fair value of Private placement Warrants and unvested founder shares, offset by increases in depreciation expense, increases in amortization expense, increases in change in fair value of Private Placement Warrants and unvested founder shares, increases in the provision for income taxes, and decreases in interest income as explained above.
During the year ended December 31, 2021, $44.0 million was used by changes in working capital including increases in net accounts receivable of $33.8 million primarily due to increases in year-over-year revenues and timing of collections, increases in prepaid expenses and other assets of $7.0 million, increases in prepaid taxes of $5.1 million, and decreases in operating lease obligations of $5.9 million, offset by increases in accounts payable and accrued expenses of $7.7 million.
During the year ended December 31, 2020, $30.0 million was provided by changes in working capital including decreases in net accounts receivable of $14.8 million primarily due to declines in year-over-year revenues and timing of collections, decreases in prepaid taxes of $2.1 million primarily due to a retrospective change in the tax law, and increases in accounts payable and accrued expenses of $29.1 million, offset by increases in prepaid expenses and other assets of $7.5 million and decreases in operating lease obligations of $8.5 million. The increase in accounts payable and accrued expenses is primarily due to an increase in accrued interest of $13.6 million and accrued taxes of $9.8 million.
Cash Flows from Investing Activities
For the year ended December 31, 2021, net cash of $228.4 million was used in investing activities including $149.7 million for the acquisition of DHP and $84.6 million for purchases of property and equipment and capitalization of software development, offset by proceeds from the sale of investment of $5.6 million. For the year ended December 31, 2020, net cash of $210.8 million was used in investing activities including $140.0 million for the acquisition of HST and $70.8 million for purchases of property and equipment and capitalization of software development. This increase in purchases of property and equipment and capitalization of software development of $13.8 million was primarily due to increased capitalization of software development on capital projects primarily to enhance our information technology infrastructure and platforms to increase efficiencies, data security, and service line capabilities.
Cash Flows from Financing Activities
Cash flows used in financing activities for the year ended December 31, 2021 were $114.7 million primarily consisting of repayments of Term Loan G of $2,341.0 million, $100.0 million of purchases of treasury stock, and $3.8 million of taxes paid on net settlement of vested share awards and repayments of Term Loan B of $3.3 million, offset by the issuance of Term Loan B of $1,298.9 million and the issuance of $1,034.5 million of the 5.50% Senior Secured Notes.
Cash flows used in financing activities for the year ended December 31, 2020 were $61.6 million primarily consisting of $369.0 million of prepayments on our Term Loan G, $1,615.6 million for the extinguishment of the 7.125% Notes, $1,202.3 million for extinguishment of the Senior PIK Notes, $101.1 million for the purchase of treasury stock, and $23.5 million for the payment of debt issuance costs, offset by $682.4 million for the effect of the Transactions, $1,267.5 million of cash provided by the issuance of Senior Convertible PIK Notes and $1,300.0 million of cash provided by the issuance of the 5.750% Notes. In addition, there was $98.0 million of borrowings on and repayments of our Revolver G.
For the year ended December 31, 2020 as compared to the year ended December 31, 2019
For a discussion comparing our cash flows from operating activities, investing activities, and financing activities from the year ended December 31, 2020 with the year ended December 31, 2019, refer to Part II, Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Cash Flow Summary – For the year ended December 31, 2020 as compared to the year ended December 31, 2019" in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the Commission on March 16, 2021.
Term Loans and Revolvers
On August 24, 2021, MPH issued new senior secured credit facilities composed of $1,325.0 million of Term Loan B and $450.0 million of Revolver B, and $1,050.0 million in aggregate principal amount of 5.50% Senior Secured Notes. MPH used the net proceeds from Term Loan B, issued with a discount of 1.00%, and the 5.50% Senior Secured Notes to repay all of the outstanding balance of its Term Loan G of $2,341.0 million, and pay fees and expenses in connection therewith.
Interest on Term Loan B and Revolver B is calculated, at MPH's option, as (a) LIBOR (or, with respect to the term loan facility only, 0.50%, whichever is higher), plus the applicable margin, or (b) the highest rate of (1) prime rate, (2) the federal funds effective rate, plus 0.50%, (3) the LIBOR for an interest period of one month, plus 1.00% and (4) 0.50% for Term Loan B and 1.00% for Revolver B, in each case, plus an applicable margin of 4.25% for Term Loan B and between 3.50% and 4.00% for Revolver B, depending on MPH's first lien debt to consolidated EBITDA ratio. The interest rate in effect for Term Loan B was 4.75% as of December 31, 2021.
Term Loan B matures on September 1, 2028 and Revolver B matures on August 24, 2026.
For all our debt agreements with an interest rate dependent on LIBOR, we are currently assessing and monitoring how transitioning from LIBOR to an alternative reference rate may affect us past 2023.
We are obligated to pay a commitment fee on the average daily unused amount of our revolving credit facility. The annual commitment fee rate was 0.50% at December 31, 2021 and 0.25% at December 31, 2020. The fee can range from an annual rate of 0.25% to 0.50% based on our consolidated first lien debt to consolidated EBITDA ratio, as defined in the agreement.
Senior Notes
On October 8, 2020, the Senior PIK notes were redeemed in full for a total redemption price of $1,237.6 million, which included a redemption premium and accrued interest. The interest rate on the Senior PIK Notes was fixed at 8.5% and was payable semi-annually on June 1 and December 1 of each year.
On October 8, 2020, the Company issued $1,300.0 million in aggregate principal amount of Senior Convertible PIK Notes. The Senior Convertible PIK Notes were issued with a 2.5% discount with a maturity date of October 15, 2027. Prior to the adoption of ASU 2020-06 on January 1, 2021, the nature of the notes required management to separate the Senior Convertible PIK Notes into liability and equity components. ASU 2020-06’s elimination of the beneficial conversion guidance resulted in "recombining" the equity and debt components of the Senior Convertible PIK Notes into a single liability. As a result, $297.9 million of the discount on the liability created by recognition of a component of the convertible debt in equity was eliminated on January 1, 2021. See Note 3 New Accounting Pronouncements and Note 9 Long-Term Debt of the Notes to the Consolidated Financial Statements for further detail.
The Senior Convertible PIK Notes are convertible into shares of Class A common stock based on a $13.0 conversion price, subject to customary anti-dilution adjustments. The interest rate on the Senior Convertible PIK Notes is fixed at 6% in cash and 7% in kind, and is payable semi-annually on April 15 and October 15 of each year.
On October 29, 2020, the 7.125% Notes were redeemed in full for a total redemption price of $1,661.3 million, which included a redemption premium and accrued interest. The interest rate on the 7.125% Notes was fixed at 7.125% and was payable semi-annually on June 1 and December 1 of each year.
On October 29, 2020, the Company issued $1,300.0 million in aggregate principal amount of the 5.750% Notes. The 5.750% Notes are guaranteed on a senior unsecured basis jointly and severally by the Company and its subsidiaries and have a maturation date of November 1, 2028. The 5.750% Notes were issued at par. The interest rate on the 5.750% Notes is fixed at 5.750%, and is payable semi-annually on May 1 and November 1 of each year.
On August 24, 2021 MPH issued $1,050.0 million in aggregate principal amount of 5.50% Senior Secured Notes with a maturation date of September 1, 2028. The interest rate on the 5.50% Senior Secured Notes is fixed at 5.50%, and is payable semi-annually on March 1 and September 1 of each year. The 5.50% Senior Secured Notes are guaranteed and secured as described below under "—Guarantees and Security."
Debt Covenants and Events of Default
We are subject to certain affirmative and negative debt covenants under the debt agreements governing our indebtedness that limit our and/or certain of our subsidiaries' ability to engage in specific types of transactions. These covenants limit our and/or certain of our subsidiaries' ability to, among other things:
•incur additional indebtedness or issue disqualified or preferred stock;
•pay certain dividends or make certain distributions on capital stock or repurchase or redeem capital stock;
•make certain loans, investments or other restricted payments;
•transfer or sell certain assets;
•incur certain liens;
•place restrictions on the ability of its subsidiaries to pay dividends or make other payments to us;
•guarantee indebtedness or incur other contingent obligations;
•prepay junior debt and make certain investments;
•consummate any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or dispose of all or substantially all of its business units, assets or other properties; and
•engage in transactions with our affiliates.
Certain covenants related to the 5.50% Senior Secured Notes will cease to apply to the 5.50% Senior Secured Notes for so long as such notes have investment grade ratings from both Moody’s Investors Service, Inc. and S&P Global Ratings.
In connection with the Refinancing, the Revolver Ratio was amended such that, if, as of the last day of any fiscal quarter of MPH, the aggregate amount of loans under the revolving credit facility, letters of credit issued under the revolving credit facility (to the extent not cash collateralized or backstopped or, in the aggregate, in excess of $10.0 million) and swingline loans are outstanding and/or issued in an aggregate amount greater than 35% of the total commitments in respect of the revolving credit facility at such time, the revolving credit facility will require MPH to maintain a maximum first lien secured leverage ratio of 6.75 to 1.00. Our consolidated first lien debt to consolidated EBITDA ratio was 2.61 times and 3.14 times as of December 31, 2021 and 2020, respectively.
As of December 31, 2021 and 2020 we were in compliance with all of the debt covenants.
The debt agreements governing the new senior secured credit facilities, Term Loan G, the Revolver G, the 5.750% Notes and the 5.50% Senior Secured Notes contain customary events of default, subject to grace periods and exceptions, which include, among others, payment defaults, cross-defaults to certain material indebtedness, certain events of bankruptcy, material
judgments, in the case of the debt agreements governing the new senior secured credit facilities and the 5.50% Senior Secured Notes, failure of a guarantee on the liens on material collateral to remain in effect, in the case of the debt agreements governing the new senior secured credit facilities, Term Loan G and the Revolver G, and any change of control. Upon the occurrence of an event of default under such debt agreements, the lenders and holders of such debt will be permitted to accelerate the loans and terminate the commitments, as applicable, thereunder and exercise other specified remedies available to the lenders and holders thereunder.
See the footnotes to the EBITDA and Adjusted EBITDA reconciliation table provided above under "Non-GAAP Financial Measures" for material differences between the financial information of MultiPlan and MPH.
Guarantees and Security
All obligations under the debt agreements governing Term Loan B, Revolver B and the 5.50% Senior Secured Notes are unconditionally guaranteed by MPH Acquisition Corp. 1, the direct holding company parent of MPH, and each existing and subsequently acquired or organized direct or indirect wholly owned U.S. organized restricted subsidiary of MPH (subject to certain exceptions). All such obligations, and the guarantees of such obligations, are secured, subject to permitted liens and other exceptions, by a first priority lien shared between the senior secured credit facilities and the 5.50% Senior Secured Notes on substantially all of MPH’s and the subsidiary guarantors’ tangible and intangible property, and a pledge of all of the capital stock of each of their respective subsidiaries.
Critical Accounting Policies
A critical accounting policy is one that is both important to the portrayal of a company's financial condition and results and requires management's most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our financial statements and accompanying notes are prepared in accordance with GAAP. Preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We base these determinations upon the best information available to us during the period in which we account for our financial condition and results. Our estimates and assumptions could change materially as conditions within and beyond our control change or as further information becomes available. We record changes in our estimates in the period the change occurs.
The following is a discussion of our critical accounting policies and the related management estimates and assumptions necessary in determining the value of related assets, liabilities, revenues and expenses.
Revenue Recognition
We derive revenues from contracts with customers by selling various cost management services and solutions. Variable consideration is estimated using the expected value method based on our historical experience and best judgment at the time. Due to the nature of our arrangements, certain estimates may be constrained if it is probable that a significant reversal of revenues will occur when the uncertainty is resolved. For our PSAV contracts, portions of revenues that are recognized and collected in a reporting period may be returned or credited in subsequent periods. These credits are the result of payors not utilizing the discounts that were initially calculated, or differences between our estimates of savings achieved for a customer and the amounts self-reported in the following month by that same customer. Significant judgment is used in constraining estimates of variable consideration, and these estimates are based upon both client-specific and aggregated factors that include historical billing and adjustment data, client contract terms, and performance guarantees. We update our estimates at the end of each reporting period as additional information becomes available.
See Note 2 Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements for additional information.
Goodwill
Goodwill is calculated as the excess of the purchase price in an acquisition over the fair value of identifiable net assets acquired. Acquired intangible assets are separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the Company's intent to do so.
We assess the impairment of our goodwill at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We performed our 2021 impairment assessment of goodwill and indefinite-lived intangible assets and determined that no impairment existed as of November 1, 2021. The Company's management is not aware
of any triggering events subsequent to the impairment review, and management believes no impairments exist as of December 31, 2021 that need to be disclosed.
The goodwill arose from the acquisition of the Company in 2016 by Holdings, the HST acquisition in 2020 and the DHP acquisition in 2021. The carrying value of goodwill was $4,363.1 million and $4,257.3 million as of December 31, 2021 and 2020, respectively and no impairment has been recognized to date.
Stock-Based Compensation
Prior to the Transactions
Stock-based compensation expense includes costs associated with Units awarded to certain members of key management. Stock-based compensation is measured at the grant date based on the fair value of the Unit and is recognized as compensation expense, net of forfeitures, over the applicable requisite service period of the Unit. The fair value of the Units is remeasured at each reporting period. Based on the put right available to the employee participants, stock-based compensation Units have been accounted for as a liability classified within Holdings' consolidated financial statements and we recorded these Units within shareholders' equity as an equity contribution from Holdings based on the fair value of the outstanding Units at each reporting period.
Each individual award was composed of time vesting units and performance vesting units. Time vesting units and performance vesting units vest based on the vesting dates and the achievement of certain performance measures as defined in each award agreement. We amortize the time vesting units on a straight line basis, and the performance vesting units on a graded vesting basis.
We determined the fair value of our awards based on (i) the customized payout structure of the subject Units, (ii) liquidity timing, and (iii) vesting hurdles, as applicable, based on the output of Monte Carlo simulations. The simulation was based on a risk neutral framework which is a common technique for valuing financial derivatives that possess optionality.
Changes in the assumptions made on (i) liquidity dates, (ii) volatility, (iii) discount rates and (iv) the risk-free rate can materially affect the estimate of fair value and ultimately how much stock-based compensation expense is recognized. The Company has historically been a private company and lacked company-specific historical and implied volatility information. Therefore, it estimated its expected stock volatility based on the historical volatility of a publicly traded set of peer companies. The risk-free interest rate is based on U.S. Treasury constant maturity yields commensurate with the remaining term for each liquidity date assumption. These inputs are subjective and generally require significant analysis and judgment to develop.
The consummation of the Transactions constituted a definitive Liquidity Event under the agreements governing the Unit awards and as a result the valuation as of October 7, 2020 used the cumulative exit value of the Company, corresponding to the transaction value and prior distributions, and removed the discount for lack of marketability.
After the consummation of the Transactions
The fair value of the awards under the 2020 Omnibus Incentive Plan is measured on the grant date. We determine the fair value of the Employee RS, Employee RSUs and Director RSUs with time based vesting using the value on our common stock on the date of the grant. We determine the fair value of Employee NQSOs with an exercise price equal to the price of the Company's Class A common stock on the grant date ("at-the-money") using a Black-Scholes option pricing model while taking into consideration the price of the Company's Class A common stock, vesting conditions, and the expected term obtained using the simplified method of averaging the vesting term and the original contractual term of the options. The fair value of Employee NQSOs with an exercise price higher than the Company's Class A common stock on the grant date is estimated on the date of grant using a binomial-lattice option pricing model while taking into consideration the price of the Company's Class A common stock, vesting conditions, and a sub optimal exercise factor calibrated to the valuation obtained from the Black-Scholes options model used for a hypothetical at-the-money option with the same vesting schedules. We determine the fair value of the Fixed Value RSUs using the fixed dollar amount of the award. The Fixed Value RSUs are classified as liabilities.
We amortize the value of these awards to expense over the vesting period on a straight line basis for employees, and in the same period(s) and in the same manner as if the Company had paid cash in exchange for the goods or services instead of a share-based award for non-employees. The Company recognizes forfeitures as they occur.
See Note 15 Stock-Based Compensation of the Notes to Consolidated Financial Statements for additional information.
