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 theU.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. MultiPlan was founded in 1980 as aNew York -based hospital network and has evolved both organically and through acquisition into an integrated data and analytics platform offering a suite of services, which efficiently address the cost of medical services. MultiPlan offers services to our customers in three categories: •Analytics-Based Services: a suite of data-driven algorithms and insights that detect claims over-charges and either negotiate or recommend fair reimbursement for out-of-network medical costs using a variety of data sources and pricing algorithms. These services are applied prior to the payment of the claim and are often processed within a day of receipt; •Network-Based Services: contracted discounts with healthcare providers to form one of the largest independent preferred provider organizations ("PPO") inthe United States with over 1.3 million providers under contract, as well as outsourced network development and/or management services. These services are applied prior to the payment of the claim and are typically processed within a day of receipt; and
•Payment and Revenue Integrity Services: data, technology, and clinical
expertise deployed to identify and remove improper and unnecessary charges
before or after claims are paid, or to identify and help restore and preserve
underpaid premium dollars.
MultiPlan sits at the nexus of four constituencies - Payors, employers/plan
sponsors, plan members and providers - offering an independent reimbursement
solution to reduce healthcare costs in a manner that is systematic, efficient
and fair to all parties involved. Although the end beneficiary of our services
are employers and other plan sponsors and their health plan members, our direct
customers are typically health plan administrators ("Payors") who go out to
market with our services. Over the last 40+ years, we have developed a platform
that offers these Payors a single interface to a comprehensive set of services,
which are used in combination or individually to reduce the medical cost burden
on their health plan customers and members while fostering independently
developed fair and efficient reimbursements to healthcare providers. These
comprehensive offerings have enabled us to maintain long-term relationships with
a number of our customers, including relationships of over 25 years with some of
the nation's largest Payors. For the year ended December 31, 2022 , our
comprehensive services identified approximately $22.3 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
OnJuly 12, 2020 , Churchill entered into the Merger Agreement by and among First Merger Sub, Second Merger Sub, Holdings, and MultiPlan Parent. OnOctober 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 51
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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
DHP Acquisition
OnFebruary 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 theCenters 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$0.1 million ,$4.9 million and$0.6 million for the years endedDecember 31, 2022 , 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 (loss) income and comprehensive (loss) income.
Uncertainty Relating to the COVID-19 Pandemic
As discussed above and in Note 1 General Information and Business of the Notes to Consolidated Financial Statements included in this Annual Report, COVID-19 has negatively impacted our business, results of operations and financial condition since the first quarter of 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. We temporarily closed all of our offices and restricted travel in 2020 and 2021 due to concern for our employees' health and safety and also in compliance with state orders. Although our offices were opened for employees in 2022, most of our approximately 2,500 employees now 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 COVID-19. For the year endedDecember 31, 2022 , the Company's revenues continued to be negatively impacted as a result of the volumes of medical charges received on non-COVID-19 claims from customers not yet reaching pre-COVID-19 pandemic levels due to fewer elective medical procedures and non-essential medical services. Such negative impacts, however, were to a lesser extent compared to the same period in 2020 and 2021, as vaccination rates have increased and most restrictions on medical services have been lifted. The extent of the ultimate impact of COVID-19 will depend on future developments of the pandemic which remain uncertain. These developments include 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 theU.S. and global economies, consumer behavior and healthcare utilization patterns.
Uncertainty Relating to Healthcare Utilization
Although claims volumes have declined for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , the average charge per claim has increased during this time period. The volumes include claims and medical charges processed from our commercial health plans, largely representing our group health Network Based-Services and Analytics-Based Services business, indicate short-term changes in utilization of the healthcare system by commercial health plan members, including on COVID-19 claims. The change in health system utilization may reflect changes in the labor market, monetary policy and inflationary pressures, and other economic conditions that induce health plan members to postpone or forego certain elective care, as well as a decline in COVID-19 testing and treatment since the beginning of 2022. The duration and severity of the change in healthcare utilization will depend on future developments that remain uncertain, including theU.S. and global economies, consumer behavior, health system capacity, and other factors that could impact utilization patterns, in addition to any actions taken by federal, state and local governments.
Factors Affecting Our Results of Operations
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Medical Cost Savings
Our business and revenues are driven by the ability to lower medical costs
through claims savings for our customers. The volume of medical charges
associated with those claims is a primary driver of our ability to generate
claim savings.
Effective with this report, we have modified the methodology for capturing and reporting medical charges processed and potential medical cost savings from previously reported submissions. We believe this new methodology provides additional insight into our business, increases alignment with our revenue reporting, and will provide a more accurate portrayal of our portfolio of services as we grow our business through the addition of new claims flows and new service offerings.
