Nutex Health (NUTX) - 2021 Q4 - Annual Report

Part I - Business and Risk Factors This section provides an overview of the company's business model, operational structure, and the significant risks it faces Business Overview Clinigence Holdings operates as a technology-driven, risk-bearing population health management company, generating revenue from capitation, SaaS, and management fees, with a strategy to expand its national network - The company operates as a technology-enabled, risk-bearing population health management company that manages provider networks, primarily through its subsidiaries which include MSOs, IPAs, and a healthcare IT company[19] - Key subsidiaries include Clinigence Health (SaaS platform), AHP Health Management (manages an IPA with 22,065 patients), and Procare Health (an MSO serving HMOs and IPAs)[21][22][24] - Revenue is generated from three primary streams: Capitation revenue from its AHP subsidiary, SaaS subscription revenue from its CHI subsidiary, and Management Fee income from its Procare subsidiary[27][30][31] - The company has significant customer concentration, with two key payors accounting for 23% of total net capitation revenue in 2021[32] - Operations are subject to extensive healthcare regulations, including the Stark Law, Anti-Kickback Statute, HIPAA, and state-specific laws like California's prohibition on the corporate practice of medicine, which necessitates the use of Management Services Agreements (MSAs) with physician-owned IPAs[35][40][41] Risk Factors The company faces substantial risks from the COVID-19 pandemic, reliance on the California market, its VIE structure, intense competition, and complex healthcare regulations including corporate practice of medicine laws - The COVID-19 pandemic has impacted business through reduced inpatient visits and may continue to disrupt operations, affect health network partners, and impact the ability to access capital[53][54][57] - The company's financial statements are consolidated with a non-owned affiliated physician group (a Variable Interest Entity or VIE); changes in accounting principles or regulations regarding VIEs could prevent the company from consolidating these revenues[59][60] - A substantial portion of revenues are derived from California, making the business vulnerable to economic, regulatory, or other changes specific to that state[65] - The company faces significant risk under its capitation contracts, where it could incur substantial losses if medical care-related expenses exceed the fixed capitation payments received[124] - State laws prohibiting the corporate practice of medicine, particularly in California, require the company to operate through Management Services Agreements (MSAs); if these arrangements are deemed invalid, it could have a material adverse effect on operations and financial condition[83][84][125] - The business is subject to numerous complex federal and state healthcare laws, including the Anti-Kickback Statute and the Stark Law; non-compliance could lead to significant penalties, fines, and exclusion from federal healthcare programs[85][86][89] - The company does not hold a Knox-Keene license in California; if regulators determine that its risk-bearing arrangements require such a license, it could face civil and criminal liability and be required to restructure its operations[110][111] Properties The company operates from leased office spaces in Florida and California, with no owned real property - The company leases all its properties, with primary offices in Florida and California; leases have terms expiring between 2021 and 2024 with monthly rents from $2,500 to $4,000[153] Legal Proceedings As of December 31, 2021, the company is not involved in any material litigation - The company is not party to any material litigation as of December 31, 2021[154] Part II - Market, Financials, and MD&A This section covers the company's common stock market, detailed financial performance, liquidity, critical accounting policies, and internal controls Market for Common Equity and Related Matters The company's common stock trades on OTCMarkets, with no cash dividends planned, and significant stock issuances occurred in 2021 for acquisitions and operations - The company's common stock is listed on the OTCMarkets under the symbol "CLNH"[158] - No cash dividends have been paid, and none are contemplated for the foreseeable future[159] - In 2021, the company sold 7.5 million common shares for proceeds of $14.4 million[160] - Significant stock issuances in 2021 were made in connection with acquisitions: 14.2 million shares for AHA, 19.0 million