Private Placement Warrants and unvested founder shares
The Company classifies the Private Placement Warrants and unvested founder shares as a long-term liability on its consolidated balance sheets. Each Private Placement Warrant and unvested founder share is initially recorded at fair value on the date of consummation of the Transactions using an option pricing model, and it is re-measured to fair value at each subsequent reporting date. The Company will continue to adjust the liability for changes in fair value for the founder shares until the earlier of the re-vesting or forfeiture of these instruments. The Company will continue to adjust the liability for changes in fair value for the private placement warrants until the warrant is equity classified.
We determine the fair value of the Private Placement Warrants and unvested founder shares using an option pricing model while taking into consideration (i) the price of the Company's Class A common stock, (ii) transfer restrictions, and (iii) vesting hurdles, as applicable. The simulation was based on a risk neutral framework which is a common technique for valuing financial derivatives that possess optionality.
Certain assumptions used in the model are subjective and require significant management judgment, and include the (i) the risk-free rate, (ii) volatility, and (iii) the discount for lack of marketability. Changes in these assumptions can materially affect the estimate of the fair value of these instruments and ultimately change in fair value of Private Placement Warrants and unvested founder shares and expenses. The Company has historically been a private company and lacked sufficient company-specific historical and implied volatility information. Therefore, it estimated its expected stock volatility based on the implied volatility of our publicly traded financial instruments and the historical volatility of a publicly traded set of peer companies. The risk-free interest rate is based on the 5 year U.S. Treasury constant maturity yields. The discount for lack of marketability for privately held securities is based on the average rate protective put method that estimates the discount based on the average price over the restriction period rather than based on the final price.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred income tax assets are recognized for deductible temporary differences, net operating loss carryforwards, and tax credit carryforwards if it is more likely than not that the tax benefits will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We evaluate a variety of factors on a regular basis to determine the amount of deferred income tax assets to recognize in our financial statements, including our recent earnings history, current and projected future taxable income, the number of years our net operating loss and tax credits can be carried forward, the existence of taxable temporary differences, any changes in current tax law, such as the CARES Act, the TCJA and available tax planning strategies.
Customer Concentration
Three customers individually accounted for 34%, 19% and 10% of revenues for the year ended December 31, 2021 and 35%, 20% and 9% of revenues for each of the years ended December 31, 2020 and December 31, 2019. The loss of the business of one or more of our larger customers could have a material adverse effect on our results of operations.
Recent Accounting Pronouncements
See Note 3 New Accounting Pronouncements of the Notes to Consolidated Financial Statements for additional information.
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of MultiPlan Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of MultiPlan Corporation and its subsidiaries (the "Company") as of December 31, 2021 and 2020, and the related consolidated statements of income (loss) and comprehensive income (loss), of shareholders' equity and of cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which it accounts for convertible instruments and contracts in an entity's own equity in 2021.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
PSAV Revenue – Variable Consideration
As described in Note 2 to the consolidated financial statements, the Company’s revenue is generated from the compensation received from healthcare cost payors in exchange for various cost management services and solutions. Compensation from payors includes commissions received for each claim based on the percentage of savings ("PSAV") achieved compared to the providers’ billed fee-for service rates. Revenue under a PSAV arrangement is entirely variable and variable consideration is estimated using the expected value method based on the Company’s historical experience and management’s best judgment at the time. Management uses significant judgment when assessing whether estimates of variable consideration are constrained and these estimates are calculated based on both client-specific and aggregated factors that include historical billing and adjustment data, client contractual terms, and performance guarantees. When assessing the estimate of variable consideration, the period of historical experience considered as part of the expected value method requires significant management judgment. For the year ended December 31, 2021, revenue from PSAV arrangements was $1,037.8 million.
The principal considerations for our determination that performing procedures relating to the PSAV revenue variable consideration, is a critical audit matter are (i) the significant judgment by management due to the measurement uncertainty involved in developing the estimates of variable consideration, as the estimates are based on assumptions developed using both client-specific and aggregated factors related to historical billing and adjustment data, including the period of historical experience utilized in determining the estimate of variable consideration, and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to management’s significant assumption related to the period of historical experience.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the PSAV revenue recognition process, including controls over management's estimation of variable consideration. These procedures also included, among others, (i) testing management’s process for developing the estimate of PSAV variable consideration, (ii) evaluating the appropriateness of the expected value method, (iii) testing the completeness and accuracy of underlying data used in the method, and (iv) evaluating the reasonableness of management’s significant assumption related to the period of historical experience. Evaluating the reasonableness of the assumption related to the period of historical experience involved considering the historical relationships of revenue recognized and collected and amounts returned or credited in subsequent periods, and whether this assumption was consistent with evidence obtained in other areas of the audit.
Valuation of Private Placement Warrants and Unvested Founder Shares
As described in Notes 2 and 10 to the consolidated financial statements, the Company classifies the private placement warrants and unvested founder shares as a liability on its consolidated balance sheets as these instruments are precluded from being indexed to the Company’s own stock given the terms allow for a settlement adjustment that does not meet the scope of the fixed-for-fixed exception in the relevant accounting guidance. The private placement warrants and unvested founder shares were initially recorded at fair value on the date of consummation of the transactions using option pricing models, and subsequently remeasured to fair value at each subsequent reporting date. Changes in these assumptions can materially affect the estimate of the fair value of these instruments and ultimately other income and expenses. Management determines the fair value of the private placement warrants and unvested founder shares using an option pricing model while taking into consideration (i) the price of the Company’s Class A common stock, (ii) transfer restrictions, and (iii) vesting hurdles, as applicable. Assumptions used in the model are subjective and require significant management judgment, and include (i) the risk-free rate, (ii) volatility, and (iii) the discount for lack of marketability. Changes in these assumptions can materially affect the estimate of
the fair value of the private placement warrants and unvested founder shares. As of December 31, 2021, the fair values of the private placement warrants and unvested founder shares were $38.0 million and $36.0 million, respectively.
The principal considerations for our determination that performing procedures relating to the valuation of the private placement warrants and unvested founder shares is a critical audit matter are (i) the significant judgment by management in determining the fair value of the private placement warrants and unvested founder shares which included the significant assumptions related to the volatility and discount for lack of marketability; (ii) the high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to the valuation of the private placement warrants and unvested founder shares, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of private placement warrants and unvested founder shares, including controls over management's review of the significant assumptions related to the volatility and discount for lack of marketability. These procedures also included, among others, testing management’s process for determining the fair value of the private placement warrants and unvested founder shares as of the balance sheet date. Testing management’s process included (i) evaluating the methodology used by management to determine the fair value of the private placement warrants and unvested founder shares, (ii) testing the mathematical accuracy of management’s model, (iii) assessing the reasonableness of management’s significant assumptions related to the volatility and discount for lack of marketability, and (iv) testing the completeness and accuracy of data used in the model. Professionals with specialized skill and knowledge were used to assist in evaluating the methodology to determine the fair value of the private placement warrants and unvested founder shares, testing the mathematical accuracy of the model, and evaluating whether the significant assumptions related to the volatility and discount for lack of marketability used by management were reasonable considering consistency with external market data.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
February 25, 2022
We have served as the Company’s auditor since 2009.
MULTIPLAN CORPORATION
Consolidated Balance Sheets
(in thousands, except share and per share data)
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 185,328 | | | $ | 126,755 | |
| Restricted cash | 3,051 | | | — | |
| Trade accounts receivable, net | 99,905 | | | 63,198 | |
| Prepaid expenses | 24,910 | | | 17,708 | |
| Prepaid taxes | 5,064 | | | — | |
| Other current assets, net | 999 | | | 1,193 | |
| Total current assets | 319,257 | | | 208,854 | |
| Property and equipment, net | 213,238 | | | 187,631 | |
| Operating lease right-of-use assets | 30,104 | | | 31,339 | |
| Goodwill | 4,363,070 | | | 4,257,336 | |
| | | |
| | | |
| | | |
| Other intangibles, net | 3,285,037 | | | 3,584,187 | |
| Other assets | 9,701 | | | 14,231 | |
| Total assets | $ | 8,220,407 | | | $ | 8,283,578 | |
| Liabilities and Shareholders’ Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 13,005 | | | $ | 15,261 | |
| Accrued interest | 55,685 | | | 31,528 | |
| Accrued taxes | — | | | 10,176 | |
| Operating lease obligation, short-term | 6,883 | | | 6,439 | |
| Current portion of long-term debt | 13,250 | | | — | |
| Accrued compensation | 25,419 | | | 21,843 | |
| Other accrued expenses | 27,666 | | | 27,251 | |
| Total current liabilities | 141,908 | | | 112,498 | |
| Long-term debt | 4,879,144 | | | 4,578,488 | |
| Operating lease obligation, long-term | 26,725 | | | 27,499 | |
| Private Placement Warrants and unvested founder shares | 74,000 | | | 106,595 | |
| Deferred income taxes | 753,825 | | | 900,633 | |
| Other liabilities | 135 | | | — | |
| Total liabilities | 5,875,737 | | | 5,725,713 | |
| Commitments and contingencies (Note 13) | | | |
| Shareholders’ equity: | | | |
| Shareholder interests | | | |
Preferred stock, $0.0001 par value — 10,000,000 shares authorized; no shares issued | — | | | — | |
Common stock, $0.0001 par value — 1,500,000,000 shares authorized; 665,456,180 and 664,183,318 issued; 638,338,774 and 655,075,355 shares outstanding | 67 | | | 66 | |
| Additional paid-in capital | 2,311,660 | | | 2,530,410 | |
| Retained earnings | 225,112 | | | 116,999 | |
Treasury stock — 27,117,406 and 9,107,963 shares | (192,169) | | | (89,610) | |
| Total shareholders’ equity | 2,344,670 | | | 2,557,865 | |
| Total liabilities and shareholders’ equity | $ | 8,220,407 | | | $ | 8,283,578 | |
The accompanying notes are an integral part of these consolidated financial statements
MULTIPLAN CORPORATION
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(in thousands, except share and per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | |
| | 2021 | | 2020 | | 2019 | |
| Revenues | | $ | 1,117,602 | | | $ | 937,763 | | | $ | 982,901 | | |
| Costs of services (exclusive of depreciation and amortization of intangible assets shown below) | | 175,292 | | | 318,675 | | | 149,607 | | |
| General and administrative expenses | | 151,095 | | | 355,635 | | | 75,225 | | |
| Depreciation | | 64,885 | | | 60,577 | | | 55,807 | | |
| Amortization of intangible assets | | 340,210 | | | 334,697 | | | 334,053 | | |
| Total expenses | | 731,482 | | | 1,069,584 | | | 614,692 | | |
| Operating income (loss) | | 386,120 | | | (131,821) | | | 368,209 | | |
| Interest expense | | 267,475 | | | 335,638 | | | 376,346 | | |
| Interest income | | (30) | | | (288) | | | (196) | | |
| Loss (gain) on extinguishment of debt | | 15,843 | | | 102,993 | | | (18,450) | | |
| (Gain) loss on investments | | (25) | | | 12,165 | | | — | | |
| Change in fair value of Private Placement Warrants and unvested founder shares | | (32,596) | | | (35,422) | | | — | | |
| Net income (loss) before taxes | | 135,453 | | | (546,907) | | | 10,509 | | |
| Provision (benefit) for income taxes | | 33,373 | | | (26,343) | | | 799 | | |
| Net income (loss) | | $ | 102,080 | | | $ | (520,564) | | | $ | 9,710 | | |
| | | | | | | |
| Weighted average shares outstanding – Basic | | 651,006,567 | | | 470,785,192 | | | 415,700,000 | | |
| Weighted average shares outstanding – Diluted | | 651,525,791 | | | 470,785,192 | | | 415,700,000 | | |
| | | | | | | |
| Net income (loss) per share – Basic | | $ | 0.16 | | | $ | (1.11) | | | $ | 0.02 | | |
| Net income (loss) per share – Diluted | | $ | 0.16 | | | $ | (1.11) | | | $ | 0.02 | | |
| | | | | | | |
| Comprehensive income (loss) | | $ | 102,080 | | | $ | (520,564) | | | $ | 9,710 | | |
The accompanying notes are an integral part of these consolidated financial statements
MULTIPLAN CORPORATION
Consolidated Statements of Shareholders' Equity
(in thousands, except share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock Issued | | Additional Paid-in Capital | | Retained
Earnings | | Treasury stock | | Total
Shareholders'
Equity |
| Shares | | Amount | | | | Shares | | Amount | |
Balance as of December 31, 2018 (1) | 415,700,000 | | | $ | 42 | | | $ | 1,362,493 | | | $ | 627,853 | | | — | | | $ | — | | | $ | 1,990,388 | |
| | | | | | | | | | | | | |
| Class B Unit expense | — | | | — | | | (14,880) | | | — | | | — | | | — | | | (14,880) | |
| Net income | — | | | — | | | — | | | 9,710 | | | — | | | — | | | 9,710 | |
Balance as of December 31, 2019 (1) | 415,700,000 | | | $ | 42 | | | $ | 1,347,613 | | | $ | 637,563 | | | — | | | $ | — | | | $ | 1,985,218 | |
| | | | | | | | | | | | | |
| Class B Unit expense (Note 15) | — | | | — | | | 405,843 | | | — | | | — | | | — | | | 405,843 | |
| 2020 Omnibus Incentive Plan (Note 15) | 31,250 | | | — | | | 211 | | | — | | | (13,087) | | | (117) | | | 94 | |
| Effect of the Mergers (Note 4) | 128,806,148 | | | 13 | | | (548,636) | | | — | | | — | | | — | | | (548,623) | |
| Private Placement Warrants and unvested founder shares (Note 10) | (12,404,080) | | | (2) | | | (142,017) | | | — | | | — | | | — | | | (142,019) | |
| PIPE Investment, net of costs (Note 4) | 132,050,000 | | | 13 | | | 1,467,396 | | | — | | | — | | | — | | | 1,467,409 | |
| Treasury stock purchases | — | | | — | | | — | | | — | | | (9,094,876) | | | (89,493) | | | (89,493) | |
| Net loss | — | | | — | | | — | | | (520,564) | | | — | | | — | | | (520,564) | |
| Balance as of December 31, 2020 | 664,183,318 | | | $ | 66 | | | $ | 2,530,410 | | | $ | 116,999 | | | (9,107,963) | | | $ | (89,610) | | | $ | 2,557,865 | |
| | | | | | | | | | | | | |
| Effect of ASU 2020-06 (Note 3) | — | | | — | | | (233,874) | | | 6,033 | | | — | | | — | | | (227,841) | |
| 2020 Omnibus Incentive Plan (Note 15) | 1,272,862 | | | 1 | | | 16,354 | | | — | | | — | | | — | | | 16,355 | |
| Tax withholding related to vesting of equity awards | — | | | — | | | (1,230) | | | — | | | (345,733) | | | (2,559) | | | (3,789) | |
| Repurchase of common stock | — | | | — | | | — | | | — | | | (17,663,710) | | | (100,000) | | | (100,000) | |
| Net income | — | | | — | | | — | | | 102,080 | | | — | | | — | | | 102,080 | |
| Balance as of December 31, 2021 | 665,456,180 | | | $ | 67 | | | $ | 2,311,660 | | | $ | 225,112 | | | (27,117,406) | | | $ | (192,169) | | | $ | 2,344,670 | |
(1) The shares of the Company's common stock, prior to the Transactions, have been retroactively restated as shares reflecting the exchange ratio established in the Transactions.
