Bright Health Group Inc. - Quarter Report: 2023 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended September 30, 2023
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission File Number: 001-40537
BRIGHT HEALTH GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 47-4991296 | ||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
8000 Norman Center Drive, Suite 900, Minneapolis, MN | 55437 | ||||
(Address of principal executive offices) | (Zip Code) | ||||
Registrant’s telephone number, including area code: (612) 238-1321
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Common Stock, $0.0001 par value | BHG | New York Stock Exchange | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | Accelerated filer | x | ||||||||
| Non-accelerated filer | o | Smaller reporting company | x | ||||||||
| Emerging growth company | o | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
As of November 2, 2023, the registrant had 7,982,087 shares of common stock, $0.0001 par value per share, outstanding.
i
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements made in this Quarterly Report that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements, and should be evaluated as such. Forward-looking statements include any statement or information concerning possible or assumed future results of operations, including descriptions of our business plan and strategies, and our operational and financial outlook, estimates, projections, and guidance. These statements often include words such as “anticipate,” “expect,” “plan,” “believe,” “intend,” “project,” “forecast,” “estimates,” “projections,” “should,” “might,” “may,” “will,” “ensure” and other similar expressions. Such forward-looking statements are subject to various risks, uncertainties and assumptions. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. Factors that might materially affect such forward-looking statements include: our ability to continue as a going concern; our ability to comply with the terms of our credit facilities, including financial covenants, both during and after any applicable waiver period, and/or obtain any additional waivers of any terms of our credit facilities to the extent required; our ability to sell our Medicare Advantage business in California on acceptable terms, including our ability to receive the proceeds thereof in a manner that would alleviate our current financial position; the failure to satisfy or obtain a waiver of any closing condition in our agreement to sell our Medicare Advantage business in California to Molina Healthcare, Inc. (the “Molina Purchase Agreement”); our ability to comply with the terms of the Molina Purchase Agreement; whether our credit facilities will satisfy our working capital needs pending the closing of our sale of our Medicare Advantage business in California; our ability to comply with the terms of the risk adjustment repayment agreements; our ability to obtain any additional short or long term debt or equity financing needed to operate our business; our ability to quickly and efficiently wind down our Individual and Family Plan (“IFP”) businesses and Medicare Advantage (“MA”) businesses outside of California, including by satisfying liabilities of those businesses when due and payable; potential disruptions to our business due to our corporate restructuring and resulting headcount reduction; our ability to accurately estimate and effectively manage the costs relating to changes in our business offerings and models; a delay or inability to withdraw regulated capital from our subsidiaries; a lack of acceptance or slow adoption of our business model; our ability to retain existing consumers and expand consumer enrollment; our and our Care Partners’ abilities to obtain and accurately assess, code, and report risk adjustment factor scores; our ability to contract with care providers and arrange for the provision of quality care; our ability to accurately estimate our medical expenses, effectively manage our costs and claims liabilities or appropriately price our products and charge premiums; our ability to obtain claims information timely and accurately; the impact of the ongoing COVID-19 pandemic on our business and results of operations; the risks associated with our reliance on third-party providers to operate our business; the impact of modifications or changes to the U.S. health insurance markets; our ability to manage the growth of our business; our ability to operate, update or implement our technology platform and other information technology systems; our ability to retain key executives; our ability to successfully pursue acquisitions and integrate acquired businesses; the occurrence of severe weather events, catastrophic health events, natural or man-made disasters, and social and political conditions or civil unrest; our ability to prevent and contain data security incidents and the impact of data security incidents on our members, patients, employees and financial results; our ability to comply with requirements to maintain effective internal controls; our ability to adapt to the new risks associated with our expansion into ACO Realizing Equity, Access, and Community Health (“ACO REACH”); and the other factors set forth under the heading “Risk Factors” in this Quarterly Report, Bright Health Group’s Quarterly Report on Form 10-Q for the quarterly periods ended March 31, 2023 and June 30, 2023, that were filed with the United States Securities and Exchange Commission (the “SEC”) on May 10, 2023 and August 9, 2023, respectively, and Bright Health Group’s Annual Report on Form 10-K for the year ended December 31, 2022, that was filed with the SEC on March 16, 2023 (“2022 Form 10-K”) and our other filings with the SEC.
The preceding list is not intended to be an exhaustive list of all of the factors that might affect our forward-looking statements. The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us. These statements are only predictions based upon our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. Other sections of this Quarterly Report may include additional factors that could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make.
You should not rely upon forward-looking statements as predictions of future events. Our forward-looking statements speak only as of the date of this Quarterly Report and, although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance and events and circumstances reflected in such forward-looking statements will be achieved or occur at all. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this release to conform these statements to actual results or to changes in our expectations.
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Bright Health Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
(Unaudited)
| September 30, 2023 | December 31, 2022 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 113,430 | $ | 217,006 | |||||||
| Short-term investments | 156 | 869 | |||||||||
Accounts receivable, net of allowance of $8,932 and $6,098, respectively | 32,663 | 19,576 | |||||||||
| ACO REACH performance year receivable | 350,478 | 99,181 | |||||||||
| Current assets of discontinued operations (Note 15) | 1,368,694 | 3,187,464 | |||||||||
| Prepaids and other current assets | 46,542 | 46,538 | |||||||||
| Total current assets | 1,911,963 | 3,570,634 | |||||||||
| Other assets: | |||||||||||
| Long-term investments | 344 | 5,401 | |||||||||
| Property, equipment and capitalized software, net | 17,517 | 21,298 | |||||||||
| Goodwill | — | 401,385 | |||||||||
| Intangible assets, net | 96,150 | 104,952 | |||||||||
| Long-term assets of discontinued operations (Note 15) | — | 529,117 | |||||||||
| Other non-current assets | 29,792 | 32,265 | |||||||||
| Total other assets | 143,803 | 1,094,418 | |||||||||
| Total assets | $ | 2,055,766 | $ | 4,665,052 | |||||||
| Liabilities, Redeemable Noncontrolling Interest, Redeemable Preferred Stock and Shareholders’ Equity (Deficit) | |||||||||||
| Current liabilities: | |||||||||||
| Medical costs payable | $ | 169,778 | $ | 116,021 | |||||||
| Accounts payable | 10,687 | 18,714 | |||||||||
| ACO REACH performance year obligation | 224,908 | — | |||||||||
| Short-term borrowings | 353,947 | 303,947 | |||||||||
| Current liabilities of discontinued operations (Note 15) | 974,502 | 3,157,236 | |||||||||
| Warrant liability (Note 6) | 9,874 | — | |||||||||
| Other current liabilities | 86,806 | 97,241 | |||||||||
| Total current liabilities | 1,830,502 | 3,693,159 | |||||||||
| Other liabilities | 30,655 | 32,208 | |||||||||
| Total liabilities | 1,861,157 | 3,725,367 | |||||||||
| Commitments and contingencies (Note 10) | |||||||||||
| Redeemable noncontrolling interests | 327,263 | 219,758 | |||||||||
Redeemable Series A preferred stock, $0.0001 par value; 750,000 shares authorized in 2023 and 2022; 750,000 shares issued and outstanding in 2023 and 2022 | 747,481 | 747,481 | |||||||||
Redeemable Series B preferred stock, $0.0001 par value; 175,000 shares authorized in 2023 and 2022; 175,000 shares issued and outstanding in 2023 and 2022 | 172,936 | 172,936 | |||||||||
| Shareholders’ equity (deficit): | |||||||||||
Common stock, $0.0001 par value; 3,000,000,000 shares authorized in 2023 and 2022; 7,981,802 and 7,878,394 shares issued and outstanding in 2023 and 2022*, respectively | 1 | 1 | |||||||||
| Additional paid-in capital | 3,037,946 | 2,972,333 | |||||||||
| Accumulated deficit | (4,078,133) | (3,156,395) | |||||||||
| Accumulated other comprehensive loss | (885) | (4,429) | |||||||||
Treasury Stock, at cost, 31,526 shares at September 30, 2023, and December 31, 2022*, respectively | (12,000) | (12,000) | |||||||||
| Total shareholders’ equity (deficit) | (1,053,071) | (200,490) | |||||||||
| Total liabilities, redeemable noncontrolling interests, redeemable preferred stock and shareholders’ equity (deficit) | $ | 2,055,766 | $ | 4,665,052 | |||||||
*Shares have been retroactively adjusted to reflect the decreased number of shares resulting from a 1 for 80 reverse stock split
See accompanying Notes to Condensed Consolidated Financial Statements
2
Bright Health Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Income (Loss)
(in thousands, except per share data)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
Capitated revenue | $ | 60,371 | $ | 33,006 | $ | 159,683 | $ | 79,295 | |||||||||||||||
| ACO REACH revenue | 200,044 | 145,433 | 676,845 | 465,435 | |||||||||||||||||||
| 8,978 | 10,076 | 31,387 | 31,038 | ||||||||||||||||||||
Investment income (loss) | 6 | 4,848 | 16 | (52,301) | |||||||||||||||||||
Total revenue | 269,399 | 193,363 | 867,931 | 523,467 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
Medical costs | 226,438 | 152,150 | 731,718 | 462,399 | |||||||||||||||||||
Operating costs | 72,532 | 85,566 | 221,697 | 261,351 | |||||||||||||||||||
| Goodwill impairment | 401,385 | — | 401,385 | — | |||||||||||||||||||
| Intangible assets impairment | — | 42,611 | — | 42,611 | |||||||||||||||||||
| Bad debt expense | 22,421 | 11 | 23,054 | 11 | |||||||||||||||||||
| Restructuring charges | 5,281 | 5 | 6,867 | 9,662 | |||||||||||||||||||
Depreciation and amortization | 4,117 | 8,947 | 14,271 | 25,283 | |||||||||||||||||||
Total operating expenses | 732,174 | 289,290 | 1,398,992 | 801,317 | |||||||||||||||||||
Operating loss | (462,775) | (95,927) | (531,061) | (277,850) | |||||||||||||||||||
| Interest expense | 10,041 | 4,905 | 26,998 | 6,435 | |||||||||||||||||||
| Warrant expense | 9,874 | — | 9,874 | — | |||||||||||||||||||
| Other income | — | (2) | — | — | |||||||||||||||||||
| Loss from continuing operations before income taxes | (482,690) | (100,830) | (567,933) | (284,285) | |||||||||||||||||||
| Income tax (benefit) expense | (3,385) | 3,401 | (3,018) | 16,286 | |||||||||||||||||||
| Net loss from continuing operations | (479,305) | (104,231) | (564,915) | (300,571) | |||||||||||||||||||
| Loss from discontinued operations, net of tax (Note 15) | (67,843) | (165,899) | (240,321) | (401,518) | |||||||||||||||||||
| Net Loss | (547,148) | (270,130) | (805,236) | (702,089) | |||||||||||||||||||
| Net earnings from continuing operations attributable to noncontrolling interests | (86,747) | (46,710) | (116,502) | (84,651) | |||||||||||||||||||
| Series A preferred stock dividend accrued | (10,178) | (9,684) | (29,834) | (28,083) | |||||||||||||||||||
| Series B preferred stock dividend accrued | (2,284) | — | (6,695) | — | |||||||||||||||||||
| Net loss attributable to Bright Health Group, Inc. common shareholders | $ | (646,357) | $ | (326,524) | $ | (958,267) | $ | (814,823) | |||||||||||||||
| Basic and diluted loss per share attributable to Bright Health Group, Inc. common shareholders | |||||||||||||||||||||||
| Continuing operations | $ | (72.52) | $ | (20.41) | $ | (90.36) | $ | (52.55) | |||||||||||||||
| Discontinued operations | (8.51) | (21.07) | (30.25) | (51.05) | |||||||||||||||||||
| Basic and diluted loss per share | (81.03) | (41.48) | (120.61) | (103.60) | |||||||||||||||||||
| Basic and diluted weighted-average common shares outstanding* | 7,977 | 7,871 | 7,945 | 7,865 | |||||||||||||||||||
*Shares have been retroactively adjusted to reflect the decreased number of shares resulting from a 1 for 80 reverse stock split
See accompanying Notes to Condensed Consolidated Financial Statements
3
Bright Health Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net loss | $ | (547,148) | $ | (270,130) | $ | (805,236) | $ | (702,089) | |||||||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||||||||
Unrealized investment holding gains (losses) arising during the year, net of tax of $0 and $0, respectively | 70 | (33,146) | 5,381 | (82,704) | |||||||||||||||||||
Less: reclassification adjustments for investment (losses) gains, net of tax of $0 and $0, respectively | 56 | (1,615) | 1,837 | (4,122) | |||||||||||||||||||
| Other comprehensive (loss) income | 14 | (31,531) | 3,544 | (78,582) | |||||||||||||||||||
| Comprehensive loss | (547,134) | (301,661) | (801,692) | (780,671) | |||||||||||||||||||
| Comprehensive loss attributable to noncontrolling interests | (86,747) | (46,710) | (116,502) | (84,651) | |||||||||||||||||||
| Comprehensive loss attributable to Bright Health Group, Inc. common shareholders | $ | (633,881) | $ | (348,371) | $ | (918,194) | $ | (865,322) | |||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
4
Bright Health Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Redeemable Preferred Stock and Shareholders’ Equity (Deficit)
(in thousands)
(Unaudited)
| Redeemable Preferred Stock | Common Stock | Additional Paid-In Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | Shares | Amount | Shares* | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2023 | 925 | $ | 920,417 | 7,878 | $ | 1 | $ | 2,972,333 | $ | (3,156,395) | $ | (4,429) | $ | (12,000) | $ | (200,490) | |||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (175,011) | — | — | (175,011) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | 74 | — | 1 | — | — | — | 1 | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | 33,320 | — | — | — | 33,320 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | 2,193 | — | 2,193 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | 925 | $ | 920,417 | 7,952 | $ | 1 | $ | 3,005,654 | $ | (3,331,406) | $ | (2,236) | $ | (12,000) | $ | (339,987) | |||||||||||||||||||||||||||||||||||||
| Net loss | — | $ | — | — | $ | — | $ | — | $ | (112,832) | $ | — | $ | — | $ | (112,832) | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | 20 | — | 1 | — | — | — | 1 | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | 15,775 | — | — | — | 15,775 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | 1,337 | — | 1,337 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | 925 | $ | 920,417 | 7,972 | $ | 1 | $ | 3,021,430 | $ | (3,444,238) | $ | (899) | $ | (12,000) | $ | (435,706) | |||||||||||||||||||||||||||||||||||||
| Net loss | — | $ | — | — | $ | — | $ | — | $ | (633,895) | $ | — | $ | — | $ | (633,895) | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | 10 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | 16,516 | — | — | — | 16,516 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | 14 | — | 14 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | 925 | $ | 920,417 | 7,982 | $ | 1 | $ | 3,037,946 | $ | (4,078,133) | $ | (885) | $ | (12,000) | $ | (1,053,071) | |||||||||||||||||||||||||||||||||||||
*Shares have been retroactively adjusted to reflect the decreased number of shares resulting from a 1 for 80 reverse stock split
See accompanying Notes to Condensed Consolidated Financial Statements
5
Bright Health Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Redeemable Preferred Stock and Shareholders’ Equity (Deficit)
(in thousands)
(Unaudited)
| Redeemable Preferred Stock | Common Stock | Additional Paid-In Capital | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | Shares | Amount | Shares* | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | — | $ | — | 7,858 | $ | 1 | $ | 2,861,305 | $ | (1,700,851) | $ | (3,335) | $ | (12,000) | $ | 1,145,120 | |||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (195,234) | — | — | (195,234) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of preferred stock | 750 | 747,481 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | 5 | — | 257 | — | — | — | 257 | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | 32,921 | — | — | — | 32,921 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (26,340) | — | (26,340) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | 750 | $ | 747,481 | 7,863 | $ | 1 | $ | 2,894,483 | $ | (1,896,085) | $ | (29,675) | $ | (12,000) | $ | 956,724 | |||||||||||||||||||||||||||||||||||||
| Net loss | — | $ | — | — | $ | — | $ | — | $ | (274,666) | $ | — | $ | — | $ | (274,666) | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | 4 | — | 415 | — | — | — | 415 | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | 20,220 | — | — | — | 20,220 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (20,711) | — | (20,711) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | 750 | $ | 747,481 | 7,867 | $ | 1 | $ | 2,915,118 | $ | (2,170,751) | $ | (50,386) | $ | (12,000) | $ | 681,982 | |||||||||||||||||||||||||||||||||||||
| Net loss | — | $ | — | — | $ | — | $ | — | $ | (316,840) | $ | — | $ | — | $ | (316,840) | |||||||||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | 7 | — | 642 | — | — | — | 642 | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | 24,122 | — | — | — | 24,122 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (31,531) | — | (31,531) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | 750 | $ | 747,481 | 7,874 | $ | 1 | $ | 2,939,882 | $ | (2,487,591) | $ | (81,917) | $ | (12,000) | $ | 358,375 | |||||||||||||||||||||||||||||||||||||
*Shares have been retroactively adjusted to reflect the decreased number of shares resulting from a 1 for 80 reverse stock split
See accompanying Notes to Condensed Consolidated Financial Statements
6
Bright Health Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (805,236) | $ | (702,089) | |||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 20,149 | 40,173 | |||||||||
| Impairment of intangible assets | — | 49,331 | |||||||||
| Impairment of goodwill | 401,385 | 74,165 | |||||||||
| Share-based compensation | 65,611 | 77,263 | |||||||||
| Deferred income taxes | (3,063) | 1,590 | |||||||||
| Unrealized loss on equity securities | — | 58,821 | |||||||||
| Amortization of investments | (17,946) | 3,236 | |||||||||
| Warrant expense | 9,874 | — | |||||||||
| Other, net | 3,812 | 6,377 | |||||||||
| Changes in assets and liabilities, net of acquired assets and liabilities: | |||||||||||
| Accounts receivable | (27,438) | 10,934 | |||||||||
| ACO REACH performance year receivable | (251,297) | (234,776) | |||||||||
| Other assets | 132,645 | (77,551) | |||||||||
| Medical cost payable | (610,027) | 149,970 | |||||||||
| Risk adjustment payable | (1,541,536) | 377,789 | |||||||||
| Accounts payable and other liabilities | (124,295) | (21,188) | |||||||||
| Unearned revenue | 127,135 | 142,597 | |||||||||
| ACO REACH performance year obligation | 224,908 | 155,145 | |||||||||
| Net cash (used in) provided by operating activities | (2,395,319) | 111,787 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of investments | (830,176) | (1,422,025) | |||||||||
| Proceeds from sales, paydown, and maturities of investments | 1,978,925 | 980,763 | |||||||||
| Purchases of property and equipment | (2,626) | (21,579) | |||||||||
| Business divestitures, net of cash disposed of | (682) | — | |||||||||
| Business acquisitions, net of cash acquired | — | (310) | |||||||||
| Net cash provided by (used in) investing activities | 1,145,441 | (463,151) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from short-term borrowings | 50,000 | 303,947 | |||||||||
| Repayments of short-term borrowings | — | (155,000) | |||||||||
| Proceeds from issuance of preferred stock | — | 747,481 | |||||||||
| Proceeds from issuance of common stock | 2 | 1,314 | |||||||||
| Distributions to noncontrolling interest holders | (8,997) | (2,032) | |||||||||
| Net cash provided by financing activities | 41,005 | 895,710 | |||||||||
| Net (decrease)/ increase in cash and cash equivalents | (1,208,873) | 544,346 | |||||||||
| Cash and cash equivalents – beginning of year | 1,932,290 | 1,061,179 | |||||||||
| Cash and cash equivalents – end of period | $ | 723,417 | $ | 1,605,525 | |||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Changes in unrealized loss on available-for-sale securities in OCI | $ | 3,544 | $ | (78,582) | |||||||
| Cash paid for interest | 12,509 | 3,171 | |||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
7
Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Organization: Bright Health Group, Inc. and subsidiaries (collectively, “Bright Health,” “we,” “our,” “us,” or the “Company”) was founded in 2015 to transform healthcare. Our mission of Making Healthcare Right. Together. is built upon the belief that by aligning the best local resources in healthcare delivery with the financing of care we can drive a superior consumer experience, optimize clinical outcomes, reduce systemic waste, and lower costs. We are a healthcare company building a national Integrated System of Care in close partnership with our Care Partners. Our differentiated approach is built on alignment, focused on the consumer, and powered by technology. Our continuing Consumer Care business operates in two segments: Care Delivery and Care Solutions. Care Delivery provides primary comprehensive services in our clinics with wrap around care management and care coordination activities for those members where we take full or partial risk from a diverse set of payor partners. Care Solutions is our provider enablement business that facilitates care coordination activities using population health tools including technology and data analytics, and provides clinical solutions and care teams to support patients managed through our affiliate partners.
