Starling Oncology, Inc. (TOI) 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 and analysis provides information that management believes is relevant to an assessment and understanding of the consolidated results of operations and financial condition of The Oncology Institute, Inc. ("TOI") along with its consolidating subsidiaries (the "Company"). The discussion should be read together with the historical audited annual financial statements for the years ended December 31, 2022 and 2021, and the related notes that are included elsewhere in this Annual Report. The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (as amended, "Securities Act"), as amended, and Section 21E of the Securities and Exchange Act of 1934 (as amended, the "Exchange Act"). Such statements are based upon current expectations, as well as management's beliefs and assumptions and involve a high degree of risk and uncertainty. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Statements that include the words "believes," "anticipates," "plans," "expects." "intends," and similar expressions that convey uncertainty of future events or outcomes are forward-looking statements. In addition, as a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. All forward-looking statements in this document are based on information available to us as of the filing date of this Annual Report on Form 10-K and we assume no obligation to update any forward-looking statements or the reasons why our actual results may differ. All dollar values are expressed in thousands, unless otherwise noted.
Overview
The Company is a leading value-based oncology company that manages community-based oncology practices that serve patients at 76 clinic locations across 15 markets and five states throughout the United States. Our community-based oncology practices are staffed with 112 oncologists and advanced practice providers. 62 of these clinics are staffed with 101 providers employed by our affiliated physician-owned professional corporations, referred to as the "TOI PCs", which provided care for more than 64,000 patients in 2022 and managed a population of approximately 1.7 million patients under value-based agreements as of December 31, 2022. The Company also provides management services to 14 clinic locations owned by independent oncology practices. The Company's mission is to heal and empower cancer patients through compassion, innovation, and state-of-the-art medical care.
Operationally, the Company’s medical centers provide a complete suite of medical oncology services including: physician services, in-house infusion and pharmacy, clinical trials, radiation, educational seminars, support groups, counseling, and 24/7 patient assistance. Many of our services, such as managing clinical trials and palliative care programs, are traditionally accessed through academic and tertiary care settings, while the TOI PCs bring these services to patients in a community setting. As scientific research progresses and more treatment options become available, cancer care is shifting from acute care episodes to chronic disease management. With this shift, it is increasingly important for high-quality, high-value cancer care to be available in a local community setting to all patients in need.
As a value-based oncology company, the Company seeks to deliver both better quality care and lower cost of care. The Company works to accomplish this goal by reducing wasteful, inefficient or counterproductive care that drives up costs but does not improve outcomes. The Company believes payors and employers are aligned with the value-based model due to its enhanced access, improved outcomes, and lower costs. Patients under the Company's affiliated providers’ care can benefit from evidence-based and personalized care plans, gain access to sub-specialized care in convenient community locations, and lower out-of-pocket costs. The Company believes its affiliated providers enjoy the stability and predictability of a large multi-state practice, are not incentivized or pressured to overtreat when it may be inconsistent with a patient’s goals of care, and can focus on practicing outstanding evidence-based medicine, rather than business building.
2022 Highlights
•Completed a $110 million strategic investment from Deerfield Management Company, L.P. through secured senior convertible notes on August 9, 2022
•Ended the fiscal year 2022 with $132 million in cash, cash equivalents, and investments
•Increased market count to 15 at year-end from 10 at the prior year end, including new markets in California, Florida and Texas
•Remediated two of the previously disclosed material weaknesses surrounding controls over review of revenue and segregation of duties within the financial close and reporting process. For the remaining one, Management has developed and continues to execute a remediation plan to address the previously disclosed material weakness around treatment of complex accounting transactions
•Received Agency for Healthcare Research and Quality's ("AHRQ") certification as an accredited Patient Safety Organization
•Generated over $1.7 million in savings to patients through the Company's dispensary co-pay assist program
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•Added 3 new gain share contracts in Florida
•Grew Capitated Membership by over 100 thousand lives
•Completed 6 practice acquisitions
The Business Combination
On June 28, 2021, DFP Healthcare Acquisition Corp. ("DFPH"), Orion Merger Sub I, Inc. ("First Merger Sub") and Orion Merger Sub II, LLC ("Second Merger Sub") entered into an agreement and plan of merger ("Merger Agreement") with TOI Parent, Inc. ("TOI Parent") (collectively, the "Business Combination"). In connection with the Business Combination, DFPH entered into subscription agreements with certain investors (the “PIPE Investors”), whereby it issued 17.5 million shares of common stock at $10.00 per share and 100,000 shares of preferred stock at $1,000.00 per share (“PIPE Shares”) for an aggregate investment of $275,000 (“PIPE Investment”), which closed simultaneously with the consummation of the Business Combination.
