Nutex Health Inc. (NUTX) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is intended to assist you in understanding our results of operations and our present financial condition and contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. We caution you that our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences are discussed elsewhere in this Annual Report, particularly in the “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors,” all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.
Explanatory Note
On April 1, 2022 (the “Merger Date”), Nutex Health Holdco LLC and Clinigence Holdings, Inc. (“Clinigence”) completed the merger (the “Merger”) contemplated by the Agreement and Plan of Merger (the “Merger Agreement”) dated as of November 23, 2021 between Clinigence, Nutex Acquisition LLC, a Delaware limited liability company and wholly-owned subsidiary of Clinigence, Nutex, Micro Hospital Holding LLC (solely for the purposes of certain sections of the Merger Agreement), Nutex Health Holdco LLC and Thomas Vo, M.D., solely in his capacity as the representative of the equity holders of Nutex. Immediately following the completion of the Merger, Clinigence amended its certificate of incorporation and bylaws to change its name to “Nutex Health Inc.” In connection with the Merger, each outstanding equity interest of Nutex Health Holdco LLC was exchanged for 3.571428575 shares of Clinigence common stock. The Merger was accounted for as a reverse business combination under U.S. GAAP. Therefore, Nutex Health Holdco LLC was treated as the accounting acquirer in the Merger. Our financial statements presented for periods prior to the Merger Date are those of Nutex Health Holdco, LLC, as the Company’s predecessor entity. Beginning with the second quarter of 2022, our financial statements are presented on a consolidated basis and include Clinigence.
Except where the context indicates otherwise, (i) references to “we,” “us,” “our,” or the “Company” refer, for periods prior to the completion of the Merger, to Nutex Health Holdco LLC and its subsidiaries, (ii) references the “Nutex Health” for periods following the completion of the Merger, refer to Nutex Health Inc. and its subsidiaries and (ii) references to “Clinigence” refer to Clinigence Holdings, Inc. and its subsidiaries prior to the completion of the Merger.
Overview
Nutex Health Inc. is a physician-led, healthcare services and operations company with 19 hospital facilities in eight states (hospital division), and a primary care-centric, risk-bearing population health management division. Our hospital division implements and operates innovative health care models, including micro-hospitals, specialty hospitals and hospital outpatient departments (“HOPDs”). The population health management division owns and operates provider networks such as independent physician associations (“IPAs”) and offers a cloud-based proprietary technology platform to IPAs which aggregates clinical and claims data across multiple settings, information systems and sources to create a holistic view of patients and providers.
We employ 1,150 full- and part-time employees and partner with over 800 physicians. Our corporate headquarters is based in Houston, Texas. We were incorporated on April 13, 2000 in the state of Delaware.
Our financial statements present the Company’s consolidated financial condition and results of operations including those of majority-owned subsidiaries and variable interest entities (“VIEs”) for which we are the primary beneficiary.
The hospital division includes our healthcare billing and collections organization and hospital entities. In addition, we have financial and operating relationships with multiple professional entities (the “Physician LLCs”) and real estate entities (the “Real Estate Entities”). The Physician LLCs employ the doctors who work in our hospitals. These entities are consolidated by the Company as VIEs because they do not have significant equity at risk, and we have historically provided support to the Physician LLCs in the event of cash shortages and received the benefit of their cash surpluses.
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The Real Estate Entities own the land and hospital buildings which are leased to our hospital entities. The Real Estate Entities have mortgage loans payable to third parties which are collateralized by the land and buildings. We consolidate the Real Estate Entities as VIEs in instances where our hospital entities are guarantors or co-borrowers under their outstanding mortgage loans. During the second quarter of 2022, we deconsolidated 17 Real Estate Entities after the third-party lenders released our guarantees of associated mortgage loans, leaving three Real Estate Entities as current VIEs consolidated in our financial statements.
The Company has no direct or indirect ownership interest in the Physician LLCs or Real Estate Entities, so 100% of the equity for these entities is shown as noncontrolling interest in the consolidated balance sheets and statements of operations.
The population health management division includes our management services organizations and a healthcare information technology company providing a cloud-based platform for healthcare organizations. In addition, AHISP, IPA, a physician-affiliated entity that is not owned by us—is consolidated as a VIE of our wholly-owned subsidiary AHP since we are the primary beneficiary of their operations under AHP’s management services contracts with them.
Sources of revenue. Our hospital division recognizes net patient service revenue for contracts with patients and in most cases a third-party payor (commercial insurance, workers compensation insurance or, in limited cases, Medicare/Medicaid).
We receive payment for facility services rendered by us from federal agencies, private insurance carriers, and patients. The Physician LLCs receive payment for doctor services from these same sources. On average, greater than 90% of our net patient service revenue are paid by insurers, federal agencies, and other non-patient third parties. The remaining revenues are paid by our patients in the form of copays, deductibles, and self-payment. We generally operate as an out-of-network provider and, as such, do not have negotiated reimbursement rates with insurance companies. In the fourth quarter of 2022, we signed in-network provider contracts with the Provider Network of America (PNA). These contracts provide for payment to us of claims at 300% of the Medicare allowable rates for our services provided to PNA members.