The accompanying notes are an integral part of these consolidated financial statements
MULTIPLAN CORPORATION
Consolidated Statements of Cash Flows
(in thousands) | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Operating activities: | | | | | |
| Net income (loss) | $ | 102,080 | | | $ | (520,564) | | | $ | 9,710 | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
| Depreciation | 64,885 | | | 60,577 | | | 55,807 | |
| Amortization of intangible assets | 340,210 | | | 334,697 | | | 334,053 | |
| Amortization of the right-of-use asset | 6,963 | | | 8,405 | | | 9,594 | |
| Stock-based compensation | 18,010 | | | 406,054 | | | (14,880) | |
| Deferred income taxes | (81,929) | | | (45,041) | | | (111,404) | |
| Non-cash interest costs | 12,259 | | | 22,888 | | | 13,368 | |
| Loss on extinguishment of debt | 15,843 | | | 102,993 | | | (18,450) | |
| Loss on equity investments | — | | | 12,165 | | | — | |
| Loss on disposal of property and equipment | 2,991 | | | 610 | | | 163 | |
| Change in fair value of Private Placement Warrants and unvested founder shares | (32,596) | | | (35,422) | | | — | |
| Changes in assets and liabilities, net of assets acquired and liabilities assumed from acquisitions: | | | | | |
| Accounts receivable, net | (33,826) | | | 14,758 | | | 5,279 | |
| Prepaid expenses and other assets | (6,952) | | | (7,480) | | | (8,822) | |
| Prepaid taxes | (5,064) | | | 2,130 | | | (1,426) | |
| Operating lease obligation | (5,900) | | | (8,461) | | | (9,462) | |
| Accounts payable and accrued expenses and other | 7,713 | | | 29,065 | | | 20,783 | |
| Net cash provided by operating activities | 404,687 | | | 377,374 | | | 284,313 | |
| Investing activities: | | | | | |
| Purchases of property and equipment | (84,590) | | | (70,813) | | | (66,414) | |
| Proceeds from sale of investment | 5,641 | | | — | | | — | |
| | | | | |
| HST Acquisition, net of cash acquired | 246 | | | (140,032) | | | — | |
| DHP Acquisition, net of cash acquired | (149,676) | | | — | | | — | |
| Net cash used in investing activities | (228,379) | | | (210,845) | | | (66,414) | |
| Financing activities: | | | | | |
| Repayments of Term Loan G | (2,341,000) | | | (369,000) | | | (100,000) | |
Extinguishment of 7.125% Notes | — | | | (1,615,583) | | | — | |
| Extinguishment of Senior PIK Notes | — | | | (1,202,302) | | | (101,013) | |
| Issuance of Senior Convertible PIK Notes | — | | | 1,267,500 | | | — | |
Issuance of 5.750% Notes | — | | | 1,300,000 | | | — | |
| Repayments of Term Loan B | (3,313) | | | — | | | — | |
| Issuance of Term Loan B | 1,298,930 | | | — | | | — | |
Issuance of 5.50% Senior Secured Notes | 1,034,520 | | | — | | | — | |
| Taxes paid on settlement of vested share awards | (3,789) | | | — | | | — | |
| Borrowings on revolving credit facility | — | | | 98,000 | | | — | |
| Repayment of revolving credit facility | — | | | (98,000) | | | — | |
| Effect of the Transactions | — | | | 682,408 | | | — | |
| Purchase of treasury stock | (100,000) | | | (101,123) | | | — | |
| Payment of debt issuance costs | — | | | (23,489) | | | — | |
MULTIPLAN CORPORATION
Consolidated Statements of Cash Flows Continued
(in thousands)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Borrowings on finance leases, net | (32) | | | (10) | | | (75) | |
| Net cash used in financing activities | (114,684) | | | (61,599) | | | (201,088) | |
| Net increase in cash, cash equivalents and restricted cash | 61,624 | | | 104,930 | | | 16,811 | |
| Cash, cash equivalents and restricted cash at beginning of period | 126,755 | | | 21,825 | | | 5,014 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 188,379 | | | $ | 126,755 | | | $ | 21,825 | |
| | | | | |
| Cash and cash equivalents | $ | 185,328 | | | $ | 126,755 | | | $ | 21,825 | |
| Restricted cash | 3,051 | | | — | | | — | |
| Cash, cash equivalents and restricted cash at end of period | $ | 188,379 | | | $ | 126,755 | | | $ | 21,825 | |
| | | | | |
| Noncash investing and financing activities: | | | | | |
| Purchases of property and equipment not yet paid | $ | 5,930 | | | $ | 4,334 | | | $ | 3,768 | |
| Operating lease right-of-use assets obtained in exchange for operating lease liabilities | $ | 6,880 | | | $ | 10,210 | | | $ | 4,000 | |
| Supplemental disclosure of cash flow information: | | | | | |
| Cash paid during the period for: | | | | | |
| Interest | $ | (231,049) | | | $ | (312,349) | | | $ | (363,907) | |
| Income taxes, net of refunds | $ | (131,517) | | | $ | (3,917) | | | $ | (114,569) | |
The accompanying notes are an integral part of these consolidated financial statements
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
1.General Information and Business
General Information
MultiPlan Corporation, formerly known as Churchill Capital Corp III, was incorporated in Delaware on October 30, 2019 for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses.
On July 12, 2020, Churchill entered into the Merger Agreement by and among First Merger Sub, Second Merger Sub, Holdings, and MultiPlan Parent. On October 8, 2020, the Merger Agreement was consummated and the Transactions were completed. In connection with the Transactions, Churchill changed its name to MultiPlan Corporation and The New York Stock Exchange ticker symbols for its Class A common stock and warrants to "MPLN" and "MPLN.WS", respectively.
The Transactions were accounted for as a reverse recapitalization. Under this method of accounting, Churchill has been treated as the acquired company for financial reporting purposes. This determination was primarily based on our existing stockholders being the majority stockholders and holding majority voting power in the combined company, our senior management comprising the majority of the senior management of the combined company, and our ongoing operations comprising the ongoing operations of the combined company. Accordingly, for accounting purposes, the Transactions were treated as the equivalent of MultiPlan issuing shares for the net assets of Churchill, accompanied by a recapitalization. The net assets of Churchill were recognized at fair value (which were consistent with carrying value), with no goodwill or other intangible assets recorded. Operations prior to the Transactions in these financial statements are those of Polaris and the retained earnings of Polaris has been carried forward after the Transactions. Earnings per share calculations for all periods prior to the Transactions have been retrospectively adjusted for the equivalent number of shares reflecting the exchange ratio established in the Transactions.
Throughout the Notes to Consolidated Financial Statements, unless otherwise noted, "we," "us," "our", "MultiPlan", and the "Company" and similar terms refer to Polaris and its subsidiaries prior to the consummation of the Transactions, and MultiPlan and its subsidiaries after the Transactions.
Business
We are a provider of data analytics and technology-enabled solutions designed to bring affordability, efficiency and fairness to the U.S. healthcare industry. We do so through services focused on reducing medical cost and improving payment accuracy for the payors of healthcare, which are health insurers, self-insured employers and other health plan sponsors (typically through their health plan administrators), and, indirectly, the plan members who are the consumers of healthcare services. The Company, through its operating subsidiary, MultiPlan, Inc., offers these solutions nationally through its Analytics-Based Services, which reduce medical cost through data-driven algorithms which detect claims over-charges and either negotiate or recommend fair reimbursement using a variety of data sources and pricing algorithms, its Network-Based Services, which reduce medical cost through contracted discounts to form one of the largest independent preferred provider organizations in the United States, and outsourced network development and/or management services; and its Payment and Revenue Integrity Services, which reduce medical cost through data, technology, and clinical expertise deployed to identify and remove improper and unnecessary charges before or after claims are paid, or to identify and help restore and preserve underpaid premium dollars. We are a technology-enabled service provider and transaction processor and do not deliver health-care services, bear insurance risk, underwrite risk, provide or manage healthcare services, provide care or care management, or adjudicate or pay claims.
Although the end beneficiary of our services are employers and other plan sponsors and their health plan members, for the most part our customers are payors. We offer these payors a single electronic gateway to a highly-integrated and comprehensive set of services in each of the above three categories, which are used in combination or individually to reduce the medical cost burden on their health plan customers and members while fostering fair and efficient payments to the providers. For the year ended December 31, 2021, our expansive network included access to over 1.2 million healthcare providers.
Payors generally aim to pay provider claims at a discount to reduce cost, to eliminate any improperly billed charges before payment is made, and to recover any incorrectly paid charges after payment is made. Our Analytics-Based Services discount claims using data-driven negotiation and/or re-pricing methodologies to support payments to providers with whom contractual discounts are not possible and are generally priced based on a percentage of savings achieved. Also included in this category are services that enable lower cost health plans that feature reference-based pricing either in conjunction with or in place of a provider network. These services are generally priced at a bundled PEPM rate. Our Network-Based Services offer payors a
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
broad network of discounted rates for providers with whom payors do not have a contractual relationship, and are priced based on either a percentage of savings achieved or at a per employee/member per month fee. This service category also includes customized network development and management services for payors seeking to expand their network footprint using outsourced services. These build services are generally priced on a per contract or other project-based price. Our Payment and Revenue Integrity Services use data, technology and clinical expertise to assist payors in identifying improper, unnecessary and excessive charges before or after claims are paid, as well as issues with premiums paid by CMS for government health plans caused by discrepancies with enrollment-related data. Payment and Revenue Integrity Services are generally priced based on a percentage of savings achieved.
2.Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying consolidated financial statements have been prepared in accordance with GAAP. The consolidated financial statements include the accounts of all subsidiaries, all of which are wholly owned.
The consolidated financial statements include the accounts of the Company and its subsidiaries for the years ended December 31, 2021, December 31, 2020 and December 31, 2019. Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from the Company's estimates. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to revenue recognition, recoverability of long-lived assets, goodwill, valuation of debt instruments, valuation of stock-based compensation awards and income taxes.
COVID-19
COVID-19 has negatively impacted our business, results of operations, and financial condition during the years ended December 31, 2021 and 2020. Effects from COVID-19 began to impact our business in first quarter 2020 with various federal, state, and local governments and private entities mandating restrictions on travel, restrictions on public gatherings, closure of non-essential commerce, and shelter in place orders. The Company experienced an approximately 4.6% decline in revenues for the year ended December 31, 2020 compared to 2019 primarily due to reduced volume from customers as a result of restrictions on elective medical procedures and non-essential medical services. For the year ended December 31, 2021, the Company's revenues continue to be negatively impacted, but to a lesser extent compared to 2020 as vaccination rates have increased and restrictions on medical services have been lifted. The extent of the ultimate impact of COVID-19 will depend on the severity and duration of the pandemic. Future developments remain uncertain, including the number of confirmed cases, the emergence of highly contagious variants, and any actions taken by federal, state and local governments such as economic relief efforts, as well as U.S. and global economies, consumer behavior and healthcare utilization patterns.
Segment Reporting
Operating segments are defined as components of an entity for which separate financial information is available and regularly reviewed by the chief operating decision maker. The Company manages its operations as a single segment for the purposes of assessing performance and making decisions. The Company's singular focus is being a leading value-added provider of data analytics and technology-enabled end-to-end cost management, payment and revenue integrity solutions to the U.S. healthcare industry.
In addition, all of the Company's revenues and long-lived assets are attributable to operations in the United States for all periods presented.
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
Business Combinations
The Company determines whether substantially all the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If this threshold is met, the set is not a business. If it is not met, the Company then evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs.
Business combinations are accounted for using the acquisition method at the acquisition date, which is when control is obtained. The consideration transferred is generally measured at fair value, as are the identifiable assets acquired and liabilities assumed. During the one-year period following the acquisition date, if an adjustment is identified based on new information about facts and circumstances that existed as of the acquisition date, the Company will record measurement-period adjustments related to the acquisitions in the period in which the adjustment is identified.
Goodwill is measured at the acquisition date as the fair value of the consideration transferred (including, if applicable, the fair value of any previously held equity interest and any non-controlling interests) less the net recognized amount (which is generally the fair value) of the identifiable assets acquired and liabilities assumed.
Transaction costs, other than those associated with the issuance of debt or equity securities incurred in connection with a business combination, are expensed as incurred and included in general and administrative expenses in the accompanying consolidated statements of income (loss) and comprehensive income (loss).
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The carrying amount of these investments approximates fair value due to the short maturity of those investments. The Company had deposits in a major financial institution that exceeded Federal Deposit Insurance Corporation insurance limits. Management believes the credit risk related to these deposits is minimal.
Restricted Cash
In accordance with local insurance regulations, our insurance captive is required to meet and maintain minimum solvency capital requirements. The cash and cash equivalents held by our insurance captive have been classified in the line item restricted cash in our consolidated balance sheets because the assets are not available to satisfy our current obligations. See the Insurance section of this footnote for additional information on our captive insurance company.
Accounts Receivable
Accounts receivable are stated at the net amount expected to be collected, using an expected loss methodology that is referred to as the CECL.
Allowance for Doubtful Accounts
The Company is paid for virtually all of its services by insurance companies, third-party administrators and employers. Management estimates constraints on variable consideration for anticipated contractual billing adjustments that its clients or the Company may make to invoiced amounts; refer to Revenue Recognition accounting policies for additional detail. Management also maintains allowances for doubtful accounts for estimated losses resulting from the Company's clients' inability to make required payments. The Company establishes an allowance for doubtful accounts based upon a specific customer's credit risk.
The following table details the changes in the allowance for doubtful accounts:
| | | | | | | | | | | | | | | | | |
| (in thousands) | 2021 | | 2020 | | 2019 |
| Allowance as of January 1, | $ | 466 | | | $ | 408 | | | $ | 529 | |
| Provision for doubtful accounts | — | | | 58 | | | — | |
| Write-offs of uncollectible receivables | (51) | | | — | | | (121) | |
| Allowance as of December 31, | $ | 415 | | | $ | 466 | | | $ | 408 | |
Management regularly evaluates the adequacy of the assumptions used in determining these allowances and adjusts as necessary. Changes in estimates are recognized in the period in which they are determined. Management writes off accounts
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
after all substantial collection efforts have failed and any resulting losses are included in general and administrative expenses within our consolidated statements of income (loss) and comprehensive income (loss).
Property and Equipment
Property and equipment are stated at historical cost less accumulated depreciation and accumulated impairment losses, if any. Major expenditures for property and equipment and those that substantially increase useful lives are capitalized. Direct internal and external costs of developing software for internal use, including programming and enhancements, are capitalized and amortized over the estimated useful lives once the software is ready for its intended use. Software training costs, maintenance and repairs are expensed as incurred. When assets are sold or otherwise disposed of, costs and related accumulated depreciation are removed from the financial statements and any resulting gains or losses are included in costs of goods sold and general and administrative expenses within our consolidated statements of income (loss) and comprehensive income (loss).
The Company provides for depreciation and amortization on property and equipment using the straight-line method to allocate the cost of depreciable assets over their estimated lives as follows:
| | | | | | | | |
| Asset Classification | | Estimated Useful Life |
| Leasehold improvements | | The shorter of the life of lease or asset life, 5 – 15 years |
| Furniture and equipment | | 5 – 7 years |
| Computer hardware | | 3 – 5 years |
| Computer software | | 3 – 5 years |
Internal-use software development costs incurred in the preliminary project stage are expensed as incurred; costs incurred in the application and development stage, that meet the capitalization criteria, are capitalized and amortized on a straight-line basis over the estimated useful life of the asset, generally five years; and costs incurred in the post-implementation/operations stage are expensed as incurred.
Leases
Substantially all of our operating leases are related to office space we lease in various buildings for our own use. The terms of these non-cancelable operating leases typically require us to pay rent and a share of operating expenses and real estate taxes. We also lease equipment under both operating and finance lease arrangements. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
ROU assets represent the Company's right to control the use of the underlying assets for the lease term and lease liabilities represent the Company's obligations to make lease payments arising from the Company's portfolio of leases. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future lease payments over the lease term beginning at the lease commencement date. The lease term is the non-cancelable period of the lease, and includes any renewal and termination options we are reasonably certain to exercise. The reasonably certain threshold is evaluated at lease commencement and is typically met if substantial economic incentives or termination penalties are identified. The operating lease ROU assets are adjusted for lease incentives, any lease payments made prior to the commencement date and initial direct costs, if incurred. Our leases generally do not include an implicit rate; therefore, we use an incremental borrowing rate based on information available at the lease commencement date in determining the present value of future lease payments. The incremental borrowing rate is determined using an approach based on the rate of interest that the lessee would pay to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. We utilized a market-based approach to estimate the incremental borrowing rate for each individual lease. The lease expense for our operating leases is recognized on a straight-line basis over the lease term and is included in cost of services or general and administrative expenses in our consolidated statements of income (loss) and comprehensive income (loss).
Finance leases are included in property and equipment, net and in long-term debt on our consolidated balance sheets. Our finance leases are not material to the financial statements as a whole.
Leases with an initial term of 12 months or less are not recorded on the balance sheet; lease expense is recognized for these short-term leases on a straight-line basis over the lease term.
See Note 7 Leases for additional information on leases.
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
Goodwill and Other Intangible Assets
Goodwill is calculated as the excess of the purchase price in an acquisition over the fair value of identifiable net assets acquired. Acquired intangible assets are separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the Company's intent to do so.
The Company assesses the impairment of its goodwill and indefinite-lived intangible assets at least annually on November 1 and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
Important factors that may trigger an impairment review include but are not limited to:
•significant underperformance relative to expected historical or projected future operating results;
•significant changes in the manner of use of the acquired assets or the strategy for the overall business;
•significant negative industry or economic trends; and
•significant decline in the Company's estimated enterprise value relative to carrying value.