The Business Combination closed on November 12, 2021 ("Closing Date"). On the Closing Date, (i) First Merger Sub merged with and into TOI Parent, with TOI Parent being the surviving corporation and (ii) immediately following, TOI Parent merged with and into Second Merger Sub ("Legacy TOI"), with Second Merger Sub being the surviving entity and a wholly owned subsidiary of DFPH. DFPH was renamed “The Oncology Institute, Inc.” and TOI Common Stock and Public Warrants continued to be listed on Nasdaq under the ticker symbols “TOI” and “TOIIW,” respectively.
The total merger consideration on the Closing Date was $762,052, consisting of 51.3 million shares of common stock, valued at $10.00 per share (aggregate $595,468, inclusive of shares of DFPH common stock issuable per restricted stock units and the exercise of Legacy TOI stock options), and $166,584 in cash. Legacy TOI also issued 12.5 million shares of common stock pursuant to the terms of an earnout (“Earnout Shares”). The earnout shares are allocable to both Legacy TOI stockholders and Legacy TOI option holders. On the Closing Date, shares of DFPH common stock that were not otherwise redeemed as part of the DFPH public stockholder vote and the PIPE Shares automatically converted into shares of TOI stock on a one-for-one basis.
The Business Combination was accounted for as a reverse recapitalization in accordance with U.S. generally accepted accounting principles (“U.S. GAAP"). Under this method of accounting, DFPH was treated as the “acquired” company for accounting purposes and the Business Combination was treated as the equivalent of Legacy TOI issuing stock for the net assets of DFPH, accompanied by a recapitalization. The net assets of DFPH are stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Business Combination were those of Legacy TOI.
Components of Results of Operations
Revenue
The Company receives payments from the following sources for services rendered: (i) commercial insurers; (ii) pharmacy benefit managers (“PBMs”), (iii) the federal government under the Medicare program administered by the Centers for Medicare and Medicaid Services (“CMS”); (iv) state governments under Medicaid and other programs; (v) other third-party payors and managed care organizations (e.g., risk bearing organizations and independent practice associations (“IPAs”)); and (vi) individual patients and clients.
Revenue primarily consists of capitation revenue, fee-for-service (“FFS”) revenue, dispensary revenue, and clinical trials revenue. Capitation and FFS revenue comprise the revenues within the Company’s patient services segment and are presented together in the results of operations. The following paragraphs provide a summary of the principal forms of our billing arrangements and how revenue is recognized for each type of revenue.
Capitation
Capitation revenues consist primarily of fees for medical services provided by the TOI PCs to the Company's patients under a capitated arrangement with various managed care organizations. Capitation revenue is paid monthly based on the number of enrollees by the contracted managed care organization (per member per month or “PMPM”). Capitation contracts generally have a legal term of one year or longer. Payments in capitation contracts are variable since they primarily include PMPM fees associated with unspecified membership that fluctuates throughout the term of the contract; however, based on our experience, our total underlying membership generally increases over time as penetration of MA products grows. Certain contracts include terms for a capitation deduction where the cost of out-of-network referrals of members are deducted from the future payment. Revenue is recognized in the month services are rendered on the basis of the transaction price established at that time.
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Fee-for-service revenue
FFS revenue represents revenue earned under contracts in which we bill and collect for medical services rendered by the TOI PCs’ employed physicians. The terms for FFS contracts are short in duration and only last for the period over which services are rendered (typically, one day). FFS revenue consists of fees for medical services provided to patients. As specialist providers, our FFS revenue is dependent on referrals from other physicians, such as primary care physicians. The Company's affiliated providers build trusted, professional relationships with these physicians and their associated medical groups, which can lead to recurring FFS volume; however, this volume is subject to numerous factors the Company cannot control and can fluctuate over time. The Company also receives FFS revenue for capitated patients that receive medical services which are excluded from the Company's capitation contracts. Under the FFS arrangements, third-party payors and patients are billed for patient care services provided by the TOI PCs. Payments for services provided are generally less than billed charges. The Company records revenue net of an allowance for contractual adjustments, which represents the net revenue expected to be collected from third-party payors (including managed care, commercial, and governmental payors such as Medicare and Medicaid), and patients. These expected collections are based on fees and negotiated payment rates in the case of third-party payors, the specific benefits provided for under each patient’s healthcare plan, mandated payment rates in the case of Medicare and Medicaid programs, and historical cash collections (net of recoveries). The recognition of net revenue (gross charges less contractual allowances) from such services is dependent on certain factors, such as the proper completion of medical charts following a patient visit, the forwarding of such charts to our billing center for medical coding and entering into the Company's billing system, and the verification of each patient’s submission or representation at the time services are rendered as to the payor(s) responsible for payment of such services. Revenue is recorded on the date the services are rendered based on the information known at the time of entering of such information into the Company's billing systems as well as an estimate of the revenue associated with medical services.
Dispensary
Oral prescription drugs prescribed by doctors to their patients are sold directly through the TOI PCs’ dispensaries. Revenue for the prescriptions is based on fee schedules set by various PBMs and other third-party payors. The fee schedule is often subject to direct and indirect remuneration (“DIR”) fees, which are based primarily on pre-established metrics. DIR fees may be assessed in the periods after payments are received against future payments. The Company recognizes revenue, deducted by estimated DIR fees, at the time the patient takes possession of the oral drug.