The following tables present the allocation of the estimated transaction price with the patient between the primary patient classification of insurance coverage:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | Year ended December 31, | |||||||
| | | 2022 | 2021 | 2020 | |||||
| | | | | | | | | | |
| Insurance | | | 89% | | | 96% | | | 96% |
| Self pay | | | 9% | | | 3% | | | 3% |
| Workers compensation | | 1% | | | 1% | | | 1% | |
| Medicare/Medicaid | | | 1% | | | 0% | | | 0% |
| Total | | | 100% | | | 100% | | | 100% |
The population health management division recognizes revenue for capitation and management fees for services to IPAs and physician groups and for the licensing, training, and consulting related to our cloud-based proprietary technology. Capitation revenue consists primarily of capitated fees for medical services provided by physician-owned entities we consolidate as VIEs. Capitated arrangements are made directly with various managed care providers including HMOs. Capitation revenues are typically prepaid monthly to us based on the number of enrollees selecting us as their healthcare provider. Capitation is a fixed payment amount per patient per unit of time paid in advance for the delivery of health care services, whereby the service providers are generally liable for excess medical costs. We receive management fees that are based on gross capitation revenues of the IPAs or physician groups we manage.
Our growth strategy. We plan to expand our operations by entering new market areas either through development of new hospitals, formation of new IPAs or by making acquisitions. We expect to open 15 to 20 new hospital facilities by the middle of the year 2025. These facilities are either under construction or in advanced planning stages and will result in our expansion into four new states: Florida, Wisconsin, Ohio and Idaho. We anticipate launching one-to-three additional IPAs per year principally in geographic areas around our existing micro-hospitals.
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COVID-19 Pandemic
A novel strain of coronavirus causing the disease known as COVID-19 was first identified in December 2019 and spread throughout the world. While vaccines and booster shots for the COVID-19 virus became widely available in the United States during 2021, COVID-19 continued to result in a significant number of hospitalizations.
As a provider of healthcare services, we were significantly affected by the public health and economic effects of the COVID-19 pandemic. Our hospitals, medical personnel, and employees have been actively caring for COVID-19 patients. We implemented considerable safety measures for treatment of COVID-19 patients and have incurred, and may continue to incur, certain increased expenses arising from the COVID-19 pandemic, including additional labor, supply chain, capital and other expenditures. Moreover, in recent months, the COVID-19 pandemic resulted in general inflationary pressures and significant disruptions to global supply networks. In this regard, we have experienced disruptions in connection with the provision of equipment, construction services, as well as inflationary pressures in connection with labor, supply chain, capital and other expenditures. We also experienced a delay in billing and collection of patient claims during this period.
The COVID-19 pandemic affected, and may continue to affect, our service mix, revenue mix, payor mix and/or patient volumes, as well as our ability to collect outstanding receivables. Pandemic-related factors may continue to adversely affect demand for our services, as well as the ability of patients and other payors to pay for services rendered.
While we are not able to fully quantify the impact that the COVID-19 pandemic will have on our future financial results, we expect developments related to COVID-19 to continue to affect our financial performance. Moreover, the COVID-19 pandemic may otherwise have material adverse effects on our results of operations, financial position, and/or our cash flows if economic and/or public health conditions in the United States deteriorate.
Overview of Legislative Developments
The U.S. Congress and many state legislatures have introduced and passed a large number of proposals and legislation designed to make major changes in the healthcare system, including changes that have impacted access to health insurance. The most prominent of these efforts, the Affordable Care Act, affects how healthcare services are covered, delivered and reimbursed. The Affordable Care Act increased health insurance coverage through a combination of public program expansion and private sector health insurance reforms. There is uncertainty regarding the ongoing net effect of the Affordable Care Act due to the potential for continued changes to the law’s implementation and its interpretation by government agencies and courts. There is also uncertainty regarding the potential impact of other health reform efforts at the federal and state levels.
In response to the COVID-19 pandemic, federal and state governments passed legislation, promulgated regulations, and have taken other administrative actions intended to assist healthcare providers in providing care to COVID-19 and other patients during the public health emergency and to provide financial relief. Among these, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) had the most impact on our business.
The CARES Act included a waiver of insurance copayments, coinsurance, and annual deductibles for laboratory tests to diagnose COVID-19 and visits to diagnose COVID-19 at an emergency department of a hospital. These provisions of the CARES Act expired on June 30, 2021. While these provisions were effective, we experienced higher levels of revenue due to a shift of payor mix. The larger number and acuity of patient claims for COVID-19 also resulted in higher revenue.
No Surprises Act
The No Surprises Act (“NSA”) is a federal law that took effect January 1, 2022, to protect consumers from most instances of “surprise” balance billing. The legislation was included in the Consolidated Appropriations Act, 2021, which was passed by Congress and signed into law by President Trump on December 27, 2020. With respect to the Company, the NSA limits the amount an insured patient will pay for emergency services furnished by an out-of-network provider. The NSA addresses the payment of these out-of-network providers by group health plans or health insurance issuers (collectively, “insurers”). In particular, the NSA requires insurers to reimburse out-of-network providers at a statutorily calculated “out-of-network rate.” In states without an all-payor model agreement or specified state law, the out-of-network rate is either the amount agreed to by the insurer and the out-of-network provider or an amount determined through an independent dispute resolution (“IDR”) process.
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Under the NSA, insurers must issue an initial payment or notice of denial of payment to a provider within thirty days after the provider submits a bill for an out-of-network service. If the provider disagrees with the insurer’s determination, the provider may initiate a thirty-day period of open negotiation with the insurer over the claim. If the parties cannot resolve the dispute through negotiation, the parties may then proceed to IDR arbitration.
Independent Dispute Resolution. The provider and insurer each submits a proposed payment amount and explanation to the arbitrator. The arbitrator must select one of the two proposed payment amounts taking into account the “qualifying payment amount” and additional circumstances including among other things the level of training, outcomes measurements of the facility, the acuity of the individual treated, and the case mix and scope of services of the facility providing the service. The NSA prohibits the arbitrator from considering the provider’s usual and customary charges for an item or service, or the amount the provider would have billed for the item or service in the absence of the NSA.