Basis of Presentation: The condensed consolidated financial statements include the accounts of Bright Health Group, Inc. and all subsidiaries and controlled companies. All intercompany balances and transactions are eliminated upon consolidation. The condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. We have omitted certain footnote disclosures that would substantially duplicate the disclosures in our audited consolidated financial statements, unless the information contained in those disclosures materially changed or is required by GAAP. As such, the condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2022 included in our Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”). The accompanying condensed consolidated financial statements include all normal recurring adjustments necessary for fair presentation of the interim financial statements.
Discontinued Operations: Having met the criteria for “held for sale,” we have reflected amounts relating to Bright HealthCare, comprised of the California Medicare Advantage business, as a disposal group classified as held for sale and included as part of discontinued operations in accordance with Accounting Standards Codification (“ASC”) 205-20. The combined assets are valued at the lower of their carrying amount or fair value, net of costs to sell and included as current assets on the Company’s condensed consolidated balance sheet. Assets classified as held for sale are not depreciated. However, interest attributable to the liabilities associated with assets classified as held for sale and other related expenses continue to be accrued. Bright HealthCare is no longer included in the segment reporting following the reclassification to discontinued operations. Refer to Note 15 for further discussion of our discontinued operations inclusive of Bright HealthCare and Bright HealthCare - Commercial.
Use of Estimates: The preparation of our condensed consolidated financial statements in conformance with GAAP requires management to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Our most significant estimates include medical costs payable, ACO REACH performance year receivable and obligation, shared savings and shared losses for our capitation contracts, and valuation and impairment of goodwill and other intangible assets. Actual results could differ from these estimates.
Going Concern: The condensed consolidated financial statements have been prepared in accordance with GAAP applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
The Company has a history of operating losses, and we generated a net loss of $805.2 million for the nine months ended September 30, 2023. Additionally, the Company experienced negative operating cash flows primarily related to our discontinued Bright HealthCare – Commercial segment for the nine months ended September 30, 2023, requiring additional cash to be infused to satisfy statutory capital requirements. The Company settled in cash $1.5 billion of 2022 related risk adjustment obligations in September 2023, and entered into repayment agreements for an aggregate amount of $380 million with the Centers for Medicare & Medicaid Services’ (“CMS”) with respect to the unpaid amount of risk adjustment obligations. The amount owing under the repayment agreements is due 18 months from September 15, 2023 and bears interest at a rate of 11.5% per annum. The Company intends to use a portion of the proceeds from the pending sale of its California Medicare Advantage business to pay certain remaining amounts due under the repayment agreements. The Company’s IFP discontinued
8
Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
operations will also continue to experience negative cash flows through the fourth quarter of 2023 as it pays out the remaining inventory of medical claims.
In addition, the Company’s $350.0 million revolving credit agreement with a syndicate of banks (the “Credit Agreement”), matures on February 28, 2024. On March 1, 2023, the Company disclosed that during the First Quarter of 2023, it had breached the minimum liquidity covenant contained in the Credit Agreement. On June 29, 2023, the Company entered into a second amended and restated limited waiver and consent (the “Third Waiver”) under the Credit Agreement. The Third Waiver amended and restated the amended and restated limited waiver and consent entered into by the Company under the Credit Agreement on April 28, 2023 (the “Second Waiver”), which had amended and restated the limited waiver and consent entered into by the Company under the Credit Agreement on February 28, 2023 (the “Original Waiver”). The Third Waiver amended the Second Waiver and the Original Waiver by, among other things, extending the temporary waiver of compliance with the minimum liquidity covenant set forth in Section 11.12.2 of the Credit Agreement, which spanned from January 25, 2023 to June 30, 2023 under the Original Waiver and the Second Waiver, to January 25, 2023 to August 29, 2023 (the “Extended Waiver Period”). The Third Waiver also, among other things, added covenants (a) requiring the Company to deliver by July 17, 2023, an agreed term sheet for an equity or debt financing (the “Bridge Financing”) to support the Company’s ongoing operating cash needs through December 31, 2023 and, by July 31, 2023 (extended to August 4, 2023), definitive documentation for the Bridge Financing and an updated budget of the Company, (b) prohibiting the incurrence of certain types of debt and (c) requiring the Company not to request any interest period for any term SOFR borrowing other than a one-month interest period.
On August 4, 2023, the Company entered into a Credit Agreement (as amended, supplemented, restated or otherwise modified from time to time, the “New Credit Agreement”), among the Company, NEA 18 Venture Growth Equity, L.P. (“NEA”) and the lenders from time to time party thereto (together with NEA and each of their respective successors and assigns, the “Lenders”), to provide for a credit facility pursuant to which, among other things, the lenders have provided $60.0 million delayed draw term loan commitments. The Company may borrow delayed draw term loans under such commitments at any time and from time to time on or prior to the date that is nine months after the effective date of the New Credit Agreement, subject to the satisfaction or waiver of customary conditions. Borrowings under the New Credit Agreement accrue interest at a rate per annum of 15.00%, payable quarterly in arrears at the Company’s election, subject to limitations set forth in the Fourth Waiver (defined below) in respect of cash payments under the New Credit Agreement, either in cash or “in kind” by adding the amount of accrued interest to the principal amount of the outstanding loans under the New Credit Agreement. The New Credit Agreement contains covenants that, among other things, restrict the ability of the Company and its subsidiaries to make certain restricted payments, incur additional debt, engage in certain asset sales, mergers, acquisitions or similar transactions, create liens on assets, engage in certain transactions with affiliates, change its business or make investments. The New Credit Agreement constitutes the Bridge Financing referred to in the Third Waiver.
On August 4, 2023, the Company entered into a third amended and restated limited waiver and consent (the “Fourth Waiver”) under the Credit Agreement. The Fourth Waiver amends and restates the Third Waiver by, among other things, permanently waiving compliance with the minimum liquidity covenant set forth in Section 11.12.2 of the Credit Agreement, which waiver under the Third Waiver previously was temporary and would have expired on August 29, 2023. From August 4, 2023 until the Credit Agreement is terminated and all outstanding loans thereunder are repaid, the Company will be subject to a minimum liquidity covenant of not less than $25.0 million. The Fourth Waiver also, among other things, (a) removes from the credit agreement in its entirety the covenant requiring maintenance of a maximum total debt to capitalization ratio, which absent such removal would have applied after September 30, 2023, (b) prohibits the incurrence of certain types of debt and (c) requires the Company not to request any interest period for any Term Benchmark borrowing other than a one-month interest period.
In connection with the New Credit Agreement, on August 4, 2023, the Company and the Lenders entered into a warrantholders agreement setting forth the rights and obligations of the Company and the Lenders as holders (in such capacity, the “Holders”) of the warrants to acquire shares of Common Stock at an exercise price of $0.01 per share (the “Warrants”), and providing for the issuance of the Warrants to purchase up to 1,656,789 shares of Common Stock.
On October 2, 2023, the Company, NEA, as the existing lender (the “Existing Lender”), and California State Teachers’ Retirement System, as an incremental lender (the “New Lender”), entered into Incremental Amendment No. 1 (“Incremental Amendment No. 1”) to the New Credit Agreement (as amended by Incremental Amendment No. 1, the “Amended Credit Agreement”) to provide for a term loan commitment increase in an aggregate principal amount of $6.4 million (the “Commitment Increase”) by the New Lender under the Amended Credit Agreement. Loans under the Commitment Increase will have the same terms as loans under the original term loan commitments provided by the Existing Lender.
9
Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In connection with Incremental Amendment No. 1, on October 2, 2023, the Company and the New Lender entered into a
warrantholders agreement setting forth the rights and obligations of the Company and the New Lender as a holder of Warrants,
and providing for the issuance of the Warrants to purchase up to 176,724 shares of Common Stock. The fair value of the warrants is recognized as a liability on the condensed consolidated balance sheets as of the reporting period. See Note 6, Common Stock Warrants for more information.
Any future non-compliance with the covenants under the Credit Agreement or the Fourth Waiver, or termination of our agreement to sell our Medicare Advantage business in California to Molina Healthcare, Inc. (“the Molina Purchase Agreement”), may result in the obligations under the Credit Agreement being accelerated.
Based on our projected cash flows and absent any other action, the Company may not meet certain covenants under the Credit Agreement, the Fourth Waiver or the New Credit Agreement, which may result in the obligations under the Credit Agreement and New Credit Agreement being accelerated. The Company will require additional liquidity to meet its obligations as they come due in the 12 months following the date the condensed consolidated financial statements contained in this Quarterly Report are issued. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
In response to these conditions, management has implemented a restructuring plan to reduce capital needs and our operating expenses in the future to drive positive operating cash flow and increase liquidity. The Company’s Bright HealthCare - Commercial business exited the ACA marketplace at the end of the 2022 plan year. In addition to our market exits, management is in the process of executing upon additional restructuring activities, which include reducing our workforce, exiting excess office space, and terminating or restructuring contracts. The Company closed on a $175.0 million capital raise in October 2022 to fund our continuing operations as further described in Note 8, Redeemable Convertible Preferred Stock. On June 30, 2023, the Company entered into the Molina Purchase Agreement to sell its California Medicare Advantage business, which consists of Brand New Day and Central Health Plan, for total purchase consideration of $600.0 million, subject to regulatory approval and other closing conditions. The closing of this transaction is expected to occur by the first quarter of 2024. Further, as described above, the Company entered into the New Credit Agreement on August 4, 2023, and borrowed a total of $50.0 million as of September 30, 2023. Subsequent to September 30, 2023 we borrowed an additional $8.2 million under the Amended Credit Agreement.
In the event the Company is unable to execute the sale of the California Medicare Advantage business, obtain additional financing or take other management actions, among other potential consequences, the Company forecasts we will be unable to satisfy our obligations. As a result, the Company has concluded that management’s plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern.
The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
Reverse Stock Split: During our annual meeting on May 4, 2023, our stockholders voted to approve an amendment to our Ninth Amended and Restated Certificate of Incorporation to effect a reverse stock split at a ratio of not less than 1-for-15 and not greater than 1-for-80, with the exact ratio and effective time of the Reverse Stock Split to be determined by our Board of Directors at any time within one year of the date of the Annual Meeting. On May 5, 2023, our Board approved a ratio of 1-for-80. The reverse stock split took effect on May 19, 2023.
The reverse stock split decreased the number of outstanding shares of the Company’s common stock by a factor of 80, subject to rounding of shares. The reverse stock split did not affect any stockholder’s proportionate equity interest in the Company. The par value of the Company’s common stock remains at $0.0001 per share following the reverse stock split and the number of outstanding shares of the Company’s common stock was proportionally reduced. As a consequence, the aggregate par value of the Company’s outstanding common stock was reduced, while the aggregate capital in excess of par value attributable to the Company’s outstanding common stock for accounting purposes was correspondingly increased. Total stockholder equity was
10
Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
not affected. All shares and per share information has been retroactively adjusted following the effective date of the reverse stock split to reflect the reverse stock split for all periods presented in future filings.
Operating Costs: Our operating costs, by functional classification for the three and nine months ended September 30, 2023 and 2022, are as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||
| Compensation and fringe benefits | $ | 45,685 | $ | 59,432 | $ | 146,722 | $ | 184,440 | ||||||||||||
| Professional fees | 15,126 | 11,455 | 34,745 | 27,200 | ||||||||||||||||
| Marketing and selling expenses | 258 | 313 | 1,462 | 2,583 | ||||||||||||||||
| General and administrative expenses | 5,129 | 5,847 | 19,719 | 19,764 | ||||||||||||||||
| Other operating expenses | 6,334 | 8,519 | 19,049 | 27,364 | ||||||||||||||||
| Total operating costs | $ | 72,532 | $ | 85,566 | $ | 221,697 | $ | 261,351 | ||||||||||||
Recently Issued and Adopted Accounting Pronouncements: There are no accounting pronouncements that were recently issued and not yet adopted or adopted since our audited consolidated financial statements were issued that had, or are expected to have, a material impact on our consolidated financial position, results of operations, or cash flows.
Correction of prior period financial statements: As previously reported, subsequent to the issuance of the condensed consolidated financial statements for the three and nine month period ended September 30, 2022, we identified an error in the accounting for gross versus net revenue recognition conclusion from certain value-based care arrangements, impacting continuing operations, and an error in the data used to account for our Risk Adjustment Factor-related (“RAF”) premiums and medical costs, impacting discontinued operations. As a result of the gross versus net revenue recognition error, capitated revenue and medical costs of continuing operations have been reduced by $44.5 million and $157.7 million for the three and nine months ended September 30, 2022, respectively. As a result of the RAF data error, loss from discontinued operations and net loss increased by $10.8 million for the three and nine month period ended September 30, 2022. As of September 30, 2022 there were corresponding decreases of $17.9 million in current assets of discontinued operations and $7.2 million in current liabilities of discontinued operations on the condensed consolidated balance sheets. The impact on net loss, current assets of discontinued operations and current liabilities of discontinued operations had corresponding impacts on condensed consolidated statements of comprehensive income (loss), condensed consolidated statements of changes in redeemable preferred stock and shareholders’ equity (deficit) and condensed consolidated statements of cash flows.
The Company determined that the correction of these errors was not material to the condensed consolidated financial statements.
NOTE 2. RESTRUCTURING CHARGES
In October 2022, we announced our decision to further focus our business on our Fully Aligned Care Model, our Care Delivery and Care Solutions segments, and that we will no longer offer commercial plans through Bright HealthCare, or Medicare Advantage products outside of California in 2023. As a result of these strategic changes, we announced and have taken actions to restructure the Company’s workforce and reduce expenses based on our updated business model.
Restructuring charges by reportable segment and corporate for the periods ended September 30 were as follows (in thousands):
11
Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| Three Months Ended September 30, 2023 | |||||||||||||||||||||||
| Care Delivery | Care Solutions | Corporate & Eliminations | Total | ||||||||||||||||||||
| Employee termination benefits | $ | — | $ | — | $ | 5,153 | $ | 5,153 | |||||||||||||||
| Long-lived asset impairments | — | — | — | — | |||||||||||||||||||
| Contract termination and other costs | 130 | — | (2) | 128 | |||||||||||||||||||
| Total continuing operations | $ | 130 | $ | — | $ | 5,151 | $ | 5,281 | |||||||||||||||
| Three Months Ended September 30, 2022 | |||||||||||||||||||||||
| Care Delivery | Care Solutions | Corporate & Eliminations | Total | ||||||||||||||||||||
| Employee termination benefits | $ | — | $ | — | $ | (30) | $ | (30) | |||||||||||||||
| Long-lived asset impairments | — | — | — | — | |||||||||||||||||||
| Contract termination and other costs | — | — | 35 | 35 | |||||||||||||||||||
| Total continuing operations | $ | — | $ | — | $ | 5 | $ | 5 | |||||||||||||||
| Nine Months Ended September 30, 2023 | |||||||||||||||||||||||
| Care Delivery | Care Solutions | Corporate & Eliminations | Total | ||||||||||||||||||||
| Employee termination benefits | $ | — | $ | — | $ | 5,774 | $ | 5,774 | |||||||||||||||
| Long-lived asset impairments | — | — | 880 | 880 | |||||||||||||||||||
| Contract termination and other costs | 130 | — | 83 | 213 | |||||||||||||||||||
| Total continuing operations | $ | 130 | $ | — | $ | 6,737 | $ | 6,867 | |||||||||||||||
| Nine Months Ended September 30, 2022 | |||||||||||||||||||||||
| Care Delivery | Care Solutions | Corporate & Eliminations | Total | ||||||||||||||||||||
| Employee termination benefits | $ | — | $ | — | $ | 8,671 | $ | 8,671 | |||||||||||||||
| Long-lived asset impairments | — | — | — | — | |||||||||||||||||||
| Contract termination and other costs | — | — | 991 | 991 | |||||||||||||||||||
| Total continuing operations | $ | — | $ | — | $ | 9,662 | $ | 9,662 | |||||||||||||||
The $0.9 million of long-lived asset impairments is the result of a lease abandonment for one of our corporate office locations during the nine months ended September 30, 2023.
Restructuring accrual activity recorded by major type for the nine months ended September 30, 2023 were as follows (in thousands):
| Employee Termination Benefits | Contract Termination Costs | Total | |||||||||||||||
| Balance at January 1, 2023 | $ | 24,077 | $ | — | $ | 24,077 | |||||||||||
| Charges | 5,774 | 213 | 5,987 | ||||||||||||||
| Cash payments | (19,385) | (213) | (19,598) | ||||||||||||||
Balance at September 30, 2023 | $ | 10,466 | $ | — | $ | 10,466 | |||||||||||
Employee termination benefits are recorded within Other current liabilities while contract termination costs are recorded within Accounts payable.