The change in methodology groups our claims charges into two categories that
correspond to differing characteristics of identified savings performance:
•Commercial Health Plans. This category primarily represents our Network-Based Services and Analytics-Based Services claims. These claims are pre-payment in nature, generate savings through repricing, and are characterized by a higher percentage of potential medical cost savings as a percentage of medical charges processed. For the year endedDecember 31, 2022 , this category represented approximately 92% of our revenues. Services included in this category are as follows: •Network-Based Services
?Commercial health primary networks
?Commercial health complementary networks
•Analytics-Based Services (All Analytics-Based Services are included in this
category)
?Reference-Based Pricing
?Value-Driven Health Plan Services
?Financial Negotiation
?Surprise Billing Services
•Payment and Revenue Integrity Services
?Clinical Negotiations
•Payment & Revenue Integrity Services, Property & Casualty, and Other. This category includes claims that typically generate savings at a lower percentage of charge volumes or that are processed on a per-claim or flat fee basis (rather than a percentage of savings basis), as well as other network services. These claims are both pre-payment and post-payment in nature. For the year endedDecember 31, 2022 , this category represented approximately 8% of our revenues. Services included in this category are as follows:
•Payment and Revenue Integrity Services
?Pre-Payment Clinical Reviews
?Coordination of Benefits and Subrogation Services
?Data Mining
?Revenue Integrity Services
•Network-Based Services
?Property & Casualty Network Services (pre-payment)
?Other network services
Additional changes to the reporting are as follows:
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•DHP claims that were previously excluded from our reporting of medical charges processed and potential medical cost savings are included in the data presented below since the date of acquisition ofFebruary 26, 2021 . •Medical charges processed and potential medical cost savings are reported based on closed claims date, such that the reported claims are claims that have closed during the period presented, which more closely aligns with our receipt of revenue during that period. Previous reporting included claims based on receipt date so that at the conclusion of any time period there were medical charges processed that would not include the ultimate potential medical cost savings achieved for that claim. •Future development of previously reported medical charges processed and potential medical cost savings due to customer claim resubmissions or cancellation of claims will be included in the future reporting period in which that future development occurs. Examples include, but are not limited to, adjudication changes, billing changes, and elimination of claims that were later determined to be invalid. The following table presents the medical charges processed and the potential savings identified for the periods presented. We have restated prior periods to report previously reported medical charges processed and potential medical cost savings calculated under this new methodology. Three Months Ended December September 30, December September 30, (in billions) 31, 2022 2022 June 30, 2022 March 31, 2022 31, 2021 2021 June 30, 2021 March 31, 2021 Commercial Health Plans Medical charges processed$ 18.1 $ 17.9 $ 18.6 $ 19.5 $ 20.0 $ 19.2 $ 19.0 $ 18.5 Potential medical cost savings$ 5.1 $ 5.1 $ 5.4 $ 5.5 $ 5.6 $ 5.3 $ 5.2 $ 5.0 Potential savings as % of charges 28.3 % 28.6 % 29.0 % 28.3 % 27.9 % 27.7 % 27.5 % 27.3 % Payment & Revenue Integrity, Property & Casualty, and Other Medical charges processed$ 20.9 $ 20.8 $ 20.8 $ 18.6 $ 18.3 $ 18.3 $ 17.0 $ 13.9 Potential medical cost savings$ 0.3 $ 0.3 $ 0.3 $ 0.2 $ 0.3 $ 0.3 $ 0.3 $ 0.2 Potential savings as % of charges 1.4 % 1.3 % 1.3 % 1.3 % 1.4 % 1.4 % 1.6 % 1.7 % Total Medical charges processed$ 39.0 $ 38.7 $ 39.4 $ 38.1 $ 38.3 $ 37.5 $ 36.1 $ 32.4 Potential medical cost savings$ 5.4 $ 5.4 $ 5.7 $ 5.8 $ 5.8 $ 5.6 $ 5.5 $ 5.3 Potential savings as % of charges 13.9 % 14.0 % 14.4 % 15.2 % 15.2 % 14.8 % 15.2 % 16.3 % 54
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Year Ended December 31,
(in billions) 2022 2021
Commercial Health Plans
Medical charges processed $ 74.2 $ 76.6
Potential medical cost savings $ 21.2 $ 21.1
Potential savings as % of charges 28.6 % 27.6 %
Payment & Revenue Integrity, Property & Casualty, and Other
Medical charges processed
$ 81.0 $ 67.6 Potential medical cost savings$ 1.1 $ 1.0 Potential savings as % of charges 1.3 % 1.5 % Total Medical charges processed$ 155.2 $ 144.2 Potential medical cost savings$ 22.3 $ 22.1 Potential savings as % of charges 14.3 % 15.4 % Medical charges processed represent the aggregate dollar amount of claims processed by our cost management and payment accuracy solutions in the period presented. The dollar amount of the claim for purposes of this calculation is the dollar amount of the claim prior to any reductions that may be made as a result of the claim being processed by our solutions. Potential medical cost savings represent the aggregate amount of potential savings in dollars identified by our cost management and payment accuracy solutions in the period presented. Since certain of our fees are based on the amount of savings achieved by our customers, and our customers are the final adjudicator of the claims and may choose not to reduce claims or reduce claims by only a portion of the potential savings identified, potential medical cost savings may not directly correlate with the amount of fees earned in connection with the processing of such claims.