Clinical trials & other revenue
The TOI PCs also enter into contracts to perform clinical research trials. The terms for clinical trial contracts last many months as the clinical research is performed. Each contract represents a single, integrated set of research activities that are satisfied over time as the output of results from the trial is captured for the trial sponsor to review. Under the clinical trial contracts, the TOI PCs receive a fixed payment for administrative, set-up, and close-down fees; a fixed amount for each patient site visit; and certain expense reimbursements. The Company recognizes revenue for these arrangements on the fees earned to date based on the state of the trial, as established under contract with the customer.
Operating Expenses
Direct costs - patient services
Direct costs - patient services primarily includes chemotherapy drug costs, clinician salaries and benefits, and medical supplies. Clinicians include oncologists, advanced practice providers such as physician assistants and nurse practitioners, and registered nurses employed by the TOI PCs.
Direct costs - dispensary
Direct costs - dispensary primarily includes the cost of oral medications dispensed in the TOI PCs’ clinic locations.
Direct costs - clinical trials & other
Direct costs - clinical trials & other primarily includes costs related to clinical trial contracts and medical supplies.
Selling, general and administrative expense
Selling, general and administrative expenses include employee-related expenses, including both clinic and field support staff as well as central administrative and corporate staff. These expenses include salaries and related costs and share-based compensation for our executives and physicians. The Company's selling, general and administrative expenses also includes
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occupancy costs, technology infrastructure, operations, clinical and quality support, finance, legal, human resources, and business development. Following the consummation of the Business Combination, general and administrative expenses have increased, and the Company expects continued increases over time, due to the additional legal, accounting, insurance, investor relations and other costs that the Company incurs as a public company, as well as other costs associated with continuing to grow the business. While the Company expects its selling, general and administrative expenses to increase in absolute dollars in the foreseeable future. such expenses are on average expected to decrease as a percentage of revenue over the long term.
Results of Operations
The following table sets forth our Consolidated Statements of Operations data expressed as a percentage of total revenues for the periods indicated. The Company’s management is not aware of material events or uncertainties that would cause the financial information below to not be indicative of future operating results or results of future financial condition. The results of operations for the year ended December 31, 2022 and as of December 31, 2022 reflect the adoption of ASU 2016-02, Leases (“Topic 842”). See Notes 2 and 10 of the notes to consolidated financial statements for more information. Financial data for the years ended December 31, 2021 and as of December 31, 2021 does not reflect the adoption of Topic 842.
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||
| Revenue | ||||||
| Patient services | 66.1 | % | 61.2 | % | ||
| Dispensary | 31.4 | % | 35.7 | % | ||
| Clinical trials & other | 2.5 | % | 3.1 | % | ||
| Total operating revenue | 100.0 | % | 100.0 | % | ||
| Operating expenses | ||||||
| Direct costs – patient services | 53.4 | % | 49.0 | % | ||
| Direct costs – dispensary | 25.8 | % | 30.6 | % | ||
| Direct costs – clinical trials & other | 0.2 | % | 0.3 | % | ||
| Goodwill impairment charges | 3.9 | % | — | % | ||
| Selling, general and administrative expense | 47.4 | % | 41.1 | % | ||
| Depreciation and amortization | 1.7 | % | 1.6 | % | ||
| Total operating expenses | 132.4 | % | 122.6 | % | ||
| Loss from operations | (32.4) | % | (22.6) | % | ||
| Other non-operating expense (income) | ||||||
| Interest expense, net | 1.6 | % | 0.2 | % | ||
| Change in fair value of derivative warrant liabilities | (0.7) | % | (1.8) | % | ||
| Change in fair value of earnout liabilities | (23.5) | % | (12.3) | % | ||
| Change in fair value of conversion option derivative liabilities | (9.6) | % | — | % | ||
| Gain on loan forgiveness | (0.1) | % | (2.4) | % | ||
| Other, net | (0.1) | % | (0.5) | % | ||
| Total other non-operating income | (32.4) | % | (16.8) | % | ||
| Loss before provision for income taxes | — | % | (5.8) | % | ||
| Income tax benefit | 0.1 | % | 0.3 | % | ||
| Net income (loss) | 0.1 | % | (5.5) | % |
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Comparison of the Years Ended December 31, 2022 and 2021
Revenue
| Year Ended December 31, | Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in thousands) | 2022 | 2021 | $ | % | |||||||||||
| Patient services | $ | 166,785 | $ | 124,074 | $ | 42,711 | 34.4 | % | |||||||
| Dispensary | 79,343 | 72,550 | 6,793 | 9.4 | % | ||||||||||
| Clinical trials & other | 6,355 | 6,379 | (24) | (0.4) | % | ||||||||||
| Total operating revenue | $ | 252,483 | $ | 203,003 | $ | 49,480 | 24.4 | % |
Patient services
The increase in patient services revenue was primarily due to a 28.9% increase in FFS revenue as a result of practice acquisitions and an overall increase in clinic count as well as a 5.2% increase in capitation revenue due to new capitation contracts entered into during 2022 and in the latter half of 2021.