Qualifying Payment Amount. The “qualifying payment amount” (QPA) is generally the median of the contracted rates recognized by the plan or issuer under such plans or coverage, respectively, on January 31, 2019, for the same or a similar item or service that is provided by a provider in the same or similar specialty and provided in the geographic region in which the items or service is furnished, with annual increases based on the consumer price index. In other words, the qualifying payment amount is typically the median rate the insurer would have paid for the service if provided by an in-network provider or facility.
HHS Final Rule. As required by the NSA, the United States Department of Health and Human Services (“HHS”) has established an IDR process under which a certified IDR entity determines the ultimate amount of payment. The HHS’ final rule became effective October 25, 2022. The final rule eliminated the rebuttable presumption that the qualified payment amount is the correct price and also abandoned the requirement that the certified IDR entity must select the offer closest to the qualifying payment amount. These key provisions were initially part of the interim rule issued in 2021 and were challenged by several court cases. Under the final rule, the certified IDR entity must instead select the offer that best reflects the value of the item or service provided, by first considering the QPA and then considering “additional information” that is relevant to the dispute.
Since the NSA became effective January 1, 2022, our average payment by insurers of patient claims for emergency services has declined by approximately 30% including as much as a 37% reduction for physician services. In our experience, insurers often initially pay amounts lower than the QPA without regard for other information relevant to the claim. This requires us to make appeals using the IDR process. We submitted almost 28 thousand cases for IDR in 2022, most in the fourth quarter. The IDR process and subsequent appeals, should we pursue them, require extensive administrative time and delays in collections.
Our experience is similar to that of other healthcare providers. In February 2023, the Emergency Department Physician Management Association reported survey results of its membership. The survey found that in more than 90% of claims surveyed, insurance companies followed the final rules implemented under the NSA for QPA disclosure and that the average claim payment declined 32% per ER Visit post-NSA.
While we are working within the established processes for IDR, we have had varying successes at achieving collections at or higher than the established QPA. We have undertaken several strategic actions designed to improve our collections results. These include:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | maximizing our claims coding efficiency, |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | increasing efforts to collect co-pays and co-insurance, |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | adding additional administrative staff to handle the increased administrative IDR burden, |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | having a dedicated IDR team to accelerate resubmission of claims under the IDR process, |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | making appeals for additional payment of claims for periods before and after the NSA final rule was adopted through the IDR process, |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | making efforts to sign favorable contracts with new insurers, |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | working to sign more favorable contracted rates with existing contracted providers, |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | working with both local and national legislatures to enforce the NSA rules and guidelines for Insurers, and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | focusing on the value-base IPA side of our business, which is less affected by the NSA. |
The final rule is already the subject of legal challenges. The Texas Medical Association (TMA) in September of 2022 filed motions for summary judgment in the U.S. Eastern District of Texas, Tyler Division, seeking to invalidate the IDR related provisions of the final rule, arguing that the QPA does not represent the fair value of the services rendered by the physicians and providers and that the final rule illegally favors the QPA over the fair value of the provider services in contravention of the statutory language of the NSA.
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On October 19, 2022, and in addition to amicus briefs by several other national medical associations, the American Society of Anesthesiologists, the American College of Emergency Physicians, and the American College of Radiology, professional associations representing an aggregate of approximately 136,000 physicians, filed an Amicus brief supporting the TMA Motion.
On February 6, 2023, the U.S. District Court ruled in favor of the TMA by granting its motion for summary judgment against the HHS and stating that the revised IDR process in the final rule "continues to place a thumb on the scale" in favor of insurers and conflicts with the statutory provisions of the NSA, is unlawful and must be set aside. The Courts decision vacated all of the revised regulations challenged by the TMA, including HHS’ rule that arbiters must primarily consider the QPA in the IDR process. The court stated that the final rules wrongly require arbitrators to presume the correctness of the QPA and then impose a heightened burden on the remaining statutory factors to overcome that presumption. In addition, the TMA on January 1, 2023, also in the U.S. Eastern District, filed a lawsuit seeking declaratory and injunctive relief to invalidate a recent 600% percent increase in the administrative fees payable in the IDR process.
We are supportive of industry efforts challenging NSA. Our experience, like that of many other healthcare providers, is that the final rule continues to unfairly favor insurers in the determination of the QPA we receive for our healthcare services. It is difficult to predict the ultimate outcome of efforts to challenge or amend the final rule. As well, there can be no assurance that third-party payors will not attempt to further reduce the rates they pay for our services or that additional rules issued under the NSA will not have adverse consequences to our business.
Results of Operations
We report the results of our operations as three segments in our consolidated financial statements: (i) the hospital division, (ii) the population health management division and (ii) the real estate division. Activity within our business segments is significantly impacted by demand for healthcare services we provide, competition for these services in each of the market areas we serve, and the legislative changes discussed above.