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$4.5 trillion , or 18.2% ofU.S. GDP in 2022, to represent 19.6% of GDP by 2030, representing a compound annual growth rate of 5.2%. 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 in the long-term. 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) Network-Based Services
that process claims at a discount compared to billed fee-for-service rates and
by using an extensive network, (ii) Analytics-Based Services that use our
leading and proprietary information technology platform to offer customers
solutions to reduce medical costs, and (iii) Payment and
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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 92% of revenues for the year endedDecember 31, 2022 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 theJune 6, 2016 acquisition by H&F and its affiliates, as well as recent acquisitions of HST and DHP by the Company.
Loss on Impairment of
A loss on impairment is recorded in connection with the quantitative impairment testing of our goodwill and indefinite-lived intangibles, and is performed annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable, and their fair value is less than their carrying value. Interest Expense
Interest expense consists of accrued interest and related interest payments on
our outstanding long-term debt and amortization of debt issuance costs and
discounts.
Interest Income
Interest income consists primarily of bank interest.
(Gain) Loss 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.
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Gain on change in fair value of Private Placement Warrants and Unvested Founder
Shares
The Company re-measures, at each reporting period, the fair value of the Private Placement Warrants and Unvested Founder Shares. The changes in fair value are primarily due to the change in the stock price of the Company's Class A common stock and the passage of time over that period.
Income Tax Expense (Benefit)
Income tax expense (benefit) consists of federal, state, and local income taxes.
Non-GAAP Financial Measures
We use EBITDA, Adjusted EBITDA and Adjusted EPS to evaluate our financial performance. EBITDA, Adjusted EBITDA and adjusted EPS are financial measures that are not presented in accordance with GAAP. We believe the presentation of these non-GAAP financial measures provides useful information to investors in assessing our financial condition and results of operations across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our financial operating results of our core business. These measurements of financial performance have important limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Additionally, they may not be comparable to other similarly titled measures of other companies. Some of these limitations are:
•such measures do not reflect our cash expenditures or future requirements for
capital expenditures or contractual commitments;
•such measures do not reflect changes in, or cash requirements for, our working
capital needs;
•such measures do not reflect the significant interest expense, or cash
requirements necessary to service interest or principal payments on our debt;
•such measures do not reflect any cash requirements for any future replacement
of depreciated assets;
•such measures do not reflect the impact of stock-based compensation upon our
results of operations;
•such measures do not reflect our income tax (benefit) expense or the cash
requirements to pay our income taxes;
•such measures do not reflect the impact of certain cash charges resulting from
matters we consider not to be indicative of our ongoing operations; and
•other companies in our industry may calculate these measures differently from
how we do, limiting their usefulness as a comparative measure.
In evaluating EBITDA, Adjusted EBITDA and Adjusted EPS, you should be aware that
in the future we may incur expenses similar to those eliminated in the
presentation.
EBITDA, Adjusted EBITDA, and Adjusted EPS are widely used measures of corporate
profitability eliminating the effects of financing and capital expenditures from
the operating results. We define EBITDA as net income adjusted for interest
expense, interest income, income tax (benefit) expense, depreciation,
amortization of intangible assets, and non-income taxes. We define Adjusted
EBITDA as EBITDA further adjusted to eliminate the impact of certain items that
we do not consider to be indicative of our core business, including other
expenses, net, gain on change in fair value of Private Placement Warrants and
Unvested Founder Shares, transaction related expenses, (gain) loss on debt
extinguishment, (gain) loss on investments, loss on impairment of goodwill and
intangible assets and stock-based compensation. See our consolidated financial
statements included in this Annual Report for more information regarding these
adjustments. Adjusted EBITDA is used in our agreements governing our outstanding
indebtedness for debt covenant compliance purposes. Our Adjusted EBITDA
calculation is consistent with the definition of Adjusted EBITDA used in our
debt instruments.
Adjusted EPS is used in reporting to our Board and executive management and as a
component of the measurement of our performance. We believe that this measure
provides useful information to investors because it is the profitability measure
we use to evaluate earnings performance on a comparable year-to-year basis.
Adjusted EPS is defined as net (loss) income adjusted for amortization of
intangible assets, stock-based compensation, transaction related expenses,
(gain) loss on debt extinguishment, (gain) loss on investments, other expense,
gain on change in fair value of Private Placement Warrants and
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Unvested Founder Shares, loss on impairment of goodwill and intangible assets and tax effect of adjustments to arrive at Adjusted net income divided by our basic weighted average number of shares outstanding.
The following table presents a reconciliation of net (loss) income to EBITDA and
Adjusted EBITDA for the periods presented:
Year Ended December 31,
(in thousands) 2022 2021 2020
Net (loss) income $ (572,912) $ 102,080 $ (520,564)
Adjustments:
Interest expense 303,401 267,475 335,638
Interest income (3,500) (30) (288)
Income tax provision (benefit) 12,169 33,373 (26,343)
Depreciation 68,756 64,885 60,577
Amortization of intangible assets 340,536 340,210 334,697
Non-income taxes 1,653 1,698 3,221
EBITDA $ 150,103 $ 809,691 $ 186,938
Adjustments:
Other expenses, net (1) 4,477 8,295 1,095
Integration expenses 4,055 9,460 801
Change in fair value of Private Placement Warrants and
Unvested Founder Shares (67,050) (32,596) (35,422)
Transaction-related expenses 34,693 9,647 31,689
(Gain) loss on investments (289) (25) 12,165
(Gain) loss on extinguishment of debt (34,551) 15,843 102,993
Loss on impairment of goodwill and intangible assets 662,221 - -
Stock-based compensation 15,083 18,010 406,054
Adjusted EBITDA $ 768,742 $ 838,325 $ 706,313
(1)”Other expenses, net” represents miscellaneous non-recurring income,
miscellaneous non-recurring expenses, gain or loss on disposal of assets,
impairment of other assets, gain or loss on disposal of leases, tax penalties,
and non-integration related severance costs.