Dispensary
The increase in dispensary revenue was primarily due to a 7.5% increase in the average revenue per fill and a 1.7% increase in the number of fills.
Clinical trials & other
For the year ended December 31, 2022, the decrease in clinical trials and other revenue was primarily due to a decrease in other revenue compared to the prior year.
Operating Expenses
| Year Ended December 31, | Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in thousands) | 2022 | 2021 | $ | % | |||||||||
| Direct costs – patient services | $134,761 | $ | 99,401 | $ | 35,360 | 35.6 | % | ||||||
| Direct costs – dispensary | 65,111 | 62,102 | 3,009 | 4.8 | % | ||||||||
| Direct costs – clinical trials & other | 518 | 652 | (134) | (20.6) | % | ||||||||
| Goodwill impairment charges | 9,944 | — | 9,944 | N/A | |||||||||
| Selling, general and administrative expense | 119,689 | 83,365 | 36,324 | 43.6 | % | ||||||||
| Depreciation and amortization | 4,411 | 3,341 | 1,070 | 32.0 | % | ||||||||
| Total operating expenses | $334,434 | $ | 248,861 | $ | 85,573 | 34.4 | % |
Patient services cost
The increase in patient services cost was primarily due to a 21.5% increase in intravenous drug costs, primarily driven by the Company's patient mix and volume, as well as the rising rate of inflation during 2022. In addition, clinical payroll costs increased 12.4% from the prior year due to the growth in clinic count.
Dispensary cost
The increase in dispensary cost was primarily due to a 3.1% increase in the average cost of the prescriptions filled, and a 1.7% increase in the number of prescriptions filled.
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Goodwill impairment charges
During the year ended December 31, 2022, impairment charges of $9,944 and $0 were recorded related to goodwill and intangible assets, respectively. See Note 2 and Note 18 in Item. 8 Financial Statements and Supplementary Data for additional detail.
Selling, general and administrative expense
The increase in selling, general and administrative expense was primarily driven by a 16.5% increase in salaries and benefits due to the growth in the Company's management and corporate team, as well as a 6.2% increase in office expenses, 5.5% increase in insurance, and 5.5% increase in professional fees primarily related to the continued growth of our business. In addition, share-based compensation expense increased 3.8%, and contingent consideration from acquisitions resulted in the increase to selling, general, and administrative expense.
Other Non-Operating Expenses (Income)
| Year Ended December 31, | Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in thousands) | 2022 | 2021 | $ | % | |||||||||||
| Interest expense, net | $ | 4,082 | $ | 320 | $ | 3,762 | 1,175.6 | % | |||||||
| Change in fair value of derivative warrant liabilities | (1,843) | (3,686) | 1,843 | (50.0) | % | ||||||||||
| Change in fair value of earnout liabilities | (59,215) | (24,891) | (34,324) | 137.9 | % | ||||||||||
| Change in fair value of conversion option derivative liabilities | (24,200) | — | (24,200) | N/A | |||||||||||
| Gain on loan forgiveness | (183) | (4,957) | 4,774 | (96.3) | % | ||||||||||
| Other, net | (501) | (1,046) | 545 | (52.1) | % | ||||||||||
| Total other non-operating expense (income) | $ | (81,860) | $ | (34,260) | $ | (47,600) | 138.9 | % |
Interest expense
The increase in interest expense was primarily the result of interest and amortization related to the Senior Secured Convertible Notes issued during the year ended December 31, 2022.
Change in fair value of liabilities
The increase in non-operating (income) expense was primarily due to gains of $59,215 and $24,200, respectively, as a result of decreases in the fair value of earnout liabilities and conversion option derivative liabilities, which were created as part of the Business Combination and the issuance of the Senior Secured Convertible Note, respectively.
Gain on loan forgiveness
During the year ended December 31, 2022, gain on loan forgiveness of $183 was a result of a CARES Act loan that was acquired as part of a physician practice acquisition and subsequently forgiven. During the year ended December 31, 2021, gain on loan forgiveness of $4,957 was a result of forgiveness of all CARES Act loans, including those obtained through physician practice acquisition.
Other, net
The change in other, net was primarily due to Provider Relief Funding received under the CARES Act during the year ended December 31, 2021 that did not occur in 2022.
Key Business Metrics
In addition to our financial information, the Company's management reviews a number of operating and financial metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.