Following is our results of operations for the periods shown:
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | Year ended December 31, | |||||||
| | | 2022 | 2021 | 2020 | |||||
| Revenue: | | | | | | | | | |
| Hospital division | | $ | 198,508,245 | | $ | 331,531,311 | | $ | 274,029,061 |
| Population health management division | | | 20,786,061 | | | - | | | - |
| Total revenue | | | 219,294,306 | | | 331,531,311 | | | 274,029,061 |
| Segment operating income: | | | | | | | | | |
| Hospital division | | | 13,064,913 | | | 179,280,958 | | | 157,606,159 |
| Population health management division | | | 387,469 | | | - | | | - |
| Total segment operating income | | | 13,452,382 | | | 179,280,958 | | | 157,606,159 |
| Corporate and other costs: | | | | | | | | | |
| Acquisition costs | | | 3,885,666 | | | 3,553,716 | | | - |
| Impairment of goodwill | | | 398,135,038 | | | - | | | - |
| General and administrative expenses | | | 18,030,832 | | | 5,462,344 | | | 4,432,272 |
| Total corporate and other costs | | | 420,051,536 | | | 9,016,060 | | | 4,432,272 |
| Interest expense | | | 12,490,260 | | | 6,196,026 | | | 6,432,941 |
| Other expense (income) | | | 559,299 | | | (5,422,144) | | | 1,001,711 |
| Income before taxes | | | (419,648,713) | | | 169,491,016 | | | 145,739,235 |
| Income tax expense | | | 13,090,905 | | | 965,731 | | | 181,341 |
| | | | | | | | | | |
| Net income (loss) | | | (432,739,618) | | | 168,525,285 | | | 145,557,894 |
| Less: net income (loss) attributable to noncontrolling interests | | | (7,959,172) | | | 35,931,957 | | | 39,588,009 |
| Net income (loss) attributable to Nutex Health Inc. | | $ | (424,780,446) | | $ | 132,593,328 | | $ | 105,969,885 |
| | | | | | | | | | |
| Adjusted EBITDA | | $ | 12,547,923 | | $ | 145,220,199 | | $ | 114,866,741 |
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Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
We reported a net loss attributable to Nutex Health Inc. of $424.8 million, or a loss of $0.67 per share, for 2022 as compared with net income attributable to Nutex Health Inc. of $132.6 million, or $0.22 per diluted share, for 2021. Our 2022 results were principally affected by:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | A non-cash impairment charge of $398.1 million to reduce the carrying amount of goodwill for the population health management division reporting unit acquired in the reverse business combination; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Decrease in revenue caused by legislative changes reducing the amounts we are able to collect for patient services to median in-network rates; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Start-up costs associated with five new facilities opened since April 2021 which are experiencing favorable market acceptance but not yet fully achieving break-even profitability; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Higher overall costs of employees and independent contractors. |
Adjusted EBITDA for 2022 was $12.5 million as compared $145.2 million for 2021. Refer to Non-GAAP Financial Measures discussed below for a definition and reconciliation of Adjusted EBITDA. The items affecting revenue and start-up costs contributed significantly to the decline in Adjusted EBITDA in the 2022 period.
A discussion of our segment results is included below.
Hospital Division. Our revenue for 2022 totaled $198.5 million as compared to $331.5 million for 2021, a decrease of 40% caused by a reduction in both collection amounts and the number of patient visits. The following table shows the number of patient visits during the periods:
| | | | | | | |
|---|---|---|---|---|---|---|
| | | Year ended December 31, | ||||
| | | 2022 | | 2021 | ||
| Patient visits: | | | | | | |
| Hospital | | | 161,014 | | | 189,016 |
Total patient visits decreased 15% during 2022 as compared with 2021. Patient visits in 2021 included significant volumes of COVID-19 related cases. The average acuity or severity of patient cases in the 2022 period was slightly higher than in 2021 but only minimally offset the impact of the lower number of total patient visits.
Collections during the years 2020 and 2021 benefited from provisions of the CARES Act which waived insurance copayments, coinsurance, and annual deductibles for laboratory tests and visits at an emergency department of a hospital to diagnose COVID-19. These provisions of the CARES Act expired on June 30, 2021. While these provisions were effective, we experienced higher levels of revenue due to a shift of payor mix.
In 2022, the average payment by insurers for patient claims for emergency services declined by approximately 30% principally because of the NSA compared to prior periods. We also experienced a decrease in collection for the remaining amounts of account receivable for periods before 2022. We believe this decline was caused, in part, by insurers underpaying these claims in the same way we are experiencing lower claim payments since the NSA became effective.
The hospital division’s operating income was $13.1 million during 2022, down 93% as compared $179.3 million in the same period of 2021. Our operating income for 2022 was adversely affected by the reduction in net revenue discussed above. Further, start-up costs for newer facilities contributed to reduced segment operating results. We have opened five new facilities since April 2021. Start-up costs include complete staffing for 24/7 operations, lease costs, in-market advertising and other operating expenses. These costs often exceed our revenue at these facilities until they achieve sustaining volumes of patient visits. In general, we expect new facilities to reach profitability within 12 months. In this time, we also added additional staff to manage higher volumes of medical claims billing and collection administration.
Population Health Management Division. We completed our reverse business combination with Clinigence in April 2022. Clinigence’s operations are reported as the population health management division. Our total revenue for 2022 for this division was $20.8 million consisting of capitation revenue of $15.5 million, management fees of $4.3 million and SaaS revenue of $946 thousand. Capitation revenue is recognized by our consolidated VIE, AHISP. We do not have an equity interest in this VIE but consolidate it
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since we are the primary beneficiary of its operations under our management services contract with them. We also earn management fees under our management services contracts with other IPAs and MSOs which are reported as revenue.
The population health management division had $387 thousand of operating income for 2022 since completion of the reverse business combination. Strategically, we are focused on the growth of this division principally through the addition of new independent physician associations and have staffed our organization to manage larger numbers of such organizations.
Real Estate Division. This division reports the operations of consolidated Real Estate Entities where we provide guarantees of their indebtedness or are co-borrowers. During the second quarter of 2022, we deconsolidated 17 Real Estate Entities after the third-party lenders released our guarantees of associated mortgage loans.