____________________
Material differences betweenMultiPlan Corporation and MPH for the years endedDecember 31, 2022 and 2021 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 ofMultiPlan Corporation . For the years endedDecember 31, 2022 , 2021 and 2020 interest expense forMultiPlan Corporation was$81.9 million ,$82.1 million , and$107.2 million higher than interest expense, respectively, for MPH due to interest expense incurred byMultiPlan Corporation on the Senior Convertible Notes (issued onOctober 8, 2020 ) and SeniorPIK Notes (redeemedOctober 8, 2020 ) including amortization of discount on SeniorPIK Notes , net of debt issue costs. For the years endedDecember 31, 2022 , 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 companyMultiPlan Corporation and not in the MPH operating company and therefore represent differences betweenMultiPlan Corporation and MPH. In the year endedDecember 31, 2022 , and 2021, MPH had higher EBITDA expenses thanMultiPlan Corporation of$2.9 million and$0.4 million , respectively due to insurance premiums paid to our captive insurance company, net of related captive insurance company costs which are eliminated in the consolidated financial reporting ofMultiPlan Corporation . 58
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The following table presents a reconciliation of net (loss) income to Adjusted
EPS for the periods presented:
Year Ended December 31,
($ in thousands, except share and per share amounts) 2022 2021 2020
Net (loss) income $
(572,912)
Adjustments:
Amortization of intangible assets
340,536 340,210 334,697 Other expenses, net (1) 4,477 8,295 1,095 Integration expenses 4,055 9,460 801
Change in fair value of Private Placement Warrants and
Unvested Founder Shares
(67,050) (32,596) (35,422) Transaction-related expenses 34,693 9,647 31,689 (Gain) loss on investments (289) (25) 12,165 (Gain) loss on extinguishment of debt (34,551) 15,843 102,993 Loss on impairment of goodwill and intangible assets 662,221 - - Stock-based compensation 15,083 18,010 406,054 Estimated tax effect of adjustments (91,295) (98,671) (106,989) Adjusted net income $
294,968
Weighted average shares outstanding - Basic 638,925,689 651,006,567 470,785,192 Net (loss) income per share - basic $
(0.90)
Adjusted earnings per share
$
0.46
(1)”Other expenses, net” represents miscellaneous non-recurring income,
miscellaneous non-recurring expenses, gain or loss on disposal of assets,
impairment of other assets, gain or loss on disposal of leases, tax penalties,
and non-integration related severance costs.
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
OnJuly 12, 2020 , Churchill entered into the Merger Agreement by and among First Merger Sub, Second Merger Sub, Holdings, and Polaris. OnOctober 8, 2020 , the Merger Agreement was consummated and the Transactions were completed.
HST Acquisition
OnNovember 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.
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DHP Acquisition
OnFebruary 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 theCenters 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$0.1 million ,$4.9 million and$0.6 million for the years endedDecember 31, 2022 , 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 (loss) income and comprehensive (loss) income.
Debt Refinancings, Repayments and Repricing
OnAugust 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, 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 for a total redemption price 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 endedDecember 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%, if higher), plus the applicable margin, or (b) the highest rate of (1) the prime rate, (2) the federal funds effective rate, plus 0.50%, (3) the LIBOR for an interest period of one month, plus 1.00% and (4) 0.50% for Term Loan B and 1.00% for Revolver B, in each case, plus an applicable margin of 4.25% for Term Loan B and between 3.50% and 4.00% for Revolver B, depending on MPH's first lien debt to consolidated EBITDA ratio. The interest rate in effect for Term Loan B was 8.98% and 4.75% as ofDecember 31, 2022 and 2021, respectively.
During November and December of 2022, the Company repurchased and cancelled
debt extinguishment of
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.
The interest rate on the 5.50% Senior Secured Notes is fixed at 5.50%, and is
payable semi-annually on
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.