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| Year Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2022 | 2021 | ||||||
| Clinics (1) | 76 | 67 | |||||
| Markets | 15 | 10 | |||||
| Lives under value-based contracts (millions) | 1.7 | 1.6 | |||||
| Net income (loss) | $ | 152 | $ | (10,927) | |||
| Adjusted EBITDA (in thousands) (2) | $ | (23,542) | $ | (5,377) |
(1) Includes independent oncology practices to which we provide limited management services, but do not bear the operating costs.
(2) Adjusted EBITDA is a "non-GAAP" financial measure with the meaning of Item 10 of Regulation S-K promulgated by the SEC. The Company defines adjusted EBITDA as net income (loss) excluding:
•Depreciation and amortization,
•Interest expense, net,
•Income tax expense,
•Non-cash addbacks,
•Share-based compensation,
•Goodwill impairment charges,
•Changes in fair value of liabilities,
•Unrealized (gains) losses on investments
•Practice acquisition-related costs,
•Practice acquisition deferred purchase price,
•Consulting and legal fees,
•Public company transaction costs, and
•Other specific charges.
The Company includes adjusted EBITDA because it is an important measure upon which our management uses to assess the results of operations, to evaluate factors and trends affecting the business, and to plan and forecast future periods.
Management believes that this measure provides an additional way of viewing aspects of the Company's operations that, when viewed with the GAAP results, provides a more complete understanding of the Company's results of operations and the factors and trends affecting the business. However, non-GAAP financial measures should be considered a supplement to, and not as a substitute for, or superior to, the corresponding measures calculated in accordance with U.S. GAAP. Non-GAAP financial measures used by management may differ from the non-GAAP measures used by other companies, including the Company's competitors. Management encourages investors and others to review the Company's financial information in its entirety, not to rely on any single financial measure.
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The following tables provide a reconciliation of net income (loss), the most closely comparable GAAP financial measure, to Adjusted EBITDA:
| Year Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in thousands) | 2022 | 2021 | $ | % | ||||||||||
| Net income (loss) | $ | 152 | $ | (10,927) | $ | 11,079 | (101.4) | % | ||||||
| Depreciation and amortization | 4,411 | 3,341 | 1,070 | 32.0 | % | |||||||||
| Interest expense, net | 4,082 | 320 | 3,762 | 1,175.6 | % | |||||||||
| Income tax benefit | (243) | (671) | 428 | (63.8) | % | |||||||||
| Non-cash addbacks(1) | 1,208 | (5,115) | 6,323 | (123.6) | % | |||||||||
| Share-based compensation | 27,683 | 24,535 | 3,148 | 12.8 | % | |||||||||
| Goodwill impairment charges | 9,944 | — | 9,944 | N/A | ||||||||||
| Change in fair value of liabilities | (85,258) | (28,577) | (56,681) | 198.3 | % | |||||||||
| Unrealized (gains) losses on investments | (640) | — | (640) | N/A | ||||||||||
| Practice acquisition-related costs(2) | 790 | 476 | 314 | 66.0 | % | |||||||||
| Post-combination compensation expense(3) | 2,243 | — | 2,243 | N/A | ||||||||||
| Consulting and legal fees(4) | 3,797 | 1,826 | 1,971 | 107.9 | % | |||||||||
| Other, net(5) | 5,030 | 1,692 | 3,338 | 197.3 | % | |||||||||
| Transaction costs(6) | 3,259 | 7,723 | (4,464) | (57.8) | % | |||||||||
| Adjusted EBITDA | $ | (23,542) | $ | (5,377) | $ | (18,165) | 337.8 | % |
(1) During the year ended December 31, 2022, non-cash addbacks were primarily comprised of non-cash rent of $711, net bad debt write-offs of $476, and other miscellaneous charges of $22. During the year ended December 31, 2021, non-cash addbacks were primarily comprised of a $4,957 gain on loan forgiveness and $417 of net bad debt recoveries, partially offset by deferred rent of $109 and other miscellaneous charges of $150.
(2) Practice acquisition-related costs were comprised of consulting and legal fees incurred to perform due diligence, execute, and integrate acquisitions of various oncology practices.
(3) Deferred consideration payments for practice acquisitions that are contingent upon the seller’s future employment at the Company.
(4) Consulting and legal fees were comprised of a subset of the Company’s total consulting and legal fees during the years ended December 31, 2022 and 2021, and related to certain advisory projects, software implementations, and legal fees for debt financing and predecessor litigation matters.
(5) Other, net is comprised of severance expenses resulting from cost rationalization programs of $248 and $127, as well as temporary labor of $1,830 and $1,182, recruiting expenses to build out corporate infrastructure of $2,835 and $1,275, and other miscellaneous expense of $117 and $131 during the years ended December 31, 2022 and 2021, respectively. During the years ended December 31, 2022 and 2021 such expenses were partially offset by $0 and $1,023, respectively, of stimulus funds received under the CARES Act.
(6) Transaction costs incurred related to the issuance of the Senior Secured Convertible Note such as legal, audit, administrative, and registration fees during the year ended December 31, 2022, and related to the Business Combination during the year ended December 31, 2021.