The Company is required to write down its goodwill and indefinite-lived intangible assets if they are determined to be impaired. The Company tests its goodwill for impairment on a reporting unit basis. A reporting unit is the operating segment unless, at businesses one level below the operating segment (the component level), discrete financial information is prepared and regularly reviewed by management and the businesses are not otherwise aggregated due to having certain common characteristics, in which case such component is the reporting unit.
We have the option to assess goodwill for impairment by initially performing a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the quantitative goodwill impairment test is not required to be performed. If we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if we do not elect the option to perform an initial qualitative assessment, we perform a quantitative goodwill impairment test. In the quantitative impairment test, we calculate the estimated fair value of the reporting unit using a (i) discounted cash flow analysis, (ii) comparable public company analysis and (iii) comparable acquisitions analysis, giving equal weight to the three approaches. If the carrying amount of the reporting unit after all of the reporting unit's other assets (excluding goodwill) have been adjusted for impairment exceeds the estimated fair value, an impairment charge is recorded for the amount that its carrying amount, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit.
Indefinite-lived intangible assets, such as certain trademarks with indefinite lives, are subject to an impairment review annually and whenever indicators of impairment exist. We have the option to assess indefinite-lived intangible assets for impairment by first performing qualitative assessments to determine whether it is more-likely-than-not that the fair values of the indefinite-lived intangible assets are less than the carrying amounts. If we determine that it is more-likely-than-not that an indefinite-lived intangible asset is impaired, or if we elect not to perform an initial qualitative assessment, we then perform the quantitative impairment test by comparing the fair value of the indefinite-lived intangible asset with its carrying amount. If the carrying amount exceeds the fair value of the indefinite-lived intangible asset, we write the carrying amount down to the fair value.
We performed our 2021 qualitative impairment assessment of goodwill and indefinite-lived intangible assets and determined that no impairment existed as of November 1, 2021. No goodwill or indefinite-lived intangible asset impairment was identified in any of the periods presented. The Company's management is not aware of any triggering events subsequent to the impairment review, and management concludes no impairment exists as of December 31, 2021.
The value of definite-lived intangible assets is recorded at their acquisition date fair value and amortized on a straight-line basis over their estimated lives. The Company tests definite-lived intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. We measure recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows that the assets or the asset group are expected to generate. If the assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value. No definite-lived intangible asset impairment was identified in any of the periods presented.
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
Following is a summary of the range of estimated useful life of other intangible assets:
| | | | | | | | |
| Asset Classification | | Range of Estimated Useful Life |
| Client relationships | | 10 to 16 years |
| Provider Network | | 15 years |
| Technology | | 4 to 5 years |
| Trade Names | | 1 year to indefinite |
See Note 8 Goodwill and Other Intangible Assets for additional information.
Revenue Recognition
All revenue recognized in the consolidated statements of income (loss) and comprehensive income (loss) is considered to be revenue from contracts with customers.
Revenue is generated from the compensation received from healthcare cost payors in exchange for various cost management services and solutions. Our service offerings include the following: (i) Network-Based Solutions that process claims at a discount compared to billed fee-for-service rates while using an extensive network, (ii) Analytics-Based Solutions that use its leading and proprietary information technology platform to offer clients Analytics-Based Solutions to reduce medical costs and (iii) Payment and Revenue Integrity Solutions that use data, technology and clinical expertise to identify improper, unnecessary and excessive charges. Compensation from payors includes (1) commissions received for each claim based on the PSAV achieved compared to the providers' billed fee-for service rates and (2) fees for standing ready to provide cost management solutions for each covered member, which are based on a PEPM.
Our performance obligation to the customer for a PSAV arrangement is the cost management services provided for each submitted claim regardless of the service offering used to achieve savings, as they are not distinct in the context of the contract. Our performance obligation for PEPM arrangements is to stand ready to process and achieve savings for all covered members each month.
For services performed under a PSAV arrangement, the Company enters into a contract with the customer once the claim is submitted. Revenue under a PSAV arrangement is entirely variable and estimated using the expected value method obtained by applying the contractual rates to the materialized savings that can be reliably estimated leveraging extensive historical data of results obtained for claims of similar nature. Revenue is recognized at a point in time where the customer obtains control over the service promised by the Company, which generally occurs when the Company successfully transfers the savings for the claim to the customer. Judgment is not typically required when assessing whether the savings have materialized.
Fees from customers for standing ready to provide cost management solutions for each customer's members each month vary depending on the number of employees covered each month. PEPM contracts represent a series of performance obligations to stand ready to provide cost management solutions to our customers' covered employees on a monthly basis with each time increment representing a distinct service. We recognize revenue over time using the time elapsed output method. In accordance with the series guidance, we allocate variable consideration to the period to which the fees relate.
Variable consideration is estimated using the expected value method based on our historical experience and best judgment at the time. Due to the nature of our arrangements, certain estimates may be constrained if it is probable that a significant reversal of revenue will occur when the uncertainty is resolved. For our PSAV contracts, portions of revenue that is recognized and collected in a reporting period may be returned or credited in subsequent periods. These credits are the result of payors not utilizing the discounts that were initially calculated, or differences between the Company's estimates of savings achieved for a customer and the amounts self-reported in the following month by that same customer. Significant judgment is used when assessing whether estimates of variable consideration are constrained and these estimates are calculated based upon both client-specific and aggregated factors that include historical billing and adjustment data, client contract terms, and performance guarantees. When assessing the estimate of variable consideration, the period of historical experience considered as part of the expected value method requires significant management judgment. We update our estimates at the end of each reporting period as additional information becomes available.
The timing of payments from customers from time to time generates contract assets or contract liabilities; however these amounts are immaterial in all periods presented.
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
Payment terms vary on a contract-by-contract basis, although terms generally include a requirement of payment within 15 to 30 days. We do not have any significant financing components in our contracts with customers.
The Company expenses sales commissions and other costs to obtain a contract when incurred, because our commissions are deemed contingent on factors broader than the simple intention of the contracts and cannot be considered directly incremental. These costs are recorded within cost of services.
Practical Expedients and Accounting Policy Elections
The Company excludes sales taxes and other similar taxes from the measurement of the transaction price.
The Company does not disclose the value of unsatisfied performance obligations, nor do we disclose the timing of revenue recognition for contracts with an original expected length of one year or less.
The Company uses a portfolio approach when estimating the amount of consideration it expects to receive from certain classes of customer contracts with similar characteristics, and expects that the difference from applying the new revenue standard to a portfolio of contracts as compared to an individual contract would not result in a material effect on the financial statements.
Disaggregation of Revenue
The following table presents revenues disaggregated by services and contract types:
| | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| Revenues | | | | | |
| Network Services | $ | 278,457 | | | $ | 271,262 | | | $ | 314,510 | |
| PSAV | 215,449 | | | 208,276 | | | 249,095 | |
| PEPM | 55,684 | | | 55,301 | | | 56,841 | |
| Other | 7,324 | | | 7,685 | | | 8,574 | |
| Analytic-Based Services | 709,272 | | | 564,661 | | | 561,525 | |
| PSAV | 692,880 | | | 560,981 | | | 560,675 | |
| PEPM | 16,392 | | | 3,680 | | | 850 | |
| Payment Integrity Services | 129,873 | | | 101,840 | | | 106,866 | |
| PSAV | 129,477 | | | 101,753 | | | 106,782 | |
| PEPM | 396 | | | 87 | | | 84 | |
| Total Revenues | $ | 1,117,602 | | | $ | 937,763 | | | $ | 982,901 | |
Costs of Services
Costs of services consist of all costs specifically associated with claims processing activities for customers, sales and marketing and the development and maintenance of the Company's networks and analytics-based solutions.
Insurance
The Company employs various risk transfer methodologies in dealing with the various insurance policies it purchases, including, for certain risks, a wholly-owned captive insurance subsidiary. These methodologies include the use of large deductible programs and self-insured retentions with stop loss limits. Errors and omissions liability, directors and officers liability, fiduciary liability, cybersecurity, employment practices liability and crime insurance are all claims made coverages and utilize self-insured retentions subject to an annual aggregate limit. These self-insured retentions range from $10,000 to $20,000,000 per claim. The Company retains the services of an insurance broker to assess current risk and exposure levels as a standalone entity. The appropriate types and levels of coverage were determined by the Company, and the Company had active policies providing the desired level of coverage deemed necessary by the Company.
Health insurance and employee benefits are subject to the participant's deductible amounts with amounts exceeding the deductibles self-insured by the Company. The Company uses historical claim data and loss trends to project incurred losses and record loss reserves. Other factors utilized in determining loss reserves include, but are not limited to, the amount and timing of
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
historical payments, severity of individual claims, jurisdictional considerations, the anticipated future volume of claims, the life span of various types of claims and input from the Company's legal representatives responsible for the defense of these claims. The ultimate value of casualty claims (primarily general liability) and professional liability (primarily errors and omissions) claims may take several years before becoming known. Liabilities associated with the risks that are retained by the Company are not discounted.
The Company’s wholly-owned captive insurance subsidiary receives direct premiums, which are netted against the Company’s insurance company costs in general and administrative expenses, in the consolidated statements of income (loss) and comprehensive income (loss).
Stock-Based Compensation
Prior to the Transactions
The Company's awards were granted in the form of Units via the Polaris Agreement.
Stock-based compensation was measured at the grant date based on the fair value of the award and was recognized as compensation expense, net of forfeitures, over the applicable requisite service period of the stock award using the straight-line method for awards with only service conditions and using the graded-vesting method for awards with performance conditions. The fair value of the awards was remeasured at each reporting period. The Units were classified as liabilities and their fair value was remeasured at each reporting period.
We determined the fair value of our awards based on (i) the customized payout structure of the subject Units, (ii) liquidity timing, and (iii) vesting hurdles, as applicable, based on the output of Monte Carlo simulations. The simulation was based on a risk neutral framework which is a common technique for valuing financial derivatives that possess optionality.
Changes in the assumptions made on (i) liquidity dates, (ii) volatility, (iii) discount rates and (iv) the risk-free rate can materially affect the estimate of fair value and ultimately how much stock-based compensation expense was recognized. The Company has historically been a private company and lacked company-specific historical and implied volatility information. Therefore, it estimated its expected stock volatility based on the historical volatility of a publicly traded set of peer companies. The risk-free interest rate is based on US Treasury constant maturity yields commensurate with the remaining term for each liquidity date assumption. These inputs are subjective and generally require significant analysis and judgment to develop.
After the consummation of the Transactions
The Company's awards are granted via the 2020 Omnibus Incentive Plan in the form of Employee RS, Employee RSUs, Fixed Value RSUs, Employee NQSOs (together "employee awards"), and Director RSUs.
Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as compensation expense for employee awards, net of forfeitures, over the applicable requisite service period of the stock award using the straight-line method for awards with only service conditions. The compensation expense for Director RSUs is recognized in the same period(s) and in the same manner as if the Company had paid cash in exchange for the goods or services instead of a share-based award. The Company recognizes forfeitures as they occur.
We determine the fair value of the Employee RS, Employee RSUs and Director RSUs with time based vesting using the value on our common stock on the date of the grant.
We determine the fair value of Employee NQSOs with an exercise price equal to the price of the Company's Class A common stock on the grant date ("at-the-money") using a Black-Scholes option pricing model while taking into consideration the price of the Company's Class A common stock, vesting conditions, and the expected term obtained using the simplified method of averaging the vesting term and the original contractual term of the options. The fair value of Employee NQSOs with an exercise price higher than the Company's Class A common stock on the grant date ("out-of-the-money") is estimated on the date of grant using a binomial-lattice option pricing model while taking into consideration the price of the Company's Class A common stock, vesting conditions, and a sub optimal exercise factor calibrated to the valuation obtained from the Black-Scholes options model used for a hypothetical at-the-money option with the same vesting schedules.
We determine the fair value of the Fixed Value RSUs using the fixed dollar amount of the award. The Fixed Value RSUs are classified as liabilities.
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
Certain assumptions used in the model are subjective and require significant management judgment, and include the (i) risk-free rate, (ii) volatility, (iii) expected term, and (iv) suboptimal exercise factor. The Company has historically been a private company and lacked sufficient company-specific historical and implied volatility information. Therefore, it estimated its expected stock volatility based on the implied volatility of our publicly traded financial instruments and the historical volatility of a publicly traded set of peer companies. The risk-free interest rate is based on the interpolated 5 and 7 year U.S. Treasury constant maturity yields. Changes in these assumptions can materially affect the estimate of the grant date fair value of the Employee NQSOs and ultimately compensation expenses.
See Note 15 Stock-Based Compensation for further information.
Private Placement Warrants and Unvested Founder Shares
The Company classifies the Private Placement Warrants and unvested founder shares as a liability on its consolidated balance sheets as these instruments are precluded from being indexed to our own stock given the terms allow for a settlement adjustment that does not meet the scope of the fixed-for-fixed exception in ASC 815.
The Private Placement Warrants and unvested founder shares were initially recorded at fair value on the date of consummation of the Transactions and are subsequently adjusted to fair value at each subsequent reporting date. Changes in the fair value of these instruments are recognized within change in fair value of Private Placement Warrants and unvested founder shares in the consolidated statements of income (loss) and comprehensive income (loss). The fair value of the unvested founder shares and unvested Private Placement Warrants is obtained using a Monte Carlo model and the fair value of the remaining Private Placement Warrants using a Black Scholes model, together referenced as the "option pricing" model. The Company will continue to adjust the liability for changes in fair value for the founder shares until the earlier of the re-vesting or forfeiture of these instruments. The Company will continue to adjust the liability for changes in fair value for the Private Placement Warrants until the warrant is equity classified.
We determine the fair value of the Private Placement Warrants and unvested founder shares using an option pricing model while taking into consideration (i) the price of the Company's Class A common stock, (ii) transfer restrictions, and (iii) vesting hurdles, as applicable. The simulation was based on a risk neutral framework which is a common technique for valuing financial derivatives that possess optionality.
Certain assumptions used in the model are subjective and require significant management judgment, and include the (i) the risk-free rate, (ii) volatility, and (iii) the discount for lack of marketability. Changes in these assumptions can materially affect the estimate of the fair value of these instruments and ultimately other income and expenses. The Company has historically been a private company and lacked sufficient company-specific historical and implied volatility information. Therefore, it estimated its expected stock volatility based on the implied volatility of our publicly traded financial instruments and the historical volatility of a publicly traded set of peer companies. The risk-free interest rate is based on the 5 year U.S. Treasury constant maturity yields. The discount for lack of marketability for privately held securities is based on the average rate protective put method that estimates the discount based on the average price over the restriction period rather than based on the final price.
Customer Concentration
Three customers individually accounted for 34%, 19% and 10% of revenues for the year ended December 31, 2021 and 35%, 20% and 9% of revenues for each of the years ended December 31, 2020 and December 31, 2019. The loss of the business of one or more of our larger customers could have a material adverse effect on our results of operations.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, which include cash and accounts receivable, approximate their fair values due to their short maturities.
The fair value of long-term debt is based on interest rates currently available for instruments with similar terms. The fair value of the Private Placement Warrants and unvested founder shares described in Note 10 Private Placement Warrants and Unvested Founder Shares is based on the price of the Company's Class A common stock while taking in consideration restrictions and vesting conditions, as applicable.
See Note 11 Fair Value Measurements for additional details.
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred income tax assets are recognized for deductible temporary differences, net operating loss carry forwards and tax credit carry forwards if it is more likely than not that the tax benefits will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
The Company evaluates all factors on a regular basis to determine the amount of deferred income tax assets to recognize in the financial statements, including its recent earnings history, current and projected future taxable income, the number of years its net operating loss and tax credits can be carried forward, the existence of taxable temporary differences and available tax planning strategies.
Earnings and Loss per Common Share
The Company calculates basic EPS based on the weighted average number of common shares outstanding for the period.
The Company determines diluted EPS using the weighted-average number of common shares outstanding during the period, adjusted for potentially dilutive shares associated with warrants, shares which may be issued upon conversion of the Senior Convertible PIK Notes, unvested founder shares and awards within the 2020 Omnibus Incentive Plan (collectively, common stock equivalents), using the treasury stock method. The treasury stock method assumes a hypothetical issuance of shares to settle the share-based awards, with the assumed proceeds used to purchase common stock at the average market price for the period. Assumed proceeds include the amount the employee must pay upon exercise and the average unrecognized compensation cost. The difference between the number of shares assumed issued and number of shares assumed purchased represents the dilutive shares. Out-of-the-money common stock equivalents are considered anti-dilutive and are excluded in the computation of diluted EPS.