12
Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 3. GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying value of goodwill by reportable segment were as follows (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Gross Carrying Amount | Cumulative Impairment | Gross Carrying Amount | Cumulative Impairment | ||||||||||||||||||||
| Care Delivery | $ | 401,385 | $ | 401,385 | $ | 401,385 | $ | — | |||||||||||||||
| Total | $ | 401,385 | $ | 401,385 | $ | 401,385 | $ | — | |||||||||||||||
For the periods ended September 30, 2023 and December 31, 2022, Care Solutions had no assigned goodwill. Due to the decline in our stock price and market capitalization, we fully impaired the Care Delivery assigned goodwill during the period ended September 30, 2023. We estimated the fair values of the reporting units using a combination of discounted cash flows and comparable market multiples, which include assumptions about a wide variety of internal and external factors.
The gross carrying value and accumulated amortization for definite-lived intangible assets were as follows (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||||||||||
| Customer relationships | $ | 80,021 | $ | 24,038 | $ | 80,021 | $ | 17,655 | |||||||||||||||
| Trade names | 48,361 | 8,194 | 48,361 | 5,776 | |||||||||||||||||||
| Total | $ | 128,382 | $ | 32,232 | $ | 128,382 | $ | 23,431 | |||||||||||||||
For the three and nine months ended September 30, 2023, there were no impairments of the definite-lived intangible assets. For the three and nine months ended September 30, 2022, we recognized $42.6 million of impairment expense of definite-lived intangible assets.
We are continuously evaluating factors that affect the fair values of our reporting units including our market capitalization, macroeconomic trends and other events and uncertainties. Negative trends in these factors could result in a non-cash charge for impairment to intangible assets in a future period.
Amortization expense relating to intangible assets for the three months ended September 30, 2023 and 2022 was $2.9 million and $6.2 million, respectively and amortization expense for the nine months ended September 30, 2023 and 2022 was $8.8 million and $18.6 million, respectively. Estimated amortization expense relating to intangible assets for the remainder of 2023 and for each of the next five full years ending December 31 is as follows (in thousands):
| 2023 (October-December) | $ | 2,912 | |||
| 2024 | $ | 11,574 | |||
| 2025 | $ | 11,574 | |||
| 2026 | $ | 11,574 | |||
| 2027 | $ | 11,574 | |||
| 2028 | $ | 10,295 | |||
13
Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 4. MEDICAL COSTS PAYABLE
The following table shows the components of the change in medical costs payable for the nine months ended September 30, 2023 and 2022 (in thousands):
| September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Medical costs payable - January 1 | $ | 116,021 | $ | 6,764 | |||||||
| Incurred related to: | |||||||||||
| Current year | 737,306 | 645,398 | |||||||||
| Prior year | 912 | (2,690) | |||||||||
| Total incurred | 738,218 | 642,708 | |||||||||
| Paid related to: | |||||||||||
| Current year | 584,240 | 535,154 | |||||||||
| Prior year | 100,221 | 4,076 | |||||||||
| Total paid | 684,461 | 539,230 | |||||||||
| Medical costs payable - September 30 | $ | 169,778 | $ | 110,242 | |||||||
Medical costs payable attributable to prior years increased by $0.9 million and decreased by $2.7 million for the nine months ended September 30, 2023 and 2022, respectively. Medical costs payable estimates are adjusted as additional information regarding claims becomes known; there were no significant changes to estimation methodologies during the periods.
The table below details the components making up the medical costs payable as of September 30 (in thousands):
| September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Claims unpaid | $ | — | $ | 602 | |||||||
| Provider incentive payable | 20,288 | 5,375 | |||||||||
| Claims adjustment expense liability | — | — | |||||||||
| Incurred but not reported (IBNR) | 149,490 | 104,265 | |||||||||
| Total medical costs payable | $ | 169,778 | $ | 110,242 | |||||||
Medical costs payable are primarily related to the current year.
NOTE 5. SHORT-TERM BORROWINGS
We have a $350.0 million revolving credit agreement with a syndicate of banks (the “Credit Agreement”), which matures on February 28, 2024. As of September 30, 2023 and December 31, 2022 we had $303.9 million borrowed under the Credit Agreement at a weighted-average effective annual interest rate of 10.42%, which remains outstanding as of September 30, 2023. Refer to Note 10, Commitments and Contingencies for more information on the undrawn letters of credit of $30.7 million under the Credit Agreement, which reduce the amount available to borrow.
On June 29, 2023, the Company entered into a second amended and restated limited waiver and consent (the “Third Waiver”) under the Credit Agreement, which amended and restated the amended and restated limited waiver and consent entered into by the Company under the Credit Agreement on April 28, 2023 (the “Second Waiver”), which previously amended and restated that certain limited waiver and consent entered into by the Company under the Credit Agreement on February 28, 2023 (the “Original Waiver”). The Third Waiver amended the Second Waiver and the Original Waiver by, among other things, extending
14
Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
the temporary waiver of compliance with the minimum liquidity covenant set forth in Section 11.12.2 of the Credit Agreement, which spanned from January 25, 2023 to June 30, 2023 under the Original Waiver and the Existing Waiver, to January 25, 2023 to August 29, 2023 (the “Extended Waiver Period”). The Third Waiver also, among other things, added covenants (a) requiring the Company to deliver by July 17, 2023, an agreed term sheet for the Bridge Financing to support the Company’s ongoing operating cash needs through December 31, 2023 and, by July 31, 2023 (extended to August 4, 2023), definitive documentation for the Bridge Financing and an updated budget of the Company, (b) prohibiting the incurrence of certain types of debt and (c) requiring the Company not to request any interest period for any term SOFR borrowing other than a one-month interest period.
On August 4, 2023, the Company entered into a third amended and restated limited waiver and consent (the “Fourth Waiver”) under the Credit Agreement. The Fourth Waiver amends and restates the Third Waiver by, among other things, permanently waiving compliance with the minimum liquidity covenant set forth in Section 11.12.2 of the Credit Agreement, which under the Third Waiver previously was temporary and would have expired on August 29, 2023. From August 4, 2023 until the Credit Agreement is terminated and all outstanding loans thereunder are repaid, the Company will be subject to a minimum liquidity covenant of not less than $25.0 million. The Fourth Waiver also, among other things, (a) removes from the credit agreement in its entirety the covenant requiring maintenance of a maximum total debt to capitalization ratio, which absent such removal would have applied after September 30, 2023, (b) prohibits the incurrence of certain types of debt and (c) requires the Company not to request any interest period for any Term Benchmark borrowing other than a one-month interest period.
On August 4, 2023, we entered into the New Credit Agreement, a $60.0 million credit agreement with NEA, which matures on December 31, 2025. As of September 30, 2023, we had $50.0 million borrowed under the New Credit Agreement at a weighted-average effective interest rate of 15.00%, which remains outstanding as of September 30, 2023.
On October 2, 2023, the Company, the Existing Lender, and the New Lender, entered into Incremental Amendment No. 1 to the New Credit Agreement (as amended by Incremental Amendment No. 1, the “Amended Credit Agreement”) to provide for a term loan commitment increase in an aggregate principal amount of $6.4 million (the “Commitment Increase”) by the New Lender under the Amended Credit Agreement. Loans under the Commitment Increase will have the same terms as loans under the original term loan commitments provided by the Existing Lender.
In connection with the New Credit Agreement, on August 4, 2023, the Company and the Lenders entered into a warrantholders agreement setting forth the rights and obligations of the Company and the Lenders as holders (in such capacity, the “Holders”) of Warrants and providing for the issuance of the Warrants. In connection with Incremental Amendment No. 1, on October 2, 2023, the Company and the New Lender entered into a warrantholders agreement setting forth the rights and obligations of the Company and the New Lender as a holder of Warrants, and providing for the issuance of the Warrants. See Note 6, Common Stock Warrants for additional information.
NOTE 6. COMMON STOCK WARRANTS
On August 4, 2023, we entered into a warrantholders agreement (the “NEA Warrantholders Agreement”) with NEA 18 Venture Growth Equity, L.P. and the lenders from time to time party thereto, setting forth the rights and obligations of the Company and the lenders as holders of the warrants to acquire shares of Common Stock at an exercise price of $0.01 per share, and providing for the issuance of warrants. We established a warrant liability of $25.1 million on this date, representing the 1.7 million warrants available to be issued under the NEA Warrantholders Agreement at a fair market value of $15.12 (closing share price on August 4th, 2023 minus the $0.01 exercise price); the warrant liability is reported within Other current liabilities. The warrants do not contain any exercise contingencies and expire on the fifth anniversary of the first closing date.
We account for our common stock warrants at the time of inception as derivatives, utilizing ASC 815, by recording a liability equal to the warrants’ fair market value that is marked to market at the end of each period. Per the terms of the NEA Warrantholders Agreement, the market value is calculated as the ending stock price less the $0.01 exercise price. As we draw on the available funds, warrants are issued; warrants will remain classified as a liability and be fair valued each period until they
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Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
are exercised by the warrantholder. Upon exercise, we relieve the associated liability into additional paid in capital at the fair value of the warrants on the date of exercise, classifying the exercised warrants as equity.
| Fair Value | |||||
| Balance at January 1, 2023 | $ | — | |||
| Newly executed Warrantholders Agreement | 25,051 | ||||
| Change in fair value of outstanding warrants | (15,177) | ||||
| Balance at September 30, 2023 | $ | 9,874 | |||
During the three and nine months ended September 30, 2023, we drew $50.0 million on the New Credit Agreement, and issued a total of 1.4 million warrants. As of September 30, 2023 no issued warrants have been exercised and 0.3 million warrants remain available to be issued under the Warrantholders Agreement. For the three and nine months ended September 30, 2023, Warrant expense was $9.9 million. There was no equivalent liability and activity for the three and nine month period ended September 30, 2022.
On October 2, 2023, the Company and the New Lender entered into a warrantholders agreement setting forth the rights and obligations of the Company and the New Lender as a holder of the warrants to acquire shares of Common Stock at an exercise price of $0.01 per share, and providing for the issuance of the warrants. As of September 30, 2023, no warrant liability has been established applicable to this agreement.
The Company classifies its warrant liability as Level 2 fair value because they are valued using observable, unadjusted quoted prices in active markets. See Note 15, Discontinued Operations for the full definition of Level 1, Level 2, and Level 3 fair values.
NOTE 7. SHARE-BASED COMPENSATION
2016 Incentive Plan
The Company adopted its 2016 Stock Incentive Plan (the “2016 Incentive Plan”) in March 2016. The 2016 Incentive Plan allowed for the Company to grant stock options, restricted stock awards (“RSAs”), and restricted stock units (“RSUs”) to certain employees, consultants and non-employee directors. The 2016 Incentive Plan was initially adopted on March 25, 2016, and most recently amended in December 2020. Following the effectiveness of our 2021 Omnibus Plan (the “2021 Incentive Plan”), no further awards will be granted under the 2016 Incentive Plan. However, all outstanding awards granted under the 2016 Incentive Plan will continue to be governed by the existing terms of the 2016 Incentive Plan and the applicable award agreements.
2021 Incentive Plan
The 2021 Incentive Plan was adopted by our Board of Directors on May 21, 2021 and approved by our stockholders on May 25, 2021 and June 5, 2021. The 2021 Incentive Plan allows the Company to grant stock options, RSAs, RSUs, stock appreciation rights, other equity based awards, and cash based incentive awards to certain employees, consultants and non-employee directors. There are 1.7 million shares of common stock authorized for issuance under the 2021 Incentive Plan. As of September 30, 2023, a total of 0.3 million shares of common stock were available for future issuance under the 2021 Incentive Plan.
Share-Based Compensation Expense
We recognized share-based compensation expense of $65.6 million and $77.3 million for the nine months ended September 30, 2023 and 2022, respectively, which is included in operating costs in the Condensed Consolidated Statements of Income (Loss).
16
Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Stock Options
The Board of Directors, or the Compensation and Human Capital Committee of the Board of Directors, as applicable, determines the exercise price, vesting periods and expiration date at the time of the grant. Stock options granted prior to the third quarter of 2021 generally vest 25% at one year from the grant date, then ratably over the next 36 months with continuous employee service. Stock options granted after the beginning of the third quarter of 2021 generally vest ratably over three years. Option grants generally expire 10 years from the date of grant.
There were no options granted during the nine months ended September 30, 2023.
The activity for stock options for the nine months ended September 30, 2023 is as follows (in thousands, except exercise price and contractual life):
| Shares | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Life (In Years) | Aggregate Intrinsic Value | ||||||||||||||||||||
| Outstanding at January 1, 2023 | 804 | $ | 145.60 | 6.7 | $ | 6,560 | |||||||||||||||||
| Granted | — | — | |||||||||||||||||||||
| Exercised | — | — | |||||||||||||||||||||
| Forfeited | (44) | 184.78 | |||||||||||||||||||||
| Expired | (87) | 161.80 | |||||||||||||||||||||
| Outstanding at September 30, 2023 | 673 | $ | 140.83 | 5.2 | $ | 225 | |||||||||||||||||
We recognized share-based compensation expense related to stock options of $27.4 million for the nine months ended September 30, 2023, which is included in operating costs in the Condensed Consolidated Statements of Income (Loss). At September 30, 2023, there was $37.0 million of unrecognized compensation expense related to stock options that is expected to be recognized over a weighted-average period of 1.4 years.
Restricted Stock Units
RSUs represent the right to receive shares of our common stock at a specified date in the future and generally vest over a three-year period, except for Board of Director grants which generally vest one year from the date of grant. The fair value of RSUs is determined based on the closing market price of our common stock on the date of grant.
The following table summarizes RSU award activity for the nine months ended September 30, 2023 (in thousands, except weighted average grant date fair value):
| Number of RSUs | Weighted Average Grant Date Fair Value | ||||||||||
| Unvested RSUs at December 31, 2022 | 470 | $ | 189.88 | ||||||||
| Granted | 964 | 32.24 | |||||||||
| Vested | (103) | 134.88 | |||||||||
| Forfeited | (275) | 111.65 | |||||||||
| Unvested RSUs at September 30, 2023 | 1,056 | $ | 71.42 | ||||||||
We recognized share-based compensation expense related to RSUs of $20.8 million for the nine months ended September 30, 2023, which is included in operating costs in the Condensed Consolidated Statements of Income (Loss). As of September 30,
17
Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
2023, there was $36.8 million of unrecognized compensation expense related to the RSU grants, which is expected to be recognized over a weighted-average period of 1.6 years.
Performance-based Restricted Stock Units (“PSUs”)
In connection with our IPO, our Board of Directors approved the grant of PSUs to members of our executive leadership team. The grant encompassed a total of 183,750 PSUs, separated into four equal tranches, each of which are eligible to vest based on the achievement of predetermined stock price goals and a minimum service period of 3.0 years. The fair value of the PSUs was determined using a Monte-Carlo simulation.
The following table summarizes PSU award activity for the nine months ended September 30, 2023 (in thousands, except weighted average grant date fair value):
| Number of PSUs | Weighted Average Grant Date Fair Value | ||||||||||
| Unvested PSUs at December 31, 2022 | 131 | $ | 744.00 | ||||||||
| Granted | — | — | |||||||||
| Forfeited | — | — | |||||||||
| Unvested PSUs at September 30, 2023 | 131 | $ | 744.00 | ||||||||
We recognized share-based compensation expense related to PSUs of $17.4 million for the nine months ended September 30, 2023, which is included in operating costs in the Condensed Consolidated Statements of Income (Loss). At September 30, 2023, there was $18.6 million of unrecognized compensation expense related to the PSU grant, which is expected to be recognized over a weighted-average period of 0.7 years.
NOTE 8. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Series A Convertible Preferred Stock
On January 3, 2022, we issued 750,000 shares of Series A Preferred Stock, par value $0.0001 per share, for an aggregate purchase price of $750.0 million, or $1,000 per share.
The Series A Preferred Stock ranks senior to the shares of the Company’s common stock with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The Preferred Stock has an initial liquidation preference of $1,000 per share, which shall increase by accumulated quarterly dividends that are not paid in cash (“compounded dividends”). Holders of the Series A Preferred Stock are entitled to a dividend at the rate of 5.0% per annum, accruing daily and payable quarterly in arrears and subject to certain adjustments, as set forth in the Certificate of Designations. Dividends will be payable in cash, by increasing the amount of liquidation preference (compounded dividends) with respect to a share of Series A Preferred Stock, or any combination thereof, at the sole discretion of the Company. The Series A Preferred Stock had accrued compounded dividends of $67.7 million and $37.9 million as of September 30, 2023 and December 31, 2022, respectively.
The Series A Preferred Stock will be convertible at the option of the holders into (I) the number of shares of common stock equal to the quotient of (a) the sum of (x) the liquidation preference (reflecting increases for compounded dividends) plus (y) the accrued dividends with respect to each share of Series A Preferred Stock as of the applicable conversion date divided by (b) the conversion price (initially approximately $364.00 per share and approximately $292.30 per share subsequent to the issuance of warrants during the quarter ended September 30, 2023) as of the applicable conversion date plus (II) cash in lieu of fractional shares, subject to certain anti‑dilution adjustments. At any time after January 3, 2025, if the closing price per share of Common Stock on the New York Stock Exchange was greater than 175% of the then effective Conversion Price for (x) each of at least twenty (20) trading days in any period of thirty (30) consecutive trading days and (y) the last trading day immediately before the Company provides the holders with notice of its election to convert all of the Series A Preferred Stock into the relevant
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Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
number of shares of common stock, the Company may elect to convert all of the Series A Preferred Stock into the relevant number of shares of common stock.
Under the Certificate of Designations, holders of the Series A Preferred Stock are entitled to vote with the holders of the common stock on an as‑converted basis, solely with respect to (i) a change of control transaction (to the extent such change of control transaction is submitted to a vote of the holders of the common stock) or (ii) the issuance of capital stock by the Company in connection with an acquisition by the Company (to the extent such issuance is submitted to a vote of the holders of the common stock), subject to certain restrictions. Holders of the Series A Preferred Stock are entitled to a separate class vote with respect to, among other things, amendments to the Company’s organizational documents that have an adverse effect on the Series A Preferred Stock, authorizations or issuances by the Company of securities that are senior to the Series A Preferred Stock, increases or decreases in the number of authorized shares of Preferred Stock, and issuances of shares of the Series A Preferred Stock after January 3, 2022.