In connection with the issuance of our debt instruments, the Company incurred specific expenses, 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, and 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 and discounts are included in interest expense in the accompanying consolidated statements of (loss) income and comprehensive (loss) income. Stock-Based Compensation Since the consummation of the Transactions, the Company has operated under the 2020 Omnibus Incentive Plan effectiveOctober 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 endedDecember 31, 2022 , the Company has granted 7.3 million Employee NQSOs, 4.0 million Employee RSUs, and 0.2 million Director RSUs under the 2020 Omnibus Incentive Plan. For the years endedDecember 31, 2022 and 2021, the Company recorded stock-based compensation expense under the 2020 Omnibus Incentive Plan of 15.1 million and 18.0 million, respectively, in the accompanying consolidated statements of (loss) income and comprehensive (loss) income. 60
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Results of Operations for the Years Ended
The following table provides the results of operations for the periods
indicated:
Year Ended December 31, Change
($ in thousands) 2022 2021 $ %
Revenues
Network-Based Services $ 245,280 $ 278,457 $ (33,177) (11.9) %
Analytics-Based Services 713,715 709,272 4,443 0.6 %
Payment and Revenue Integrity Services 120,721 129,873 (9,152) (7.0) %
Total Revenues $ 1,079,716 $ 1,117,602 $ (37,886) (3.4) %
Costs of services (exclusive of depreciation and
amortization of intangible assets shown below) 204,098 175,292 28,806 16.4 %
General and administrative expenses 166,837 151,095 15,742 10.4 %
Depreciation expense 68,756 64,885 3,871 6.0 %
Amortization of intangible assets 340,536 340,210 326 0.1 %
Loss on impairment of goodwill and intangible
assets 662,221 - 662,221 NM
Operating (loss) income (362,732) 386,120 (748,852) (193.9) %
Interest expense 303,401 267,475 35,926 13.4 %
Interest income (3,500) (30) (3,470) NM
(Gain) loss on extinguishment of debt (34,551) 15,843 (50,394) (318.1) %
Gain on investments (289) (25) (264) NM
Gain on change in fair value of Private Placement
Warrants and Unvested Founder Shares (67,050) (32,596) (34,454) 105.7 %
Net (loss) income before taxes (560,743) 135,453 (696,196) (514.0) %
Provision for income taxes 12,169 33,373 (21,204) (63.5) %
Net (loss) income $ (572,912) $ 102,080 $ (674,992) NM
NM = Not meaningful
Revenues
Revenues decreased $37.9 million , or 3.4%, for the year ended December 31, 2022 ,
as compared to the year ended December 31, 2021 . This decrease in revenues was
due to decreases in Network-Based Service revenues of $33.2 million , and Payment
and Revenue Integrity Services of $9.2 million , partially offset by a $4.4
million increase in Analytics-Based Services revenues.
Network-Based Services revenues decreased $33.2 million , or 11.9%, in the year
ended December 31, 2022 , as compared to the year ended December 31, 2021 . Of
this decrease, $31.7 million was primarily related to lower identified potential
medical cost savings on Network-Based Services claims received from customers,
partially due to reduced health system utilization as evidenced by lower claims
volume, lower COVID-19-related claims volumes, the shift of certain claims
volumes that previously would have been processed against our network to
Analytics-Based Services claims volumes, customer contract adjustments, and some
customer attrition. The remaining $1.5 million decrease was related to decreases
in PEPM and other network revenues.
Analytics-Based Services revenues increased $4.4 million , or 0.6%, for the year
ended December 31, 2022 as compared to the year ended December 31, 2021 . Of this
increase, $5.8 million was due to increases in PEPM Analytic-Based Services
revenues primarily due to organic growth in our value-driven health plan service
line of business, partially offset by a $1.4 million decrease in PSAV
Analytics-Based Services revenues primarily due to customer contract
adjustments.
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Payment and Revenue Integrity Services revenues decreased$9.2 million , or 7.0%, for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . Of this decrease,$22.0 million was primarily related to lower savings on medical charges processed on claims received from customers in our pre-payment integrity line of business and customer contract adjustments, offset by increases of$12.8 million in our post-payment integrity line of business, due to$5.7 million of acquired revenues from DHP and$7.1 million of organic growth in this service line. Costs of Services (exclusive of depreciation and amortization of intangible assets) Year Ended December 31, Change ($ in thousands) 2022 2021 $ % Personnel expenses excluding stock-based compensation$ 169,703 $ 147,342 $ 22,361 15.2 % Stock-based compensation 3,351 2,618 733 28.0 % Personnel expenses including stock-based compensation 173,054 149,960 23,094 15.4 % Access and bill review fees 16,580 13,526 3,054 22.6 % Other cost of services expenses 14,464 11,806 2,658 22.5 % Total costs of services$ 204,098 $ 175,292 $ 28,806 16.4 % The increase in costs of services of$28.8 million , or 16.4%, for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 was primarily due to increases in personnel expenses of$23.1 million , access and bill review fees of$3.1 million , and other costs of services expenses of$2.7 million . The increase in personnel expenses, including contract labor, of$23.1 million for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 was primarily due to increases in stock-based compensation of$0.7 million and non-stock-based compensation-related personnel expenses of$22.4 million , primarily due to increases in employee headcount, year-over-year compensation increases, and a$3.9 million increase in compensation related expenses from the acquisition of DHP, which was acquired onFebruary 26, 2021 . The increase in access and bill review fees of$3.1 million for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , was primarily due to an increase in claims processing fees of$3.1 million and bill review fees of$0.3 million , partially offset by a decrease in network access fees of$0.4 million . The increases in other costs of services expenses of$2.7 million for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , was primarily related to a decrease in the integration expense offset of$2.6 million , an increase in travel and meeting expenses of$1.2 million , partially offset by decreases in professional fees of$0.6 million and decreases in other net costs of services expenses of$0.5 million .