In periods when the Company records net loss, common stock equivalents are excluded in the computation of diluted EPS because their inclusion would be anti-dilutive.
See Note 17 Basic and Diluted Earnings and Loss Per Share for additional information.
3.New Accounting Pronouncements
We consider the applicability and impact of all ASUs and applicable authoritative guidance. The ASUs not listed below were assessed and determined to be either not applicable or are expected to have an immaterial impact on our consolidated financial position.
New Accounting Pronouncements Recently Adopted
ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses. In 2016, the FASB issued Accounting Standards Update ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments including subsequent amendments to the initial guidance: ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. ASU 326 and related amendments require credit losses on financial instruments measured at amortized cost basis to be presented at the net amount expected to be collected, replacing the current incurred loss approach with an expected loss methodology that is referred to as CECL. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We adopted this standard on January 1, 2020, using a modified retrospective approach. Our financial instruments in the scope of the new standard consist primarily of trade receivables and loans. The adoption of ASC 326 had no material impact on our consolidated financial statements.
ASU 2018-15, Intangibles-Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer's Accounting for
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU addresses a customer's accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). We adopted this new accounting standard as of January 1, 2020 on a prospective basis. The adoption of this ASU did not have a material impact on our consolidated financial statements.
ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Change to the Disclosure Requirements for Fair Value Measurement. In June 2016, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Change to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures. This ASU is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. We adopted this guidance on January 1, 2020 and it had no material impact on our consolidated financial statements.
ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. We adopted this guidance on January 1, 2021 and it had no material impact on our consolidated financial statements.”
ASU 2020-06, Debt — Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. On August 5, 2020, the FASB issued ASU 2020-06, Debt — Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. The amendments simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity's own equity. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Early adoption is permitted. The Company adopted this new accounting standard on January 1, 2021 on a modified retrospective basis. As a result, comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods. The adoption of the standard resulted in a reclassification to long-term debt of $297.9 million, corresponding to the equity component of $233.9 million previously recorded in additional paid-in capital, the deferred taxes related to the equity component as of January 1, 2021 of $70.0 million, and a cumulative-effect adjustment to increase retained earnings as of January 1, 2021 by $6.0 million, which reflects the elimination of the discount amortization related to the equity component in prior periods, net of deferred taxes. See Note 9 Long-Term Debt below for additional information on the impact of this adoption.
New Accounting Pronouncements Issued but Not Yet Adopted
ASU 2020-04 and 2021-01, Reference Rate Reform (Topic 848) and Reference Rate Reform (Topic 848): Scope. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848), which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope, which expanded the scope of Topic 848 to include derivative instruments impacted by discounting transition. ASU 2020-04 and ASU 2021-01 are effective for all entities through December 31, 2022. The expedients and exceptions provided by the amendments do not apply to contract modifications and hedging relationships entered into or evaluated after December 31, 2022, except for hedging transactions as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The Company has senior secured credit facilities for which the interest rates are indexed on the LIBOR. The guidance did not have an impact on our financial position, results of operations or disclosures at transition, but we will continue to evaluate its impact on contracts and hedging relationships modified on or before December 31, 2022.
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
4. The Transactions
As discussed in Note 1 General Information and Business, on October 8, 2020, the Company consummated the Transactions. Upon the consummation of the Transactions: (i) First Merger Sub was merged with and into Polaris with Polaris being the surviving company in the merger and (ii) immediately following the First Merger and as part of the same overall transaction as the First Merger, Polaris was merged with and into Second Merger Sub, with Second Merger Sub surviving the merger as a wholly owned subsidiary of the Company. In connection with the consummation of the Transactions:
•$1,521.0 million in cash was paid to Holdings on behalf of Holdings' equity holders as the closing cash consideration;
•the Company issued 415,700,000 shares of its Class A common stock as closing share consideration;
•holders of 8,693,855 shares of the Company's Class A common stock sold in its Initial Public Offering properly exercised their right to have such shares redeemed for a full pro rata portion of the Trust Account holding the proceeds from the Company's Initial Public Offering, calculated as of two business days prior to the consummation of the Transactions, or approximately $10.03 per share and $87.2 million in the aggregate;
•the Company issued and sold to investors in a private placement, (x) 130,000,000 shares of the Company's Class A common stock at a purchase price of $10.00 per share for aggregate proceeds of $1,300.0 million, (y) warrants to purchase 6,500,000 shares of the Company's Class A common stock and (z) an additional 2,050,000 shares of the Company's Class A common stock in lieu of an original issue discount;
•the Company issued and sold to investors in a private placement $1,300.0 million in aggregate principal amount of Senior Convertible PIK Notes, with an original issue discount of $32.5 million, for aggregate proceeds of $1,267.5 million;
•the Senior PIK Notes were redeemed in full for a total redemption price of $1,237.6 million (which includes accrued interest through October 7, 2020);
•all of the Company's 27,500,000 outstanding shares of Class B common stock were converted into shares of the Company's Class A common stock on a one-for-one basis;
•the Company paid KG a transaction fee of $15.0 million and a placement fee of $15.5 million, all of which was paid in cash; and
•The Sponsor elected to convert the full balance of the unsecured promissory note issued by the Company, in the principal amount of $1.5 million, into 1,500,000 Working Capital Warrants.
The consummation of the Transactions constituted a definitive Liquidity Event under the agreements governing the Unit awards and as a result all unvested Units vested on October 7, 2020, as more fully described in Note 15 Stock-Based Compensation. Polaris recorded these awards within shareholders' equity as an equity contribution from Holdings based on the fair value of the outstanding Units at each reporting period. The settlement of these awards was made in a combination of cash and shares of the Company's Class A common stock and was included in the aggregate consideration paid to Polaris Owners.
After giving effect to the Transactions and the redemption of public shares as described above, there were 664,152,068 shares of the Company's Class A common stock issued and 655,057,192 shares of the Company's Class A common stock outstanding, excluding (i) the 9,094,876 shares purchased by a subsidiary of MultiPlan in August 2020, which shares are held by the Company as treasury shares and (ii) the 12,404,080 founder shares that unvested in connection with the Transactions as more fully described in Note 10 Private Placement Warrants and Unvested Founder Shares. The shares, options and net loss per share available to holders of the Company's common stock, prior to the Transactions, have been retroactively restated as shares reflecting the exchange ratio established in the Transactions.
In connection with the Transactions, the Company has incurred transaction costs. The transaction costs directly attributable to the Transactions represent $113.1 million and have been recorded as a reduction to additional paid in capital in the accompanying consolidated balance sheets. The transaction costs considered incremental have been expensed as incurred and these amounts, $28.7 million for the year ended December 31, 2020, are included in general and administrative expenses in the accompanying consolidated statements of income (loss) and comprehensive income (loss).
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
Remaining funds held on the Closing Date in the Trust Account of $792.7 million were released to be used for working capital and general corporate purposes.
5.Business Combinations
DHP Acquisition
On February 26, 2021, the Company completed the acquisition of DHP, an analytics and technology company offering healthcare revenue and payment integrity services. The Company acquired 100 percent of the voting equity interest of DHP. The acquisition strengthens MultiPlan's service offering in the payment integrity market with new and complementary services to help its payor customers manage the overall cost of care and improve their competitiveness. It also adds revenue integrity services for plans that receive premiums from the Centers for Medicare and Medicaid Services.
The DHP acquisition was accounted for as a business combination using the acquisition method of accounting. As a result of the DHP acquisition and the application of purchase accounting, DHP's identifiable assets and liabilities were adjusted to their fair market values as of the acquisition date. The amount of DHP goodwill that is deductible for income tax purposes is $48.0 million.
The following table summarizes the consideration transferred to acquire DHP and the amounts of identified assets acquired and liabilities assumed at the acquisition date:
| | | | | | | | |
| (in thousands) | | |
| Total consideration transferred in cash | | $ | 151,776 | |
| | |
| Cash and cash equivalents | | 2,100 | |
| Trade accounts receivable, net | | 2,993 | |
| Prepaid expenses | | 369 | |
| Other current assets, net | | 119 | |
Property and equipment, net(1) | | 9,056 | |
| Other assets | | 276 | |
Other intangibles, net(2) | | 41,060 | |
| Accounts payable | | (458) | |
| Other accrued expenses | | (5,209) | |
| Deferred income taxes | | (6,215) | |
| Long-Term Liabilities | | (553) | |
| Total identifiable net assets | | 43,538 | |
| | |
| Goodwill | | $ | 108,238 | |
(1)Includes capitalized software of $8.9 million and other tangible assets of $0.2 million.
(2)Includes client relationships of $39.8 million with a remaining useful life of 16 years, and trade names of $1.2 million with a remaining useful life of 10 years. The weighted average remaining useful life of the acquired intangibles subject to amortization is 15 years, 9 months.
The preliminary purchase price allocation for the business combination is subject to adjustment as valuation analyses, primarily related to property and equipment and intangible assets, are finalized.
The results of operations and financial condition of DHP have been included in the Company's consolidated results from the date of acquisition. Through December 31, 2021, DHP's impact on revenues and net earnings was not material and as a result no pro forma disclosures were required.
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
In connection with the DHP acquisition, the Company incurred transaction costs that have been expensed as incurred and these amounts totaling $4.9 million for the year ended December 31, 2021, are included in general and administrative expenses in the accompanying consolidated statements of income (loss) and comprehensive income (loss).
HST Acquisition
On November 9, 2020, the Company completed the acquisition of HST, a reference-based pricing company that uses data analytics and tools to engage members and providers on the front and back end of healthcare. The Company acquired 100 percent of the voting equity interest of HST. The acquisition increases the value that MultiPlan offers to healthcare payors by adding complementary services to help them better manage cost, enhances MultiPlan's analytics products and services and further extends the company into adjacent customer segments such as TPAs and Regional Health Plans.
The HST acquisition was accounted as a business combination using the acquisition method of accounting. As a result of the HST acquisition and the application of purchase accounting, HST's identifiable assets and liabilities were adjusted to their fair market values as of the acquisition date. The HST goodwill is not deductible for income tax purposes.
The following table summarizes the consideration transferred to acquire HST and the amounts of identified assets acquired and liabilities assumed at the acquisition date:
| | | | | | | | | | | | | | | | | |
| (in thousands) | December 31, 2020 | | Measurement period adjustments | | December 31, 2021 |
| | | | | |
| Total consideration transferred in cash | $ | 145,416 | | | $ | (182) | | | $ | 145,234 | |
| | | | | |
| Cash and cash equivalents | 5,384 | | | 64 | | | 5,448 | |
| Trade accounts receivable, net | 885 | | | (112) | | | 773 | |
| Prepaid expenses | 138 | | | — | | | 138 | |
| Operating lease right-of-use assets | 1,306 | | | — | | | 1,306 | |
| Property and equipment, net | 78 | | | — | | | 78 | |
| Other current assets, net | 60 | | | 1,635 | | | 1,695 | |
| Trademark, net | 1,430 | | | — | | | 1,430 | |
| Technology, net | 6,350 | | | — | | | 6,350 | |
| Client relationships intangible, net | 24,460 | | | — | | | 24,460 | |
| Accounts payable | (419) | | | (139) | | | (558) | |
| Other accrued expenses | (310) | | | (140) | | | (450) | |
| Deferred income taxes | (7,854) | | | 1,016 | | | (6,838) | |
| Operating lease obligation | (1,415) | | | — | | | (1,415) | |
| Total identifiable net assets | 30,093 | | | 2,324 | | | 32,417 | |
| | | | | |
| Goodwill | $ | 115,323 | | | $ | (2,506) | | | $ | 112,817 | |
The results of operations and financial condition of HST have been included in the Company's consolidated results from the date of acquisition. Through December 31, 2021, HST's impact on revenues and net earnings was not material and as a result no pro forma disclosures were required.
In connection with the HST acquisition, the Company incurred transaction costs. The transaction costs have been expensed as incurred and these amounts totaling $0.1 million and $0.9 million for the years ended December 31, 2021 and 2020, respectively, are included in general and administrative expenses in the accompanying consolidated statements of income (loss) and comprehensive income (loss).
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
6.Property and Equipment
Property and equipment, net consisted of the following as of December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
| (in thousands) | Property
and
Equipment | | Accumulated
Depreciation | | Property and
Equipment,
Net | | Property
and
Equipment | | Accumulated
Depreciation | | Property and
Equipment,
Net |
| Leasehold improvements | $ | 4,279 | | | $ | (3,074) | | | $ | 1,205 | | | $ | 3,583 | | | $ | (2,507) | | | $ | 1,076 | |
| Furniture & equipment | 5,569 | | | (4,137) | | | 1,432 | | | 5,719 | | | (3,810) | | | 1,909 | |
| Computer hardware | 46,733 | | | (26,776) | | | 19,957 | | | 45,865 | | | (29,115) | | | 16,750 | |
| Computer software | 35,991 | | | (28,477) | | | 7,514 | | | 33,903 | | | (27,796) | | | 6,107 | |
| Capitalized software development | 405,203 | | | (222,073) | | | 183,130 | | | 341,844 | | | (180,055) | | | 161,789 | |
| Total Property and Equipment | $ | 497,775 | | | $ | (284,537) | | | $ | 213,238 | | | $ | 430,914 | | | $ | (243,283) | | | $ | 187,631 | |
Furniture and equipment includes assets under finance leases of $0.5 million and $0.4 million with accumulated depreciation of $0.3 million and $0.2 million as of December 31, 2021 and 2020, respectively.
During the years ended December 31, 2021 and 2020, the Company conducted a review of its property and equipment records and wrote-off assets with a net value of $3.2 million and $0.7 million, respectively.
7.Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets and current and non-current operating lease obligation on the consolidated balance sheets. Finance lease ROU assets are included in property and equipment, net, and the current and non-current portion of finance lease liabilities are included in other accrued expenses and long-term debt, respectively, on the consolidated balance sheets.
The Company has operating and finance leases for corporate offices and certain equipment. Leases have remaining lease terms ranging from one to six years. Certain leases include options to renew in increments of five years; the options to renew are not considered reasonably certain to be exercised at commencement and are not included in the lease term. Some leases have variable payments, however, because they are not based on an index or rate, they are not included in the measurement of ROU assets and operating lease liabilities. Variable payments for real estate leases relate primarily to common area maintenance, insurance and property taxes associated with the properties. These variable payments are expensed as incurred. The Company elected to not separate lease and non-lease components for building and equipment leases. The Company will account for the lease and non-lease components, such as those described above, as a single lease component.
The Company’s lease costs are recorded in cost of services and general and administrative expenses. Short-term and finance lease expense was determined to not be material. For the years ended December 31, 2021, 2020 and 2019 lease costs are as follows:
| | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| Operating lease cost | $ | 9,851 | | | $ | 10,884 | | | $ | 11,000 | |
| Variable lease cost | 1,629 | | | 1,886 | | | 1,800 | |
| Total operating lease cost | $ | 11,480 | | | $ | 12,770 | | | $ | 12,800 | |
| | | | | |
| Operating cash flow from operating leases | $ | 7,709 | | | $ | 10,527 | | | $ | 10,961 | |
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
Future lease payments under operating leases as of December 31, 2021 were as follows:
| | | | | |
| (in thousands) | |
| 2022 | $ | 8,578 | |
| 2023 | 8,439 | |
| 2024 | 5,087 | |
| 2025 | 4,950 | |
| 2026 | 4,687 | |
| Thereafter | 7,490 | |
| Total lease payments | 39,231 | |
| Less: Interest | (5,623) | |
| Present value of lease liabilities | $ | 33,608 | |
Additional information related to the Company’s leases as of December 31, 2021 and 2020, respectively, is as follows:
| | | | | | | | | | | |
| For the Year Ended December 31, |
| 2021 | | 2020 |
| Weighted-average remaining lease term | 5 years, 8 months | | 5 years, 4 months |
| Weighted-average discount rate | 5.7 | % | | 6.5 | % |
As of December 31, 2021 and 2020, there were no material lease transactions that we have entered into but have not yet commenced.