At any time following January 3, 2027, the Company may redeem all of the Series A Preferred Stock for a per share amount in cash equal to: (i) the sum of (A) the liquidation preference (reflecting increases for compounded dividends) thereof plus (B) all accrued dividends as of the applicable redemption date, multiplied by (ii) (A) 105% if the redemption occurs at any time prior to January 3, 2029 and (B) 100% if the redemption occurs at any time on or after January 3, 2029. Upon certain change of control events involving the Company, the holders of the Series A Preferred Stock may, at such holder’s election, convert their shares of Series A Preferred Stock into common stock at the then‑current conversion price or require the Company to purchase all or a portion of such holder’s shares of Preferred Stock that have not been so converted at a purchase price per share of Preferred Stock, payable in cash, equal to the greater of (I) (A) if the change of control effective date occurs at any time prior to January 3, 2029, the product of 105% multiplied by the sum of (x) the liquidation preference of such share of Series A Preferred Stock (reflecting increases for compounded dividends) plus (y) the accrued dividends in respect of such share of Series A Preferred Stock as of the change of control purchase date and (B) if the change of control effective date occurs on or after January 3, 2029, the sum of (x) the liquidation preference (reflecting increases for compounded dividends) of such share of Series A Preferred Stock plus (y) the accrued dividends in respect of such share of Series A Preferred Stock as of the change of control purchase date and (II) the consideration that would have been payable in connection with such change of control if such share of Series A Preferred Stock had been converted into Common Stock immediately prior to the change of control.
Series B Convertible Preferred Stock
On October 17, 2022, we issued 175,000 shares of Series B Preferred Stock, par value $0.0001 per share, for an aggregate purchase price of $175.0 million, or $1,000 per share.
The Series B Preferred Stock ranks senior to the shares of the Company’s common stock with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The Preferred Stock has an initial liquidation preference of $1,000 per share, which shall increase by compounded dividends. Holders of the Series B Preferred Stock are entitled to a dividend at the rate of 5.0% per annum, accruing daily and payable quarterly in arrears and subject to certain adjustments, as set forth in the Certificate of Designations. Dividends will be payable in cash, by increasing the amount of liquidation preference (compounded dividends) with respect to a share of Series B Preferred Stock, or any combination thereof, at the sole discretion of the Company. The Series B Preferred Stock had accrued compounded dividends of $8.5 million and $1.8 million as of September 30, 2023 and December 31, 2022, respectively.
The Series B Preferred Stock will be convertible at the option of the holders into (I) the number of shares of common stock equal to the quotient of (a) the sum of (x) the liquidation preference (reflecting increases for compounded dividends) plus (y) the accrued dividends with respect to each share of Series B Preferred Stock as of the applicable conversion date divided by (b) the conversion price (initially approximately $113.60 per share and approximately $101.85 per share subsequent to the issuance of warrants during the quarter ended September 30, 2023) as of the applicable conversion date plus (II) cash in lieu of fractional shares, subject to certain anti‑dilution adjustments. At any time after October 17, 2025, if the closing price per share of common stock on the NYSE was greater than 287% of the then effective Conversion Price for (x) each of at least twenty (20) trading days in any period of thirty (30) consecutive trading days and (y) the last trading day immediately before the Company provides the holders with notice of its election to convert all of the Series B Preferred Stock into the relevant number of shares of
19
Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
common stock, the Company may elect to convert all of the Series B Preferred Stock into the relevant number of shares of common stock.
Under the Certificate of Designations, holders of the Series B Preferred Stock are entitled to vote with the holders of the common stock on an as‑converted basis, solely with respect to (i) a change of control transaction (to the extent such change of control transaction is submitted to a vote of the holders of the common stock) or (ii) the issuance of capital stock by the Company in connection with an acquisition by the Company (to the extent such issuance is submitted to a vote of the holders of the common stock), subject to certain restrictions. Holders of the Series B Preferred Stock are entitled to a separate class vote with respect to, among other things, amendments to the Company’s organizational documents that have an adverse effect on the Series B Preferred Stock, authorizations or issuances by the Company of securities that are senior to the Series B Preferred Stock, increases or decreases in the number of authorized shares of Preferred Stock, and issuances of shares of the Series B Preferred Stock after October 17, 2022.
At any time following October 17, 2027, the Company may redeem all of the Series B Preferred Stock for a per share amount in cash equal to: (i) the sum of (A) the liquidation preference (reflecting increases for compounded dividends) thereof plus (B) all accrued dividends as of the applicable redemption date, multiplied by (ii) (A) 105% if the redemption occurs at any time prior to October 17, 2029 and (B) 100% if the redemption occurs at any time on or after October 17, 2029. Upon certain change of control events involving the Company, the holders of the Series B Preferred Stock may, at such holder’s election, convert their shares of Series B Preferred Stock into common stock at the then‑current conversion price or require the Company to purchase all or a portion of such holder’s shares of Preferred Stock that have not been so converted at a purchase price per share of Preferred Stock, payable in cash, equal to the greater of (I) (A) if the change of control effective date occurs at any time prior to October 17, 2029, the product of 105% multiplied by the sum of (x) the liquidation preference of such share of Series B Preferred Stock (reflecting increases for compounded dividends) plus (y) the accrued dividends in respect of such share of Series B Preferred Stock as of the change of control purchase date and (B) if the change of control effective date occurs on or after October 17, 2029, the sum of (x) the liquidation preference (reflecting increases for compounded dividends) of such share of Series B Preferred Stock plus (y) the accrued dividends in respect of such share of Series B Preferred Stock as of the change of control purchase date and (II) the consideration that would have been payable in connection with such change of control if such share of Series B Preferred Stock had been converted into common stock immediately prior to the change of control.
NOTE 9. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders for the three and nine months ended September 30 (in thousands, except for per share amounts):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Loss from continuing operations, net noncontrolling interests and accrued preferred stock dividends | $ | (578,514) | $ | (160,625) | $ | (717,946) | $ | (413,305) | |||||||||||||||
| Loss from discontinued operations | (67,843) | (165,899) | (240,321) | (401,518) | |||||||||||||||||||
Net loss attributable to Bright Health Group, Inc. common shareholders | $ | (646,357) | $ | (326,524) | $ | (958,267) | $ | (814,823) | |||||||||||||||
Weighted-average number of shares outstanding used to compute net loss per share attributable to common stockholders, basic and diluted | 7,977 | 7,871 | 7,945 | 7,865 | |||||||||||||||||||
| Basic and diluted loss per share attributable to Bright Health Group, Inc. common shareholders | |||||||||||||||||||||||
| Continuing operations | $ | (72.52) | $ | (20.41) | $ | (90.36) | $ | (52.55) | |||||||||||||||
| Discontinued operations | $ | (8.51) | $ | (21.07) | $ | (30.25) | $ | (51.05) | |||||||||||||||
Net loss per share attributable to common stockholders, basic and diluted | $ | (81.03) | $ | (41.48) | $ | (120.61) | $ | (103.60) | |||||||||||||||
20
Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following outstanding shares of potentially dilutive securities were excluded from the computation of diluted net loss per share because including them would have had an anti-dilutive effect for the nine months ended September 30 (in thousands):
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Redeemable convertible preferred stock (as converted to common stock) | 4,599 | 2,112 | |||||||||
| Issued and outstanding common stock warrants | 1,381 | — | |||||||||
| Stock options to purchase common stock | 673 | 853 | |||||||||
| Restricted stock units | 1,056 | 458 | |||||||||
| Total | 7,709 | 3,423 | |||||||||
NOTE 10. COMMITMENTS AND CONTINGENCIES
Legal proceedings: In the normal course of business, we could be involved in various legal proceedings such as, but not limited to, the following: lawsuits alleging negligence in care or general liability, violation of regulatory bodies’ rules and regulations, or violation of federal and/or state laws.
On January 6, 2022, a putative securities class action lawsuit was filed against us and certain of our officers and directors in the Eastern District of New York. The case is captioned Marquez v. Bright Health Group, Inc. et al., 1:22-cv-00101 (E.D.N.Y.). The lawsuit alleges, among other things, that we made materially false and misleading statements regarding our business, operations, and compliance policies, which in turn adversely affected our stock price. An amended complaint was filed on June 24, 2022, which expands on the allegations in the original complaint and alleges a putative class period of June 24, 2021 through March 1, 2022. The amended complaint also adds as defendants the underwriters of our initial public offering. The Company has served a motion to dismiss the amended complaint, which has not yet been ruled on by the court.
We are vigorously defending the Company in the above actions, but there can be no assurance that we will be successful in any defense.
Based on our assessment of the facts underlying the claims and the degree to which we intend to defend the Company in these matters, the amount or range of reasonably possible losses, if any, cannot be estimated. We have not accrued for any potential loss as of September 30, 2023 and December 31, 2022 for these actions.
Other commitments: As of September 30, 2023, we had $30.7 million outstanding, undrawn letters of credit under the Credit Agreement.
NOTE 11. SEGMENTS AND GEOGRAPHIC INFORMATION
Factors used to determine our reportable segments include the nature of operating activities, economic characteristics, existence of separate senior management teams and the type of information used by the Company’s Chief Operating Decision Maker (“CODM”) to evaluate its results of operations. We have identified two operating segments within our continuing operations based on our primary product and service offerings: Care Delivery and Care Solutions. The Care Delivery and Care Solutions segments were new starting in the second quarter of 2023 and were formerly reported together within the aggregated Consumer Care segment. The updates to our reportable segments conform with the Company’s CODM’s view of our ongoing operations.
Care Delivery and Care Solutions, which make up our value-driven Consumer Care business that manages risk in partnership with external payors, aim to significantly reduce the friction and current lack of coordination between payors by delivering on our Fully Aligned Care Model with multiple payors. The following is a description of the types of products and services from which the two reportable segments of our continuing operations derive their revenues:
21
Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Care Delivery: Provides care services in our clinics with wrap around care management and care coordination activities for those members where we take full or partial risk. As of September 30, 2023, Care Delivery provides virtual and in-person clinical care through its 72 owned primary care clinics within an integrated care delivery system. Through these risk-bearing clinics and our affiliated network of care providers, our Care Delivery segment serves approximately 330,000 consumers. Care Delivery customers include external payors, third party administrators, affiliated providers and direct-to-government programs.
Care Solutions: Our provider enablement business that facilitates care coordination activities through the use of population health tools including technology, data analytics, care and utilization management, and clinical solutions and care teams to support patients. As of September 30, 2023, Care Solutions has approximately 62,000 members attributed to its REACH ACO’s.
The Company’s accounting policies for reportable segment operations are consistent with those described in Note 2, Summary of Significant Accounting Policies, in our 2022 Form 10-K. We utilize operating income (loss) before income taxes as the profitability metric for our reportable segments.
The following tables present the reportable segment financial information for the three and nine months ended September 30, 2023 and 2022 (in thousands):
| Three Months Ended September 30, 2023 | Care Delivery | Care Solutions | Corporate & Eliminations | Consolidated | ||||||||||||||||||||||
| Capitated revenue | $ | 60,371 | $ | — | $ | — | $ | 60,371 | ||||||||||||||||||
| ACO REACH revenue | — | 200,044 | — | 200,044 | ||||||||||||||||||||||
| Service revenue | 8,245 | 733 | — | 8,978 | ||||||||||||||||||||||
| Investment income | — | — | 6 | 6 | ||||||||||||||||||||||
| Total unaffiliated revenue | 68,616 | 200,777 | 6 | 269,399 | ||||||||||||||||||||||
| Affiliated revenue | (1,482) | — | 1,482 | — | ||||||||||||||||||||||
| Total segment revenue | 67,134 | 200,777 | 1,488 | 269,399 | ||||||||||||||||||||||
| Operating loss | (390,761) | (29,355) | (42,659) | (462,775) | ||||||||||||||||||||||
| Depreciation and amortization | 3,160 | — | 957 | 4,117 | ||||||||||||||||||||||
| Bad debt expense | 8 | 22,413 | — | 22,421 | ||||||||||||||||||||||
| Restructuring charges | 130 | — | 5,151 | 5,281 | ||||||||||||||||||||||
| Goodwill impairment | 401,385 | — | — | 401,385 | ||||||||||||||||||||||
| Three Months Ended September 30, 2022 | Care Delivery | Care Solutions | Corporate & Eliminations | Consolidated | ||||||||||||||||||||||
| Capitated revenue | $ | 33,006 | $ | — | $ | — | $ | 33,006 | ||||||||||||||||||
| ACO REACH revenue | — | 145,433 | — | 145,433 | ||||||||||||||||||||||
| Service revenue | 10,050 | 26 | — | 10,076 | ||||||||||||||||||||||
| Investment income (loss) | — | — | 4,848 | 4,848 | ||||||||||||||||||||||
| Total unaffiliated revenue | 43,056 | 145,459 | 4,848 | 193,363 | ||||||||||||||||||||||
| Affiliated revenue | 257,707 | — | (257,707) | — | ||||||||||||||||||||||
| Total segment revenue | 300,763 | 145,459 | (252,859) | 193,363 | ||||||||||||||||||||||
| Operating income (loss) | (42,627) | (3,115) | (50,185) | (95,927) | ||||||||||||||||||||||
| Depreciation and amortization | 6,374 | — | 2,573 | 8,947 | ||||||||||||||||||||||
| Bad debt expense | 4 | — | 7 | 11 | ||||||||||||||||||||||
| Restructuring charges | — | — | 5 | 5 | ||||||||||||||||||||||
| Intangible assets impairment | 42,611 | — | — | 42,611 | ||||||||||||||||||||||
22
Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| Nine Months Ended September 30, 2023 | Care Delivery | Care Solutions | Corporate & Eliminations | Consolidated | ||||||||||||||||||||||
| Capitated revenue | $ | 159,683 | $ | — | $ | — | $ | 159,683 | ||||||||||||||||||
| ACO REACH revenue | — | 676,845 | — | 676,845 | ||||||||||||||||||||||
| Service revenue | 29,711 | 1,676 | — | 31,387 | ||||||||||||||||||||||
| Investment income (loss) | — | — | 16 | 16 | ||||||||||||||||||||||
| Total unaffiliated revenue | 189,394 | 678,521 | 16 | 867,931 | ||||||||||||||||||||||
| Affiliated revenue | 6,487 | — | (6,487) | — | ||||||||||||||||||||||
| Total segment revenue | 195,881 | 678,521 | (6,471) | 867,931 | ||||||||||||||||||||||
| Operating income (loss) | (373,094) | (27,868) | (130,099) | (531,061) | ||||||||||||||||||||||
| Depreciation and amortization | 9,470 | — | 4,801 | 14,271 | ||||||||||||||||||||||
| Bad debt expense | 639 | 22,415 | — | 23,054 | ||||||||||||||||||||||
| Restructuring charges | 130 | — | 6,737 | 6,867 | ||||||||||||||||||||||
| Goodwill impairment | 401,385 | — | — | 401,385 | ||||||||||||||||||||||
| Nine Months Ended September 30, 2022 | Care Delivery | Care Solutions | Corporate & Eliminations | Consolidated | ||||||||||||||||||||||
| Capitated revenue | $ | 79,295 | $ | — | $ | — | $ | 79,295 | ||||||||||||||||||
| ACO REACH revenue | — | 465,435 | — | 465,435 | ||||||||||||||||||||||
| Service revenue | 30,960 | 78 | — | 31,038 | ||||||||||||||||||||||
| Investment income (loss) | — | — | (52,301) | (52,301) | ||||||||||||||||||||||
| Total unaffiliated revenue | 110,255 | 465,513 | (52,301) | 523,467 | ||||||||||||||||||||||
| Affiliated revenue | 830,098 | — | (830,098) | — | ||||||||||||||||||||||
| Total segment revenue | 940,353 | 465,513 | (882,399) | 523,467 | ||||||||||||||||||||||
| Operating income (loss) | (65,376) | 1,874 | (214,348) | (277,850) | ||||||||||||||||||||||
| Depreciation and amortization | 19,119 | — | 6,164 | 25,283 | ||||||||||||||||||||||
| Bad debt expense | 4 | — | 7 | 11 | ||||||||||||||||||||||
| Restructuring charges | — | — | 9,662 | 9,662 | ||||||||||||||||||||||
| Intangible assets impairment | 42,611 | — | — | 42,611 | ||||||||||||||||||||||
For all periods presented, all of our long-lived assets were located in the United States, and all revenues were earned in the United States. We do not include asset information by reportable segment in the reporting provided to the CODM.
NOTE 12. INCOME TAXES
Income tax was a benefit of $3.4 million and an expense $3.4 million for the three months ended September 30, 2023 and 2022, respectively. For the nine months ended September 30, 2023 and 2022, income tax was a benefit of $3.0 million and an expense of $16.3 million, respectively. The impact from income taxes varies from the federal statutory rate of 21.0% due to state income taxes, changes in the valuation allowance for deferred tax assets and adjustments for permanent differences. For the three and nine months ended September 30, 2023, the benefit largely relates to the removal of the accrued amortization of originating goodwill from asset acquisitions due to goodwill impairment and estimated state income taxes attributable to income earned in separate filing states without state net operating loss carryforwards. For the three and nine months ended September 30, 2022, the expense largely relates to amortization of originating goodwill from asset acquisitions and estimated state income taxes attributable to income earned in separate filing states without state net operating loss carryforwards.
We assess whether sufficient future taxable income will be generated to permit the use of deferred tax assets. This assessment includes consideration of the cumulative losses incurred over the three-year period ended September 30, 2023. Such objective
23
Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
evidence limits the ability to consider other subjective evidence, such as the Company’s projections for future earnings. On the basis of this evaluation, we have recorded a valuation allowance for deferred tax assets to the extent that they cannot be supported by reversals of existing cumulative temporary differences. Any federal tax benefit generated from losses in 2023 is expected to require an offsetting adjustment to the valuation allowance for deferred tax assets, and thus have no net effect on the income tax provision.
NOTE 13. REDEEMABLE NONCONTROLLING INTEREST
Redeemable noncontrolling interests in our subsidiaries whose redemption is outside of our control are classified as temporary equity. The following table provides details of our redeemable noncontrolling interest activity for the three and nine months ended September 30, 2023 and 2022 (in thousands):
| 2023 | 2022 | ||||||||||
| Balance at January 1 | $ | 219,758 | $ | 128,407 | |||||||
| Earnings attributable to noncontrolling interest | 1,421 | (2,681) | |||||||||
| Distribution to noncontrolling interest holders | (1,805) | — | |||||||||
| Measurement adjustment | 4,129 | 17,285 | |||||||||
| Balance at March 31 | $ | 223,503 | $ | 143,011 | |||||||
| Earnings attributable to noncontrolling interest | 3,139 | 3,625 | |||||||||
| Distribution to noncontrolling interest holders | (3,147) | (1,894) | |||||||||
| Measurement adjustment | 21,066 | 19,712 | |||||||||
| Balance at June 30 | $ | 244,561 | $ | 164,454 | |||||||
| Earnings attributable to noncontrolling interest | 3,211 | 30,765 | |||||||||
| Distribution to noncontrolling interest holders | (4,045) | (138) | |||||||||
| Measurement adjustment | 83,536 | 15,945 | |||||||||
| Balance at September 30 | $ | 327,263 | $ | 211,026 | |||||||
NOTE 14. ACO REACH
We participate in the CMS ACO REACH Model with three REACH ACOs participating through the global risk arrangement and assuming full risk for the total cost of care of aligned beneficiaries. As part of our participation in the ACO REACH Model, we are guaranteeing the performance of our care network of participating and preferred providers. The intention of the ACO REACH Model is to enhance the quality of care for Medicare FFS beneficiaries while reducing the administrative burden, supporting a focus on complex, chronically ill patients, and encouraging physician organizations that have not typically participated in Medicare FFS programs to serve Medicare FFS beneficiaries.