Liquidity and Capital Resources
General
To date, the Company has financed its operations principally through debt facilities, issuances of equity securities and payments received from various payors. As of December 31, 2022, the Company had $14,010 of cash and cash equivalents, none of which are restricted cash, as well as $59,796 of current marketable securities and $58,354 of noncurrent marketable securities.
The Company expects to incur operating losses and generate negative cash flows from operations for the foreseeable future due to the investments management intends to continue to make in expanding operations and sales and marketing and due to
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additional general and administrative expenses management expects to incur in connection with operating as a public company. As a result, the Company may require additional capital resources to execute strategic initiatives to grow the business.
Management believes that the cash on hand and investments in marketable securities will be sufficient to fund the Company's operating and capital needs for at least the next 12 months. Management's assessment of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties. The Company's actual results could vary because of, and its future capital requirements will depend on, many factors, including our growth rate, the timing and extent of spending to open or acquire new clinics and expand into new markets and the expansion of sales and marketing activities. The Company may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. The Company has based this estimate on assumptions that may prove to be wrong, and the Company could use its available capital resources sooner than management currently expects. The Company may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, the Company may not be able to raise it on terms acceptable to management or at all. If unable to raise additional capital when desired, or if the Company cannot expand operations or otherwise capitalize on business opportunities because the Company's lack of sufficient capital, the Company's business, results of operations, and financial condition would be adversely affected.
Cash Flows
The following table presents a summary of the Company's consolidated cash flows from operating, investing, and financing activities for the periods indicated.
| Year Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in thousands) | 2022 | 2021 | $ | % | ||||||||||
| Net cash, cash equivalents, and restricted cash used in operating activities | $ | (61,756) | $ | (32,680) | $ | (29,076) | 89.0 | % | ||||||
| Net cash, cash equivalents, and restricted cash used in investing activities | (131,614) | (12,154) | (119,460) | 982.9 | % | |||||||||
| Net cash, cash equivalents, and restricted cash provided by financing activities | 92,206 | 154,010 | (61,804) | (40.1) | % | |||||||||
| Net (decrease) increase in cash, cash equivalents, and restricted cash | $ | (101,164) | $ | 109,176 | $ | (210,340) | (192.7) | % | ||||||
| Cash, cash equivalents, and restricted cash at beginning of period | 115,174 | 5,998 | 109,176 | 1,820.2 | % | |||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 14,010 | $ | 115,174 | $ | (101,164) | (87.8) | % |
Operating Activities
Significant changes impacting net cash, cash equivalents, and restricted cash used in operating activities for the year ended December 31, 2022 as compared to the year ended December 31, 2021 were as follows:
•Net income increased $11,079, primarily as a result of a decrease in the fair value of liabilities of $85,258 for the year ended December 31, 2022 as compared to a decrease in fair value of liabilities of $28,577 during the year ended December 31, 2021;
•Cash used by accounts receivable increased $18,090 for the year ended December 31, 2022 as compared to the year ended December 31, 2021 due to the growth in the Company's business;
•Cash used by accounts payable, accrued expenses and income taxes payable increased $2,535 for the year ended December 31, 2022 as compared to the year ended December 31, 2021 primarily due to an increase in vendor payables due to the growth in the Company's business; and
•Cash used by purchasing inventory decreased $110 for the year ended December 31, 2022 as compared to the year ended December 31, 2021 as a result of an increase in inventory acquired through practice acquisition.
•Cash provided by prepaid and other current assets increased $13,373 for the year ended December 31, 2022 as compared to the year ended December 31, 2021 primarily due to the financing of the Company's directors and officers insurance policy that occurred in 2021.
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Investing Activities
Net cash used in investing activities increased $119,460 for the year ended December 31, 2022 as compared to the year ended December 31, 2021 due to purchases of marketable securities of $117,508 that did not occur in the prior year and an increase in cash used for purchases of property and equipment of $2,682 for new clinic builds and clinic remodels, offset by a decrease in cash used for purchases of practice acquisitions and intangibles of $730.
Financing Activities
Net cash provided by financing activities decreased $61,804 for the year ended December 31, 2022 as compared to the year ended December 31, 2021 primarily due to cash received in connection with the Business Combination and the issuance of $20,000 of Legacy Preferred Stock during the year ended December 31, 2021, that did not occur in 2022 offset primarily by $110,000 of proceeds from the issuance of the Senior Secured Convertible Note during year ended December 31, 2022.