Revenue and operating expenses of consolidated Real Estate Entities are not significant since the extent of these entities’ operations is to own facilities leased to our hospital division entities which are financed by a combination of contributed equity by related parties and third-party mortgage indebtedness. Such leases are typically on a triple net basis where our hospital division is responsible for all operating costs, repairs and taxes on the facilities. Finance lease income is recognized outside of segment operating income as other income by the Real Estate Entities. However, these amounts are largely eliminated in the consolidation of these entities into our financial statements.
At December 31, 2022, three Real Estate Entities continue to be consolidated in our financial statements. We expect that hospitals we open in the future may be leased from new Real Estate Entities which may be owned in whole or part by related parties. Third-party lenders to these entities may require that we provide a guarantee or become co-borrowers under mortgage indebtedness financings for such facilities. In such instances, we may be required to consolidate these new Real Estate Entities in our financial statements as VIEs.
Corporate and other costs. Corporate and other costs in 2022 included general and administrative expenses totaling $18.0 million, acquisition costs for the reverse business combination with Clinigence totaling $3.9 million and a non-cash impairment charge reducing goodwill totaling $398.1 million. Our corporate costs for 2021 included general and administrative costs of $5.5 million and acquisition costs of $3.6 million. General and administrative costs include our executive management, accounting, human resources, corporate technology, insurance and professional fees. We have incurred higher levels of professional fees as a public company. In 2022, we have made staffing additions commensurate with our operational growth and made key additions to our executive management team.
As a public company, we must comply with new laws, regulations and requirements, certain corporate governance provisions of the Sarbanes-Oxley Act of 2002, related regulations of the SEC and the continued listing requirements of the NASDAQ, with which we were not required to comply with as a private company. We incur additional annual expenses related to these matters and, among other things, additional directors’ and officers’ liability insurance, director fees, reporting requirements of the SEC, transfer agent fees, hiring additional accounting, legal and administrative personnel, increased auditing and legal fees and similar expenses.
In 2022, we recognized a non-cash impairment charge of $398.1 million, as revised, to reduce the carrying amount of goodwill for the population health management division reporting unit acquired in the reverse business combination. This impairment was determined as part of our annual test for impairment of goodwill. This test is made by comparing the estimated fair values of our reporting units to their respective carrying values. We use an income method to estimate the fair value of these assets, which is based on forecasts of the expected future cash flows attributable to the respective assets and is subject to significant estimates and assumptions. In performing this test, we determined that the estimated fair value of our population health management division reporting unit was less than its carrying value recorded in the reverse business combination. Therefore, we conducted a second step of the goodwill impairment test to determine the implied fair value of the reporting unit's goodwill. The non-cash impairment charge reduced the excess carrying amount of goodwill for the population health management division that were greater than its residual fair value. As discussed in Item 8, “Financial Statements – Note 20 – Quarterly Financial Data, we made a retrospective adjustment to reduce the amount of goodwill impairment expense from the $408.5 million previously recognized in our quarterly report on Form 10-Q for the period ended September 30, 2022 to $398.1 million.
Nonoperating items
Interest expense. Interest expense totaled $12.5 million in 2022 as compared with $6.2 million for 2021. This includes interest expense associated with the mortgage indebtedness of consolidated Real Estate Entities, interest expense on outstanding term notes and lines of credit for financing operating equipment and working capital needs, interest expense for financing leases and the accretion costs related to the conversion of notes assumed in the Clinigence transaction. Interest expense is expected to decline in future periods as a
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result of the deconsolidation of 17 Real Estate Entities and their associated mortgage indebtedness during the second quarter of 2022 as well as due to the elimination of accretion costs related to the conversion of notes payable assumed in the Clinigence transaction.
Income tax expense. In periods before our merger with Clinigence, Nutex Health Holdco LLC and the Nutex Subsidiaries were pass-through entities treated as partnerships for U.S. federal income tax purposes. No provision for federal income taxes was provided for these periods as federal taxes were obligations of these companies’ members. After the merger, Nutex Health Holdco LLC became a wholly-owned subsidiary of Clinigence and is included in its consolidated corporate tax filings. We recognized a non-cash charge of $21.3 million to income tax expense during 2022 for the change in tax status of Nutex Health Holdco LLC. This charge provides for the accumulated net deferred tax liabilities representing the differences between the book and tax bases of Nutex Health Holdco LLC’s assets and liabilities as of the April 1, 2022 change in tax status.
At the time of our merger with Clinigence, Clinigence had a full valuation allowance against its deferred tax assets. We recorded a non-cash benefit of $2.4 million to income tax expense to remove the acquired valuation allowance after we concluded that the associated deferred tax assets would be realizable.
Each of the discrete items above, as well as the non-deductible goodwill impairment expense also recognized 2022, are one-time, non-cash items.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
We reported net income attributable to Nutex Health Inc. of $132.6 million, or $0.22 per diluted share, for the year ended December 31, 2021 as compared with $106.0 million, or $0.18 per diluted share, for 2020. Our 2021 results benefited from higher patient volumes including COVID-19 related cases.
Adjusted EBITDA for 2021 was a $145.2 million as compared with $114.9 million for 2020. Refer to Non-GAAP Financial Measures discussed below for a definition and reconciliation of Adjusted EBITDA.
A discussion of our segment results follows.