Key components of the financial agreement for the ACO REACH Model include:
•Performance Year Benchmark: The target amount for Medicare expenditures on covered services (Medicare Part A and B) furnished to a REACH ACO’s aligned beneficiaries during a performance year. The Performance Year Benchmark will be compared to the REACH ACO’s performance year expenditures. This comparison will be used to calculate shared savings and shared losses. The Performance Year Benchmark is established at the beginning of the performance year utilizing prospective trend estimates and is subject to retrospective trend adjustments, if warranted, before the Financial Reconciliation.
•Risk-Sharing Arrangements: Used in determining the percent of savings and losses that REACH ACOs are eligible to receive as shared savings or may be required to repay as shared losses.
•Financial Reconciliation: The process by which CMS determines shared savings or shared losses by comparing the calculated total benchmark expenditures for a given REACH ACO’s aligned population to the actual expenditures of that REACH ACO’s aligned beneficiaries over the course of a performance year that includes various risk-mitigation options such as stop-loss reinsurance and risk corridors.
24
Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
•Risk-Mitigation Options: Two of our REACH ACOs elected to participate in a “stop-loss arrangement” for the current and prior performance year offered by CMS, while one REACH ACO has elected third-party coverage. The “stop-loss arrangement” and third-party coverage are designed to reduce the financial uncertainty associated with high-cost expenditures of individual beneficiaries. Additionally, CMS has created a mandatory risk corridor program that allocates the REACH ACO’s shared savings and losses in bands of percentage thresholds, after a deviation of greater than 25.0% of the Performance Year Benchmark.
Performance Guarantees
Through our participation in the ACO REACH Model, we determined that our arrangements with the providers of our REACH ACO beneficiaries require us to guarantee their performance to CMS. At the beginning of the performance year, we recognized the ACO REACH estimated performance year obligation and receivable for the duration of the performance year. This receivable and obligation are measured at an amount equivalent to the estimated Performance Year Benchmark per CMS that is representative of the expected Medicare expenditures for beneficiaries aligned to our REACH ACOs. As we fulfill our obligation, we amortize the guarantee on a straight-line basis for the amount that represents the completed portion of the performance obligation. The receivable is reduced as we receive payments from CMS for in-network claims or receive CMS reporting detailing out-of-network claims paid by CMS on behalf of our aligned beneficiaries. At the end of each reporting period, we estimate both in-network claims and out-of-network claims incurred by beneficiaries aligned to our REACH ACOs but not yet reported and record a reserve for the estimated amount which is included in medical costs payable on the Condensed Consolidated Balance Sheets. For each performance year, the final consideration due to the REACH ACOs by CMS (shared savings) or the consideration due to CMS by the REACH ACOs (shared loss) is reconciled in the year following the performance year. On a periodic basis CMS adjusts the estimated Performance Year Benchmark based upon revised trend assumptions and changes in attributed membership. CMS will also estimate the shared savings or loss for the REACH ACO on a quarterly basis based upon the estimated Performance Year Benchmark, changes to membership, payments made to the REACH ACO for in-network claims, out-of-network claims paid on behalf of the REACH ACO and various other assumptions including incurred but not reported reserves. The estimated Performance Year Benchmark is our best estimate of our obligation as we are unable to estimate the potential shared savings or loss due to the “stop-loss arrangement”, risk corridor components of the agreement, and a number of variables including but not limited to risk ratings and benchmark trends that could have an inestimable impact on estimated future payments.
The tables below include the financial statement impacts of the performance guarantee at September 30, 2023 and for the three and nine-month period then ended (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
ACO REACH performance year receivable(1) | $ | 350,478 | $ | 99,181 | |||||||
| ACO REACH performance year obligation | 224,908 | — | |||||||||
(1) We estimate there to be $141.2 million and $0.6 million in-network and out-of-network claims incurred by beneficiaries aligned to our REACH ACOs but not reported as of September 30, 2023 and December 31, 2022, respectively; this is included in medical costs payable on the Condensed Consolidated Balance Sheets.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
Amortization of ACO REACH performance year receivable(1) | $ | 223,363 | $ | 153,868 | $ | 648,334 | $ | 385,804 | |||||||||||||||
| Amortization of ACO REACH performance year obligation | 200,024 | 151,281 | 674,724 | 498,482 | |||||||||||||||||||
| ACO REACH revenue | 200,044 | 145,433 | 676,845 | 465,435 | |||||||||||||||||||
(1) The amortization of the ACO REACH performance year receivable includes $99.2 million related to the amortization of the prior year receivable.
25
Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 15. DISCONTINUED OPERATIONS
In April 2023, we announced that we were exploring strategic alternatives for our California Medicare Advantage business, the Bright HealthCare reporting segment, with the focus on a potential sale. At that time, we met the criteria for “held for sale,” in accordance with ASC 205-20. This represents a strategic shift that will have a material impact on our business and financial results. As such, we have reflected amounts relating to Bright HealthCare as a disposal group as part of discontinued operations. On June 30, 2023, the Company entered into a definitive agreement with Molina Healthcare, Inc. to sell its California Medicare Advantage business, which consists of Brand New Day and Central Health Plan, for total purchase consideration of $600.0 million, subject to regulatory approval and other closing conditions. The closing of this transaction is expected to occur by early 2024.
In October 2022, we announced that we will no longer offer commercial plans through our Bright HealthCare - Commercial segment in 2023. As a result, we exited the Commercial marketplace effective December 31, 2022. We determined this exit represented a strategic shift that will have a material impact on our business and financial results that requires presentation as discontinued operations.
While we are no longer offering plans in the Commercial marketplace as of December 31, 2022, we will continue to have involvement in the states where we formerly operated in as we support run out activities of medical claims incurred in the 2022 plan year and perform other activities necessary to wind down our operations in each state, including making substantial payments of 2022 risk adjustment payable liabilities during the third quarter of 2023. We expect to be substantially complete with medical claim payments by the end of 2023 and we will continue to make payments towards the remaining risk adjustment obligations through 2024 and early 2025.
Our discontinued operations are also inclusive of our DocSquad business that was sold in March 2023; this is presented within the column labeled Other in the tables below.
The discontinued operations presentation has been retrospectively applied to all prior periods presented.
The financial results of discontinued operations by major line item for the periods ended September 30 were as follows (in thousands):
26
Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| Three Months Ended September 30, 2023 | Bright HealthCare - Commercial | Bright HealthCare | Other | Total | ||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||
| Premium revenue | $ | (2,237) | $ | 439,267 | $ | — | $ | 437,030 | ||||||||||||||||||
| Service revenue | — | — | — | — | ||||||||||||||||||||||
| Investment income | 19,923 | 39 | — | 19,962 | ||||||||||||||||||||||
| Total revenue from discontinued operations | 17,686 | 439,306 | — | 456,992 | ||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Medical costs | 53,331 | 399,492 | — | 452,823 | ||||||||||||||||||||||
| Operating costs | 15,873 | 54,022 | 106 | 70,001 | ||||||||||||||||||||||
| Depreciation and amortization | — | — | — | — | ||||||||||||||||||||||
| Total operating expenses from discontinued operations | 69,204 | 453,514 | 106 | 522,824 | ||||||||||||||||||||||
| Operating loss from discontinued operations | (51,518) | (14,208) | (106) | (65,832) | ||||||||||||||||||||||
| Interest expense | (2,011) | — | — | (2,011) | ||||||||||||||||||||||
| Loss from discontinued operations before income taxes | (53,529) | (14,208) | (106) | (67,843) | ||||||||||||||||||||||
| Income tax expense (benefit) | — | — | — | — | ||||||||||||||||||||||
| Net loss from discontinued operations | $ | (53,529) | $ | (14,208) | $ | (106) | $ | (67,843) | ||||||||||||||||||
| Three Months Ended September 30, 2022 | Bright HealthCare - Commercial | Bright HealthCare | Other | Total | ||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||
| Premium revenue | $ | 992,661 | $ | 374,861 | $ | — | $ | 1,367,522 | ||||||||||||||||||
| Service revenue | 38 | — | 2,001 | 2,039 | ||||||||||||||||||||||
| Investment income | 6,849 | 36 | — | 6,885 | ||||||||||||||||||||||
| Total revenue from discontinued operations | 999,548 | 374,897 | 2,001 | 1,376,446 | ||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Medical costs | 913,574 | 340,685 | — | 1,254,259 | ||||||||||||||||||||||
| Operating costs | 157,918 | 49,297 | 3,389 | 210,604 | ||||||||||||||||||||||
| Goodwill impairment | 4,148 | 70,017 | — | 74,165 | ||||||||||||||||||||||
| Depreciation and amortization | — | 4,417 | 539 | 4,956 | ||||||||||||||||||||||
| Total operating expenses from discontinued operations | 1,075,640 | 464,416 | 3,928 | 1,543,984 | ||||||||||||||||||||||
| Operating loss from discontinued operations | (76,092) | (89,519) | (1,927) | (167,538) | ||||||||||||||||||||||
| Interest expense | — | — | — | — | ||||||||||||||||||||||
| Loss from discontinued operations before income taxes | (76,092) | (89,519) | (1,927) | (167,538) | ||||||||||||||||||||||
| Income tax expense (benefit) | (1) | (1,649) | 11 | (1,639) | ||||||||||||||||||||||
| Net loss from discontinued operations | $ | (76,091) | $ | (87,870) | $ | (1,938) | $ | (165,899) | ||||||||||||||||||
27
Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| Nine Months Ended September 30, 2023 | Bright HealthCare - Commercial | Bright HealthCare | Other | Total | ||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||
| Premium revenue | $ | (16,824) | $ | 1,336,116 | $ | — | $ | 1,319,292 | ||||||||||||||||||
| Service revenue | 30 | — | 2,383 | 2,413 | ||||||||||||||||||||||
| Investment income | 61,934 | 477 | — | 62,411 | ||||||||||||||||||||||
| Total revenue from discontinued operations | 45,140 | 1,336,593 | 2,383 | 1,384,116 | ||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Medical costs | 113,933 | 1,228,331 | — | 1,342,264 | ||||||||||||||||||||||
| Operating costs | 107,166 | 164,652 | 2,472 | 274,290 | ||||||||||||||||||||||
| Depreciation and amortization | — | 5,872 | — | 5,872 | ||||||||||||||||||||||
| Total operating expenses from discontinued operations | 221,099 | 1,398,855 | 2,472 | 1,622,426 | ||||||||||||||||||||||
| Operating loss from discontinued operations | (175,959) | (62,262) | (89) | (238,310) | ||||||||||||||||||||||
| Interest expense | (2,011) | — | — | (2,011) | ||||||||||||||||||||||
| Loss from discontinued operations before income taxes | (177,970) | (62,262) | (89) | (240,321) | ||||||||||||||||||||||
| Income tax expense (benefit) | — | — | — | — | ||||||||||||||||||||||
| Net loss from discontinued operations | $ | (177,970) | $ | (62,262) | $ | (89) | $ | (240,321) | ||||||||||||||||||
| Nine Months Ended September 30, 2022 | Bright HealthCare - Commercial | Bright HealthCare | Other | Total | ||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||
| Premium revenue | $ | 3,134,624 | $ | 1,191,233 | $ | — | $ | 4,325,857 | ||||||||||||||||||
| Service revenue | 108 | — | 6,243 | 6,351 | ||||||||||||||||||||||
| Investment income | 13,099 | 83 | — | 13,182 | ||||||||||||||||||||||
| Other income | — | — | 799 | 799 | ||||||||||||||||||||||
| Total revenue from discontinued operations | 3,147,831 | 1,191,316 | 7,042 | 4,346,189 | ||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Medical costs | 2,717,841 | 1,095,455 | — | 3,813,296 | ||||||||||||||||||||||
| Operating costs | 702,296 | 132,799 | 11,921 | 847,016 | ||||||||||||||||||||||
| Goodwill impairment | 4,148 | 70,017 | — | 74,165 | ||||||||||||||||||||||
| Intangible assets impairment | 6,720 | — | — | 6,720 | ||||||||||||||||||||||
| Depreciation and amortization | 145 | 13,292 | 1,453 | 14,890 | ||||||||||||||||||||||
| Total operating expenses from discontinued operations | 3,431,150 | 1,311,563 | 13,374 | 4,756,087 | ||||||||||||||||||||||
| Operating loss from discontinued operations | (283,319) | (120,247) | (6,332) | (409,898) | ||||||||||||||||||||||
| Interest expense | — | — | — | — | ||||||||||||||||||||||
| Loss from discontinued operations before income taxes | (283,319) | (120,247) | (6,332) | (409,898) | ||||||||||||||||||||||
| Income tax expense (benefit) | (3) | (8,390) | 13 | (8,380) | ||||||||||||||||||||||
| Net loss from discontinued operations | $ | (283,316) | $ | (111,857) | $ | (6,345) | $ | (401,518) | ||||||||||||||||||
28
Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table presents cash flows from operating and investing activities for discontinued operations for the nine months ended September 30, 2023 (in thousands):
| Cash used in operating activities - discontinued operations | (2,310,771) | ||||
| Cash provided by investing activities - discontinued operations | 1,145,441 | ||||
Assets and liabilities of discontinued operations were as follows (in thousands):
| September 30, 2023 | ||||||||||||||||||||
| Bright HealthCare - Commercial | Bright HealthCare | Total | ||||||||||||||||||
| Assets | ||||||||||||||||||||
| Current assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 279,198 | $ | 330,789 | $ | 609,987 | ||||||||||||||
| Short-term investments | 9,948 | 676 | 10,624 | |||||||||||||||||
| Accounts receivable, net of allowance | 1,792 | 77,670 | 79,462 | |||||||||||||||||
| Prepaids and other current assets | 18,455 | 132,544 | 150,999 | |||||||||||||||||
| Property, equipment and capitalized software, net | — | 19,948 | 19,948 | |||||||||||||||||
| Goodwill | — | 358,693 | 358,693 | |||||||||||||||||
| Intangible assets, net | — | 138,981 | 138,981 | |||||||||||||||||
| Current assets of discontinued operations | 309,393 | 1,059,301 | 1,368,694 | |||||||||||||||||
| Total assets of discontinued operations | $ | 309,393 | $ | 1,059,301 | $ | 1,368,694 | ||||||||||||||
| Liabilities | ||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||
| Medical costs payable | $ | 49,462 | $ | 268,271 | $ | 317,733 | ||||||||||||||
| Accounts payable | 26,879 | 6,807 | 33,686 | |||||||||||||||||
| Risk adjustment payable | 402,354 | — | 402,354 | |||||||||||||||||
| Unearned revenue | — | 137,733 | 137,733 | |||||||||||||||||
| Other current liabilities | 18,981 | 64,015 | 82,996 | |||||||||||||||||
| Current liabilities of discontinued operations | 497,676 | 476,826 | 974,502 | |||||||||||||||||
| Total liabilities of discontinued operations | $ | 497,676 | $ | 476,826 | $ | 974,502 | ||||||||||||||
29
Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| December 31, 2022 | ||||||||||||||||||||||||||
| Bright HealthCare - Commercial | Bright HealthCare | Other | Total | |||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||
| Current assets: | ||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 1,469,577 | $ | 244,616 | $ | 1,091 | $ | 1,715,284 | ||||||||||||||||||
| Short-term investments | 1,129,800 | 3,972 | — | 1,133,772 | ||||||||||||||||||||||
| Accounts receivable, net of allowance | 4,167 | 59,308 | 1,636 | 65,111 | ||||||||||||||||||||||
| Prepaids and other current assets | 187,818 | 85,479 | — | 273,297 | ||||||||||||||||||||||
| Current assets of discontinued operations | 2,791,362 | 393,375 | 2,727 | 3,187,464 | ||||||||||||||||||||||
| Other assets: | ||||||||||||||||||||||||||
| Property, equipment and capitalized software, net | — | 21,298 | — | 21,298 | ||||||||||||||||||||||
| Goodwill | — | 358,693 | — | 358,693 | ||||||||||||||||||||||
| Intangible assets, net | — | 144,131 | — | 144,131 | ||||||||||||||||||||||
| Other non-current assets | — | 4,995 | — | 4,995 | ||||||||||||||||||||||
| Other assets of discontinued operations | — | 529,117 | — | 529,117 | ||||||||||||||||||||||
| Total assets of discontinued operations | $ | 2,791,362 | $ | 922,492 | $ | 2,727 | $ | 3,716,581 | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||||||||
| Medical costs payable | $ | 691,221 | $ | 290,296 | $ | — | $ | 981,517 | ||||||||||||||||||
| Accounts payable | 160,707 | 10,858 | — | 171,565 | ||||||||||||||||||||||
| Risk adjustment payable | 1,942,643 | 1,247 | — | 1,943,890 | ||||||||||||||||||||||
| Unearned revenue | — | — | 242 | 242 | ||||||||||||||||||||||
| Other current liabilities | 19,373 | 40,002 | 647 | 60,022 | ||||||||||||||||||||||
| Current liabilities of discontinued operations | 2,813,944 | 342,403 | 889 | 3,157,236 | ||||||||||||||||||||||
| Total liabilities of discontinued operations | $ | 2,813,944 | $ | 342,403 | $ | 889 | $ | 3,157,236 | ||||||||||||||||||
Revenue Recognition: We record adjustments for changes to the risk adjustment balances for individual policies in premium revenue. The risk adjustment program adjusts premiums based on the demographic factors and health status of each consumer as derived from current-year medical diagnoses as reported throughout the year. Under the risk adjustment program, a risk score is assigned to each covered consumer to determine an average risk score at the individual and small-group level by legal entity in a particular market in a state. Additionally, an average risk score is determined for the entire subject population for each market in each state. Settlements are determined on a net basis by legal entity and state and are made in the middle of the year following the end of the contract year. Each health insurance issuer’s average risk score is compared to the state’s average risk score. Risk adjustment is subject to audit by the U.S. Department of Health and Human Services (“HHS”), which could result in future payments applicable to benefit years.
