Bright Health Group(BHG) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Unaudited statements show significant growth in assets and revenue driven by acquisitions, alongside widening net losses and a strengthened balance sheet post-IPO Condensed Consolidated Balance Sheets Total assets doubled to $3.6 billion and shareholders' equity turned positive to $1.9 billion, driven by acquisitions and the IPO Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $3,575,095 | $1,810,802 | | Cash and cash equivalents | $956,189 | $488,371 | | Goodwill | $842,301 | $263,035 | | Total Liabilities | $1,507,862 | $593,859 | | Medical costs payable | $685,045 | $249,777 | | Risk adjustment payable | $548,352 | $187,777 | | Total Shareholders' Equity (Deficit) | $1,937,204 | ($503,672) | Condensed Consolidated Statements of Income (Loss) Revenue grew significantly for Q3 and the nine-month period, but net losses widened substantially due to higher operating costs Statement of Income (Loss) Highlights (in thousands, except per share data) | Metric | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $1,078,657 | $352,120 | $3,067,055 | $847,542 | | Premium revenue | $1,020,233 | $345,426 | $2,922,950 | $827,135 | | Operating Loss | ($296,281) | ($59,256) | ($378,159) | ($93,772) | | Net Loss | ($296,722) | ($59,256) | ($364,990) | ($84,610) | | Basic & Diluted Loss Per Share | ($0.48) | ($0.43) | ($1.19) | ($0.62) | Condensed Consolidated Statements of Cash Flows Net cash from operations and financing increased significantly, driven by the IPO, resulting in a $467.8 million net increase in cash Cash Flow Summary (in thousands) | Activity | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $233,114 | $11,339 | | Net cash used in investing activities | ($653,128) | ($528,830) | | Net cash provided by financing activities | $887,832 | $687,714 | | Net increase in cash and cash equivalents | $467,818 | $170,223 | Notes to Condensed Consolidated Financial Statements Notes detail the IPO, major acquisitions boosting goodwill, segment performance, and a material weakness in internal controls - On June 28, 2021, the company completed its IPO, receiving net proceeds of $887.3 million after deducting underwriting discounts and commissions[22] - The company completed several acquisitions in 2021: Centrum for $296.2M, Central Health Plan (CHP) for $271.7M, True Health New Mexico (THNM) for $3.4M, and Zipnosis for $69.8M[28][34][38] - Goodwill increased from $263.0 million at year-end 2020 to $842.3 million as of September 30, 2021, with acquisitions contributing $580.9 million to the balance[66] - For Q3 2021, the Bright HealthCare segment had an operating loss of ($303.3) million on $995.6 million in revenue, while the NeueHealth segment had operating income of $7.0 million on $222.8 million in revenue[90] Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue growth was driven by a 247% increase in consumers, though MCR rose due to COVID-19, while IPO proceeds bolstered liquidity - Bright HealthCare consumers grew to over 720,000 as of September 30, 2021, a 247% increase from the prior year, while NeueHealth served over 170,000 patients under value-based arrangements[141] - The Medical Cost Ratio (MCR) for Q3 2021 was 103.0%, an increase of 1,290 basis points from Q3 2020, driven by a 540 basis point impact from COVID-19 costs and a 900 basis point impact from risk adjustment pressures[162] - The company's IPO in June 2021 generated $887.3 million in net proceeds, strengthening liquidity and enabling the repayment of $200 million in debt and funding of the Centrum acquisition[134][135] Business Overview The company operates through two segments: NeueHealth for care delivery and Bright HealthCare for insurance products - NeueHealth delivers virtual and in-person clinical care through 44 owned primary care clinics and maintains over 200,000 unique patient relationships, with over 170,000 served through value-based arrangements[105] - Bright HealthCare provides health benefits to over 720,000 consumers, including approximately 607,000 in commercial plans and 114,000 in Medicare Advantage products across 14 states[109][110] COVID-19 Update The pandemic increased medical costs by $55.6 million in Q3 2021, leading to a 540 basis point unfavorable impact on MCR Financial Impact of COVID-19 | Period | Medical Cost Increase | MCR Impact (Basis Points) | | :--- | :--- | :--- | | Q3 2021 | $55.6 million | +540 bps | | Nine Months 2021 | $124.0 million | +420 bps | Results of Operations Q3 revenue grew 206% to $1.08 billion, but a higher Medical Cost Ratio of 103.0% resulted from increased medical costs Key Performance Ratios | Ratio | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Medical Cost Ratio (MCR) | 103.0% | 90.1% | 90.3% | 81.6% | | Operating Cost Ratio | 28.7% | 27.7% | 25.4% | 30.8% | - The increase in Q3 2021 MCR was primarily due to COVID-19 related costs and a $134.0 million unfavorable change in estimate for risk adjustment, of which $89.3 million related to the first half of 2021[160][162] Liquidity and Capital Resources The IPO provided $887.3 million in net proceeds, boosting cash to $956.2 million and ensuring liquidity for the next twelve months - As of September 30, 2021, the company had $956.2 million in cash and cash equivalents, $331.7 million in short-term investments, and $681.9 million in long-term investments[190] - The company repaid the $200.0 million principal balance outstanding under its revolving credit agreement following the IPO and has no borrowings outstanding as of September 30, 2021[187] - Management expects to incur operating losses and negative cash flows for the foreseeable future but believes existing cash will be sufficient for the next twelve months[186] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate changes affecting its investment portfolio, with net unrealized gains decreasing - The company is exposed to financial market risk, primarily from changes in interest rates impacting its investment portfolio[199] - The net unrealized gain on the investment portfolio was $0.2 million at September 30, 2021, down from $2.4 million at December 31, 2020[200] Controls and Procedures Disclosure controls were deemed ineffective due to a material weakness at a subsidiary, with remediation efforts underway - The CEO and CFO concluded that disclosure controls and procedures were not effective as of September 30, 2021[202] - The ineffectiveness is due to a material weakness in internal control over financial reporting at the Brand New Day subsidiary[203] - Remediation steps are underway, including enhancing controls, hiring additional resources, and migrating Brand New Day's financial systems to Bright Health's ERP platform in Q3 2021[203][204] PART II. OTHER INFORMATION Legal Proceedings The company is not currently a party to any material legal proceedings - The company is not presently a party to any material legal proceedings[206] Risk Factors Risk factors were updated to include security incidents following a data breach at a subsidiary in October 2021 - A new risk factor was added to address security incidents, data loss, and IT disruptions[208] - In October 2021, the subsidiary True Health New Mexico experienced a data security incident; an investigation is substantially complete and authorities have been notified[212][214] Unregistered Sale of Equity Securities and Use of Proceeds Details the issuance of 4.4 million shares for an acquisition and the use of $880.6 million in net IPO proceeds - Issued 4,388,811 shares of common stock on July 1, 2021, in connection with the acquisition of Centrum, exempt from registration under Section 4(a)(2) of the Securities Act[217] - Net IPO proceeds of $880.6 million were used to repay $200.0 million in debt, fund the $222.4 million cash portion of the Centrum acquisition, and for general corporate purposes[218]