Hospital Division. Our revenue for 2021 totaled $331.5 million as compared to $274.0 million for 2020, an increase of 21% principally caused by higher patient volumes including COVID-19 related cases. The following table shows the number of patient visits during the periods:
| | | | | | | |
|---|---|---|---|---|---|---|
| | | Year ended December 31, | ||||
| | | 2021 | | 2020 | ||
| Patient visits: | | | | | | |
| Hospital | | | 189,016 | | | 168,443 |
Total patient visits increased 12% in 2021 as compared with 2020. Patient visits each year included significant volumes of COVID-19 related cases each year. The number and acuity of patient visits in the fall of 2021 increased significantly due to the emergence of the Omicron variant of the COVID-19 virus. These higher volumes began to subside in early-2022.
Collections during the years 2020 and 2021 benefited from provisions of the CARES Act which waived insurance copayments, coinsurance, and annual deductibles for laboratory tests and visits at an emergency department of a hospital to diagnose COVID-19. These provisions of the CARES Act expired on June 30, 2021. While these provisions were effective, we experienced higher levels of revenue due to a shift of payor mix.
The hospital division’s operating income was $179.3 million during 2021, up $21.7 million or almost 14% from $157.6 million reported for 2020. Our operating income for 2021 benefited from the higher revenues discussed above.
Real Estate Division. This division reports the operations of consolidated Real Estate Entities where we provide guarantees of their indebtedness or are co-borrowers.
Revenue and operating expenses of consolidated Real Estate Entities are not significant since the extent of these entities’ operations is to own facilities leased to our hospital division entities which are financed by a combination of contributed equity by related parties
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and third-party mortgage indebtedness. Such leases are typically on a triple net basis where our hospital division is responsible for all operating costs, repairs and taxes on the facilities. Finance lease income is recognized outside of segment operating income as other income by the Real Estate Entities. However, these amounts are largely eliminated in the consolidation of these entities into our financial statements.
Corporate and other costs. Corporate and other costs in 2021 included general and administrative expenses totaling $5.5 million as compared with $4.4 million for 2020. Acquisition costs totaled $3.6 million in 2021. These acquisition costs and higher levels of general and administrative expenses in 2021 were incurred as we prepared for our reverse business combination with Clinigence and added corporate staffing in preparation for our public listing.
Nonoperating items
Interest expense. Interest expense totaled $6.2 million in 2021 as compared with $6.4 million for 2020. This includes interest expense associated with the mortgage indebtedness of consolidated Real Estate Entities and interest expense on outstanding term notes and lines of credit for financing operating equipment and working capital needs.
Income tax expense. As discussed above, in periods before our merger with Clinigence, Nutex Health Holdco LLC and the Nutex Subsidiaries were pass-through entities treated as partnerships for U.S. federal income tax purposes. No provision for federal income taxes was provided for these periods as federal taxes were obligations of these companies’ members. Reported amounts for income tax expense in these periods were for Texas state tax obligations.
Liquidity and Capital Resources
As of December 31, 2022, we had $34.3 million of cash and equivalents, compared to $36.1 million of cash and equivalents at December 31, 2021.
Significant sources and uses of cash during 2022.
Sources of cash:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Cash from operating activities was $50.6 million, which included $64.3 million from the primary components of our working capital (receivables, inventories, accounts payable and expenses). |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Clinigence’s balance sheet at the merger date included $12.7 million of cash. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | We received net proceeds of $3.4 million from borrowings under notes payable and lines of credit. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | We received net proceeds of $4.2 million from the exercise of common stock warrants and options. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Non-controlling members made cash capital contributions of $4.5 million. |
Uses of cash:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Capital expenditures were $14.6 million. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | We made distributions to our owners related to operations prior to the merger with Clinigence and to noncontrolling interest owners totaling $51.2 million. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| • | Cash associated with the 17 deconsolidated Real Estate Entities totaled $2.4 million. |
Future sources and uses of cash. Our operating activities are financed with cash on hand which is generated from revenues. Most of our hospital facilities are leased from various lessors including related parties. These leases are presented in our consolidated balance sheets unless the lease is from a consolidated Real Estate Entity. Our growth plans include the development of new hospital locations. We expect that in many of these locations we will lease facilities from newly established entities partially owned by related parties.
We routinely enter into equipment lease agreements to procure new or replacement equipment and may also finance these purchases with term debt. We have smaller lines of credits available for working capital purposes and are presently working to supplement or replace these with larger financing commitments. These larger financing commitments are subject to market conditions and we may not be able to obtain such larger financing commitments at favorable economic terms or at all.
Indebtedness. The Company’s indebtedness at December 31, 2022 is presented in Item 8, “Financial Statements – Note 8 – Debt” and our lease obligations are presented in Item 8, “Financial Statements—Note 9 – Leases.”
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We have entered into private debt arrangements with banking institutions for the purchase of equipment and to provide working capital and liquidity through cash and lines of credit. Unless otherwise delineated above, these debt arrangements are obligations of Nutex and/or its wholly-owned subsidiaries. Consolidated Real Estate Entities have entered into private debt arrangements with banking institutions for purposes of purchasing land, constructing new emergency room facilities and building out leasehold improvements which are leased to our hospital entities. Nutex is a guarantor or, in limited cases, a co-borrower on the debt arrangements of the Real Estate Entities for the periods shown. During the second quarter of 2022, we deconsolidated 17 Real Estate Entities after the third-party lenders released our guarantees of associated mortgage loans.
Certain outstanding debt arrangements require minimum debt service coverage ratios and other financial covenants. At December 31, 2022, we were not in compliance with the debt service coverage ratio for term loan with an outstanding balance of $1.0 million. This balance has been included in current liabilities. At December 31, 2022, we had remaining availability of $2.1 million under outstanding lines of credit.