Premium revenue under the MA program includes CMS monthly premiums that are risk adjusted based on CMS defined formulas using consumer demographics and hierarchical condition category codes (“HCC risk scores”) calculated based on historical data submitted to CMS on a lagged basis. Risk Adjustment Factor-related (“RAF”) premiums settle between CMS and the Company during both a midyear and final reconciliation process. Due to the lagged nature of the reconciliation and settlement, RAF-related premiums are estimated based on the lagged information that we submitted to CMS. The accuracy of the data submissions to CMS used in the RAF reconciliation are subject to CMS audit under the RADV audits and could result in future adjustments to premiums.
Goodwill: Due to the decline in our stock price and market capitalization, we performed an interim goodwill impairment analysis for the period ended September 30, 2023. We estimated the fair value of the Bright HealthCare reporting units by using
30
Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
the Molina purchase price as an approximate fair value; as a result we determined that no impairment of the goodwill assigned to the Bright HealthCare reporting unit was necessary.
Restructuring Charges: As a result of the strategic changes, we announced and have taken actions to restructure the Company’s workforce and reduce expenses based on our updated business model.
There were no restructuring charges for the three and nine months ended September 30, 2022. Restructuring charges within our discontinued operations for the three and nine months ended September 30, 2023 were as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
| 2023 | 2023 | ||||||||||
| Employee termination benefits | $ | 451 | $ | 3,628 | |||||||
| Long-lived asset impairments | — | 7,429 | |||||||||
| Contract termination and other costs | 12 | (977) | |||||||||
| Total discontinued operations restructuring charges | $ | 463 | $ | 10,080 | |||||||
Restructuring accrual activity recorded by major type for the nine months ended September 30, 2023 was as follows (in thousands):
| Employee Termination Benefits | Contract Termination Costs | Total | |||||||||||||||
| Balance at January 1, 2023 | $ | 16,053 | $ | 29,053 | $ | 45,106 | |||||||||||
| Charges | 3,628 | (977) | 2,651 | ||||||||||||||
| Cash payments | (15,001) | (3,213) | (18,214) | ||||||||||||||
| Balance at September 30, 2023 | $ | 4,680 | $ | 24,863 | $ | 29,543 | |||||||||||
31
Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Employee termination benefits are recorded within Other current liabilities of discontinued operations while contract termination costs are recorded within Accounts payable of discontinued operations.
Fixed Maturity Securities: Available-for-sale securities within our discontinued operations are reported at fair value as of September 30, 2023 and December 31, 2022. Held-to-maturity securities are reported at amortized cost as of September 30, 2023 and December 31, 2022. The following is a summary of our investment securities (in thousands):
| September 30, 2023 | |||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Carrying Value | ||||||||||||||||||||
| Cash equivalents | $ | 90,952 | $ | — | $ | — | $ | 90,952 | |||||||||||||||
| Available for sale: | |||||||||||||||||||||||
| U.S. government and agency obligations | 1,940 | — | (116) | 1,824 | |||||||||||||||||||
| Corporate obligations | 874 | — | (16) | 858 | |||||||||||||||||||
| Mortgage backed securities | 1,553 | — | (150) | 1,403 | |||||||||||||||||||
| Total available-for-sale securities | 4,367 | — | (282) | 4,085 | |||||||||||||||||||
| Held to maturity: | |||||||||||||||||||||||
| U.S. government and agency obligations | 6,305 | — | (84) | 6,221 | |||||||||||||||||||
| Certificates of deposit | 318 | — | — | 318 | |||||||||||||||||||
| Total held-to-maturity securities | 6,623 | — | (84) | 6,539 | |||||||||||||||||||
| Total investments | $ | 101,942 | $ | — | $ | (366) | $ | 101,576 | |||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Carrying Value | ||||||||||||||||||||
| Cash equivalents | $ | 963,062 | $ | 32 | $ | — | $ | 963,094 | |||||||||||||||
| Available for sale: | |||||||||||||||||||||||
| U.S. government and agency obligations | 372,244 | 1 | (3,239) | 369,006 | |||||||||||||||||||
| Corporate obligations | 520,619 | 521 | (714) | 520,426 | |||||||||||||||||||
| State and municipal obligations | 10,308 | — | (96) | 10,212 | |||||||||||||||||||
| Certificates of deposit | 12,012 | — | (2) | 12,010 | |||||||||||||||||||
| Mortgage-backed securities | 154,167 | 46 | (156) | 154,057 | |||||||||||||||||||
| Asset backed securities | 59,289 | — | — | 59,289 | |||||||||||||||||||
| Other | 386 | — | (14) | 372 | |||||||||||||||||||
| Total available-for-sale securities | 1,129,025 | 568 | (4,221) | 1,125,372 | |||||||||||||||||||
| Held to maturity: | |||||||||||||||||||||||
| U.S. government and agency obligations | 6,622 | — | (158) | 6,464 | |||||||||||||||||||
| Certificates of deposit | 1,936 | — | — | 1,936 | |||||||||||||||||||
| Total held-to-maturity securities | 8,558 | — | (158) | 8,400 | |||||||||||||||||||
| Total investments | $ | 2,100,645 | $ | 600 | $ | (4,379) | $ | 2,096,866 | |||||||||||||||
We believe that we will collect the principal and interest due on our debt securities that have an amortized cost in excess of fair value. The unrealized losses were primarily caused by interest rate increases and not by unfavorable changes in the credit quality associated with these securities. At each reporting period, we evaluate securities for impairment when the fair value of
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Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
the investment is less than its amortized cost. We evaluated the underlying credit quality and credit ratings of the issuers, noting no significant deterioration since purchase.
Fair Value Measurements: Certain assets and liabilities are measured at fair value in the condensed consolidated financial statements or have fair values disclosed in the notes to the condensed consolidated financial statements. These assets and liabilities are classified into one of three levels of a hierarchy defined by GAAP.
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Quoted prices for similar assets or liabilities in active markets or quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
For a description of the methods and assumptions that are used to estimate the fair value and determine the fair value hierarchy classification of each class of financial instrument see Note 5 to the audited consolidated financial statements included in our 2022 Form 10-K.
As of September 30, 2023, investments and cash equivalents within our discontinued operations were comprised of $78.7 million and $22.9 million with fair value measurements of Level 1 and Level 2, respectively. As of December 31, 2022, the investments and cash equivalents within our discontinued operations were comprised of $1.3 billion and $826.0 million with fair value measurements of Level 1 and Level 2, respectively.
Medical Costs Payable: The table below details the components making up the medical costs payable within current liabilities of discontinued operations (in thousands):
| Bright HealthCare - Commercial | Bright HealthCare | ||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | ||||||||||||||||||||
Claims unpaid | $ | 18,668 | $ | 24,029 | $ | 53,604 | $ | 48,989 | |||||||||||||||
Provider incentive payable | 310 | 4,347 | 41,882 | 36,302 | |||||||||||||||||||
Claims adjustment expense liability | 5,438 | 13,796 | 4,820 | 5,732 | |||||||||||||||||||
Incurred but not reported (IBNR) | 25,046 | 552,285 | 167,965 | 179,505 | |||||||||||||||||||
Total medical costs payable of discontinued operations | $ | 49,462 | $ | 594,457 | $ | 268,271 | $ | 270,528 | |||||||||||||||
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Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table shows the components of the change in medical costs payable for the nine months ended September 30 (in thousands):
| Bright Health Care | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Medical costs payable - January 1 | $ | 290,296 | $ | 240,854 | ||||||||||
| Incurred related to: | ||||||||||||||
| Current year | 1,200,160 | 1,102,586 | ||||||||||||
| Prior year | 26,195 | 3,296 | ||||||||||||
| Total incurred | 1,226,355 | 1,105,882 | ||||||||||||
| Paid related to: | ||||||||||||||
| Current year | 962,131 | 849,253 | ||||||||||||
| Prior year | 286,249 | 226,955 | ||||||||||||
| Total paid | 1,248,380 | 1,076,208 | ||||||||||||
| Medical costs payable - September 30 | $ | 268,271 | $ | 270,528 | ||||||||||
Risk Adjustment: We record adjustments for changes to the risk adjustment balances for individual policies in premium revenue. The risk adjustment program adjusts premiums based on the demographic factors and health status of each consumer as derived from current-year medical diagnoses as reported throughout the year. Under the risk adjustment program, a risk score is assigned to each covered consumer to determine an average risk score at the individual and small-group level by legal entity in a particular market in a state. Additionally, an average risk score is determined for the entire subject population for each market in each state. Settlements are determined on a net basis by legal entity and state and are made in the middle of the year following the end of the contract year. Each health insurance issuer’s average risk score is compared to the state’s average risk score. Risk adjustment is subject to audit by HHS, which could result in future payments applicable to benefit years.
Our insurance subsidiaries in Colorado, Florida, Illinois and Texas entered into repayment agreements with CMS with respect to the unpaid amount of their risk adjustment obligations for an aggregate amount of $380 million (the "Repayment Agreements"). The amount owing under the Repayment Agreements is due 18 months from September 15, 2023 (the date the first installment payment was made under the Repayment Agreements) and bears interest at a rate of 11.5% per annum. In late September 2023 we received additional RADV invoices from CMS relating to the 2021 plan year in the amount of $22.6 million; these invoices were subsequently paid in full in October 2023.
Restricted Capital and Surplus: Our regulated insurance legal entities are required by statute to meet and maintain a minimum level of capital as stated in applicable state regulations, such as risk-based capital requirements. These balances are monitored regularly to ensure compliance with these regulations. For the period ended September 30, 2023, we are out of compliance with the minimum levels for certain of our regulated insurance legal entities.
NOTE 16. SUBSEQUENT EVENTS
On October 2, 2023, the Company, the existing lender, and the New Lender, entered into Incremental Amendment No. 1 to provide for the Commitment Increase by the New Lender under the Amended Credit Agreement. Loans under the Commitment Increase will have the same terms as loans under the original term loan commitments provided by the Existing Lender.
In connection with Incremental Amendment No. 1, on October 2, 2023, the Company and the New Lender entered into a warrantholders agreement setting forth the rights and obligations of the Company and the New Lender as a holder of Warrants, and providing for the issuance of the Warrants to purchase up to 176,724 shares of Common Stock. See Note 5, Short-Term Borrowings, for additional information regarding the New Credit Agreement, Incremental Amendment No.1 and the Warrantholders Agreement.
Subsequent to September 30, 2023, we borrowed an additional $8.2 million under the New Credit Agreement and issued a total of 226,428 warrants.
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Bright Health Group, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
We have evaluated the events and transactions that have occurred through the date at which the condensed consolidated financial statements were issued. Except as stated above, no additional events or transactions have occurred that may require adjustment to the condensed consolidated financial statements or disclosure.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, liquidity and capital resources. This discussion should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes and the “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the accompanying notes as well as the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2022 Form 10-K. Unless the context otherwise indicates or requires, the terms “we”, “our”, and the “Company” as used herein refer to Bright Health Group, Inc. and its consolidated subsidiaries.
Business Overview
Bright Health Group was founded in 2015 to transform healthcare. Our mission of Making Healthcare Right. Together. is built upon the belief that by connecting and aligning the best local resources in healthcare delivery with the financing of care, leveraging what we call the “Value Layer” of healthcare, we can drive a superior consumer experience, reduce systemic waste, lower costs, and optimize clinical outcomes. Bright Health Group consists of two reportable segments within our continuing Consumer Care operations: Care Delivery and Care Solutions.
Care Delivery. Provides comprehensive services in our clinics with wrap around care management and care coordination activities for those members where we take full or partial risk. As of September 30, 2023, Care Delivery provides virtual and in-person clinical care through its 72 owned primary care clinics within an integrated care delivery system. Through these risk-bearing clinics and our affiliated network of care providers, the Care Delivery segment serves approximately 330,000 consumers. Care Delivery segment customers include external payors, third party administrators, affiliated providers and direct-to-government programs.
Care Solutions. Our provider enablement business that facilitates the transition to value-based care. Support services provided by Care Solutions include, but are not limited to, population health management, data analytics, provider report cards, real time patient monitoring, transitions of care, chronic case management, utilization management, and claims adjudication and payments. In addition, Care Solutions operates three ACOs as part of CMS’s ACO REACH program that has approximately 62,000 attributed members as of September 30, 2023.
Business Update
In the third quarter we continued to make progress across our key initiatives; for the three and nine months ended September 30, 2023 we reported net loss from continuing operations of $479.3 million and $564.9 million, respectively. Importantly, the Consumer Care business, our continuing operations, returned our second consecutive quarter of Adjusted EBITDA profitability.
We have focused the company on our value-driven Consumer Care business, NeueHealth, where we are serving consumers through a differentiated integrated care model. We are aligned with our payor and provider partners clinically and financially to improve the quality and cost of care, in both our Care Delivery and Care Solutions segments. We believe we are well positioned for the future of healthcare as the industry continues to shift to value-based care.
Consumer Care’s Care Delivery
Excluding the impact of the goodwill impairment recognized in the quarter, Care Delivery produced another quarter of positive operating income. Across the ACA Marketplace consumers served, our medical cost management and member engagement initiatives have been performing well and in the third quarter our performance metrics were strong, driving the Care Delivery upside in the quarter. The strong performance in the third quarter gives us confidence in the potential for further upside in our Care Partner relationships. We have taken a conservative amount of risk in these contracts as we get to know the patient populations and care provider networks at our payor partners, but it is important to us that we have an aligned interest with our payor partners and that we are taking total cost of care risk. By successfully delivering on our aligned and integrated consumer care delivery model we are lowering the cost of care for our payor partners and we are beginning to recognize the shared upside in these savings. Importantly, we are also seeing high levels of consumer satisfaction in our Care Delivery business.
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Our Care Delivery business serving Medicare Advantage consumers also performed well in the third quarter. Medical Costs on our fully capitated Medicare Advantage consumers were consistent with seasonal trends in the quarter and contributed to Care Delivery’s gross profit performance in the third quarter. We believe our performance in our Medicare Advantage risk-bearing relationships, when measured by Medical Cost Ratio, inpatient admissions, and NPS and Stars ratings, is among the best in the industry.
Consumer Care’s Care Solutions
Looking to the performance in our REACH ACOs within the Care Solutions segment, CMS recently released the final results for the 2022 ACO REACH Program that showed solid performance for the two REACH ACOs we operated in 2022. Our REACH ACOs had a combined gross savings of $30.3 million, a savings rate of 4.4% compared to the benchmark, which was more than 75 basis points better than the program average among all REACH ACOs. This gross margin is before the mandatory CMS savings rate deduction of 2% and any risk sharing arrangements with our downstream provider partners.
Our NeueHealth Pineapple ACO was one of the top performing ACOs in 2022 with a gross savings rate of 11.0%. Our Physicians Plus ACO also produced gross savings but not sufficient to cover the 2% CMS mandatory savings requirements. The performance of the Physician Plus ACO was weighed down by the deficit incurred by one of our provider partners, Babylon Medical Group, as a result of Babylon’s bankruptcy announced in August 2023.
Apart from the impact of Babylon’s bankruptcy, our 2023 REACH ACOs are performing in line with our expectations. In 2024 Babylon will no longer participate in our ACO REACH program. Our Care Solutions team has secured additional provider partners to add to our REACH ACOs and is projecting some organic growth from our existing partners for 2024. Although we expect some pressure on top line growth related to the ACO REACH business, we expect overall ACO REACH margins to improve as the terminated providers are projected to run deficits in 2023.
Our team continues to engage a number of new provider groups on the physician enablement part of the business across payor categories. We see growth opportunities with Federally Qualified Health Centers and other provider partners to serve Medicaid, as well as a strong pipeline to add to our REACH ACOs.
Bright HealthCare
Regarding the announced sale of our California Medicare Advantage business, the regulatory approval process for Molina’s acquisition and the satisfaction of other closing conditions are proceeding as planned and we continue to expect to close by the first quarter of 2024.
Our MA business had a strong quarter, with 17% premium revenue growth compared to the same period in 2022, and a 90.9% Medical Cost Ratio, solid performance on our book of business with a high concentration of underserved and Special Needs consumers. Our Medicare Advantage team has been working for some time on initiatives to drive improved utilization metrics and lower Medical Costs. We have seen the benefits of these efforts with utilization down approximately 10% across the book and operational improvements that have resulted in claims inventory down approximately 50%.
Bright HealthCare - Commercial
In the third quarter, we also continued to make significant progress on the wind-down of our ACA Insurance business. Our claims inventory has continued to decline consistent with our expectations, and we have clear visibility to the remaining obligations in the business. We were pleased to announce in September that we paid down 80% of the final risk adjustment obligations for the business and that our insurance subsidiaries entered into repayment agreements with CMS and four states to satisfy the remaining risk adjustment obligations.
We believe the ongoing business at Bright Health is one of the largest providers of value-based care delivery with substantial long-term growth opportunities. As we have shown so far this year through positive enterprise Adjusted EBITDA, we are focused on balancing risk and growth in the business, and setting Bright Health up for long-term profitable growth.
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Key Metrics and Non-GAAP Financial Measures
In addition to our GAAP financial information, we review 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 our business plan and make strategic decisions. The following table provides the approximate consumers and patients served as of September 30, 2023 and 2022.
| As of September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
Value-Based Consumers served(1) | 355,000 | 115,000 | |||||||||
(1) The value-based care consumers at September 30, 2022 have been recast for comparability to exclude approximately 409,000 consumers attributable to our Bright HealthCare- Commercial business that we exited beginning in 2023.
Value-Based Care Consumers
Value-based care consumers are consumers attributed to providers contracted under various value-based care delivery models in which the responsibility for control of an attributed patient’s medical care is transferred, in part or wholly, to our Consumer Care managed medical groups. We believe growth in the number of value-based care consumers is a key indicator of the performance of our Consumer Care business. It also informs our management of the operational, clinical, technological and administrative functional area needs that will require further investment to support expected future patient growth. We saw a year over year increase in value-based care consumers of approximately 240,000 consumers. Our focus is to continue to grow the number of value-based care consumers through third-party payor relationships.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||
| ($ in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||
| Net loss from continuing operations | $ | (479,305) | (104,231) | $ | (564,915) | (300,571) | ||||||||||||||
Adjusted EBITDA(1) | $ | 1,205 | (8,047) | $ | 1,876 | (52,805) | ||||||||||||||
(1)See “Non-GAAP Financial Measures” below for reconciliations to the most directly comparable financial measures calculated in accordance with GAAP and related disclosures.