8.Goodwill and Other Intangible Assets
As of each balance sheet date, other intangible assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, |
| | | 2021 | | 2020 |
| (in thousands) | Weighted-average amortization period | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Value | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Value |
| Client relationships | 15 years | | $ | 4,178,280 | | | $ | (1,531,679) | | | $ | 2,646,601 | | | $ | 4,138,460 | | | $ | (1,252,892) | | | $ | 2,885,568 | |
| Provider network | 15 years | | 896,800 | | | (332,812) | | | 563,988 | | | 896,800 | | | (273,026) | | | 623,774 | |
| Technology | 5 years | | 6,350 | | | (1,482) | | | 4,868 | | | 6,350 | | | (211) | | | 6,139 | |
| Trade names | 9 years | | 2,670 | | | (390) | | | 2,280 | | | 1,430 | | | (24) | | | 1,406 | |
| Trade names | Indefinite | | 67,300 | | | — | | | 67,300 | | | 67,300 | | | — | | | 67,300 | |
| Total | | | $ | 5,151,400 | | | $ | (1,866,363) | | | $ | 3,285,037 | | | $ | 5,110,340 | | | $ | (1,526,153) | | | $ | 3,584,187 | |
The estimated aggregate amortization expense for each of the five succeeding years is $340.2 million per year.
The goodwill arose from the acquisition of the Company in 2016 by Holdings, the HST acquisition in 2020 and the DHP acquisition in 2021. The carrying value of goodwill was $4,363.1 million and $4,257.3 million as of December 31, 2021 and 2020, respectively, and no impairment has been recognized to date.
Goodwill for the years ended December 31, 2021 and 2020 are as follows:
| | | | | | | | | | | | | | |
| (in thousands) | | 2021 | | 2020 |
| Beginning balance, January 1 | | $ | 4,257,336 | | | $ | 4,142,013 | |
| Acquisitions | | 108,435 | | | 115,323 | |
| Measurement period adjustments | | (2,701) | | | — | |
| Ending balance, December 31 | | $ | 4,363,070 | | | $ | 4,257,336 | |
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
9.Long-Term Debt
As of December 31, 2021, and 2020, outstanding long-term debt is summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Key Terms | | As of December 31, |
| (in thousands) | Character | | Priority | | Maturity | | Coupon | | 2021 | | 2020 |
| Term Loan G | Term Loan | | Senior Secured | | 6/7/2023 | | Variable | | $ | — | | | $ | 2,341,000 | |
| Term Loan B | Term Loan | | Senior Secured | | 9/1/2028 (1) | | Variable (2) | | 1,321,688 | | | — | |
5.750% Notes | Notes | | Senior Unsecured | | 11/1/2028 | | 5.750% | | 1,300,000 | | | 1,300,000 | |
5.50% Senior Secured Notes | Notes | | Senior Secured | | 9/1/2028 | | 5.50% | | 1,050,000 | | | — | |
| Senior Convertible PIK Notes | Convertible Notes (3) | | Senior Unsecured | | 10/15/2027 | | Cash Interest 6.00%, PIK Interest 7.00% | | 1,300,000 | | | 1,300,000 | |
| Finance lease obligations, non-current | Other | | Senior Secured | | 2022-2024 | | 3.38% - 20.31% | | 71 | | | 92 | |
| Long-term debt | | | | | | | | | 4,971,759 | | | 4,941,092 | |
| Less: current portion of long-term debt | | | | | | | | | (13,250) | | | — | |
| Less: debt discounts, net | | | | | | | | | (40,579) | | | (333,325) | |
| Less: debt issuance costs, net | | | | | | | | | (38,786) | | | (29,279) | |
| Long-term debt, net | | | | | | | | | $ | 4,879,144 | | | $ | 4,578,488 | |
(1)Beginning December 31, 2021 and quarterly thereafter, we shall repay a principal amount of the Term Loan B equal to 0.25% of the initial aggregate principal of $1,325.0 million. These scheduled principal repayments may be reduced by any voluntary or mandatory prepayments made in accordance with the credit agreement.
(2)Interest on Term Loan B and Revolver B is calculated, at MPH's option, as (a) LIBOR (or, with respect to the term loan facility only, 0.50%, whichever is higher), plus the applicable margin, or (b) the highest rate of (1) prime rate, (2) the federal funds effective rate, plus 0.50%, (3) the LIBOR for an interest period of one month, plus 1.00% and (4) 0.50% for Term Loan B and 1.00% for Revolver B, in each case, plus an applicable margin of 4.25% for Term Loan B and between 3.50% and 4% for Revolver B, depending on MPH's first lien debt to consolidated EBITDA ratio. The interest rate in effect for Term Loan B was 4.75% as of December 31, 2021.
(3)The Senior Convertible PIK Notes are convertible into shares of Class A common stock based on a $13.00 conversion price, subject to customary anti-dilution adjustments.
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
As of December 31, 2021, the aggregate future principal payments for long-term debt, including non-current finance lease liabilities, for each of the next five years and thereafter are as follows:
| | | | | |
| ($ in thousands) | |
| 2022 | $ | 13,250 | |
| 2023 | 13,307 | |
| 2024 | 13,264 | |
| 2025 | 13,250 | |
| 2026 | 13,250 | |
| Thereafter | 4,905,438 | |
| Total | $ | 4,971,759 | |
Debt issuance and redemption
During August and September of 2019, the Company repurchased and cancelled $121.3 million of the Senior PIK Notes. As a result, we recognized a gain on debt extinguishment of $18.5 million in the year ended December 31, 2019 included in Loss (gain) on extinguishment of debt in the accompanying consolidated statements of income (loss) and comprehensive income (loss).
On October 8, 2020, the Senior PIK notes were redeemed in full for a total redemption price of $1,237.6 million. As a result, we recognized a loss on debt extinguishment of $35.7 million in the year ended December 31, 2020 included in Loss (gain) on extinguishment of debt in the accompanying consolidated statements of income (loss) and comprehensive income (loss).
On October 29, 2020, the Company (a) consumed the 5.750% Notes offering by MPH and increased the revolving credit facility under the senior secured credit facilities from $100.0 million to $450.0 million and (b) repaid of all outstanding 7.125% Notes and $369.0 million of indebtedness under Term Loan G with the net proceeds of the 5.750% Notes offering, together with $715.0 million of cash on hand. As a result, we recognized a loss on debt extinguishment of $67.2 million in the year ended December 31, 2020 included in Loss (gain) on extinguishment of debt in the accompanying consolidated statements of income (loss) and comprehensive income (loss).
On August 24, 2021, MPH issued new senior secured credit facilities composed of $1,325.0 million of Term Loan B and $450.0 million of a Revolver B, and $1,050.0 million in aggregate principal amount of 5.50% Senior Secured Notes. MPH used the net proceeds from Term Loan B, and the 5.50% Senior Secured Notes to repay all of the outstanding balance of its Term Loan G of $2,341.0 million, and pay fees and expenses in connection therewith. As a result, we recognized a loss on debt extinguishment of $15.8 million in the year ended December 31, 2021 included in Loss (gain) on extinguishment of debt in the accompanying consolidated statements of income (loss) and comprehensive income (loss).
Debt Discounts
Some of our debt instruments have been issued with a discount. These costs were capitalized and are being amortized over the term of the related debt using the effective interest method.
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
The following table is a summary of the cost and accumulated amortization of debt discounts as of December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Original discount % | | As of December 31, |
| | 2021 | | 2020 |
| ($ in thousands) | | Cost | | Accumulated
Amortization | | Net | | Cost | | Accumulated
Amortization | | Net |
| Term Loan G | 0.5% | | $ | — | | | $ | — | | | $ | — | | | $ | 17,350 | | | $ | (13,519) | | | $ | 3,831 | |
| Term Loan B | 1.0% | | 13,429 | | | (565) | | | 12,864 | | | — | | | — | | | — | |
| Senior Convertible PIK Notes | 2.5% | | 32,500 | | | (4,785) | | | 27,715 | | | 337,501 | | | (8,007) | | | 329,494 | |
| Total | | | $ | 45,929 | | | $ | (5,350) | | | $ | 40,579 | | | $ | 354,851 | | | $ | (21,526) | | | $ | 333,325 | |
Prior to the adoption of ASU 2020-06 on January 1, 2021, the nature of the Senior Convertible PIK Notes required management to separate them into liability and equity components. ASU 2020-06’s elimination of the beneficial conversion guidance resulted in "recombining" the equity and debt components of the Senior Convertible PIK Notes into a single liability. As a result, $297.9 million of the discount on the liability created by recognition of a component of the convertible debt in equity was eliminated. See Note 3 New Accounting Pronouncements above for additional detail.
Debt Issuance Costs
In connection with the issuance of our debt instruments, the Company incurred specific expenses related to raising the debt, including commissions, fees and expenses of investment bankers and underwriters, registration and listing fees, accounting and legal fees pertaining to the financing and other external, incremental expenses paid to advisors that were directly attributable to realizing the proceeds of the debt issues. These costs were capitalized and are being amortized over the term of the related debt using the effective interest method.
The following table is a summary of the cost and accumulated amortization of debt issuances costs as of December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortization
Period | | As of December 31, |
| | 2021 | | 2020 |
| ($ in thousands) | | Cost | | Accumulated
Amortization | | Net | | Cost | | Accumulated
Amortization | | Net |
| Term Loan G | 84 months | | $ | — | | | $ | — | | | $ | — | | | $ | 32,324 | | | $ | (22,658) | | | $ | 9,666 | |
| Term Loan B | 84 months | | 7,316 | | | (308) | | | 7,008 | | | — | | | — | | | — | |
5.750% Notes | 96 months | | 19,939 | | | (2,349) | | | 17,590 | | | 19,939 | | | (326) | | | 19,613 | |
5.50% Senior Secured Notes | 84 months | | 14,695 | | | (507) | | | 14,188 | | | — | | | — | | | — | |
Revolver(1) | 84 months | | 4,955 | | | (290) | | | 4,665 | | | 4,722 | | | (1,076) | | | 3,646 | |
| Total | | | $ | 46,905 | | | $ | (3,454) | | | $ | 43,451 | | | $ | 56,985 | | | $ | (24,060) | | | $ | 32,925 | |
(1)The debt issuance costs associated with the revolving credit facility are included in other assets in the accompanying consolidated balance sheets.
Interest expense
During the year ended December 31, 2020, a correcting adjustment of $2.3 million was made to increase interest expense to account for acceleration of debt issuance cost due to principal prepayments made on the Term Loan G in the years 2018, 2019 and 2020. The adjustment was not material to the current period or historical period financial statements.
The Company is obligated to pay a commitment fee on the average daily unused amount of Revolver B. The annual commitment fee can range from an annual rate of 0.25% to 0.50% based on the Company's first lien debt to consolidated EBITDA ratio, as defined in the agreement. Interest expense, including commitment fees and amortization of debt issuance costs, were $2.7 million, $1.9 million and $0.2 million for the years ended December 31, 2021, 2020 and 2019, respectively. These amounts are included in interest expense in the accompanying consolidated statements of income (loss) and comprehensive income (loss).
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
Interest expense related to long-term debt was $264.8 million, $333.7 million and $376.1 million for the year ended December 31, 2021, 2020 and 2019, respectively. These amounts are included in the accompanying consolidated statements of income (loss) and comprehensive income (loss).
Guarantees
The senior secured credit facilities and their guarantees are secured, subject to permitted liens and other exceptions, by a first priority lien on substantially all of MPH's and the subsidiary guarantors' tangible and intangible property, and a pledge of all of the capital stock of each of their respective subsidiaries. All obligations under the debt agreement governing the senior secured credit facilities are unconditionally guaranteed by MPH Acquisition Corp. 1, the direct holding company parent of MPH, and each existing and subsequently acquired or organized direct or indirect wholly owned U.S. organized restricted subsidiary of MPH (subject to certain exceptions).
The 5.50% Senior Secured Notes are fully and unconditionally guaranteed, jointly and severally, by each of MPH’s wholly owned domestic restricted subsidiaries that guarantee its senior secured credit facilities. The 5.50% Senior Secured Notes are not guaranteed by the Company. The 5.50% Senior Secured Notes and their guarantees are secured, subject to permitted liens and other exceptions, by a first priority lien shared with the senior secured credit facilities on substantially all of MPH’s and the subsidiary guarantors’ tangible and intangible property, and a pledge of all of the capital stock of each of their respective subsidiaries.
The 5.750% Notes and the Senior Convertible PIK Notes are jointly and severally guaranteed on a senior unsecured basis by each of the issuer’s wholly owned domestic restricted subsidiaries that guarantee the issuer’s existing senior secured credit facilities.
Debt Covenants and Events of Default
The Company is subject to certain affirmative and negative debt covenants under the debt agreements governing our indebtedness that limit our and/or certain of our subsidiaries' ability to engage in specific types of transactions. These covenants limit our and/or certain of our subsidiaries' ability to, among other things:
•incur additional indebtedness or issue disqualified or preferred stock;
•pay certain dividends or make certain distributions on capital stock or repurchase or redeem capital stock;
•make certain loans, investments or other restricted payments;
•transfer or sell certain assets;
•incur certain liens;
•place restrictions on the ability of its subsidiaries to pay dividends or make other payments to us;
•guarantee indebtedness or incur other contingent obligations;
•prepay junior debt and make certain investments;
•consummate any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or dispose of all or substantially all of its business units, assets or other properties; and
•engage in transactions with our affiliates.
Certain covenants related to the 5.50% Senior Secured Notes will cease to apply to the 5.50% Senior Secured Notes for so long as such notes have investment grade ratings from both Moody’s Investors Service, Inc. and S&P Global Ratings.
In connection with the Refinancing, the Revolver Ratio was amended such that, if, as of the last day of any fiscal quarter of MPH, the aggregate amount of loans under the revolving credit facility, letters of credit issued under the revolving credit facility (to the extent not cash collateralized or backstopped or, in the aggregate, in excess of $10.0 million) and swingline loans are outstanding and/or issued in an aggregate amount greater than 35% of the total commitments in respect of the revolving credit facility at such time, the revolving credit facility will require MPH to maintain a maximum first lien secured leverage ratio of 6.75 to 1.00. As of December 31, 2021 and 2020 we were in compliance with all of the debt covenants.
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
The debt agreements governing the new senior secured credit facilities, Term Loan G, the Revolver G, the 5.750% Notes and the 5.50% Senior Secured Notes contain customary events of default, subject to grace periods and exceptions, which include, among others, payment defaults, cross-defaults to certain material indebtedness, certain events of bankruptcy, material judgments, in the case of the debt agreements governing the new senior secured credit facilities and the 5.50% Senior Secured Notes, failure of a guarantee on the liens on material collateral to remain in effect, in the case of the debt agreements governing the new senior secured credit facilities, Term Loan G and the Revolver G, any change of control. Upon the occurrence of an event of default under such debt agreements, the lenders and holders of such debt will be permitted to accelerate the loans and terminate the commitments, as applicable, thereunder and exercise other specified remedies available to the lenders and holders thereunder.
10.Private Placement Warrants and Unvested Founder Shares
In connection with the execution of the Merger Agreement, Churchill and the Insiders entered into a Sponsor Agreement. Pursuant to the terms of the Sponsor Agreement, 12,404,080 of the founder shares and 4,800,000 Private Placement Warrants were unvested as of October 8, 2020 and will re-vest at such time as, during the period starting on October 8, 2021 and ending on October 8, 2025, the closing price of our Class A common stock exceeds $12.50 per share for any forty (40) trading days in a sixty (60) consecutive day period. Such founder shares and Private Placement Warrants that do not re-vest on or before October 8, 2025 will be forfeited and cancelled.
With certain limited exceptions, the founder shares are not transferable, assignable or salable (except to our officers and directors and other persons or entities affiliated with the Sponsor and other permitted transferees, each of whom will be subject to the same transfer restrictions) until April 8, 2022. The 4,800,000 Private Placement Warrants that vest are not transferable, assignable or salable (except to our officers and directors and other persons or entities affiliated with the Sponsor and other permitted transferees, each of whom will be subject to the same transfer restrictions) until they re-vest, and not before April 8, 2022.
In the event of an "Acquiror Sale" defined by the Sponsor Agreement as (i) a purchase, sale, exchange, business combination or other transaction in which the equity securities of the acquiror, its successor or the surviving entity of such business combination or other transaction are not registered under the Securities Exchange Act of 1934, or listed or quoted for trading on a national securities exchange or (ii) a sale, lease, exchange or other transfer in one transaction or a series of related transactions of all or substantially all of the acquiror's assets to a third party that is not an affiliate of the Sponsor, the founder shares and Private Placement Warrants that re-vest will change based on the acquiror price. If the Acquiror Price is less than $10 per share, no Founder Shares or vesting Private Placement Warrants will vest; if the Acquiror Price exceeds $12.50 per share, all Founder Shares or vesting Private Placement Warrants will vest; and if the Acquiror Price is between $10 per share and $12.50 per share, the number of founder shares or vesting Private Placement warrants that vest will be determined based on linear interpolation between such share price levels. The remaining Founder Shares and vesting Private Placement warrants will be forfeited and cancelled for no consideration.