Material Cash Requirements
The Company's material cash requirements for the following five years consist of principal and interest due on the convertible note, operating leases and other miscellaneous administrative expenses. Additionally, the Company is subject to certain outside claims and litigation arising out of the ordinary course of business, however, no such litigation requires future cash expenditure as of December 31, 2022.
| Material Cash Requirements Due by the Year Ended December 31, | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in thousands) | 2023 | 2024-2025 | 2026-2027 | Thereafter | Total | ||||||||||||||
| Convertible note1 | $ | 10,666 | $ | 21,624 | $ | 127,648 | $ | — | $ | 159,938 | |||||||||
| Operating leases | 6,637 | 11,778 | 8,711 | 4,600 | 31,726 | ||||||||||||||
| Deferred acquisition and contingent consideration | 2,584 | 525 | — | — | 3,109 | ||||||||||||||
| Other2 | 3,131 | 119 | 68 | — | 3,318 | ||||||||||||||
| Total material cash requirements | $ | 23,018 | $ | 34,046 | $ | 136,427 | $ | 4,600 | $ | 198,091 |
(1) Includes principal and interest payments due.
(2) Other is comprised of finance leases and directors and officers insurance premiums.
JOBS Act
The Company qualifies as an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and has elected to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies, but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with another public company that is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Critical Accounting Policies
The Company prepares its financial statements in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates under different assumptions or conditions.
Variable Interest Entities
The Company consolidates entities for which it has a variable interest and is determined to be the primary beneficiary. The Company holds variable interests in the TOI PCs, comprised of The Oncology Institute CA, a Professional Corporation (“TOI
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CA”) and The Oncology Institute FL, LLC (“TOI FL”) and The Oncology Institute TX, a Professional Association ("TOI TX"), all of which the Company cannot legally own due to jurisdictional laws governing the corporate practice of medicine. The TOI PCs employ physicians and other clinicians in order to provide professional services to patients of our managed clinics, and under substantially similar MSAs, we serve as the exclusive manager and administrator of the TOI PCs’ non-medical functions and services. The TOI PCs are considered variable interest entities (“VIEs”) as they do not have sufficient equity to finance their activities without additional financial support from the Company. An enterprise having a controlling financial interest in a VIE must consolidate the VIE if it has both power and benefits — that is, it has (1) the power to direct the activities of a VIE that most significantly impacts the VIE’s economic performance (power), and (2) the obligation to absorb the losses of the VIE that potentially could be significant to the VIE or the right to receive benefits from the VIE that potentially could be significant to the VIE (benefits). The Company has the power to control all financial activities of the TOI PCs, the rights to receive substantially all benefits from the VIEs, and consequently consolidates the TOI PCs. Revenues, expenses, and income from the TOI PCs are included in the consolidated amounts as presented on the Consolidated Statements of Operations.
Segment Reporting
The Company presents the financial statements by segment in accordance with the relevant accounting literature to provide investors with transparency into how the chief operating decision maker (“CODM”) manages the business. The Company's CODM is our Chief Executive Officer. The CODM reviews financial information and allocates resources across three operating segments: dispensary, patient care, and clinical trials & other.
Revenue Recognition
The Company recognizes consolidated revenue based upon the principle of the transfer of control of our goods and services to customers in an amount that reflects the consideration it expects to be entitled. This principle is achieved through applying the following five-step approach:
1.Identification of the contract, or contracts, with a customer.
2.Identification of the performance obligations in the contract.
3.Determination of the transaction price.
4.Allocation of the transaction price to the performance obligations in the contract.
5.Recognition of revenue when, or as, the entity satisfies a performance obligation.
Consolidated revenue primarily consists of capitation revenue, fee-for-service (FFS) revenue, dispensary revenue, and clinical trials revenue. Revenue is recognized in the period in which services are rendered or the period in which the TOI PCs are obligated to provide services. The form of billing and related risk of collection for such services may vary by type of revenue and the payor. The following paragraphs provide a summary of the principal forms of billing arrangements and how revenue is recognized for each.
Capitation
Capitation contracts have a single performance obligation that is a stand ready obligation to perform specified healthcare services to the population of enrolled members and constitutes a series for the provision of managed healthcare services for the term of the contract, which is deemed to be one month since the mix of patient-customers can and do change month over month. The transaction price for capitation contracts is variable as it primarily includes PMPM fees associated with unspecified membership that fluctuates throughout the term of the contract. Further, we adjust the transaction price for capitation deductions based on historical experience. Revenue is recognized in the month services are rendered on the basis of the transaction price established at that time. If subsequent information resolves uncertainties related to the transaction price, adjustments will be recognized in the period they are resolved. When payment has been received but services have not yet been rendered, the payment is recognized as a contract liability.
Fee For Service
FFS revenue consists of fees for medical services actually provided to patients. These medical services are distinct since the patient can benefit from the medical services on their own. Each service constitutes a single performance obligation for which the patient accepts and receives the benefit of the medical services as they are performed.
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The transaction price from FFS arrangements is variable in nature because fees are based on patient encounters, credits due to patients, and reimbursement of provider costs, all of which can vary from period to period. The Company estimates the transaction price using the most likely methodology and amounts are only included in the net transaction price to the extent that it is probable that a significant reversal of cumulative revenue will not occur once any uncertainty is resolved. As a practical expedient, the Company adopted a portfolio approach to determine the transaction price for the medical services provided under FFS arrangements. Under this approach, the Company bifurcated the types of services provided and grouped health plans with similar fees and negotiated payment rates.