Non-GAAP Financial Measures
Adjusted EBITDA
We define Adjusted EBITDA as net loss excluding loss from discontinued operations, interest expense, income taxes, depreciation and amortization, any impairment of goodwill or intangible assets, adjusted for the impact of acquisition and financing-related transaction costs, share-based compensation, changes in the fair value of equity securities, changes in the fair value of contingent consideration, contract termination costs and restructuring costs. Adjusted EBITDA has been presented in this Quarterly Report as a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP, because we believe it assists management and investors in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Management believes Adjusted EBITDA is useful to investors in highlighting trends in our operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. Management uses Adjusted EBITDA to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies, to make budgeting decisions, to establish discretionary annual incentive compensation and to compare our performance against that of other peer companies using similar measures. Management supplements GAAP results with non-GAAP financial measures to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone.
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Adjusted EBITDA is not a recognized term under GAAP and should not be considered as an alternative to net income (loss) as a measure of financial performance or cash provided by operating activities as a measure of liquidity, or any other performance measure derived in accordance with GAAP. Additionally, this measure is not intended to be a measure of free cash flow available for management’s discretionary use as we do not consider certain cash requirements such as interest payments, tax payments and debt service requirements. The presentation of this measure has limitations as an analytical tool and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Because not all companies use identical calculations, the presentation of this measure may not be comparable to other similarly titled measures of other companies and can differ significantly from company to company.
The following table provides a reconciliation of net loss to Adjusted EBITDA for the periods presented:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| ($ in thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Net loss | $ | (547,148) | $ | (270,130) | $ | (805,236) | $ | (702,089) | |||||||||||||||
Loss from Discontinued Operations (a) | 67,843 | 165,899 | 240,321 | 401,518 | |||||||||||||||||||
| EBITDA adjustments from continuing operations | |||||||||||||||||||||||
| Interest expense | 10,041 | 4,905 | 26,998 | 6,435 | |||||||||||||||||||
| Income tax (benefit) expense | (3,385) | 3,401 | (3,018) | 16,286 | |||||||||||||||||||
Transaction costs (b) | 8,941 | 4 | 18,889 | 386 | |||||||||||||||||||
| Depreciation and amortization | 4,117 | 8,947 | 14,271 | 25,283 | |||||||||||||||||||
Share-based compensation expense (c) | 16,515 | 24,123 | 65,611 | 77,263 | |||||||||||||||||||
Restructuring and contract termination costs (d) | 5,281 | 5 | 6,867 | 10,162 | |||||||||||||||||||
| Impairment of goodwill and intangible assets | 401,385 | 42,611 | 401,385 | 42,611 | |||||||||||||||||||
ACO REACH care partner bankruptcy (e) | 27,741 | — | 27,741 | — | |||||||||||||||||||
Change in fair value of warrant liability (f) | 9,874 | — | 9,874 | — | |||||||||||||||||||
Change in fair value of contingent consideration (g) | — | — | (1,827) | — | |||||||||||||||||||
| Change in fair value of equity securities | — | 12,188 | — | 69,340 | |||||||||||||||||||
| EBITDA adjustments from continuing operations | $ | 480,510 | $ | 96,184 | $ | 566,791 | $ | 247,766 | |||||||||||||||
| Adjusted EBITDA | $ | 1,205 | $ | (8,047) | $ | 1,876 | $ | (52,805) | |||||||||||||||
(a)Beginning in the fourth quarter of 2022, Adjusted EBITDA excludes the impact of discontinued operations. The comparable period in 2022 has been recast to exclude these impacts. Represents losses associated with the Commercial business segment and MA Legacy operations that we exited at the end of 2022 and the California Medicare Advantage business classified as held for sale.
(b)Transaction costs include accounting, tax, valuation, consulting, legal and investment banking fees directly relating to financing initiatives. These costs can vary from period to period and impact comparability, and we do not believe such transaction costs reflect the ongoing performance of our business.
(c)Represents non-cash compensation expense related to stock option and restricted stock unit award grants, which can vary from period to period based on a number of factors, including the timing, quantity and grant date fair value of the awards.
(d)Restructuring and contract termination costs represent severance costs as part of a workforce reduction, amounts paid for early termination of leases, and impairment of certain long-lived assets primarily relating to our decision to exit the Commercial business for the 2023 plan year.
(e)Represents the costs expected to be incurred as a result of one of our ACO REACH care partners filing for bankruptcy; includes the full allowance established for the outstanding receivable and ongoing costs incurred to manage and provide service to members attributed to the care partner that would have otherwise been reimbursed prior to the care partner’s bankruptcy.
(f)Represents the non-cash change in the fair value of the warrant liability established for warrants included in our financing arrangements, which are remeasured at fair value each reporting period.
(g)Represents the non-cash change in fair value of contingent consideration from business combinations, which is remeasured at fair value each reporting period.
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Results of Operations
The following table summarizes our unaudited Condensed Consolidated Statements of Income (Loss) data and other financial information for the three and nine months ended September 30, 2023 and 2022.
| ($ in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||
| Condensed Consolidated Statements of Income (loss) and operating data: | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||
| Revenue: | ||||||||||||||||||||
| Capitated revenue | $ | 60,371 | $ | 33,006 | $ | 159,683 | $ | 79,295 | ||||||||||||
| ACO REACH revenue | 200,044 | 145,433 | 676,845 | 465,435 | ||||||||||||||||
| Service revenue | 8,978 | 10,076 | 31,387 | 31,038 | ||||||||||||||||
| Investment income (loss) | 6 | 4,848 | 16 | (52,301) | ||||||||||||||||
| Total revenue | 269,399 | 193,363 | 867,931 | 523,467 | ||||||||||||||||
| Operating costs | ||||||||||||||||||||
| Medical costs | 226,438 | 152,150 | 731,718 | 462,399 | ||||||||||||||||
| Operating costs | 72,532 | 85,566 | 221,697 | 261,351 | ||||||||||||||||
| Goodwill impairment | 401,385 | — | 401,385 | — | ||||||||||||||||
| Intangible assets impairment | — | 42,611 | — | 42,611 | ||||||||||||||||
| Bad debt expense | 22,421 | 11 | 23,054 | 11 | ||||||||||||||||
| Restructuring charges | 5,281 | 5 | 6,867 | 9,662 | ||||||||||||||||
| Depreciation and amortization | 4,117 | 8,947 | 14,271 | 25,283 | ||||||||||||||||
| Total operating costs | 732,174 | 289,290 | 1,398,992 | 801,317 | ||||||||||||||||
| Operating loss | (462,775) | (95,927) | (531,061) | (277,850) | ||||||||||||||||
| Interest expense | 10,041 | 4,905 | 26,998 | 6,435 | ||||||||||||||||
| Warrant expense | 9,874 | — | 9,874 | — | ||||||||||||||||
| Other income | — | (2) | — | — | ||||||||||||||||
| Loss from continuing operations before income taxes | (482,690) | (100,830) | (567,933) | (284,285) | ||||||||||||||||
| Income tax expense (benefit) | (3,385) | 3,401 | (3,018) | 16,286 | ||||||||||||||||
| Net loss from continuing operations | (479,305) | (104,231) | (564,915) | (300,571) | ||||||||||||||||
| Loss from discontinued operations, net of tax (Note 15) | (67,843) | (165,899) | (240,321) | (401,518) | ||||||||||||||||
| Net loss | (547,148) | (270,130) | (805,236) | (702,089) | ||||||||||||||||
| Net earnings from continuing operations attributable to noncontrolling interests | (86,747) | (46,710) | (116,502) | (84,651) | ||||||||||||||||
| Series A preferred stock dividend accrued | (10,178) | (9,684) | (29,834) | (28,083) | ||||||||||||||||
| Series B preferred stock dividend accrued | (2,284) | — | (6,695) | — | ||||||||||||||||
| Net loss attributable to Bright Health Group, Inc. common shareholders | $ | (646,357) | $ | (326,524) | $ | (958,267) | $ | (814,823) | ||||||||||||
| Adjusted EBITDA | $ | 1,205 | $ | (8,047) | $ | 1,876 | $ | (52,805) | ||||||||||||
Operating Cost Ratio (1) | 26.9 | % | 44.3 | % | 25.5 | % | 49.9 | % | ||||||||||||
(1)Operating Cost Ratio is defined as operating costs divided by total revenue.
Total revenues increased by $76.0 million, or 39.3%, for the three months ended September 30, 2023 as compared to the same period in 2022, which was primarily driven by an increase of approximately 13,000 beneficiaries aligned to our REACH ACOs.
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Our capitated revenue also increased $27.4 million for the three months ended September 30, 2023 as compared to the same period in 2022 as a result of increased membership through our third party payor contracts as compared to the three months ended September 30, 2022. In addition, for the three months ended September 30, 2022 we had an investment loss of $4.8 million driven by changes in the fair value of our investments in equity securities; we held no equity securities during the three months ended September 30, 2023 and as such there was not equivalent activity in the current period.
Total revenues increased by $344.5 million, or 65.8%, for the nine months ended September 30, 2023 as compared to the same period in 2022, which was driven by an increase of approximately 13,000 beneficiaries aligned to our REACH ACOs. Our capitated revenue also increased $80.4 million for the nine months ended September 30, 2023 as compared to the same period in 2022. The increase was a result of increased membership through our third party payor contracts as compared to the nine months ended September 30, 2022. In addition, for the nine months ended September 30, 2022 we had an investment loss of $52.3 million driven by changes in the fair value of our investments in equity securities; we held no equity securities during the nine months ended September 30, 2023 and as such there was not equivalent activity in the current period.
Medical costs increased by $74.3 million, or 48.8%, for the three months ended September 30, 2023 as compared to the same period in 2022. Medical costs increased by $269.3 million, or 58.2%, for the nine months ended September 30, 2023 as compared to the same period in 2022. The increase in medical costs was primarily driven by an increase in beneficiaries aligned to our REACH ACOs.
Operating costs decreased by $13.0 million, or 15.2%, for the three months ended September 30, 2023 as compared to the same period in 2022. Operating costs decreased by $39.7 million, or 15.2%, for the nine months ended September 30, 2023 as compared to the same period in 2022. The decrease in operating costs was primarily due to a decrease in compensation and benefit costs resulting from a decrease in employees.
Our operating cost ratio of 26.9% and 25.5% for the three and nine months ended September 30, 2023, decreased 1,740 and 2,440 basis points respectively compared to the same periods in 2022. The decrease is primarily a result of our restructuring efforts.
We recognized a $401.4 million non-cash impairment of goodwill for the three and nine months ended September 30, 2023 as a result of the decline in our stock price and market capitalization.
Bad debt expense increased by $22.4 million for the three months ended September 30, 2023 as compared to the same period in 2022. Bad debt expense increased by $23.0 million for the nine months ended September 30, 2023 as compared to the same period in 2022. The increase in bad debt expense was primarily driven by one of our ACO REACH care partners filing for bankruptcy in the third quarter of 2023 and a full allowance being established on the corresponding receivables.
Depreciation and amortization decreased by $4.8 million and $11.0 million for the three and nine months ended September 30, 2023 as compared to the same period in 2022, respectively. The decrease is primarily due to the full impairment of the reacquired contract intangible asset during the third quarter of 2022; for the three and nine months ended September 30, 2022 amortization of the reacquired contract intangible asset was $3.3 million and $9.9 million, respectively as compared to no related expense for the same periods ended September 30, 2023.
Interest expense increased $5.1 million and $20.6 million for the three and nine months ended September 30, 2023 as compared to the same periods in 2022, respectively. These increases are due to increased borrowings on the Credit Agreement throughout the periods.
We recognized warrant expense of $9.9 million for the three and nine months ended September 30, 2023 as compared to none in the same periods in 2022. This is a result of the Warrantholders Agreement executed in conjunction with the New Credit Agreement in the third quarter of 2023; there were no warrants prior to the third quarter of 2023.
Income tax was a benefit of $3.4 million and an expense of $3.4 million for the three months ended September 30, 2023 and 2022, respectively. Income tax was a benefit of $3.0 million and an expense of $16.3 million for the nine months ended September 30, 2023 and 2022, respectively. The impact from income taxes varies from the federal statutory rate of 21.0% due
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to state income taxes, changes in the valuation allowance for deferred tax assets and adjustments for permanent differences. For the three and nine months ended September 30, 2023, the benefit largely relates to the removal of the accrued amortization of originating goodwill from asset acquisitions and estimated state income taxes attributable to income earned in separate filing states without state net operating loss carryforwards.
Loss from discontinued operations decreased by $98.1 million and $161.2 million for the three and nine months ended September 30, 2023 as compared to the same periods in 2022. The three and nine months ended September 30, 2023 are reflective of the run out of our Bright HealthCare - Commercial business as compared to active operations of the commercial business during the three and nine months ended September 30, 2022. For the three and nine months ended September 30, 2023, the loss from discontinued operations aligned to our Bright HeathCare - Commercial business decreased $22.6 million and $105.3 million, compared to the same periods ended September 30, 2022, respectively. Additionally, the loss from discontinued operations aligned to our Bright HealthCare operations classified as held for sale decreased $73.7 million and decreased $49.6 million for the three and nine ended September 30, 2023 as compared to 2022, respectively.
| Care Delivery | |||||||||||||||||||||||
| ($ in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
| Statement of income (loss) and operating data: | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Capitated revenue | $ | 60,371 | $ | 33,006 | $ | 159,683 | $ | 79,295 | |||||||||||||||
| Service revenue | 8,245 | 10,050 | 29,711 | 30,960 | |||||||||||||||||||
| Total unaffiliated revenue | 68,616 | 43,056 | 189,394 | 110,255 | |||||||||||||||||||
| Affiliated revenue | (1,482) | 257,707 | 6,487 | 830,098 | |||||||||||||||||||
| Total segment revenue | 67,134 | 300,763 | 195,881 | 940,353 | |||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Medical Costs | 20,883 | 264,013 | 64,325 | 850,011 | |||||||||||||||||||
| Operating Costs | 32,329 | 30,388 | 93,026 | 93,984 | |||||||||||||||||||
| Goodwill impairment | 401,385 | — | 401,385 | — | |||||||||||||||||||
| Intangible assets impairment | — | 42,611 | — | 42,611 | |||||||||||||||||||
| Bad debt expense | 8 | 4 | 639 | 4 | |||||||||||||||||||
| Restructuring charges | 130 | — | 130 | — | |||||||||||||||||||
| Depreciation and amortization | 3,160 | 6,374 | 9,470 | 19,119 | |||||||||||||||||||
| Total operating expenses | 457,895 | 343,390 | 568,975 | 1,005,729 | |||||||||||||||||||
| Operating income (loss) | $ | (390,761) | $ | (42,627) | $ | (373,094) | $ | (65,376) | |||||||||||||||
Consumer Care’s Care Delivery segment’s capitated revenue increased by $27.4 million, or 82.9%, for the three months ended September 30, 2023 as compared to the same period in 2022. For the nine months ended September 30, 2023 the Care Delivery segment’s capitated revenue increased by $80.4 million, or 101.4%, as compared to the same period in 2022. The increase was a result of increased membership through our third-party payor contracts as compared to the three and nine months ended September 30, 2022.
Consumer Care’s Care Delivery segment’s service revenue decreased $1.8 million and $1.2 million for the three and nine months ended September 30, 2023 as compared to the same period in 2022. The decrease in Care Delivery’s service revenue for the three and nine months ended September 30, 2023 was primarily driven by a reduction in pharmacy revenue.
Affiliated revenue decreased to $(1.5) million and $6.5 million for the three and nine months ended September 30, 2023 as compared to $257.7 million and $830.1 million for the three and nine months ended September 30, 2022 as our result of our exit of our Commercial business.
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Consumer Care’s Care Delivery segment’s medical costs decreased by $243.1 million and $785.7 million for the three and nine months ended September 30, 2023 as compared to the same period in 2022. The decrease is primarily a result of the limited risk contracts that we have entered into with third-party payors that are accounted for on a net basis as compared to the full risk contract with Bright Healthcare - Commercial that was accounted for on a gross basis in the prior period.
Operating costs remained relatively flat for the three and nine months ended September 30, 2023 as compared to the same periods in 2022. Operating costs for the Care Delivery segment increased $1.9 million and decreased $1.0 million for the three and nine months ended September 30, 2023 as compared to the same period in 2022, respectively. The $1.9 million increase for the nine months ended September 30, 2023 is primarily attributable to higher compensation and professional fees partially offset by lower rent expense. The $1.0 million increase for the three months ended September 30, 2023 is primarily driven by lower rent expense.
Due to the decline in our stock price and market capitalization, we recognized a $401.4 million non-cash impairment of goodwill assigned to the Care Delivery segment for the three and nine months ended September 30, 2023.
Consumer Care’s Care Delivery segment’s depreciation and amortization decreased by $3.2 million and $9.6 million for the three and nine months ended September 30, 2023 as compared to the same periods in 2022, respectively. The decrease is primarily due to the full impairment of the reacquired contract intangible asset during the third quarter of 2022; for the three and nine months ended September 30, 2022 amortization of the reacquired contract intangible asset was $3.3 million and $9.9 million, respectively, as compared to no related expense for the same periods ended September 30, 2023.
| Care Solutions | |||||||||||||||||||||||
| ($ in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
| Statement of income (loss) and operating data: | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| ACO REACH revenue | $ | 200,044 | $ | 145,433 | $ | 676,845 | $ | 465,435 | |||||||||||||||
| Service revenue | 733 | 26 | 1,676 | 78 | |||||||||||||||||||
| Total segment revenue | 200,777 | 145,459 | 678,521 | 465,513 | |||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Medical Costs | 204,017 | 146,253 | 673,891 | 457,161 | |||||||||||||||||||
| Operating Costs | 3,702 | 2,321 | 10,083 | 6,478 | |||||||||||||||||||
| Bad debt expense | 22,413 | — | 22,415 | — | |||||||||||||||||||
| Total operating expenses | 230,132 | 148,574 | 706,389 | 463,639 | |||||||||||||||||||
| Operating income | $ | (29,355) | $ | (3,115) | $ | (27,868) | $ | 1,874 | |||||||||||||||
Consumer Care’s Care Solutions segment’s ACO REACH revenue increased $54.6 million, or 37.6% for the three months ended September 30, 2023 compared to the same period in 2022. The Care Solutions segment’s ACO REACH revenue increased $211.4 million, or 45.4% for the nine months ended September 30, 2023 compared to the same period in 2022. This increase is attributable to an increase of approximately 13,000 beneficiaries aligned to our REACH ACOs as of September 30, 2023 compared to the same period in 2022. See Note 14, ACO REACH, for additional information regarding our remaining performance obligation based on the most recent benchmark data.
Consumer Care’s Care Solutions segment’s service revenue increased $0.7 million and $1.6 million for the three and nine months ended September 30, 2023 as compared to the same period in 2022. The increase in service revenue was driven by revenue for the managed service organization contracts.