Committed Investment Agreement with Lincoln Park Capital. On November 14, 2022, Nutex and Lincoln Park Capital Fund, LLC, an Illinois limited liability company (the “Investor”), entered into a purchase agreement pursuant to which Nutex has the right, in its sole discretion, but not the obligation, to sell to the Investor up to $100 million worth of shares of Common Stock, over the 36-month term of the purchase agreement, subject to the terms and conditions provided therein. Nutex will control the timing and amount of any future sales of its Common Stock and the Investor is obligated to make purchases in accordance with the purchase agreement, subject to various limitations including those under the Nasdaq listing rules.
Nutex intends to use the net proceeds from the future sale of its Common Stock for working capital and general corporate purposes to support its growth.
Regular Purchases: At any time after the satisfaction of certain conditions including the effectiveness of a registration statement, the Company has the right, but not the obligation, to require the Investor to purchase on any particular trading day (“Purchase Date”) up to:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | 300,000 shares of Common Stock provided that the closing price is not below $0.10; |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | 600,000 shares if the closing price is not below $0.75; and |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | 900,000 shares if the closing price is not below $1.50. |
The Investor’s committed obligation under each Regular Purchase shall not exceed $3,000,000. For Regular Purchases the purchase price shall be equal to 97% of the lesser of:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | the lowest sale price of the Common Stock during the applicable Purchase Date; or |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | the average of the three lowest closing sale prices of the Common Stock during the ten business days prior to the applicable Purchase Date. |
Accelerated Purchases: In addition to Regular Purchases and provided that the Company has directed a Regular Purchase in full (as set forth above), the Company in its sole discretion may require the Investor on each Purchase Date to purchase on the following business day (the “Accelerated Purchase Date”) up to the lesser of:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | three times the number of shares purchased pursuant to such Regular Purchase; or |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | 30% of the trading volume on the Accelerated Purchase Date; |
In each case, the purchase price shall be equal to 97% of the lesser of:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | the closing sale price on the Accelerated Purchase Date; or |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | the Accelerated Purchase Date’s volume weighted average price. |
There is no upper limit to the price per share that the Investor may pay for future issuances of Common Stock under the Agreement, and the Investor has agreed not to cause or engage in any direct or indirect short selling or hedging of our Common Stock. No warrants are being issued the Investor and the Agreement does not contain any rights of first refusal, participation rights, penalties, or liquidated damages provisions in favor of any party.
In connection with the execution of the Agreement, the Company issued 1,356,318 shares of Common Stock to the Investor as a commitment fee, in a private transaction exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended.
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Under the Agreement, issuances of Common Stock may be suspended upon the occurrence of customary events, including the unavailability of the resale registration statement. The Company has the right at any time for any reason to terminate the Agreement.
Off-Balance Sheet Arrangements
As of December 31, 2022, we had no material off-balance sheet arrangements.
Non-GAAP Financial Measures
Adjusted EBITDA. Adjusted EBITDA is used as a supplemental non-GAAP financial measure by management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies. We believe Adjusted EBITDA is useful because it allows us to more effectively evaluate our operating performance.
We define Adjusted EBITDA as net income (loss) attributable to Nutex Health Inc. plus net interest expense, income taxes, depreciation and amortization, further adjusted for stock-based compensation, certain defined items of expense, any acquisition-related costs and impairments. A reconciliation of net income to Adjusted EBITDA is included below. Adjusted EBITDA is not intended to serve as an alternative to U.S. GAAP measures of performance and may not be comparable to similarly-titled measures presented by other companies.
| | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|
| | | Year ended December 31, | |||||||
| | | 2022 | 2021 | 2020 | |||||
| Reconciliation of net income (loss) attributable to Nutex Health Inc. to Adjusted EBITDA: | | | | | | | | | |
| Net income (loss) attributable to Nutex Health Inc. | | $ | (424,780,446) | | $ | 132,593,328 | | $ | 105,969,885 |
| Depreciation and amortization | | | 13,131,374 | | | 7,662,464 | | | 5,898,361 |
| Interest expense, net | | | 12,490,260 | | | 6,196,026 | | | 6,432,941 |
| Income tax expense | | | 13,090,905 | | | 965,731 | | | 181,341 |
| Allocation to noncontrolling interests | | | (4,837,514) | | | (5,751,066) | | | (3,615,787) |
| EBITDA | | | (390,905,421) | | | 141,666,483 | | | 114,866,741 |
| Stock-based compensation expense | | | 189,581 | | | - | | | - |
| Rescission of warrant exercise | | | 1,243,059 | | | - | | | - |
| Impairment of goodwill | | | 398,135,038 | | | - | | | - |
| Acquisition costs | | | 3,885,666 | | | 3,553,716 | | | - |
| Adjusted EBITDA | | $ | 12,547,923 | | $ | 145,220,199 | | $ | 114,866,741 |
Significant Accounting Policies
Revenue recognition.
Hospital division – Our hospital division recognizes net patient service revenue for contracts with patients and in most cases a third-party payor (commercial insurance, workers compensation insurance or, in limited cases, Medicare/Medicaid). The Company’s performance obligations are to provide emergency health care services primarily on an outpatient basis. Net patient service revenues are recorded at the amount that reflects the consideration to which the Company expects to be entitled in exchange for providing patient care. These amounts are net of appropriate discounts giving recognition to differences between the Company’s charges and reimbursement rates from third party payors.
Patient service net revenues earned by the Company are recognized at a point in time when the services are provided, net of adjustments and discounts. Because all the Company’s performance obligations relate to contracts with a duration of less than one-year, certain disclosures are limited.