General and Administrative Expenses
Year Ended December 31, Change
($ in thousands) 2022 2021 $ %
General and administrative expenses excluding
stock-based compensation and transaction-related
expenses $ 120,412 $ 126,056 $ (5,644) (4.5) %
Stock-based compensation 11,732 15,392 (3,660) (23.8) %
Transaction-related expenses 34,693 9,647 25,046 259.6 %
General and administrative expenses $ 166,837 $ 151,095 $ 15,742 10.4 %
The increase in general and administrative expenses of $15.7 million , or 10.4%,
for the year ended December 31, 2022 , as compared to the year ended December 31,
2021 was primarily due to increases in transaction-related expenses of $25.0
million , non-stock-based compensation expenses of $2.6 million , insurance of
$1.1 million primarily related to higher insurance costs, equipment lease and
maintenance of $1.4 million , and telecommunication expenses of $0.9 million , and
net increase in other expenses of $2.0 million , partially offset by decreases in
stock-based compensation of $3.7 million , integration expenses of $5.4 million
primarily related to the acquisitions of HST and DHP, professional fees of $1.1
million , loss on disposal of equipment of $1.8 million , and an increase in the
capitalized software development offset of $5.3 million . The increase in
non-stock-based compensation of $2.6 million was primarily due to an increase in
contract labor of $6.6 million , offset by a net decrease in employee-related
compensation expenses of $4.0 million . The increase in Transaction-related
expenses of $25.0 million is
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primarily related to the Delaware Stockholder Litigation settlement and related
legal fees which is further described in Note 13 Commitments and Contingencies.
Depreciation Expense
The increase in depreciation expense for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 was due to purchases of property and equipment, including internally generated capitalized software in the years endedDecember 31, 2022 and 2021, 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 endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 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.
Loss on Impairment of
For the year endedDecember 31, 2022 , in connection with quantitative impairment testing performed on our goodwill and indefinite-lived intangibles, we recorded a$662.2 million expense for losses on impairment of intangible assets. This amount includes$657.9 million for the loss on impairment of goodwill, and$4.3 million for the loss on impairment of trade names.
Interest Expense and Interest Income
The increase in interest expense for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 of$35.9 million , or 13.4%, was due to the increase in LIBOR and increase in interest rates due to the effect of the refinancing onAugust 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. Our annualized weighted average cash interest rate increased by 2.03% across our total debt in the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 . As ofDecember 31, 2022 , our long-term debt was$4,741.9 million and included (i)$1,295.2 million Term Loan B, excluding the current portion of Term Loan B of$13.3 million , discount on Term Loan B of$11.1 million , (ii)$1,050.0 million of 5.50% Senior Secured Notes, (iii)$1,163.8 million of 5.750% Notes, (iv)$1,300.0 million of Senior Convertible PIK Notes, discount on Senior Convertible PIK Notes of$23.6 million , and (v)$0.1 million of long-term finance lease obligations, net of (vi) debt issue costs of$32.4 million . As ofDecember 31, 2022 , our total debt had an annualized weighted average cash interest rate of 6.67%.. As ofDecember 31, 2021 , our long-term debt was$4,879.1 million and included (i)$1,308.4 million Term Loan B, excluding the current portion of Term Loan B of$13.3 million , 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% Notes, (iv)$1,300.0 million of Senior Convertible PIK Notes, discount on Senior Convertible PIK Notes of$27.7 million , and (v)$0.1 million of long-term finance lease obligations, net of (vi) debt issue costs of$38.8 million . As ofDecember 31, 2021 , our total debt had a weighted average cash interest rate of 4.64%.
Loss (gain) on extinguishment of debt
In the year endedDecember 31, 2022 , the Company repurchased in the open market and cancelled$136.2 million of the 5.750% Notes, resulting in the recognition of a gain on extinguishment of debt of$34.6 million , representing the difference between the purchase price including associated fees and the net carrying value. As a result of the refinancing transactions ofAugust 24, 2021 , the Company recognized a loss on extinguishment of debt of$15.8 million for the year endedDecember 31, 2021 , 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.
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 endedDecember 31, 2022 , the fair values of the Private Placement Warrants and the Unvested Founder Shares decreased by$67.1 million and$32.6 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. 63
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Provision (Benefit) for Income Taxes
Net loss before income taxes for the year endedDecember 31, 2022 of$560.7 million generated a provision for income taxes of$12.2 million with an effective tax rate of (2.2)%. Net income before income taxes for the year endedDecember 31, 2021 of$135.5 million generated a provision for income taxes of$33.4 million with an effective tax rate of 24.6%. Our effective tax rate for the year endedDecember 31, 2022 differed from the statutory rate primarily due to non-deductible stock-based compensation expense, non-deductible mark-to-market liability, non-deductible intangible asset impairment charge, limitations on executive compensation, changes in the Company's deferred state tax rate due to previous acquisitions, tax credits, operations and state tax expense. Our effective tax rate for the year endedDecember 31, 2021 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
2020
For a discussion comparing our consolidated operating results from the year endedDecember 31, 2021 with the year endedDecember 31, 2020 , refer to Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations for the Years EndedDecember 31, 2021 andDecember 31, 2020 " in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , which was filed with the Commission onFebruary 25, 2022 .