As of December 31, 2020, the fair values of the Private Placement Warrants and unvested founder shares were $44.5 million and $62.1 million, respectively. As of December 31, 2021, the fair values of the Private Placement Warrants and unvested founder shares were $38.0 million and $36.0 million, respectively. From the year ended December 31, 2021, and primarily as a result of the decrease in the price of the Company's Class A common stock over that period, the fair value of the Private Placement Warrants and the unvested founder shares decreased by $6.5 million and $26.1 million, respectively, and the corresponding gain is recognized within change in fair value of Private Placement Warrants and unvested founder shares in the consolidated statements of income (loss) and comprehensive income (loss).
11.Fair Value Measurements
Fair value measurements are based on the premise that fair value represents an exit price representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the following three-tier fair value hierarchy has been used in determining the inputs used in measuring fair value:
•Level 1 — Quoted prices in active markets for identical assets or liabilities on the reporting date.
•Level 2 — Inputs, other than quoted prices in active markets (Level 1), that are observable for the asset or liability, either directly or indirectly.
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
•Level 3 — Unobservable inputs in which there is little or no market data, which require the entity to develop its own assumptions
Financial instruments
Certain financial instruments which are not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable and accounts payable, which approximate fair value due to their short-term nature. The financial instrument that potentially subjects the Company to concentrations of credit risk consists primarily of accounts receivable.
We estimate the fair value of long-term debt, including current maturities of finance lease obligations, based on estimates using present value techniques that are significantly affected by the assumptions used concerning the amount and timing of estimated future cash flows and discount rates that reflect varying degrees of risk. Assumptions include interest rates currently available for instruments with similar terms as well as the five, seven, and eight-year Treasury bill rates. As such, this is considered a Level 2 fair value measurement.
As of December 31, 2021 and 2020, the Company's carrying amount and fair value of long-term debt consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 |
| (in thousands) | Carrying
Amount | | Fair Value | | Carrying
Amount | | Fair Value |
| Liabilities: | | | | | | | |
| Term Loan G, net of discount | $ | — | | | $ | — | | | $ | 2,337,169 | | | $ | 2,390,720 | |
| Term Loan B, net of discount | 1,308,824 | | | 1,294,312 | | | — | | | — | |
5.750% Notes, net of discount | 1,300,000 | | | 1,245,436 | | | 1,300,000 | | | 1,300,000 | |
5.50% Senior Secured Notes | 1,050,000 | | | 1,029,680 | | | — | | | — | |
| Senior Convertible PIK Notes, net of discount | 1,272,285 | | | 1,245,958 | | | 970,506 | | | 970,506 | |
| Finance lease obligations | 71 | | | 71 | | | 92 | | | 92 | |
| Total Liabilities | $ | 4,931,180 | | | $ | 4,815,457 | | | $ | 4,607,767 | | | $ | 4,661,318 | |
Recurring fair value measurements
Prior to the Transactions, we measured our 2016 Class B Unit Incentive Plan at fair market value on a recurring basis. The fair value of the stock-based compensation awards was determined based on significant inputs not observable in the market which would represent a level 3 measurement within the fair value hierarchy. The Company uses a Monte Carlo simulation to estimate the fair value of the stock-based compensation awards. See Note 15 Stock-Based Compensation for further information.
The Private Placement Warrants and unvested founder shares are measured at fair value on a recurring basis. The fair value of these instruments was determined based on significant inputs not observable in the market which would represent a level 3 measurement within the fair value hierarchy. The Company uses an option pricing simulation to estimate the fair value of these instruments.
Non-recurring fair value measurements
We also measure certain non-financial assets at fair value on a nonrecurring basis, primarily goodwill and long-lived tangible and intangible assets, in connection with periodic evaluations for potential impairment. We estimate the fair value of these assets using primarily unobservable inputs and, as such, these are considered Level 3 fair value measurements. There were no material impairment charges for these assets for fiscal years 2021, 2020 and 2019.
For additional information related to goodwill, intangible assets, long-lived assets and impairments, see Note 2 Summary of Significant Accounting Policies.
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
12.Income Taxes
The Company does not have operations in foreign jurisdictions. The provision (benefit) for income taxes for the years ended December 31, 2021, 2020 and 2019 are as follows:
| | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| Current | | | | | |
| Federal | $ | 95,674 | | | $ | 14,602 | | | $ | 96,148 | |
| State and local | 19,628 | | | 4,096 | | | 16,055 | |
| $ | 115,302 | | | $ | 18,698 | | | $ | 112,203 | |
| Deferred | | | | | |
| Federal | $ | (73,987) | | | $ | (48,168) | | | $ | (97,326) | |
| State and local | (7,942) | | | 3,127 | | | (14,078) | |
| (81,929) | | | (45,041) | | | (111,404) | |
| Total provision (benefit) from continuing operations | $ | 33,373 | | | $ | (26,343) | | | $ | 799 | |
The Company's provision for income taxes for the years ending December 31, 2021, 2020 and 2019 continues to be impacted by the TCJA, which was enacted into law on December 22, 2017. Income tax effects resulting from changes in tax laws are accounted for by the Company in accordance with the authoritative guidance, which requires that these tax effects be recognized in the period in which the law is enacted. During 2020 the Internal Revenue Service issued final regulations relating to the TCJA that the Company assessed and was accounted for in the period when issued. Additional changes under the CARES act in Q1 2020 increased the allowable interest expense deduction for 2019 and 2020. These changes reduced the Company's deferred tax asset and taxes payable in the amount of $32.5 million. This was recorded in the period of enactment. Other impacts of the CARES act were reviewed and determined not to be material to the Company.
The pre-tax income during the year ended December 31, 2021 of $135.5 million generated an income tax provision of $33.4 million. The pre-tax loss during the year ended December 31, 2020 was $546.9 million which generated income tax benefits of $26.3 million. The pre-tax income during the year ended December 31, 2019 of $10.5 million generated an income tax provision of $0.8 million.
The reconciliation of the tax provision at the U.S. federal statutory rate to the provision for income taxes and the effective tax rate for the years ended December 31, 2021, 2020 and 2019 is as follows:
| | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| Tax at Statutory | $ | 28,445 | | | $ | (114,850) | | | $ | 2,207 | |
| Non-Deductible Expenses | 279 | | | 639 | | | 75 | |
| Equity Compensation Plan | 443 | | | 85,227 | | | (3,125) | |
| Non-Deductible change in fair value of Private Placement Warrants and unvested founder shares Liability | (6,845) | | | (7,439) | | | — | |
| State Taxes (net) | 6,003 | | | (1,741) | | | 1,704 | |
| Valuation Allowance | 1,127 | | | 2,555 | | | — | |
| Non-Deductible Compensation | 1,561 | | | 2,725 | | | — | |
| Tax Credits | (1,064) | | | (915) | | | — | |
| Other | 131 | | | 40 | | | 87 | |
| State Deferred Rate Changes | 3,293 | | | 7,416 | | | (149) | |
| Total | $ | 33,373 | | | $ | (26,343) | | | $ | 799 | |
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
Our effective tax rate for the years ended December 31, 2021, 2020 and 2019 differed from the statutory rate primarily due to non-deductible stock-based compensation expense, non-deductible mark-to-market liability, limitations on executive compensation, changes in the Company's deferred state tax rate due to the DHP acquisition, tax credits, operations, and state tax expense.
The following are significant deferred income tax assets and liabilities as of December 31, 2021 and 2020:
| | | | | | | | | | | |
| As of December 31, |
| (in thousands) | 2021 | | 2020 |
| Deferred income tax assets: | | | |
| Allowances on trade receivables | $ | 82 | | | $ | 93 | |
| Net operating loss carryforwards | 934 | | | 432 | |
| Capital loss carryforwards | 1,421 | | | 153 | |
| Accrued expenses and reserves | 4,864 | | | 4,205 | |
| Interest limitation carryforward | 57,011 | | | 47,192 | |
| Leases – right-of-use liability | 7,935 | | | 8,311 | |
| Transaction expenses | 7,696 | | | 8,422 | |
| Other | 494 | | | 50 | |
| Valuation allowance | (1,421) | | | (153) | |
| Deferred income tax assets | $ | 79,016 | | | $ | 68,705 | |
| Deferred income tax liabilities: | | | |
| Intangible assets | 778,209 | | | 846,049 | |
| Depreciable assets | 47,168 | | | 42,078 | |
| Leases – right-of-use asset | 7,108 | | | 7,712 | |
| Debt costs | — | | | 73,027 | |
| Other | 356 | | | 472 | |
| Deferred income tax liabilities | 832,841 | | | 969,338 | |
| Net deferred income tax liabilities | $ | 753,825 | | | $ | 900,633 | |
The Company has NOL carry forwards for federal income tax purposes of $2.9 million, $0.6 million tax effected, that will be available to reduce future taxable income. The utilization of most of these losses is subject to annual limitations under federal income tax law. The Company believes that it will be able to fully utilize these losses under current federal tax law. The net operating losses begin to expire in 2022. The Company has net operating loss carry forwards for state income tax purposes of $0.3 million. The Company believes that it will be able to fully utilize these losses under current state tax laws. Substantially all of the Company's state NOL carryforwards expire by 2025. The Company has disallowed interest carry forwards for federal income tax purposes of $241.5 million, $57.0 million tax effected, that will be available to reduce future taxable income, subject to certain income limitations and which have an indefinite carryforward period. The Company believes it is more likely than not that these interest carryforwards will be fully utilized considering the weight of all positive and negative evidence under current tax laws.
During the third and fourth quarters of 2020, the Company marked-to-market certain investments which would result in a capital loss deferred tax asset for which the Company recorded a corresponding valuation allowance of $2.6 million. Commensurate with the Transactions, one of these investments and the corresponding deferred tax asset related valuation allowance, were written off to additional paid-in capital totaling $2.4 million. As of December 31, 2021, the Company increased the valuation allowance related to the remaining estimated capital losses in excess of capital gain based on the difference between the tax and book balance of these investments. It is more likely than not the Company will not generate capital gain income to offset these losses.
The Company does not have reserves for uncertain tax positions. Any need for a reserve or changes in a reserve would be a component of the Company's tax provision. The Company includes interest and tax penalties as part of the tax provision. The Company does not reasonably expect any other significant changes in the next twelve months.
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
Various regulatory tax authorities periodically examine the Company's and its subsidiaries' tax returns. Tax years December 2018 through 2021 are open for Federal examination. The Company's closed its 2017 IRS audit during the year. There were no impacts to the 2021 financial statements. Tax years 2018 through 2021 are still open for examination related to income taxes to various state taxing authorities.
13.Commitments and Contingencies
Commitments
The Company has certain irrevocable letters of credit used to satisfy real estate lease agreements for three of our offices in lieu of security deposits that reduced the capacity of Revolver G by $1.8 million as of December 31, 2020. The $1.8 million letters of credit remain outstanding and reduced the capacity of Revolver B as of December 31, 2021 .
We are a defendant in various lawsuits and other pending and threatened litigation and other adversarial matters which have arisen in the ordinary course of business as well as regulatory investigations, all which have arisen in the ordinary course of business. While the ultimate outcome with respect to such proceedings cannot be predicted with certainty, we believe they will not have a material adverse effect on our financial condition or results of operations.
On March 25, 2021 and April 9, 2021, we were named as a defendant in two putative class action lawsuits relating to the Transactions that have since been consolidated under the caption In Re MultiPlan Corp. Stockholders Litigation, Consolidated C.A. No. 2021-0300-LWW (Del.Ch) ("Delaware Stockholder Litigation”). The Delaware Stockholder Litigation asserts breach of fiduciary duty claims and aiding and abetting breach of fiduciary duty claims against the former directors of the Churchill board, the Sponsor, KG and M. Klein (collectively, the "Churchill Defendants") and the Company. The Delaware Stockholder Litigation complaint alleges that the Transactions were a product of an unfair process by Churchill, which was allegedly impacted by conflicts of interest, resulting in mispricing of the Transactions. The complaint seeks, among other things, damages, certain equitable relief including the reopening of redemptions, and attorneys’ fees and costs. The Company and the Churchill Defendants filed motions to dismiss the complaint. On January 3, 2022, the Chancery Court issued a ruling granting in part the Company’s motion to dismiss and denying the motion to dismiss filed by the Churchill Defendants. The Company is therefore dismissed from the Delaware Stockholder Litigation, which will proceed against the Churchill Defendants. Certain of the Churchill Defendants have contractual indemnification rights to the Company.
We accrue for costs associated with certain contingencies, including, but not limited to, settlement of legal proceedings, regulatory compliance matters and self-insurance exposures when such costs are probable and reasonably estimable. Such accruals are included in other accrued expenses on the accompanying consolidated balance sheets. In addition, we accrue for legal fees incurred in defense of asserted litigation and regulatory matters as such legal fees are incurred. To the extent it is probable under our existing insurance coverage that we are able to recover losses and legal fees related to contingencies, we record such recoveries concurrently with the accrual of the related loss or legal fees. Significant management judgment is required to estimate the amounts of such contingent liabilities and the related insurance recoveries. In our determination of the probability and ability to estimate contingent liabilities and related insurance recoveries we consider the following: litigation exposure based on currently available information, consultations with external legal counsel, adequacy and applicability of existing insurance coverage and other pertinent facts and circumstances regarding the contingency. Liabilities established to provide for contingencies are adjusted as further information develops, circumstances change, or contingencies are resolved; and such changes are recorded in the accompanying consolidated statements of income (loss) and comprehensive income (loss) during the period of the change and appropriately reflected in other accrued liabilities on the accompanying consolidated balance sheets.
14.Shareholders' Equity
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock with a par value of $0.0001 per share with such designations, voting and other rights and preferences as may be determined from time to time by the Company's board of directors. At December 31, 2021 and 2020, there were no shares of preferred stock issued or outstanding.
Class A Common Stock
The Company is authorized to issue 1,500,000,000 shares of Class A common stock with a par value of $0.0001 per share. At December 31, 2021, there were 665,456,180 shares of Class A common stock issued, excluding (i) 77,231,072 shares of Class A common stock available for future grants under our MultiPlan Corporation 2020 Omnibus Incentive Plan, (ii) the
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
100,000,000 shares of Class A common stock issuable upon conversion of the Senior Convertible PIK Notes, and (iii) the 58,500,000 shares of Class A common stock issuable upon exercise of the warrants described below.
Except as otherwise required by law or as otherwise provided in any certificate of designation for any series of preferred stock, the holders of common stock will possess all voting power for the election of directors and all other matters requiring stockholder action and will be entitled to one vote per share on matters to be voted on by stockholders. The holders of our Class A common stock will at all times vote together as one class on all matters submitted to a vote of the common stock.
Class B Common Stock
Holders of Class B common stock had the right to elect all of the Company's directors prior to a business combination. The shares of Class B common stock automatically converted into shares of Class A common stock at the time of the Transactions on a one-for-one basis.
Warrants
Each whole Public Warrant entitles the registered holder to purchase one share of our Class A common stock at a price of $11.50 per share, subject to adjustment as discussed below, at any time commencing on February 19, 2021. Pursuant to the warrant agreement, a holder may exercise its Public Warrants only for a whole number of shares of our Class A common stock. This means only a whole public warrant may be exercised at a given time by a holder. The Public Warrants will expire at 5:00 p.m., New York City time, on October 8, 2025 or earlier upon redemption or liquidation.
If the Company calls the Public Warrants for redemption, management will have the option to require all holders that wish to exercise the Public Warrants to do so on a "cashless basis," as described in the warrant agreement. The exercise price and number of shares of Class A common stock issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, or recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuance of Class A common stock at a price below its exercise price. Additionally, in no event will the Company be required to net cash settle the warrants.
The Company may redeem the Public Warrants:
•in whole and not in part;
•at a price of $0.01 per warrant;
•upon a minimum of 30 days' prior written notice of redemption, or the 30-day redemption period, to each warrant holder; and
•if, and only if, the closing price of the Company's Class A common stock equals or exceeds $18.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date on which we send the notice of redemption to the warrant holders.
The Public Warrants are classified as equity on the Company’s consolidated balance sheet.