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Consumer Care’s Care Solutions segment’s medical costs increased by $57.8 million and $216.7 million for the three and nine months ended September 30, 2023 as compared to the same period in 2022. These increases correspond to the increase in the ACO REACH revenue as the medical costs are derived from the amortization of the ACO REACH performance obligation that is aligned to the number of beneficiaries aligned to our REACH ACOs.
Consumer Care’s Care Solutions segment’s operating costs increased by $1.4 million and $3.6 million for the three and nine months ended September 30, 2023 as compared to the same periods in 2022. These increases were driven by the additional compensation and general administrative expenses supporting the growing business and increased membership.
Consumer Care’s Care Solutions segment’s bad debt expense increased by $22.4 million, for the three and nine months ended September 30, 2023 as compared to the same period in 2022. The increase in bad debt expense was primarily driven by one of our ACO REACH care partners filing for bankruptcy in the third quarter of 2023 and a full allowance being established on the corresponding receivables.
Liquidity and Capital Resources
We assess our liquidity and capital resources in terms of our ability to generate adequate amounts of cash to meet our current and future needs. We have historically funded our operations and acquisitions primarily through the sale of stock, including the issuance of Series B Preferred Stock in October 2022, which generated cash proceeds of $172.9 million and the issuance of Series A Preferred Stock in January 2022, which generated cash proceeds of $747.5 million.
We have incurred operating losses since our founding, and we expect to incur operating losses in the future. However, we are executing a restructuring plan to reduce our capital needs and our operating expenses in the future to drive positive operating cash flow and increase liquidity. Our restructuring plan includes Bright HealthCare’s exiting of the Commercial marketplace for the 2023 plan year as well as reducing our workforce, exiting excess office space, and terminating or restructuring contracts. On June 30, 2023, the Company entered into a definitive agreement with Molina Healthcare, Inc. to sell its California Medicare Advantage business, which consists of Brand New Day and Central Health Plan, for total purchase consideration of $600.0 million, subject to regulatory approval and other closing conditions. The closing of this transaction is expected to occur by early 2024.
In the event the Company is unable to execute the sale of the California Medicare Advantage business, obtain additional financing or take other management actions, among other potential consequences, we forecast we will be unable to satisfy our obligations.
In addition to our current capital needs, we regularly evaluate our future capital needs to support our future growth plans and other strategic opportunities that may arise. We may seek funds through borrowings or through additional rounds of financing, including private or public equity offerings. Our longer-term future capital requirements and ability to raise additional capital will depend on many forward-looking factors, including:
•investor confidence in our ability to continue as a going concern,
•our ability to continue executing on cost saving measures previously described, and
•our ability to successfully improve our profitability.
Our expected primary short-term uses of cash include ongoing disbursements for claims payments related to our regulated insurance entities, the ACO REACH performance year obligation, as well as payments into the risk adjustment program which generally occur in the third quarter. For our non-regulated entities, our expected short-term uses of cash include capital infusions into our regulated insurance entities, interest payments and other general and administrative costs. Our long-term cash requirements primarily include operating lease obligations and redeemable noncontrolling interests.
Cash and investment balances held at regulated insurance entities are subject to regulatory restrictions and can only be accessed through dividends declared to the non-regulated parent company, pending regulatory approval, or through reimbursements
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related to administrative services agreements with the parent company. The Company declared no dividends from the regulated insurance entities to the parent company during the nine months ended September 30, 2023 and 2022.
The regulated legal entities are required to hold certain minimum levels of risk-based capital and surplus to satisfy regulatory requirements. As of September 30, 2023, we were out of compliance with the minimum levels for certain of our regulated insurance legal entities within our Bright HealthCare-Commercial and Bright Health Care segments.
Credit Agreement
We have a $350.0 million Credit Agreement, which matures on February 28, 2024. The Credit Agreement contains a covenant that requires the Company to maintain a total debt to capitalization ratio of (a) 0.25 to 1.00. The Credit Agreement also contains a covenant that requires us to maintain a minimum liquidity of $150.0 million. We were not in compliance with the total debt to capitalization ratio covenant as of September 30, 2022. On November 8, 2022, we executed an amendment to the Credit Agreement pursuant to which certain collateral related defaults were waived and, in addition, it was agreed that we would (i) not be required to test our debt to capitalization ratio covenant during and including the four quarter test period ending September 30, 2022 through and including the four quarter test period ending September 30, 2023, (ii) be required to maintain a minimum liquidity of $200.0 million from November 8, 2022 through and including September 30, 2023 and (iii) be required to maintain a minimum liquidity of $150.0 million after September 30, 2023. As of September 30, 2023, we had $303.9 million of short-term borrowings under the Credit Agreement.
On March 1, 2023, the Company disclosed that during the First Quarter of 2023, the Company breached the minimum liquidity covenant of the Credit Agreement. On February 28, 2023, the Company entered into a limited waiver and consent (the “Original Waiver”) under the Credit Agreement, which, among other matters, provided for a temporary waiver for the period from January 25, 2023 through April 30, 2023 of compliance with the minimum liquidity covenant set forth in Section 11.12.2 of the Credit Agreement.
On April 28, 2023, the Company entered into an amended and restated limited waiver and consent (the “Second Waiver”) under the Credit Agreement, which amended and restated the Original Waiver. The Second Waiver amended the Original Waiver by, among other things, extending the temporary waiver of compliance with the minimum liquidity covenant set forth in Section 11.12.2 of the Credit Agreement, which originally spanned from January 25, 2023 to April 30, 2023, to January 25, 2023 to June 30, 2023 (the “Extended Waiver Period”). The Second Waiver also (i) amended the Original Waiver and the Credit Agreement by changing the definition of "Minimum Liquidity" to mean unrestricted cash of the Company and the other loan parties and (ii) waived permanently any default or event of default arising from the failure to deliver the 2022 audit report without a qualification as to "going concern." In addition, during the Extended Waiver Period, the Company did not have access to certain negative covenant baskets and will be subject to additional cash-flow, cash balance, and other reporting requirements.
On June 29, 2023, the Company entered into a second amended and restated limited waiver and consent (the “Third Waiver”) under the Credit Agreement. The Third Waiver amended and restated the Second Waiver, which previously amended and restated the Original Waiver. The Third Waiver amended the Second Waiver and the Original Waiver by, among other things, extending the temporary waiver of compliance with the minimum liquidity covenant set forth in Section 11.12.2 of the Credit Agreement, which spanned from January 25, 2023 to June 30, 2023 under the Original Waiver and the Second Waiver, to January 25, 2023 to August 29, 2023 (the “Extended Waiver Period”). The Waiver also, among other things, added covenants (a) requiring the Company to deliver by July 17, 2023, an agreed term sheet for the Bridge Financing to support the Company’s ongoing operating cash needs through December 31, 2023 and, by July 31, 2023 (extended to August 4, 2023), definitive documentation for the Bridge Financing and an updated budget of the Company, in form and substance acceptable to the Administrative Agent, (b) prohibiting the incurrence of certain types of debt and (c) requiring the Company not to request any interest period for any Term SOFR borrowing other than a one-month interest period. In connection with the Waiver, the Company agreed to pay to the Administrative Agent, for the account of each lender consenting thereto that delivered a signature page by 4:00 p.m. on June 29, 2023, a waiver fee in the amount of 0.25% of such lender’s commitment.
On August 4, 2023, the Company entered into the New Credit Agreement to provide for a credit facility pursuant to which, among other things, the lenders have provided $60.0 million delayed draw term loan commitments. The Company may borrow delayed draw term loans under such commitments at any time and from time to time on or prior to the date that is nine months after the effective date of the New Credit Agreement, subject to the satisfaction or waiver of customary conditions. Borrowings
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under the New Credit Agreement accrue interest at a rate per annum of 15.00%, payable quarterly in arrears at the Company’s election, subject to limitations set forth in the Fourth Waiver (defined below) in respect of cash payments under the New Credit Agreement, either in cash or “in kind” by adding the amount of accrued interest to the principal amount of the outstanding loans under the New Credit Agreement. The New Credit Agreement contains covenants that, among other things, restrict the ability of the Company and its subsidiaries to make certain restricted payments, incur additional debt, engage in certain asset sales, mergers, acquisitions or similar transactions, create liens on assets, engage in certain transactions with affiliates, change its business or make investments. The New Credit Agreement constitutes the Bridge Financing referred to in the Third Waiver.
On August 4, 2023, the Company entered into a third amended and restated limited waiver and consent (the “Fourth Waiver”) under the Credit Agreement. The Fourth Waiver amends and restates the Third Waiver by, among other things, permanently waiving compliance with the minimum liquidity covenant set forth in Section 11.12.2 of the Credit Agreement, which waiver under the Third Waiver previously was temporary and would have expired on August 29, 2023. From August 4, 2023 until the Credit Agreement is terminated and all outstanding loans thereunder are repaid, the Company will be subject to a minimum liquidity covenant of not less than $25.0 million. The Fourth Waiver also, among other things, (a) removes from the credit agreement in its entirety the covenant requiring maintenance of a maximum total debt to capitalization ratio, which absent such removal would have applied after September 30, 2023, (b) prohibits the incurrence of certain types of debt and (c) requires the Company not to request any interest period for any Term Benchmark borrowing other than a one-month interest period.
In connection with the New Credit Agreement, on August 4, 2023, the Company and the Lenders entered into a warrantholders agreement setting forth the rights and obligations of the Company and the Lenders as holders (in such capacity, the “Holders”) of the warrants to acquire shares of Common Stock at an exercise prices of $0.01 per share (the “Warrants”), and providing for the issuance of the Warrants to purchase up to 1,656,789 shares of Common Stock.
On October 2, 2023, the Company, the existing lender, and the New Lender, entered into Incremental Amendment No. 1 to provide for the Commitment Increase by the New Lender under the Amended Credit Agreement. Loans under the Commitment Increase will have the same terms as loans under the original term loan commitments provided by the Existing Lender.
In connection with Incremental Amendment No. 1, on October 2, 2023, the Company and the New Lender entered into a warrantholders agreement setting forth the rights and obligations of the Company and the New Lender as a holder of Warrants, and providing for the issuance of the Warrants to purchase up to 176,724 shares of Common Stock. See Note 5, Short-Term Borrowings, for additional information regarding the New Credit Agreement, Incremental Amendment No.1 and the Warrantholders Agreement.
The obligations under the Credit Agreement are secured by substantially all of the assets of the Company and its wholly owned subsidiaries that are designated as guarantors, including a pledge of the equity of each of its subsidiaries. Borrowings under the Credit Agreement accrue interest at the Company’s election either at a rate of: the (i) the sum of (a) the greatest of (1) the Prime Rate (as defined in the Credit Agreement), (2) the rate of the Federal Reserve Bank of New York in effect plus 1∕2 of 1.0% per annum, and (3) London interbank offered rate (“LIBOR”), plus 1% per annum, and (b) a margin of 4.0%; or (ii) the sum of (a) the LIBOR multiplied by a statutory reserve rate and (b) a margin of 5.0%. In addition, the commitment fee is 0.75% of the unused amount of the Credit Agreement.
Furthermore, the Credit Agreement contains covenants that, among other things, restrict the ability of the Company and its subsidiaries to make dividends or other distributions, incur additional debt, engage in certain asset sales, mergers, acquisitions or similar transactions, create liens on assets, engage in certain transactions with affiliates, change its business or make investments. In addition, the Credit Agreement contains other customary covenants, representations and events of default.
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As of September 30, 2023, we had $30.7 million of outstanding, undrawn letters of credit under the Credit Agreement, which reduce the amount available to borrow.
Preferred Stock Financing
On January 3, 2022, we issued 750,000 shares of the Series A Preferred Stock, par value $0.0001 per share, for an aggregate purchase price of $750.0 million. We used a portion of the proceeds to repay in full our $155.0 million of outstanding borrowings under the Credit Agreement on January 4, 2022.
On October 17, 2022, we issued 175,000 shares of the Series B Preferred Stock, par value $0.0001 per share, for an aggregate purchase price of $175.0 million.
For additional information on the Series A and Series B Preferred Stock, see Note 8, Redeemable Convertible Preferred Stock, in our condensed consolidated financial statements of this Quarterly Report.
Cash and Investments
As of September 30, 2023, we had $723.4 million in cash and cash equivalents, $10.8 million in short-term investments and $0.3 million in long-term investments on the consolidated balance sheet. Our cash and investments are held at non-regulated entities and regulated insurance entities.
As of September 30, 2023, we had non-regulated cash and cash equivalents of $113.4 million, short-term investments of $0.2 million and $0.3 million of long-term investments.
As of September 30, 2023, we had regulated insurance entity cash and cash equivalents of $610.0 million, of which $2.2 million was restricted, and short-term investments of $10.6 million, of which $6.4 million was restricted.
Cash Flows
The following table presents a summary of our cash flows for the periods shown:
| Nine Months Ended September 30, | |||||||||||
| ($ in thousands) | 2023 | 2022 | |||||||||
| Net cash (used in) provided by operating activities | $ | (2,395,319) | $ | 111,787 | |||||||
| Net cash provided by (used in) investing activities | 1,145,441 | (463,151) | |||||||||
| Net cash provided by financing activities | 41,005 | 895,710 | |||||||||
| Net (decrease)/increase in cash and cash equivalents | (1,208,873) | 544,346 | |||||||||
| Cash and cash equivalents at beginning of period | 1,932,290 | 1,061,179 | |||||||||
| Cash and cash equivalents at end of period | $ | 723,417 | $ | 1,605,525 | |||||||
Operating Activities
During the nine months ended September 30, 2023, net cash provided by operating activities decreased by $2.5 billion compared to the nine-month period ended September 30, 2022, primarily driven by our Commercial business being in runout and not incurring additional medical costs and increase to our risk adjustment payable beyond prior period development.
Investing Activities
During the nine months ended September 30, 2023, net cash used in investing activities increased by $1.6 billion compared to the nine-month period ended September 30, 2022. The increase was primarily attributable to an increase in the proceeds of
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investment sales of $998.2 million during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. Investment purchases also decreased by $591.8 million during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.
Financing Activities
During the nine months ended September 30, 2023, net cash provided by financing activities decreased by $854.7 million compared to the nine months ended September 30, 2022. This decrease is primarily due to our Series A issuance during the nine months ended September 30, 2022 and net proceeds from short term borrowings of $148.9 million during that same period; as compared to $50.0 million net proceeds from short-term borrowings in the nine months ended September 30, 2023.
Critical Accounting Policies and Estimates
As of September 30, 2023, there had been no material changes to the critical accounting policies and estimates used in the preparation of our condensed consolidated financial statements as described in the 2022 Form 10-K under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates.”
Recently Adopted Accounting Pronouncements
For a description of recently issued accounting pronouncements, see Note 1, Organization and Basis of Presentation, in our condensed consolidated financial statements of this Quarterly Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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ITEM 4. CONTROLS AND PROCEDURES
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2023, our disclosure controls and procedures were not effective due to the material weakness in our internal control over financial reporting described below. In light of this fact, our management has performed additional analyses, reconciliations, and other post-closing procedures and has concluded that, notwithstanding the material weaknesses in our internal control over financial reporting, the condensed consolidated financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.
Previously Reported Material Weakness in Internal Control Over Financial Reporting
As disclosed in our 2022 Form 10-K, we previously identified a material weakness related to the control activities component of internal control over financial reporting, based upon the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO framework”). Specifically, multiple deficiencies constituted a material weakness, in the aggregate, relating to deployment of control activities through internal control policies that establish what is expected and procedures that put policies into action. As of September 30, 2023, we continue to test and evaluate the design and operating effectiveness of our internal controls over financial reporting, as well as validate the remediation of control deficiencies that in aggregate resulted in a material weakness noted in 2022. The remainder of 2023 will include additional control testing activities and follow-up of any outstanding control deficiencies that remain from 2022.
Changes in Internal Control over Financial Reporting
Other than the material weakness remediation actions discussed above, there have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management continues to advance its remediation program to ensure that control deficiencies contributing to the material weakness are remediated.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Other than the matters described in Note 10, Commitments and Contingencies, we are not presently a party to any litigation the outcomes of which, we believe, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, cash flows, or financial condition.
Item 1A. Risk Factors
This Quarterly Report on Form 10-Q should be read in conjunction with the risk factors included in our 2022 Form 10-K and our other filings with the SEC. There have been no material changes to the risk factors disclosed under the heading “Risk Factors” in our 2022 Form 10-K except for the following risk factor, which supplements the “Risk Factors” in our 2022 Form 10-K.
We may not be able to execute the sale of our California Medicare Advantage business.
We may not be able to execute the sale of our California Medicare Advantage business to Molina Healthcare, Inc. Further, in the event we are unable to execute the sale of this business, we may not be able to effect a strategic alternative to a sale. In addition, in executing this sale, we may experience operational difficulties separating it from our retained assets and operations, which could result in disruptions to our operations or claims for damages, among other things. Failure to consummate this sale or other strategic alternative could have a material adverse effect on our liquidity, business, financial condition, results of operations or cash flows.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
EXHIBIT INDEX
| Exhibit Number | Description | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 3.3 | ||||||||
| 3.4 | ||||||||
| 3.5 | ||||||||
| 3.6 | ||||||||
| 4.1 | ||||||||
| 10.1 | ||||||||
| 10.2 | ||||||||
10.3 | ||||||||
10.4 | ||||||||
10.5 | ||||||||
10.6 | ||||||||
10.7 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| 101 | The following financial information from our Quarterly Report on Form 10-Q for the third quarter of fiscal 2023, filed with the SEC on November 9, 2023, formatted in Inline Extensible Business Reporting Language (“iXBRL”) | |||||||
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| Exhibit Number | Description | |||||||
| 104 | Cover Page Interactive Data File (formatted as iXBRL and embedded within Exhibit 101) | |||||||
* Filed herewith
† Management contract or compensatory plan or arrangement.
(1) The certifications in Exhibits 32.1 and 32.2 to this Quarterly Report on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| BRIGHT HEALTH GROUP, INC. | ||||||||
| Dated: November 9, 2023 | By: | /s/ G. Mike Mikan | ||||||
| Name: | G. Mike Mikan | |||||||
| Title: | Vice Chairman, President and Chief Executive Officer | |||||||
| (Principal Executive Officer) | ||||||||
| By: | /s/ Jay Matushak | |||||||
| Name: | Jay Matushak | |||||||
| Title: | Chief Financial Officer | |||||||
| (Principal Financial Officer) | ||||||||
| By: | /s/ Jeffrey J. Scherman | |||||||
| Name: | Jeffrey J. Scherman | |||||||
| Title: | Chief Accounting Officer | |||||||
| (Principal Accounting Officer) | ||||||||
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