Liquidity and Capital Resources
As ofDecember 31, 2022 , we had cash and cash equivalents of$340.6 million , which includes restricted cash of$6.5 million , and$448.2 million of loan availability under the revolving credit facility. OnAugust 24, 2021 , the maturity of the revolving credit facility was extended fromJune 7, 2023 toAugust 24, 2026 . As ofDecember 31, 2022 , we have three letters of credit totaling$1.8 million of utilization against the revolving credit facility. The three letters of credit are used to satisfy real estate lease agreements for three of our offices in lieu of security deposits. OnAugust 27, 2021 , the Company's Board 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 expired onDecember 31, 2022 . As ofDecember 31, 2022 , 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 these sources will provide sufficient liquidity for us to meet our working capital and, 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) 2022 2021
Net cash flows provided by (used in):
Operating activities $ 372,364 $ 404,687
Investing activities $ (104,446) $ (228,379)
Financing activities $ (115,738) $ (114,684)
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For the year ended
2021
Cash Flows from Operating Activities
Cash flows from operating activities provided$372.4 million for the year endedDecember 31, 2022 and$404.7 million for the year endedDecember 31, 2021 . This$32.3 million , or 8.0%, decrease in cash flows from operating activities was primarily the result of decrease in net income of$675.0 million , after adjusting for non-cash items of$543.3 million , offset by changes in net working capital of$99.4 million . The$543.3 million increase in non-cash items was primarily due to the change in the loss on impairment of goodwill and intangible assets of$662.2 million , change in the (gain) loss on extinguishment of debt of$50.4 million , change in the deferred tax benefit of$32.4 million , and the change in fair value of Private Placement Warrants and Unvested Founder Shares of$34.5 million .
The decrease in net income of
loss on impairment of goodwill and intangible assets of
explained above.
During the year endedDecember 31, 2022 ,$55.3 million was provided by changes in working capital including decreases in net accounts receivable of$21.0 million primarily due to decreases in year-over-year revenues and timing of collections, decreases in prepaid expenses and other assets of$2.8 million , decreases in prepaid taxes of$3.7 million , and increases in accounts payable and accrued expenses of$34.3 million , offset by decreases in operating lease obligations of$6.5 million . During the year endedDecember 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 .
Cash Flows from Investing Activities
For the year endedDecember 31, 2022 , net cash of$104.4 million was used in investing activities including$89.7 million for purchases of property and equipment and capitalization of software development and$15.0 million for purchase of equity investments, offset by proceeds from the sale of investment of$0.3 million . For the year endedDecember 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 an investment of$5.6 million . This increase in purchases of property and equipment and capitalization of software development of$5.1 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 endedDecember 31, 2022 were$115.7 million primarily consisting of the repurchase of 5.750% Notes for$100.0 million , repayments of Term Loan B of$13.3 million , and$2.5 million of taxes paid on net settlement of vested share awards. Cash flows used in financing activities for the year endedDecember 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.
For the year ended
2020
For a discussion comparing our cash flows from operating activities, investing activities, and financing activities from the year endedDecember 31, 2021 with the year endedDecember 31, 2020 , refer to Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Cash Flow Summary - For the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 " in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , which was filed with the Commission onFebruary 25, 2022 .
Term Loans and Revolvers
OnAugust 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 65
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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
Interest on the senior secured credit facilities 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 8.98% as ofDecember 31, 2022 .
Term Loan B matures on
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% atDecember 31, 2022 and 2021. 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 OnOctober 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 ofOctober 15, 2027 . 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 onApril 15 andOctober 15 of each year. OnOctober 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 ofNovember 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 onMay 1 andNovember 1 of each year. OnAugust 24, 2021 MPH issued$1,050.0 million in aggregate principal amount of 5.50% Senior Secured Notes with a maturation date ofSeptember 1, 2028 . The interest rate on the 5.50% Senior Secured Notes is fixed at 5.50%, and is payable semi-annually onMarch 1 andSeptember 1 of each year. The 5.50% Senior Secured Notes are guaranteed and secured as described below under "-Guarantees and Security."
During November and December of 2022, the Company repurchased and cancelled
debt extinguishment of
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;
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•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
The Revolver Ratio is such that, if, as of the last day of any fiscal quarter of MPH, the aggregate amount of loans under the revolving credit facility, letters of credit issued under the revolving credit facility (to the extent not cash collateralized or backstopped or, in the aggregate, in excess of$10.0 million ) and swingline loans are outstanding and/or issued in an aggregate amount greater than 35% of the total commitments in respect of the revolving credit facility at such time, the revolving credit facility will require MPH to maintain a maximum first lien secured leverage ratio of 6.75 to 1.00. Our consolidated first lien debt to consolidated EBITDA ratio was 2.64 times and 2.61 times as ofDecember 31, 2022 and 2021, respectively.
As of
covenants.