The Private Placement Warrants (including the Class A common stock issuable upon exercise of the Private Placement Warrants) are not transferable, assignable or salable until (i) with respect to 4,800,000 Private Placement Warrants and pursuant to the terms of the Investor Rights Agreement, April 8, 2022 and (ii) with respect to all other Private Placement Warrants February 19, 2021, (except, among other limited exceptions, to our officers and directors and other persons or entities affiliated with the Sponsor) and they will not be redeemable by us so long as they are held by the Sponsor or its permitted transferees. The Sponsor, or its permitted transferees, has the option to exercise the Private Placement Warrants on a cashless basis and will be entitled to certain registration rights. Otherwise, the Private Placement Warrants have terms and provisions that are identical to those of the Public Warrants. If the Private Placement Warrants are held by holders other than the Sponsor or its permitted transferees, the Private Placement Warrants will be redeemable by us and exercisable by the holders on the same basis as the Public Warrants. All Private Placement Warrants held by the Sponsor or its permitted transferees are classified as a liability on the Company’s consolidated balance sheets.
In connection with the Transactions on July 12, 2020, the Sponsor loaned us an unsecured promissory note (the "Note") in the principal amount of $1.5 million. The Note had no interest and was repayable in full upon the closing of the Transactions. The Sponsor also had the option to convert any unpaid balance of the Note into Working Capital Warrants equal to the principal
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
amount of the Note. The Sponsor elected to convert the full balance of the Note, in the principal amount of $1.5 million, into 1,500,000 Working Capital Warrants. The Working Capital Warrants have identical terms to the Private Placement Warrants. All Working Capital Warrants held by the Sponsor or its permitted transferees are classified as a liability on its consolidated balance sheets.
In connection with the Transactions, the Company issued PIPE Warrants on terms identical to the terms of the Private Placement Warrants, other than the redemption feature exists for all holders of the PIPE warrants. Each whole PIPE warrant entitles the holder to purchase one share of our Class A common stock at a price of $12.50 per share. The PIPE warrants are classified as equity on the Company's consolidated balance sheets.
As of December 31, 2021, we had warrants to purchase an aggregate of 58,500,000 shares of Class A common stock outstanding, consisting of: (a) the Public Warrants (warrants to purchase an aggregate of 27,500,000 shares of Class A common), (b) the Private Placement Warrants (warrants to purchase an aggregate of 23,000,000 shares of Class A common stock), (c) the Working Capital Warrants (warrants to purchase an aggregate of 1,500,000 shares of Class A common stock) and (d) the PIPE Warrants (warrants to purchase an aggregate of 6,500,000 shares of Class A common stock).
Additional paid-in capital
Additional paid-in capital is reported in the shareholders' equity section of the balance sheet and corresponds to the cash that shareholders have given the Company in exchange for stock.
Treasury stock
During 2020, a subsidiary of the Company purchased 9,094,876 shares to be held in treasury for the purpose of facilitating the Transactions for a total amount of $100.6 million excluding fees and commissions. Prior to the consummation of the Transactions, this investment was accounted for as equity securities with a readily determinable fair value and carried at fair value with changes in fair value recorded in "loss on investments" in the consolidated statements of income (loss) and comprehensive income (loss). Upon the consummation of the Transactions, the fair value of the shares of $89.5 million was recorded as a reduction to shareholder's equity.
On August 27, 2021, the Company announced a share repurchase program approved by its board of directors, authorizing, but not obligating, the repurchase of up to an aggregate amount of $250,000,000 of its Class A common stock from time to time through December 31, 2022. As of December 31, 2021, the Company has repurchased approximately $100.0 million of its Class A common stock as part of this program using cash on hand.
For the years ended December 31, 2021 and 2020, the Company repurchased 345,733 shares and 13,087 shares, respectively, of Class A common stock in payment of withholding taxes upon the vesting of stock based compensation awards for a total amount of $2.6 million and $0.1 million, respectively.
At December 31, 2021 and 2020, there were 27,117,406 and 9,107,963 shares of Class A common stock held in treasury, respectively.
15.Stock-Based Compensation
Prior to the Transactions
Prior to the Transactions, the Company operated under the Polaris Plan. The purpose of the Polaris Plan was to provide a means through which Holdings may attract and retain key personnel and to provide a means whereby Polaris Plan Participants can acquire and maintain an equity interest in Holdings, thereby strengthening their commitment to the welfare of Holdings and its subsidiaries, including MultiPlan, Inc. Under the Polaris Plan, Holdings may grant awards to select Polaris Plan Participants at the sole discretion of the Holdings Board. Polaris Plan awards are granted in the form of Holdings' Class B Units via the Polaris Agreement.
There were 343,114 Units available for issuance under the Polaris Plan. There were 267,768 Units issued and outstanding as of the date of the Liquidity Event, October 7, 2020. The Company's CEO, with the approval of the Holdings Board, determined participation and the allocation of the Units.
Each individual Award is composed of time vesting units and performance vesting units. Time vesting units and performance vesting units vest based on the vesting dates and the achievement of certain performance measures as defined in each agreement. The Company amortizes the time vesting units on a straight line basis, and the performance vesting units on a
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
graded vesting basis. In the event of the termination of an employee Participant due to a Qualifying Termination as defined by the Polaris Agreement, the Polaris Plan Participant shall have the right to cause Holdings to purchase all or any portion of the vested Units owned by the employee, subject to the approval of the Company's CEO. Based on this put right available to the employee Participants, stock-based compensation awards related to the Polaris Plan have been accounted for as liability classified awards within Holdings' consolidated financial statements. The Company records these awards within Shareholders' equity as an equity contribution from Holdings based on the fair value of the outstanding Units at each reporting period. Upon the occurrence of a definitive Liquidity Event all unvested units vest immediately prior to such Liquidity Event. All vested shares will be exchanged for new shares and cash as determined at the time of such Liquidity Event. See Note 4 The Transactions for details regarding the Transactions.
The consummation of the Transactions described in Note 4 The Transactions constituted a definitive Liquidity Event under the agreements governing the Unit awards and as a result all unvested Units vested on October 7, 2020. Therefore, the Company recorded an expense of $106.2 million related to the accelerated vesting during the fourth quarter of 2020. The Company recorded these awards within shareholders' equity as an equity contribution from Holdings based on the fair value of the outstanding Units at each reporting period.
The fair value of the outstanding Units was $475.5 million as of October 7, 2020, and represents the cumulative exit value of the Company, which reflects the transaction value plus prior distributions. We also removed the discount for lack of marketability from the calculation of fair value. The Company recorded stock-based compensation expense for Class B Units of $405.8 million during the period ended December 31, 2020, and stock-based compensation profit of $14.9 million during the period ended December 31, 2019. Forfeitures are accounted for as they occur.
The following table lists the principal assumptions used estimating the fair value of the Units during the year ended December 31, 2019:
| | | | | |
| Risk free rate of return | 1.6 | % |
| Expected volatility | 24.9 | % |
| Expected dividend yield | 0.0 | % |
| Discount for Lack of Marketability | 20.0 | % |
Stock-based compensation expense related to Class B Units has been allocated between costs of services and general and administrative expenses in the accompanying consolidated statements of income (loss) and comprehensive income (loss) for the years ending December 31, 2020, and 2019 as follows:
| | | | | | | | | | | | | |
| For the Year Ended December 31, |
| (in thousands) | 2020 | | 2019 | | |
| Cost of services | $ | 163,025 | | | $ | (7,904) | | | |
| General and administrative | 242,818 | | | (6,976) | | | |
| Total stock-based compensation | $ | 405,843 | | | $ | (14,880) | | | |
After the consummation of the Transactions
The Company operates under the 2020 Omnibus Incentive Plan effective October 8, 2020. The purpose of the 2020 Omnibus Incentive Plan is to provide a means through which the Company and the other members of the Company may attract and retain key personnel and to provide a means whereby directors, officers, employees, consultants and advisors of the Company and its subsidiaries can acquire and maintain an equity interest in the Company, or be paid incentive compensation, including incentive compensation measured by reference to the value of Common Stock, thereby strengthening their commitment to the welfare of the Company and aligning their interests with those of the Company's stockholders.
There are 85,850,000 shares of Class A common stock available for the issuance of awards under the 2020 Omnibus Incentive Plan. The Company's CEO, with the approval of the Board, determines participation and the allocation of the Units. Awards under the 2020 Omnibus Incentive Plan typically vest from 6 months to 4 years and are generally subject to either cliff vesting or graded vesting. Awards do not have non-forfeitable rights to dividends or dividend equivalents.
The Company has adopted an Incentive Compensation Clawback Policy in order to help ensure that incentive compensation is paid or awarded based on accurate financial results and the correct calculation of performance against incentive targets.
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
Non-qualified stock options
Non-qualified stock option activity for the year ended December 31, 2021 is summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contract Term (Years) | | Aggregate Intrinsic Value | |
| Nonvested at beginning of period | | — | | | $ | — | | | | | | |
| Awarded | | 4,167,862 | | | 8.43 | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Nonvested at end of period | | 4,167,862 | | | $ | 8.43 | | | 3 years, 5 months | | $ | — | | |
| | | | | | | | | |
| Exercisable at end of period | | — | | | — | | | — | | | — | | |
Restricted Stock and Restricted Stock Units
Restricted Stock and Restricted Stock Units activity for the year ended December 31, 2021 is summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Employee RS | | Director RSUs | | Employee RSUs | | Fixed Value RSUs | | Weighted Average grant date fair value per share |
| Nonvested at beginning of period | 1,468,750 | | | 42,847 | | | — | | | — | | | $ | 8.82 | |
| Awarded | 133,689 | | | 87,275 | | | 2,903,845 | | | 492,610 | | | 6.56 | |
| Vested | (930,564) | | | (48,061) | | | (522,539) | | | — | | | 8.47 | |
| Forfeited | (671,875) | | | — | | | (37,325) | | | — | | | 8.65 | |
| Nonvested at end of period | — | | | 82,061 | | | 2,343,981 | | | 492,610 | | | $ | 6.24 | |
On August 4, 2021, the Company granted $2.0 million of Fixed Value RSUs to the chief executive officer as part of the side letter agreement entered into on the same date. The required service period of the grant is the time between the grant date and the vesting date of January 31, 2022, and the compensation cost related to the grant was amortized ratably over the service period. This grant is accounted for as liability-classified award because the obligation is based on fixed monetary amount that was known at inception of the obligation, to be settled with a variable number of shares of our common stock based on the volume weighted average trading price of the common stock of the Company over the preceding 30 consecutive trading days prior to the grant's vesting date, which occurred on January 31, 2022.
Other share based compensation data
The following table lists the principal assumptions used in estimating the grant date fair value of NQSOs during the year ended December 31, 2021:
| | | | | |
| Risk free rate of return | 1.10% - 1.52% |
| Expected volatility | 40% - 52% |
| Expected dividend yield | 0.0% |
| Expected life in years | 6 years - 6 years, 3 months |
| Sub optimal exercise factor | 1.9 |
The Company has allocated stock based compensation expense under the 2020 Omnibus Incentive Plan between costs of services and general and administrative expenses in the accompanying consolidated statements of income (loss) and comprehensive income (loss) for the years ending December 31, 2021, and 2020 as follows:
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | |
| For the Year Ended December 31, |
| (in thousands) | 2021 | | 2020 | | |
| Cost of services | $ | 2,618 | | | $ | — | | | |
| General and administrative | 15,392 | | | 211 | | | |
| Total stock-based compensation | $ | 18,010 | | | $ | 211 | | | |
There was $22.8 million of unrecognized compensation cost as of December 31, 2021 related to the outstanding awards which is expected to be recognized over a weighted average period of 3 years, 3 months.
16.Employee Benefit Plan
The Company sponsors a profit-sharing plan under Section 401(k) of the Internal Revenue Code. The plan covers eligible employees and provides for discretionary employer contributions and a matching contribution subject to certain limitations of employee salary deferrals. Profit sharing expense was immaterial during the periods ended December 31, 2021, 2020, and 2019.
17.Basic and Diluted Earnings and Loss Per Share
Basic and diluted earnings and loss per share was calculated as follows for the years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| ($ in thousands, except number of shares and per share data) | 2021 | | 2020 | | 2019 |
| Numerator for earnings per share calculation | | | | | |
| Net income (loss) | $ | 102,080 | | | $ | (520,564) | | | $9,710 |
| Denominator for earnings per share calculation | | | | | |
| Weighted average number of shares outstanding – basic | 651,006,567 | | 470,785,192 | | 415,700,000 |
| Effect of stock-based compensation | 519,224 | | — | | — |
| Weighted average number of shares outstanding – diluted | 651,525,791 | | 470,785,192 | | 415,700,000 |
| Income (Loss) per share – basic and diluted: | | | | | |
| Net income (loss) per share – basic | $ | 0.16 | | | $ | (1.11) | | | $ | 0.02 | |
| Net income (loss) per share – diluted | $ | 0.16 | | | $ | (1.11) | | | $ | 0.02 | |
Earnings per share calculations for all periods prior to the Transactions have been retrospectively restated to the equivalent number of shares reflecting the exchange ratio established in the reverse recapitalization. Subsequent to the Transactions, earnings per share will be calculated based on the weighted average number of shares of common stock then outstanding.
As of the year ended December 31, 2021, we have excluded from the calculation of diluted net income per share the instruments whose effect would have been anti-dilutive, including (i) 58,500,000 warrants outstanding, (ii) 100,000,000 shares which may be issued upon conversion of the Senior Convertible PIK Notes, and (iii) 12,404,080 unvested founder shares. Additionally, we have excluded from the calculation of diluted net income per share awards within the 2020 Omnibus Incentive Plan whose effect would have been anti-dilutive of 4,935,228 for the year ended December 31, 2021. For the year ended December 31, 2020, potentially dilutive securities were excluded from the calculation of diluted net loss per share, as their effect would have been anti-dilutive given the Company's losses incurred in 2020 and because contingencies for vesting have not been met. Therefore, the weighted average number of shares outstanding used to calculate both basic and diluted net loss per share is the same. There were no warrants, options, unvested founder shares, Employee RS or Director RSUs for the years ended December 31, 2019.
MULTIPLAN CORPORATION
Notes to Consolidated Financial Statements
18.Related Party Transactions
The accompanying consolidated statements of income (loss) and comprehensive income (loss) include expenses and revenues to and from related parties for the years ended December 31, 2021, 2020 and 2019 as follows:
| | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| Revenues | $ | 2,632 | | | $ | 1,973 | | | $ | 2,373 | |
| Total revenues from related parties | $ | 2,632 | | | $ | 1,973 | | | $ | 2,373 | |
| Cost of services | $ | (2,737) | | | $ | (2,137) | | | $ | (3,753) | |
| General and administrative | (479) | | | (231) | | | (288) | |
| Total expense from related parties | $ | (3,216) | | | $ | (2,368) | | | $ | (4,041) | |
The accompanying consolidated balance sheets include accruals from related parties as of December 31, 2021 and 2020 as follows:
| | | | | | | | | | | |
| As of December 31, |
| (in thousands) | 2021 | | 2020 |
| Current liabilities: | | | |
| Accounts payable | $ | 2,297 | | | $ | 2,725 | |
| Total liabilities from related parties | $ | 2,297 | | | $ | 2,725 | |
In the years ended December 31, 2021, 2020 and 2019, the related party transactions included the following:
•The Company purchased PPO network services from a company controlled by Hellman & Friedman LLC to supplement our provider network. We also recognize revenues from that same company for the use of our provider network and other claims processing services.
•The Company has obtained insurance brokered through a company controlled by Hellman & Friedman LLC.
•The Company compensates a non-employee member of the Board for his services on the Board. The Company also purchased cyber security risk management services from a company controlled by that same member of the Board.
•The Company reimburses Hellman & Friedman LLC for reasonable out of pocket expenses that include travel, lodging, meals, and any similar expenses.
•Companies controlled or managed by members of the Board have participated in the PIPE Investment, including the Senior Convertible PIK Notes.
•The Company purchased advisory services in connection with the Transactions from companies controlled or managed by members of the Board.
19.Subsequent Events
On January 31, 2022, and in accordance with a succession plan previously approved by the Board of Directors of MultiPlan Corporation and reported by the Company, Mr. Mark Tabak, Chief Executive Officer of the Company and member and Chairman of the Board, delivered his resignation as Chief Executive Officer to the Company, effective immediately, to be succeeded as Chief Executive Officer of the Company by Mr. Dale White. Mr. Tabak will continue to serve on the Board as Chairman and Mr. White joined the Board on such date.