shares for AHP, and 0.6 million shares for Procare[162][163] Management's Discussion and Analysis (MD&A) The MD&A details the company's transformative 2021 financial performance driven by acquisitions, resulting in significantly increased revenue and a higher net loss, alongside improved liquidity and a planned reverse merger 2021 Highlights and Recent Developments Key developments in 2021 included the acquisitions of AHP, AHA, and Procare, culminating in a merger agreement for a reverse merger with Nutex Health - On February 26, 2021, the company consummated mergers with AHP Health Management Services, Inc. and Accountable Healthcare America, Inc. (AHA)[173][179] - On October 15, 2021, the company acquired Procare Health, Inc[184][185] - On November 23, 2021, the company entered into a merger agreement for a reverse merger with Nutex Health Holdco LLC, which was subsequently approved by shareholders in March 2022[188][493] Results of Operations (2021 vs. 2020) The company experienced dramatic revenue growth in 2021 due to acquisitions, alongside a significant increase in general and administrative expenses, leading to a higher net loss Consolidated Statement of Operations (2021 vs. 2020) | Financial Metric | 2021 | 2020 | | :--- | :--- | :--- | | Total Sales | $18,793,783 | $1,585,952 | | Capitation revenue, net | $16,620,488 | $0 | | SaaS revenue | $1,653,806 | $1,585,952 | | Management services revenue, net | $519,489 | $0 | | Cost of sales | $14,647,045 | $909,780 | | Gross profit | $4,146,738 | $676,172 | | General and administrative expenses | $12,177,316 | $3,251,353 | | Income (loss) from operations | ($9,018,075) | $1,373,320 | | Net loss | ($13,668,624) | ($5,650,167) | | Net loss attributable to Clinigence | ($13,669,515) | ($5,650,167) | - Total revenue increased dramatically to $18.8 million in 2021 from $1.6 million in 2020, primarily due to $16.6 million in new capitation revenue from the AHP acquisition[200] - General and administrative expenses increased to $12.1 million in 2021 from $3.25 million in 2020, largely due to transactional costs from acquisitions and stock-based compensation[205] Liquidity and Capital Resources The company's cash position significantly improved in 2021 due to stock offerings, alleviating going concern doubts and providing sufficient capital for future operations - Cash position significantly improved to $15.3 million at year-end 2021, compared to just $26,931 at year-end 2020[217] - The company raised approximately $14.4 million in gross proceeds from stock offerings during 2021[218] - Management believes that with the funds raised, it has alleviated substantial doubt about the company's ability to continue as a going concern and has sufficient capital to fund operations for at least one year from the filing date[218][393] Cash Flow Summary for FY 2021 | Cash Flow Activity | Amount | | :--- | :--- | | Net Cash Used in Operating Activities | ($6,703,530) | | Net Cash Provided by Investing Activities | $7,951,570 | | Net Cash Provided by Financing Activities | $14,039,357 | Critical Accounting Policies and Estimates Key accounting estimates involve the valuation of assets and liabilities from business combinations, consolidation of Variable Interest Entities, and annual goodwill impairment testing - Key estimates include the valuation of assets acquired and liabilities assumed in business combinations, particularly for the 2021 acquisitions of Procare, AHA, and AHP[224][251] - The company consolidates Variable Interest Entities (VIEs) for which it is the primary beneficiary, determined by a qualitative analysis of power and economics[233] - Goodwill is not amortized but is tested annually for impairment; no impairment was recorded for the year ended December 31, 2021[253][408] Financial Statements and Supplementary Data The audited financial statements for 2021 and 2020 are presented with an unqualified auditor opinion, highlighting the valuation of acquisition-related assets and liabilities as a Critical Audit Matter - The independent auditor, Marcum LLP, issued an unqualified opinion on the financial statements[348] - A Critical Audit Matter was identified concerning the valuation of assets and liabilities from the acquisitions of AHA, AHP, and Procare, due to the highly subjective and judgmental nature of estimating the fair value of intangible assets and goodwill[352][353][357] Consolidated Balance Sheet Highlights (as of Dec 31) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Cash | $15,314,328 | $26,931 | | Goodwill | $57,338,935 | $0 | | Intangible assets, net | $10,585,592 | $0 | | Total Assets | $85,733,528 | $169,857 | | Total Liabilities | $10,594,906 | $1,303,652 | | Total Stockholders' Equity (Deficiency) | $75,138,622 | ($1,133,795) | - Subsequent to year-end, on March 16, 2022, stockholders approved the merger with Nutex Health Holdco LLC[493] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2021 - Management concluded that as of December 31, 2021, the company's disclosure controls and procedures were effective[265] - Management concluded that the company maintained effective internal control over financial reporting as of December 31, 2021, based on the COSO framework[267][268] Part III - Corporate Governance and Compensation This section outlines the company's corporate governance structure, executive compensation, security ownership, related party transactions, and principal accountant fees Directors, Executive Officers, and Corporate Governance The report details the Board of Directors and executive team, including established committees and the adoption of a Code of Business Conduct and Ethics Key Executive Officers | Name | Position | | :--- | :--- | | Dr. Warren Hosseinion | Chief Executive Officer and Chairman of the Board | | Fred Sternberg | President, Director | | Michael Bowen | Chief Financial Officer | | Dr. Lawrence Schimmel | Chief Medical Information Officer | | Elisa Luqman | General Counsel, EVP of Finance and Director | - The Board has established an Audit Committee, a Compensation Committee, and a Governance and Nominating Committee[294] - The Audit Committee is composed of three independent directors, with John Waters serving as Chairman and designated "audit committee financial expert"[296] - The company has adopted a Code of Business Conduct and Ethics applicable to its principal officers[303] Executive Compensation Executive compensation for 2021 included base salaries, bonuses, and significant stock awards, with a new equity incentive plan approved in 2022 2021 Summary Compensation for Key Executives | Name & Principal Position | Year | Salary ($) | Bonus ($) | Option Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | Warren Hosseinion, CEO | 2021 | 342,805 | 150,000 | 964,602 | 1,307,407 | | Fred Sternberg, President | 2021 | 232,500 | 10,000 | 0 | 242,500 | | Michael Bowen, CFO | 2021 | 167,509 | 50,000 | 0 | 217,509 | - The company has multi-year employment agreements with its named executive officers, which include provisions for severance payments upon termination without cause[308][309] - In 2022, shareholders approved the 2022 Equity Plan, which replaces the 2019 Plan; contingent upon this approval, the company granted 3,624,000 nonqualified stock options in late 2021[315][317] Security Ownership Dominus Embree is the largest beneficial owner, while directors and executive officers collectively hold a significant portion of the company's outstanding shares - The largest known beneficial owner is Dominus Embree, with 6,973,483 shares, representing 14.39% beneficial ownership[326] - All directors and officers as a group beneficially own 21,694,050 shares, representing 44.78% of the company[326] Related Transactions and Director Independence A majority of the board members are independent, with limited related party transactions and one disclosed family relationship among executives - The Board of Directors has determined that a majority of its members, including Messrs. Breslin, Creem, Fawcett, Margolin, Meiri, Sim, and Waters, are independent[331] - A family relationship exists between President Fred Sternberg and his son, Andrew Barnett, Executive Vice President of Corporate Development[333] Principal Accountant Fees and Services Fees paid to Marcum LLP for audit services in 2021 and 2020 are detailed, with all services pre-approved by the Audit Committee Accountant Fees (Marcum LLP) | Fee Type | 2021 | 2020 | | :--- | :--- | :--- | | Audit Fees | $142,623 | $55,000 | | Audit-Related Fees | $0 | $0 | | All Tax Fees | $0 | $0 | | Other Fees | $0 | $0 | | Total | $142,623 | $55,000 | Part IV - Exhibits and Financial Statement Schedules This section lists all financial statements and key exhibits filed with the report, including merger agreements and equity incentive plans Exhibits and Financial Statement Schedules This section lists all financial statements and key exhibits filed with the report, including merger agreements and equity incentive plans - Lists all financial statements and schedules filed with the report[341] - Key exhibits filed include merger agreements for the 2021 acquisitions (AHA, AHP, Procare), the 2019 and 2022 Equity Incentive Plans, and various corporate governance documents[341]