At these levels, portfolios share the characteristics conducive to ensuring that the results do not materially differ from the standard applied to individual patient contracts related to each medical service provided.
Revenue is recorded on the date the services are rendered based on the information known at the time of entering of such information into our billing systems as well as an estimate of the revenue associated with medical services. When the performance obligation is not satisfied, the billing is recognized as a contract liability.
Dispensary
Dispensed prescriptions that are filled and delivered to the patient are considered a distinct performance obligation. The transaction price for the prescriptions is based on fee schedules set by PBMs and other third-party payors. The fee schedule is often subject to DIR fees, which are based primarily on pre-established metrics. DIR fees may be assessed in periods after payments are received against future payments. The Company estimates DIR fees to arrive at the transaction price for prescriptions. Revenue is recognized based on the transaction at the time the patient takes possession of the oral drug.
Clinical Research & Other
Clinical research contracts represent a single, integrated set of research activities and thus are a single performance obligation. The performance obligation is satisfied over time as the output is captured in data and documentation that is available for the customer to consume over the course of arrangement and furthers progress of the clinical trial. The Company has elected to recognize revenue for clinical trials using the ‘as-invoiced’ practical expedient. The customer is invoiced periodically based on the progress of the trial such that each invoice captures the revenue earned to date based on the state of the trial as established under contract with the customer.
Leases
On January 1, 2022, the Company adopted ASU 2016-02, Leases, with various amendments issued in 2018 and 2019 (collectively, “ASC 842”) using the modified retrospective approach, for leases that existed on January 1, 2022. ASC 842 requires lessees to recognize assets and liabilities for most leases. The Company evaluates whether an arrangement is or contains a lease at contract inception. A lease exists when a contract conveys to the customer the right to control the use of an identified asset for a period of time in exchange for consideration. Upon lease commencement, the date on which a lessor makes the underlying asset available to the Company for use, the Company classifies the lease as either an operating or finance lease. The Company applied certain practical expedients permitted under the transition guidance, including the package of practical expedients, which permits the Company not to reassess its prior conclusions related to lease identification, lease classification, and initial direct costs capitalization. The Company solely acts as a lessee and its leases primarily consist of operating leases for its real estate in the states in which the Company operates. The Company has other operating or financing leases for various clinical and non-clinical equipment.
Generally, upon the commencement of a lease, the Company will record a right-of-use (“ROU”) asset and lease liability. An ROU asset represents the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Lease liabilities are measured at the present value of the remaining, fixed lease payments at lease commencement. The Company uses its incremental borrowing rate, based on the information available at the later of adoption, inception, or modification in determining the present value of lease payments. ROU assets are measured at an amount equal to the initial lease liability, plus any prepaid lease payments (less any incentives received) and initial direct costs, at the lease commencement date. The Company has elected to account for lease and non-lease components as a single lease component for all underlying classes of assets. As a result, the fixed payments that would otherwise be allocable to the non-lease components are account for as lease payments and included in the measurement of the Company’s right-of-use asset and lease liability.
Lease arrangements with an initial term of 12 months or less are considered short-term leases and are not recorded on the balance sheet. The short-term lease payments are recognized as an expense on a straight-line basis over the lease term. The
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lease term includes any period covered by renewal options available that the Company is reasonably certain to exercise and any options to terminate the lease that the Company is not reasonably certain to exercise.
Direct Costs of Sales
Direct cost of sales primarily consists of wages paid to clinical personnel and other health professionals, oral and IV drug costs, and other medical supplies used to provide patient care. Costs for clinical personnel wages are expensed as incurred and costs for inventory and medical supplies are expensed when used, generally by applying the specific identification method.
Goodwill and Intangible Assets
The Company accounts for goodwill and intangible assets under Accounting Standards Codification Topic No. 350, Goodwill and Other (“ASC 350”). Goodwill represents the excess of the fair value of the consideration conveyed in acquisition over the fair value of net assets acquired.
Goodwill is not amortized but is required to be evaluated for impairment at the same time every year. The Company performs annual testing of impairment for goodwill in the fourth quarter of each year. When impairment indicators are identified, the Company compares the reporting unit’s fair value to its carrying amount, including goodwill. An impairment loss is recognized as the difference, if any, between the reporting unit’s carrying amount and its fair value to the extent the difference does not exceed the total amount of goodwill allocated to the reporting unit.
Under ASC 350, finite-lived intangible assets are stated at acquisition-date fair value. Intangible assets are amortized using the straight-line method.
Finite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When circumstances indicate that recoverability may be impaired, the Company assesses its ability to recover the carrying value of the asset group from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. Fair value is determined based on appropriate valuation techniques.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, refer to Note 2 of our consolidated financial statements included in this Annual Report on Form 10-K.