The transaction price is determined based on gross charges for services provided, reduced by contractual adjustments provided to third-party payors, discounts and implicit e concessions provided primarily to uninsured patients in accordance with the Company’s
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policy. For uninsured patients, the Company recognizes revenue based on established rates, subject to certain discounts and implicit price concessions. The Company is reimbursed from third party payors under various methodologies based on the level of care provided. We are considered “out-of-network” with commercial health plans. As there are no contractual rates established with insurance entities, revenues are estimated based on the “usual and customary” charges allowed by insurance payors using historical collection experience, historical trends of refunds and payor payment adjustments (retractions). Revenue from the Medicare program is based on reimbursement rates set by governmental authorities.
Patients who have health care insurance may also have discounts applied related to their copayment or deductible. Estimates of contractual adjustments and discounts are determined by major payor classes for outpatient revenues based on historical experience. The Company estimates implicit price concessions based on its historical collection experience with these classes of patients using a portfolio approach. The portfolios consist of major payor classes for outpatient revenue. Based on historical collection trends and other analyses, the Company concluded that revenue for a given portfolio would not be materially different than if accounting for revenue on a contract-by-contract basis.
Customer payments are due upon receipt of an explanation of benefits for insured patients or it is due upon receipt of the bill from the Company for uninsured payments. There is no financing component associated with payments due from insurers or patients.
Population health management division – The population health management division recognizes revenue for capitation and management fees for services to IPAs and physician groups and for the licensing, training, and consulting related to our cloud-based proprietary technology.
Capitation revenue consists primarily of capitated fees for medical services provided by physician-owned entities we consolidate as VIEs. Capitated arrangements are made directly with various managed care providers including HMOs. Capitation revenues are typically prepaid monthly to us based on the number of enrollees selecting us as their healthcare provider. Capitation is a fixed payment amount per patient per unit of time paid in advance for the delivery of health care services, whereby the service providers are generally liable for excess medical costs.
We receive management fees that are based on gross capitation revenues of the IPAs or physician groups we manage. Revenue is recognized and received monthly for our services. In addition, we provide consultant services that are charged as a flat fixed rate and recognized as revenue when the service is performed. Consultant services revenues represent a small portion of our total revenue.
Software licenses are provided as SaaS-based subscriptions that grants access to proprietary online databases and data management solutions. Training and consulting are project based and billable to customers on a monthly-basis or task-basis. Revenue from training and consulting are generally recognized upon delivery of training or completion of the consulting project. The duration of training and consulting projects are typically a few weeks or months and last no longer than 12 months.
SaaS-based subscriptions are generally marketed under multi-year agreements with annual, semi-annual, quarterly, or month-to-month renewals and revenue is recognized ratably over the renewal period with the unearned amounts received recorded as deferred revenue. For multiple-element arrangements accounted for in accordance with specific software accounting guidance, multiple deliverables are segregated into units of accounting which are delivered items that have value to a customer on a standalone basis.
Cash payments for SaaS-based subscriptions received in advance of the satisfaction of our performance obligations as deferred revenue and recognized as revenue over the period in which the performance obligations are satisfied. The Company completes its contractual performance obligations through providing its customers access to specified data through subscriptions for a service period, and training on consulting associated with the subscriptions. We primarily invoice our customers on a monthly basis and do not provide any refunds, rights of return, or warranties.
Construction in Progress. The Company regularly is in the process of constructing new facilities. Generally, our ER Entities are responsible for the leasehold buildout and equipment while the associated Real Estate Entity procures the land, if any, and constructs a new or remodeled facility. Costs incurred to construct assets which will ultimately be classified as fixed assets are capitalized and classified in our financial statements as construction in progress until construction is completed and the asset is available for use. Once the asset is available for use, it is reclassified as another category of fixed assets and depreciated across its useful life.
Goodwill Impairment. We test goodwill for impairment at least annually by comparing the estimated fair values of our reporting units to their respective carrying values. We use an income method to estimate the fair value of these assets, which is based on forecasts of the expected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations
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reflect a consideration of other marketplace participants, and include the amount and timing of future cash flows (including expected growth rates and profitability). Estimates utilized in the projected cash flows include consideration of macroeconomic conditions, overall category growth rates, competitive activities, Company business plans and the discount rate applied to the cash flows. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions.
During the three months ended September 30, 2022, we determined that the estimated fair value of our population health management division reporting unit which was acquired in the reverse business combination with Clinigence was less than its carrying value. Therefore, we conducted a second step of the goodwill impairment test to determine the implied fair value of the reporting unit’s goodwill. In this analysis, we allocated the fair value of the reporting unit to identifiable assets and liabilities of the reporting unit. The residual fair value after this allocation was compared to the goodwill balance with the excess goodwill charged to expense. Based on this analysis, we recognized a non-cash impairment charge of $398.1 million, as revised, to reduce the carrying amount of goodwill for the population health management division reporting unit. As discussed in Item 8, “Financial Statements – Note 20 – Quarterly Financial Data, we made a retrospective adjustment to reduce the amount of goodwill impairment expense from the $408.5 million previously recognized in our quarterly report on Form 10-Q for the period ended September 30, 2022 to $398.1 million.
We believe the estimates and assumptions utilized in our impairment testing are reasonable and are comparable to those that would be used by other marketplace participants. However, actual events and results could differ substantially from those used in our valuations. To the extent such factors result in a failure to achieve the level of projected cash flows used to estimate fair value for purposes of establishing or subsequently impairing the carrying amount of goodwill and intangible assets, we may need to record additional non-cash impairment charges in the future.