The debt agreements governing the senior secured credit facilities, the 5.750% Notes and the 5.50% Senior Secured Notes contain customary events of default, subject to grace periods and exceptions, which include, among others, payment defaults, cross-defaults to certain material indebtedness, certain events of bankruptcy, material judgments, in the case of the debt agreements governing the senior secured credit facilities and the 5.50% Senior Secured Notes, failure of a guarantee on the liens on material collateral to remain in effect, in the case of the debt agreements governing the senior secured credit facilities, any change of control. Upon the occurrence of an event of default under such debt agreements, the lenders and holders of such debt will be permitted to accelerate the loans and terminate the commitments, as applicable, thereunder and exercise other specified remedies available to the lenders and holders thereunder.
See the footnotes to the EBITDA and Adjusted EBITDA reconciliation table
provided above under “Non-GAAP Financial Measures” for material differences
between the financial information of MultiPlan and MPH.
Guarantees and Security
All obligations under the debt agreements governing the senior secured credit facilities and the 5.50% Senior Secured Notes are unconditionally guaranteed byMPH Acquisition Corp. 1, the direct holding company parent of MPH, and each existing and subsequently acquired or organized direct or indirect wholly ownedU.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 and Estimates
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
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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 customer-specific and aggregated factors that include historical billing and adjustment data, customer contractual 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 is calculated as the excess of the purchase price in an acquisition over the fair value of identifiable net assets acquired. 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$3,705.2 million and$4,363.1 million as ofDecember 31, 2022 and 2021, respectively. 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 tests goodwill for impairment at least annually as ofNovember 1 , or more frequently if there are events or circumstances indicating the carrying value of our reporting unit may exceed its fair value on a more likely than not basis. The impairment assessment compares the fair value of the reporting unit to its carrying value. Impairment is measured as the amount by which the carrying value of the reporting unit exceeds its fair value. We perform our annual impairment assessment of goodwill and indefinite-lived intangible assets as of November, however, based on significant declines in our market capitalization during the second half of the fourth quarter of 2022, we performed a quantitative impairment test as ofDecember 31, 2022 . In the quantitative impairment test of our indefinite-lived intangibles, which consist of trademarks, we calculate the estimated fair value using the relief from royalty method. Under this method a royalty rate based on observed market royalties is applied to projected revenue supporting the trademarks and discounted to present value. The estimated fair value of our indefinite-lived intangibles was less than their carrying value and as a result a loss on impairment$4.3 million was recorded during the year endedDecember 31, 2022 . In the quantitative impairment test of goodwill, we calculate the estimated enterprise fair value of the reporting unit using a (i) discounted cash flow analysis, (ii) forecasted EBITDA trading multiples for comparable publicly traded companies and (iii) historical EBITDA multiples for comparable acquisitions, giving equal weight to the three approaches. Assumptions used in the discounted cash flow analysis include forecasted revenues, terminal growth rate, forecasted expenses and the discount rate. The fair value measurements are based on significant unobservable inputs, and thus represent Level 3 inputs. This estimated enterprise fair value is then reconciled to our market enterprise value based on our market capitalization at year end with an appropriate implied market participant acquisition premium.
Qualitative impairment assessments were performed for the years ended
31, 2021
The quantitative assessment of our goodwill as ofDecember 31, 2022 indicated that the estimated fair value of the reporting unit of approximately$6.3 billion was less than its carrying value of approximately$6.9 billion . As a result, a loss on impairment of$657.9 million was recorded during the year endedDecember 31, 2022 . The loss on impairment of goodwill and intangible assets was primarily due to the impacts of macroeconomic factors. Our discounted cash flow analysis and the relief from royalty analysis utilized a higher discount rate for the 2022 impairment test, primarily due to central banks raising interest rates in 2022. Fair value measurements require considerable judgment and are sensitive to changes in underlying assumptions. As a result, there can be no assurance that estimates and assumptions made for purposes of the impairment assessment will prove to be an accurate prediction of the future. Potential circumstances that could have a negative effect on the fair value of our reporting unit include, but are not limited to, lower than forecasted growth rates or profit margins and changes in the weighted average cost of capital. A reduction in the estimated fair value of the reporting unit could trigger an impairment in the future. The Company cannot predict the occurrence of certain events or changes in circumstances that might adversely affect the carrying value of goodwill. If the future financial performance falls below our expectations or there are unfavorable revisions to 68
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significant assumptions, or if our market capitalization significantly declines, we may need to record an additional non-cash loss on impairment of goodwill and intangible assets charge in a future period.
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 re-measured 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 ofMonte 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 onU.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 ofOctober 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
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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 yearU.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.
The following table shows the significant assumptions in the development of the
fair value of the Private Placement Warrants and the Unvested Founder Shares:
Year Ended December 31,
Significant Unobservable Inputs 2022 2021
Stock price $ 1.15 $ 4.43
Strike price $ 11.50 $ 11.50
Remaining life (in years) 2.75 3.75
Volatility 72.7 % 79.0 %
Risk-free interest rate 4.3 % 1.1 %
Expected dividend yield - % - %
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, the TCJA and available tax planning
strategies.
Customer Concentration
Three customers individually accounted for 32%, 20% and 10% of revenues for the
year ended December 31, 2022 and 34%, 19% and 10% of revenues for the year ended
December 31, 2021 and 35%, 20% and 9% of revenues for the year ended
December 31, 2020 . 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.
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